an existing heating system. This suggests that once a heating system is installed, that house is no longer part of the relevant market. High conversion costs mean that while PP&L has over 1,000,000 homes in its service area, those homes with existing heating systems are extremely difficult to reach, and only a small fraction -- those with the financial resources and desire to convert their system -- are susceptible to marketing.
The high costs of conversion, and the veritable removal from the market of those homes with existing systems, suggest that the new home submarket is crucial to the economic sustenance of residential heating suppliers. The Court therefore considers the 29,512 grants in light of the 208,681 new residential connections made between 1981 and 1995 and the 133,756 new connections made between 1987 and 1995. These significantly higher percentages for the new construction submarket provide a more accurate reflection of the all-electric agreements' anticompetitive effects.
The record also contains evidence of antitrust injury. See Mathews v. Lancaster General Hosp., 87 F.3d 624, 641 (3d Cir. 1996) (requiring a court to "analyze the antitrust injury from the viewpoint of the consumer. An antitrust plaintiff must prove the challenged conduct affected the prices, quantity or quality of goods or services, not just his own welfare") (citations omitted). The agreements lessened choices for new homeowners and made builders and developers resistant to the installation of alternative heating sources. They required new home purchasers to incur the increased costs associated with an electric heating system and forego a less expensive and more efficient oil or gas system. By inducing builders to install electric heating systems with grants, PP&L effectively strapped new homeowners with an electric heating system that required them to pay supracompetitive prices for a less desirable system that they did not specifically choose. In a purely competitive market, the new home purchaser could freely choose among gas, oil, or electric based on the advantages and disadvantages presented by each system. Finally, Plaintiffs presented an extensive expert report outlining the injury they suffered as competitors. (Pl.'s Ex. 96). PP&L's expert's report, however, which urges that Plaintiffs can point to no evidence of antitrust injury, creates a genuine issue of material fact for jury resolution. (Def.'s Ex. 24 PP 124-32). Accordingly, the Court cannot conclude as a matter of law that the all-electric agreements did not constitute an unreasonable restraint of trade.
5. Conversion Grants
An examination of the conversion grants, however, compels a different result. The unique factors implicated by the all-electric agreements, which dealt largely with new home construction, have no applicability to conversion grants which were awarded to existing homeowners. The submissions relied on by Plaintiffs fail to establish that such conversion grants had any significant impact on the relevant market.
PP&L initiated the conversion grant program in 1983, and conversion grants enabled PP&L to lessen the financial drawbacks associated with converting a heating system. (Pl.'s Ex. 60). While the record does not reveal the exact number of conversion grants PP&L paid to existing homeowners, it states that PP&L converted 218 homes in 1987, 346 homes between 1988 and 1990, and 72 homes between 1990 and 1994. In its "Annual Conservation and Load Management Report for 1987," PP&L stated "the projection for 1988 is to have 400 storage space and water heating systems installed as replacements to present fossil-fueled space heating and water heating systems." PP&L set the same number at 250 in its 1988 Report. (Pl.'s Ex. 60 at 510, 527; Def.'s Ex. 15).
These numbers can only be considered in the context of the existing homes in the relevant market. Between 1983 and 1995, there were 192,519 homes constructed in a relevant market of 1,074,015 homes, leaving 881,496 existing homes during this period for conversions. Assuming PP&L converted its targeted 400 homes per year between 1983 and 1995 (a total of 4,800 homes), these conversion grants affected only 0.5% of 881,496 existing homes in the relevant market. Plaintiffs have failed to establish that the conversion grants eliminated a significant amount of competition to raise a genuine issue of material fact with regard to whether the conversion grants constitute an unreasonable restraint of trade. See 2 Von Kalinowski § 6G.03 (establishing numerical guidelines for § 1 violations and finding "under the rule of reason, an exclusive dealing or requirements contract probably would not violate Section 1 of the Sherman Act unless it affected over 50% of the relevant market").
6. Conclusion -- Sherman Act § 1
Accordingly, Plaintiffs' claims under § 1 of the Sherman Act only survive with respect to the all-electric agreements insofar as those agreements affect new homes. To the extent that Plaintiffs allege that PP&L unreasonably restrained trade by (1) offering cash incentives and financial aid to convert existing homeowners to electric heat and (2) offering builders cash incentives through the all-electric agreements to convert existing homes, the Court grants summary judgment to PP&L.
C. Clayton Act § 3
Plaintiffs assert that the all-electric agreements violate § 3 of the Clayton Act. At a minimum, argue Plaintiffs, a triable fact issue exists as to whether the agreements substantially foreclosed competition in the relevant market. Considering that the all-electric agreements foreclosed 14% of the new home submarket (setting the damage period between 1981 and 1995 and 21% for the period between 1987 and 1995), Plaintiffs suggest that a jury could find substantial foreclosure. These percentages, urge Plaintiffs, when considered in conjunction with PP&L's size, its achievement of an 84% share of the submarket in 1986, its achievement of more than 70% saturation in the new home submarket between 1987 and 1995, and the fact that homeowners must pay substantially higher prices for electric heat, support a finding of substantial foreclosure offensive to § 3. (Pl.'s Ex. 37; Ex. 46; Ex. 67; Ex. 69; Def.'s Ex. 66 at 4-5). According to Plaintiffs, the substantial market effect is seen in the consumers paying higher prices for electric energy than they would if oil was widely used. Furthermore, argue Plaintiffs, PP&L nearly doubled its saturation with the agreements: 95% of homes in developments controlled by all-electric agreements contain electric heat compared to 49.6% of new homes in developments not governed by the all-electric agreements.
PP&L argues that Plaintiffs cannot demonstrate substantial foreclosure when only (1) 8% of new developments, 120 out of 1,500, were governed by the all-electric agreements, (2) 3% of the relevant market (29,512 out of 1,074,015 homes) has been affected, and (3) 14% of the submarket (29,512 out of 208,681 new homes constructed) has been affected. This left open 85% of all new homes constructed and 97% of all homes in the relevant market, percentages Plaintiffs admitted indicate strong business possibilities. According to PP&L, the Clayton Act applies only to the sale of goods, wares, merchandise, machinery, supplies, or other commodities and not electricity; PP&L relies on Groton v. Connecticut Light & Power Co., 497 F. Supp. 1040, 1052 n.14 (D. Conn.) (finding, for purposes of § 2(a) of the Clayton Act (15 U.S.C.A. § 13(a)) that "electricity is not a commodity") (citing City of Newark v. Delmarva Power & Light, 467 F. Supp. 763, 773-74 (D. Del. 1979) (remarking "the wording of the statute, its legislative history, and the regulation of the electric utility industry which existed at the time [of] the adoption of the Robinson-Patman Act, all suggest that 'commodity' was not intended to encompass electric power")), aff'd in part and remanded, 662 F.2d 921 (2d Cir. 1980).
1. Distinguished From Sherman Act § 1
Section 3 of the Clayton Act provides:
Sale, etc., on agreement not to use goods of competitor
It shall be unlawful for any person engaged in commerce, in the course of such commerce, to lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies, or other commodities, whether patented or unpatented, for use, consumption, or resale within the United States . . . or fix a price charged therefor, or discount from, or rebate upon, such price on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery, supplies, or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract for sale or such condition, agreement, or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce.
15 U.S.C.A. § 14 (West 1973). "Section 3 applies to a narrower range of transactions than does Section 1 [including goods or commodities but not including real property, advertising, or services. Furthermore, a] lesser degree of anticompetitive injury need be demonstrated under Section 3 than under Section 1." 2 Von Kalinowski § 6G.03.
While § 1 applies to actual restraints of trade, § 3 "condemn[s] sales or agreements where the effect of such sale or contract would, under the circumstances disclosed, probably lessen competition or create an actual tendency to monopoly." Tampa, 365 U.S. at 326, 81 S. Ct. at 627 (citation omitted). "The legality of an exclusive dealing arrangement under the Clayton Act depends on whether the competition foreclosed constitutes a substantial share of the relevant market." Barr, 978 F.2d at 110 (citation omitted). The two leading § 3 cases are Tampa (1961) and Standard Oil Co. of California and Standard Stations, Inc. v. United States, 337 U.S. 293, 69 S. Ct. 1051, 93 L. Ed. 1371 (1949).
2. Quantitative Substantiality Test
In Standard, the Supreme Court found that agreements requiring contracting retailers to purchase all their gasoline from the Standard Oil substantially lessened competition. Accounting for 23% of sales, Standard Oil was the largest gasoline retailer in the area. These exclusive supply contracts covered 6.7% of the area's sales and foreclosed competing refiners from marketing their product through 16% of the independent retail gasoline outlets in the region. Standard, 337 U.S. at 295, 69 S. Ct. at 1053. The Supreme Court adopted a "quantitative substantiality" test whereby a § 3 case would be made out "upon a showing that the exclusive dealing arrangement involved a significant share of the relevant market, or possibly even upon a showing that the arrangement involved a substantial volume of commerce." American, 521 F.2d at 1251 n.75 (citing Standard, 337 U.S. at 299, 310-14, 69 S. Ct. at 1051, 1062). Applying Standard, "the only relevant economic indicator is the percentage of the market the contracts foreclose." Barr, 978 F.2d at 110 (citation omitted). Despite the Supreme Court's later interpretation of § 3 in Tampa, Standard remains viable authority. See American, 521 F.2d at 1251 n.75 (stating "although the Supreme Court has modified the rigid rule articulated in Standard Oil, it has not indicated that the result in Standard Oil would differ from Tampa Electric ").
Taking the Standard approach, the all-electric agreements do not violate § 3 because Plaintiffs have failed to produce proof "that competition has been foreclosed in a substantial share of the line of commerce affected." Standard, 337 U.S. at 314, 69 S. Ct. at 1062. The Court relies on the same definitions of relevant market and submarket crafted in dealing with the Sherman Act claims. See 2 Von Kalinowski § 13.03 (stating "the manner in which the relevant market is identified [under § 3 of the Clayton Act] is the same under the Sherman Act"). The all-electric agreements affected only 3% of the relevant market. Compare Barr, 978 F.2d at 111 (finding 15% preemption, in the presence of other factors, insufficient to make out a § 3 claim) and American, 521 F.2d at 1252 (finding foreclosure of 14% "may well offend limitations which the Clayton Act places on exclusive contracts") with Tampa, 365 U.S. at 333, 81 S. Ct. at 631 (finding .77% insubstantial). See also 2 Von Kalinowski § 6G.04 n.39 (stating "the lowest percentage of sales volume in the relevant market to be termed substantial was . . . . about 5%") (citing Lessig v. Tidewater Oil Co., 327 F.2d 459 (9th Cir.), cert. denied, 377 U.S. 993, 84 S. Ct. 1920, 12 L. Ed. 2d 1046 (1964)). While the all-electric agreements affected 21% of the new construction submarket, the Court reserves discussion of the unique implications associated with that statistic for its "qualitative" analysis.
3. Qualitative Substantiality Test
Evaluating a requirements contract providing a utility company with an assured supply of coal for its generating plants that foreclosed only .77% of the relevant market, Tampa spawned the "qualitative substantiality test." Tampa considered the requirements contract lawful in light of the small percentage of the market foreclosed, the non-dominant position of the seller, and the failure of the exclusive dealing arrangements to hamper competition in the coal industry. The qualitative substantiality test examines three factors:
It is necessary to weigh the probable effect of the contract on the relevant area of effective competition, taking into account the relative strength of the parties, the proportionate volume of commerce involved in relation to the total volume of commerce in the relevant market area, and the probable immediate and future effects which pre-emption of that share of the market might have on effective competition therein.
Tampa, 365 U.S. at 329, 81 S. Ct. at 629. Under this test, "the degree of market foreclosure is only one of the factors involved in determining the legality of an exclusive dealing arrangement." Barr, 978 F.2d at 111 (citation omitted). The Third Circuit applies the qualitative substantiality test. See id. (applying Tampa); American, 521 F.2d at 1251 n.75 (remarking that the qualitative test "introduced greater flexibility").
Application of the qualitative substantiality test compels a different conclusion from that reached under the quantitative substantiality test. The nature of the agreements, and PP&L's status as a monopoly, assure that the developments will be "all-PP&L" to the exclusion of oil and gas. The all-electric agreements foreclosed 21% of the submarket. As discussed supra, the new construction submarket plays a crucial role in the economic viability of these competitors, and the importance of that market cannot be underestimated. The high costs of conversion lessen the significance of the relevant market, and the "permanence" of an existing system makes the new construction submarket crucial to the sustenance of these competitors. The inability to access this submarket has deleterious effects on Plaintiffs' competitiveness in the relevant market, and blocking expansion into 21% of the new home submarket results in a substantial foreclosure of the relevant market. See American, 521 F.2d at 1252 (finding foreclosure of 14% "may well offend limitations which the Clayton Act places on exclusive contracts"); Dictograph Prods., Inc. v. Federal Trade Comm'n, 217 F.2d 821, 828 (2d Cir. 1954) (considering control of 20% retail outlets through exclusive dealing contracts by a large industry leader substantial foreclosure), cert. denied, 349 U.S. 940, 75 S. Ct. 784, 99 L. Ed. 1268 (1955).
The Court does not reach the same result with respect to the conversion grants. The qualitative analysis applicable to the all-electric agreements -- which dealt mostly with new home construction -- is not germane to the conversion grants -- which PP&L awarded to existing homeowners. The submissions relied on by Plaintiffs reveal that the conversion grants affected only 0.5% of 881,496 existing homes in the relevant market, an insufficient figure to demonstrate that they either had significant impact on competition in the relevant market or involved a substantial portion of commerce in the relevant market. The record in the instant case therefore fails to raise a genuine issue of material fact with regard to whether PP&L's use of the conversion grants violates § 3 of the Clayton Act. See Tampa, 365 U.S. at 331, 81 S. Ct. at 630 (considering foreclosure of less than 1% inadequate).
The Court rejects PP&L's contention that electricity is not a commodity for purposes of either the Clayton Act or the Robinson-Patman Act. Admittedly, City of Newark refused to include electricity within the definition of commodity. The Court notes, however, that City of Newark assessed § 2(a) of the Robinson-Patman Act, and this Court limits its holding to that section. See City of Newark, 467 F. Supp. at 773 n.12 (remarking "none of the cases cited by plaintiffs decide the issue of whether the terms commodity in Section 2(a) includes electric power") (emphasis supplied). Furthermore, a considerable number of cases have found that electricity is a commodity for purposes of the Clayton and Robinson-Patman Acts. See Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367, 371 n.3 (3d Cir. 1985) (remarking "the Supreme Court held that section 2(c) was independent of 2(a)") (citation omitted); Kirkwood v. Union Elec. Co., 671 F.2d 1173, 1181-82 (8th Cir. 1982) (finding electricity is a commodity for Robinson-Patman purposes; "electric power can be felt, if not touched. It is produced, sold, stored in small quantities, transmitted, and distributed in discrete quantities"), cert. denied, 459 U.S. 1170, 103 S. Ct. 814, 74 L. Ed. 2d 1013 (1983); Rankin County Cablevision v. Pearl River Valley Water Supply Dist., 692 F. Supp. 691, 693 (S.D. Miss. 1988) (remarking "most of the courts which have considered the issue have concluded that electricity is a commodity subject to the [Robinson-Patman] Act"); Concord v. Boston Edison, Co., 676 F. Supp. 396 (D. Mass. 1988) (same); Ellwood City v. Pennsylvania Power Co., 570 F. Supp. 553, 561 (W.D. Pa. 1983) (same); Gainesville v. Florida Power & Light Co., 488 F. Supp. 1258, 1282 (S.D. Fla. 1980) (considering electricity a commodity under both Clayton and Robinson-Patman Acts; finding City of Newark decision an "unnecessarily narrow view of Congressional intent in using the word commodity"). Considering that PP&L generates and sells electricity, and the instant case involves the sale of electricity as a manufactured product that PP&L distributes in the form of residential heat, the Court adopts the rationale expressed in the aforementioned cases.
4. Conclusion -- Clayton Act § 3
Accordingly, Plaintiffs' claims under § 3 of the Clayton Act only survive with respect to the all-electric agreements insofar as those agreements affect new homes. To the extent that Plaintiffs allege that PP&L violated § 3 of the Clayton Act by (1) offering cash incentives and financial aid to convert existing homeowners to electric heat and (2) offering builders cash incentives through the all-electric agreements to convert existing homes, the Court grants summary judgment to PP&L.
D. Robinson-Patman Act § 2(c)
The Robinson-Patman Act, argue Plaintiffs, prohibits PP&L from providing payments to builders (purchasers of the heat pump) in order to exert influence over the builders' selection of electric heat. Plaintiffs allege that PP&L furnished grants to builders and developers that were not provided in exchange for services rendered by the builders and developers. According to Plaintiffs, a cause of action under § 2(c) does not require proof of predatory pricing. Plaintiffs suggest that § 2(c) requires only that a payment be made in connection with the purchase or sale of goods; it does not specifically require that the seller make the payment. Finally, Plaintiffs attack PP&L's assertion that the transactions in question do not affect interstate commerce, claiming that the heat pumps, as well as the components from which they are manufactured, are produced outside the Commonwealth by Carrier Corporation in Syracuse, New York.
PP&L argues that Yeagers II immunizes these cash incentives. According to PP&L, Plaintiffs have failed to produce evidence of either predatory pricing or sales that crossed state lines, two requirements under § 2(c); PP&L relies on Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 195, 95 S. Ct. 392, 398, 42 L. Ed. 2d 378 (1974) (stating "the distinct 'in commerce' language of the Clayton and Robinson-Patman Act provisions . . . appears to denote only persons or activities within the flow of interstate commerce"). PP&L contends that the record contains no evidence that it is either a seller or a buyer in the heat pump transactions, and therefore the grants do not pass the "seller-buyer" line. Finally, PP&L protests that Plaintiffs have not shown a fiduciary relationship between the builders and potential homeowners, pointing to Yeagers I, 804 F. Supp. at 715 (finding, that for purposes of a RICO claim, Plaintiffs' Amended Complaint failed to aver "that the developers and/or builders and/or contractors are employees, agents or fiduciaries of anyone from whom they were required to obtain consent before accepting the payments").
Section 2(c) of the Robinson-Patman Act addresses price discrimination and provides, in part:
Discrimination in price, services, or facilities -- Price; selection of customers
* * * *
Payment or acceptance of commission, brokerage or other compensation