The opinion of the court was delivered by: PADOVA
2. PP&L's First Motion for Summary Judgment
4. The Amended and Consolidated Complaint
(a). Costs and Efficiency
(b). Programs and Initiatives
(c). Specific Anticompetitive Conduct
(b). All-Electric Development Agreements
III. Federal Antitrust Laws
1. Attempted Monopolization
(c). Dangerous Probability of Success
(iv). Barriers to Entry & Competition
(v). Probability Conclusion
1. Per Se Illegality of the Contested Agreements
2. The Agreements are Exclusive Dealing Contracts
3. Application of the Rule of Reason
5. Conclusion -- Sherman Act § 1
1. Distinguished from Sherman Act § 1
2. Quantitative Substantiality Test
3. Qualitative Substantiality Test
4. Conclusion -- Clayton Act § 3
D. Robinson-Patman Act § 2(c)
1. Tortious Interference with Contractual Relations
The Court commences another chapter in this protracted and multifarious litigation. Defendant, Pennsylvania Power and Light ("PP&L"), operates an electric utility in central and northeastern Pennsylvania and constitutes the sole source of electric power in those regions. Plaintiffs, fuel oil dealers,
compete directly with PP&L in the market for residential heating and related equipment in PP&L's service area. Plaintiffs contend that PP&L unlawfully restrained trade through business practices and marketing schemes in violation of both federal antitrust laws and state common-law. PP&L currently submits, for the Court's consideration, its Motion for Summary Judgment.
It should be noted at the outset that both parties have presented the Court well drafted, comprehensive, concise, and organized briefs, with relevant submissions attached thereto. During oral argument on the Motion, both sides crafted compelling arguments, and the Court, in evaluating this Motion, faces a difficult task. After much deliberation, and for the following reasons, the Court will grant in part and deny in part PP&L's Motion.
In August, 1991, various fuel oil dealers filed a complaint in this Court alleging violations of §§ 1 and 2 of the Sherman Antitrust Act ("Sherman Act"), 15 U.S.C.A. §§ 1, 2 (West Supp. 1996); section 2(c) of the Robinson-Patman Price Discrimination Act ("Robinson-Patman Act"), 15 U.S.C.A. § 13(c) (West 1973); section 3 of the Clayton Antitrust Act ("Clayton Act"), 15 U.S.C.A. § 14 (West 1973); and section 1962(c) of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C.A. §§ 1961-1968 (West 1984 & Supp. 1995). In April, 1992, Losch Boiler Sales & Service Company, a fuel oil and related equipment dealer, filed a separate complaint against PP&L in this Court asserting essentially the same claims, with the addition of a claim under § 3 of the Robinson-Patman Act, 15 U.S.C.A. § 13a (West 1973) and state-law claims of unfair competition and civil conspiracy. Both Complaints rested on the same factual allegations, and the Court consolidated the cases. (See Doc. Nos. 89, 144 (consolidating cases)). Generally, Plaintiffs alleged that PP&L engaged in illegal promotional strategies, such as cash incentives, reduced electric rates, rebates, and subsidized advertising, in an effort to encourage the installation of electric heat pumps in homes located in its service area.
2. PP&L's First Motion For Summary Judgment
In early 1992, PP&L moved for summary judgment. By Opinion and Order dated September 8, 1992, this Court granted in part and denied in part PP&L's Motion. See Yeager's Fuel, Inc. v. Pennsylvania Power & Light Co., 804 F. Supp. 700 (E.D. Pa. 1992), aff'd in part, rev'd in part, 22 F.3d 1260 (3d Cir. 1994) ("Yeagers I "). Accepting PP&L's contention that the challenged conduct constituted part and parcel of the Commonwealth of Pennsylvania's energy conservation policies, and having determined that the allegedly anticompetitive behavior was conducted "pursuant to a clearly articulated state policy and under active state supervision," the Court determined that Parker v. Brown, 317 U.S. 341, 63 S. Ct. 307, 87 L. Ed. 315 (1943), immunized PP&L from federal antitrust and racketeering liability. Yeagers I, 804 F. Supp. at 702. Similarly, the Court dismissed the RICO claim in the absence of a properly pleaded predicate act.
The United States Court of Appeals for the Third Circuit affirmed in part and reversed in part in Yeager's Fuel, Inc. v. Pennsylvania Power & Light Co., 22 F.3d 1260, 1263 (3d Cir. 1994) ("Yeagers II "). Reversing this Court's decision regarding the federal antitrust claims, Yeagers II narrowed the focus of those claims considerably, extending immunity to PP&L's practice of "offering builders and developers cash grants and other incentives, and . . . offering consumers a special electric rate for installation of high efficiency electric heating systems." Id. at 1263. This protection did not, however, insulate PP&L "to the extent that [PP&L] made these offers contingent upon the all-electric development agreements . . . . , i.e., for actions undertaken in connection with all-electric development agreements." Id. at 1263, 1272. The Third Circuit described the all-electric development agreements ("all-electric agreements") as follows:
Although not specifically alleged in the Oil Dealers' Complaints, PP&L apparently included in some of its incentive offers provisions such as the following:
Developer must agree that the entire development will consist of only electrically heated units during the term of this Agreement. Completion of a non-electrically heated unit shall void this Agreement and the System grants for future units in the development will revert to whatever applicable program, if any, is in effect at the time.
In allowing to proceed those antitrust claims which alleged that "PP&L provided benefits to builders and developers in exchange for entry into all-electric development agreements," id. at 1263, Yeagers II bestowed immunity on PP&L with respect to the "RTS Rate" and other incentive programs that it offered "free of all-electric development agreements to builders and developers pursuant to a clearly articulated and affirmatively expressed policy." Yeagers II, 22 F.3d at 1264, 1266 (defining "RTS Systems" as those which "promote load management by heating water during off-peak hours . . . and storing it for use during peak hours . . . . PP&L offered a special rate (the 'RTS Rate') to homeowners purchasing homes with these units because RTS systems are more expensive than electric baseboard heating"). To the extent that those incentives were offered in conjunction with the all-electric agreements, however, PP&L received no immunity.
3. The Utility Commission
The Bureau of Conservation, Economics & Energy Planning (the "Bureau") is an arm of the Pennsylvania Public Utilities Commission ("PUC"). In an 1989 internal report, the Bureau "found that PP&L's offering of certain incentives to owners and builders to install high efficiency electric heating systems in new homes was a legitimate load management program." Id. at 1268. Despite the 1989 report approving PP&L's use of cash incentives, in March 1993, the PUC altered its policy, disallowing the use of such incentives. The PUC now requires approval of certain promotional activities implemented by utilities, "prohibits the use of cash to influence builders and developers[,] . . . . [and forbids] delivery of allowances such as cash or appliances to builders and developers in order to influence their choice of energy for use in new residential developments." Id. at 1269 (citing 52 Pa. Code § 57.63). Under the new PUC regulations -- issued March 19, 1993 and effective July 24, 1993 -- a "promotional activity" includes:
[a] thing done by a utility with the object of bringing about an increase, or preventing a decrease, in the quantity of its service purchased by the public or with the object of inducing any person to purchase its service, or select or install any appliance or equipment designed to use its service, in preference to a competing form of energy. A demand-side management program approved by the Commission, with the object of encouraging customers to conserve energy or to shift demand from or reduce demand during peak periods, shall not be considered a promotional activity for the purpose of this subchapter.
(Pl.'s Mem. Opp. Ex. 57 ("Pl.'s Ex. ") (citing 52 Pa. Code. § 57.61)). The new regulations specifically forbid any utility, in the absence of PUC approval, from inter alia "delivering anything of more than token value to an architect, engineer, builder, developer, or other person for services performed or to be performed in connection with realty, other than realty acquired or intended for acquisition by the utility for use in the conduct of its own business." (Id. (citing 52 Pa. Code § 57.63(2)).
In light of the PUC's changed position, Yeagers II further limited PP&L's immunity to past conduct: "the fact that the PUC now prohibits such actions does not mean that PP&L should be denied state action immunity for its past activity." Yeagers II, 22 F.3d at 1269.
4. The Amended and Consolidated Complaint
On August 11, 1995, Plaintiffs filed an Amended and Consolidated Complaint ("Am. Compl.") containing additional factual allegations. Specifically, the Amended Complaint alleges that PP&L received advanced notice of all new construction in its service area, offered developers and builders cash grants for the installation of electric heat, and sought commitments from developers and builders to exclude fossil fuel from new developments. According to Plaintiffs, PP&L also offered and made cash payments to contractors and customers whose residences were already heated by fossil fuel in an effort to persuade them to convert those heating systems to electric ("conversion grants"). In exchange for the grants, the contractors and homeowners had to agree that the electric heating device would not be supplemented by any fossil fuel device.
The Amended Complaint presents eight Counts: § 1 of the Sherman Act (Count I); section 2 of the Sherman Act (Count II); section 2(c) of the Robinson-Patman Act (Count III); section 3 of the Clayton Act (Count IV); common-law restraint of trade (Count V); tortious interference with contractual relations (Count VI); unfair methods of competition (Count VII); and civil conspiracy (Count VIII). (See Def.'s Mem. Supp. Mot. Summ. J. Ex. 1) ("Def.'s Ex. ").
PP&L is immunized only for the cash grants and other incentives it offered before July 24, 1993 -- including special rates for customers who installed high-efficiency heating systems -- that were not conditioned on, or exchanged for, an agreement to exclude oil or fossil fuel for such residential uses. All other alleged incentives -- including both the conversion grants and the all-electric agreements -- which properly fall within the purview of the Amended and Consolidated Complaint, and which the Court has not dismissed, constitute the present scope of this litigation. The Court will examine such conduct herein, if and as implicated by PP&L's Motion.
In the instant case, the parties performed extensive briefing and offered submissions designed to substantiate their respective theories of the case. They present different interpretations of the events that transpired in the heating, fuel, and equipment market in central and northeastern Pennsylvania between the late 1970s and the early 1990s. At this point, the Court examines both Plaintiffs' and PP&L's positions.
(a). Costs and Efficiency
Oil and fossil fuel present the most cost-efficient heating systems and are less to install and operate than their gas and electric counterparts. Electric heat involves heat pump systems as well as baseboard heating systems. When heating a space, the heat pump gathers outside air, funnels it through the pump, increases the air's temperature, and releases the air through vents into the space being heated. If the temperature drops below 45 degrees, the heat pump becomes inefficient. (Pl.'s Ex. 4 at 103).
"Resistance" or baseboard heat costs much less to install than oil or gas but its operating costs are two and three times the price of oil or gas. (Pl.'s Ex. 1 at 161; Ex. 22 at 8). While the heat pump presents a more efficient alternative to the electric baseboard, its operating costs are 30% to 40% higher than fossil fuel. (Pl.'s Ex. 22 at 8). In the space heating context, oil costs $ 11.07 per million Btu, gas $ 11.40, electric baseboard heat $ 22.56, and heat pump heat $ 13.77. (Pl.'s Ex. 48).
When heating water, the heat pump costs $ 10.25 per million Btu, with gas and oil costing $ 9.79 and $ 9.37 respectively. (Id.). When combined with oil as a supplemental heating system, however, the heat pump presents a lower operating cost than any single source of heat, lower than regular electricity, oil, propane, or the ordinary, unsupplemented heat pump. (Pl.'s Ex. 1 at 343; Ex. 17).
Electric heat also imposes higher installation costs. Specifically, in 1989, gas (forced air) cost $ 1,600 to install and $ 450 per year to operate, while the same numbers for oil, electric baseboard, and heat pump systems were $ 1,900/$ 429, $ 800/$ 1,245, and $ 3,000/$ 623 respectively. (Pl.'s Ex. 26 at 2). Electric rates have generally increased more rapidly than oil or gas. Between 1980 and 1990, electric rates increased 91%, gas rates increased 43%, and oil rates decreased 8% (Pl.'s Ex. 49). Electric heating equipment also depreciates and becomes obsolete faster than oil heating equipment. A heat pump only lasts for 10 to 15 years while oil heating equipment might last 30 years. (Pl.'s Ex. 58 at 16; Ex. 8 at 148).
(b). Programs and Initiatives
"As PP&L emerged from conservation directed programs in the 1970s and early 1980s, emphasis was directed to revenue growth while uncoupling the rate-of-demand growth." (Pl.'s Ex. 49 at 8). PP&L's revenue comes from three major sources, the residential market ($ 800,587,000); the commercial market ($ 647,949,000); and the industrial market ($ 503,806,000). (Pl.'s Ex. 41). The residential market, by far the largest, became the target for revenue growth. In 1982 and 1983, PP&L sought to increase its sales by 3 1/2% (Pl.'s Ex. 9 at 56-57).
Several PUC decisions, however, undercut PP&L's ability to generate revenue. Between 1978 and 1979, the PUC found that PP&L could no longer use the savings it achieved through sales to other electric utilities on an interchange to improve the earnings and profits of the company. Rather, the PUC ruled that any savings accumulated had to be used to reduce the energy cost rate. (Pl.'s Ex. 9 at 52). Furthermore, in the early 1980s, PP&L constructed two nuclear power plants. Specifically, "Unit 1" of PP&L's Susquehanna nuclear power plant began commercial operation in 1983, and "Unit 2" at Susquehanna began commercial operation in 1985. PP&L appealed, albeit unsuccessfully, to the PUC in both 1983 and 1985, asking for a rate increase to offset the increased costs associated with constructing Unit 1 and Unit 2. The PUC found, however, that PP&L was experiencing capacity that exceeded its requirements for the remainder of the century. (Def.'s Ex. 66 at 2-3; Pl.'s Ex. 9 at 53).
In order to increase its revenues, PP&L now had to make "sales through [its] own customers or through contract sales to other entities." (Pl.'s Ex. 52). PP&L looked to the residential market, specifically heat pumps, as the vehicle to increase kilowatt hour sales. (See Pl.'s Ex. 9 at 90; Ex. 28 (describing heat pumps as "the solution to PP&L's long term marketing needs"); Ex. 49 (remarking "the electric heat pump is the primary competitor of gas heat in both single family and multi-family houses")). PP&L also began offering cash incentives for the installation of "off-peak" electric thermal storage systems which used heat pumps. As early as 1981, PP&L had been providing cash grants to customers. (Pl.'s Ex. 9 at 69). Between 1985 and 1989, PP&L awarded between $ 750 and $ 1,200 per heat pump in "New Construction Grants" to customers who installed heat pumps. (Pl.'s Ex. 45 at 539; Ex. 55 at 1804-05; Def.'s Ex. 57). PP&L also began to approach developers to advance them advertising subsidies. (Pl.'s Ex. 9 at 75, 95).
PP&L has always been cognizant that (1) builders decide what type of heating equipment will be placed in a home and (2) installation cost is a "critical" concern for new home builders. (Pl.'s Ex. 1 at 124-25; Ex. 26 at 2). PP&L therefore began to leverage its strong rapport with developers, assigning its best consultants to develop long term relationships. PP&L recognized that neither the oil nor gas companies, both of which lacked extensive personnel and organization, could match this effort. (Pl.'s Ex. 9 at 73; Ex. 25). PP&L also reached out, in this respect, to the actual equipment contractors, forming the Central Eastern Pennsylvania Heat Pump Association ("CEPHPA"). PP&L required, as a condition for receiving grant payments, that a CEPHPA member install the heat pump. (Pl.'s Ex. 38 at 154650). In addition, PP&L engaged in cooperative ...