Town of Concord, Mass. v. Boston Edison Co.

• Decision Date: 05 April 1990
• Docket Number: No. 89-1872,89-1872
• Citation: 915 F.2d 17
• Parties: , 1990-2 Trade Cases 69,193 TOWN OF CONCORD, MASSACHUSETTS, et al., Plaintiffs, Appellees, v. BOSTON EDISON COMPANY, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 17

915 F.2d 17

59 USLW 2201, 1990-2 Trade Cases 69,193

TOWN OF CONCORD, MASSACHUSETTS, et al., Plaintiffs, Appellees, v. BOSTON EDISON COMPANY, Defendant, Appellant.

No. 89-1872.

United States Court of Appeals First Circuit.

Heard April 5, 1990.

Decided Sept. 21, 1990.

William L. Patton with whom Robert J. Stillman, Ropes & Gray, Boston, Mass., George F. Bruder, Carmen L. Gentile, Bruder, Gentile & Marcoux, Washington, D.C., John J. Desmond, III and Jeffrey N. Stevens, Boston, Mass., were on brief, for defendant, appellant.

Charles F. Wheatley, Jr., with whom Don Charles Uthus, Peter A. Goldsmith, Timothy P. Ingram, Pace J. McConkie, Allen D. Freemyer, Wheatley & Ranquist, Arlington, Va., Charles R. Parrott, Nutter, McClennen & Fish, Boston, Mass., Albert S. Robinson, and Grindle, Robinson & Kertzman, Wellesley, Mass., were on brief, for plaintiffs, appellees.

Before BREYER, Chief Judge, and CAMPBELL and SELYA, Circuit Judges.

BREYER, Chief Judge.

The chief question raised by this appeal is whether a pricing practice known as a price squeeze violates the antitrust laws when it takes place in a fully regulated industry.

To understand the nature of a price squeeze the reader must keep three basic facts in mind. First, a firm can engage in a price squeeze only if it operates at two levels of an industry, and only if its competitors at one level are also its customers. Alcoa, the defendant in a famous antitrust case, provides an example of such a firm. See United States v. Aluminum Co., 148 F.2d 416 (2d Cir.1945) (Alcoa ). For several decades, Alcoa controlled the domestic production of almost all of America's aluminum ingot. It sold its ingot to independent fabricators, some of whom turned the ingot into aluminum sheet; it also fabricated sheet itself. Both Alcoa and the independents sold the finished sheet to the same group of consumers. Alcoa, therefore, operated at two levels of the aluminum business--ingot production and sheet production--and it competed with its customers (the independent sheet fabricators) at the second level.

Second, a price squeeze occurs when the integrated firm's price at the first level is too high, or its price at the second level is too low, for the independent to cover its costs and stay in business. Suppose, hypothetically, that Alcoa's price for ingot was $100 per ton; that the independents' costs of fabricating ingot into sheet was $50 per ton; and that Alcoa's price for sheet was $145 per ton. Under these circumstances, the independents, with ingot costs of $100 and fabricating costs of $50, would have no "room" to make a profit, for they could not charge more than $145 for sheet without losing all of their business to Alcoa. Alcoa's prices of $100 for ingot and $145 for sheet would squeeze the independents out of business.

Third, Judge Learned Hand, in United States v. Aluminum Co., supra, wrote that a price squeeze violates Sherman Act Sec. 2, 15 U.S.C. Sec. 2(a), when (1) the firm conducting the squeeze has monopoly power at the first industry level, (2) its price at this level is "higher than a 'fair price,' " and (3) its price at the second level is so low that its competitors cannot match the price and still make a "living profit." See id. at 437-38. Other courts, using substantially similar language, have reached the same conclusion. See, e.g., Bonjorno v. Kaiser Aluminum & Chem. Corp., 752 F.2d 802, 808-11 (3d Cir.1984), cert. denied, 477 U.S. 908, 106 S.Ct. 3284, 91 L.Ed.2d 572 (1986); George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 553 (2d Cir.1977); Carl Hizel & Sons, Inc. v. Browning-Ferris Indus., Inc., 600 F.Supp. 161, 161-62 (D.Colo.1985).

This case raises a narrow question about the price squeeze theory of antitrust liability: does Sherman Act Sec. 2 forbid a governmentally regulated firm with fully regulated prices--prices that are regulated at both industry levels--from asking regulators to approve prices that could create a price squeeze? Despite language in some cases suggesting that the answer is yes, see pp. 28-29, infra, our analysis of the likely effects of a price squeeze in a fully regulated industry leads us to conclude that the answer is no. Effective price regulation at both the first and second industry levels makes it unlikely that requesting such rates will ordinarily create a serious risk of significant anticompetitive harm. At the same time, regulatory circumstances create a significant risk that a court's efforts to stop such price requests will bring about the very harms--diminished efficiency, higher prices--that the antitrust laws seek to prevent. We conclude, therefore, that price regulation will, in most cases, prevent a price squeeze from constituting an "exclusionary practice" of the sort that Sherman Act Sec. 2 forbids.

We also conclude that, regardless, the plaintiffs in this particular case did not demonstrate the existence of an unlawful exclusionary practice, for the evidence does not support a critical jury finding. It does not show that the defendant, Boston Edison, possessed monopoly power in the primary product market.

For these reasons, we reverse a judgment in favor of the plaintiffs.

I Background

The private firms that supply American homes and businesses with electricity are called "investor-owned utilities." Most of these firms are fully integrated, operating at all three levels of the electric power industry: (1) they produce (or generate) electricity, (2) they transmit electricity from generators to local distributors, and (3) they distribute electricity at the local level. See generally Joskow, Mixing Regulatory and Antitrust Policies in the Electric Power Industry: The Price Squeeze and Retail Market Competition, in Antitrust and Regulation 175-78 (F.M. Fisher ed. 1985) [hereinafter Joskow ]; Meeks, Concentration in the Electric Power Industry: The Impact of Antitrust Policy, 72 Colum.L.Rev. 64, 67-69 (1972) [hereinafter Meeks ]. Despite being fully integrated, these firms typically do not distribute only electricity that they themselves have generated. Rather, in many parts of the country, groups of firms have formed power "pools" through which they coordinate the generation, transmission, and distribution of electricity throughout a large geographical area. These pooling arrangements aim to enhance reliable and efficient electric service by matching customer demands (which change minute by minute) with available low-cost supply sources. As a result of power pooling, an integrated utility will often wind up distributing electricity generated by a different, interconnected company. See generally 16 U.S.C. Sec. 824a-1 (governing pooling agreements); New England Power Pool Agreement, 56 F.P.C. 1562 (1976) (describing the New England Power Pool), petitions for review denied, Municipalities of Groton v. FERC, 587 F.2d 1296 (D.C.Cir.1978); C. Phillips, Jr., The Regulation of Public Utilities 585-92 (1988) (discussing coordination among electric utilities) [hereinafter C. Phillips ]. Even in the absence of explicit pooling arrangements, the many physical interconnections among American utilities, combined with the tendency of electricity to flow instantaneously along interconnected lines to wherever it is demanded, make it likely that electricity distributed by one utility will be supplied by another. One legal consequence of these interconnections and pooling arrangements is that most electricity flows "interstate," permitting federal, as well as state, regulation of electricity. See Cincinnati Gas & Elec. Co. v. FPC, 376 F.2d 506, 507-09 (6th Cir.), cert. denied, 389 U.S. 842, 88 S.Ct. 77, 19 L.Ed.2d 106 (1967); Public Serv. Co. v. FPC, 375 F.2d 100 (7th Cir.), cert. denied, 387 U.S. 931, 87 S.Ct. 2054, 18 L.Ed.2d 992 (1967); see generally FPC v. Florida Power & Light Co., 404 U.S. 453, 92 S.Ct. 637, 30 L.Ed.2d 600 (1972).

Investor-owned utilities of the type we have described supply approximately 75% of the nation's electricity. The remainder is supplied by government- and consumer-owned systems. Unlike their investor-owned counterparts, these systems tend not to be integrated. The federal government, for example, generates about 10% of the nation's electricity (at systems such as the Tennessee Valley Authority), but sells most of it to independent distributors. Approximately 2,000 municipalities and cooperatives own small-scale distribution companies, but only a handful generate their own electricity; most purchase the electricity they distribute from investor-owned utilities or from the federal government. In contrast to investor-owned systems, municipal systems typically enjoy generous tax and financing subsidies and substantial freedom from regulation. See generally Joskow at 175-78; Joskow and Schmalensee, Markets for Power: An Analysis of Electric Utility Deregulation 17-20 (1983); Lopatka, The Electric Utility Price Squeeze as an Antitrust Cause of Action, 31 UCLA L.Rev. 563, 568 & n. 29 (1984) [hereinafter Lopatka ]; Meeks, 72 Colum.L.J. at 67-69.

The record before us reveals facts typical of the national pattern. The defendant, Boston Edison, is a fully integrated investor-owned utility. It belongs to the New England Power Pool ("NEPOOL"). It transmits electricity (either self-generated or, e.g., secured from other NEPOOL members) to 52 cities and towns in eastern Massachusetts. Each of these towns has only one distribution system serving all of the towns' inhabitants. In 39 of the towns, Edison owns the distribution system. In the remaining towns, either the town itself or another utility owns the distribution system. Concord and Wellesley, the plaintiffs, are two of the towns that own their own distribution systems. They take all of their electricity over Edison's transmission lines, and buy most of it directly from Boston Edison.

Edison's rates are completely regulated. The Federal Energy Regulatory Commission ("FERC," or the "Commission")...