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Article Excerpt
I. INTRODUCTION
II. A HISTORICAL PERSPECTIVE OF ELECTRICAL TRANSMISSION REGULATION A. The Infancy of Electricity Deregulation B. The Deregulatory Era: 2000 to Present III. THE CURRENT STATUS OF THE TRANSMISSION SYSTEM IN THE UNITED STATES A. The New, Semi-Independent Status of the Power Grid Destabilizes Coordination Between Interconnections B. Underinvestment in the Infrastructure Exacerbates the Problems Associated With the Power Grid C. Poor Separation Between Generation and Transmission Facilities Undermines the Goal of Competition in Wholesale Electricity Markets IV. ANTITRUST IMPLICATIONS OF LONG-TERM FIRM TRANSMISSION RIGHTS AND OTHER HEDGING STRATEGIES A. The Essential Facilities Doctrine B. First Generation Antitrust Cases C. Second Generation Cases D. The Horizontal Merger Guidelines & The Inability of Antitrust Law to Remedy Transmission Market Power E. Transmission Market Power 1. The Process of Transmitting Electricity 2. Gaming Behaviors that Undermine Competition V. INTERNATIONAL COMMUNITY DEREGULATION EFFORTS AND NEW MARKET STRUCTURES A. Deregulation of Electricity in the European Union (Community) 1. The Scandinavian Countries (Nord Pool) 2. England B. Transmission Market Power in the European Union C. Argentina Market Structure and Gaming Behaviors VI. REMEDIES MITIGATING THE ACCUMULATION AND EXERCISE OF MARKET POWER IN TRANSMISSION MARKETS A. Nationalization of the Transmission Grid Under the Supervision of a Monopoly Transmission Company B. Functional Separation of Generation and Transmission VII. CONCLUSION
I. INTRODUCTION
At 4:10 p.m., on August 14, 2003, dozens of patrons at the Cedar Point Amusement Park in Sandusky, Ohio sat suspended in the air within the confined spaces of the Magnum XL200 roller coaster, which had come to a sudden halt three-quarters of the way up the steepest drop. (1) At this time, New York; Cleveland, Ohio; Detroit, Michigan; and Toronto and Ottawa, Canada; endured a complete electrical blackout that lasted until 1 a.m. the following day for many customers. (2) Authorities attributed the blackout to multiple failures in the electricity grid. (3) In the last forty years, various portions of the United States endured a complete, albeit temporary, loss of electricity due to grid failure. (4) These instances highlight the need for a more secure, reliable, and competitive transmission grid.
Recently, the Federal Energy Regulatory Commission (FERC) promulgated Order No. 681, which extended the duration of long-term firm electrical transmission rights for current holders of such rights to ensure reliable electrical flows without harming competition. (5) Previously, FERC failed to delineate clearly any specifications as to the duration of long-term firm transmission rights, but FERC had a marked preference for longer terms of transmission service. (6) For example, FERC has, on occasion, allowed terms of transmission service up to twenty years in duration. (7) Order No. 681, however, will further exacerbate many of the market power issues experienced in U.S. electricity markets. (8) Because electrical transmission capacity should be an essential facility within the context of antitrust enforcement, FERC's decision to extend the duration of long-term firm transmission rights will serve to limit competition as holders of long-term firm transmission have incentives to congest transmission lines and engage in other gaming behaviors to prevent entry into deregulated electricity markets. (9)
This Article will provide: (1) a brief history of electricity deregulation and the current structure of the transmission grid; (2) a discussion of the antitrust implications of firm transmission rights and gaming behaviors; (3) examples of how the international community addresses the noncompetitive aspects of transmission capacity; and (4) a cost/benefit analysis of possible remedies, including a complete separation of generation from transmission facilities and a complete nationalization of the transmission market.
II. A HISTORICAL PERSPECTIVE OF ELECTRICAL TRANSMISSION REGULATION
A. The Infancy of Electricity Deregulation
The deregulation of the U.S. electricity market has undergone significant restructuring since the advent of the modern electricity distribution grid. (10) The passage of the Public Utility Regulatory Policies Act of 1978 (PURPA) (11) marked the commencement of deregulation in electricity markets in the United States. (12) Although not initially intended to spur the creation of deregulated wholesale electricity markets, the unintended consequence of the regulation was the creation of incentives for state legislators to deregulate wholesale power markets. (13)
The main thrust of PURPA was to create a more diversified U.S. energy market and to promote the usage of efficient alternative energy resources. (14) Among the many requirements of PURPA, investor-owned utilities (previously referred to as utility holding companies) were to purchase energy from nonutility qualifying facilities at "avoided cost" (15) rates that were determined by state regulators and were subject to federal guidelines. (16) In addition, the investor-owned utilities were required to "make such interconnections with any qualifying facility as may be necessary to accomplish purchases or sales." (17) Basically, PURPA required utilities to buy power from qualifying facilities and to connect those qualifying facilities to the electricity grid, thus expanding the highly segmented electricity grid. (18) Traditionally, utilities were geographically isolated and disconnected from other control areas, which forced the utilities to supply their own generation needs. (19) Many problems arose when an intrastate transmission line or a major generation station within a control area was forced off-line, causing prolonged blackouts that undermined the reliability objectives of Public Utility Holding Company Act of 1932 (PUHCA). (20) Among the major blackouts during this regulatory period of time was the "Great Northeast Blackout of 1965," which affected twenty-five million customers from Buffalo, New York to New Hampshire, and from New York City to Ontario. (21)
To combat the rampant unreliability of the electricity grid, the utilities began to increase interconnectivity and formed the North American Electric Reliability Council (NERC) in 1968. (22) The various utilities around the country joined NERC and organized themselves into ten regional reliability councils under the regulatory control of NERC. (23) The interconnection of the utilities was of great importance to this movement, given that if a utility should endure the loss of a transmission line or the loss of a generator within its control area, the interconnectivity of the utilities would allow the suffering utility to import power from another utility within the reliability council. (24) NERC guidelines required that participating utilities maintained surplus capacity to ensure reliability should another utility lose a transmission line or generator. (25) The surplus capacity requirement and the interconnectivity of the utilities created the foundation for the trading of wholesale electricity. (26)
The passage of the Energy Policy Act of 1992 (EPAct) (27) was the culmination of Congress' effort to facilitate competition in wholesale energy markets to drive down prices, increase innovation, and force the utilities to sell electricity at marginal cost. (28) EPAct introduced two major changes to the structure of wholesale energy markets that Congress envisioned would spur competition. (29) EPAct created a new class of generators called exempt wholesale generators (EWGs) and required wholesale wheeling of electricity across the grid. (30) The relaxation of the entry barriers erected by PUHCA for generation by EPAct allowed for increased generation by the EWGs without the onerous costs imposed by PUHCA regulation. (31) In addition, the wholesale wheeling provision of EPAct opened the electricity grid to all market participants by requiring transmission facility owners to accept requests for wholesale wheeling that were reasonable. (32) Independent power producers were now allowed to enter the electricity market and, thus, increase the supply of power to all markets. (33) The increased supply of power would serve to lower prices given that generators were not taken offline in an attempt to manipulate the market. The opening of the grid to independent power producers also served to increase the ability of generators to sell their wholesale electricity to utilities that were not directly interconnected. (34) Therefore, generators that could produce power at or close to marginal cost were rewarded, while those that produced electricity in excess of marginal cost were penalized in that there was limited or no demand for their high priced power. (35) The combined impact of the two provisions of EPAct proved to create a more robust wholesale electricity market while opening up the electricity grid to competition through the deconstruction of entry barriers created by previous regulatory efforts. (36)
In an effort to further encourage competition in wholesale electricity markets, FERC promulgated Order No. 888 on April 24, 1996. (37) Order No. 888 marked the beginning of FERC's open access policy. (38) "Order No. 888 required vertically integrated utilities to provide transmission service on an unbundled basis pursuant to a Pro Forma Open Access Transmission Tariff (OATT)." (39) This action by FERC sought to rid the electricity market of '"undue discrimination in transmission services in interstate commerce and provid[e] an orderly and fair transition to competitive bulk power markets.'" (40) The main purpose of Order No. 888 was to allow competitors to compete vigorously with the powerful vertically-integrated utilities through open access to the transmission grid. (41) Utilities were required to file separate tariffs with separate rates, terms, and conditions for each segment of the supply chain, including wholesale generation service, transmission service, and any ancillary services. (42) FERC estimated that open access transmission would save U.S. electric consumers $3.8 to $5.4 billion a year and would encourage more technological innovation in the industry. (43)
Order No. 888 also suggested the creation of Independent System Operators (ISOs) to monitor and coordinate open access to the grid. (44) The creation of the ISO was an attempt to reduce the ability of the utilities to benefit their own generation via discriminatory access to the utility's transmission system. (45) By placing the control of the transmission grid in the hands of the ISO, the ability of the utility to exercise vertical market power was minimized, theoretically. (46) As a direct result of this design, FERC essentially expected lower retail prices, increased reliability of service, and nondiscriminatory electric service from the public utilities. (47)
The powerful utilities lobbied hard against the promulgation of Order No. 888 and the requirement to open the utility-owned transmission lines to competitors. (48) After all, the utilities owned the lines, and Order No. 888 functionally unbundled the transmission lines from the utility, whereby the utility was forced to transact with competitors and provide access to the transmission lines on a nondiscriminatory basis. (49) In the spirit of compromise and to ensure reliability, FERC provided the utilities with a fair opportunity to recover prudently incurred regulatory costs and any costs associated with making the transition to a competitive wholesale market. (50)
Order No. 889 further clarified the requirements of Order No. 888 and established an electronic information system to ensure competitive wholesale markets. (51) The electronic system, called OASIS (open access same-time information system) provided existing and potential transmission users the same access to transmission information as that enjoyed by the transmission owner. (52) Order No. 889 also required utilities to comply with standards of conduct that precluded anticompetitive behavior by transmission owners, whereby affiliated generators or power marketers would be favored with transmission services. (53) Order Nos. 888 and 889 had a dramatic impact on creating competitive wholesale electricity markets through open access to the transmission grid on a nondiscriminatory basis and the encouragement of ISO formation. The Orders, however, failed to address issues surrounding retail wheeling and the appropriate form for a transmission facility. (54)
In 1999, FERC promulgated Order No. 2000 to rectify engineering and economic inefficiencies and to counteract continued opportunities for discrimination. (55) FERC determined that electricity markets were insufficiently competitive and found the following: (1) the reliability of the bulk power system was stressed; (2) there were increasing difficulties in computing transmission capacity; (3) regional coordination was needed for congestion management; (4) there was increased uncertainty with transmission planning and expansion; and (5) pancaked rates in transmission pricing inhibited market development. (56)
Order No. 2000 changed the cumbersome terminology for the ISO to a regional transmission organization (RTO). (57) FERC's institution of a new regime involving RTOs sought to promote competition in wholesale markets by eliminating the discriminatory behavior engaged in by transmission line owners, despite the prohibition of such behavior by Order Nos. 888 and 889. (58) With regard to discriminatory behavior, FERC was highly concerned about self-dealing and the appearance of self-dealing. (59) Prior to Order No. 2000, transmission owners had no obligation to serve all customers outside of their control area. (60) A lack of transmission grid access was the main impediment to creating an open and competitive electricity market. (61) The impetus for limited access to the grid is that most of the transmission lines are privately-owned by the utilities, and the utilities have a fiduciary duty to their shareholders to maximize the value of the enterprise. (62) Therefore, utilities have an enormous incentive to increase prices to the maximum point that the market can bear, and there is very little incentive for the utilities to relinquish ownership or control of the transmission lines or any other segment of the operation. (63)
Although Order No. 2000 created RTOs to coordinate operations, planning, and transmission, FERC did not mandate RTO membership. (64) FERC simply allowed utilities to join RTOs on a voluntary basis. (65) The fact that membership was voluntary led to the creation of a hodgepodge of power markets throughout the United States. (66) Power markets developed in California, PJM (Pennsylvania, New Jersey, and Maryland), New York, and NEPOOL (the New England states), while less organized power markets formed in the Midwest, the South, and in Texas. (67)
In creating an RTO, FERC established two fundamental approaches: the nonprofit ISO, and the for-profit independent transmission company (Transco). (68) Both forms would have independent boards, but the ISO would be committed to nondiscriminatory service while the Transco would be driven by profit. (69) Despite the attempt by FERC to functionally separate transmission services into nonprofit and for-profit segments, the shareholder maximization problem still exists, because the utility still owns and operates the transmission assets. (70) In addition, the incentives for the ISO and Transco organizations are misaligned; in fact, the incentives are negatively correlated. (71) Therefore, the privately-owned utility has a greater incentive to act on behalf of the Transco unit to increase shareholder value at the expense of the nonprofit ISO unit, which serves to maximize the competitive benefits of open access to the transmission grid. (72)
B. The Deregulatory Era: 2000 to Present
The new deregulatory era involving transmission services commenced with the enactment of Order No. 2004, which encompassed regulations regarding Standards of Conduct for Transmission Providers. (73) The major thrust of the newly-enacted Standards of Conduct for Transmission Providers was the elimination of a loophole that failed to cover a Transmission Provider's relationship with Energy Affiliates that are not marketers or merchant affiliates. (74) FERC's Order No. 2004 sought to ensure that Transmission Providers could not "extend their market power over transmission to wholesale energy markets by giving their Energy Affiliates unduly preferential treatment." (75)
The Energy Policy Act of 2005 (EPAct 2005), enacted August 8, 2005, serves as the cornerstone for deregulated electricity markets to ensure competition and open access. (76) Section 1233(b) of the EPAct 2005, for example, requires that FERC implement a new section to the previously enacted Section 217(b)(4) of the Federal Power Act (FPA) for transmission organizations with organized electricity markets. (77) EPAct 2005 set a target date of August 8, 2006, as the deadline for the implementation of the new section to the FPA. (78) With regard to the new section of the FPA, EPAct 2005 essentially provides teeth to Order No. 2000. The intent of Congress to strongly encourage membership in RTOs for Transmission Providers is an attempt to increase market transparency, ensure reliability, alleviate discriminatory practices engaged in by Transmission Providers, and mitigate market power exercised by vertically integrated utilities that remain. (79) EPAct 2005, however, also fails to mandate membership in an RTO. (80) Membership in the RTO affords participating members the opportunity to improve their ability to respond to regional preferences, and the RTO acts as a self-policing unit to ensure that RTO markets are competitive, assuming an absence of collusion. (81) Section 1233 of EPAct 2005 also directs FERC:
[to facilitate] the planning and expansion of transmission facilities to meet the reasonable needs of the load-serving entities to satisfy the service obligations of the load-serving entities, and enable[] [them] to secure firm transmission rights (or equivalent financial rights) on a long-term basis.... (82)
EPAct 2005 also addressed the undue discrimination issues through prohibiting the utility companies from granting unfair access to the transmission grid via their Energy Affiliate. (83) EPAct 2005 reiterated the objectives of Order No. 2004, which required utilities to deal with their Energy Affiliate at "arm's length" in granting access to the transmission grid. (84) Essentially, the main objective of EPAct 2005 was to increase competitiveness in wholesale electricity markets through remedying discriminatory practices in transmission grid access and providing teeth to the previously enacted FERC orders. (85)
Recently, FERC has promulgated several orders aimed at clarifying financial rights associated with transmission services. Currently, Transmission Providers provide customers with transmission services on a firm or non-firm basis for varying degrees of time. (86) Order No. 681, finalized on July 20, 2006, significantly clarified the process for long-term firm transmission rights awards in organized electricity markets. (87) The passage of Order No. 681 serves to minimize uncertainty in electricity markets and allows market participants to hedge electricity price volatility over long periods of time, especially in a market where electricity prices are positively correlated with natural gas prices. (88) FERC now authorizes RTOs to develop long-term firm transmission designs that "reflect regional preferences and accommodate their regional market designs." (89) The Commission further noted, "long-term firm transmission rights must be made available with terms (and/or rights to renewal) that are sufficient to meet the reasonable needs of load serving entities to support long-term power supply arrangements used to satisfy their service obligations." (90) The main criteria intimated by FERC in awarding long-term firm transmission rights is that the rights must be made available to all transmission customers, although FERC failed to delineate exactly how a Transmission Provider is to make the rights available to all customers and how much must be allocated to new customers. (91) In addition, Order No. 681 requires that Transmission Providers offer long-term firm transmission rights to any entity that pays for upgrades to the transmission grid or builds expansions. (92)
To clarify further, FERC adopted seven additional guidelines that must be followed in awarding long-term transmission rights. (93) The guidelines include: (1) a long-term transmission right should specify a source, a sink, and a quantity; (94) (2) the right must provide a hedge against day-ahead locational marginal pricing congestion charges or other direct assignment of congestion charges for the period covered and the quantity specified; (95) (3) long-term firm transmission rights made feasible by transmission grid upgrades or expansions must be made available upon request to any party that pays for such upgrades or expansions; (96) (4) rights must be made available with term lengths that are at the discretion of the RTO, but FERC requires at least a ten-year firm transmission right; (97) (5) load-serving entities must have priority over non-load serving entities in the allocation of firm transmission rights; (98) (6) long-term firm transmission rights designed to support a service obligation are assignable to another entity that acquires that service obligation; (99) and (7) "[t]he initial allocation of the long-term firm transmission rights shall not require recipients to participate in an auction." (100) These requirements characterize FERC's attempt to create incentives for transmission grid upgrades and to ensure that load-serving entities have the ability to hedge against price volatility to increase reliability and competitiveness of electricity markets.
III. THE CURRENT STATUS OF THE TRANSMISSION SYSTEM IN THE UNITED STATES
Current transmission capacity (101) on the grid cannot keep up with burgeoning demand of consumers. (102) Since the mid-1990s, demand for wholesale electricity products has increased by about 2-3% per year, while supply of transmission has increased only about 0.7% per year. (103) This phenomenon is attributed to the lack of investment in the transmission grid, the massive influx of new merchant power, and poor transmission pricing formulas by FERC. (104) In fact, it is estimated that from 2002 to 2012, national electricity demand will increase by twenty percent, but construction of high-voltage transmission facilities will not keep up. (105) "The 2003 Long-Term Reliability Assessment of [NERC], the voluntary organization responsible for grid reliability, states that 'North American transmission systems are expected to perform reliably in the near term,'" but many sections of the grid are reaching their reliability limits due to increased customer demand and increased power transfers from new merchant power stations brought online as a byproduct of competition. (106) The best indicator of the problem is the expansion of the Transmission Loading Relief (TLR) system, which is a procedure used to allocate transmission capacity when requests for transmission exceed the capacity on the grid. (107) As previously mentioned, over fifty million people lost power due to an enormous blackout in the Northeastern United States in 2003. (108) The outdated transmission grid is vulnerable to such outages for numerous reasons. Among the most common explanations for the outages are: (1) lack of coordination in the power grid due to its new, semi-independent status; (2) a lack of investment in the infrastructure; and (3) a lack of competition in the industry due to poor separation of generation from transmission. (109)
A. The New, Semi-Independent Status of the Power Grid Destabilizes Coordination Between Interconnections
Over time, the purpose of the transmission grid has changed. Initially, the grid was used to transport electricity from regional generators to local customers, but now the grid supports a budding international market in power. (110) Despite its changed purpose, the grid retains the old-world fractured organization of multiple and uncoordinated local utility companies. (111) The fractured organization of the transmission grid has made it more difficult to repair or improve the power grid while maintaining an international power market. (112) Routine maintenance on the grid, let alone expansions or upgrades to the infrastructure, is nearly impossible given the lack of capacity and the burgeoning demand for electricity. (113) Typically, "[w]hen one portion of the grid is taken offline for maintenance or repair, other areas of the grid--perhaps owned by completely different utility companies--are expected to compensate." (114) The grid cannot sustain maintenance or repairs conducted by multiple utility companies that require transmission lines to be taken offline. (115) The result of such action is increased congestion on the power lines with the possibility of blackouts. (116) Some utilities are attempting to coordinate maintenance, repair, and upgrade procedures via webpages and other communications. (117) Ironically, utilities in California are leading the charge in increasing coordination between state utilities, but the grid remains vastly unorganized and uncoordinated. (118)
In addition, the lack of coordination and organization has increased the difficulty for generators to transport power from place to place. Often, a utility must contract with several different utilities to transport power from point A to point B. (119) Due to FERC's handling of the pricing of transmission, each utility on the path from point A to point B gets to charge the generator a tariff, which breeds inefficient results. (120) This process, also known as the "pancaking" of rates, creates a resulting price for transmission that is irrational and illogical given that the distance the electricity travels or how congested the lines are do not determine the price. (121) The transmission price is simply determined based on the number of fractured utilities that happen to be on the path between point A and point B. (122) FERC's RTO membership proposal may serve to mitigate the "pancaking" phenomenon, but the creation of RTOs are very expensive, and FERC has yet to mandate RTO membership for all utilities. (123) Additional problems arise with regard to "loop flow" externalities, but this issue is beyond the scope of this Article. (124)
B. Underinvestment in the Infrastructure Exacerbates the Problems Associated With the Power Grid
The current lack of investment in the transmission grid is attributable to two major problems: (1) FERC has incorrectly priced transmission, and (2) for transmission that may be "correctly" priced, FERC guidelines do not account for an appropriate premium for the uncertainty associated with the electricity industry. (125)
FERC Order No. 888 required all utilities that owned transmission lines to delineate a single tariff for the usage of those lines. (126) However, the calculation of the tariffs presents many problems, including the fact that the tariff tends to under compensate transmission facilities for new capital investments like new power lines. (127) Furthermore, the tariff-pricing scheme fails to account for "bottlenecks" on popular paths. (128) "Bottlenecks" are another way to describe congestion on a line, whereby there is more demand to send power over the transmission line than there is capacity to carry the power over the line, thus resulting in a supply shortage. (129) Such a shortage of supply would usually increase prices, yet the tariff-pricing scheme fails to attach the appropriate risk premium to compensate consumers for the risk of curtailment. (130)
In addition, FERC is now recommending that utilities divest their transmission assets or relinquish control over the transmission assets to ISOs or RTOs, which have not been proven to be profitable. (131) Therefore, there is a disincentive for Transmission Providers to join RTOs or ISOs given that membership will likely reduce the utility's ability to exercise monopoly power. (132) Considering the fact that numerous regulations involving the electricity industry are still in flux, much uncertainty surrounds the industry. (133) This uncertainty does not create the appropriate incentives for investors to finance upgrades or improvements to the grid. Appropriate incentives that compensate investors for the high risk associated with electricity markets may serve to bankrupt many utilities or force the abandonment of many projects given the high cost of capital, thus creating a self-fulfilling prophecy. (134)
The underinvestment in the electricity infrastructure is also attributable to the absence of incentives for utilities--still largely vertically integrated--to innovate or upgrade the grid system. (135) The expansion of the electricity grid would afford more generators the opportunity to compete in the electricity market, which would subsequently reduce prices given the increase in supply. (136) The decrease in prices would likely reduce the profitability of the utilities. Previously, utilities were able to recoup all their costs and obtain a reasonable rate of return associated with an expansion to the grid under a cost-of-service regime. (137) Given that many jurisdictions have abandoned the cost-of-service regime and opted to deregulate their electricity markets, utilities enjoy neither the guarantees of recouping their costs nor the recovery of a reasonable rate of return. (138) The uncertainty surrounding the industry creates incentives for the utilities to maintain the status quo and resist innovation due to the unlikelihood that costs would be recouped and the fact that rational investors would not finance such projects without a reasonably certain rate of return. (139) The risk is much too high for most investors to finance transmission grid expansion.
C. Poor Separation Between Generation and Transmission Facilities Undermines the Goal of Competition in Wholesale Electricity Markets
The generation sector of the electricity industry "operates not in a free market, but under the shadow of monopoly." (140) PURPA and EPActs 1992 and 2005 afforded new generation facilities opportunities to enter the market with relative ease in order to buy and sell wholesale power at the lowest price. (141) The reality, however, is that the market is not fair given that independent generators are often at a disadvantage in procuring transmission services from the incumbent utility that owns the transmission lines. (142) The incumbent utility has an incentive to withhold transmission from competitors to the greatest degree afforded by law. Incumbent utilities routinely discriminate against competing generation firms, and they are often successful in doing so given the difficulty in proving the discriminatory conduct. (143) Perverse incentives exist whereby competitors would not attempt to file a complaint with FERC given the likelihood that competitors will not be able to meet their burden of proof to show that the alleged discriminatory conduct transpired and that the costs of litigation are so high. In addition, incumbent utilities have great incentives to charge competing generation firms higher prices for access to their transmission lines, which undermines competition in the electricity market. Until regulators fully separate transmission services from generation, incumbent utilities will substantially benefit from the fact that they own the transmission lines. The incumbents will attempt to exercise market power over the transmission services in an attempt to reduce competition and maximize profits.
The current structure of the electricity grid creates incentives for incumbent utilities that own the transmission lines to benefit their native generation or participate in gaming behaviors that serve to undermine the spirit of open access and nondiscriminatory allocation of transmission assets. Considering that FERC has not made RTO membership mandatory and that utilities can create for-profit Transcos that have perverse incentives in relation to the nonprofit ISOs, utilities will continue to seek to maximize profitability in accordance with the fiduciary duty they owe to their shareholders. (144) If FERC were to give Order No. 888 and Order No. 889 some enforcement power, then it is possible that the discriminatory practices that currently transpire could be mitigated.
It is difficult, however, to prove that such discriminatory practices transpire. In fact, numerous commentators and my own experiences as a wholesale electricity scheduler and trader illustrate that complete open access is a fallacy. (145) The recent increase in duration for firm transmission rights and the discretion given to RTOs to tailor the financial transmission rights to the preference of their region only serve to exacerbate the situation and perpetuate the fractured coordination of the grid explained above. The expansion of firm transmission rights raise numerous antitrust issues and may result in further discriminatory practices and limited open access to the electricity grid. (146)
It appears that until FERC forces the complete separation of generation from transmission or mandates RTO membership, incumbent utilities will continue to seek ways to benefit native generation at the expense of the competitive electricity market. Of the many potential remedies for this situation, one solution may require the complete overhaul of the electricity industry whereby regulators force divestiture of transmission assets from the utilities and create a nationalized transmission company that is independent from an association with a utility and must offer transmission access on an open and nondiscriminatory basis. Such a remedy is explored in greater detail later. (147) The point is that the regulators must remain proactive in devising solutions to counteract the gaming behavior that incumbent utilities currently engage in to the detriment of the consumer.
IV. ANTITRUST IMPLICATIONS OF LONG-TERM FIRM TRANSMISSION RIGHTS AND OTHER HEDGING STRATEGIES
A. The Essential Facilities Doctrine
It follows that the U.S. transmission grid should be considered an essential facility within the context of antitrust enforcement considering the cost-prohibitive nature of replication and that many states have enacted legislation preventing the construction of a duplicate transmission grid. The essential facilities doctrine has its roots in the 1912 Supreme Court decision in United States v. Terminal R.R. Ass'n. (148) This case involved a railroad company limiting access to a railway line that passed through St. Louis, Missouri. (149) The court found that "in ordinary circumstances," railroads could overcome the market power exercised by Terminal Company over the terminal system by constructing their own. (150) The situation with St. Louis proved to be "most extraordinary" because the '"physical or topographical condition peculiar to the locality'" made the acquisition of adequate facilities cost-prohibitive. (151) In lieu of divestiture of the problematic terminals, the court devised an open access policy whereby Terminal Company could continue its operations as long as it either admitted all railroads to ownership of the assets in question or provided for the use of terminal facilities "upon such just and reasonable terms and regulations as will, in respect of use, character and cost of service, place every such company upon as nearly an equal plane as may be with respect to expenses and charges as that occupied by the proprietary companies." (152) This case served as the first acknowledgement of the essential facilities doctrine, and it acts as an early open access policy which FERC has at its disposal in devising open access policies for transmission use. (153)
The modern statement of the essential facilities doctrine arose from MCI Comm. Corp. v. AT&T, a case that grew out of MCI's attempts to enter the long-distance telephone services market at the behest of AT&T. (154) At the time, AT&T was the monopoly provider of local "switched" telephone service but was facing increasing competition in the long-distance market. (155) The Federal Communications Commission (FCC) authorized MCI to provide long-distance service using microwave technology. (156) MCI, subsequently, built numerous microwave towers to transmit signals between terminals in different cities, but the connection effort also required an interconnect with AT&T's local lines and switches, which AT&T refused. (157) The court determined that:
A monopolist's refusal to deal under these circumstances is governed by the so-called essential facilities doctrine. Such a refusal may be unlawful because a monopolist's control of an essential facility (sometimes called a "bottleneck") can extend monopoly power from one stage of production to another, and from one market into another. Thus, the antitrust laws have imposed on firms controlling an essential facility the obligation to make the facility available on nondiscriminatory terms. (158)
The court further delineated that in order to establish liability under the essential facilities doctrine, the following four elements must be satisfied: (1) control of the essential facility by a monopolist; (2) a competitor's inability, practically or reasonably, to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility. (159)
B. First Generation Antitrust Cases
Characterizations of antitrust claims involving electric utilities are either "first generation" or "second generation." (160) The 1973 decision in Otter Tail by the U.S. Supreme Court marked the first significant instance in which the courts closely examined transmission access issues. (161) Following the Otter Tail decision, a wave of antitrust cases were filed involving monopolization claims under Section Two of the Sherman Act. (162) This initial wave of cases is considered "first generation" based on the utility's refusal to wheel power. (163) Since the enactment of EPAct 1992 and the open access Order Nos. 888 and 889, "second generation" cases have been brought relating to transmission access, but subject to liability in "restraint of trade" under Section One of the Sherman Act. (164)
The emergence of antitrust enforcement in transmission access began with the Supreme Court decision in Otter Tail Power Co. v. United States. (165) For first generation cases, the most common antitrust allegation for refusing access to the transmission grid is a monopolization claim under Section Two of the Sherman Act. (166) For a utility to be found liable under Section Two of the Sherman Act, a plaintiff must establish: (1) that the defendant possesses monopoly power in the relevant product and geographic market; and (2) that the defendant acquired or maintained such power by improper means (through exclusionary or anticompetitive conduct). (167) Typically, plaintiffs narrowly define the market to include transmission or generation in the utility's service area whereby the utility's monopoly power is self-evident. (168) Any transmission alternatives that are economically feasible or realistic will negate such a narrow market definition and undermine any claims of monopoly power. (169) The element of exclusionary or anticompetitive conduct is not satisfied if the utility offers a legitimate business justification for a refusal to wheel, such as limited transmission capacity. (170) Historically, courts are deferential to the utility's business justifications for refusing to wheel power. (171) "For example, if a utility has insufficient transmission capacity to provide the requested wheeling, it will probably not be required as a matter of antitrust law to expand its facilities to accommodate the request." (172)
Prior to the passage of EPAct 1992, a party seeking transmission services from an electric utility would probably have a better chance of success by suing in federal court under the antitrust laws than by petitioning FERC. (173) It is likely that this phenomenon remains true given FERC's reactive nature towards enforcement and regulation, the difficulty of proving such anticompetitive behavior, and the limited resources afforded FERC to enforce judgments. (174) FERC's open access policies require that the utility treat all transmission customers in a manner that is comparable to how it would treat itself. (175) However, the reality of FERC effectively enforcing such policies is a fallacy. A Section Two refusal to wheel case may be extremely difficult to satisfy if the utility seeks to justify its conduct as an effort to comply with shifting regulatory standards involving transmission rather than conduct undertaken to exclude competition. (176)
Furthermore, several courts have held that specific intent to monopolize is required in a Sherman Act...
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