State Action Antitrust Exemption Collides with Deregulation: Rehabilitating the Foreseeability Doctrine

INTRODUCTION A capitalist society with policies established to "regulate" the promotion of competition in traditionally regulated industries such as the electrical market seems counterintuitive. Yet, it is a reality in the United States. In particular, traditionally rate-regulated industries, such as electricity, have been "deregulated." In this context, deregulation means opening up certain components of the industry to competition. However, regulatory mechanisms in place to prevent abuses of the competitive process are also driving this competition, resulting in a "regulated deregulation."1 Specifically, recent initiatives to "deregulate" the electricity markets have highlighted that free markets thrive where competitive structures in place do not suppress competition. Before Congress passed PURPA (the Public Utilities Regulatory Policy Act) in 1978, electricity in the United States was provided by a vertically integrated firm, which provided transmission, distribution and generation service on a bundled basis.2 Since this firm had a legally conferred monopoly, state public utility commissions regulated its consumer rates.3 As a result, the electricity market has consisted of a structural design supporting regulatory entities that supervise and monitor the generation, transmission, and distribution of electricity to end-users. Market monitoring and intrusiveness on the part of state legislatures and regulatory agencies permeate such structures and, therefore, cannot sustain competition without additional policies intended to promote competition.4 In essence, such deregulatory measures "re-regulate" an already regulated market.5 In a wholly regulated market, an electrical utility, servicing a franchised service territory, would generate its own electricity and then transport and distribute it to end-users, under regulated rate structures for this bundled service.6 Federal and state governments regulated pricing and distribution of electricity in order to protect consumers from this market power and any external costs of electricity production such as overproduction and the social costs of pollutants.7 Deregulatory policies have triggered an unbundling primarily through a separation of transmission from power generation. Transmission remains regulated. The jurisdiction over electricity rates of the Federal Energy Regulatory Commission (FERC) extends, in principle, to wholesale transactions, though the extent of this jurisdiction over retail rate regulation remains unclear.8 Twenty-four states and the District of Columbia have legislation in place to "partially" deregulate their retail electricity markets by implementing retail access, even though some states have not moved forward in this.9 States' attempts to "deregulate" the electrical markets do not transform old paradigms of regulation, in which state governments created artificial barriers for new entrants, into new competitive regimes. Rather, traditional regulatory structures remain in place. The pervasiveness of regulation in the business of electrical power generation has left utilities little room for antitrust law.10 One particularly useful tool for potential antitrust defendants is the state action immunity doctrine. The original purpose of state action immunity is to preserve principles of federalism and allow states to displace competition in sectors of their domestic economies so as to compensate for the failures of competition and protect the public welfare of its citizens.11 Essentially, it is a judicially created exemption that limits the potential antitrust liability of private parties, as well as municipalities and government entities.12 For an entity to successfully allege state action immunity, it must prove that it is advancing the interests of the state rather than its own interests. This is done by showing that the conduct is pursuant to a "clearly-articulated" state policy and that it has been "actively supervised" by the state. …