Warren E. Burger: We will hear arguments next in American Paper Institute against the American Electric Power Service Corporation. Mr. Bator, I think you can proceed when you are ready.
Paul M. Bator: Mr. Chief Justice, and may it please the Court: This case involves the validity of two rules issued by the Federal Energy Regulatory Commission, FERC. Under Section 210 of the statute commonly known as PURPA, the Public Utility Regulatory Policies Act of 1978. The Government is here because the Court of Appeals for the District of Columbia circuit held these rules invalid. It is the submission of the Government that the Court of Appeals misread the statute, that the rules are valid, and that the ruling of that Court threatens to cripple an important and an exciting experiment that Congress set on when it enacted PURPA. I want to start by giving some background to put the arguments made in our brief and our reply brief in context. This Court is of course familiar with PURPA from its decision last term in FERC and Mississippi. In PURPA Congress embarked on an ambitious attempt to encourage the development of innovative energy efficient technology for producing electric power. The central point was to lessen the country's dependance on foreign oil, to end the waste of nonrenewable fossil fuel, and to encourage energy efficiency. More specifically, Congress sought to tap the tremendous reservoir of potential energy potentially available from renewable sources and from wasted heat produced in industrial and domestic settings. There are two technologies involved. Cogeneration is the simultaneous production of electricity on the one hand and thermal energy, heat and steam, on the other. Small power production is the generation of relatively small amounts, less than 80 megawatts of electricity, from non-fossil fuel and renewable sources, wind, water, sun, organic materials, and waste. Cogenerators and small power producers together are referred to as qualifying facilities, QF's for purposes of this case. In enacting PURPA, Congress found that cogeneration of small power production was hindered historically in this country by two things: the traditional electrical utilities, the interests represented by the Respondent here, sought to preserve their monopoly in the production of electricity by refusing to buy electricity from or selling back of electricity to QF's. Secondly, an uneconomical and rigid regulatory environment deterred firms from entering the business of unconventional power production. Behind these two labels, cogeneration and small power production, there is a world of hundreds of variagated technologies. Cogenerators and small power producers come in all sizes and shapes from the $5,000 back-yard windmill producing maybe 10 kilowatts to the enormous paper mill generating maybe 300 to 400 kilowatts of power that may cost several hundred million dollars to build. QF's use dozens of different fuels from walnut shells to garbage, from sawdust to geothermal brine. Every facility that needs a fair amount of heat is a potential co-generator, every hospital, school, every laundry, every apartment house. This is a wide-open road. It is open to all comers. It is exactly the opposite of the traditional monopolistic electric utility business. Now, there are three critical elements in the congressional plan for encouraging cogeneration and small power production. First, Section 210 of PURPA creates a legal obligation on utilities to buy to and sell from QF's. Second, Congress instructed FERC to relieve QF's from the constricting regulatory environment that surrounded the commerce in electrical energy. The third element in the congressional plan was decentralization. The states are to play a critical role. FERC was given one year to issue general framework rules to state the enterprise, to set it on foot. Implementation was then to go forward at the state level. I turn now to the first rule in question in this case. Here the commission addressed the question of what rate is to be paid by a utility buying power from a QF. After extensive rule-making proceedings, FERC determined that a two-track system should be established. Rates for old capacities, co-generators and small power producers already in existence or under construction, those rates were left on a flexible basis to state commissions. The second track was for new capacities not yet in existence. It was, of course, here that the central PURPA purpose of encouraging new firms to come in was in play. The rate system for new capacity was itself sub-divided into two tracks: one, rates could be set by negotiation in contracts at any level agreed to by the parties thus allowing the marked full play. Two, if there is no contract, then a PURPA rate system comes into play. The PURPA rate system is that the utility buying power from the QF must pay the QF the full avoided cost of that power. Now, this is in turn subject both to state implementation and state waivers.
Harry A. Blackmun: Professor Bator, you put the other first and the full avoid cost second. I must confess, having looked at the statute, I looked at it just the reverse.
Paul M. Bator: Well, Your Honor, if there had been a physical way to state them together simultaneously, I would have because they proceed in tandem. Actually, in the regulations the very first thing in the regulations, the very first of the two, refers to the full play of negotiated and bargained-for rates, and it is later in Section 304 that we get the full avoided rate... full avoided cost. I think it is important that there not be a misunderstanding about what the PURPA system and full avoided cost is because we think that the Court of Appeals really had a misunderstanding of it. The Court of Appeals seemed to think that this was a very rigid, flat, single uniform rate. Full avoided cost is not really a rate at all. It is a rate system. It is a dynamic rate structure. It means simply that the amount paid by the utility to the QF equals the cost the utility would have incurred had that particular quantum of power not been available from the QF if it had to be produced by the utility. Full avoided cost is simply the cost the utility avoided by having the QF power made available. This means that full avoided cost is anything but rigid. It varies from utility to utility. It varies within each utility everytime fuel costs go up and down. When OPEC puts down the price of oil, full avoided cost goes down because the power that would have had to have been produced by the utility would have been less. Further, it is important to note that even when fuel prices are flat, full avoided cost varies because the unit cost of producing electricity is not uniform. The more power a utility has to produce, the higher the unit cost to produce it. It is a firm rule of utility practice that the most efficient, least-costly facilities are turned on first and are turned off last. Thus, a utility may have coal, oil, gas-fired units. At a time of low demand, the low-cost coal-fired units come on line. If demand goes up, the next block of power comes in, the higher-priced fuel-oil-fired units. At times of peak demand, the so-called peakers come on. Those may be the very high-price natural-gas-fired units.
John Paul Stevens: But is it not true, Mr. Bator, that at all times, even though the full avoided cost may be different at different times of the day and so forth, at all times, it is the maximum rate permitted by the statute?
Paul M. Bator: The full avoided rate system is the maximum rate permitted by the statute.
John Paul Stevens: Well, and at any given time of day, whatever that rate might be if it is equal to the utility's full avoided cost, it is the highest the statute would permit to be charged.
Paul M. Bator: It is the highest that the statute permits.
Speaker: Yes.
Paul M. Bator: But the actual price involved varies not only over these long ranges but will vary even within a given day. At 3:00 a.m. when demand is very low, only the very low-cost facilities are on, and the price avoided by the utility is the low price. At 7:00 p.m. when demand high, if there is QF power available, it would be replaced relatively high priced oil. A QF that is supplying power over 16 or 24 hours a day... they all do... does not get just the peak price. It gets the average price. What this means is that full avoided cost, since it depends on the cost of the power it is replacing, it means that the first QF that comes along will always get the highest full avoided cost. It is replacing the most expensive fuel. The next one that comes along will be replacing the next block, less-costly capacity. The third one that comes along will be getting a lower price. Really, the beauty of the system is that QF capacity replaces the least efficient utility capacity first, and the other beauty of the system is that the more QF power comes in, the lower the full avoided cost. It drives down the full avoided cost because it will be replacing less and less costly utility capacity. Now, the Court of Appeals invalidated this rule. Why? It did so because it found that the commission did not adequately take into account the interest of electrical utility consumers. The Court of Appeals evidently concluded that full avoided cost system would lead to excessive profits to QF's because cost savings would not be passed on immediately to utilities and their customers, and it concluded that this violated the statutory command that the rate be just and reasonable to consumers. Our submission, Your Honor, is that the Court of Appeals treading in an infinitely complicated and technical area entrusted to an expert commission really misapprehended the statute, misapprehended the commission's regulatory task under the statute, and certainly misunderstood the workings of the PURPA rate. The Court of Appeals asserted that the statute requires basically that QF profits be limited so that all savings or a lot of savings could immediately pass through to customers. Of course, this is traditional utility regulation. This is cost-of-service regulation in which the return to the seller is limited in terms of the seller's cost, but in this statute Congress made its intention clear. As the conference report which is quoted at length in our reply brief makes clear, Congress did not wish these entities to be subjected to the cumbersome case-by-case cost-of-service regulation traditional in the utility business. In other words, the commission rightly rejected cost-of-service rate making here as a solution because Congress had identified it as the problem. Rate-making pitched to QF cost is really in opposite in this industry for three reasons: the costs are an infinitely variagated set of costs associated with an incredibly complex and various form of technology and enterprise. We are talking about future costs. This is new capacity in a rapidly developing and a technologically very volatile field. Most important, we are talking about an industry that is an at-risk open-to-all-comers industry. It is fully competitive. So that the problem of monopoly profits does not exist in this case, and it is in light of this clearly-expressed congressional purpose that FERC determined that rather than rates pitched to the seller's cost, an across-the-board rate set by rule in advance was necessary. Now, to return to Justice Stevens: why start it at 100 percent of avoided cost? Why not some lower figure? The Court of Appeals suggested that might show a savings in some way with utility customers. Our answer is that the cost had to be set in advance in a world of uncertainty under a statute whose principal purpose was to entice entrants, new firms, into the business. Now, from this advanced perspective, this whole picture of savings and excess profits is very misleading. You don't know in advance what the costs of that new QF are going to be. Here is an illustration. Suppose there is a utility which has an avoided cost at peak times and a peak demand of eight cents a kilowatt hour. It's true that maybe a QF will come along that has only a four-cent cost, and yet under the PURPA rate, the utility will have to pay eight cents. You say, "Why not set it at six cents? " "The QF would still be making a profit and some of the savings could be passed along. " The difficulty is that in advance you don't know whether the QF that is going to come along has a four-cent cost or whether it has a six-cent or a seven-cent or an eight-cent or a ten-cent cost.
William H. Rehnquist: Well, the full avoided cost rule really doesn't guarantee any QF a profit, does it?
Paul M. Bator: Absolutely no, Your Honor. Absolutely no. It is absolutely a comparative invitation. You can come in as long as you are more efficient than the utility. If in my illustration, the QF's cost is nine cents, it won't come in because it can't get more than eight. Now, suppose the commission had done that which it is constantly being invited to which is set a rate at less than full avoided cost. Suppose the commission had set a six-cent maximum, 75 percent of full avoided cost. What would be effective then? It would have deterred from the market QF's that could produce electricity at six cents and seven cents. That capacity would never have been built, and if it is never built, what do we have in its place. We have eight-cent utility power. The eight-cent utility power is using low efficiency fossil fuel and not the renewable resource that Congress wishes to encourage in that case. Finally, the Court of Appeals picture of savings here is misleading because it simply forgets the self-correcting nature of full avoided cost. It may happen that the first one that comes in has four-cent cost and therefore gets a fairly high profit, but that will attract other firms into the business. The next firm won't get that profit because it has to replace lower-cost utility capacity. It drives down. Under the PURPA plan state commissions are constantly readjusting full avoided cost. Eventually, full avoided cost should come down to a market clearing or equilibrium rate. It is a self-correcting rate.
William H. Rehnquist: Does the first QF in a field of a particular utility get kind of a grandfather right to replace the highest cost power?
Paul M. Bator: Your Honor, that depends entirely on the state implementation. In a sense what this does is leave it open to the states to work out the details, and there is now going on in every state elaborate rule making. In a lot of states, it is averaged out. There are all kinds of systems being tried out. The full avoided cost generally is reevaluated from time to time and in some states very, very frequently. Of course, that really leads me to my next point. There is a way in which you can get a guaranteed grandfather rate, and that is to contract. That's the alternate track. That is quite apart from the PURPA rate. The QF and the utility can bargain any rate they wish. In this industry that is essential for the QF because the QF cannot get financing without a long-term contract. The PURPA rate is too risky. It is subject all... it may be reevaluated by the commission. It is subject to the state implementations. It is subject to every variation in the price of fuel. There is a lot of bargaining going on. QF's have the incentive to bargain because they need long-term stability for financing. Utilities have an incentive to bargain. Why? Because of the PURPA rate. Before the PURPA rate, the utilities had no need to bargain. The Commission explicitly found that it is the existence of the PURPA maxim that would tilt the utilities into bargaining, and what is happening in the industry? The Southern California experience which has been referred to in the brief shows clearly that contracts are being written, and they are producing savings to utility customers because they are below fully avoided cost.
John Paul Stevens: On that point, one of the objections that the Court of Appeals made was that the commission had not adequately explained its reasoning. I understand your argument. You think it was made in the same terms by the commission that you made it today. In fact, they said in one place that it would not produce any savings for consumers.
Paul M. Bator: We think that that sentence, which we would have been happier had they not included it in their opinion, in context refers to short-term. It is clear that this system doesn't guarantee short-term savings, but we think that the commission report... and the commission was operating under the informal rule-making statute of the APA. All its obligation was to give a concise general statement. It did not have to make findings. The standard of review here is not substantial evidence. We think that the commission's report and its background... it was a very sensitive staff report here that the commission played off on. There were rules, amendments to the rules. We think that the entire record sensitively read clearly shows that the commission had all these matters in mind. I will add just one more quick point on this one, and that is it must be remembered that this is all to be considered experimental. The statute explicitly told PURPA, "Do this fast in one year. " "Send this baby out and let's see what happens. " "Let the states do the implementation. " "States can come in and get waivers if they don't like it. " The commission was told explicitly in the statute, "Reevaluate your role". The commission really decided that this PURPA system would eventually replicate market forces. It would maximize the statutory purpose for creating an incentive for new firms to come in all of which, Justice Stevens, without a penny of extra costs for the utility costs. There is no harm either to the utility or to the customer. That is built into the system.
Warren E. Burger: Are there bills pending in Congress to overcome the Court of Appeals decision?
Paul M. Bator: If there are, Justice Blackmun, I don't know. I just don't know.
Sandra Day O'Connor: I think you will find there is a bill pending.
Paul M. Bator: I am embarrassed to say that I just don't know. We do feel, Your Honor, that the commission's expert judgment that this was the... and it was a predictive judgement... that this was a good way to start this experiment should not have been overturned. This experiment is really already succeeding. That is, under the PURPA rate there are droves of co-generators and small power producers coming in seeking to qualify under this statute since 1980 under the PURPA rules. About seven and a half million kilowatts of capacity have been applied for to qualify as QF's under PURPA. Now, that is the equivalent of seven or eight nuclear plants, so this baby is out there, and it is flourishing, and the states are adopting very many varieties of ways to implement the fully avoided cost system. If the thing sours or goes bad somewhere, a state utility commission which is the natural representative of a consumer interest. The utilities are here rather piously telling us that they are interested in consumers, but it is historically the state utility commissions that have protected the consumer, and if they think this thing is ripping off the consumer, they are quite free to come in and get a waiver or suggest a change. Your Honor, I have only three minutes to deal with my dazzingly complicated second issue which is the interconnection rule. The Court of Appeals here held that the rule requiring utilities to hook up, to make the physical interconnection necessary to accomplish purchase and sales under PURPA is invalid. Section 210 of PURPA requires utilities to hook in order to purchase and sell power, and the commission sensibly ruled that the only way to purchase and sell power was to make the physical interconnection so that you can do it. The Court of Appeals said that the only way you can do this is to use the enormously complicated separate proceeding provided in Section 210 of the Federal Power Act to accomplish this. The arguments on this issue where we think that the Court of Appeals misconstrued the two statutes and really issued a ruling threatening to cripple this experiment again. I will leave to our brief and reply brief and would like to reserve the rest of my time for rebuttal.
Warren E. Burger: Mr. Berlin?
Edward Berlin: Mr. Chief Justice, and may it please the Court: I, too, will be dealing with the purchase rate rule. I suggest that if Congress wished to encourage every last drop of cogeneration, it would have legislated the 100-percent avoided cost rule. It did not do that because it wished the commission to inquire to search out whether it was possible consistent with the statutory objectives to share some element of the savings with the utility consumers. It did not intend for the commission to do what it did which was to automatically without that inquiry legislate the 100-percent rate which Congress itself certainly could have. The commission failed to inquire. It rejected out of hand the percentage of avoided cost possibility on the speculation that it might not bring forth every last drop of cogeneration. It did not even consider the possibility of establishing such a percentage as a beginning rate allowing co-generators to come in and seek more if that is insufficient in encouragement for them.
William H. Rehnquist: Mr. Berlin, why is it irrational for the commission to say that when we want to get this thing off the ground we do want to bring in every last drop of cogeneration because then we will know that the co-generators are doing as well as they can, and then there will be time enough to adjust and see what proportion of those benefits are passed on to the consumers later after the co-generators are in place?
Edward Berlin: Justice Rehnquist, it undoubtedly is the case that a great deal of cogeneration that will be produced by the rule will be produced in response to the legislation and of the rule fairly immediately. In fact, there is a great flurry of activity as Mr. Bator has indicated. Under the commission's rules, co-generators have an absolute right to a long-term contract. They do not have to rely on negotiations apart from the rule to get a long-term contract. Under the commission's rules they can get a long-term assurance of a 100-percent rate. I suggest that if the Congress shared the view that is assumed in your question, if it wished to encourage every last drop, it would have legislated a 100-percent rule.
William H. Rehnquist: What do you mean when you say they can get a long-term contract without negotiation?
Edward Berlin: Under 304(d) of the commission's rules, a co-generator at its option can in fact force a long-term commitment at 100 percent of avoided cost.
William H. Rehnquist: What would be the term as the rules say.
Edward Berlin: We use the term, "To the discretion and option of the co-generator. " If the co-generator is willing to commit capacity or energy for any term, then under that rule, the utility must accept it and must pay the full 100 percent of avoided cost rate.
Sandra Day O'Connor: Although that rate can vary from time to time as Mr. Bator indicated.
Edward Berlin: That is certainly correct, and I think that shows the illogic in simply looking at the utilities' rate in establishing a rate that will be sufficient to encourage cogeneration. Indeed, even under a 100-percent rate, we have no way of knowing whether for any particular co-generator that will be enough. Congress realized that. That's why Congress put in the specific rate criteria in 210(b). It wanted the commission to exercise its judgment to make some inquiry, not an intrusive inquiry, but some inquiry nonetheless to make certain that it was providing enough, but not entirely excluding consumers if it was possible to permit consumers to share.
Sandra Day O'Connor: Mr. Berlin, I guess you agree, do you not, that the standard of review that should be applied in the Court is an abuse-of-discretion standard of review in determining whether the commission properly exercised it.
Edward Berlin: Quite frankly, Justice O'Connor, I think that whether it is arbitrary or capricious, a substantial evidence need not be reached in this case because it is our contention that the agency simply failed to carry out the statutory criteria, failed to apply the statutory criteria.
William H. Rehnquist: That's just dressing up the same argument another way.
Edward Berlin: I think that is probably correct, and we would not dispute. Now, I do note, although I don't think it is an issue in this case, that the Federal Power Act itself makes substantial evidence the review standard. That is not the issue in this case. The question is whether or not the agency has complied with the mandate imposed upon by the statute, and that is what we are arguing. We are contending that they abused this discretion. They acted arbitrarily in failing to give meaning to the statutory criteria. Mr. Bator says that... and I was about to cite the Court to the reference in the commission's opinion where they say, "There will be no rate savings for consumers. " Mr. Bator construes the commission's... and the commission chose not to, but he construes it saying, "The commission really means there will be no immediate savings for consumers, but there will be. " I assume he is implying, "long-term savings". That is categorically wrong. There cannot be any rate savings for consumers in the immediate future or over the long term. The whole logic of the 100-percent avoided cost rule is that if a utility as a consequence of the availability of co-generated power is able to reduce its own cost of generation, it must pay the full measure of that savings immediately, tomorrow, and in the future to the co-generator. The utility's costs do not go down one cent. Its consumer rates cannot go down one cent.
Sandra Day O'Connor: Mr. Berlin, it does appear that adoption of the full avoided cost rule is simply the upper limit of what is permitted under the statute, so the commission appears to have acted within the framework of the statute but simply set the rate at the upper limits. Isn't it in fact a question of whether acting in that way is an abuse of discretion?
Edward Berlin: I'm not sure that is the upper limit permitted by the statute, Justice O'Connor. The statute provides and the Government concedes this in its reply and it certainly made very clear in the conference report that the upper limit is either the rate produced by application of the 210(b) criteria or the utility's avoided cost whichever is the lower. We suggest to you that Congress recognized that a just and reasonable rate might well be lower than the utility's avoided cost, and that's why it mandated the commission to inquire. Now, the Government endeavors to substantiate the commission's rule by reasons similar--
William H. Rehnquist: Let me just ask one question--
Edward Berlin: --Yes, sir.
William H. Rehnquist: --about what you are just talking about, Mr. Berlin. You say that there are no prospects in store of savings for consumers even down the road. Does the commission's action of promulgating this particular rule negate the possibility that perhaps three or four years from now after it is satisfied that there are viable co-generators in the field of changing the full avoided cost rule so as to pass on the savings?
Edward Berlin: There is nothing to preclude the commission from changing its rule in the future, and should it change its rule and should it lower the rate below 100 percent, then there would be a possibility. I was just simply pointing out that I think Mr. Bator is in error in suggesting that under a 100-percent rule there can be savings. There cannot be now or in the future. Mr. Bator--
John Paul Stevens: The commission didn't assume there would be savings, did it? Mr. Bator's argument was not disagreeing with that the commission said--
Edward Berlin: --Absolutely not.
John Paul Stevens: --in explanation of its own--
Edward Berlin: Absolutely not. The commission--
John Paul Stevens: --It found public benefit because of the reduction in the use of coal and so forth.
Edward Berlin: --Not even that, Justice Stevens. The commission said first very clearly, "There will not be consumer savings. "
John Paul Stevens: Correct.
Edward Berlin: Then it went on and said, "Commenters have pointed out, nonetheless, that there may be fuel savings. " et cetera.
John Paul Stevens: Well, that's obviously true, isn't it?
Edward Berlin: That obviously is true--
John Paul Stevens: Yes.
Edward Berlin: --and we don't dispute it.
John Paul Stevens: And that's a public-interest factor.
Edward Berlin: And there is question that it can take that into consideration. Mr. Bator suggests that the alternative confronting the commission was either to establish a 100-percent generic rule or subject co-generators to intrusive cost-of-service regulations. We obviously agree that Congress did not intend to subject co-generators to utility-type regulation, but look at the conference report that he cites in his brief, footnote 2, page 2 of the reply brief. "Congress clearly did not preclude any inquiry into co-generator cost. " "It said,. " In fact, it cannot be contended that the commission would be under a great burden if it undertook that responsibility. There is a companion rulemaking which you will find in the appendix to the petition. That companion rulemaking defined qualifying status... those utilities that would qualify for purpose benefits. In undertaking that rulemaking, the commission said, "We must do a market penetration analysis. " "We must anticipate how much cogeneration would be brought forth by a 100-percent avoided cost rule. " As it says on page B-139, "We begin our inquiry by looking at co-generator costs. " The commission in fact had a great deal of information available to it about co-generator costs. Mr. Bator also suggests, "So I say that when they are burdensome, there are ways available without subjecting them to adjudicatory case-by-case inquiry. " "Permian Basin is certainly a prime example of what could have been done. " Mr. Bator also suggests in his brief that we should give deference to the commission. It is a start-up rule. It was making predictive judgements. Again, he is putting words in the commission's mouth. The commission never said that this is a start-up rule, that we are doing the best that we could in light of limited facts. In fact, the companion rulemaking shows that they had a great deal more information available to them. The predictive judgment cases have never stood for the proposition that you excuse compliance with the requirements of the statute, that you validate a rule but fail to comply with the statutory prescription. I would now like to turn--
John Paul Stevens: May I ask, sir, what part of the statute did they not comply with?
Edward Berlin: --They made no effort at all, Justice Stevens, to look at any of the 210(b) criteria. 210(b) says that we should consider a rate that is dressed in reasonable--
John Paul Stevens: By hypothesis this is just and reasonable because if they didn't buy the substitute power, they would still have a rate that the local utility said was just and reasonable.
Edward Berlin: --That, sir, is exactly what Congress knew and told us. If it wished to capture none of the savings for utility consumers, it would have prescribed and wished to maximize cogeneration, would have prescribed a 100-percent rule.
John Paul Stevens: Congress could have said, "It must be there", but I think you said they have violated the statute by prescribing the statutory maximum. It seems to me that this is one of the alternatives the statute permits.
Edward Berlin: Well, let me then correct that, Justice Stevens.
John Paul Stevens: Yes.
Edward Berlin: A 100 percent avoid cost rule is certainly permitted by the statute, and if I have given any contrary indication, let me retract it. I suggest, however, that before the commission can arrive at that 100-percent statutorily permitted rate, it must give deference to the criteria articulated by the statute. The commission never did that. It simply joined to the ceiling that Congress had established and said, "That is the just and reasonable rate. " Let me turn to interconnection issue if I can. The commission has directed that in every case in which a co-generator wishes to ship power into a utility system, interconnection ought to take place automatically without the need to comply with the Federal authority. We say that may not do, Justice Stevens, under the statute. The statute is clear on its face. Here we are dealing with two different section 210's. I hope I don't confuse it. We are dealing with Section 210 of the Federal Power Act which is an interconnection provision. In PURPA Section 210 which has the rate provision in it, Congress authorized the commission to exempt co-generators from certain provisions of the Power Act, but it said, "You may not exempt them from the interconnection provision of the Federal Power Act. " For Mr. Bator to prevail before you, he has two hurdles to overcome. He has to show the validity of his rule in light of 210(e)(3)(b), the non-exemption provision, and if he does, he must establish nonetheless that there is implicit authority in PURPA to order interconnection. I suggest to you that the Government's argument really is illogical. The Government contends correctly that Congress knew all along that there must be interconnection authority, and then it goes on and says, "Congress confers this authority implicitly", though indeed the Congress did know that there had to be interconnection authority. It provided that interconnection authority in the Federal Power Act. That was the pattern followed from the very inception of the legislation. There was always a cogeneration rate provision and a companion interconnection provision which from the very first day included co-generators, small power producers. Those little guys that Mr. Bator was talking about were always included in the Federal Power Act interconnection provision. When the administration testified on the legislation, the Deputy Administrator of FEA, the Federal Energy Administration, said, "The interconnection provision of the Federal Power Act would be the vehicles by which co-generators were getting to connections. " He didn't suggest that there was implicit authority in the companion cogeneration provision. Mr. Bator in his reply brief says, "We can forget about their testimony. " "That was addressed to the Administration's bill, not to the bill as enacted by the House, but there was no substantial difference in the respect that I am now talking about between those two bills. " More to the point, the testimony that the Government chooses not to deal with except in a footnote reference, that of the Chairman of the Federal Energy Regulatory Commission, Charles Curtis, was addressed to the House-passed bill, the bill that Mr. Bator says is relevant from a legislative-history purpose. That bill bears some consideration. At that time, the House-passed bill contained two different interconnection provisions: the Federal Power Act interconnection provision with transmission facilities and the cogeneration interconnection provision allowing interconnection with distribution facilities. What does Chairman Curtis, the chairman of the agency that is to administer the statute, say? He said to Congress, "You must pass the Federal Power Act interconnection provision because that will be the vehicle by which all co-generators and small power producers, the little guys, get the ability to shift power into a utility system. "
John Paul Stevens: May I ask you one broad question? Under your view of the statute, would the commission have the power to adopt a rule that would give the authority to a local state commission to make the decision on whether a particular interconnection should be made?
Edward Berlin: The commission could certainly under my view--
John Paul Stevens: Under your view.
Edward Berlin: --And I totally advocate its responsibility. I think it may, Justice Stevens, have the capacity to delegate responsibility to state commissions in the overwhelming majority of the cases. I think it must, however, leave its door open a crack to allow someone who believes that a Federal interest is being violated, and the Federal interest here is an interest in the reliability of the interconnector transmission network to come before it and raise that reliability question.
John Paul Stevens: As I read your brief, you seemed to say that Section 210 of the Power Act is the exclusive authority... statutory authority... for interconnection orders.
Edward Berlin: With transmission facilities, yes, Your Honor.
John Paul Stevens: And if that's true, then it would seem to me that that would require that the Federal Power Commission in Washington issue all those orders.
Edward Berlin: That is correct, and let me respond to what I think lurks behind your question. The Government certainly implies that if we prevail, we will be setting... we will be requiring all of these thousands of small windmills that Mr. Bator very vividly talks about. He doesn't talk about the amicae in this case, the large paper companies and chemical companies and petroleum companies who will account for the overwhelming majority of cogeneration, but be that as it may, let's speak about his windmills. The statute certainly says that interconnection proceedings ought to be treated as adjudicatory proceedings. It references the APA sections. To my mind, Justice Stevens, that shows that Congress was very concerned about these types of proceedings. It does now follow, however, that simply because these are adjudicatory proceedings that you must have thousands of proceedings before the FERC. I am reminded of this Court's decision in Weinberger v. Heinsen, also an adjudicatory situation, where I believe Justice Rehnquist was writing for the Court, and he said that even in that situation when you use your rule-making authority to establish general rules, to establish congressional requirements, if Mr. Bator is correct that the overwhelming majority of interconnections will not present issues worthy of adjudicatory proceedings, then we submit that the commission can take care of that by using its rule-making authority by directing a threshold variable. What it may not do is to prevent a utility which believes it has the capacity to overcome that threshold showing from any opportunity to come before it. I think my answer to your question--
John Paul Stevens: What is the source of the rule-making authority you say is there? Is it 210(a) of PURPA?
Edward Berlin: --No, I think it's a general authority to issue rules and regulations under the Federal Power Act. I suggest that if you look at Chairman Curtis's testimony, if you recognize that he was addressing legislation which at that time said that co-generators can obtain interconnections... rather that distribution interconnections were available under the cogeneration provisions. When you recognize that he said that was not going to be the vehicle because we are dealing with transmission facilities, please enact the Federal Power Act interconnection provision. That shows that the Government is flatly wrong in making the voltage-level distinction it tries to make between transmission and distribution facilities. In fact, it is not a voltage-level distinction at all. It is a functional distinction. This Court has held facilities as low as 12 kilovolts in the City of Colton case to be transmission facilities. Conversely, it has held slightly larger facilities, 13.8 kilovolts to be distribution facilities in the Connecticut Light and Power case. Why is that? The reason for that is that is not a voltage level distinction. It's a functional distinction. When power is being shipped to an ultimate consumer and it is going in one direction when a utility controls the flow of it, can protect its system, can protect its other customers, that is a distribution facility, but when someone who is not under the control of the utility unilaterally controls the flow of power into a utility system, when it is a two-way flow, and that is what the commission's rules require... it requires parallel operation... then you are dealing with transmission facilities. Congress recognized that. It recognized the transmission facilities present unique problems, and it dealt with those unique problems comprehensively in the 210 provisions. Remember, in the 210 Federal Power Act provision, Congress included from the very inception co-generators, small power producers, those little guys who were going to produce less than 80 megawatts. Congress included them because it recognized the potential for reliability problems, and it recognized that was a non-delegable Federal interest that FERC could not abdicate its responsibility. Now, let me say a word about 210(e)(3)(b). Congress has just finished writing 210 of the Federal Power Act through all of the things that I have just described. Why did it put in 210(e)(3)(b)? It put in 210(e)(3)(b) in conference at the same time it put in a savings clause in the Federal Power Act, 210(12)(e) and at the same time it put in the necessary-to-encourage language. Why do they do that? What's the logical explanation? What's the fair reading? Well, the fair reading was that Congress simply did not want the commission to undo what it carefully crafted in the Federal Power Act interconnection provision, and that's why it put in 210(e)(3)(b). The Government in its reply brief repeats one argument that the commission had offered and then offers two new arguments that hadn't been made before. First it contends that there is really a target applicant distinction, that 210(e)(3)(b) is intended to exempt co-generators when they are targets, but you cannot exempt them from being targets for interconnection orders, and it points out that when you exempt somebody, you exempt them from an obligation, from a duty, from a burden.
William H. Rehnquist: We have heard about QF's and PURPA. What is a target?
Edward Berlin: A target is the Government's invention for the justification of 210(e)(3)(b) which says that you cannot exempt QF's or co-generators from the Federal Power Act interconnection provision. The commission says that what Congress was really saying there was you cannot exempt a co-generator when it is the target of someone else's efforts to interconnect with it. Under 210 of the Federal Power Act, a co-generator can either apply for an interconnection or it can be the unwilling recipient of someone else's interconnection.
William H. Rehnquist: Sort of like a take over.
Edward Berlin: Yes, and that's when they are a target. The problem is that 210 contains burdens when you are an applicant. Indeed, the whole purpose of putting 212 in the Federal Power Act is to impose burdens on those who are applicants for interconnection orders. Secondly, the Government implies that co-generators were included as targets for the first time in conference when (e)(3)(b) was added. We suggest to you that does not appear to be the case. If you look at the House and Senate bills that preceded conference which the Government timely included as an appendix in the reply brief, you will see that they both reference the possibility that cogenerators could be targets of interconnection orders. Finally, in a footnote to its reply brief, the Government contends that (e)(3)(b) talks about facilities. When discussing cogenerators as targets, they talk about them as facilities, and that, it implies, buttresses its target-applicant distinction. I point out, however, that 210(e)(1) which is the provision which gives the commission the authority to exempt cogenerators from the Federal Power Act, from the Public Utility Holding Company Act, from state laws also talks about facilities. Carried to its logical extreme, it would mean that the barrier... the barrier that Congress was determined to pull down, the barrier of regulations, would remain because under (e)(1) the commission could not relieve owners, operators. The Public Utility Holding Company Act is not addressed to facilities. It's addressed to the owners of those facilities. All of the reporting requirements, all of the accounting requirements would remain if the Government's highly technical reading, admittedly in the footnote to its brief, was sustained. Thank you very much, Mr. Chief Justice.
Warren E. Burger: Do you have anything further, Mr. Bator?
Paul M. Bator: Yes, Chief Justice, just a few comments. The question raised by Mr. Berlin about the legal obligation under the rules of the utilities to enter into the long-term arrangements, I would like to complicate it in a tricky reading of these rules. We believe and the Government submits that it requires an enormous torture process to be done to the language to those rules to lead to the conclusion that the utilities have a long-term obligation or have an obligation to enter into long-term contracts with QF's. The simple reading and the straightforward reading of the statute is that in the absence of using the PURPA system you simply... each side is wholly free to bargain or not to bargain to a long-term contract. On the long-term-saving question, Justice Stevens, on Mr. Berlin's account of this statute, it would be totally inexplicable. Why fix the utilities so they will be unable since the PURPA rate went into effect to obtain long-term contracts at less than fully avoided cost? The reason that long-term saving will inure to the customer is the commission's rules explicitly provide that the availability of QF power as it comes into play should be taken in account, should be factored into the calculation of fully avoided cost.
John Paul Stevens: I think I understand your argument, but I am not entirely sure the commission made that argument.
Paul M. Bator: Well, they put it in the rule. Rule 292.304(e)(6) says to the states, "Factor it in". The commission did explicitly say the other thing which is that the existence of the PURPA rate would pit both parties into negotiation, and that is what it has done. And that has already... we don't even have to wait for the long term. Customers have already realized savings. Finally, on this one, the commission explicitly made a relevant modest disavowal. They said, "This rulemaking presents an effort to evolve concept in a newly-developing area. " That is not our invention. That's what the commission said. Now, on the interconnection question, Mr. Berlin makes light of the obligations that would be imposed if every interconnection had to start with a Section 210 Power Act proceeding. My only response to that, Your Honor, is to sit down and read Section 210 of the Power Act. It requires an absolutely full evidentiary hearing, a complete set of public-interest findings. Substantial evidence must support all of these findings. There is an absolutely overwhelming process. The two statues, the Power Act and PURPA, are the product of an enormously complicated and untidy legislative process, and all I have time for is to beg the Court to understand that there were two very different things going on at the same time. The Power Act was dealing with a different range of problems, and it is really just sort of an unhappy coincidence that there is a kind of surface plausibility to injecting this totally inapposite Power Act proceeding into the middle of every PURPA interconnection. It makes no sense. It makes absolutely no sense. For these reasons and the reasons stated in our brief, we ask that the judgment of the Court of Appeals be reversed.
Warren E. Burger: Thank you, gentlemen. The case is submitted.


Warren E. Burger: Hear arguments next in number 71-703 United States against First National Bancorporation. -- to wait just a minute. I think you can proceed now, Mr. Friedman.
Friedman: Mr. Chief Justice and may it please the Court. This is a direct appeal from the United States District Court for the District of Colorado which at trial dismissed a government antitrust suit, challenging a bank merger is violating Section 7 of the Clayton Act. The merger involved the acquisition by the First Bancorporation of Colorado, the second largest bank holding company in Colorado of the First National Bank of Greeley which is the second largest bank in the City of Greeley. The holding company which I shall refer to as Bancorporation, does not, through any of its subsidiaries, operate in the City of Greeley. So, this means that the acquiring firm and the acquired firm are not themselves direct competitors. The theory of the government's case, was that the Bancorporation was a potential entrant into the Greeley market and that by acquiring the bank in Greeley, the effect was to remove the competitive effect, that the presence of this potential entrant had on the outside of the market on the theory that had it not been for the acquisition, there was a reasonable probability that this acquiring firm, the holding company, would either itself have entered the market for acquiring a small bank or from opening a new bank in the Greeley area.
Warren E. Burger: Mr. Friedman, does the fact that some acquisition is made automatically make the acquiring entity a potential entrant?
Friedman: No, no, of course not, of course, not Mr. Chief Justice. The -- first of all, our argument is that, in view of all the circumstances shown here, under the proper standard, in fact, this corporation was a potential entrant at the time it made the acquisition. We do not say that the mere fact that made the acquisition made it a potential entrant. What we do say is, that in this kind of a situation, where the firm, as I shall develop, was interested in the market, whereas an attractive market, where as the record shows, they were interested in going into all the markets and where it was an attractive thing to prudent management that is enough to make it, we think, a potential entrant, And then the next question, of course, is whether the elimination of that potential entrant may have the effect substantially, to lessen competition in violation of Section 7.
Potter Stewart: Potential independent entrant or an entrant by way foothold.
Friedman: That's correct Mr. Justice. There are claimants that they were a potential entrant here in both ways.
Potter Stewart: You're going to get, are you, to the foothold?
Friedman: Oh, yes.
Potter Stewart: Because, except I don't -- that was a new one to me --
Friedman: Well, let me explain it right now.
Potter Stewart: Well, I think I understand it, but I hadn't seen any -- it didn't ring any bells with me in opinions of this Court.
Friedman: No -- well, I think this Court does not say so, but the concept is a very simple, one which is, if you have concentrated market, where two or three firms own a major share of the -- have a major share of the business as it's true in Greeley, if an outside firm comes in and merely succeeds to the share of the market held by one of these large firms, this merely solidifies the existing relationship. It tends to -- to tie up the existing structure. On the other hand, if a large firm comes into the market by acquiring a smaller firm in the market, this means that the only way of the large firm can hope to achieve a substantial share of the market is by engaging in very vigorous competition. And it also, it seems to me self-evident that a very large firm is not going to acquire a small firm in the market unless it believes and hopes that it can build it up, and these are -- the theory of it that this kind of an entry will inject into the market a new competitive force which is not present in the usual concentrated market.
Potter Stewart: In your view, is it even better to be a foothold entrant than an independent entrant, from the point of view of Section 7?
Friedman: That I -- we -- we -- I don't know Mr. Justice. Both of them, we think, both of them we think are desirable in changing the structure of concentrated markets, in a sense -- in a sense, perhaps, the acquisition of a small little firm in the market which up to this time by definition has not been a very effective competitor, that's almost the equivalent of going in by yourself because you start with a little one that says, though, you just started it and try to build it up, and get a larger share of the market and compete vigorously in this market.
Potter Stewart: Is this -- is this document developed in the -- in the Courts of Appeals or the District Courts?
Friedman: No, no, I think it's merely developed by the --
Potter Stewart: Over in your department?
Friedman: -- by the government, Mr. Justice. And the -- unfortunately, I had to say it is not thus far, been persuasive to the District Courts that we consider it but we hope it will be to this Court.
William H. Rehnquist: Mr. Friedman, isn't the -- the question being though, it was before Judge Doyle in this case, basically a factual one?
Friedman: It's basically a factual one Mr. Justice, but we think in resolving that question, Judge Doyle, we think, applied the wrong standards for determining, what is a potential entrant. That -- that is, we think the judge applied what we call the subjective standard, the standard based on the express intent of the corporate official, as the official as to what they would do, and we don't think that is the proper standard as I shall develop in the light of the congressional purposes in such so.
William H. Rehnquist: Didn't he in his opinion also refer to consideration of objective evidence which he found led to the same conclusion as the subjective evidence?
Friedman: He -- he spoke of objective evidence, but I -- I think Mr. Justice, once again, what he meant by objective evidence was largely the -- the testimony plus the fact that he was impressed, I think, by what he felt was the unlikelihood in terms of the management-stated prior program and of plans of their going in. He -- he did not, it seems, to us, address himself to the standards that we think are the controlling of this. Now, I would like just by a way of background, give a little bit of the history of the bank merger movement in this country. In the late, in the year, we -- in late 1950s, we had a tremendous way of back mergers in the major cities of this country. Competing banks joined. They formed these huge banks and manufactures, hand over Morgan Guaranty in New York and this merger went on for awhile and finally the government began to bring suits against these mergers. And when this Court in 1963 decided in the Philadelphia Bank case, that Section 7 of the Clayton Act applied to bank mergers, that basically marked the end of this aspect of the bank merger movement in this country, because that case established the two large banks having a significant share of the market where competitors cannot combine.
Potter Stewart: When did you say that the present day movement began more or less?
Friedman: The movement I discussed I think --
Potter Stewart: Yeah.
Friedman: -- began in the late 1940s to the early 1950s. But the next phase of this movement, which I am coming to, I think began in the early 1960s. And that was the tendency by the large banks in the big cities to move into many of the local regional markets, the smallest cities by the acquisition of the most important banks in those areas. That is in states with permitted branch-banking a large bank would move into a local area by buying the first, the second, the third, largest bank in the city. In areas that did not permit branch-banking, the holding company movement developed whereby a holding company was formed with a large a bank as its nucleus and this holding company in turn proceeded to acquire various banks in the large cities. This trend developed very rapidly and there's an exhibit in the record, defendants exhibit 30, at page 1662, which is a table showing as of the end 1969, the percentages of the total state bank deposits held by the three largest and the five largest banks. And this shows that in 17 states, one-third of the states by 1969, 17 -- I'm sorry, the three largest banking organizations in the state had more than 50% of the total deposits. And in 24 states, it was the five largest banks that had more than that percentage of the deposits. Now, this trend was also present in Colorado. In 1960, there was one holding company operating in Colorado that had three banks and 4.4% of the deposits. By 1970, there were seven holding companies operating in Colorado. They had 41 banks. And while the 41 banks were less than one-fifth of the total banks in the state, they had 51% of the deposits in Colorado. So, we see that what has been happening in Colorado is what has been happening throughout the rest of the country in varying degree. The large banks -- the large banks in the cities through these holding companies have been going out and acquiring major competitors in the local markets. Now, the Greeley area itself, has felt this trend. There are eight banking organizations in Greeley, prior to this acquisition. Four of them were owned by two Colorado holding companies and they had 60% of the deposits in the Greeley area. And it's against this background, this history, of a merger movement in the banking field that the acquisition by more and more of the local banking leaders throughout the state, that the effect of this merger in the Greeley area must be -- get based. Now Denver is the commercial and banking center of Colorado, but in addition to this, there were six other important banking centers, smaller cities in Colorado of which Greeley is one. The holding company was formed in 1968 by the officials of the principal bank in the system, the First National Bank which is the second largest bank in the City of -- I'm sorry, it's above myself -- is the largest bank in the City of Denver. It's a bank with assets of approximately $500 million. It also has three smaller banks in the Denver suburbs which were organized by the people who were the principals of the First National Bank of Denver prior to the time the holding company was formed. And in his deposition, the president of the holding company testified that one reason his people formed this holding company was because of the trend in Colorado of other bank holding companies acquiring banks. That's shown at page 535 of the record. Now, in its first annual report to its stockholders, the -- the holding company explained what its purpose was, what it was going to do. It said and this is at page 513 of the record. He said, “The policy of our company is to expand as rapidly and as wisely as possible, through the acquisition of other banks in Colorado and it's a (Inaudible) banks which held out of good potential for growth and through other legally permissible investments and activities.” Now, this thought was repeated in a deposition, again, given by the president of the holding company which he said at pages 535 to 536 of the record, “We would like to have a bank in the major cities of Colorado.” They want -- they wanted a bank in major cities of Colorado and he also listed various other areas where they would like to be. And then he was asked whether in their plans the holding company had ruled out the possibility of de novo expansion, because the report, they spoke about acquiring other banks and he said, “No, we haven't ruled out that possibility.” The first step in this program of expanding into the various local areas was the acquisition in Greeley. That was the first one. Since that time, Bancorporation has attempted to acquire five other banks in various areas of Colorado. Two of the proposed acquisitions were the largest banks in the particular areas. Two others were of the second largest banks. They've not been successful in this in endeavor, and one of them, they were able to accomplish. At two instances, the regulatory authorities turned them down. In one instance, the acquisition was approved, but was abandoned when the Government filed a suit, and the last one, we still have a suit against it pending. But to us, the significant setting is to show that the First Bancorporation was not just sitting idly by with its three or four banks and waiting. It was going out trying to acquire other banks in the area. Now, the City of Greeley is 15 miles, approximately north of Denver. The city has a population of 38,000. The Greeley area which has certain surrounding communities which the District Court held here to be the relevant market has a population of 58,000. It has mainly been an agricultural community, but in the last decade, industry has come up in substantial measure. The areas had a good, steady growth as we set out in our brief at page 9, to give some statistics. And this is an area that is attractive to Bancorporation. Now, our opponent suggests that there was no particular reason why this company should have gone into Greeley, that there are more attractive markets involved. But I would like to read to the Court two quotations. Unfortunately, we did not cite this in our brief from page 555. And this is the man named “Adams” who is the present of the First National Bank of Denver and a previous president of the Bancorporation, and he was asked on this deposition why the bank was interested in acquiring the Bank in Greeley, and what he said was in the middle of the page, “We were very anxious as I say to get into the Greeley area, because it is one of the best towns in Northern Colorado and has been for many, many, many years a great agricultural area and a fine area. And we would very much like to have a unit up there in Greeley.” That at the bottom of the page he repeated this quote, when he said, “It is one of the growth areas of Colorado and we'd like to be in it.” Now, the Greeley market, as I indicated before, is a concentrated market. The three principle banking organizations have 92% of the deposits. The acquired bank, First National of Greeley is approximately the same size as the larger bank within a -- a 10th of 1%, percentage wise, roughly, 32% of the market. And the First National Bank is the only bank in the area, the only largest bank in the area that is not owned by a holding company. Now, the District Court in deciding this case stated that the issue was whether if there would be -- there would be, not there may be, he said, “Whether there would be a substantial lessening of competition”. And the Court concluded that the Government had to show that the acquisition in question has the effect, substantially, to lessen competition. Now, the Court agreed with the Government that commercial banking is the relevant product market and found, although, the Government had suggested two alternatives, found that the Greeley area was the relevant geographical market. The District Court also recognized that the elimination of a potential competitor may have the effect of substantially lessening competition in violation of Section 7. The Court said, “Where the concentration is high, the merger removes the potential competitor as a restraining influence and the anticompetitive effects can be significant.” The court went it on -- and they hold however, that this merger did not eliminate a substantial competitor, sorry, a substantial entrant. Since the Court said that the evidence was uncontradicted that Bancorporation has no intention of entering the Greeley market if this acquisition is disapproved. And we think primarily that the District Court relied on two bits of evidence. One was the testimony of an official of Bancorporation that they would not enter the market. And secondly, the testimony of state regulatory officials which the District Court interpreted as indicating, they would not charter a new bank in the Greeley area. The Court did not reach because of its disposition that the Government had not shown anticompetitive effect. The second issue under the Bank Holding Company Act is the same as under the Bank Merger Act whether any anticompetitive effect of the acquisition are clearly outweighed by the effect of the merger in serving the convenience and needs of the community. So, that issue has not been resolved and if the Court agrees with us that the wrong standards were applied then the case has to be remanded, that is an issue for the District Court to deal with on remand. The court also rejected an alternative ground on which the Government challenged the merger. That is, that the effect of this merger was to foreclose to competing large banks in Colorado, so-called correspondent banking. That is the practice by which the large city banks perform various cervices for the country banks, such as clearing checks, making loans in excess of the local banks, when it's giving them investment advice, serving as a depository for various funds. And the Government claims that by preempting the correspondent banking business of first, of Greeley, the effect of the merger was to foreclose to the other banks in Colorado a significant important share of this business and that in the light of the trend toward concentration in the Colorado banking field, this also had an anticompetitive effect. This argument is a rather detailed and technical one. It turns on questions of defining the market on disputes as to the irrelevant statistics involved. It's not particularly appropriate for oral argument and I propose to leave that discussion to the brief. Now, as I indicated, the District Court didn't question that the elimination of potential competition may substantially lessen the competition. And this Court has repeatedly so indicated. And as I've also indicated, we think the primary issue in this case, therefore, is the standard for determining whether a firm is a potential entrant. The 1950 Amendments, the (Inaudible) Act, to Section of 7 of the Clayton Act, reflected the rising concern -- I'm sorry, the concern of Congress over the rising trend of concentration in American industry and Congress was concerned that this trend or concentration would result in a further weakening of a normal -- forces of competition in the marketplace. And accordingly, Congress strengthened the prohibitions of the Clayton Act against mergers which may have an anticompetitive effect. The purpose of Section 7 as amended was to maintain the structure of the market. Unlike such in one of the Sherman Act which is directed to conduct in the market anticompetitive acts, we think Section 7 is designed to preserve the structure, to avoid changes in the organization of the market that pose a serious danger of anticompetitive effects as it's repeatedly been stated in Section 7. In 1950, congress was concerned with -- not with certainties but with probabilities. It was designed to stop these things in their incipiency. Now, in a market where you have many sellers, a large number of sellers, none of whom has any significant major share of the market, normally, we know that competition plays the role of regulating the market. But when you get into these concentrative markets, where a small number of sellers have the major share of the market and each one has a very large share, economic theory teaches that in that situation, what's likely to develop is not the normal competition but parallel policies, easy accommodation. And therefore, traditionally markets that have a small number of firms with a large share are not characterized by the kind of vigorous competition normally found in traditional markets. And that principle, that concentration is inimicable to the free play of competitive forces is also applicable to banking. As this Court stated in the Philadelphia Bank case, there is no reason to think that concentration is less inimicable to the free play of competition in banking than in any other services. Now, as I have indicated, the potential entrants standing on the outside of a concentrated market has two roles to play, two roles in preserving the competitive structure of the market. First of all, standing outside the market inevitably plays an influence on the people inside the market. That is the firms inside the market who have this great economic power are well aware that if they abused it, if they get too greedy in their practices, there's always the danger of this strong firm coming in and taking away from the firms that hold a major share of the market, a section of that market. And indeed this Court and its Penn-Olin opinion at 378 U.S. at page 174, quoted with approval from a T.N.E.C. monograph written 30 years ago which directly reflected that principle and it's also reflected in the testimony of our economic expert, Professor Welch.
Speaker: Mr Friedman, do I correctly have the impression that somewhere in this period a new bank charter in Greeley was granted?
Friedman: That is correct, fairly recently.
Speaker: If Bancorp were acquiring that new small young bank, would you be here today?
Friedman: No, I -- no I would not. That, in fact -- that's one of our major contentions is, that we think that Bancorporation instead of acquiring this large firm, this is one of, we think, one of the proper ways for a large firm to get into a concentrated market. This firm has been charted by a small holding company, a small holding company in Colorado. The claim is that Bancorporation couldn't have gotten a charter. That's one of the claims. They rely -- they say that the testimony by the state banking commission indicates that because charters had been turned down in other localities, there was no chance that a charter would have been granted for another bank Greeley. Less than a year later, lo and behold, someone did come in and seek a charter for new bank in Greeley and it was granted. And there's no reason to think that if Bancorporation instead of seeking to make this acquisition had itself going in, looked for an application for new a charter that it wouldn't have been granted, too.
Speaker: Do you feel that Greeley is under bank and that the issuance of this charter is an indication that's in under bank?
Friedman: No -- no we don't -- we don't contend it's under bank, Mr. Justice. What we do contend is that Greeley was a growing area where there's room for additional banks, and that the creation of new competition in Greeley would tend to shake up this market which had been relatively static before then. Now, the other role of a potential competitor play one role -- the potential competitor sits on the outside and in effect inhibits anticompetitive behavior by the large firms in the market. The other role, equally significant, is if the potential competitor enters the market. If a potential competitor enters the market, either by acquiring a small bank or by itself organizing the bank, this again tends to inject into what has been basically and not very competitive off the market, a new competition. Now, of course, as long as the potential competitor remains outside, it has these salutary purposes. But once it enters by acquiring a market leader, two things happen. Whatever effect it has staying on the outside disappears and the possibility of any vigorous and new competition by creation of a new competitor disappears. All at you have in this type of a situation is that the outside powerful firm comes in and takes over the market share of one of the major banks in the area. Now, the significance that an outside potential entrant has on competition in the market, basically depends on the relationship between this bank and the structure of the market, That is, what kind of a market is it, what is its role on the outside, is it a concentrated market of the facts such as to indicate that the bank is likely to come in. And that of course it seems to me is the kind of a question that has to be determined on the basis of the objective evidence in the case, not on the basis of the intent of the parties -- the stated intent of the firm. It seems to us that this is just not the way in which this kind of a determination should be made.
William H. Rehnquist: Mr. Friedman, are you saying that the Court can properly consider evidence of the subjective intent in making the ultimate determination?
Friedman: I would not go so far as to say that cannot consider it but certainly the court can't base it on that fact and I think it's entitled to very little weight. And let me -- if I may explain particularly with reference to this kind of testimony, the question basically. It is -- is asked in this case, as is, had you not been permitted to make the acquisition, would you have gone in either through making a small acquisition or by organizing your own bank. And almost invariably, as is true in this case, the answer is no, we would not. Now, this is a question put to a witness after the witness has already made the decision to go in by the acquisition route. And it -- it's just, almost, psychologically impossible for someone to give an objective valuation as to what he would have done, had there not been this situation.
William H. Rehnquist: Of course, without any new rule of law, the District Court is perfectly free to disbelieve or discount the witness's testimony just on the ground you suggest, isn't it? He doesn't need any new principle of law to do that.
Friedman: No, but we're not -- we're -- what I was suggesting Mr. Justice, is that is just not a very reliable basis upon which to make the kind of a judgment involved in this area because it -- it's subject to -- to many problems.
Potter Stewart: This is -- this is entirely a one-way street, however, isn't it? If you'd answered your question yes, we would have. We couldn't get in. This way we would have gone in independently. You certainly wouldn't want the Court to disregard that evidence, would you?
Friedman: Now, well, I think the strongest -- the strongest evidence of his intention to go unless it'd say --
Potter Stewart: Is subjective evidence, is it not?
Friedman: Well, but -- but I -- I think it's a --- it's a different situation, Mr. Justice, it's a very different situation.
Potter Stewart: Yes, with regard that's admission against interest and you get it in under that rule, would you?
Friedman: Perhaps. I -- I think the difference is this, Mr. Justice. In the one case -- in the one case, he's being asked in effect a hypothetical question, what he -- what they would have done, had they not done what they decided to do. And this seems to me gets –-
Potter Stewart: And if he said --- if he answers the question no, as to be wholly disregarded, and if he answers the question yes, I'm sure he would not say.
Friedman: I don't say that he'd wholly disregard, but I -- I think it's something that cannot be dispositive or given great way.
Potter Stewart: Or else by contrast to you in pretrial, discovery proceedings that found some inter office memorandum from one executive to the other, saying if we get turned on -- on it down on this acquisition, we'll try to go in there independently. You would find that extremely helpful I'm sure, would you?
Friedman: I'm sure I would.
Potter Stewart: And that would entirely subjective. So it's really, the test isn't whether it's subjective or objective, is it?
Friedman: Well, it's whether it's -- the test -- let me make, if I may suggest, in there and hypothetically you oppose to finding the document that support our case, I think we would say that just confirms what the other evidence shows.
Potter Stewart: Now, you've -- in previous cases, you'd use it much more than on a confirmatory basis.
Friedman: Well, it is. It's -- it's obviously of subsequence. Let me explain another thing here, another reason why we think this kind of intent testimony is not, preferably persuasive. One of the effects, one of the substantial impacts that the presence of an outside competitor has is on the conduct of the people in the market. The knowledge of this and the outside competitor on the (Inaudible) And the people who are in the market have to make their judgment, have to influence their practices on the basis of what they judge from the objective evidence. That is, they look and see what kind of a firm in this, what is happening in the market, whether it has the capacity to come in, whether it looks like the kind of an opportunity -- would be attractive for them. They don't know. They don't know and can't make their business judgments on the basis of what may be in the minds of the officials of the outside company. Now, I think one other bit of evidence that is quite significant in deciding how you evaluate these claims that they wouldn't go in, otherwise, is what has actually happened in Colorado and in other states where bank holding companies have sought and been denied permission to the enter the markets, to acquiring a large share. And when that was turned down and that failed they would then go in and try to acquire a smaller bank. A very interesting example is this very holding company, Bancorporation. And in addition, United Banks of Colorado, the largest holding company in this state, each of them tried to acquire one of the leading banks in a large community, failed. And then preceeded to try to acquire and succeeded a much smaller bank. Bancorporation tried to acquire the leading bank in Colorado Springs. And it's -- I -- I'm sorry, the second largest bank in Colorado Springs, and when it, in its application to the Federal Reserve Board, it said it would be imprudent for it. Imprudent was the word they'd used, to try to get into the market either by acquiring a smaller bank or by opening its own bank. The Fed approved that, but the merger was abandoned when the Government filed an antitrust suit. Bancorporation then turned around and applied for and got permission, to acquire a bank in Colorado Springs that was one-seventh the size of the bank they originally had sought.
William H. Rehnquist: Was that evidence before the District Court in the trial of this case?
Friedman: I don't believe it -- I don't believe that evidence was, but it seems to us --
William H. Rehnquist: How can we consider it?
Friedman: Well, it's all the matter of public record Mr. Justice. These are reports of government regulatory authorities deciding these cases.
William H. Rehnquist: But do we ordinarily limit ourselves though, in a factual question like this, to what was put in, in the record in the District Court?
Friedman: Normally so, Mr. Justice, but I'm just suggesting that this subsequent evidence confirms our claim that the kind of evidence that the District Court relied on in this case, is not a reliable basis for deciding these questions. One last point I would make is the testimony of the regulatory officials, of the court relied on. Again, this is a wholly conjectural type of evidence. He's asked whether he would or wouldn't charter a new bank, and he said, he had recommended he would charter a new bank within five years. Well, regulatory officials decide questions of whether they charter a new bank on the basis on an application to that is filed to them. They consider all the facts. They have also sorts of detailed specifications. All he said was that he wouldn't recommend to his superior the controller of the currency. It's the controller of the currency who makes the decision. Conditions change. Perhaps, he would not have recommended the chartering of a new bank in Greeley at the time of the trial. In two years he might have used regulatory officials also (Inaudible)
Warren E. Burger: We'll resume at 10 o'clock in the morning, Mr. Friedman.