Opinion ID: 566757
Heading Depth: 2
Heading Rank: 2

Heading: Edison's Petitions

Text: 63 For its part, Edison attacks the Commission's price discrimination findings on several grounds. None merits extended discussion. 64 First, Edison argues that as a matter of law, the entire locked-in period must be the basis for assessing price discrimination: If, as in both cases here, the Commission does not find price discrimination over the locked-in period considered as a whole, it cannot make a price squeeze finding. In support of this claim, Edison points to a single sentence in Conway in which the Court stated that the decision to remedy an alleged price squeeze would involve an examination of the entire factual context in which the proposed wholesale rate will function.'  426 U.S. at 280, 96 S.Ct. at 2005 (quoting Conway Corp. v. FPC, 510 F.2d 1264, 1273 (D.C.Cir.1975)). 65 By entire factual context, however, the Court was signifying its approval of our conclusion that the Federal Power Act does not contemplate that [FERC] is to operate in an airtight chamber, insulated from nonjurisdictional factors, 510 F.2d at 1272. FERC may consider the effect on competition of the relationship between the wholesale rate and the nonjurisdictional retail rate. It is Edison that advocates an airtight chamber by insisting that the entire locked-in period must be the framework for determining whether price discrimination is undue. 40 F.E.R.C. at 62,161. As the Commission stated: This argument is based on an assumption that price discrimination is solely the product of the wholesale rate (which determines the locked-in period) without regard to the individual competing retail rates in effect over this period.... Id. 66 The Commission correctly reads Conway to focus the inquiry on the anticompetitive effects of the utility's rates. See id. We agree with the Commission that [t]he anticompetitive effect resulting from a price squeeze is a function of the magnitude and the duration of the price discrimination. Id. Thus, price discrimination that exists over an entire locked-in period might not constitute price squeeze, while severe discrimination in a subperiod might. See id.; [291 U.S.App.D.C. 331] 51 F.E.R.C. at 61,884. In making that determination, the Commission has authority to focus on subperiods that are defined by changes in the effective retail rate(s), as it did here. Edison's approach, on the other hand, would impos[e] an arbitrary time period, 40 F.E.R.C. at 62,163, and could potentially thwart the price squeeze inquiry where the wholesale rate is open-ended, id. at 62,161. 67 Second, Edison takes issue with the Commission's decision in Opinion 347 to include the FCBA credit in computing retail revenues. See 51 F.E.R.C. at 61,882-83. The CPUC ordered the credit to reimburse retail customers for the overcollections of 1972-1976 at issue in Opinion 128. Edison paid the credit through a special tariff from 1979-1981. It totaled $133.2 million plus interest, of which $118.3 million was credited to the bills of retail customers during the locked-in period. See id. at 61,882-83; Opinion 347-A, 53 F.E.R.C. at 61,316-17 & n. 38. 68 The Commission reasonably construed the credit as part of the effective rates against which the wholesale customers competed. The credit was included in the bills paid during the period of discrimination, and the amount and duration of the credit were substantial enough to affect the consumption decisions of Edison's retail customers. 51 F.E.R.C. at 61,882; see 53 F.E.R.C. at 61,316-17. Thus, the Commission could reject the ALJ's conclusion that retail customers would have known the credit was only temporary. 51 F.E.R.C. at 61,882 n. 28. Moreover, the Commission could reasonably conclude that Edison could not benefit from excluding the credit when the associated overcollections, at Edison's urging, had been included in retail revenues in Opinion 128. See id. at 61,882. 69 Third, Edison claims the Commission erred in Opinion 347 in measuring price discrimination against Vernon on the basis of the Cities' composite rate-of-return study, which Vernon had used to support its price squeeze claim. Because ninety percent of Vernon's retail load was industrial, Edison argues, the Commission, like the ALJ, should have used Edison's comparison between the R-2 and LP/VLP rates of return, which indicated no discrimination. Instead, the Commission concluded that the LP/VLP study ignore[d] the potential for competition for nonindustrial customers, and that Edison had failed to rebut evidence that the study was flawed. See 51 F.E.R.C. at 61,893. 70 We will uphold the Commission's ruling. We do so, however, without deciding whether a wholesale customer that makes a prima facie showing of competition only with respect to large industrial purchasers may nevertheless rely upon an analysis of price discrimination that includes a composite of all retail classes. Here, Edison conceded the existence of competition with Vernon, and Vernon was therefore allowed to join the Cities' price squeeze case without a separate prima facie showing of competition. Furthermore, there is evidence in the record, in the form of expert testimony presented by Vernon, sufficient to support a finding of potential competition for nonindustrial service that could be affected by a broader rate disparity. See Joint Appendix (J.A.), No. 90-1515, at 69-73, 77-84, 252A-58A (testimony of Baker G. Clay). 71 Finally, we affirm the Commission's use of test year data in calculating the wholesale rate of return. See 40 F.E.R.C. at 62,154-55; 51 F.E.R.C. at 61,880 & n. 17. This ruling fits with the Commission's court-approved practice of relying on test year estimates in determining just and reasonable rates, even when the actual data for the projected test year become available. See Cities of Batavia, 672 F.2d at 74; see also Boroughs of Ellwood City, 731 F.2d at 965-66. The Commission relies on test year data unless they are shown to be substantially in error or to yield unreasonable results; Edison made no such showing here. See 40 F.E.R.C. at 62,155. Given the Commission's considerable discretion in constructing an appropriate wholesale rate for price discrimination purposes, just as in defining the effective retail rate, we find its reasoning on this issue neither arbitrary nor capricious. 72 [291 U.S.App.D.C. 332] 2. Anticompetitive Effects 73 Edison's challenge to the findings of anticompetitive effect is more substantial. The Commission stated in Opinion 284 that anticompetitive effect is the alpha and omega of the price squeeze inquiry. 40 F.E.R.C. at 62,165. We agree. As we have previously pointed out, discriminatory effect ... is the very raison d'etre of the price squeeze doctrine and must be the Commission's paramount consideration[ ]. Boroughs of Ellwood City, 731 F.2d at 978. Regrettably, in these cases the Commission failed to make a sufficient finding of anticompetitive effects. 74 Edison does not attack head-on the legality of the presumption of anticompetitive effects. Rather, Edison claims that the Commission, once it had decided that the presumption is invalid and that complaining customers will henceforth have the burden of showing competitive harm, should have applied the new rule to the cases at hand, absent manifest injustice. Cf. Clark-Cowlitz Joint Oper. Agency v. FERC, 826 F.2d 1074, 1081-82 (D.C.Cir.1987) (en banc), cert. denied, 485 U.S. 913, 108 S.Ct. 1088, 99 L.Ed.2d 247 (1988), cited in Opinion 284, 40 F.E.R.C. at 62,183 n. 65; Illinois Power Co., 52 F.E.R.C. p 61,162, at 61,624 (1990). In the alternative, Edison argues that its evidence in both cases was sufficient to overcome the presumption. Because we agree on the evidence, we do not reach the retroactivity issue. 75 The Commission's approach to potential anticompetitive effects springs from the agency's view that it must consider the broad policies expressed in the various antitrust statutes to determine whether the objectives of these statutes are being hindered by price discrimination. Connecticut Light, 8 F.E.R.C. at 61,653. One objective of antitrust policy is to prohibit practices whose effect is or could be to harm competition. Id. at 61,654 (emphasis added). Thus, the Robinson-Patman Act, which prohibits price discrimination between purchasers of like commodities where the effect may be substantially to lessen competition, 15 U.S.C. § 13(a), does not require that the discriminations must in fact have harmed competition, but only ... a reasonable possibility that they 'may' have such an effect, Corn Prods. Refining Co. v. FTC, 324 U.S. 726, 742, 65 S.Ct. 961, 89 L.Ed. 1320 (1945). See 8 F.E.R.C. at 61,654. Similarly, section 7 of the Clayton Act, 15 U.S.C. § 18, requires only a reasonable probability that an acquisition will result in competitive harm. See 8 F.E.R.C. at 61,654 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 323 n. 39, 82 S.Ct. 1502, 1523 n. 39, 8 L.Ed.2d 510 (1962)). 76 The Commission took its evidentiary presumption directly from FTC v. Morton Salt Co., 334 U.S. 37, 68 S.Ct. 822, 92 L.Ed. 1196 (1948). See 8 F.E.R.C. at 61,654. In Morton Salt, which dealt with the practice of providing substantial quantity discounts to purchasers of carload lots of salt, the Court ruled that enforcement of the Robinson-Patman Act would be hampered by requiring the government to prove what was, under the circumstances, self-evident: that there is a 'reasonable possibility' that competition may be adversely affected by a practice under which manufacturers and producers sell their goods to some customers substantially cheaper than they sell like goods to the competitors of these customers. 334 U.S. at 50, 68 S.Ct. at 830. 77 The Commission's use of the Morton Salt inference must be qualified in two important respects. First, the inference is not irrebutable; as the Commission itself recognized, it merely shifts to the defending party the initial burden of producing the minimum quantum of proof necessary to support a finding of the nonexistence of the presumed fact. See Opinion 284, 40 F.E.R.C. at 62,171 (citing Pennzoil Co. v. FERC, 789 F.2d 1128, 1138 (5th Cir.1986)). Specific, substantial evidence showing an absence of the presumed competitive injury is sufficient to rebut what is, after all, only an inference. Boise Cascade Corp. v. FTC, 837 F.2d 1127, 1144 (D.C.Cir.1988). Thus, Edison may overcome the presumption of potential effects by presenting substantial evidence that there was no reasonable probability the price discrimination harmed competition. See City of Groton [291 U.S.App.D.C. 333] v. Connecticut Light & Power Co., 662 F.2d 921, 935 (2d Cir.1981). 78 Second, the competition at risk in a Robinson-Patman case fundamentally differs from that in a price squeeze case, especially one arising in the fully regulated electric power industry. Morton Salt 's inference was meant to apply where discriminatory pricing directly harms competition between the buyers. See 334 U.S. at 49-50, 68 S.Ct. at 829-30. Price squeeze occurs when a firm with monopoly power on the primary, or wholesale, level engages in a prolonged price increase that drives competitors out of the secondary, or retail, level, and thereby extends its monopoly power to the secondary market. See Town of Concord v. Boston Edison Co., 915 F.2d 17, 18, 23 (1st Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 1337, 113 L.Ed.2d 268 (1991); cf. United States v. Aluminum Co. of Am., 148 F.2d 416, 437-38 (2d Cir.1945). The anticompetitive effect of price squeeze is indirect. The squeeze must last long enough and be severe enough to produce effects in the secondary market. 79 The addition of regulation makes it less likely that a price squeeze will actually drive independent distributors from the marketplace. Town of Concord, 915 F.2d at 26. The retail service franchises granted by the state are themselves monopolies in which a single distributor of electricity supplies relatively immobile customers. Id. If a utility is able to squeeze a competing distributor out of the retail market, it still cannot take over the competitor's franchise without the state's permission. Id. In Connecticut Light, the Commission took notice of these factors: [T]he regulated industries have not been viewed as industries in which competition can be seen in the form of active rivalry between alternative suppliers of the same product. 8 F.E.R.C. at 61,653. Rather, competition between a utility and its resale customers is strongest for those purchasers, like industrial and other commercial firms, that can choose a supplier when deciding where to locate; although there is also competition for service areas, this competition is on a long term basis. See id. (quoting Borough of Ellwood City v. Pennsylvania Power Co., 462 F.Supp. 1343, 1346 (W.D.Pa.1979)). 80 With these qualifications in mind, we conclude that Edison made a sufficient showing to rebut the presumption in both cases. In the first proceeding, Edison presented testimony of Dr. Joe D. Pace, an industrial organization and public utility economist, concerning the probable effects of the eleven-and-a-half months of price discrimination on competition to attract and retain large industrial, or A-8, customers, and on fringe area competition for A-8 customers located near the borders of competing service areas. Because price discrimination was confined to the A-8 rate, the evidence properly focused on competition for large industrial customers. Dr. Pace testified that price discrimination of the magnitude and duration at issue would be unlikely to affect industrial customers' locational decisions. These decisions are made with the objective of minimizing costs over a period of years, and industrial firms that are particularly sensitive to the cost of electricity must be concerned with expected long-term rate relationships when choosing a site for new or expanded operations. Testimony of Joe D. Pace, July 15, 1983, J.A. No. 90-1236, at 396. Choosing an industrial location on the basis of short-term rate differentials, especially ones that are only mildly unfavorable, would be irrational. 81 Dr. Pace quantified the total rate-of-return disparity over the period as 0.67 percent on a test year basis. Eliminating the disparity would have produced a wholesale rate decrease that, if fully passed on by the Cities, would in turn have lowered the Cities' industrial retail rates by an amount equal to two to five percent of the average A-8 customer's revenue per kilowatt-hour. Because electricity costs are less than five percent of a firm's total costs, even in high-energy industries, this rate differential would amount to an overall cost savings of less than 0.25 percent. 82 Dr. Pace concluded that such a differential would not cause a price-sensitive firm to ignore long-term rate relationships. He [291 U.S.App.D.C. 334] testified that this is especially true in southern California, where strict local air quality standards impose prohibitive costs on energy-intensive industries. Turning to specific industrial customers identified by the Cities, he explained why, in his opinion, there was no reasonable probability that any had been lost because of the rate relationship. 83 Finally, Dr. Pace discussed fringe area competition. He explained that the annexation of fringe areas is more or less permanent and involves a host of economic and social factors in a long run context. The R-2/A-8 rate disparity could not have a rational influence on any annexation decision by the Cities, unless the area in question contained predominantly A-8 customers. Id. at 407. Given the length of the period at issue, the disparity would only have caused the Cities to delay any such extensions of service until 1977. Again, Dr. Pace went through the Cities' examples and explained why he believed the rate relationship had not been a determining factor in any annexation decision. 84 In the second proceeding, Edison presented testimony from Dr. Pace as well as from another industrial organization economist, Dr. John H. Landon. Based on his review of evidence produced by the Cities, Dr. Landon testified that during the twenty-three months of the locked-in period, there was no indication of any effect on franchise competition or of any consideration given by the Cities to selling their franchises. He found no attempt by the Cities to match Edison's rates, and, reviewing the profit margins and financial records of the municipal electric systems, he concluded that all of them, with the exception of Banning's (whose distribution costs were three times higher), were in sound financial shape and could have sustained rates comparable to Edison's. 85 Dr. Landon, like Dr. Pace, further testified that the rate relationship would not have affected the locational decisions of industrial customers. On the issue of fringe competition, he could find no evidence of border customers switching to Edison; nor had the rate relationship impaired the Cities' ability or willingness to expand their service areas, because they had actively done so. He also found nothing to indicate adverse effects to yardstick competition, which he defined as pressure from customers for a change in franchise ownership and pressure for more efficient management of the municipal system. 86 Dr. Pace also testified that no anticompetitive effects were reasonably probable. Because the disparity involved all retail rates, the Cities viewed franchise competition as the most fundamental. Dr. Pace testified that a rate differential of the magnitude and duration claimed by the Cities could not reasonably threaten the disenfranchisement of any of the municipal systems because rational franchise decisions are made over a much longer period and tend to be once-and-for-all, all-or-nothing decisions. Id. at 651. The same conclusions, in his opinion, applied to yardstick competition, which at bottom is simply the threat of disenfranchisement. Finally, his testimony supported Dr. Landon's views concerning potential effects on locational decisions of retail customers and on fringe area competition. 87 This testimony constitutes substantial evidence to support a finding that no adverse competitive effects were reasonably probable. The Commission offered no basis for concluding that such testimony consist[ed] mainly of conjecture, see 40 F.E.R.C. at 62,172. In each case, the Commission's finding that Edison failed to rebut the presumption rested principally on the judgment that witnesses have testified persuasively in other proceedings that the only valid basis for analyzing price squeeze is to evaluate what was confronting the wholesale customer from day-to-day. 40 F.E.R.C. at 62,172; see 51 F.E.R.C. at 61,890. If this statement is meant to be a rule of general application, it conflicts with the Commission's proper focus on the magnitude and duration  of price discrimination, see 40 F.E.R.C. at 62,166 (emphasis added), and would seem to impose an impossibly heavy burden on the utility, see id. at 62,186 (Comm'r Sousa, dissenting in part). Under this rule, competitive harm [291 U.S.App.D.C. 335] would seem to result from a one-day rate disparity, unless it could be shown that not a single skittish customer made a judgment that day that Edison was more economical than the municipal system. 88 If the statement represents a finding, it is not supported by substantial evidence on the record. The day-to-day concept originated with the testimony of an expert witness presented by intervenors in an unrelated price squeeze proceeding. See Pennsylvania Power Co., 11 F.E.R.C. p 63,009, at 65,054 (1980) (subsequent history omitted), quoted in 34 F.E.R.C. at 65,297. This witness expressed the opinion that in a price squeeze the wholesale buyer is harmed because he cannot compete with his retail customer's evaluation of what the competitor supplier is charging for like service right now. Id. (emphasis added). This focus on day-to-day perceptions and fleeting rate disparities, borrowed from the record in another proceeding, cannot sweep away the evidence put forth by Edison in the present cases. Moreover, as an approach to the effects inquiry, it is inconsistent with the Commission's principle that the subjective plans of individual customers are irrelevant, 40 F.E.R.C. at 62,172 (quoting City of Groton, 662 F.2d at 934). 89 In Opinion 284, the Commission also based its finding, in part, on Dr. Pace's response to the claim that Edison's price discrimination had caused the City of Riverside to delay extending service to an area known as Lily-Tulip, which it had annexed in 1975. The Commission noted that witness Pace conceded that there is 'some probability' that Riverside's extension of service to Lily-Tulip would have gone forward in 1976 had the wholesale/retail rate disparity not existed. Id. Dr. Pace's recognition of a possible link is not sufficient to support a finding of nonrebuttal. It does not undercut his general conclusion that no fringe area competition had been affected or his specific opinion that no connection between the rate disparity and Riverside's decision was reasonably probable. He stated that although elimination of the A-8/wholesale rate disparity in 1976 would have made the economic comparison of the costs and benefits of extending service much closer from the City's point of view, the evidence does not suggest that the City would have acted at that time. In reality, Riverside chose to extend service only after observing a several-year period of extremely favorable A-8/wholesale rate relationships. J.A., No. 90-1236, at 412-13. 90 As further support for finding against Edison in Opinion 347, the Commission pointed out that the competitive disadvantage a wholesale customer suffers as a result of a rate disparity is itself an anticompetitive effect. See 51 F.E.R.C. at 61,890. This conclusory judgment does not suffice as a finding. It simply restates the inference of competitive harm, which Edison overcame. 91 The Cities claim that Edison made no attempt to rebut evidence of actual effects that the Cities introduced in Phase I of the first proceeding as part of their prima facie showing of competition. See 34 F.E.R.C. at 65,306 n. 35. It is not clear that Edison had an obligation specifically to rebut all Phase I findings on the issue of competition that might also relate to effects. In any event, the Commission based its findings of competitive harm in both Opinion 284 and Opinion 347 squarely on the presumption of potential, not actual, anticompetitive effects. We conclude only that the utility rebutted that inference. 92 Edison goes further and argues that in each case the record conclusively proves that no adverse effects were reasonably probable. That finding is not ours to make. Rather, we must remand each order to the Commission to determine whether, absent the presumption, the evidence suffices to support a finding of anticompetitive effects. 93