Richard Shapiro and Lara Leibman on State Action Doctrine in the transition to a deregulated industry: an AAI column


By Richard S. Shapiro and Lara J. Leibman

   Regulation-based defenses historically have played a significant role in limiting the effectiveness of antitrust actions against electric utilities. As the nation moves rapidly towards competitive restructuring at both the federal and state levels, however, utility attempts to use regulatory defenses such as the state action doctrine will become less successful. States will implement fewer policies that are specifically intended to displace competition and regulatory supervision of utility conduct will be much less comprehensive. The result will be that courts will be increasingly reluctant to find that states intended to displace competition with regulation unless legislative or regulatory history makes it absolutely explicit that the state seeks to prohibit competition in its retail electric market.

   The electricity services industry continues to open to competition. To date, 18 states have enacted legislation and/or issued comprehensive orders agreeing to competitively restructure their retail electric markets. Given the pace of restructuring and the pressure on incumbent utilities to maintain their monopolist positions, it is anticipated that a great deal of anti-competitive behavior will ensue. As FTC Chairman Robert Pitofsky explained to a Congressional committee:

Because industry participants have become used to a regulated
environment, some may attempt to protect or duplicate many of
the comfortable aspects of that environment. Where they are
accustomed to coordinated interaction and the use of the regulatory
process to bar or disadvantage new entry, industry members may
attempt to use monopolistic or cartel behavior to protect their
entrenched positions after deregulation.


Prepared Statement Before the Committee on the Judiciary,
U.S. House of Representatives, June 4, 1997.


   As a result, it is necessary for us to determine whether, in competitive retail electric markets, application of the state action doctrine would need to be changed.

   In a competitive market, the doctrine itself would not need to be changed for it is good law. A change in its application, however, is necessary. In an industry emerging from decades of government sanctioned monopoly, less regulation aimed at displacing competition indicates that the incumbent utilities should no longer receive the level of protection under the state action doctrine that they have grown accustomed to over the years. This change is in keeping with the main purpose of the antitrust laws, which is to promote competition and thereby maximize consumer welfare.

   Under the state action doctrine, state regulation can provide antitrust immunity to certain anti-competitive conduct. In Parker v. Brown, 317 U.S. 341 (1943), and the cases following it, the Supreme Court articulated a two-prong test for determining whether state regulated conduct is immune from the antitrust laws: First the challenged restraint must be one clearly articulated and affirmatively expressed as state policy; second, the policy must be actively supervised by the State itself." "Clear articulation" requires that the appropriate governmental authorities expressly authorize the challenged restraint. If the restraint is so authorized, the immunity inquiry need go no further.

   Express authorization, is, however, only the first step, because not every authorization provides state action immunity for actions so authorized. Clear articulation requires as well that the state policy providing the authorization be one intended to displace competition with regulation. Thus, if the conduct is expressly authorized, the next question is whether anti-competitive consequences foreseeably result from that conduct. To that end, the correct foreseeability test for the clear articulation standard should be whether anti-competitive effects are a foreseeable result of authorized conduct; not whether the private conduct is a foreseeable result of state agency action. The latter would simply dispense with the requirement of express authorization as the necessary predicate for the Supreme Court's foreseeability test.

   State action immunity cannot be based on ambiguous state acts. The doctrine is a "rigorous" test that "ensure[s] that private parties [can] claim state action immunity from [antitrust] liability only when their anticompetitive acts [are] truly the product of state regulation." Patrick v. Burget, 486 U.S.94, 100 (1988). For example, parties seeking immunity cannot substitute in for the express authorization of the state and ask whether circumstances justify an inference that the state agency intended to authorize the conduct in question. As Jade Eaton,a trial attorney with the Antitrust Division of the DOJ stated: "It is the state action doctrine, not the utility action doctrine." See "Department of Justice Enforcement Efforts for Retail Competition," Washington, D.C., May 15, 1998.

   States no longer wish to displace competition with regulation in the retail electric marketplace. Through legislation and comprehensive commission orders, states are increasingly proclaiming new policies that endorse competition. As a result, in recent antitrust cases, it is apparent that courts are reluctant to find that states intend to displace competition. Toward that end, courts are placing a greater emphasis on the clear articulation standard by seriously questioning whether a state's policy is sufficiently clear in authorizing the anti-competitive conduct at issue.

   Moreover, with new state policies endorsing retail competition, there is a growing need to ensure that other state laws consistently promote competition. For example, in a state that has agreed to deregulate, allowing only utilities the discretion to provide discounts to customers during a mandatory transition period is anti-competitive and contradictory to that state's policy supporting retail competition. Following Pennsylvania's lead, individual states should adopt a policy statement, which would clarify any existing contradictions in their laws and thereby assist both private parties and courts in deliberations regarding the clear articulation standard. See Pennsylvania's Proposed Policy Statement, adopted December 18, 1997, by the Pennsylvania Public Utilities Commission.

   Perhaps one of the most significant decisions signaling a rollback of the state action defense as courts become increasingly reluctant to find that states intend to displace competition with regulation is the Ninth Circuit's recent opinion in ColumbiaSteel Casting Co., Inc. v. Portland General Electric Company, 111 F.3d 1427 (9th Cir. 1996, as amended, (1997), cert. denied, 118 S.Ct. 1688 (1998). Columbia Steel, a large electric customer, asked Pacific Power & Light to service its plant because PP&L's rates were lower than those of Portland General Electric. PP&L refused on the ground that Columbia Steel was located in PGE's exclusive service territory. Columbia Steel filed an antitrust action against the utilities, charging them with dividing the city of Portland into exclusive territories in violation of sections 1 and 2 of the Sherman Act. The utilities raised a state action immunity defense based on a 1972 order of the Oregon Public Utilities Commission, which the utilities asserted approved the division.

   The court ruled that two utilities' exchange of facilities and division of territory violated Section 1 of the Sherman Act even though the OPUC had approved the action. Although the OPUC approved the exchange of equipment and customer accounts between PGE and PP&L in a 1972 order, the 9th Circuit found that the agreement merely described an exchange of facilities and related customer accounts, but did not clearly allocate territories. The 1972 order discusses exclusive territories within another Oregon city indicating that the OPUC easily could have granted exclusive service if it actually intended to do so but it never mentions the existence of, or intent to create, exclusive territories in Portland. In sum, the court held that the OPUC did not forthrightly state a policy of the state of Oregon that was 'clear in its purpose' to displace competition in the Portland market with territorial monopolies. (Citing Midcal, 445 U.S. at 104). Simply put, if the OPUC never explicitly authorized the two utilities to divide Portland into exclusive territories, then there was no state action immunity for that division.

   In United States of America v. Rochester Gas & Electric Corp., No. 97-CV-6294T (W.D.N.Y. 1998), another seminal case, RG&E entered into a contract with the University of Rochester in which RG&E promised the University a number of benefits, including electricity at reduced rates, in exchange for the University's promise not to compete against RG&E in the sale of electricity to consumers. The "clear articulation" prong of RG&E's state action defense was based on New York's policy of allowing utilities to negotiate individual prices with certain customers ("flexible rate contracts") capable of generation on their own. The adoption of regulations permitting flexible rate contracts was to give utilities the flexibility to compete with their largest customers' other supply options. But the DOJ did not challenge the flexible rate policy or the price under which the University bought electricity from RG&E. The DOJ challenged RG&E's agreement with the University not to sell electricity in competition with RG&E.

   The court found the agreement between RG&E and the University fundamentally inconsistent with New York's regulation of the electric industry. In fact, in its Decision and Order, the court stated that "the New York Public Service Law does not permit a utility to offer discounts to a potential competitor in return for that competitor's promise not to compete." Decision, p.11. The court further stated that: "the fact that the New York Public Service Commission ha[d] approved the contract at issue [did] not mean that the state ha[d] authorized, and shielded from federal law, allegedly anticompetitive behavior." Id. at p.12. In the court's analysis of the first prong of the state action doctrine, therefore, it appears that preventing potential competitors from entering the market was not a foreseeable consequence of New York's policy permitting discounted rates to certain customers. The state had not intended such an effect to occur in order to further state policy. As with the PGE case, therefore, the court in this case correctly relied upon the first prong of the state action doctrine in articulating its reluctance to find that a state's policy intended to displace competition with regulation.

   In California CNG, Inc. v. Southern California Gas Co., 96 F.3d 1193 (9th Cir. 1996, as amended, January 30, 1997), the court held that a natural gas local distribution company's actions in using ratepayer funds to subsidize its natural gas vehicle fueling stations were immune from antitrust liability under the state action doctrine, but only for a limited period of time. Id. at 1203. The court found that from July 1991 to 1993, the California Public Utilities Commission clearly articulated a state policy that utility involvement in the NGV industry was desirable and did not adversely affect competition because the market contained no competitors. Id. at 1200. The court, therefore, found that any activity by SoCalGas during this period to use ratepayer funds to provide NGV fueling stations to customers below cost "was part of a clearly articulated and affirmatively expressed state policy." Id.

   Between July 1993 and November 1995, however, the CPUC generally provided that utilities' NGV programs must not compete unfairly with nonutility enterprises and must not interfere with the development of a competitive market. In addition, after November 1995, the CPUC issued new rules forbidding utilities from using ratepayer funds to compete with non-utilities in providing NGV fueling stations. As a result, the court held that any SoCalGas actions in providing subsidized NGV fueling stations to customers after July 1993 were not protected by the state action doctrine. Id. at 1200-01.

   Importantly, the fact that the CPUC approved the structure of SoCalGas' filed tariff in 1992 was deemed irrelevant to whether state action immunity shielded the utility from antitrust action after July 1993. The court ruled that the CPUC had adopted a new policy on utility participation in the NGV market by that time and expressly required all existing utility NGV programs to be brought into compliance with the new policy. Id. at 1201. Thus, SoCalGas was found immune from antitrust liability only until July 1993 when California clearly articulated a new NGV policy.

   The decision in California CNG further clarifies that the availability of state action immunity is not constant, but rather may change in response to the changing policies of state regulators and legislators. Where state authorities set target dates for supplanting regulation with competition, conduct thought to be protected up until that point in time can no longer be expected to remain immune.

   Even as competitive restructuring of the electric industry takes deeper root in more states, it must be stressed that each case is fact-specific. The relevance of a state agency's actions to the immunity analysis depends on the facts of each case. With increased reliance on competition in utility industries that formerly were pervasively regulated, it is unlikely that many states will find it in their best interests to continue to prescribe or condone blatantly anti-competitive aspects of their utility laws. Utilities will be forced to overcome their anti-competitive tendencies in order to avoid antitrust liability as they attempt to grapple with the new market forces.

   The cases discussed herein clearly demonstrate that there is a growing and appropriate reluctance to find that states' policies intended to displace competition with regulation. Quite simply, this trend is in full accord with the move into a competitively restructured retail marketplace. As a result, lessons or guidance to be gleaned are that, when in doubt, utilities should obtain clarification, where possible, from regulators as to permissible conduct authorized under a specific state policy. Moreover, once a state competitively restructures its electricity market, utilities should attempt to bring rates, tariffs and their overall activity into line with competitive state policies governing retail electric markets. Finally, everyone should strive to adhere to the fundamental goal of sound antitrust policy to enhance consumer choice, promote competition and encourage innovation.


*Richard Shapiro is Vice President of State Government Affairs for Enron Corp. and a member of the Advisory Board of the American Antitrust Institute (AAI). Lara Leibman is a Manager in Enron's Government Affairs group. The views are those of the authors, presented to inform and stimulate the antitrust community.



Albert A. Foer