Stephen Calkins on energy deregulation and the FTC: an AAI column

Dec 21 1999


AAI column:*

by Stephen Calkins**

The Federal Trade Commission is reasonably accomplished at the separate endeavors of antitrust enforcement, consumer protection, and conducting studies and making reports. Litigation and analytical xskills honed in one activity enhance others. But it is unusual for a challenge to call simultaneously on the Commission's three sets of tools.

Energy deregulation is providing an extraordinary opportunity for the Commission to use its unique strengths. This brief note applauds the work that the Commission has done and urges it to do more. (The Antitrust Division has a long tradition of activity with the regulated energy industries, so I will confine my remarks to the FTC.)

The importance of the gas and electric industries is evident. The Commission has testified that electric power alone represents annual revenues of more than $200 billion and capital investment approximating 10% of the U.S. total. Beyond the massive dollars, the industries have critical human importance (sustaining life itself) and competitive importance (determining where certain industries locate and how effectively they compete).

Now the basis of commercial success in these industries is being fundamentally changed. Gas has seen significant deregulation, but the nature of competition remains to be worked out. In electricity, states across the country are considering or embarking on deregulation. An industry founded on paternalism is being asked to compete.

That industry, and those responsible for it in state legislatures and in regulatory offices, need the help that the FTC is uniquely positioned to give. The more than a score of comments on electricity deregulation that the Commission's Bureau of Economics has filed with regulatory agencies and state legislatures have been unusually insightful and important. The FTC's explanation of its proposed consent order with PacifiCorp/Peabody was unusually thorough and helpful to understanding the Commission's view of competition in energy.

Now is the time for the Commission to do more, for several reasons.

* Deregulatory decisions being made now will affect consumer welfare for decades. With all due respect, whether states get deregulation right matters far more to consumers than whether the Commission brings another lawsuit or even another dozen. * The Commission's is a unique expert voice for competition. The Antitrust Division refrains from most of this kind of competition advocacy. Given the stakes, special interests on various sides will move mountains to influence outcomes. Consumers need an honest, expert voice to be heard in state legislatures and in national and state regulatory bodies. Both at FERC and especially in the states, the FTC is providing a perspective that otherwise might not be heard.

* Energy deregulation presents genuinely hard questions. There are difficult trade-offs between efficiencies from vertical integration and competition-driven benefits. The country needs rigorous thinking and then rethinking.

* The Commission's consumer protection expertise and its ability to give clear guidance are of critical importance. Incumbent utilities are being asked to compete in retail markets, which they have not had to do before. Consumers need vigorous but legitimate competition. Utilities must be encouraged to engage in hard-hitting comparative advertising and to know that this will not be punished. Utilities must be deterred from squelching efficient new competition through unfair or deceptive practices.

* As the Commission has testified before Congress, electricity producers are competing on environmental friendliness. The Commission's experience with "green" claims can be of great assistance in our getting this part of competition right.

* Competition is initiated only once. When deregulation comes to a state, there is a unique window of opportunity for incumbent firms to demonstrate efficiencies and for more efficient start-up firms to attract customers. Guidance and law enforcement cannot wait or a crucial moment will be lost.

* Private enforcers may be deterred by an overly broad reading of the state action doctrine. When a state embraces competition, the state action doctrine needs swiftly to be removed as a cloak of protection for anticompetitive practices. Waiting until competition is well established is waiting too long.

* Although most legislators, regulators, and competitors want to do the right thing, this is an industry in which all the instincts are wrong, in terms of competition. Jade Eaton of the Antitrust Division has forcefully made this point. The ethos has been paternalism. The Commission has a special calling to help move it toward competition.

* Electricity deregulation presents a near-classic case of an industry where the Commission's advocacy work and its law enforcement efforts, both competition and consumer protection, have informed and lent legitimacy to each other, and can do so in the future.

Energy deregulation calls for solutions based on, among other things, a blend of competition, consumer protection, and expert investigation and reporting. Advertising and other promotional practices need to be examined both to protect consumers directly and, perhaps even more important, to protect competition. Competition enforcement should be informed by an understanding of consumer protection remedies. Legislatures and regulators will have a continuing need for expert advice that is informed by enforcement realities.

The resources the Commission has invested in energy deregulation have been well spent, and additional resources would be well-justified. Deregulation and competition/consumer protection cannot be a staggered process. Deregulation will work only if it is accompanied by the simultaneous initiation of competition and consumer protection, with clear guidance so firms will compete aggressively but legitimately.

** Stephen Calkins is professor of law at Wayne State University, Detroit, a former FTC general counsel and staff director for the FTC study known as Kirkpatrick II

* This is the second in a series of essays produced for FTC:WATCH by the American Antitrust Institute, an independent public interest organization dedicated to robust "post-Chicago" antitrust laws and institutions.