Antitrust Compliance Briefing

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Antitrust Compliance Briefing

• ISO-NE Demand Resources Group
• July 27, 2006
• John C. Peirce

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Antitrust Risks

• Criminal penalties -- fines and prison
• Civil treble damages
• Disruptive lawsuits can last years
• Strategic change may be delayed or stopped
• Political scapegoating

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Sherman Act 1Basics
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Sherman Act Section 1

• Every contract, combination in the form of trust
  or otherwise, or conspiracy, in restraint of
  trade or commerce among the several States, or
  with foreign nations, is declared to be illegal.

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Contract, combination . . . or conspiracy

• No requirement of written agreement
• Conspiracy sufficient but not necessary
• Conscious parallelism (everybodys doing it)
  alone is not illegal
• Plus factors

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FERC Market Behavior Rule

• prohibited acts include collusion with another
  party for the purpose of manipulating market
  prices, market conditions, or market rules for
  electric energy or electricity products.

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Sherman Act 2Basics
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Sherman Act Section 2

• Prohibits
• Anticompetitive conduct to obtain monopoly
• Anticompetitive conduct to keep monopoly

• Permits
• Obtaining monopoly by skill or historical
  accident
• Keeping monopoly by any fair means (e.g., being
  efficient)
• Charging monopoly prices

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Policy tension

• Sherman Act Section 2 implicitly assumes entry is
  easy and will discipline monopoly pricing
• Most Section 2 cases focus on exclusionary
  conduct of the monopolist erecting barriers to
  entry, etc.

• FERC believes entry is often difficult
• Since entry will not always reliably discipline
  monopoly pricing, FERC intervenes in pricing
• But FERC also wants to use price signals to
  attract entry

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Complexities in market power analysis

• Time of day
• Season
• Drought
• Transmission congestion
• Fuel limitations
• Environmental restrictions
• Restrictions in other ISOs
• Etc.

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Uncertainty creates risk

• Uncertainty about market definition makes
  antitrust analysis . . . . FUN
• Uncertainty about market power affects incentive
  for regulators to intervene
• Uncertainty about level of regulatory involvement
  reduces available antitrust immunity
• discussion

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ISO-NE, NEPOOL and Antitrust
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Potential risks

• Competitors agreeing on
• market rules affecting price
• market rules affecting market power
• incentives for new investment
• etc.
• How can we manage these risks
• for NEPOOL and ISO-NE?

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Antitrust Immunity

• Noerr-Pennington immunity
• Seeking government action First Amendment basis
• State action and implied immunity
• Complying with government requirement
• Government officials performing non-commercial
  duties
• Antitrust immunities are limited to specific
  behavior.

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Managing Risk

• Ensure every activity is
• Immune, or
• Does not violate antitrust law, or
• Both.

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Creating Market Rules

• Proposing FERC filed tariff Noerr-Pennington
• Complying with FERC mandate
• Inclusive stakeholder process
• Transparency

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Meetings

• Good meeting practices
• Agenda
• Transparency
• Minutes
• Civility
• Awareness of antitrust issues

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Hypothetical scenario 1

• Members from each sector (transmission,
  generation, load-serving, etc.) meet ahead of
  scheduled Committee meeting to discuss how each
  bloc should vote on agenda items
• Members of Generation Caucus also discuss bidding
  strategies, an issue not on the agenda

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Hypothetical scenario 2

• At DRG meeting on demand side bidding,
  Participants discuss different bidding strategies
  that could reduce power costs
• Generation-owning Participant complains that the
  load-serving Participants as a group are planning
  to coordinate their bids to manipulate the market

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Antitrust Risk Management

• Always comply with the law
• Avoid ambiguous contacts with competitors
• Understand your competitive position
• Use antitrust analysis in strategic planning
• When in doubt, contact Legal