Amicus Curiae Brief — Schuylkill Energy Resources, Inc. v. Pennsylvania Power & Light Co.

MOTION FILED

OCT 2 2 1997,

No. 97-387

IN THE SUPREME COURT OF THE UNITED STATES

October Term, 1997

SCHUYLKILL ENERGY RESOURCES, INC.

Petitioners,

Vv.

PENNSYLVANIA POWER & LIGHT, INC.

Respondents.

MOTION OF THE ATTORNEY GENERAL

OF THE COMMONWEALTH OF PENNSYLVANIA

TO FILE AN AMICUS BRIEF OUT OF TIME AND AMICUS

BRIEF IN SUPPORT OF PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE THIRD CIRCUIT

D. MICHAEL FISHER

Attorney General

JAMES A. DONAHUE, Il

Chief Deputy Attorney General

ALEXIS L. BARBIERI

Executive Deputy Attorney

General

Counsel of Record

Office of Attorney General

14* Floor, Strawberry Square

Harrisburg, PA 17120

(717) 787-4530

Attorneys for the Commonwealth of Pennsylvania

SDR iE Aa be Tie Ek tte Ne SMD ea ttl, Ar EO a IR RI. Hie Sey 0 Ville “ a ath a

LIST OF COUNSEL

Counsel for the Commonwealth of Pennsylvania

D. MICHAEL FISHER

Attorney General

JAMES A. DONAHUE, II

Chief Deputy Attorney General

Office of Attorney General

14" Floor, Strawberry Square

Harrisburg, PA 17120

(717) 787-4530

ALEXIS L. BARBIERI

Executive Deputy Attorney General

Office of Attorney General

14" Floor, Strawberry Square

Harrisburg, PA 17120

(717) 787-9716

Counsel of Record

TABLE OF CONTENTS

PAGES

TABLE OF AUTHORITIES .................. i, li

MOTION OF THE ATTORNEY GENERAL

OF THE COMMONWEALTH OF

PENNSYLVANIA TO FILE AN AMICUS

BRIEF OUT OF THRE 2 se. casas i see... l

AMICUS BRIEF IN SUPPORT OF PETITION

FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

SD SR AEE 6 ne vevnsssbnndecsues 3

INTEREST OF THE AMICUS STATE......... 3

SUMMARY OF REASONS CERTIORARI

SHOULD BE GRANTED ................... 3

Fe Pe ee 4

TABLE OF AUTHORITIES

CASES PAGES

Blue Shield of Virginia v. McCready,

457 U.S: 465. (1962) nn cc cccccccdeses 7

Brunswick Corp. v. Pueblo Bowl-o-Mat, Inc.,

429 US. 477 CAST)... bocce ces ceces 7

Interstate Circuit, Inc. v. United States,

SE ee 7

Schuylkill Energy Resources, Inc. v. Pennsylvania

Power & Light, Inc.,

113 F.3d 405 (3d. Cir. 1997)...........-- 3

Schuylkill Energy Resources, Inc. v. Pennsylvania

Power & Light, Inc.,

1996-1 Trade Cas. § 71,447 (E.D. Pa. 1996). 6

STATUTES

15 U.S.C. § 1 et seg. (1994) .... 2... cece e eee eeee 5

CE EE acces k andes pare ncseadectussss 7

66 P.S. § 2801 ef seg... 0... ee cece eee reece 5

66 Pa. C.S.A. § 2806(b) .. 2... eee eee ewer e eee 6

(ij AR wy) Seer 4

Se PTE ce vccrageescsasacesaasvinsnnses 8

LIS PSE RE .. . ccct vou sen eRe ekeeeades «+ i

CE es ox 6 kn bs vancd beneeneeuseueeas 3,8

OTHER AUTHORITIES

Telecommunications Act of 1996,

Pub. L. No. 104-104 (1996) .............. 3

Sap. CO BR. BGEG) «oo 5 cc on on UU Ra cca 3

ii

MOTION OF THE ATTORNEY GENERAL

OF THE COMMONWEALTH OF PENNSYLVANIA

TO FILE AN AMICUS BRIEF OUT OF TIME

The Attorney General of the Commonwealth of

Pennsylvania (“Attorney General”) respectfully moves this Court

for permission to file an amicus brief out of time in the above

matter.

1. This case involves antitrust standing in soon-to-be regulated

markets.

2. The Attorney General originally decided not to file an amicus

brief in this case.

3. Subsequent to that decision, the Attorney General has become

involved in an onslaught of litigation over deregulation issues. One

case, involving the merger of Allegheny Power System and

Duquesne Light Company currently involves litigation before the

Federal Energy Regulatory Commission: Application for Merger

Approval and Related Authorizations among DQE, Inc., Allegheny

Power System, Inc. and AYPSub, Inc., Docket Nos. EC97-46-000,

ER97-4050-000; and ER97-405 1-000; the Pennsylvania Public

Utility Commission: In re: Joint Application of DQE, Inc. and

Allegheny Power System, Inc. and AYPSub, Inc. for Approval of

the Transfer by Merger of the Property and Rights of Duquesne

Light Company to Allegheny Power Systems, Inc., Docket

No. A-110150F0015; and the United States District Court for the

Western District of Pennsylvania: Washington Power (1), Inc. and

Air Products and Chemicals, Inc. v. Allegheny Power Systems, Inc.,

Allegheny Power Service Corporation and West Penn Power, Civil

Action No. 95-0658 (filed May 2, 1995, amended October 4, 1996,

W.D. Pa.); Champion Processing, Inc., North Branch Energy, Inc.

and Air Products and Chemicals Inc. v. Allegheny Power System,

Inc., Allegheny Power Service Corporation and West Penn Power

Company, Civil Action No. 96-0598 (filed April 1, 1996, amended

September 30, 1996, W.D. Pa.};City of Pittsburgh v. West Penn

Power Company, Allegheny Power System, Inc., Duquesne Light

Company and DQE, Inc., Civil Action No. 97-1772 (filed

Sepember 29, 1997, W.D. Pa.).

4. All three bodies are looking at the competitive impact of the

merger.

5. It is anticipated that other mergers will occur in the

telecommunications industry which will prompt similar litigation.

6. Upon further reflection, the Attorney General determined that

any ambiguity of standing in the newly deregulated industries could

cause confusion among the courts or the regulatory-commissions.

Therefore, the Attorney General respectfully requests

that this court grant the Attorney General’s motion to file an amicus

brief out of time.

Respectfully submitted by,

D. MICHAEL FISHER

Attorney General

JAMES A. DONAHUE, III

Chief Deputy Attorney General

ALEXIS L. BARBIERI

Executive Deputy Attorney General

Counsel of Record

Office of Attorney General

14* Floor, Strawberry Square

Harrisburg, PA 17120

(717) 787-4530

Attorneys for the Commonwealth of Pennsylvania

October 28, 1997

AMICUS BRIEF IN SUPPORT OF PETITION

FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURTS OF APPEALS

FOR THE THIRD CIRCUIT

In Schuylkill Energy Resources, Inc. v. Pennsylvania Power

& Light, Inc., 113 F.3d 405 (3d. Cir. 1997), the Third Circuit denied

standing to a potential new entrant into an electricity market which

was about to be deregulated. The Attorney General of the

Commonwealth of Pennsylvania (hereinafter “Attorney General”)

respectfully files this amicus brief to urge this Court to clarify

antitrust standing in newly-deregulated markets. The Attorney

General takes no position on the merits of the underlying dispute

between the parties.

The Third Circuit’s decision “conflicts with applicable

decisions of this Court,” Sup. Ct. R. 10(c), and will undermine state

antitrust enforcement in deregulated electric and telecommunica-

tions markets. Deregulation throughout the economy is likely to

raise questions of antitrust standing repeatedly in the future.

INTEREST OF THE AMICUS STATE

This case involves the application of the antitrust laws to an

emerging deregulated market. The Commonwealth focuses on one

portion of the Third Circuit’s opinion in this brief. The Third

Circuit held that an antitrust plaintiff in a market about to be

deregulated did not have standing to challenge actions designed to

keep the plaintiff out of that future market because the plaintiff was

not yet a competitor. 113 F.3d at 416. The issue is at what point do

those parties, who intend to enter newly-deregulated markets, have

antitrust standing to complain about acts which injure them in

violation of the antitrust laws. This case is significant because of

the national trend toward deregulation. While the instant case

involves deregulation of electric generation services in

Pennsylvania, similar issues can occur with regard to the application

of the Telecommunications Act of 1996, Pub. L. No. 104-104

3

(1996) and electric deregulation efforts in the other 39 states.' In

most cases of deregulation, the incumbent monopolist will continue

to play a role in delivering the deregulated service either through

ownership of local telephone switches and lines, as in the case of

telephone service, or through the ownership of local transmission

lines, as in the case of electric service. The ongoing forced

relationship between incumbent monopolists and new entrants sets

the context for the dispute in this case.

As the chief law enforcement officer of the Commonwealth

of Pennsylvania, the Attorney General is one of the primary

enforcers of the federal antitrust laws within the state.”

SUMMARY OF REASONS CERTIORARI

SHOULD BE GRANTED

Electric and telecommunications deregulation across the

country will pit incumbent natural monopolists against new

competitors. This Court should grant certiorari in this case to

affirm that upstart competitors have antitrust standing to challenge

actions which they believe violate the antitrust laws, but which

occur prior to complete deregulation of the market.

ARGUMENT

This dispute arises out of a contract between SER and

PP&L regarding the sale of electricity. SER has contracted to sell

79.5 megawatts of its energy plant’s output to PP&L for a period of

'So far, eleven states, California, Maine, Massachusetts, Michigan,

Montana, Nevada, New Hampshire, New Jersey, New York, Oklahoma, and

Pennsylvania, have enacted some form of electric utility deregulation.

271 PS. § 732-204(c).

™

20 years. PP&L is obligated to buy the electricity except during,

among some other limited times, “system emergencies.” 113 F.3d

at 411.

SER alleges that PP&L is trying to monopolize the market

for electricity by declaring numerous “sham” transmission “system

emergencies;” thus, causing SER to lose the revenues from selling

energy and incurring other incidental costs. SER claims that the

loss of electricity sale revenue and other increased costs resulting

from the “sham” system emergencies will cause it and other

independent power producers to exit the market place before

deregulation takes effect.’ Jd. SER alleges two separate federal

antitrust violations by PP&L under the Sherman Act, 15 U.S.C.

§ 1 et seg. (1994). In the first count, SER alleges a claim of

monopolization in violation of section 2 of the Sherman Act. In the

second count, SER alleges a claim of attempt to monopolize in

violation of section 2 of the Sherman Act.

PP&L has been regulated as a natural or legal monopoly.

Many advancements in technology have been made that will allow

competition in the wholesale and retail electric markets. These

advancements led to the passage of the Pennsylvania Electricity

Generation Customer Choice and Competition Act (“Customer

Choice Act”) 66 P.S. § 2801 et seg. The Customer Choice Act’s

first phase begins January 1, 1999, after a 1997-98 pilot program

period. This gives consumers the opportunity to choose their

electricity supplier. The Customer Choice Act phases in

competition for electricity during 1999-2001. On January 1, 1999,

electric utilities must offer a choice of electric suppliers to a

maximum of 33% of the peak load of each customer class: on

January 1, 2000, electric utilities must offer a choice of electric

> Again, the Attorney General takes no position on whether the acts

alleged by SER, namely the repeated declaration of system emergencies,

allegedly for improper reasons, constitutes an antitrust violation. The

Commonwealth’s sole interest in this petition is on the standing question.

suppliers to a maximum of 66% of the peak load of each customer

class and on January 1, 2001, all customers must have the

opportunity to choose suppliers. 66 Pa. C.S.A. § 2806(b).

Suppliers must be approved before they can offer electricity to

consumers.

The District Court dismissed SER’s complaint for failing to

state an antitrust injury. 1996-1 Trade Cas. § 71,447 (E.D. Pa.

1996) (Pet. App. at 32a). Specifically, the District Court cited

SER’s failure to allege injury to competition generally not just to

itself (Pet. App. at 33a) and the speculative nature of SER’s claim

that PP&L will be able to raise electric rates to consumers at some

point in the future if it drives firms like SER from the market

(Pet. App. at 33 and 37a).

The Third Circuit affirmed the District Court’s dismissal.

One reason for dismissal was the inability of SER to currently

compete in the electricity market even though the Customer Choice

Act would give SER that right in the future. In reference to the

passage of the Customer Choice Act, the Third Circuit held:

We wiil not attempt to predict the future of

competitive retail access in Pennsylvania. We do

not know whether SER or PP&L will even exist in

2001, and we certainly do not know whether PP&L

will enjoy an unlawful monopoly in its service area

at that time. What we do know is that SER is

presently unable to compete with PP&L, both by

agreement and by law. While SER attempts to

characterize itself as PP&L’s competitor on the eve

of deregulation, we conclude that SER cannot, as a

matter of law, establish that PP&L’s generation

curtailment policy creates an injury of the type the

antitrust laws were intended to prevent.

113 F.3d at 416 (footnotes omitted).

|

In a footnote attached to the end of the above passage, the

Third Circuit added that it was not deciding whethe: PP&L’s

activities would violate the antitrust laws in a “competitive market.”

Id.

Separate and apart from the facts of this case, the Third

Circuit’s opinion appears to give incumbent monopolists carte

blanche to injure potential entrants into soon-to-be deregulated or

partially deregulated markets because the new entrants do not have

standing to fight back. The Commonwealth asserts that this is an

improper application of antitrust standing principals.

Antitrust standing is set forth in 15 U.S.C. § 15 which

grants standing to any person injured in his or her business by

anything prohibited by the antitrust laws. This Court requires

plaintiffs in antitrust cases to show that they have been injured by

an activity antitrust laws were designed to prevent. Brunswick

Corp. v. Pueblo Bowl-o-Mat, Inc., 429 U.S. 477 (1977). Standing

has been granted to those who are the intended victims of

anticompetitive conduct. Blue Shield of Virginia v. McCready,

457 U.S. 465 (1982). The Third Circuit has misapplied these

standing principles in this case.

SER contends that PP&L declared false system emergencies

with the intent to drive up SER’s costs and damage its equipment.‘

Normally, this type of alleged injury would be sufficient to establish

antitrust standing. Interstate Circuit, Inc. v. United States, 306

U.S. 208 (1939).

In its opinion, the Third Circuit recognized the passage of

the Customer Choice Act but held that any potential injury to SER

“No discovery has been taken in this case so it is unclear

whether SER will find evidence to support its contention that the system

emergencies were in fact false. Since this issue was decided on a motion

to dismiss, SER’s allegations are assumed to be true. Schuylkill Energy,

113 F.3d at 411.

as a potential competitor under this Act was too speculative.

Schuylkill Energy, 113 F.2d at 416. This was an improper

conclusion to make on a motion to dismiss. SER alleged that

PP&L, an incumbent monopolist, about to lose its monopoly,

engaged in acts designed to drive SER and other potential electricity

generators out of business before they would be able to compete

with it. The antitrust laws are designed to prevent monopolists from

engaging in predatory conduct which raises rivals’ costs. It is

unclear why SER, or anyone else in SER’s position in the future,

lacks standing to prove its claims on the basis that the electricity

market has not been deregulated yet.

By dragging timing into its analysis of standing, the Third

Circuit’s opinion in this case has unnecessarily confused the law of

antitrust standing. Clearly, if an entity in PP&L’s position engaged

in predatory conduct against new competitors in 2001, after

deregulation of the electric industry was complete in Pennsylvania,

the new competitors would have standing. But what if PP&L, or

any other entity, engaged in the same alleged acts a week before the

market was completely deregulated? Would these new competitors

still have standing? What result does the Third Circuit’s decision

mandate when only 33% of Pennsylvania consumers can participate

in a deregulated market after January 1, 1999? It appears from the

court’s decision that an incumbent monopolist could do anything to

its new competitors until 2001, a huge disadvantage to those

competitors and a result not consistent with this Court’s previous

opinions.

For these reasons, we respectfully request that this Court

grant the petition for certiorari in this case on the narrow issue of

when entities about to enter to newly deregulated markets have

standing under the antitrust laws.

Respectfully submitted by,

D. MICHAEL FISHER

Attorney General

JAMES A. DONAHUE, III

Chief Deputy Attorney General

ALEXIS L. BARBIERI

Executive Deputy Attorney General

Counsel of Record

Office of Attorney General

14* Floor, Strawberry Square

Harrisburg, PA 17120

(717) 787-4530

Attorneys for the Commonwealth of Pennsylvania

October 28, 1997