Antitrust Law Daily Wrap Up, ANTITRUST NEWS: AAI asks federal enforcers to probe capacity withholding in wholesale electricity markets, (Jul 23, 2014)

By Linda O’Brien, J.D., LL.M.

The American Antitrust Institute (AAI) recommended the investigation of generating capacity withholding in the wholesale electricity markets in a July 22 letter to U.S. Department of Justice (DOJ) Antitrust Division Assistant Attorney General William Baer and FTC Chairwoman Edith Ramirez.

Wholesale electricity markets handle much of the nation’s wholesale electricity supply and can deliver the benefits of competition to consumers if properly structured and managed. Recently, there have two incidents of strategic capacity withholding for the purpose of driving up the prices of wholesale electricity, according to the AAI. Such conduct can be damaging to buyers of wholesale electricity and ultimately to retail consumers who pay supra-competitive prices for an essential service.

Given the harmful effects of capacity withholding, the DOJ and FTC should investigate both incidents and, if an antitrust violation is found, use all statutory tools available to challenge the conduct, the organization advised. Framing the withholding issue, the letter noted that wholesale electricity markets have features that exacerbate the effects of capacity withholding. First, the demand for electricity is relatively inelastic. Second, supply inelasticity during times when capacity is withheld contributes to supra-competitive prices. The withholding issue is complicated by factors that make it more difficult to detect and challenge and detect. Those factors are (1) most of the organized electricity market employs single-price auctions and (2) withholding can be accomplished by a firm acting unilaterally or in coordination with other market participants in a collusive scheme.

Antitrust enforcement and federal regulation occupy unique roles in policing capacity withholding in wholesale electricity markets and are complementary enforcement tools, said the letter, signed by AAI Vice President Diane Moss and Special Counsel Sandeep Vaheesan. The AAI encourages the use of Section 7 of the FTC Act in challenges to proposed mergers that raise the threat of capacity withholding. Section 7 is also a potent tool for challenging consummated mergers or acquisitions in which the parties have engaged in illegal post-merger conduct.

According to the AAI, a variety of factors has increased the complexity of relationships and agreements involving wholesale electricity market participants. The DOJ has been successful in using Section 1 of the FTC Act to prosecute capacity withholding that is the product of an underlying anticompetitive agreement. As part of a comprehensive competition enforcement policy involving both agencies, the FTC might consider suing its authority under Section 5 to challenge unilateral capacity withholding that is not actionable under Section 1 or 7. A Section 5 inquiry could consider whether strategic withholding is not likely to be justified by a legitimate business practice, undermines efficiency in the market, and is unfair in that it is opportunistic or coercive.

Antitrust enforcement and federal regulation provide for an assortment of remedies, some of which will be more effective than others, according to the organization. Given the widespread consumer harm associated with higher electricity prices from withholding, the DOJ might consider pursuing criminal sanctions against offending companies or seek disgorgement of the entire amount of the gains from the violation. The FTC has broad authority to craft appropriate equitable remedies under Section 5 and should seek disgorgement of all gains and divestiture of the capacity that gave rise to the ability and incentive to withhold supply, the AAI concluded.

The American Antitrust Institute is an independent, Washington-based non-profit education, research, and advocacy organization. Its stated mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy.

News: Antitrust