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Borough of Lansdale v. Philadelphia Electric Co.

November 8, 1982

BOROUGH OF LANSDALE, APPELLANT,
v.
PHILADELPHIA ELECTRIC COMPANY



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.

Aldisert and Higginbotham, Circuit Judges and Meanor, District Judge.*fn*

Author: Aldisert

Opinion OF THE COURT

ALDISERT, Circuit Judge.

In this appeal from a judgment entered on a jury verdict in a case brought under § 2 of the Sherman Act,*fn1 our major task is to decide if the district court erred in not setting aside the jury's finding with respect to the definition of the relevant geographic market. Appellant, the Borough of Lansdale, operates a small retail electric company. Failing to obtain certain services from the Philadelphia Electric Company, Lansdale brought an antitrust action but did not prevail before the jury. Before us on this appeal, it now argues that the geographic market should have been defined as a matter of law. We affirm the judgment of the district court.

I.

The Borough of Lansdale comprises 2.9 square miles in Montgomery County, Pennsylvania. Although it lies within the service area of the Philadelphia Electric Company, it is also adjacent to an area served by Pennsylvania Power and Light Company. For several years Lansdale has operated its own electric utility company, but since 1972 it has not generated its own power; rather, it purchases electricity wholesale from Philadelphia Electric and resells it to its own customers. Philadelphia Electric is a vertically-integrated, investor-owned public utility company whose service area comprises 2,255 square miles. Lansdale is one of seventy-three municipalities in Philadelphia Electric's service area that are authorized by statute to operate their own electrical systems, but it is the only municipality that actually does so. Within Philadelphia Electric's service area Lansdale is its only wholesale customer and the only other retail power company. At present Philadelphia Electric is the only utility with transmission lines to Lansdale.

Lansdale has two potential methods of purchasing wholesale power other than obtaining it from Philadelphia Electric: building a high tension line to connect its system with Pennsylvania Power and Light Company; or arranging to have power moved over Philadelphia Electric's lines by a process known as wheeling. Wheeling involves transfer of electricity by direct transmission or displacement from one utility to another over the facilities of an intermediate utility.

From 1972 to 1977 Lansdale bought power from Philadelphia Electric under a fixed-rate contract, although Philadelphia Electric unsuccessfully attempted to raise its wholesale rate when confronted with higher fossil fuel costs. In 1975, with the end of its contract term approaching, Lansdale began to investigate the possibility of purchasing power from other suppliers, e.g., Pennsylvania Power and Light Company, Niagara Mohawk Power Corporation, and the Power Authority of the State of New York. Upon receiving commitments from these suppliers, Lansdale asked Philadelphia Electric whether it could wheel power from them over Philadelphia Electric's lines. The parties dispute the nature of Philadelphia Electric's response: Lansdale construes it as a flat refusal to wheel; on its part Philadelphia Electric states that it said it was willing to wheel "unit power," loosely defined as electric power from a generating facility in which Lansdale was part owner.*fn2

Philadelphia Electric also made plans in contemplation of the end of its Lansdale contract. It filed with the Federal Energy Regulatory Commission two successive wholesale rate increase requests which Lansdale opposed as discriminatory, anti-competitive, and not cost justified. In particular, Lansdale opposed Philadelphia Electric's proposed Auxiliary Service Provision to compensate Philadelphia Electric for back-up service in the event that Lansdale obtained an alternative power source. Responding to Lansdale's argument that back-up service would not be needed, an administrative law judge considering Philadelphia Electric's first filing found the Auxiliary Service Provision proposal "not just and reasonable," app. at 765a, but otherwise approved the rate increase. Lansdale did not appeal this decision. Philadelphia Electric then deleted a similar Auxiliary Service Provision from its second filing. As to the remainder of the second request, however, an administrative law judge found a de minimis disparity between Philadelphia Electric's wholesale and retail rates, but nevertheless approved Philadelphia Electric's rate increase request in relevant part. App. at 821a-23a.

Lansdale brought this action for damages and injunctive relief in July 1978 contending that Philadelphia Electric's new wholesale rates, combined with its refusal to wheel and its attempt to charge Lansdale for unneeded back-up service, constituted illegal monopolization in violation of § 2 of the Sherman Act. Lansdale presented essentially two theories: that Philadelphia Electric, in refusing to wheel and in filing the Auxiliary Service Provision proposals, used its strategic dominance in the wholesale market to foreclose competition from alternate wholesale sources and thus to injure Lansdale; and that because Philadelphia Electric's increased wholesale prices were greater than some of Philadelphia Electric's retail prices, Lansdale's ability to compete with Philadelphia Electric for retail customers was impaired by a "price squeeze." Also important to its monopoly claims was its argument that, because of construction costs and various environmental hurdles, it would not be feasible to build its own high tension line connecting it to other electricity suppliers.

The parties stipulated that the relevant product markets were "firm electric power"*fn3 for sale at wholesale, and electric power for sale at retail. Thus, their presentations, emphasizing expert testimony, concentrated on definition of relevant geographic market and possession of monopoly power. Lansdale's expert defined the relevant geographic markets for both retail and wholesale power as identical to Philadelphia Electric's service area. Philadelphia Electric's expert defined the wholesale market broadly to include the service areas of nearby wholesale sources; he provided a more complex definition of the geographic market for retail power, tending to focus on Lansdale as Philadelphia Electric's major source of retail competition. The trial judge instructed the jury:

In determining the relevant [geographic] market, you should consider the area in which the seller operates and the area to which purchasers can practically turn for each product under consideration. In determining the area of effective competition, you may include areas of potential competition if you find that the plaintiff has proven the existence of potential competition by a preponderance of the evidence. For you to decide that potential competition exists, the evidence must show something more than the existence of an entity with the legal authority to sell either retail or wholesale electric power. However, you need not limit your consideration to competition that appears to be immediate or imminent. In determining whether potential competition exists, you may consider existence of regulation, the nature of the product itself, and the means required to deliver the product. You may consider how these affect the likelihood of a new seller entering the market. You should also consider whether any entity has shown an interest or desire in competing with [Philadelphia Electric] in areas where [Philadelphia Electric] services either wholesale or retail customers. You will recall that the pertinent consideration is the area to which a buyer can rationally turn for an alternate supplier of power.

App. at 687a-88a. The jury returned its findings in the form of answers to the following ...


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