Otter Tail Power Co. v. United States

410 U.S. 366, 93 S. Ct. 1022, 35 L. Ed. 2d 359, 1973 U.S. LEXIS 131

Opinions

Mr. Justice Douglas

delivered the opinion of the Court.

In this civil antitrust suit brought by appellee against Otter Tail Power Co. (Otter Tail), an electric utility company, the District Court found that Otter Tail had attempted to monopolize and had monopolized the retail distribution of electric power in its service area in violation of § 2 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. § 2. The District Court found that Otter Tail had attempted to prevent communities in which its retail distribution franchise had expired from replacing it with a municipal distribution system. The principal means employed were (1) refusals to sell power at wholesale to proposed municipal systems in the communities where it had been retailing power; (2) refusals to “wheel” power to such systems, that is to say, to transfer by direct transmission or displacement electric power from one utility to another over the facilities of an intermediate utility; (3) the institution and support of litigation designed to prevent or delay establishment of those systems; and (4) the invocation of provisions in its transmission contracts with several other power suppliers for the purpose of denying the municipal systems access to other suppliers by means of Otter Tail’s transmission systems.

Otter Tail sells electric power at retail in 465 towns in Minnesota, North Dakota, and South Dakota. The District Court’s decree enjoins it from refusing to sell electric power at wholesale to existing or proposed municipal electric power systems in the areas serviced by Otter Tail, from refusing to wheel electric power oyer the lines from the electric power suppliers to existing or proposed municipal systems in the area, from entering into or enforcing any contract which prohibits use of Otter Tail’s lines to wheel electric power to municipal electric power systems, or from entering into or enforcing any contract which limits the customers to whom and areas in which Otter Tail or any other electric power company may sell electric power.

The decree also enjoins Otter Tail from instituting, supporting, or engaging in litigation, directly or indirectly, against municipalities and their officials who have voted to establish municipal electric power systems for the purpose of delaying, preventing, or interfering with the establishment of a municipal electric power system. 331 F. Supp. 54. Otter Tail took a direct appeal to this Court under § 2 of the Expediting Act, as amended, 62 Stat. 989, 15 U. S. C. § 29; and we noted probable jurisdiction, 406 U. S. 944.

In towns where Otter Tail distributes at retail, it operates under municipally granted franchises which are limited from 10 to 20 years. Each town in Otter Tail’s service area generally can accommodate only one distribution system, making each town a natural monopoly market for the distribution and sale of electriq power at retail. The aggregate of towns in Otter Tail’s service area is the geographic market in which Otter Tail competes for the right to serve the towns at retail.¹ That competition is generally for the right to serve the entire retail market within the composite limits of a town, and that competition is generally between Otter Tail and a prospective or existing municipal system. These towns number 510 and of those Otter Tail serves 91%, or 465.

Otter Tail’s policy is to acquire, when it can, existing municipal systems within its service areas. It has acquired six since 1947. Between 1945 and 1970, there were contests in 12 towns served by Otter Tail over proposals to replace it with municipal systems. In only three — Elbow Lake, Minnesota, Colman, South Dakota, and Aurora, South Dakota — were municipal systems actually established. Proposed municipal systems have great obstacles; they must purchase the electric power at wholesale. To do so they must have access to existing transmission lines. The only ones available ² belong to Otter Tail. While the Bureau of Reclamation has high-voltage bulk-power supply lines in the area, it does not operate a subtransmission network, but relies on wheeling contracts with Otter Tail and other utilities to deliver power for its bulk supply lines to its wholesale customers.³

The antitrust charge against Otter Tail does not involve the lawfulness of its retail outlets, but only its methods of preventing the towns it served from establishing their own municipal systems when Otter Tail’s franchises expired. The critical events centered largely in four towns — Elbow Lake, Minnesota, Hankinson, North Dakota, Colman, South Dakota, and Aurora, South Dakota. When Otter Tail’s franchise in each of these towns terminated, the citizens voted to establish a municipal distribution system. Otter Tail refused to sell the new systems energy at wholesale and refused to agree to wheel power from other suppliers of wholesale energy.

Colman and Aurora had access to other transmission. Against them, Otter Tail used the weapon of litigation.

As respects Elbow Lake and Hankinson, Otter Tail simply refused to deal, although according to the findings it had the ability to do so. Elbow Lake, cut off from all sources of wholesale power, constructed its own generating plant. Both Elbow Lake and Hankinson requested the Bureau of Reclamation and various cooperatives to furnish them with wholesale power; they were willing to supply it if Otter Tail would wheel it. But Otter Tail refused, relying on provisions in its contracts which barred the use of its lines for wheeling power to towns which it had served at retail. Elbow Lake after completing its plant asked the Federal Power Commission, under § 202 (b) of the Federal Power Act, 49 Stat. 848, 16 U. S. C. § 824a (b), to require Otter Tail to interconnect with the town and sell it power at wholesale. The Federal Power Commission ordered first a temporary⁴ and then a permanent connection.⁵ Hankinson tried unsuccessfully to get relief from the North Dakota Commission and then filed a complaint with the federal commission seeking an order to compel Otter Tail to wheel. While the application was pending, the town council voted to withdraw it and subsequently renewed Otter Tail’s franchise.

It was found that Otter Tail instituted or sponsored litigation involving four towns in its service area which had the effect of halting or delaying efforts to establish municipal systems. Municipal power systems are financed by the sale of electric revenue bonds. Before such bonds can be sold, the town’s attorney must submit an opinion which includes a statement that there is no pending or threatened litigation which might impair the value or legality of the bonds. The record amply bears out the District Court’s holding that Otter Tail’s use of litigation halted or appreciably slowed the efforts for municipal ownership. “The delay thus occasioned and the large financial burden imposed on the towns’ limited treasury dampened local enthusiasm for public ownership.” 331 F. Supp. 54, 62.

I

Otter Tail contends that by reason of the Federal Power Act it is not subject to antitrust regulation with respect to its refusal to deal. We disagree with that position.

“Repeals of the antitrust laws by implication from a regulatory statute are strongly disfavored, and have only been found in cases of plain repugnancy between the antitrust and regulatory provisions.” United States v. Philadelphia National Bank, 374 U. S. 321, 350-351. See also Silver v. New York Stock Exchange, 373 U. S. 341, 357-361. Activities which come under the jurisdiction of a regulatory agency nevertheless may be subject to scrutiny under the antitrust laws.

In California v. FPC, 369 U. S. 482, 489, the Court held that approval of an acquisition of the assets of a natural gas company by the Federal Power Commission pursuant to § 7 of the Natural Gas Act “would be no bar to [an] antitrust suit.” Under § 7, the standard for approving such acquisitions is “public convenience and necessity.” Although the impact on competition is relevant to the Commission’s determination, the Court noted that there was “no ‘pervasive regulatory scheme’ including the antitrust laws that ha[d] been entrusted to the Commission.” Id., at 485. Similarly, in United States v. Radio Corp. of America, 358 U. S. 334, the Court held that an exchange of radio stations that had been approved by the Federal Communications Commission as in the “public interest” was subject to attack in an antitrust proceeding.

The District Court determined that Otter Tail’s consistent refusals to wholesale or wheel power to its municipal customers constituted illegal monopolization. Otter Tail maintains here that its refusals to deal should be immune from antitrust prosecution because the Federal Power Commission has the authority to compel involuntary interconnections of power pursuant to § 202 (b) of the Federal Power Act. The essential thrust of § 202, however, is to encourage voluntary interconnections of power. See S. Rep. No. 621, 74th Cong., 1st Sess., 19-20, 48-49; H. R. Rep. No. 1318, 74th Cong., 1st Sess., 8. Only if a power company refuses to interconnect voluntarily may the Federal Power Commission, subject to limitations unrelated to antitrust considerations, order the interconnection. The standard which governs its decision is whether such action is “necessary or appropriate in the public interest.” Although antitrust considerations may be relevant, they are not determinative.

There is nothing in the legislative history which reveals a purpose to insulate electric power companies from the operation of the antitrust laws. To the contrary, the history of Part II of the Federal Power Act indicates an overriding policy of maintaining competition to the maximum extent possible consistent with the public interest. As originally conceived, Part II would have included a “common carrier” provision making it “the duty of every public utility to . . . transmit energy for any person upon reasonable request . . . .” In addition, it would have empowered the Federal Power Commission to order wheeling if it found such action to be “necessary or desirable in the public interest.” H. R. 5423, 74th Cong., 1st Sess.; S. 1725, 74th Cong., 1st Sess. These provisions were eliminated to preserve “the voluntary action of the utilities.” S. Rep. No. 621, 74th Cong., 1st Sess., 19.

It is clear, then, that Congress rejected a pervasive regulatory scheme for controlling the interstate distribution of power in favor of voluntary commercial relationships. When these relationships are governed in the first instance by business judgment and not regulatory coercion, courts must be hesitant to conclude that Congress intended to override the fundamental national policies embodied in the antitrust laws. See United States v. Radio Corp. of America, supra, at 351. This is particularly true in this instance because Congress, in passing the Public Utility Holding Company Act, which included Part II of the Federal Power Act, was concerned with “restraint of free and independent competition” among public utility holding companies. See 15 U. S. C. § 79a (b)(2).

Thus, there is no basis for concluding that the limited authority of the Federal Power Commission to order interconnections was intended to be a substitute for, or to immunize Otter Tail from, antitrust regulation for refusing to deal with municipal corporations.

HH l — l

The decree of the District Court enjoins Otter Tail from “[Refusing to sell electric power at wholesale to existing or proposed municipal electric power systems in cities and towns located in [its service area]” and from refusing to wheel electric power over its transmission lines from other electric power lines to such cities and towns. But the decree goes on to provide:

“The defendant shall not be compelled by the Judgment in this case to furnish wholesale electric service or wheeling service to a municipality except at rates which are compensatory and under terms and conditions which are filed with and subject to approval by the Federal Power Commission.”

So far as wheeling is concerned, there is no authority granted the Commission under Part II of the Federal Power Act to order it, for the bills originally introduced contained common carrier provisions which were deleted.⁶ The Act as passed contained only the interconnection provision set forth in §202 (b).⁷ The common carrier provision in the original bill and the power to direct wheeling were left to the “voluntary coordination of electric facilities.”⁸ Insofar as the District Court ordered wheeling to correct anticompetitive and monopolistic practices of Otter Tail, there is no conflict with the authority of the Federal Power Commission.

As respects the ordering of interconnections, there is no conflict on the present record. Elbow Lake applied to the Federal Power Commission for an interconnection with Otter Tail and, as we have said, obtained it. Hank-inson renewed Otter Tail’s franchise. So the decree of the District Court, as far as the present record is concerned, presents no actual conflict between the federal judicial decree and an order of the Federal Power Commission. The argument concerning the pre-emption of the area by the Federal Power Commission concerns only instances which may arise in the future, if Otter Tail continues its hostile attitude and conduct against “existing or proposed municipal electric power systems.” The decree of the District Court has an open end by which that court retains jurisdiction “necessary or appropriate” to carry out the decree or “for the modification of any of the provisions.” It also contemplates that future disputes over interconnections and the terms and conditions governing those interconnections will be subject to Federal Power Commission perusal. It will be time enough to consider whether the antitrust remedy may override the power of the Commission under § 202 (b) as, if, and when the Commission denies the interconnection and the District Court nevertheless undertakes to direct it. At present, there is only a potential conflict, not a present concrete case or controversy concerning it.

III

The record makes abundantly clear that Otter Tail used its monopoly power in the towns in its service area to foreclose competition or gain a competitive advantage, or to destroy a competitor, all in violation of the antitrust laws. See United States v. Griffith, 334 U. S. 100, 107. The District Court determined that Otter Tail has “a strategic dominance in the transmission of power in most of its service area” and that it used this dominance to foreclose potential entrants into the retail area from obtaining electric power from outside sources of supply. 331 F. Supp., at 60. Use of monopoly power “to destroy threatened competition” is a violation of the “attempt to monopolize” clause of § 2 of the Sherman Act. Lorain Journal v. United States, 342 U. S. 143, 154; Eastman Kodak Co. v. Southern Photo Materials Co., 273 U. S. 359, 375. So are agreements not to compete, with the aim of preserving or extending a monopoly. Schine Chain Theatres v. United States, 334 U. S. 110, 119. In Associated Press v. United States, 326 U. S. 1, a cooperative news association had bylaws that permitted member newspapers to bar competitors from joining the association. We held that that practice violated the Sherman Act, even though the transgressor “had not yet achieved a complete monopoly.” Id., at 13.

When a community serviced by Otter Tail decides not to renew Otter Tail's retail franchise when it expires, it may generate, transmit, and distribute its own electric power. We recently described the difficulties and problems of those isolated electric power systems. See Gainesville Utilities v. Florida Power Corp., 402 U. S. 515, 517-520. Interconnection with other utilities is frequently the only solution. Id., at 519 n. 3. That is what Elbow Lake in the present case did. There were no engineering factors that prevented Otter Tail from selling power at wholesale to those towns that wanted municipal plants or wheeling the power. The District Court found— and its findings are supported — that Otter Tail's refusals to sell at wholesale or to wheel were solely to prevent municipal power systems from eroding its monopolistic position.

Otter Tail relies on its wheeling contracts with the Bureau of Reclamation and with cooperatives which it says relieve it of any duty to wheel power to municipalities served at retail by Otter Tail at the time the contracts were made. The District Court held that these restrictive provisions were “in reality, territorial allocation schemes,'' 331 F. Supp., at 63, and were per se violations of the Sherman Act, citing Northern Pacific R. Co. v. United States, 356 U. S. 1. Like covenants were there held to “deny defendant’s competitors access to the fenced-off market on the same terms as the defendant.” Id., at 12. We recently re-emphasized the vice under the Sherman Act of territorial restrictions among potential competitors. United States v. Topco Associates, 405 U. S. 596, 608. The fact that some of the restrictive provisions were contained in a contract with the Bureau of Reclamation is not material to our problem for, as the Solicitor General says, “government contracting officers do not have the power to grant immunity from the Sherman Act.” Such contracts stand on their own footing and are valid or not, depending on the statutory framework within which the federal agency operates. The Solicitor General tells us that these restrictive provisions operate as a “hindrance” to the Bureau and were “agreed to by the Bureau only at Otter Tail’s insistence,” as the District Court found. The evidence supports that finding.

IV

The District Court found that the litigation sponsored by Otter Tail had the purpose of delaying and preventing the establishment of municipal electric systems “with the expectation that this would preserve its predominant position in the sale and transmission of electric power in the area.” ⁹ 331 F. Supp., at 62. The District Court in discussing Eastern Railroad Conference v. Noerr Motor Freight, 365 U. S. 127, explained that it was applicable “only to efforts aimed at influencing the legislative and executive branches of the government.” Ibid. That was written before we decided California Motor Transport Co. v. Trucking Unlimited, 404 U. S. 508, 513, where we held that the principle of Noerr may also apply to the use of administrative or judicial processes where the purpose to suppress competition is evidenced by repetitive lawsuits carrying the hallmark of insubstantial claims and thus is within the “mere sham” exception announced in Noerr. 365 U. S., at 144. On that phase of the order, we vacate and remand for consideration in light of our intervening decision in California Motor Transport Co.

y

Otter Tail argues that, without the weapons which it used, more and more municipalities will turn to public power and Otter Tail will go downhill. The argument is a familiar one. It was made in United States v. Arnold, Schwinn & Co., 388 U. S. 365, a civil suit under § 1 of the Sherman Act dealing with a restrictive distribution program and practices of a bicycle manufacturer. We said: “The promotion of self-interest alone does not invoke the rule of reason to immunize otherwise illegal conduct.” Id., at 375.

The same may properly be said of § 2 cases under the Sherman Act. That Act assumes that an enterprise will protect itself against loss by operating with superior service, lower costs, and improved efficiency. Otter Tail’s theory collided with the Sherman Act as it sought to substitute for competition anticompetitive uses of its dominant economic power.¹⁰

The fact that three municipalities which Otter Tail opposed finally got their municipal systems does not excuse Otter Tail’s conduct. That fact does not condone the antitrust tactics which Otter Tail sought to impose. Moreover, the District Court repeated what we said in FTC v. National Lead Co., 352 U. S. 419, 431, “those caught violating the Act must expect some fencing in.” The proclivity for predatory practices has always been a consideration for the District Court in fashioning its antitrust decree. See United States v. Crescent Amusement Co., 323 U. S. 173, 190.

We do not suggest, however, that the District Court, concluding that Otter Tail violated the antitrust laws, should be impervious to Otter Tail’s assertion that compulsory interconnection or wheeling will erode its integrated system and threaten its capacity to serve adequately the public. As the dissent properly notes, the Commission may not order interconnection if to do so “would impair [the utility’s] ability to render adequate service to its customers.” 16 U. S. C. § 824a (b). The District Court in this case found that the “pessimistic view” advanced in Otter Tail’s “erosion study” “is not supported by the record.” Furthermore, it concluded that “it does not appear that Bureau of Reclamation power is a serious threat to the defendant nor that it will be in the foreseeable future.” Since the District Court has made future connections subject to Commission approval and in any event has retained jurisdiction to enable the parties to apply for “necessary or appropriate” relief and presumably will give effect to the policies embodied in the Federal Power Act, we cannot say under these circumstances that it has abused its discretion.

Except for the provision of the order discussed in part IV of this opinion, the judgment is

Affirmed.

Mr. Justice Blackmun and Mr. Justice Powell took no part in the consideration or decision of this case.

1 Northern States Power Co. also supplies some towns in Otter Tail’s area with electric power at retail. But the District Court excluded these towns from Otter Tail’s area because the two companies do not compete in the towns served by each other. Of the 615 remaining towns in the area, 465 are served at retail by Otter Tail, 45 by municipal systems, and 105 by rural electric cooperatives. The cooperatives are barred by § 4 of the Rural Electrification Act of 1936, 49 Stat. 1365, as amended, 7 U. S. C. § 904, from borrowing federal funds to provide power to towns already receiving central station service. For this and related reasons, the District Court excluded the rural cooperatives from the relevant market.

2 Subtransmission lines, with voltages from 34.5 kv to 69 kv are used for moving power from the bulk supply lines to points of local distribution. Of Otter Tail’s basic subtransmission system in this area, two-thirds of those lines are 41.6 kv subtransmission lines.

3 The 38 distribution rural cooperatives in Otter Tail’s area generally own only low-voltage distribution lines, which in most instances could not be used to supply power to proposed municipal utilities. The few rural cooperatives that have generation and transmission services do not, it was found, cut significantly into Otter Tail’s dominant position in subtransmission.

4 Elbow Lake v. Otter Tail Power Co., 40 F. P. C. 1262, aff’d, Otter Tail Power Co. v. FPC, 429 F. 2d 232 (CA8), cert, denied, 401 U. S. 947.

5 Elbow Lake v. Otter Tail Power Co., 46 F. P. C. 675.

6 See S. Rep. No. 621, 74th Cong., 1st Sess.; H. R. Rep. No. 1318, 74th Cong., 1st Sess.; Elbow Lake v. Otter Tail Power Co., 46 F. P. C., at 679.

7 Section 202 (b) provides: “Whenever the Commission, upon application of any State commission or of any person engaged in the transmission or sale of electric energy, and after notice to each State commission and public utility affected and after opportunity for hearing, finds such action necessary or appropriate in the public interest it may by order direct a public utility (if the Commission finds that no undue burden will be placed upon such public utility thereby) to establish physical connection of its transmission facilities with the facilities of one or more other persons engaged in the transmission or sale of electric energy, to sell energy to or exchange energy with such persons: Provided, That the Commission shall have no authority to compel the enlargement of generating facilities for such purposes, nor to compel such public utility to sell or exchange energy when to do so would impair its ability to render adequate service to its customers. The Commission may prescribe the terms and conditions of the arrangement to be made between the persons affected by any such order, including the apportionment of cost between them and the compensation or reimbursement reasonably due to any of them.”

⁸

S. Rep. No. 621, supra, n. 6, at 19.

9 After noting that the “pendency of litigation has the effect of preventing the marketing of the necessary bonds thus preventing the establishment of a municipal system,” 331 F. Supp., at 62, the District Court went on to find:

“Most of the litigation sponsored by the defendant was carried to the highest available appellate court and although all of it was unsuccessful on the merits, the institution and maintenance of it had the effect of halting, or appreciably slowing, efforts for municipal ownership. The delay thus occasioned and the large financial burden imposed on the towns’ limited treasury dampened local enthusiasm for public ownership. In some instances, Otter Tail made offers to the towns to absorb the towns’ costs and expenses, and enhance the quality of its service in exchange for a new franchise. Hankinson, after several years of abortive effort, accepted this type of offer and renewed defendant’s franchise.” Ibid.

10 The Federal Power Commission said in Elbow Lake v. Otter Tail Power Co., 46 F. P. C., at 678:

“The public interest is far broader than the economic interest of a particular power supplier. It is our legal responsibility, as the Supreme Court made clear in Pennsylvania Water & Power Co. v. FPC, 343 U. S. 414 (1952), to use our statutory authority to assure 'an abundant supply of electric energy throughout the United States,’ and particularly to use our statutory power under Section 202 (b) to compel interconnection and coordination when the public interest requires it. The exercise of that authority may well require, as it does here, that we order a public utility to interconnect with an isolated municipal system. The private company’s lack of enthusiasm for the arrangement cannot deter us, so long as the public interest requires it.”