Western District Pulls the Plug on Antitrust and Unfair Competition Claims against Duke Energy
In Duke Energy Carolinas, LLC v. NTE Carolinas II, LLC, the U.S. District Court for the Western District of North Carolina granted summary judgment to Duke Energy on numerous federal antitrust and state unfair competition counterclaims by a competitor.
Suggesting a dim view of the counterclaims, the court noted up front that “the antitrust and unfair competition laws at issue stand not as a means to choose market winners and losers, but rather only as guardrails to protect the fairness of the process.” The court viewed NTE’s counterclaims as using the antitrust laws “not as the shield they are intended to be but as a sword to ensure their own success where the market hasn’t fully rewarded their labor.”
The court then thoroughly analyzed each of the counterclaims, progressively dimmed the lights on NTE, and granted summary judgment for Duke Energy on all fronts, concluding that Duke Energy had not engaged in unlawful anticompetitive conduct under the Sherman Act or the North Carolina Unfair and Deceptive Trade Practices Act.
Duke Energy and NTE compete in the sale of wholesale electric power, which is regulated by the Federal Energy Regulatory Commission (FERC). For years FERC has recognized that Duke Energy has market power—about 90% in the Carolinas—for purposes of determining how Duke Energy must price its wholesale power, which it sells to municipalities.
NTE is an independent power producer that develops power plants that also sell wholesale power to municipalities. Importantly, NTE does not build transmission networks to connect its plants to the interstate transmission grid. This means that NTE must connect to transmission networks owned by other utilities, such as Duke Energy.
FERC requires Duke Energy to allow NTE to connect to Duke Energy’s transmission network. FERC also sets the terms of the interconnection by requiring the parties to enter into a FERC-approved standard interconnection agreement.
In 2014, NTE began developing a natural gas plant in Kings Mountain, North Carolina. Duke Energy and NTE entered into a FERC-approved interconnection agreement. Nine former Duke Energy customers agreed to buy power from NTE’s new plant, which began operations in 2018. NTE alleged that its success caused Duke Energy to begin targeting NTE as a competitor. Indeed, Duke Energy’s internal documents note that it wanted to go to “battle” to “stop the NTE train” and “ruin NTE’s plans.”
In 2016, NTE announced plans for another new North Carolina power plant, this time in Reidsville. NTE signed contracts with three customers, including a former Duke Energy customer. Like in Kings Mountain, Duke Energy and NTE entered into FERC’s standard interconnection agreement for the Reidsville plant.
At that time, Fayetteville was the largest municipality served by Duke Energy that might be served by NTE’s Reidsville plant. NTE needed Fayetteville as an anchor customer for its Reidsville plant. Fayetteville was under a long-term (20-year) contract with Duke Energy, but the city had the right to terminate the contract before expiration if it provided notice by a certain date.
In 2019, Fayetteville evaluated numerous supply options in considering whether to terminate or renew its contract with Duke Energy. Fayetteville considered pricing proposals from five potential suppliers, including Duke Energy and NTE. In April 2019, Fayetteville decided to negotiate a contract extension with Duke Energy. Duke Energy offered a lower cost than NTE, as well as a diverse fuel-sourcing system, which Fayetteville viewed as less risky than NTE’s single fuel-source (natural gas) option.
In May 2019, pursuant to the interconnection agreement, NTE suspended work on the Reidsville project. At that time, NTE was behind on millions of dollars of payments that it owed Duke Energy under the agreement. The parties unsuccessfully attempted to resolve the dispute, and Duke Energy terminated the agreement.
That same day, Duke sued NTE in North Carolina state court, asserting claims for breach of contract, unjust enrichment, negligent misrepresentation, and unfair trade practices. Defendants removed the case to the Western District of North Carolina and filed counterclaims of monopolization and attempted monopolization under Section 2 of the Sherman Act, as well as unfair trade practices and unfair competition under section 75-1.1.
NTE’s Antitrust Counterclaims Meet Resistance
NTE alleged that Duke Energy’s actions constituted monopolization and attempted monopolization in violation of Section 2 of the Sherman Act. The court thoroughly analyzed the long-standing requirement for monopolization: (1) the possession of monopoly power in the relevant market and (2) willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.
On the first element, the court concluded that a reasonable jury could disagree as to whether Duke Energy has monopoly power. First, the court rejected Duke Energy’s argument that it cannot be found to have monopoly power because of FERC’s regulations that limit Duke Energy’s pricing power and require it to allow competitors to access its transmission network. Rather, a jury must consider an entity’s market share along with the realities of the market (e.g., barriers to entry) to determine whether it has monopoly power.
But the court also rejected NTE’s argument that monopoly power should be inferred from Duke Energy’s high market share. The court explained that a dominant company still may not have the ability to control prices or exclude competition given market realities, such as competitive bidding for limited customers.
The court observed that there was evidence of Duke Energy’s high market share and barriers to entry, yet also limitations on its ability to control prices and exclude competitors. Accordingly, summary judgment on the issue of monopoly power was not appropriate.
On the second element of monopolization, the court analyzed NTE’s allegations of Duke Energy’s exclusionary conduct, focusing most heavily on NTE’s claims that (1) Duke Energy’s termination of the interconnection agreement constituted a refusal to deal and a denial of an essential facility and (2) Duke Energy used predatory pricing in its attempt to retain Fayetteville’s business.
At the outset, the court surveyed relevant Section 2 caselaw and explained that for conduct to be condemned as exclusionary, it must harm the competitive process and thereby harm consumers as opposed to simply harming one or more competitors. That analysis is necessarily fact intensive. Indeed, whether any particular act of a monopolist is exclusionary—rather than merely a form of vigorous competition—can be difficult to discern.
Termination of the Interconnection Agreement
NTE alleged that by terminating the Reidsville interconnection agreement, Duke Energy denied NTE access to Duke Energy’s transmission grid, which NTE alleged to be an “essential facility,” and therefore improperly refused to deal with a rival. The court granted summary judgment to Duke Energy on this claim for two reasons.
First, the court explained that FERC’s regulatory oversight bars NTE’s claims under Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP. In Trinko, a local AT&T customer sued Verizon for denying interconnection services to rivals to limit the rivals’ entry into the market for telephone services. The Supreme Court held that Verizon’s alleged refusal to deal could not be pursued as an antitrust claim because there was no anticompetitive malice, and a monopolist generally is not required to do business with a rival.
The Supreme Court in Trinko also concluded that essential-facility claims should be denied where a state or federal agency has authority to compel sharing and to regulate its scope and terms. Here, FERC requires Duke Energy to share its transmission systems with competitors, and the Western District found that Trinko barred NTE’s antitrust claim based on a refusal to deal or denial of access to an essential facility.
Second, the court analyzed NTE’s refusal-to-deal claim under Aspen Skiing Co. v. Aspen Highlands Skiing Corp., which the Trinko Court described as “the leading case for § 2 liability based on refusal to cooperate with a rival” but which “is at or near the outer boundary of § 2 liability.” In Aspen Skiing, the Supreme Court discussed two important factors to determine whether a refusal to deal is exclusionary: (1) the unilateral termination of a voluntary course of dealing and (2) the refusal to deal at retail price. The court agreed with Duke Energy that neither factor was present here and granted summary judgment to Duke Energy independently under Aspen Skiing in addition to Trinko.
NTE also claimed that Duke Energy’s predatory pricing allowed it to renew its contract with Fayetteville. Duke Energy sought summary judgment based on the “filed rate” doctrine, which generally bars claims that challenge a “filed” rate that has been approved by a regulatory agency. Duke Energy also argued that its pricing was not predatory because its price was above its marginal cost and, in any event, it had no probability of recouping any alleged losses incurred by below-cost pricing. The court agreed with Duke Energy on both counts.
First, NTE argued that the filed-rate doctrine does not apply to suits involving competitors. The court explained that circuit courts are split on this issue and, except in an unpublished opinion, the Fourth Circuit has not addressed it. Due to the circuit split and the lack of published authority from the Fourth Circuit, the court here did not take on the issue; rather, it found that NTE’s claim failed on the merits.
The court explained that a viable predatory-pricing claim must establish that (1) the rival’s price is below an appropriate measure of its costs, and (2) the rival has a dangerous probability of recouping its losses from its below-cost pricing. A key issue is determining the appropriate measure of costs.
Neither the Supreme Court nor the Fourth Circuit has identified the appropriate measure of costs for analyzing predatory pricing claims. However, the court here found that NTE’s reliance on “total average system costs” was against “the overwhelming weight of authority [that] favors a measurement that does not include the fixed, non-incremental costs included in NTE’s proposed measurement.” Indeed, circuit courts outside the Fourth Circuit have routinely held that the appropriate measure of costs is either average variable cost or marginal cost, which Duke Energy had proposed.
The court concluded that, using a proper measure of incremental, marginal, or variable costs, a reasonable jury could not find that Duke Energy’s pricing to Fayetteville was predatory under the antitrust laws.
NTE’s Section 75-1.1 and Unfair Competition Claims Generate No Support
NTE brought additional claims against Duke Energy for both statutory and common law unfair competition under North Carolina law. The court explained that a party is guilty of an unfair act or practice when it engages in conduct that amounts to an inequitable assertion of its power or position. Here, NTE alleged that Duke Energy acted unfairly in violation of section 75-1.1 through the same conduct it alleged to be unlawfully exclusionary under the federal antitrust laws.
First, Duke Energy asserted that Congress covered wholesale electricity regulation through the Federal Power Act, which delegates to FERC the exclusive authority to regulate wholesale electric-energy transmission. Under field preemption, state law falling within a field that Congress intended to be occupied by federal law is preempted. The court found that field preemption barred NTE’s state-law allegations of unfair trade practices through Duke’s allegedly exclusionary conduct (notably, the termination of the interconnection agreement and predatory pricing).
Second, Duke Energy argued that NTE’s section 75-1.1 claim failed on the merits. The court agreed. As to NTE’s claim that Duke Energy’s termination of the interconnection agreement was exclusionary, the court explained that a contractual breach cannot support a section 75-1.1 claim without substantial aggravating circumstances.
NTE argued that it demonstrated an array of unfair acts by Duke Energy amounting to improper interference with NTE as a competitor for wholesale energy distribution. The court explained, however, that even assuming that Duke Energy intentionally breached the Reidsville contract, there were no aggravating circumstances—only attempts to collect money owed under the contract and termination of the contract when those efforts failed. Such activity is not actionable under section 75-1.1 because it is based squarely on the terms of a contract.
Similarly, the court found that NTE’s claims for predatory pricing failed on the merits for the reasons discussed above—notably that there was no below-cost pricing. The court did not address this issue further, which suggests that a traditional antitrust analysis may suffice to determine whether such a claim violates section 75-1.1.
Duke Energy Carolinas demonstrates analytical consistency on federal antitrust claims and unfair competition claims under North Carolina law. The federal court conducted traditional analyses under both the antitrust laws and section 75-1.1, reaching a straightforward conclusion about all of the allegedly anticompetitive practices by Duke Energy. We will continue to monitor cases from both federal and state courts in North Carolina that address antitrust and section 75-1.1 claims.
Author: Scott Hazelgrove