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November 2, 2015

Arizona Court Ruling Opens New Front In Rooftop Solar War With Utilities

Elon Musk, developer of PayPal, Tesla Motors and SpaceX, prides himself in disrupting business models of market incumbents.[1] With his investment in SolarCity, an installer of rooftop solar systems, he is challenging the electric utility industry, which has been fighting back (in many cases successfully) in state legislatures and before utility commissions across the country.[2] Earlier this year, when an Arizona utility raised fees on customers that install rooftop solar, SolarCity filed an antitrust suit in federal court alleging that the fees amounted to unlawful monopolization of (or attempt to monopolize) the market for providing electric power to end-use customers. With the string of Supreme Court decisions narrowing the scope of liability for monopolization, the legal prospects for SolarCity’s Complaint were highly uncertain.[3]

On October 27, 2015, the Arizona District Court issued a 26-page Order that removes some of that uncertainty.[4] While paring some of SolarCity’s other claims, the Court declined to dismiss counts relating to unlawful monopolization, holding that SolarCity had alleged a cognizable claim under Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)(“Aspen Skiing”), a case that the Supreme Court subsequently characterized as “at or near the outer boundary” of unlawful monopolization doctrine under Section 2 of the Sherman Act.[5] With this ruling, SolarCity may get the opportunity to prove that antitrust law trumps utilities’ claims that their tactics are justified to protect against unfair cost-shifting. If so, SolarCity may have opened a new front in its “war” with utilities.[6]

Arizona’s sunny climate makes the state an attractive market for SolarCity. Until its rate dispute, the company was installing almost 400 systems per month in the service territory of the Salt River Project (“SRP”), which operates in the Phoenix-metro area.[7] SRP comprises two entities: the Salt River Valley Water Users’ Association (“Association”) and the Salt River Project Agricultural Improvement and Power District (“District”). The former is a private, for-profit corporation formed to arrange for irrigation of Salt River Valley landowners’ land, while the latter generates power and sells it at retail to Phoenix-area customers. The District operates much like a municipal utility, in that its rates and service are overseen by its elected Board and Council and not by the state public utility commission.

Before SolarCity’s rapid growth in the Phoenix area, the District had provided incentives for customers to install rooftop solar. In 2011, the District introduced its own “Community Solar” program, allowing customers to buy solar-generated electricity that the District acquired from solar farms. In late 2013, the District lowered pricing under the Community Solar program and subsequently eliminated incentives for customers to install their own solar systems. In February 2015, following public hearings, the District’s Board approved new Standard Electric Price Plans (“SEPPs”) that included dramatic rate increases for customers that generate their own electricity, including additional charges applicable only to those customers and reductions in bill credits for excess power sold back to the grid by those customers. That triggered SolarCity’s filing of a Complaint in March 2015.

Solar City’s Complaint included counts alleging monopolization and attempted monopolization, in violation of Section 2 of the Sherman Act; unreasonable restraints of trade and exclusive dealing arrangements in violation of Section 1 of the Sherman Act and Section 3 of the Clayton Act, respectively; violations of state antitrust law; and interference with prospective economic advantage and contract. The Association and the District moved to dismiss all counts.

The Court granted the Association’s motion in full on the grounds that the Complaint failed to directly implicate the Association in any of the challenged conduct, and that the Association was not an alter ego of the District. Order at 8-11. As already noted, however, the Court allowed some of the claims against the District itself to proceed.

Antitrust claims require the plaintiff to allege that the defendant has market power in a “relevant market,” which is generally defined to encompass the product or service at issue and their economic substitutes. SolarCity alleged the relevant market to consist of the provision of power to end-use residential, governmental and business customers. The Court upheld this definition of the market as “not facially unsustainable” since customers may switch to self-generation with inexpensive solar power, reducing the electricity they would otherwise buy from the utility, and there are no other economically feasible electricity sources for customers. Order at 12-14. The fact that customers who self-generate remain partially dependent on the utility did not undermine the interchangeability of the products, according to the Court. Order at 13.

The Court next disposed of the District’s claim that SolarCity’s Complaint failed to allege “antitrust injury,” i.e., “injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendants’ acts unlawful.” Order at 14, quoting from Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). The Court relied in  part on SolarCity’s allegations that at least one SRP employee had referred to SolarCity as “the enemy,” and “a trade group with which SRP corresponded during the SEPPs’ approval process has published a report noting that distributed solar is one of many ‘disruptive technologies …that may compete with utility-provided services’ and that ‘[a]s the cost curve for these technologies improves, they could directly threaten the centralized utility model.’” Order at 15 (emphasis in original). This and other allegations sufficed in the Court’s view to establish that SolarCity had adequately pleaded injury to competition.

The Court found merit in the District’s motion to dismiss SolarCity’s claims that the District had entered into unlawful agreements with customers to restrain trade. Those claims must fail, the Court reasoned, because SolarCity did not allege that the customers agreed to restrain trade by raising prices (as required for SolarCity’s Sherman Act Section 1 agreement or conspiracy claim), and because SolarCity failed to allege an agreement by the customers to deal exclusively with the District (as required for the Clayton Act Section 3 exclusive dealing claim). Order at 16-18. The Court also upheld the District’s argument that SolarCity failed to allege unlawful tying of grid access to the purchase of electricity from the District, on the ground that grid access and electricity are not separate products. Order at 18-19.

The Court declined to dismiss the monopolization claims on the ground that SolarCity had alleged facts similar to those found by the Court to constitute unlawful monopolization in Aspen Skiing. Aspen Skiing involved a suit by a ski resort operator alleging that a competing owner of three nearby ski resorts monopolized the market for downhill skiing services by opting out of an interchangeable lift-ticket program that had provided customers access to all four resorts. The parties had  jointly offered the program for several years, but after the defendant dropped out, plaintiff’s market share dropped significantly. The defendant argued that while it had monopoly power, it had no duty under the antitrust laws to cooperate with the plaintiff. Aspen Skiing, 472 U.S. at 594-600.

The Supreme Court disagreed with the defendant, holding that the right of a monopolist to refuse to deal with other firms is not unqualified. It said that a decision to make a change in a pattern of distribution that had persisted for several years is not necessarily anticompetitive unless “the conduct in which it engaged to implement that decision…can fairly be characterized as exclusionary…” Id., 472 U.S. at 604. Whether conduct is exclusionary depends on “its impact on consumers and whether it has impaired competition in an unnecessarily restrictive way.” Order at 21, quoting from Aspen Skiing, 472 U.S. at 605. The Supreme Court found that the evidence supported an inference that the defendant was motivated not be efficiency concerns but rather a desire to take business from its smaller competitor. Order at 21, quoting from Aspen Skiing, 472 U.S. at 610.

The Arizona Court found that SolarCity’s allegations of monopolization stated a plausible cause of action because of their similarity to Aspen Skiing:

[SolarCity] alleges the District is a monopolist and imposed the SEPPs to exclude SolarCity from a market that was previously supporting such competition. “SRP has reversed a long-time course of conduct that had generated customer goodwill, benefitted SRP in the short-[term] and medium term… for the sake of excluding long-term competition by preventing customers in its service area from installing distributed solar from competitors like SolarCity. [citation omitted] SolarCity claims the SEPPs limit the choices of consumers because they will decide against purchasing SolarCity’s products. These allegations plausibly allege anticompetitive conduct by an alleged monopolist.

Order at 21.

Because Aspen Skiing has never been overruled, the Supreme Court’s subsequent characterization of Aspen Skiing in Trinko as being “at or near the outer boundary” of unlawful monopolization doctrine under Section 2 of the Sherman Act does not mean that the Arizona Court was unjustified in relying on it. Whether the Court focused on that aspect of Trinko is unclear, however. The Court did cite Trinko, albeit for another point, i.e., that an antitrust plaintiff must demonstrate both monopoly power of the defendant in a relevant market and the willful acquisition or maintenance of that power as distinguished from growth or development due to a superior product, business acumen, or historic accident. The Court also noted that the District had argued that “Aspen Skiing applies only in rare circumstances,” but dismissed that argument on the ground that the District “fail[ed] to explain why it does not apply to this case.”Order at 21.

However, allowing the SolarCity monopolization claim to proceed appears to raise some of the concerns that formed the basis for the Supreme Court’s narrowing of the monopolist’s duty to deal with competitors in Trinko. Among those concerns was the risk of “false positives,” by which the Court was referring to mistaken inferences that a monopolist’s challenged conduct was intended to be exclusionary when a more benign explanation for the conduct might exist. 540 U.S. at 514.That concern is particularly apt in SolarCity. Unlike firms in most competitive markets, utilities like the District operate under the principle of “cost-of-service” rates, meaning that the utility is assured of the opportunity to recover all of its prudently incurred costs in rates. As such, if revenues decline, as may occur if increasing numbers of customers install rooftop solar panels, the burden falls in the first instance on other customers, who must pay higher rates, rather than on the utility’s shareholders.[8]

It is unclear how the issue of rate impacts on other customers will play out in SolarCity. While the Court does not explicitly mention it in its discussion of the monopolization claims, it arguably left the door open for the District to raise the issue when it stated that “Whether conduct is exclusionary depends on ‘its impact on consumers and whether it has impaired  competition in an unnecessarily restrictive way.” Order at 21, quoting from Aspen Skiing, 472 U.S. at 605. The District may argue that any impairment to competition arising out of its rate structure is necessary to protect against higher rates to its other, captive customers.

In fact, the District did raise the rate impact argument, but in a different context. The District claimed that it was immune from SolarCity’s state law damages claims under an Arizona statute that provides immunity for a public entity’s exercise of a judicial or legislative function or of an administrative function involving the determination of fundamental governmental policy. Order at 23. Rate-setting, the District argued, is a legislative function; and the need to increase rates to customers installing solar panels so that the District can cover its fixed costs so that it can provide electricity and water to its customers is a policy issue. The Court stated that neither of these arguments provided a basis to dismiss SolarCity’s state law claims, as they both raised issues of fact. Order at 23-24.[9]

Another concern cited by the Court in Trinko as a basis for limiting Aspen Skiing was that the challenged conduct might be “beyond the practical ability of the ability of a judicial tribunal to control.” 540 U.S. at 514, citing Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993). Assuming the Court ultimately finds that the District’s rates for customers with rooftop solar violated Section 2 of the Sherman Act, administering a remedy could require the Court to supervise the District’s rate structure, something that it is not well equipped to do.

While the denial in part of the motions to dismiss opens the door to consideration of these complex issues, two other considerations bear on the potential precedential significance of this case. The first stems from the fact that the District is more akin to a municipal utility than a traditional, investor-owned utility. Because its rates are not as heavily supervised as those of investor-owned utilities (whose rates are typically overseen by public utility commissions), the District is less likely to prevail on an argument that its conduct deserves antitrust immunity under the “state action” doctrine.  Accordingly, a favorable outcome on the merits here may not be readily transferable to actions challenging attempts by investor-owned utilities to raise barriers to rooftop solar installations.

Second, the Court ruled that the District is immune from damages (but not injunctive relief) under the antitrust laws by virtue of the Local Government Antitrust Act, 15 U.S.C. § 35(a). The inability to recover monetary damages will lessen the incentive to sue other municipal utilities for antitrust violations, even if SolarCity ultimately prevails on its claims for injunctive relief.

Nonetheless, the partial denial of the motions to dismiss leaves the case in an interesting posture. Perhaps most important, a decision on the merits will reveal whether antitrust doctrine trumps policies underlying utility rate-setting. If SolarCity is successful, it may open a front where its odds of prevailing are better than they have proven to be before state legislatures and regulators.

[1] See Vance, A., “Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future” (Ecco/Harper Collins 2015).

[2] Warrick, J.,  “Utilities Wage Campaign Against Rooftop Solar,” Washington Post (March 7, 2015), accessible at https://www.washingtonpost.com/national/health-science/utilities-sensing-threat-put-squeeze-on-booming-solar-roof-industry/2015/03/07/2d916f88-c1c9-11e4-ad5c-3b8ce89f1b89_story.html/.

[3] See Adelberg, A., “Solar Panel Antitrust Case May Test Monopolization Law” (Law360, August 10, 2015), accessible at http://www.law360.com/articles/689204/solar-panel-antitrust-case-may-test-monopolization-law.

[4] SolarCity Corp. v. Salt River Project Agricultural Improvement and Power District, et al., No. CV-15-00374-PHX-DLR, Order (D. Ariz. Oct. 27, 2015)(“Order”).

[5] Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 409 (2004)(“Trinko”).

[6] Commentators now regularly characterize the disputes between solar panel firms and utilities as “war,” especially in Arizona. See, e.g.,”Arizona Gears up for Full Cost-Benefit Solar Value Proceeding: Can a Combination of Cost of Service and Value of Service End the State’s Metering Wars” (November 2, 2015), accessible at http://www.utilitydive.com/news/arizona-gears-up-for-full-cost-benefit-solar-value-proceeding/408375/ “AZ’s electric utilities’ unrelenting war on solar” (September 7, 2015), accessible at http://www.dailykos.com/story/2015/09/07/1418971/-AZ’-s-electric-utilities-unrelenting-war-on-solar/; “The utilities’ war on solar won’t work because Americans have already decided the outcome” (April 7, 2015), accessible at http://safeenergy.org/2015/04/07/the-utilities-war-on -solar-won’t-work/.

[7] The factual background of the dispute comes from the Order which, in turn, relied on allegations in SolarCity’s Complaint. Because the Court was ruling on a motion to dismiss the complaint, it accepted the factual allegations as true. Order at 7, citing Smtih v. Jackson, 84 F.3d 1213, 1217 (9thCir. 1996).

[8] While District doesn’t have shareholders in the same sense as investor-owned utilities, the issue is essentially the same. Because the District transfers net revenues to the Association rather than applying them to reduce electricity rates, the Association in effect takes the place of shareholders.

[9] The Court also held that the District’s argument that it was immune from antitrust liability under the “state action” doctrine raised factual issues that could not be addressed in ruling on a motion to dismiss. Order at 24-25. Under that doctrine, antitrust immunity exists where the conduct is undertaken pursuant to state law or regulation if the state has articulated a clear and affirmative policy to allow the anticompetitive conduct and provides active supervision of anticompetitive conduct undertaken by private actors. FTC v. Ticor Title Ins. Co., 504 U.S. 621, 631 (1992).

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