Anti(trust)

The Essentials Newsletter, Thirty-eighth Edition

Mentioning to my husband that I was going to write about antitrust in this edition of The Essentials sparked an immediate, visceral reaction from him. The gist of that reaction was that Congress has messed up – not in creating the laws themselves, but in carving out certain critical infrastructure (CI) sectors from their reach.

But let’s back up. I’m bringing this up now because I am, frankly, concerned about the invocation of antitrust laws when it quells needed dialogue and collaboration amongst CI sectors. Backing up even further, let me contextualize with some definitions and a bit of history. Two of my favorite things.

According to Investopedia:

Antitrust laws are regulations that encourage competition by limiting the market power of any particular firm. This often involves ensuring that mergers and acquisitions don’t overly concentrate market power or form monopolies, as well as breaking up firms that have become monopolies.

Antitrust laws also prevent multiple firms from colluding or forming a cartel to limit competition through practices such as price fixing. Due to the complexity of deciding what practices will limit competition, antitrust law has become a distinct legal specialization…The ‘trust’ in antitrust refers to a group of businesses that team up or form a monopoly to dictate pricing in a particular market.

According to the Federal Trade Commission (FTC):

Congress passed the first antitrust law, the Sherman Act, in 1890 as a "comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade." In 1914, Congress passed two additional antitrust laws: the Federal Trade Commission Act, which created the FTC, and the Clayton Act. With some revisions, these are the three core federal antitrust laws still in effect today.

I am an unabashed fan of Roosevelt – no, not that one (although he has some admirable traits, to be sure) – the other one, Teddy. In fact, one of my favorite books is called “Mornings on Horseback,” by David McCullough, and is about the early life of Mr. Theodore Roosevelt (TR). But I digress. During his storied political career, TR became known as a “trust buster.” He appropriately recognized that greedy and power-hungry people will do almost anything to consolidate their power and accumulate as much wealth as possible. Not that that concept was new to the second half of the 19th century, but it was crystallized during the Gilded Age in our country – a time of tremendous build outs of newly developed infrastructure such as railroads, steel manufacturing, electric infrastructure, telegraph – and then telephone -- lines.

Companies building such infrastructure often trend toward monopolistic behavior. U.S. News and World Report notes that “A monopoly occurs when one supplier dominates an industry. As the only supplier, the monopolistic company is free to set the market price for the industry, and consumers – with no viable alternatives – have no choice but to take what the monopolistic company offers at the price it sets.” As our economy has evolved with its unique balance between local, state, and federal marketplaces so has our understanding of where certain products and services fall on the spectrum of monopoly vs. free market.

Certain industries naturally trend toward the monopolistic end of the spectrum because they have: 1) extensive infrastructure that can’t be easily moved; 2) infrastructure that often can’t be duplicated; 3) products or services that are unique or essential. On the other end of the spectrum are things that can be made easily, moved around easily, replicated or improved upon easily, can enter markets easily and are therefore subject to price competition. As you can imagine, many of our now 17-identified (16 sectors approved by the Department of Homeland Security and one additional sector, mining, which should be on that list as I have noted often and as China’s recent announcement denying critical mineral exports to the U.S. underscores) CI sectors trend naturally toward the monopoly end of the spectrum. Some of them are allowed to be monopolies, but in exchange, are price regulated. Others are monitored via the antitrust laws championed by my favorite President, Teddy Roosevelt.

TR and others were motivated to create/champion/enforce these laws because individuals within these newly minted infrastructure companies banded together to integrate elements of other companies such that they could control everything from production to transportation to delivery, effectively blocking new entrants at every level, and thereby controlling their respective markets. Steel, railroads, oil, tobacco, and eventually, in the early 20th century, electricity, all experienced this combination of natural monopolistic traits and power-hungry leaders willing to stop at nothing to dominate their respective markets. You can imagine the pushback TR and his colleagues encountered when trying to rein this in. TR actually used the Sherman Act of 1890 to break-up J.P. Morgan’s railroad trust, beginning in 1902. To that point, the law hadn’t been used effectively. TR subsequently brought 44 antitrust suits, some resulting in breaking up the monopolies and others resulting in regulation. More happened, of course, but you get the picture.

Now, we have a combination of price regulation of natural monopolies for utilities such as water and electric, hybrid approaches in some cases, such as the differentiation in the telecommunications industry between traditional telephone services (regulated) and broadband/internet services (unregulated), etc. Some CI sectors aren’t regulated at all, but are monitored for monopolistic behavior. Others get away with market power if their prices don’t get too out of whack (that’s a technical term).

As a longtime trade association executive, we also had to ensure that, when our electric utility members got together -- whether in-person, on calls, or in online forums – they never discussed price. Even though they themselves were not competitors, if they discussed the prices they were getting from manufactured goods or services, it could impact those marketplaces, for example. We had processes to guard against these conversations – the staff monitored forums to stop any discussion of price if a member mentioned such a topic and we read antitrust statements before board meetings, etc.

Again, according to the FTC:

It is a fundamental principle of antitrust law that competitors – whether businesses or individuals – cannot join together to limit the way that they offer products or services to potential customers, especially where there is no legitimate business purpose other than avoiding competition. Strictly speaking, competitors are expected to compete.

Today’s trade associations typically serve many legitimate purposes, and from an antitrust perspective, most trade association activities are procompetitive or benign. But sometimes, trade association rules, codes, or bylaws can cross the line into forbidden antitrust territory. When such conduct or rules regulate or restrict the activities of members, it pays to remember that they will be viewed by antitrust enforcers and courts as joint decision-making by otherwise independent competitors. Trade association conduct or rules that restrict competition in a way that harms consumers will continue to invite antitrust scrutiny.

As I’ve been attempting to convey in this newsletter over the last couple of years, we need collaboration amongst CI sectors to address major challenges such as cyber- and physical-security, permitting and siting reform, supply chain constraints, etc. Such collaboration should not run afoul of antitrust laws, yet sometimes those laws are cited when gatherings or conversations between CI sectors are contemplated. Invoking antitrust should not prevent or quell such collaborations – rather, antitrust laws and the rules of the road to ensure adherence to such laws should provide structure to these necessary conversations. Managed with effective legal counsel, such collaborations are essential to inspiring trust across CI sectors and solving the challenges we face to provide the affordable, safe, and reliable services that underpin our economy.