By U.S. Mail and Email
November 16, 2016
To:

Office of Policy and Coordination
Room CC5422
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
antitrust@ftc.gov

Citizen Complaint Center
Antitrust Division
950 Pennsylvania Avenue, NW
Room 3322
Washington, DC 20530
antitrust.complaints@usdoj.gov

From: Pat Gallagher
Legal Director
Sierra Club
2101 Webster Street, Suite 1300
Oakland, CA 94612
(415) 977-5500
pat.gallagher@sierraclub.org
Re:

Antitrust Issues Raised by the NEXUS Gas Transmission Project, FERC
Docket No. CP-16-22-000.

To Whom It May Concern:
I am writing in my capacity as Director of the Sierra Club’s Environmental Law Program
to alert the Department of Justice and the Federal Trade Commission (the Agencies) to
important antitrust and competition policy issues arising from the NEXUS Project, a natural
gas pipeline proposed to be built in the states of Ohio and Michigan.
As explained in detail below, the NEXUS Project uses an electric utility’s monopoly over
the retail sale of electricity to gain a monopoly in the market for the generation of electric
power. 1 The Project is a proposal to build and operate an approximately 250-mile largediameter pipeline that will transport natural gas from Ohio to a delivery point in eastern
Michigan. The Project is 50% owned by a holding company for Michigan’s largest electric
utility, DTE Electric Company (DTE Electric). DTE Electric has contracted to buy delivery
of natural gas over the pipeline for use in generating electricity for resale to Michigan retail
customers. When DTE Electric entered into this contract, at least six alternative sources of
1

Infra pt. II-IV.

 gas were available to transport the needed supply. 2 All six offered transportation services at
lower rates than NEXUS. 3 Nonetheless, DTE Electric contracted to buy gas from its
parent’s proposed pipeline, despite the availability of these less-costly alternatives. According
to internal documents, DTE Electric did so “in order to ensure that the project has
sufficient customer commitment to justify proceeding with construction.” 4
DTE Electric intends to finance the above-market costs of the NEXUS Project by
passing off its expenses associated with purchasing NEXUS gas to Michigan ratepayers. 5
Consistent with DTE Electric’s plan, an Administrative Law Judge entered an order on
October 28, 2016, recommending that the Michigan Public Service Commission (MPSC)
approve DTE Electric’s request to include the Project’s costs in its retail electricity rates. 6 In
contrast, a different hearing officer expressed “significant trepidation” about a DTE Electric
affiliate’s request to charge a similar pass-through of NEXUS costs to ratepayers and
conditioned approval on the affiliate submitting “a full cost-benefit analysis prior to allowing
any form of cost recovery . . . that relate[s] to the NEXUS project.” 7 The Michigan Attorney
General estimates that Electric will charge Michigan ratepayers an additional $355 million to
pay for the Project. 8
DTE Electric already controls 47% of installed generating capacity owned by Michigan
utilities. Through the NEXUS Project, Electric exploits its monopoly position in the retail
electricity market to expand its control over the market for installed capacity to generate
electricity by using its ratepayer base to subsidize an unnecessary and inefficient natural gas
pipeline. 9 The Project harms competition and consumers by diverting demand from moreefficient suppliers of utility-scale electricity, locking Michigan’s largest electric utility into a
thirty-five year contract with an inefficient supplier, and raising the rates charged to
ratepayers above what would be charged if DTE Electric had decided to buy from available,
lower-cost alternatives. 10

Infra pt. III.
Id.
4
Exhibit MEC 16, In re Application of DTE Electric Co., Michigan Public Services Comm’n
No. U-17920 at 34 of 34. Hereinafter, all exhibit references are to exhibits entered in the In
re Application of DTE Electric Co. proceeding (the Michigan PSC Proceeding) unless otherwise
stated. The Michigan PSC Proceeding concerns DTE Electric’s request to recover certain
costs from Michigan ratepayers, including costs associated with the NEXUS Project. See
generally DTE Electric Company’s Initial Brief, In re Application of DTE Electric Co., Michigan
Public Services Comm’n No. U-17920.
5
See In re Application of DTE Electric Co., Michigan Public Services Comm’n No. U-17920.
6
Proposal for Decision, In re: DTE Electric Co. for Authority to Implement a Power Supply Cost
Recovery Plan, Michigan Public Services Comm’n Docket No. U-17920 (Oct. 28, 2016)
[hereinafter, Proposal for Decision”].
7
Proposal for Decision, supra n. 6 at 25.
8
Attorney General’s Reply Brief, In re: Application of DTE Electric Company, Michigan Public
Services Commission No. U-17920 at 17.
9
Infra pt. IV.
10
Infra pt. IV.E.
2
3

2

 Section 2 of the Sherman Antitrust Act prohibits the use of monopoly power in a
primary market to gain market power in a related secondary market. 11 Similarly, Section 5 of
the Federal Trade Commission Act empowers the Commission to prohibit “not only
practices that violate the Sherman Act and the other antitrust laws, but also practices that the
Commission determines are against public policy for other reasons.” 12 Pursuant to the
Agencies’ authority to enforce these provisions, the Agencies should investigate DTE
Electric’s abuse of its monopoly in the retail electricity market to subsidize an unnecessary
and inefficient natural gas pipeline, with the goal of gaining a monopoly in the market for
utility-scale electricity generating capacity.
The NEXUS Project is the subject of pending proceedings before the Federal Energy
Regulatory Commission. 13 The matters raised below may be appropriate for comment by
the Agencies in the FERC proceedings or through litigation.
I.

Direct and Indirect Ownership of Natural Gas Pipeline Capacity by
Electric Utilities is Driving a Nationwide Trend Toward Pipeline
Overexpansion and Distortion of the Electric Power Markets

The nationwide context of natural gas pipeline overexpansion may be useful to the
Agencies in evaluating the NEXUS Project’s competitive impacts, as well as the need for
intervention. According to statistics published by the United States Department of Energy,
the nation’s pipeline infrastructure is overbuilt. Only 54% of the nation’s existing natural gas
pipeline capacity was used between 1998 and 2013. 14 This overexpansion is due in part to
incentives created when public utilities subsidize the cost of pipelines owned by their
affiliates. 15 As the Institute for Energy Economics and Financial Analysis explains,
[a] regulated electric or gas utility that is purchasing natural gas for power
generation or for use as a heating fuel passes the cost of its pipeline
contracts, which include a FERC-approved profit for the pipeline developer,
on to its customers. If the regulated utility’s parent company can build its
own pipeline for use by its regulated subsidiary, it can capture this profit,
See, e.g., Cost Mgmt. Servs., Inc. v. Washington Natural Gas Co., 99 F.3d 937, 951-52 (9th Cir.
1996) (denying motion to dismiss claims alleging that regulated utility violated Sherman Act
§2 by using its monopoly in the market for natural gas distribution to gain market power
over gas sales); Florida Mun. Power Agency v. Florida Power & Light Co., 81 F. Supp. 2d 1313,
1333 (M.D. Fla. 1999) (finding triable issues of fact on claims that electric utility used its
monopoly position in electricity transmission markets to obtain market power in bulk
electricity sales); Grason Elec. Co. v. Sacramento Mun. Util. Dist., 571 F. Supp. 1504 (E.D. Cal.
1983) (finding triable issues of fact on claims that electrical utility used its monopoly over
retail electricity to gain market power in market for electrical distribution systems).
12
F.T.C. v. Indiana Fed'n of Dentists, 476 U.S. 447, 454 (1986).
13
NEXUS Gas Transmission LLC, Federal Energy Regulatory Commission Docket No.
CP16-22-000.
14
U.S. Dep’t of Energy, Natural Gas Infrastructure Implications of Increased Demand from the Electric
Power Sector 22 (Feb. 2015), available at www.energy.gov.
15
Institute for Energy Economics and Financial Analysis, Risks Associated with Natural Gas
Pipeline Expansion in Appalachia (April 2016) [hereinafter, IEEFA], available at www.ieefa.org.
11

3

 giving a utility holding company an incentive to prioritize building its own
pipeline rather than utilizing that of another company. 16
The effect of this structure is to “shift[] some of the risk of pipeline development from the
developer and its shareholders to the regulated utility’s ratepayers.” 17 In addition to giving
pipeline developers a mechanism to externalize project risks, this structure offers outsized
returns: FERC typically authorizes a 14% profit margin on natural gas pipelines, which is
“high relative to returns that one could expect to receive by investing capital elsewhere in the
utility business.” 18 Even so, “many pipelines appear to be earning higher returns than
authorized by their recourse rates.” 19 The combination of abnormally high profit margins
with the ability to shift project risks to ratepayers creates a powerful incentive to overbuild
natural gas pipelines. 20
In addition to creating incentives to overbuild, utility indirect ownership of interstate
natural gas pipelines can have significant anti-competitive effects. In testimony before the
Senate Energy and Natural Resources Committee, the Environmental Defense Fund’s
Director for Energy Market Policy N. Jonathan Peress highlights that the “disturbing trend
of utilities pursuing a capacity expansion strategy by imposing transportation contract costs
on state-regulated retail utility ratepayers” may “undermine market drivers for more efficient
solutions[.]” 21 The NEXUS Project demonstrates that utilities’ use of their ratepayer bases to
subsidize affiliate-owned interstate gas pipelines provides a vehicle for the utilities to
monopolize the market for generating capacity and force ratepayers to bear the associated
above-market costs.
II.

Background of the NEXUS Project

A. Project Overview
The NEXUS Project is a proposal to build and operate an approximately 250-mile largediameter pipeline that will carry 1.5 billion cubic feet per day of natural gas from a
processing plant in Kensington, Ohio, to a delivery point in Ypsilanti Township, Michigan. 22
The Project is owned by NEXUS Gas Transmission, LLC (NEXUS), a joint venture of
DTE Energy Company (DTE Energy) and Spectra Energy Corporation (Spectra). 23

Id. at 5.
Id. at 5-6.
18
Id. at 8.
19
Id. at 9 (emphasis added).
20
IEEFA, supra n. 3 at 5-6 (describing the incentives toward pipeline overexpansion).
21
Jonathan Peress, Testimony Before the Senate Energy and Natural Resources Committee
at 4, 5 (June 14, 2016), available at http://www.energy.senate.gov.
22
Direct Testimony of Matthew T. Paul, In re Application of DTE Electric Co., Michigan Public
Services Comm’n No. U-17920 [hereinafter, “Paul Direct”] at MTP-8:7-16.
23
DTE Energy Co., Form 10-Q (June 30, 2016) at 50; Spectra Energy Corp., Form 10-Q at
16 (June 30, 2016).
16
17

4

 B. The Project’s Primary Utility Customers—DTE Gas and DTE Electric—Are
Highly Integrated With the Project’s Owners
DTE Energy and Spectra’s interests in NEXUS are divided 50% and 38.3%,
respectively. 24 DTE Energy is a holding company and parent of DTE Gas Company (DTE
Gas) and DTE Electric. 25 DTE Gas and DTE Electric are gas and electric utilities operating
in eastern Michigan. 26
Figure 1 illustrates the Project’s proposed route.

C. DTE Gas and DTE Electric’s Purchasing Commitments
Both DTE Gas and DTE Electric have contracted to buy natural gas transported on the
NEXUS pipeline. DTE Gas has committed to buying 75,000 dekatherms/day (dth/day). 27
DTE Electric entered into a Precedent Agreement with NEXUS in July 2014 to buy 8,000
dth/day beginning in November 2017, increasing to 75,000 dth/day beginning either in May
2020 or whenever DTE Electric has built sufficient gas-fired generating capacity to consume

24

DTE Energy Co., Form 10-Q (June 30, 2016) at 50; Spectra Energy Corp., Form 10-Q at
16 (June 30, 2016).
25
DTE Energy Co., Form 10-K (December 31, 2015) at 1 & 21.
26
Id. at 6 & 10.
27
Paul Direct at MTP-12:2-MTP-13:4.
5

 that amount. 28 Electric’s contract with NEXUS will have a monthly reservation charge of
$0.695 per dth, plus an estimated fuel charge of 1.9%. 29
Electric amended the Precedent Agreement in August 2015 to increase its initial
commitment from 8,000 dth/day to 30,000 dth/day until November 2017. 30 The term of the
amended agreement is thirty-five years, with an optional ten year extension. 31 The
Agreement is contingent on Electric receiving permission from the Michigan Public Service
Commission (PSC) to charge ratepayers with its costs and expenses related to the Project. 32
III.

The NEXUS Project is Less Cost-Effective Than Available Alternatives

The Project history demonstrates that Electric committed to buying NEXUS gas despite
its own conclusions that NEXUS would be less cost-effective than other available means of
obtaining the same supply. In deciding to buy gas delivery from NEXUS, DTE Electric
refused to consider existing pipeline infrastructure that could have satisfied its demand more
cheaply, and failed to negotiate with the sponsors of other new pipeline projects that were
proposed to supply the region. 33 In proceedings before the Michigan Public Service
Commission (PSC), the Attorney General of Michigan urged the PSC to deny Electric’s
request to buy gas from NEXUS in part because Electric had not adequately investigated
these less-costly alternative sources of supply. 34
A. The NEXUS Project is Less Cost-Effective Than Delivering Gas Over the
Kensington-MichCon Route
DTE Electric executed a Precedent Agreement with NEXUS in July 2014 35. In
anticipation of amending the Precedent Agreement in August 2015, Electric compared the
cost of buying gas from NEXUS with the cost of purchasing gas over an existing alternative
route running from a receipt point near Kensington, Ohio, to the Michigan Consolidated
CityGate delivery point, located northeast of Detroit (the Kensington-MichCon Route). 36
This study (the August Analysis) concluded that NEXUS was less cost-effective than the

Id.
Id. at MTP-12:11-13.
30
Id. at 12:15-22.
31
Id. at 12:15-13:4.
32
Exhibit MEC 12 at 10 of 39.
33
Id. at 644:14-645:10.
34
Attorney General’s Initial Brief, In re Application of DTE Electric Co., Michigan Public
Services Comm’n No. U-17920 [hereinafter, “Michigan AG Br.”] at 1 (requesting that the
Commission deny DTE Electric’s request to purchase NEXUS transportation capacity until
Electric “demonstrate[s] clear and sufficient evidence that it has fully explored all options . . .
, include[ing] proof of having into serious negotiations with alternative suppliers to
determine the best available terms and rates”).
35
Exhibit MEC 12 at 1.
36
Exhibit MEC 16 at 27 of 34.
28
29

6

 Kensington-MichCon Route in all Project years except one. 37 The August Analysis projected
that buying gas from NEXUS would cost $54 million more than buying from the
Kensington-MichCon Route. 38
DTE Electric identified two reasons to increase its commitment to buying NEXUS gas.
First, Electric cited its acquisition of two gas-fired power plants. 39 However, Electric does
not appear to have analyzed whether these plants can be supplied adequately with the
cheaper gas available over Kensington-MichCon. 40 Second, Electric concluded that
[b]ased on recent discussions with NEXUS, we believe that an increased
commitment is necessary in order to ensure that the project has sufficient
customer commitment to justify proceeding with construction. 41
In other words, Electric decided to purchase from NEXUS to ensure the necessary
approvals to build the Project, notwithstanding its own conclusion that NEXUS was less
cost-effective than the Kensington-MichCon Route.
B. Electric Commissions a Second Study that Finds Cost-Benefits Only After
the First Thirteen Years of Project Operation
Electric commissioned another analysis of the Project that was completed in November
2015 (the “November Analysis”). 42 Like the August Analysis, the November Analysis
concluded that NEXUS is costlier than Kensington/MichCon until at least 2024. 43 The
November Analysis also acknowledges that the project will remain a net cost until at least
2030. 44 However, the November Analysis departed from the August Analysis in concluding
that NEXUS will recoup the losses incurred in previous years after 2030. 45 Contrary to the
August Analysis’s finding of $54 million in net costs, the November Analysis projected $79
million in net savings of using NEXUS over Kensington-MichCon. 46

See id. (finding a negative “basis spread”—i.e., cost comparison—in sixteen out of
seventeen Project years).
38
Id.
39
See id. at 34 of 34 (identifying “[t]wo major factors,” including acquisition of two “existing
gas fired CTs”).
40
See generally Exhibit MEC 16.
41
Id at 34 of 34.
42
Exhibit A-25.
43
See id. at 64 of 75 ex. 4-6.
44
4 Transcript, In re Application of DTE Electric Co., Michigan Public Services Comm’n No. U17920 at 961:21-962:2 (testimony of James F. Wilson) (“[E]ven under this estimate, the
cumulative impact is a net cost, not benefit, through 2030.”).
45
See id. at 962:1-2; Exhibit A-25 at 64 of 75 ex. 4-6.
46
2 Transcript, In re Application of DTE Electric Co., Michigan Public Services Comm’n No. U17920 at 143:21-24 (testimony of Michael D. Sloan).
37

7

 C. Electric’s Calculation of the Project’s Purported Cost Savings Over
Kensington/MichCon is Flawed
Even on its own terms, the November Analysis fails to demonstrate overall costeffectiveness until at least 2030. 47 Assuming that comparative efficiencies realized after 2030
explain why Electric agreed to inefficient purchases over the first thirteen years of the
proposed NEXUS Project, Electric’s conclusion about post-2030 cost-savings is based on
unrealistic assumptions that are skewed to provide a justification for building the Project.
The November Analysis projects that the cost of buying gas over Kensington-MichCon
will increase beginning in 2017 and will continue to increase through at least 2037. 48 The
increase in Kensington-MichCon prices will result in DTE Electric’s cost of supplying gas
from Kensington-MichCon convergin with its cost of supplying from NEXUS in 2024. 49
Most of the cost savings are projected to occur after 2030, when Electric forecasts that the
cost of the Kensington/MichCon Route will increase by roughly 50% from the beginning of
2028 until the beginning of 2031, and will continue to increase thereafter:
November Analysis’ Transport Cost Projections, 2017-2037

Source: Exhibit A-25, In re Application of DTE Electric Co., Michigan Public Service Comm’n No. U-17920

The November Analysis’ assumption that natural gas transport costs will increase
steadily through 2028, experience dramatic increases of approximately 50% between 2028
and 2031, and sustain those increases throughout the coming decade, is implausible. First,
the November Analysis’ assumption of ever-increasing gas prices ignores the likely impact of
increasingly cost-effective renewable energy supplies on demand for natural gas. Wind and
utility-scale solar electricity are already cost-competitive with natural gas, despite recent

Supra n. 44.
Exhibit A-25 at 64 of 75 ex. 4-6.
49
Id.
47
48

8

 decreases in natural gas prices. 50 Indeed, the average and median utility-scale levelized cost of
solar energy alone is projected to enter the fuel cost range of natural gas in 2020, to reach the
reference case for natural gas by 2030, and to continue declining below the reference case
after 2034—precisely the period in which DTE assumes gas prices are likely to increase. 51
Utility-scale wind and solar generation accounted for 43% and 41% of all new generating
capacity installed in the United States in 2014 and 2015, respectively. 52 Since utilities will
likely continue to adopt these cheaper renewable sources of energy instead of more costly
generation methods using fossil fuels, the continuing reduction in the price of utility-scale
renewables is incompatible with the dramatic and sustained price increases that DTE
Electric relies on to justify NEXUS.
Second, Electric’s price increase assumptions are inconsistent with the U.S. Energy
Information Administration’s projections, which forecast natural gas prices to remain stable
under “business-as-usual” assumptions from 2025 through 2040. 53

50

Lazard Freres & Co., LLC, Levelized Cost of Energy Study—Version 9.0, Executive
Summary at 1 (Nov. 18, 2015) (finding that “[c]ertain Alternative Energy technologies (e.g.,
wind and utility-scale solar) continue to be cost-competitive with conventional generation
technologies in some scenarios, despite large decreases in the cost of natural gas”), available
at www.lazard.com; see Lazard Freres & Co., LLC, Levelized Cost of Energy Study—Version
9.0 at 2 (2015) (finding lower levelized energy costs for utility-scale wind and solar in
comparison to combined cycle natural gas at both the bottom and the top of the levelized
cost dispersion), available at www.lazard.com.
51
M. Bolinger & J. Seel, Utility-Scale Solar 2015: An Empirical Analysis of Project Cost,
Performance, and Pricing Trends in the United States, 34-35 (Lawrence Berkeley National
Laboratory, Aug. 2016).
52
United States Department of Energy, Revolution . . . Now: The Future Arrives for Five Clean
Energy Technologies – 2016 Update (U.S. Dep’t of Energy, September 2016).
53
United States Energy Information Administration, Annual Energy Outlook 2016, Figure
ES-6 (August 2016). The U.S. EIA describes the “Reference Case” scenario as its “businessas-usual trend estimate, given known technology and technological and demographic
trends.” Id. at iii. Natural gas prices remain lower than the November Analysis’ projection in
two out of four of EIA’s alternative scenarios to the Reference Case projection. See id. at
Figure MT-42.
9

 U.S. Energy Information Administration Reference-Case Gas Prices
Source: Figure ES-6, United States Energy Information Administration, Annual Energy
Outlook 2016, Figure ES-6 (August 2016)

Third, the November Analysis underestimates the expansion of natural gas pipeline
capacity that would occur in response to the dramatic and sustained price increases that it
forecasts after 2030—the period in which the largest cost savings are achieved according to
Electric’s estimate. 54 When pipeline capacity expands, the price differentials between delivery
locations on the new and existing pipelines moderate as the market begins to absorb the new
capacity. 55 Electric’s model assumes that no new pipelines from the Marcellus-Utica basin
serving the Michigan region will be built after 2028, even under a model assuming dramatic
and sustained price increases. 56 In the November Analysis, this assumed freeze in new
capacity causes the increase in the transport cost of Kensington-MichCon, which causes
Electric’s agreement to buy from NEXUS to become economic.
Electric’s assumption that new pipeline construction will stop after 2028 in the face of
assumed (and unrealistic) rapid and sustained price increases is unjustified. Conventional
forecasting methods predict that pipeline capacity expands to meet demand when prices
increase. 57 In contrast, Electric’s model predicts that no new capacity will be added to serve
the Michigan markets after 2028, even as the transport prices charged by the
Kensington/MichCon transit route increase rapidly. Basic economic logic and conventional
modeling suggest that if prices began to show the rate of increase that Electric projects
during this period, the increases would attract additional capacity that would mitigate or
4 Transcript at 960:23-961:4 (testimony of James F. Wilson); see generally id.. at 952-61
(describing the impact of DTE Electric’s pipeline capacity assumptions on its cost
projections).
55
Id. at 952:15-23.
56
Id. at 956:4-14.
57
Id. at 953:13-954:11. For example, the Deloitte MarketPoint Integrated North American
Model expands capacity endogenously when it is economic, given the computed supplydemand dynamics as well as infrastructure restraints and costs. See id.
54

10

 eliminate further increases in the price differentials. Indeed, the Interstate Natural Gas
Association of America (INGAA) views the Marcellus/Utica shale gas production region
from which the NEXUS Project originates as particularly likely to experience pipeline
capacity expansion. 58
Electric’s projection that no new capacity will be added after 2028 even in the face of
Electric’s assumed price increases is contradicted by the following additional considerations:
•

By projecting that production of natural gas in the Marcellus/Utica shale region will
grow by an additional 13 billion cubic feet (bcf) between 2019 and 2037 59 but only
2.85 billion bcf in additional transport capacity from the region will come online over
the same period, Electric forecasts an unrealistically low proportion of new supply in
relation to transport capacity; 60

•

The United States Department of Energy (DoE) estimates that production growth in
the Marcellus/Utica shale region will grow at a rate that is 3 billion cubic feet/day
(bcf/day) less than what Electric forecasts between 2015 and 2030. 61 Despite having a
lower production forecast, DoE estimates between 1 and 4 bcf/day more in
additional transport capacity from the Marcellus/Utica Shale regions and the region
including NEXUS’s service area than Electric; 62 and

•

Electric’s estimate of capacity changes between 2019 and 2037 is unresponsive to
capacity created by NEXUS and another regional pipeline project (the “Rover
Project”). In particular, Electric’s model assumes that the NEXUS and Rover
Projects will have no effect on the building of pipeline capacity by other developers. 63
If, as Electric asserts, the NEXUS Project were necessary to satisfy demand for gasfired electricity in Michigan, other suppliers would likely step in to meet demand if
one or both projects does not go forward. 64

Contrary to the welter of evidence undermining Electric’s projection, the Administrative
Law Judge presiding over Electric’s cost recovery case accepted Electric’s model on the basis
that it was “unrealistic” to forecast “that pipeline capacity out of the production region will

See Exhibit DTE A-35 at 43 of 118 (INGAA Report) (noting that unlike other production
regions, “[i]n the rapidly growing areas like the Marcellus and Utica . . . there is likely to be
sufficient supply and demand driven motivation to build new capacity” and “producers are
likely to view the cost of pipeline transport to be relatively small compared with the revenues
lost” if new capacity is not built).
59
Exhibit MEC 2.
60
4 Transcript at 956:4-14 (testimony of James F. Wilson); Exhibit MEC 14 (DTE Electric’s
assumed pipeline expansion projects).
61
2 Transcript at 272:5-9 (testimony of Michael D. Sloan).
62
Id. at 268-69 (Electric witness agreeing that DoE transport capacity forecasts are higher
than Electric’s).
63
4 Transcript at 958:22-959:6 (testimony of James F. Wilson).
64
Id. at 959:7-969:5.
58

11

 match production growth[.]” 65 However, the rebuttal to Electric’s model does not require
that pipeline growth “match” increases in production capacity, rather, it forecasts that pipeline
capacity will respond more quickly to increases in demand for natural gas than Electric
supposes. 66 Moreover, the ALJ acknowledged that “projecting natural gas costs over a 20
year period” is “problematic,” “[e]ven more so” when it comes to “projecting pipeline
expansions,” which “is ‘difficult’ because for [sic] a number of economic and non-economic
considerations.” 67 Of course, Electric relies on these admittedly “problematic” and “difficult”
projections to argue in favor of the NEXUS Project, since it relies on post-2030 cost savings
projections to argue that the pipeline can be economical. At the same time, Electric concedes
that the pipeline will be cost-ineffective in comparison to Kensington-Michcon in the short
term. 68 Thus, regardless of the exact timing of when new pipeline capacity will be added, the
ALJ’s finding that the projections that Electric uses to argue for cost-efficiency are
“difficult” and “problematic” supports the conclusion that Electric’s forecast is not a reliable
basis to decide that NEXUS is cost-effective.
In sum, Electric’s analysis simulates cost-savings only by assuming increases in natural
gas prices that are unlikely to take place. The implausible price increases skew Electric’s
model toward finding long-term cost effectiveness, even while conceding short-term
inefficiency. Moreover, Electric’s conclusion is contradicted by the August Analysis
(completed only three months earlier), which did not include the November Analysis’s
unrealistic pricing assumptions and found that NEXUS is less cost effective in all project
years save one.
D. NEXUS is Less Cost-Effective Than Pre-Existing Pipeline Routes
Besides Kensington-MichCon
In addition to the Kensington-MichCon alternative, at least three additional pipeline
routes existed at the time of Electric’s decision to buy NEXUS gas that could have delivered
the same amount of gas at less cost with minor facility enhancements. Before the Michigan
PSC, DTE Electric admitted that it did not consider purchasing gas from any of these existing
routes before committing to buy from NEXUS. 69 The Michigan Attorney General criticized
Electric’s cost evaluation as “clearly deficient for not considering alternative pipeline
suppliers.” 70
First, the Lebanon Lateral Reversal Project involved facility modifications to provide
350,000 dth/day of additional capacity on existing pipelines co-owned by pipeline operators
ANR and TetCo. ANR held open bidding for the additional capacity in September and
October 2013 for an in-service date of March 2014. This pipeline system could have brought
Proposal for Decision, supra n. 6 at 91.
4 Transcript at 954:5-9 (explaining that the rebuttal to Electric’s assumptions projects that
new pipeline capacity will be developed where there are “sufficient after-tax margins to
justify the cost of expansion”).
67
Proposal for Decision, supra n. 6 at 90-91.
68
Supra pt. III.B.
69
3 Transcript at 503:16-504:2 (testimony of Matthew T. Paul).
70
Michigan AG Br. at 13.
65
66

12

 Appalachian gas supplies to the same receipt point where NEXUS will terminate. 71 The
combined rate for that project would have been $0.52/dth-- $0.175/dth less than the
$0.695/dth NEXUS rate agreed to by DTE Electric. 72
Second, the Sulphur Springs Project involved facility enhancements to provide 400,000
dth/d of capacity from Glen Karn, Ohio to the interconnection with ANR’s Southeast line.
ANR held open bidding for this capacity in the fall of 2013, with a November 2015 inservice date. This pipeline system also could have delivered Appalachian gas from the Glen
Karn interconnection to Ypsilanti Township, Michigan. The combined rate would have been
$0.50 per dth--$0.195/dth less than the NEXUS rate accepted by DTE Electric. 73
Third, the Utica Marcellus to Market Project was available to provide existing capacity
from Ohio and Indiana that allowed shippers to deliver Utica and Marcellus gas to Michigan.
ANR held open bidding for this capacity in February and March 2014, with a November
2015 in-service date. If DTE Electric had subscribed for this capacity, it could
have shipped gas from any of the pipelines in the Appalachian Basin that connect with
ANR, with the rates based on the $0.20 per dth rate for ANR plus the
interconnecting pipeline’s rate if DTE chose to subscribe for upstream service. In
fact, signing up for the capacity would have provided DTE Electric with low-cost access not
only to Appalachian gas but also to supplies from the Gulf Coast as well as the Fayetteville,
Barnett and Haynesville shale gas regions through other interconnections on that line. 74
However, DTE Electric did not evaluate whether to buy gas from this or any of the other
existing routes. 75

71

4 Transcript at 658:4-15 (testimony of Lee Bennett). Each of these cost estimates assumes
that DTE would have needed to buy gas delivery along these pipelines from certain
upstream sites, which raises the purchase price. These estimates are therefore “high” cost
estimates. It is possible that DTE could have avoided purchasing at the upstream sites if
sellers began competing to sell supply at downstream locations. In that situation, the price of
all three alternatives would have been even lower—only $0.20 dth/day, or $0.495 dth/dy
less than what Electric paid. Id. at 661:3-663:21.
72
Id. at 658:4-15.
73
Id. at 658:16-659:3.
74
Id. at 659:4-17.
75
Supra n. 69
13

 All three routes are illustrated in Figure 2. 76

Despite the lower-cost alternatives to transport gas over existing pipeline routes, the
Administrative Law Judge presiding over DTE Electric’s cost-recovery case decided, in a
single paragraph of analysis, that purchasing from NEXUS was justified because it enabled
DTE Electric to own pipeline capacity running directly to Appalachian wellheads. The ALJ
concluded that this feature made NEXUS “preferable, from a cost perspective, to securing
transportation on [existing] pipelines.” 77 This determination is clearly erroneous. The costcomputations presented above demonstrate that shipping gas over the existing pipeline
networks was less expensive than shipping over NEXUS. Importantly, all three
computations included the costs of contracting to transport the gas from the wellheads. 78 Thus, the

76

4 Transcript at 657, Figure 3 (testimony of Lee Bennett).
Id. at 87 (emphasis added).
78
4 Transcript at 658:13-15 & 659:2-3 (testimony of Lee Bennett) (computation of existing
pipeline costs “assumes that DTE Electric would have chosen to purchase the upstream
portion” running to the wellhead); see id. at 659:10-13 (testifying that that DTE Electric
77

14

 alternatives presented would have enabled DTE Electric to purchase capacity directly from
the production regions, at lower rates than available on NEXUS. The so-called
“opportunity” to pay more for this upstream capacity is no benefit.
E. NEXUS is Less Cost-Effective Than Alternative New Pipeline Routes
That Were Proposed at the Same Time
In addition to these four existing delivery routes, at least two new pipelines (ANR East
and Rover) designed to provide the same Michigan and Ontario markets as NEXUS with
access to Appalachian gas supply had been proposed by developers ANR and Energy
Transfer Partners (ETP) at the time that Electric agreed to buy from NEXUS. 79 Figure 3
shows the similarity of the proposed ANR East, Rover, and NEXUS pipeline routes: 80

Figure 3
DTE Electric did not submit bids in ANR East or in Rover’s open seasons or otherwise
attempt to negotiate for capacity on either of the two proposed routes, notwithstanding their
similarity to the NEXUS route. 81 Although DTE Electric claims to have relied on a
comparison of the relative costs of the three projects by DTE Gas, the studies Electric
identifies were made after both Gas and Electric had executed Precedent Agreements with
could have purchased additional capacity on the upstream lines, and the downstream
pipeline would have cost $.40 per dth (i.e, 66%) less than NEXUS).
79
Id. at 640:7-642:9
80
Id. at 640.
81
4 Transcript at 644:14-645:10.
15

 NEXUS. 82 Because both studies were completed after the DTE companies were
contractually bound, neither study could have contributed to a meaningful cost-comparison.
Moreover, both studies compared the negotiated rate offered by NEXUS with the unnegotiated
rates posted by NEXUS and Rover. 83 This comparison is meaningless. Negotiated and
unnegotiated rates are not commensurate since pipelines typically agree to negotiated rates
that are lower than their posted tariffs. 84
Nonetheless, the Administrative Law Judge presiding over DTE Electric’s cost-recovery
case concluded that ANR East and Rover did not provide alternative sources of supply
available to DTE Electric on grounds that Electric had “decided to negotiate” with NEXUS
as of December 2013, which was before ANR East and Rover held open seasons. 85 This
conclusion is a non-sequitur. There is no reason Electric could not have negotiated
simultaneously with multiples suppliers and chosen the most cost-competitive alternative.
The ALJ’s conclusion in this respect is also incompatible with his finding that “any claim
that DTE was somehow committed to NEXUS” before July 2014 was “tenuous .” 86 The
Michigan Attorney General agrees that “without engaging into serious negotiations, it is not
possible to determine if those rates and terms could have been modified to suit both DTE
Gas’ and DTE Electric’s needs for transportation capacity at comparable or better rates than
NEXUS.” 87
F. NEXUS Does Not Enhance the “Reliability” of Utility-Scale Gas Supply
Available to Electric
Electric has asserted the NEXUS pipeline will increase the “reliability” of natural gas
supply in Michigan. As a threshold consideration, this assertion proves too much. Every
time a new source of a product or input is created it increases the “reliability” of the supply
simply by creating another source. However, merely creating another supplier of natural gas
available to Electric does not mean the Project makes sense as an economic matter when
more cost-effective means of obtaining the same delivery are available through any of the
alternative routes discussed above.
In any event, Electric’s “reliability” arguments fail on their own terms. Buying gas
through any of the three pre-existing ANR pipeline systems would have given Electric access
to gas delivered over ANR’s existing network of interconnected pipeline routes. 88 This
would have enabled Electric to acquire gas from suppliers at other points along ANR’s
delivery system, thus increasing Electric’s choices and negotiating leverage with other sellers
due to ANR’s interconnections with multiple pipelines that source supply in Appalachia as
well as in other areas. 89
82

3 Transcript at 499:9-13 (testimony of Matthew T. Paul).
4 Transcript at 648:6-649:2 (testimony of Lee Bennett).
84
Id.
85
Proposal for Decision, supra n. 6 at 85.
86
Id. at 81-82.
87
Michigan AG Br at 14.
88
4 Transcript at at 665:13-666:13 (testimony of Lee Bennett).
89
Id.
83

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 Further, Electric’s reliability argument exaggerates the extent to which NEXUS will
guarantee an additional source of natural gas. Electric’s Precedent Agreement with NEXUS
makes clear that Electric will get an additional 45,000 dth/day out of the 75,000 dth/day that
it has contracted to purchase only if someone else does not buy it first:
Additionally, the service Agreement will specify an incremental increase in
the [maximum daily quantity of gas delivered] by 45,000 Dth/d (“Increased
MDQ”), exclusive of fuel requirements, on the in-service date of Customer
Facilities, provided that sufficient unsubscribed capacity is available at the
time of the effectiveness of the Increased MDQ. Customer may reserve the
Increased MDQ, if available and subject at all times to applicable regulatory
requirements, at the time it applies for any regulatory approves [sic] for
construction of the Customer Facilities. 90
Thus, the Agreement treats Electric like any other purchaser that may buy its gas on a
first-come, first-served basis. 91 Testifying before the Michigan PSC, an Electric witness
confirmed that the Agreement does not actually guarantee additional capacity. 92
IV.

DTE Electric’s Support for the NEXUS Project is Anti-Competitive and
Intended to Monopolize the Market for Electric Power

A firm that “(1) . . .has engaged in predatory or anticompetitive conduct with (2) a
specific intent to monopolize and (3) a dangerous probability of achieving monopoly power”
violates Section 2 of the Sherman Act. 93 Section 2 prohibits a monopolist from using its
monopoly power in a primary market in an attempt to monopolize a related market. 94 Here,
DTE Electric’s use of its monopoly over the distribution of electricity to transfer the
inefficient cost of the Project to its retail customers, for the purpose of expanding its control
over the market for installed capacity, satisfies these elements.

90

Exhibit MEC-12 (2015 Amendment) at 35 of 39.
This provision also permits Electric to reserve additional supply at the time it applies for
regulatory approvals of its yet-unbuilt gas transmission facilities, however, it provides for
such reservation only if the reserved capacity is “available” at the time of Electric’s
application. Id.
92
3 Transcript at 448:24-449:3 (“Q: At least contractually, there exists the potential that the
primary objective of entering into this agreement ultimately would not be me, right? A: I
guess I would say that, yes, theoretically there’s a chance that [additional capacity] would not
be available.”) (testimony of Matthew T. Paul).
93
Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993).
94
See e.g., Cost Mgmt. Servs., Inc., 99 F.3d at 952 (allegations that regulated gas utility “has used
its monopoly power in the gas delivery market in an attempt to monopolize the market for
gas sales” stated violation of Sherman Act § 2.).
91

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 A. DTE Electric Dominates the Relevant Product Markets Within its Service
Area
Two product markets are relevant here: the retail electricity market within DTE’s service
area and the market for installed capacity used to generate electricity for retail consumption
in the state of Michigan.
1. DTE Electric Dominates the Retail Electricity Market in its Service Area
DTE Electric sells electricity to 2.2 million retail customers in its southeastern Michigan
service area. 95 Electric acknowledges that its competition is “primarily from the on-site
generation of industrial customers and from distributed generation applications by industrial
and commercial customers.” 96 It “does not expect significant competition for distribution to
any group of customers in the near term.” 97
2. DTE Electric Dominates the Market for Installed Capacity
As the Agencies are aware, “[d]efining a relevant product market is primarily a process of
describing those groups of producers which, because of the similarity of their products, have
the ability—actual or potential—to take significant amounts of business away from each
other.” 98 “[C]ross-elasticity of demand—the extent to which consumers demand less of the
particular product as the price for its alleged substitute declines”—is the key determinant. 99
Here, the market for installed capacity for utility-scale generation of electricity is the
relevant secondary product market. The installed capacity market is “[t]he capability to
generate or transmit electrical power, measured in megawatts (“MW”).” 100 At the peak of its
contract with DTE Electric, NEXUS will transport 75,000 dth/day of natural gas for use in
DTE Electric’s gas-fired electricity generating plants. The U.S. Energy Information
Administration recognizes that demand for natural gas as a generator of bulk electricity is
linked to the prices of generation alternatives: “[w]hen the cost of the other fuels falls,
demand for natural gas may decrease, which may lead to lower prices for natural gas.” 101 By
extension, to the degree that the price of generating electricity through non-gas sources
declines, demand for the pipelines used to transport the gas will decline correspondingly.
Thus, bulk generators of electricity like Electric will “demand less of the particular
product”—here, pipelines – as the price for its alleged substitute declines” (i.e., alternative
means of generating electricity). 102
95

DTE Electric Co., Form 10-K (Dec. 31, 2015) at 6.
Id. at 9-10.
97
Id.
98
Duty Free Americas, Inc. v. Estee Lauder Companies, Inc., 797 F.3d 1248, 1263 (11th Cir. 2015)
(internal quotation marks omitted).
99
Id. at 1264 (internal quotation marks omitted).
100
New York Indep. Sys. Operator, Inc., 122 FERC ¶ 61211, 62212 (Mar. 7, 2008)
101
U.S. Energy Information Administration, Natural Gas Explained,
http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_factors_affecting_prices
(last accessed September 27, 2016).
102
Duty Free Americas, 797 F.3d at 1264.
96

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 DTE Electric dominates the market for installed capacity to generate electricity in
Michigan. Electric owned 10,418 MW of generating capacity, 103 or 34% of all installed
capacity in Michigan, and 47% of installed capacity owned by Michigan utilities in 2014, the
most recent year data is available from the United States Energy Information
Administration. 104 By way of illustration, the next-largest owner of generating capacity in
Michigan, Consumers Energy, owned 5,885 MW of generating capacity in 2015, 105 or less
than half the 11,907 MW that Electric owned that year. 106
B. DTE Electric Guarantees Project Financing by Michigan Ratepayers
The Project will cost $ 2.2 billion. 107 DTE Electric has applied to the Michigan Public
Service Commission to include costs associated with the Project in its retail rates. 108
According to the Michigan Attorney General, “[t]he cumulative cost of the capacity
contracted with NEXUS that the Company plans to charge [ratepayers] will reach
approximately $335 million from 2017 through 2037.” 109 As noted, an ALJ has provisionally
recommended that the MPSC approve DTE Electric’s request to include the Project’s costs
in its retail electricity rates. 110 On October 5, 2016, an Administrative Law Judge
provisionally recommended approving a similar request to pass-through NEXUS costs by
DTE Gas “with significant trepidation” and subject to DTE Gas submitting “a full costbenefit analysis prior to allowing any form of cost recovery regarding capital expenditures
made that relate to the NEXUS project.” 111
C. DTE Electric’s Use of its Ratepayer Base to Subsidize the Inefficient Costs of
the NEXUS Project Instead of More Cost-Effective Sources is
Anticompetitive
DTE Electric’s intent to monopolize may be inferred from its decision to purchase from
NEXUS instead of more-efficient suppliers while using its ratepayer base to subsidize the
Project’s above-market costs. 112 Economic theory assumes that under competitive
103

DTE Electric Co., Form 10-K (Dec. 31, 2014) at 6.
U.S. Energy Information Administration, State Electricity Profiles, Michigan Electricity
Profile 2014, https://www.eia.gov/electricity/state/michigan/ (last accessed October 17,
2016).
105
Consumers Energy Company, Form 10-K (Dec. 31, 2015) at 18.
106
Compare id., with DTE Electric Co., Form 10-K (Dec. 31, 2015) at 8.
107
Paul Direct at MTP-14:14-5 (describing the need for “timely support of all stakeholders to
make the greenfield construction of this . . . $2.2 billion pipeline a reality”).
108
See id. at MTP-14:1-3 (“NEXUS gas transportation capacity costs are included” in DTE
Electric’s proposed rates).
109
Attorney General’s Reply Brief, In re: Application of DTE Electric Company, Michigan
Public Services Commission No. U-17920 at 17.
110
Proposal for Decision, supra n. 2.
111
Id. at 25.
112
See Tops Markets, Inc. v. Quality Markets, Inc., 142 F.3d 90, 101 (2d Cir. 1998) (proof of
unlawful conduct may imply specific intent).
104

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 conditions, DTE Electric would opt for the most cost-effective methods of achieving the
desired natural gas supply. Instead, Electric has chosen the most costly available means –
constructing hundreds of miles of new pipeline capacity when existing routes or other
proposed routes could have been acquired for less. 113 That Electric decided to buy from
NEXUS instead of less-costly alternatives strongly suggests that its decision was taken to
expand its 114 position in the electricity generation markets, not to achieve a needed quantity
of gas at the best available price.
Unlike normal competitive scenarios, Electric is both the buyer of NEXUS gas and the
wholly-owned subsidiary of NEXUS’s 50% owner (DTE Energy). 115 Electric’s position on
both sides of the transaction gives it good reason not to pursue more-efficient alternatives
because supporting NEXUS will expand Electric’s control over the market for electric
power. Electric’s decision is enabled by the fact that Electric will not internalize the full costs
of the Project. Rather, Electric will pass some of these costs off to the public, i.e., the
ratepayers in Electric’s retail monopoly. 116 Because that retail monopoly can be used to
absorb the Project’s inefficient costs, Electric can shift the Project’s costs and risks to
ratepayers while expanding its control over the market for capacity to generate utility-scale
electricity.
D. NEXUS is Not a New Entrant and Does Not Create Countervailing ProCompetitive Benefits
As a newly-formed joint venture that was created for the purpose of developing the
NEXUS Project, NEXUS may claim to be a new entrant in the market for interstate natural
gas pipelines. As explained, any such claim would mischaracterize the market at issue, which
should be defined as the market for capacity to generate utility-scale electric power in which
DTE Electric already holds significant market share. 117 In any event, this claim would elevate
corporate form over substance. NEXUS’s largest shareholders—DTE Energy and
Spectra—are among the largest pipeline developers in the nation and have a significant
presence in the Midwestern pipeline market. 118 Moreover, NEXUS fails to provide the major
competitive benefit that is normally associated with new entry—generating the same or
See supra pt. III.
The fact that DTE Energy and DTE Electric are nominally separate entities is immaterial
– as the parent and wholly owned subsidiary of one another, they “‘have a complete unity of
interest’” for antitrust purposes “and thus . . . the subsidiary acts for the benefit of the
parent, its sole shareholder.’” Am. Needle v. Nat’l Football League, 560 U.S. 183, 195-96 (2010)
(quoting Copperweld Corp. v. Indepedence Tube Corp., 467 U.S. 752, 771 (1984)).
115
DTE Energy Co., Form 10-K (December 31, 2015) at 1 & 21.
116
See generally Proposal for Decision, supra n. 6.
117
Supra pt. IV.A.
118
DTE Energy’s wholly-owned subsidiary DTE Gas owns 25%-100% of four interstate
pipelines transporting gas to Midwestern and Northeastern markets. DTE Energy Co., Form
10-K (December 31, 2015) at 12. Spectra Energy Corp. owns “approximately 21,000 miles of
transmission pipelines” in the United States and Canada, and describes itself as “one of
North America’s leading natural gas infrastructure companies.” Spectra Energy Corp. Form
10-K (December 31, 2015) at 4.
113
114

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 greater output at lower prices—because it charges more than market price for its transmission
services. 119 Thus, any claim by NEXUS to be a “new entrant” would ignore its parents’
substantial presence in the interstate pipeline market.
E. DTE Electric’s Participation in the NEXUS Project Distorts the Electric
Power Market and Harms Competition and Michigan Ratepayers
Sierra Club believes that DTE Electric’s use of its ratepayer base to subsidize expanding
its upstream monopoly over the market for utility-scale electricity generation causes
economic harm to both the market for retail electricity and the input market. As the
Commission has previously recognized, when, as here, “a firm engages in conduct that is
intended to monopolize a market or to leverage market power in one market to gain market
power in another market, it can reduce output and increase prices above the competitive
level, thereby injuring consumers and misallocating society's resources.” 120 These are
precisely the competitive harms that Sierra Club views as likely to materialize if the Project
proceeds.
First, the Project’s inefficiencies raise the retail price of electricity paid by ratepayers
above competitive levels, who are overcharged for the electricity they use by having the
inefficient costs of the Project built into retail prices. These overcharges are created by the
fact that the Project is more costly than available alternatives to meet Electric’s demand. 121
Electric could have transferred the savings achieved by using these more-efficient
alternatives to ratepayers in the form of lower rates. Instead of those savings, ratepayers now
must pay extra (to the tune of $335 million, according to the Attorney General) for the cost
of funding Electric’s expansion in the installed capacity market.
Second, the Project harms the upstream market for the utility-scale generation of
electricity by shifting demand to the ratepayer-subsidized Project, excluding more-efficient
suppliers. Specifically, Electric’s use of its ratepayer base to subsidize the Project excludes
firms that are capable of providing the same capacity for the generation of bulk electricity
through more-efficient means. And the Project stifles the incentive for competing suppliers
to enter the market with more-efficient methods of generating bulk electricity by committing
Michigan’s largest utility to buying gas from an unnecessary and comparatively inefficient
pipeline network for the next thirty-five years.
Third, the Project suppresses demand for energy-efficiency technologies below what
would exist absent Electric’s attempted monopoly. By using ratepayers to absorb the cost of
building and operating pipeline capacity that is more expensive than what the market had to
offer, the Project reduces Electric’s incentive to invest in energy-efficiency measures that it
would be incentivized to invest in if it were required to internalize the Project’s abovemarket costs. By eliminating demand for the energy-efficiency measures that Electric would
be incentivized to adopt in a competitive universe, the Project suppresses the market for
products and technologies (and related innovation in these technologies) that enhance
energy efficiency.
Supra pt. III.
Federal Trade Commission, Annual Report - 1994, 1994 WL 16189411, at *12.
121
Supra pt. III.
119
120

21

 Electric’s efforts to leverage its monopoly over the retail distribution of electricity by
using ratepayers to subsidize expanding its share of the market for generating capacity also
threatens the transparency and integrity of the ratemaking process. The Department
recognizes the potential for competitive harm where, as here, a monopoly public utility
acquires upstream capacity for electricity generation and its inputs. Acquiring upstream
generating capacity
may be used by monopoly public utilities subject to rate regulation as a tool
for circumventing that regulation. The clearest example is the acquisition
by a regulated utility of a supplier of its fixed or variable inputs. After
the merger, the utility would be selling to itself and might be able arbitrarily
to inflate the prices of internal transactions. Regulators may have great
difficulty in policing these practices, particularly if there is no independent
market for the product (or service) purchased from the affiliate. As a result,
inflated prices could be passed along to consumers as “legitimate”
costs. In extreme cases, the regulated firm may effectively preempt the
adjacent market, perhaps for the purpose of suppressing observable market
transactions, and may distort resource allocation in that adjacent market
as well as in the regulated market. 122
Sierra Club believes that the Project, if approved, will cause these competitive harms by
requiring ratepayers to subsidize the higher cost of the Project in comparison to numerous
available alternatives while shifting demand away from more-efficient suppliers of utilityscale electricity. While the Department “recognizes that genuine economies of integration
may be involved” 123 in some vertical merger or development proposals, it is hard to imagine
such economies being realized where, as here, an entirely new pipeline system is being created
instead of leveraging the efficiencies of existing infrastructure by, for example, linking
generating facilities to existing capacity or decreasing demand by adopting energy efficiency
targets.
IV. CONCLUSION
Sierra Club believes that the NEXUS Project, if allowed to proceed, will cause serious
distortions and suppress competition in the market for capacity to generate electricity while
raising the electricity rates charged to consumers above competitive levels. If permitted to
continue, the Project will likely lock-in inefficient means of producing electricity and
suppress practical, more-efficient and environmentally sustainable alternatives. 124 The Project
also threatens to create long-term negative competitive consequences by discouraging
122

United States Department of Justice, Antitrust Division, Non-Horizontal Merger
Guidelines § 4.23 Evasion of Rate Regulation (emphasis added).
123
Id.
124
For additional information on how utility investment in natural gas transportation
infrastructure suppress investment in other generation technologies, see N. Jonathan Peress,
Energy Exchange, How to Ensure New Natural Gas Infrastructure Doesn’t Lock Out Renewables
(June 5, 2015), available at http://blogs.edf.org/energyexchange/2015/06/05/how-toensure-new-natural-gas-infrastructure-doesnt-lock-out-renewables/.
22

 innovation and entry into the electricity generation market by more-competitive firms. These
harms are significant and worthy of the Agencies’ intervention.
For the foregoing reasons, Sierra Club respectfully requests that the Agencies investigate
the monopolistic effects of the NEXUS Project and take all necessary measures to stay the
Project’s implementation until such an investigation can be completed.
Very truly yours,

Pat Gallagher

Cc:

Federal Energy Regulatory Commission, FERC Docket No. CP16-22-000.

23