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Market Power and Antitrust Issues in the Restructuring Electric Industry National Regulatory Conference Williamsburg, Virginia May 8, 2000 David Cruthirds

Key Points Who is Dynegy? Behavioral vs Structural Remedies Various questions about the applicability of antitrust law Market power problems encountered by Dynegy

Dynegy Inc. Dynegy is one of the country’s leading energy merchants - Formerly NGC Corporation and Natural Gas Clearinghouse Dynegy owns an interest in power plants with more than 14,000 MW of domestic generating capacity. Dynegy is currently developing power generation projects in seven states   (Arizona, Florida, Georgia, Illinois, Kentucky, Louisiana, North Carolina) Average worldwide natural gas sales of more than 10 Bcf/d. Recently completed merger with Illinova/Illinois Power Headquartered in Houston: approximately 5,000 employees

Core Issue: Vertically Integrated Electric Utilities - common control of generation, transmission, and distribution The electric utility industry produces many distinct, sequential, and interrelated products and services, including the processes of generation, transmission, and distribution Prior to the technological advances in the generation and delivery of electricity, and the introduction of competition into wholesale and retail markets,  vertical integration of these processes made sense When successive stages of production are not vertically integrated, prices tend to be set by competitive forces, provided that one or more stages are not being used as a bottleneck

Core Issue, continued Transmission and distribution are “natural monopolies” and will continue to be regulated, while generation and value-added products and services are subject to competition Management is accountable to shareholders to maximize profits and create value from its investments For vertically integrated electric utilities, generation investment generally far exceeds transmission investment FERC regulations require comparability, prohibit discrimination and prohibit preferential treatment of affiliates Management dilemma: how  to reconcile accountability to shareholders and to regulators?

Structural v. Behavioral Remedies Behavioral Focus is on behavior, not underlying motivations Monitoring is costly and complex - violations are difficult to detect and document Possible misidentification of appropriate, competitive behavior Codes of conduct - may not adequately address opportunity and incentive Structural Reduces opportunity and incentive to use regulated assets to favor “at risk” assets Reduces need for regulatory oversight Example: divestiture of generation or transmission Does not address access problems related to physical constraints

Behavioral Remedies Alone Are Not Sufficient FERC Order 497 - standards of conduct for interstate gas pipelines FERC Orders 888 and 889: OATTs and OASIS FERC Order 2000: Discrimination in transmission services can still occur when operation of the transmission system remains in the control of a vertically integrated utility FERC beginning to take structural remedies more seriously Divestiture of generation or transmission is an effective remedy

State Action Immunity Application of the state action immunity doctrine is a question of law: Immunizes a private party from antitrust liability if private party acts pursuant to a “clearly articulated” and “affirmatively expressed” state policy to allow the anticompetitive conduct, and the regulatory policy is “actively supervised”  by the state itself Behavioral rules do not evidence a clear intent by the state to displace competition with a regulatory structure, nor do they ensure adequate state supervision

Constitutional Limits: The Dormant Commerce Clause & Burdens on Interstate Commerce The negative or dormant Commerce Clause prohibits state regulation that discriminates against, or unduly burdens, interstate commerce State moratoriums on merchant power plants Will they survive scrutiny under the dormant Commerce Clause? Are they examples of simple economic protectionism, or do they protect legitimate local concerns, with only incidental effects on interstate commerce?

Private Antitrust Enforcement Expensive and time consuming to pursue The market may “vote with its feet” Difficult issues of proof Relief not timely - justice delayed is justice denied State action immunity could shield inappropriate conduct Private interests may depend on DOJ to pursue

When Is Antitrust Enforcement Needed? Little need when industry was totally regulated Antitrust oversight will gradually replace regulatory oversight as the industry is restructured and structural separation has been implemented Special attention to regulatory gaps during transition to competition State and federal regulators face challenges to identify and address gaps

Want More Information? For more information on Dynegy, visit Dynegy’s web site at: www.dynegy.com David L. Cruthirds Sr. Director and Regulatory Counsel 1000 Louisiana Street, Suite 5800 Houston, Texas 77002 (713) 507-6785 (713) 507-6834 (Fax) dlcr@dynegy.com