Can a municipal water utility use its monopoly to increase its natural gas sales to homeowners?  In Diverse Power, Inc. v. City of LaGrange, Georgia, Case No. 18-11014 (decided August 20, 2019), United States Court of Appeals for the Eleventh Circuit answered “no.”

The City of LaGrange enjoys a monopoly on providing water service within the City of LaGrange and in portions of surrounding, unincorporated Troup County. The City also provides natural gas service to those areas.  In 2004, the La Grange City Council passed an ordinance that provided that for new residential construction outside of the city limits of LaGrange, the City would provide water service only to customers that had a natural gas furnace, a natural gas water heater, and at least one other natural gas outlet that could be used for another natural gas appliance. Because the City had a monopoly on water service, this ordinance effectively forced new residential customers to have these natural gas appliances, making them consumers of the City’s natural gas and depriving them of the option to purchase electrical appliances. A local electricity supplier complained that the ordinance violated the Sherman Antitrust Act, contending that the City of LaGrange had illegally tied its providing water service to the installation of natural gas appliances.

The issue before the Court was whether the City of LaGrange could be sued or whether it enjoyed “state action immunity.” That is a doctrine that immunizes state and local governments from antitrust liability. A local government enjoys such immunity if its actions are pursuant to a “clearly articulated and affirmatively expressed state policy to displace competition.” Opinion, p. 7.

Georgia law authorizes local governments to operate water and sewer systems and to be monopoly providers of such services.  The issue before the Court was whether the Georgia Legislature would have foreseen that local governments would use their authority to be water monopolies to increase their share of an unrelated market. The Court held that such conduct was not foreseeable. State law contemplated anti-competitive conduct in providing water and sewer service. It contemplated monopolies. But, nothing in state law contemplated expanding that monopoly power to markets for other goods or services.

This decision strikes a blow for consumers by limiting anti-competitive conduct by municipal utilities.

The opinion is available at http://media.ca11.uscourts.gov/opinions/pub/files/201811014.pdf