Second Circuit Blocks Class Action Against KeySpan-Morgan Stanley for Market Manipulation

On September, 20, 2012, the United States Court of Appeals for the Second Circuit affirmed a lower court decision dismissing an incipient class action against KeySpan Corporation and Morgan Stanley Capital Group, Inc. The court's decision was the most recent development in the ongoing saga surrounding KeySpan and Morgan Stanley's manipulation of capacity auction for the New York City market. Simon v. KeySpan Corp., Docket No. 11-2265-cv (2d Cir. 2012).

As detailed in prior blog posts in February 2010, February 2011, and August 2012, KeySpan acquired a financial interest in its largest competitor, Astoria Generating Company Acquisitions, L.L.C., through a swap agreement with Morgan Stanley, which, in turn, entered into an agreement with Astoria. The arrangement was designed to allow KeySpan to withhold capacity and to bid prices up to a price cap imposed by the Federal Energy Regulatory Commission. Both FERC and the Department of Justice launched investigations, with FERC ultimately concluding that KeySpan's conduct did not violate relevant market rules and FERC's prohibition on market manipulation. The DOJ brought civil suits under federal antitrust laws and both companies have entered into settlements with DOJ requiring them to disgorge a portion of their profits under the agreements.

In this case, Mr. Charles Simon, a customer of Consolidated Edison Company of New York, Inc., sought to represent himself and other customers who had purchased electricity from Con Ed between 2006 and 2009.Because Con Ed had purchased energy through the New York capacity market, Simon maintained that the defendants' conduct resulted in Con Ed's consumers being overcharged for electricity and that they were entitled to recover the amount that they were overcharged under state and federal antitrust law.

On March 22, 2011, the United States District Court for the Southern District of New York dismissed Simon's federal and state antitrust claims. The district court found that he lacked standing under federal antitrust law and that his state claims were preempted given the fact that FERC had exclusive authority over wholesale sales of electric energy. In addition, the district court found that all of Simon's claims were barred by the filed rate doctrine because the rate that he was challenging had been approved by FERC.

In its decision affirming the district court, the Second Circuit agreed that Mr. Simon lacked standing under the general rule that only direct purchasers may bring a suit under federal antitrust law. Simon argued that he qualified for an exception from this rule for an indirect purchaser that has a pre-existing contract with the direct purchaser that obligates it to purchase a fixed quantity and pay the direct purchaser's costs plus a predetermined fee because Con Ed passed through 100% of the costs of procuring capacity to its customers. The court rejected this argument, relying on prior court precedent finding that consumers of regulated public utilities that pass on 100% of their costs to consumers do not fall within the scope of the exception.

With respect to the application of the filed rate doctrine, the court rejected Mr. Simon's argument that the doctrine is inapplicable where the market-based rates are at issue (such as the rates obtained through the capacity auction) and should only be applied where the relevant regulatory agency specifically chose or approved the rate in question. While the court acknowledged that Mr. Simon's argument had some appeal, it held that the filed rate doctrine applies where a regulator has created a process for setting rates, reviewed the resulting rates, and, after investigation, determined that the anti-competitive behavior did not undermine the process and that the resulting rates were reasonable. In finding that the doctrine should bar Mr. Simon's suit, the court cited the fact that FERC had imposed price caps on the major producers participating in the market after finding that these producers had market power. The court also relied on the fact that FERC decided to take no action in response to KeySpan's actions despite having various mechanisms in place to do so. The court declined to find that the filed rate doctrine would always serve to bar challenges to anticompetitive conduct affecting market-based rates, especially where "the only involvement of a regulator is creating the process ultimately corrupted by parties in the market."