Second Circuit Bars Consumer Antitrust Claims Against NYISO Capacity Market Gamers Under Standing and Filed Rate Doctrines

In Simon v. KeySpan Corp., consumer plaintiffs commenced a private civil antitrust action for damages against Keyspan, then a New York City power producer owning the largest power plant in the City, alleging that it inflated NYISO capacity market prices through strategic bidding facilitated by a financial derivative contract with codefendant Morgan Stanley.  The impact of the scheme was to increase charges to consumers, estimated to be $158 million to several hundred million dollars.  Plaintiffs claimed approximately $360 million in treble damages for violations of the Sherman Antitrust Act, New York’s General Business Law, and common law.

Previously, the Justice Department Antitrust Division had settled public cases against KeySpan and Morgan Stanley involving the same conduct, with no finding of wrongdoing and disgorgement of a small part of their profits from the scheme, and FERC staff had found in a report that the conduct had not violated NYISO tariffs or FERC antimanipulation rules.  See Peter Lattman, Federal Judge Grudgingly Approves Morgan Stanley Price-Fixing Case, N.Y. Times Dealbook blog, Aug. 7, 2012  See also, Morgan Stanley Derivative Accord Wins Approval, Bloomberg, Aug. 7, 2012; US Judge OKs Morgan Stanley Price-fixing Pact Opposed by AARP, Chicago Tribune, Reuters, Aug. 7, 2012; Bill Sanderson, Morgan Stanley to pay $4.8M settlement in alleged $157M price-fix scheme, N.Y. Post, Aug. 7, 2012.

When the defendants moved to dismiss the complaint, the federal district court granted the motion, and an appeal to the Court of Appeals for the Second Circuit followed.

The Second Circuit, in an opinion issued September 20, 2012, affirmed the dismissal, finding that the plaintiff consumer, as an indirect purchaser of retail electric service from Con Edison, which allegedly paid the artificially inflated prices at the wholesale level, lacks standing to assert federal antitrust claims, and the "filed rate doctrine" bars consumer claims even though the allegedly supracompetitive rate was the product of a market-based auction in which rates were not publicly filed in advance under the Federal Power Act.

The decision is significant in several respects:

1.   It extends the shield of the filed rate doctrine to unfiled "market-based rates" when the rates are set in a FERC-approved process, 
2.   It highlights that Con Edison, which did have standing to assert antitrust claims, did not sue to protect its retail customers. 
3.   It rejected arguments of antitrust experts for an exception to the general rule that retail customers cannot assert antitrust claims against wrongful agreements at the wholesale level, 
4.   it found that the individual plaintiff might have avoided the impact of the inflated wholesale capacity costs when they were flowed through to customers at the retail level by Con Edison, by not using electricity, but did not recognize that there was no way for the class of customers to avoid the pass through of inflated wholesale capacity costs, 
5. It underscores that FERC's deregulatory market based rates scheme lacks effective remedies for consumers when excessive charges are imposed, and 
6. It confirms that using financial derivatives to support sellers' strategic bidding schemes in the NYISO markets has little downside economic risk.

In its discussion of the filed rate doctrine, the Court omits any citation to the requirement of the Federal Power Act that all rates be filed,  but states:

Simon urges us to limit the filed rate doctrine to cases where the regulatory agency itself chose or approved the rate. We acknowledge that Simon's approach has some appeal. Because FERC did not directly set the rate at issue here, it did not specifically determine that the rate was reasonable. Moreover, KeySpan's alleged conduct undermined the competitive market scheme FERC and NYISO had created. One could therefore conclude that the rate arrived at was not the one envisioned by FERC.

The protection of the filed rate doctrine was extended to the unfiled auction rates because FERC had approved the NYISO auction process and believed that the results would be competitive.  FERC conflates the goal of competitive market prices with the statutory standard of just and reasonable rates.  As the Supreme Court has stated, "the prevailing price in the marketplace cannot be the final measure of "just and reasonable" rates mandated by the Act **** the Act makes unlawful all rates which are not just and reasonable, and does not say a little unlawfulness is permitted. " FPC v Texaco, 417 U.S. 380 (1974). 

Interestingly, the Second Circuit appears to have reserved to itself the flexibility to look closer at "market-based rates' ("MBRs") in other cases in the future:

In affirming the application of the filed rate doctrine in this case, we need not announce a per se rule and, in a case that does not require it, are reluctant to do so. It is not clear to us that the filed rate doctrine, and the rationales underlying it, should preclude all court scrutiny of alleged anti-competitive behavior affecting the setting of MBRs. The Supreme Court's three rationales from [a case where sellers allegedly colluded to set rates]do not apply with equal force to rates set by MBRs when the only involvement by a regulator is creating the process ultimately corrupted by parties in the market. This is so because antitrust remedies become more necessary as markets become increasingly deregulated by the MBR system. Indeed, some of our sister circuits who have held that the filed rate doctrine applies have taken into account factors such as the level of FERC review.* * * *

FERC's auction process was plainly designed to result in a reasonable rate, and we are not willing to say that KeySpan's bid cap, specifically approved by FERC, was not reasonable. We conclude that the filed rate doctrine applies on these facts—where the regulator created a process for setting rates, reviewed the resulting rates, and, after investigation, determined that the anti-competitive behavior did not undermine its process and that the resulting rates were reasonable. There is no need for us to reach the question of whether the filed rate doctrine would apply to all MBRs irrespective of the oversight of the regulator, and we leave that question for another day.

The Simon case underscores that consumers have lost considerable protection with the advent of FERC's "market-based rates".  See Paul Mohler, Has the "Complete and Permanent Bond of Protection" Provided by FERC Refunds Eroded in the Transition to Market-Based Rates? , 33 Energy Law Journal 41 (2012); Jim Rossi, Lowering the Filed Tariff Shield: Judicial Enforcement for a Deregulatory Era, 56 Vand. L. Rev. 1592 (2003).

The Court, in rejecting the antitrust claims of the retail customer, indicated its belief that Con Edison did have standing:

Even if Con Ed increased its rates by exactly the amount it was overcharged for installed capacity, it does not follow that Con Ed's sales and profits were unaffected. In short, Con Ed may have suffered an antitrust injury as a result of the agreement, and therefore under Hanover Shoe and Illinois Brick, it is the only proper plaintiff.

Con Edison, however, did not sue for damages, though it did object to the settlement of the Justice Department in the U.S. v KeySpan public antitrust case.  This may be an area that deserves more scrutiny by the New York Public Service Commission, to assure that interests of utilities and customers are  aligned so that utilities having standing to attack inflated wholesale charges will actually do so for the benefit of customers who lack standing.

The plaintiff is seeking rehearing of the Second Circuit decision.  The American Antitrust Institute has filed an amicus brief in support of a motion for rehearing, which is rarely granted by the Second Circuit.  Still, there is always the possibility of Supreme Court review, so this may not be the last word on the case.  Just last term, the Supreme Court declined to accept a case presenting the issue whether FERC had any authority to relax the statutory filed rate requirements when it created its "market-based rates" system.  See PULP Network, Supreme Court Denies Review of Consumer Groups' Challenge to FERC's "Market-Based Rates" Scheme, Leaving Issue Unresolved, June 29, 2012.  Perhaps the Court will take a greater interest in reviewing FERC's market rate innovations that have put customers in the situation of losing large amounts of money due to excessive rates, with no remedy.

The takeaway from this and other cases appears to be that there is no consumer remedy when NYISO markets are gamed and prices are inflated, if the gaming was not directly prohibited by the constantly evolving market rules.  Also, the use of derivatives to support gaming strategies has not been found to be illegal, and so there is no "scienter", i.e., knowledge that conduct is wrongful, which is required under FERC's stringent standard for finding illegal civil or criminal electricity market manipulation.  The mild disgorgement of 20 - 25% of profits from the KeySPan/Morgan Stanley arrangement, and now the insulation  from  private antitrust actions given by the Simon case, seems to leave the door wide open for more creative gaming and innovative exploitation of NYISO market flaws at the expense of consumers.

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