Court Pulls Plug On Complaint Challenging Power Company’s Overcharges

Federal Judge Shira Scheindlin of the Southern District of New York has dismissed a class action alleging that regional power generator KeySpan Corp. overcharged millions of electricity customers.

The complaint in Simon v. Keyspan Corp., 10 CIV. 5437 SAS (S.D.N.Y. 2011), challenged a derivative transaction – the “KeySpan Swap,” arranged by financial advisor Morgan Stanley – relating to New York City’s electric power generation market.  The plaintiffs alleged that the KeySpan Swap was an anticompetitive scheme to keep electricity prices high in violation of federal and state antitrust law.

KeySpan consulted Morgan Stanley on buying one of its two rivals in the highly concentrated New York City power generation market – Astoria Generating Company – but concluded the acquisition of its largest competitor would raise “serious market power issues.”  Instead, Morgan Stanley designed the Swap to allow KeySpan to acquire a financial interest in Astoria’s generating capacity.  Keyspan would pay Astoria a fixed revenue stream in return for the revenues generated from Astoria’s capacity sales in auctions for electric power, part of a short-term bid to avoid lowering KeySpan’s wholesale electricity costs in the face of two new power plants due to come online.

The U.S. Department of Justice commenced an investigation of KeySpan’s conduct with respect to the Swap in late 2006, which was resolved by a $12 million settlement and consent decree filed in the Southern District of New York in February 2010.

But Judge Scheindlin’s broad decision concluded that any private class action was barred on several alternative grounds.  First, the court found that the putative class members – residential power customers – were merely indirect purchasers who lacked antitrust injury and standing.  Second, the court found that the filed rate doctrine barred federal and state law claims for damages.  The Federal Energy Regulatory Commission’s (FERC) exercised full authority over the capacity markets and the relevant tariff rates were approved by the FERC – which had also specifically examined the KeySpan Swap.  The complex regulatory scheme also provided the final blow to the plaintiffs’ state law claims, which the court found were barred by both “field preemption” and “conflict preemption.”

The decision is another example of judicial deference to well-established regulatory authority, especially in a highly-regulated arena such as energy.  In addition to a firm rejection of plaintiffs’ arguments for standing, the court was especially moved by the FERC’s own review of the Swap and the end result – rates below those set by the agency.