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Charles Simon, On Behalf of Himself and All Others Similarly Situated v. Keyspan Corporation

September 20, 2012

CHARLES SIMON, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF-APPELLANT,
v.
KEYSPAN CORPORATION, MORGAN STANLEY CAPITAL GROUP INC., DEFENDANTS-APPELLEES.



The opinion of the court was delivered by: John M. Walker, Jr., Circuit Judge:

11-2265-cv

Simon v. Keyspan Corporation

Argued: February 28, 2012

Before : WALKER, LYNCH, and DRONEY, Circuit Judges.

25 Plaintiff-appellant Charles Simon appeals from an order of 26 the United States District Court for the Southern District of New 27 York (Shira A. Scheindlin, Judge), dismissing his federal and 28 state antitrust claims against defendants-appellees KeySpan 29 Corporation and Morgan Stanley Capital Group Inc. We agree with 30 the district court that plaintiff-appellant lacks standing to 31 pursue his federal claims because he was an indirect purchaser 1 and that his claims are otherwise barred by the filed rate 2 doctrine. AFFIRMED.

38 This appeal requires us to consider whether plaintiff- 39 appellant Charles Simon ("Simon"), a retail consumer of 40 electricity in New York City, can maintain an antitrust action 41 against defendant-appellee KeySpan Corporation ("KeySpan"), a 1 producer of electricity in New York that allegedly colluded with 2 one of its rivals to increase installed capacity prices, and 3 defendant-appellee Morgan Stanley Capital Group Inc. ("Morgan 4 Stanley"), a financial firm that allegedly facilitated KeySpan's 5 anticompetitive conduct.

The United States District Court for 6 the Southern District of New York (Shira A. Scheindlin, Judge) 7 dismissed plaintiff-appellant's claims principally on the grounds 8 that he lacked antitrust standing and that his claims were barred 9 by the filed rate doctrine.*fn1 We agree and conclude that 10 plaintiff-appellant, as an indirect purchaser, lacks standing to 11 bring his federal antitrust claims. We further hold that the 12 filed rate doctrine bars plaintiff-appellant's state and federal 13 claims even though the allegedly supracompetitive rate was the 14 product of a market-based auction.

15 BACKGROUND

16 In reviewing a motion to dismiss, we accept all factual 17 claims in the complaint as true and draw all reasonable 18 inferences in the plaintiff's favor. Famous Horse Inc. v. 5th 19 Ave. Photo Inc., 624 F.3d 106, 108 (2d Cir. 2010). Where 20 necessary, we take judicial notice of the regulatory structure 21 governing the New York City electricity market.

1 I. The New York City Electricity Market

2 The market for electricity in New York City is overseen by 3 the New York Independent System Operator ("NYISO").*fn2 On the 4 wholesale side, the market is based on the producers' "installed 5 capacity," i.e. the amount of electricity that the producer can 6 supply at a given time. Retail sellers of electricity must 7 purchase enough installed capacity from producers to meet their 8 expected peak demand plus a share of reserve capacity. The 9 system is designed to ensure that the amount of electricity 10 eventually sold to consumers is consistent with the total 11 production capacity of the producers.

12 In order to determine the price at which producers can sell 13 their capacity, NYISO has established an auction system that 14 results in a market-based rate ("MBR"). Producers submit bids 15 indicating the amount of capacity they can produce and the lowest 16 per unit price at which they are willing to sell. The bids are 17 then "stacked" from lowest to highest price until the total 18 demand for capacity has been met.

The point at which demand is met determines the market price for installed capacity and every 1 producer stacked below that price point can sell its full 2 capacity for the market price. The producer whose bid set the 3 price can sell as much of its capacity as is necessary to meet 4 demand. The rest remains unsold. Any producer that bid higher 5 than the market price cannot sell its capacity. 6 The New York City capacity market is highly concentrated.

7 Three firms - defendant-appellee KeySpan, NRG Energy, Inc. 8 ("NRG"), and Astoria Generating Company ("Astoria") - control a 9 substantial portion of the total generating capacity.*fn3 The total 10 demand for installed capacity cannot be met without at least some 11 of the capacity from each of these three firms.

Accordingly, 12 NYISO has imposed a price cap on these firms' bids and barred 13 them from selling electricity outside of the auction process. 14 KeySpan's bid cap is the highest of the three.

16 II. The Anticompetitive Agreement

17 As a result of the prevailing market conditions from June 18 2003 to December 2005, most of KeySpan's capacity was necessary 19 to satisfy total demand. KeySpan therefore routinely bid at its 20 price cap and set the market price at that level.

However, 1 because other producers would be bringing new plants online, 2 KeySpan anticipated that in 2006, supply would increase, leaving 3 KeySpan to either bid below its cap or risk selling only a small 4 amount of its capacity. To avoid these unappealing options, 5 KeySpan indirectly entered into an agreement with Astoria ("the 6 agreement").

Using Morgan Stanley as an intermediary, KeySpan de 7 facto agreed to pay Astoria a fixed income in exchange for any 8 potential profits (after a certain point) from Astoria's 9 generating capacity.*fn4

10 The agreement consisted of two separate deals: the "KeySpan 11 Swap" and the "Astoria Hedge." The KeySpan Swap, executed on 12 January 18, 2006, provided that if the market price after auction 13 were set above $7.57 per KW-month ("the fixed price"), Morgan 14 Stanley would pay KeySpan the difference between the market price 15 and the fixed price multiplied by 1800 megawatts ("MW"). If the 16 market price were lower than the fixed price, KeySpan would pay 17 the difference (times 1800 MW) to Morgan Stanley. The "Astoria 18 Hedge," executed on January 11, 2006, provided that if the market 19 price were higher than $7.07 per KW-month, Astoria would pay 20 Morgan Stanley the difference times 1800 MW. If the price were 21 below $7.07, Morgan Stanley would pay the difference (times 1800 22 MW) to Astoria. The net effect of the agreement was that Astoria 1 was assured of always receiving exactly $7.07 per KW-month for 2 its capacity while KeySpan received any profits (if the market 3 price were above $7.57) and subsidized any losses (if the market 4 price were below $7.07) from the sale of Astoria's capacity.

The 5 combination of the KeySpan Swap and the Astoria Hedge enabled 6 Morgan Stanley to receive a fixed rate of fifty cents per KW- 7 month in exchange for facilitating the deal.

8 As a result of the agreement, it remained lucrative for 9 KeySpan to continue to bid as high as its cap permitted and set 10 the market price at that level. If it then sold only a small 11 amount of its own capacity, it would still receive substantial 12 profits from Astoria's capacity. Since either all of KeySpan's 13 or all of Astoria's capacity would be required by the market, 14 KeySpan stood to make a substantial profit by setting the price 15 as high as possible, i.e., at its cap. In the absence of the 16 agreement, KeySpan would likely have had to bid competitively, 17 which might have lowered the market price of capacity. This was 18 borne out by experience: KeySpan continued to bid at its cap, 19 setting the market price and leaving a significant portion of its 20 capacity unsold. Thus the market price of capacity did not drop 21 despite an industry-wide increase in generating capacity.

1 III. Investigations of the Agreement

2 In May 2007, the United States Department of Justice ("DOJ") 3 began an investigation into the KeySpan agreement based on its 4 anticompetitive effect. In February 2010, it filed a civil 5 complaint alleging that KeySpan had unlawfully restrained trade. 6 KeySpan entered into a stipulation with the DOJ to settle the 7 case. Pursuant to a consent decree, KeySpan paid the United 8 States $12 million and the case was resolved "without trial or 9 adjudication of any issue of fact or law."*fn5

10 FERC also conducted an investigation of the agreement. Its 11 enforcement office issued a detailed report concluding that 12 KeySpan had not violated FERC's ...


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