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Market Manipulation, Preemption, and FERC Jurisdiction: Antitrust Claim from 2000-01 Crisis Revived By Ninth Circuit

April 10, 2013 posted by Eric Christensen

The U.S. Court of Appeals for the Ninth Circuit today revived a class-action antitrust case against a large assemblage of natural gas sellers and marketers who were allegedly involved in manipulating Western natural gas prices during 2000-01. Manipulation of gas prices was one factor contributing to the meltdown of Western electricity markets during the same period. The court's decision, entitled In re: Western States Wholesale Natural Gas Antitrust Litigation, limits the extent to which the Federal Energy Regulatory Commission's exclusive jurisdiction under the Natural Gas Act ("NGA") preempts private antitrust claims under both state and federal law. While the immediate effect of the court's decision is to allow plaintiffs harmed by the alleged gas market manipulation to seek potentially substantial antitrust remedies, the decision is likely to have long-term import well beyond the specifics of the particular facts addressed by the court. This is so because the NGA is one of a family of similar New Deal-era statues which also includes statutes like the Federal Power Act and the Federal Communications Act, and the court's decision turns on language that is common to this family of statutes. Further, the court opens the way for antitrust damage claims that allow injured private parties to seek damages, including treble damages, against market manipulators. These private actions will serve to bolster FERC's recently-intensified battle against energy market manipulation, which extends to the power markets as well as the natural gas markets. The Ninth Circuit appeal arises from antitrust cases filed in multiple jurisdictions that were consolidated in the U.S. District Court in Nevada. The claims are based on a FERC investigation of Western natural gas markets that found many gas traders were manipulating the natural gas markets by making false price reports to industry trade publications like Gas Daily and Inside FERC, and also by engaging in "wash trades." Wash trades are off-setting trades executed simultaneously on an electronic platform in which the first trade is reversed by the second. As a result, no gas physically changes hands, but reported prices on the electronic platform can be moved significantly. The plaintiffs, generally end users of natural gas, alleged that these price manipulations constituted economic collusion violating the antitrust laws, and that the plaintiffs suffered significant damages as a result. The District Court granted the defendants' motions for summary judgment, concluding that the antitrust claims were preempted because the false price reporting and wash trade transactions constituted "practices" affecting FERC-jurisdictional natural gas transactions. In the District Court's view, the antitrust claims were therefore preempted because FERC has exclusive jurisdiction to regulate such "practices" under Section 5(a) of the NGA. The Ninth Circuit rejected this conclusion, finding that the antitrust claims are not preempted because they involve claims of manipulation of many gas sales that are not subject to FERC jurisdiction. Congress has specifically excluded several categories of gas sales from FERC jurisdiction, including retail sales and "first sales" from gas producers, which were removed from FERC jurisdiction by the Wellhead Decontrol Act. The Ninth Circuit reasoned that FERC's jurisdiction to regulate "practices" under Section 5(a) must be read in the context of these limits on its jurisdiction. The District Court therefore erred by reading "practices" broadly, without taking into account these jurisdictional limitations. In reaching this conclusion, the Ninth Circuit found that "[s]tate and federal antitrust laws complement Congress's intent to move to a less regulated market, because such laws support fair competition." This finding calls into question the "filed rate doctrine," a judicial creation arising from early court decisions, decided before the era of deregulation, which generally barred antitrust lawsuits and other claims would result in changing the price contained in a tariff that had been filed with and approved by FERC or another regulatory agency. As FERC has deregulated significant portions of both the natural gas and electricity markets, however, it has generally allowed prices to be set by market forces rather than by approved cost-of-service rates. In the context of deregulation, the court's finding suggests that the logical underpinning of the filed rate doctrine -- the need to protect the regulatory agency's authority to approve a specific price -- has eroded. Rather than undermining regulatory authority, antitrust lawsuits may enhance the agency's efforts to combat market manipulation and ensure fair competition. If you have any questions about the Ninth Circuit's decision, the NGA and related statutes, the utility industry, or antitrust claims in the context of regulated industries, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group.