Antitrust Law Daily Wrap Up, RICO—S.D. Cal.: Claims against JP Morgan over manipulation of electricity prices barred by filed rate doctrine, (Oct 27, 2015)

By Michael Menzhuber, J.D., LL.M.

A class action suit alleging that the energy trading unit of JPMorgan Chase engaged in a pattern of racketeering activity to manipulate the price of electricity, in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), was barred by the “filed rate” doctrine, the federal district court in San Diego, California has decided (Woolsey v. J.P. Morgan Ventures Energy Corporation, October 26, 2015, Hayes, W.).

Background. J.P. Morgan Ventures Energy Corporation (JPM-V), a subsidiary of JPMorgan Chase, engages in financial transactions related to commodities. With respect to electrical transactions, the company leases the rights to the output of a number of electrical generating plants in Southern California and sells the power produced from those plants in the state electrical wholesale market. The wholesale market is operated by the California Independent System Operator Corporation (CAISO), a nonprofit public benefit corporation that is regulated by the Federal Energy Regulatory Commission (FERC).

In settlement of a formal investigation undertaken by FERC, JPM-V admitted to the facts constituting violations including: (1) from September 2010 to November 2012, it designed its bidding strategies to obtain market prices for its sale of electricity and that its designs were usually successful in garnering premium rates for the electricity that it generated and sold; (2) it engaged in certain fraudulent conduct that operated as fraud on participants in California’s wholesale electricity market; and (3) its bids were not based on competitive market principles but on a manipulation of the market.

In March 2015, Catherine Woolsey, Carol Ball, and Rachel Reidinger, residential consumers of electricity, brought a class action complaint against the defendants that alleged that JMP-V engaged in a pattern of racketeering activity to manipulate the price of electricity. According to the complaint, the actual damages to California electrical ratepayers from the cost of paying for the defendants’ illegal market manipulation was substantially in excess of the unjust profits recouped by FERC on behalf of California electrical consumers. The defendants moved to dismiss the complaint.

Filed rate doctrine. The defendants argued that the filed rate doctrine, which precludes interference with the rate setting authority of an administrative agency such as FERC, forbids courts form setting a rate different from the rate set by FERC or assuming a hypothetical rate when there are allegations that the rates FERC set were unfair or improper. The plaintiffs argued that an exception to the “filed rate” doctrine applied because: (1) FERC rejected the rates/prices resulting form JPM-V’s alleged market manipulation when it ordered disgorgement of profits and imposed civil penalties on the defendants; and (2) FERC’s jurisdiction was not limited to new or changed rates and FERC could impose remedies retroactively when the Federal Power Act (FPA) is violated.

The court determined that, in order to award damages to the plaintiff, it would be required to determine rates that the defendants should have charged, an act prohibited by the filed rate doctrine. There was an exception to the filed rate doctrine if the rate had been suspended or set aside by the relevant agency. However, the exception did not apply because FERC did not have authority to retroactively reset rates and any adjustments in rates must be applied prospectively.

The court further concluded that the purposes of the file rate doctrine, to prevent discrimination among ratepayers and uphold a statutory scheme for uniform price regulation, would be served by barring the plaintiffs’ claims and precluding the court from second-guessing FERC’s past filed rates and considering the adequacy of the settlement agreement that FERC had entered into with JPM-V.

FERC’s exclusive jurisdiction. The defendants argued that the plaintiffs’ RICO claim should be dismissed as an impermissible attempt to circumvent FERC’s exclusive authority to enforce the FPA. The defendants contended that: (1) the plaintiffs, in alleging RICO violations, relied on the statutory provisions of the FPA; (2) the statutory provisions cited by the plaintiffs mandate that FERC has exclusive jurisdiction to regulate the wholesale electricity markets and to enforce the FPA’s requirements; and (3) the plaintiff’s allegations of FPA violations and “mail and wire fraud” relate to the same course of conduct by the defendant, which falls squarely within FERC’s statutory authority.

The plaintiffs’ argument that they did not seek to enforce the FPA but, rather, bring a RICO claim and the defendants’ actions in deceiving CAISO and market participants to obtain higher prices for electricity constituted a RICO violation was rejected. The court found that the plaintiffs’ RICO claim was wholly dependent on the alleged violation of specific provisions of the FPA and, therefore, could not form the basis of a RICO claim.

The case is No. 3:15-cv-00530-WQH-BGS.

Attorneys: Attorneys: Joseph J. Siprut (Siprut PC) for Catherine Woolsey. James E. Brandt (Latham & Watkins LLP) for J.P. Morgan Ventures Energy Corp. and JPMorgan Chase & Co.

Companies: J.P. Morgan Ventures Energy Corp.; JPMorgan Chase & Co.

Cases: RICO CaliforniaNews