Antitrust - Ninth Circuit Determines that “Filed Rate Doctrine” Does Not Entirely Bar Antitrust Damages Claims for Natural Gas Rates
In E. & J. Gallo Winery v. EnCana Corp., No. 05-17352, 2007 U.S. App. LEXIS 22332 (9th Cir. Sept. 19, 2007), the Ninth Circuit unanimously upheld an Eastern District of California decision denying summary judgment to EnCana
Corp. (“EnCana”) against E. & J. Gallo Winery (“Gallo”). EnCana had argued that the filed rate doctrine and federal preemption barred Gallo’s claims of EnCana’s violations of state and
federal antitrust laws. The Ninth Circuit found that the filed rate doctrine bars federal antitrust claims in the natural gas arena because the Federal Energy and Regulatory Commission (“FERC”) exercises its statutory
authority to approve natural gas rates. But the Court concluded that Gallo’s claim could go forward because some of the various indices pricing natural gas were not comprised of FERC-authorized rates, and
thus were subject to antitrust scrutiny.
Background
Gallo is a wine producer and distributor based in California that uses natural gas for its winery and gas plant. Gallo purchases its natural gas from a California border market from EnCana, an energy trader. The contract between
Gallo and EnCana did not specify a purchase price for natural gas. Instead, the parties pegged the price to indices published in two natural gas trade publications, Natural Gas Intelligence (“NGI”) and Gas Daily.
A main component of the Court’s decision is rooted in the calculation of the NGI and Gas Daily indices. Beginning in the summer of 2000, natural gas prices at the California border markets were subject to “widespread
manipulation by energy traders that dramatically raised the price of natural gas.” Of the various transactions that were reported in the indices, some were FERC-regulated natural gas transactions and others were not. FERC
investigated the operation of the various indices and concluded that much of the price reporting that went into establishing each index was haphazard, inaccurate and – in some cases – fabricated. Because Gallo paid
EnCana for natural gas at rates pegged to the indices, Gallo claimed damages for artificially inflated prices. Gallo stated that their damages are the difference in price between a hypothetical fair index price and the actual inflated
index price.
In the district court, EnCana moved for summary judgment on Gallo’s federal antitrust claims due to the filed rate doctrine and federal preemption. The filed rate doctrine basically holds that where a federal government agency,
such as FERC, has authority over wholesale rates over a commodity, those rates are presumed to be “fair and reasonable,” and thus antitrust damage claims brought by purchasers relying on those rates can be barred.
The district court denied EnCana’s motion, holding that Gallo could prove its damages without requiring the court “to examine the fairness of a rate or tariff that has been filed by FERC.” E & J. Gallo Winery,
2005 LEXIS U.S. Dist. LEXIS 24240 at *65. However, the district court certified its order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b) because of questions regarding the applicability of the filed rate doctrine and
stayed further litigation pending the Ninth Circuit’s determination. The Ninth Circuit granted EnCana’s petition for interlocutory review.
Discussion
In affirming the district court’s decision, the Ninth Circuit undertook significant analysis of several aspects of the filed rate doctrine, the natural gas market, the components of the price indices and Gallo’s claims.
The filed rate doctrine first was applied to federally set rates in Keogh v. Chicago & N.R. Co., 260 U.S. 156 (1922), and it was affirmed sixty-two years later in Square D Co. v. Niagara Frontier Tariff Bureau, Inc.,
476 U.S. 409 (1986). In Square D, the Supreme Court held that the definition of “injury” was precluded under § 15 of the Sherman Act for lawful rates approved by a federal agency.
In Gallo,the Ninth Circuit applied the logic of those cases and held that the Natural Gas Act (“NGA”), which provides the framework for FERC’s federal regulation of natural gas, is subject to the filed
rate doctrine. The Court then analyzed whether market-based rates (as opposed to rates filed with FERC) are FERC-authorized rates. It noted that Congress and FERC had effected a “substantial deregulation” of the natural
gas market from the mid-1990’s to the present. The Court then analogized the natural gas market to the electricity market, in which FERC has approved of market rates as opposed to filed rates. It then concluded that, because
of the similarity between the electricity and gas markets, FERC implemented market-based rates for natural gas as within FERC’s rate regulatory jurisdiction.
Thus, the Court concluded, a challenge to market-based natural gas rates under FERC’s jurisdiction are barred by the filed rate doctrine. Because the rates authorized by FERC are presumed to be “fair and reasonable,”
those rates cannot be the basis for a federal antitrust or state damages action.
However, the NGI and Gas Daily indices included transactions that are both within FERC’s jurisdiction as well as transactions that were outside FERC’s jurisdiction. The Court noted that there was evidence (viewed
in a light most favorable to Gallo) that some index pricing inputs were misreported or completely fabricated. The Court stated that “[m]isreported rates and rates reported for fictitious transactions are not FERC-approved
rates, and barring claims that such fictitious transactions damaged purchases in the natural gas market would not further the purpose of the filed rate doctrine.” The Court also noted that at least some of the transactions
within the wholesale market were not subject to FERC’s jurisdiction and, because of the haphazard nature of reporting, no distinction was made between these rates and FERC-approved rates.
Thus, the Ninth Circuit concluded that, to the extent that the indices were comprised of rates that were not FERC-authorized, the filed rate doctrine does not bar Gallo’s antitrust claims on those grounds. However, Gallo is
not permitted to challenge FERC-authorized rates that are incorporated into the indices.
Conclusion
The Ninth Circuit’s decision raises an interesting exception to the filed rate doctrine. Although the decision reinforces that a federal agency’s regulated rate for energy – even one set by market prices – is presumed to be “fair and reasonable” and thus subject to the file rate doctrine, it also carves out an exception for those rates that are fraudulent, misreported or fabricated. Those rates, as well as those from other non-fraudulent non-FERC-regulated transactions, are not protected under the filed rate doctrine. This opens the possibility for more challenges to index pricing where market manipulation is involved.