[Federal Register Volume 75, Number 138 (Tuesday, July 20, 2010)]
[Notices]
[Pages 42134-42164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16321]
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DEPARTMENT OF JUSTICE
Antitrust Division
United States v. Keyspan Corporation; Public Comments and
Response on Proposed Final Judgment
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States hereby publishes below the comments
received on the proposed Final Judgment in United States v. Keyspan
Corporation. Civil Action No. 1:10-CV-01415-WHP, which were filed in
the United States District Court for the Southern District of New York
on June 11, 2010, together with the response of the United States to
the comments.
Copies of the comments and the response are available for
inspection at the Department of Justice Antitrust Division, 450 Fifth
Street, NW., Suite 1010, Washington, DC 20530 (telephone: 202-514-
2481), on the Department of Justice's Web site at http://www.justice.gov/atr, and at the Office of the Clerk of the United
States District Court for the Southern District of New York. Copies of
any of these materials may be obtained upon request and payment of a
copying fee.
Patricia A. Brink,
Deputy Director of Operations.
In the United States District Court for the Southern District of New
York
United States of America, Plaintiff, v. Keyspan Corporation,
Defendant.
Civil Action No.: 1:10-cv-01415-WHP
Hon. William H. Pauley III
Plaintiff United States's Response to Public Comments
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16(b)-(h) (``Tunney Act''), the United States
hereby responds to the public comments received regarding the proposed
Final Judgment in this case. After careful consideration, the United
States continues to believe that the relief sought in the proposed
Final Judgment will provide an effective and appropriate remedy for the
antitrust violation alleged in the Complaint. The United States will
move the Court for entry of the proposed Final Judgment after the
public comments and this Response have been published in the Federal
Register, pursuant to 15 U.S.C. 16(d).\1\
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\1\ The United States and KeySpan will submit an amended
proposed Final Judgment that takes account of the retention of
jurisdiction concerns expressed by the Court with respect to Section
IV of the proposed Final Judgment.
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The United States brought this lawsuit against Defendant KeySpan
Corporation (``KeySpan'')to remedy a violation of Section 1 of the
Sherman Act, 15 U.S.C. 1. On January 18, 2006, KeySpan entered into an
agreement in the form of a financial derivative (the ``KeySpan Swap'')
that essentially transferred to KeySpan, the largest supplier of
electricity generating capacity in the New York City market, the
capacity of its largest competitor. The KeySpan Swap ensured that
KeySpan would withhold substantial output from the capacity market, a
market that was created to ensure the supply of sufficient generation
capacity for the millions of New York City consumers of electricity.
The likely effect of this agreement was to increase capacity prices for
the retail electricity suppliers that must purchase capacity and, in
turn, to increase the prices consumers pay for electricity.
Simultaneously with the filing of the Complaint, the United States
filed a proposed Final Judgment (to be modified pursuant to the Court's
direction, see, supra, n. 1) and a
[[Page 42135]]
Stipulation signed by the United States and KeySpan consenting to the
entry of the proposed Final Judgment after compliance with the
requirements of the Tunney Act. Pursuant to those requirements, the
United States filed a Competitive Impact Statement (``CIS'') in this
Court on February 23, 2010; published the proposed Final Judgment and
CIS in the Federal Register on March 4, 2010, see United States v.
KeySpan corporation, 75 FR 9946-01, 2010 WL 723203; and published
summaries of the terms of the proposed Final Judgment and CIS, together
with directions for the submission of written comments relating to the
proposed Final Judgment, in The Washington Post for seven days
beginning on March 10, 2010 and ending on March 16, 2010 and in The New
York Post beginning on March 11, 2010 and ending on March 17, 2010. The
60-day period for public comments ended on May 16, 2010. The United
States received seven comments, as described below, which are attached
hereto.\2\
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\2\ To respond to the concerns raised by the submitted comments,
this Response provides greater detail beyond the allegations in the
Complaint.
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1. Background
A. The United States's Investigation of the Transaction
On November 21, 2006, the United States opened its investigation
into the transaction at issue and its impact on the market. During the
course of its extensive investigation, the United States received and
considered over a million pages of documents and analyzed significant
amounts of complex data, including bidding data from market
participants. The United States issued Civil Investigative Demands to
market participants and other entities with relevant information,
interviewed market participants and the market's regulators, and
conducted detailed economic analyses.
The United States considered the potential competitive effects of
the KeySpan Swap in light of all relevant circumstances and concluded,
as the Complaint alleges, that the KeySpan Swap was an anticompetitive
agreement in violation of Section 1 of the Sherman Act.
B. The New York City installed Capacity Market
In the state of New York, sellers of retail electricity must
purchase a product from generators known as ``capacity:'' \3\
Electricity retailers are required to purchase capacity in an amount
equal to their expected peak energy demand plus a share of reserve
capacity. These payments for capacity assure that retail electric
companies do not use more electricity than the system can deliver and
encourage electric generating companies to build new facilities as
needed. Because transmission constraints limit the amount of energy
that can be imported into the New York City area from the power grid,
the New York Independent System Operator (``NYISO'') requires retail
providers of electricity to consumers in New York City to purchase 80%
of their capacity from generators in that region. The New York City
Installed Capacity (``NYC Capacity'') Market constitutes a relevant
geographic and product market.
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\3\ Except where noted otherwise, this description pertains to
the market conditions that existed from May 2003 through March 2008.
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The price for installed capacity in New York City has been set
through auctions administered by the NYISO. The NYISO organizes the
auctions to serve two distinct seasonal periods, summer (May though
October) and winter (November through April). For each season, the
NYISO conducts seasonal, monthly, and spot auctions in which capacity
for New York City can be acquired for all or some of the seasonal
period. Capacity suppliers offer price and quantity bids in each of
these three auctions. Suppliers may bid all of their capacity at a
single price or in separate increments of capacity at different prices.
Supplier bids are ``stacked'' from lowest-priced to highest. The stack
is then compared to the amount of demand. The offering price of the
last bid in the ``stack'' needed to meet requisite demand establishes
the market price for all capacity sold into that auction. Any capacity
bid at higher than this price is unsold, as is any capacity bid at what
becomes the market price not needed to meet demand.
The NYC Capacity Market was highly concentrated during the relevant
period, with three firms--KeySpan, Astoria, and NRG Energy, Inc.--
controlling a substantial portion of the market's generating capacity.
These three firms were designated as ``pivotal'' suppliers by the
Federal Energy Regulatory Commission (``FERC''), meaning that at least
some of each of these three suppliers' output was required to satisfy
demand. The three firms were subject to bid and price caps--KeySpan's
being the highest for nearly all of their generating capacity in New
York City and were not allowed to sell their capacity outside of the
NYISO auction process.
C. The Anticompetitive Agreement
As discussed more fully in the CIS, in the tight market conditions
that existed from June 2003 through December 2005, almost all capacity
in the New York City market was needed to meet demand, and KeySpan
could sell nearly all of its capacity into the market even while
bidding at its cap. KeySpan did so, and the market cleared at the price
established by the cap, with only a small fraction of KeySpan's
capacity remaining unsold.
Those tight conditions in the NYC Capacity Market were expected to
end in 2006 due to the entry of approximately 1,000MW of new generating
capacity, with excess supply of capacity forecast to last into 2009.
The increased supply meant KeySpan could no longer be confident that
``bid the cap'' would remain its most profitable strategy during the
2006-2009 period. While bidding the cap would keep market prices high,
doing so also would entail withholding sales of substantially more
capacity. The additional withholding could reduce KeySpan's revenues by
as much as $90 million a year. Alternatively, KeySpan could compete
with its rivals for sales by bidding more capacity at lower prices,
which could potentially produce much higher returns for KeySpan than
bidding the cap, but carried the risk that competitors would undercut
its price and take sales away.
KeySpan contemplated acquiring Astoria's generating assets, which
were for sale. The acquisition would have solved the problem that new
entry posed for KeySpan's revenue stream, as Astoria's capacity would
have provided KeySpan with sufficient additional revenues to make
continuing to bid its cap its best strategy. KeySpan, however, soon
concluded that the market power issues raised by an acquisition of its
largest competitor would imperil the contemplated transaction. Instead
of purchasing the Astoria assets outright, KeySpan devised a plan to
acquire a financial interest in Astoria's capacity. KeySpan would pay
Astoria's owner a fixed revenue stream in return for the revenues
generated from Astoria's capacity sales in the auctions. Rather than
directly approach its competitor, KeySpan turned to a financial
services company to act as the counterparty to the derivative agreement
the KeySpan Swap recognizing that the financial services company would,
and in fact did, enter an offsetting agreement with Astoria (the
``Astoria Hedge'').\4\
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\4\ Although KeySpan knew about Astoria's role in the
transaction, the financial services company did not inform Astoria
about KeySpan. It appears that Astoria believed that the financial
services company had found a counter-party other than a competing
supplier of capacity to offset the financial services company's
market risk from the Astoria Hedge.
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[[Page 42136]]
The KeySpan Swap remained in effect from May 1, 2006 through April
30, 2008. During that two year period, KeySpan earned approximately $49
million in net revenues under the Swap.\5\
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\5\ The New York Public Service Commission (``NYPSC'') estimated
KeySpan's net revenues under the KeySpan Swap at $67.8 million for
the period May 2006 through March 2008. See NYPSC Comment, Paynter
Affidavit at ] 15. The estimate, however, fails to reflect the fact
that the terms of the KeySpan Swap imposed a ceiling on the spot
auction clearing price used to determine revenues under the Swap.
This ceiling is based on the average of the bid caps for KeySpan,
Astoria and NRG. Using this ceiling for the appropriate months,
KeySpan's net Swap revenues were approximately $61 .2 million for
the May 2006 through March 2008 period. The NYPSC estimate also
fails to include the last month of the Swap (April 2008) in which
KeySpan had to pay out approximately $12.2 million.
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D. The Anticompetitive Effect of the KeySpan Swap
The clear tendency of the KeySpan Swap was to alter KeySpan's
bidding behavior in the NYC Capacity Market auctions. The KeySpan Swap
effectively eliminated KeySpan's incentive to compete for sales by
lowering price. As a result, KeySpan bid its cap, causing capacity
market prices to clear at a level higher than likely would have
occurred absent the agreement.
1. Likely Bidding Scenarios Absent the KeySpan Swap
Absent the Swap, KeySpan likely would have chosen from a range of
potentially profitable competitive strategies in response to the entry
of new capacity and, had it done so, the price of capacity likely would
have declined. Although one cannot confidently predict the price level
that would have occurred but for the Swap, it is likely that oligopoly
pricing in this highly concentrated market would have been the outcome;
i.e., prices would have fallen below the cap levels but would have
remained above levels that would have prevailed under perfect
competition.\6\
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\6\ The New York City Economic Development Corporation
(``NYCEDC'') comments cite an affidavit submitted in a FERC
proceeding by the NYISO market monitor, David Patton, for the
proposition that, had all capacity been sold, prices would have
cleared under $6/kW month, which is less than half the level of the
pivotal suppliers' caps (which were above $ 121kw month). NYCEDC
Comments at 9; see also AARP Comments at 11. Dr. Patton described
the effect all suppliers would have had on the auction if bidding as
``price-takers'' (i.e., a ``perfectly competitive'' outcome), but he
does not opine that suppliers actually would have bid in this manner
absent the Swap.
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In considering how to bid when the new capacity entered the market,
the key suppliers KeySpan, Astoria and NRG (each of which would have
remained pivotal) would have sought to mitigate the risk of lost sales
that could occur if they bid too high and their capacity was not taken
(i.e., volume risk) and the risk of low price from competitive bidding
(i.e., price risk). To protect against these risks, these suppliers
likely would have bid increments of capacity at different price levels
(``tiered bids'') rather than bid all of their capacity at a single
price. The strategic tiering of bids at relatively high prices would
have made sense for these suppliers because it would have preserved the
possibility of obtaining the rewards of discounting (selling a greater
volume of capacity) while simultaneously mitigating the price risk of
discounting.
The United States believes that, absent the KeySpan Swap, KeySpan
and the other pivotal suppliers would have engaged in tiered bidding
upon the entry of new generation capacity in 2006.\7\ In other words,
in the but-for world, tiered bidding strategies at prices lower than
the cap would have been compelling for KeySpan and the other pivotal
suppliers because they offered significant upside, and these suppliers
would have been able to structure their tiered bids to limit their
downside risk relative to bidding their caps. As a result, market
prices likely would have cleared at a level below the cap but above
competitive levels.\8\ This view is consistent with the pattern
observed during prior periods of excess capacity, when prices did not
fall to perfectly competitive levels.
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\7\ If all the pivotal suppliers used tiered bidding, it is more
likely, at any given clearing price, that withholding would be
shared (i.e., that each would lose some sales) rather than one
supplier taking on the high cost of being the sole withholder of
capacity and losing the greatest share of sales.
\8\ NYCEDC claims that the effect of the Swap was to ``more than
doubl[e] what would otherwise be the market clearing price'' and
that, absent the Swap, prices would have fallen to competitive
levels. NYCEDC Comment at 9-10. In an attempt to show that prices
but for the Swap would have fallen dramatically to levels consistent
with perfect competition, NYCEDC compares prices for specific
auction periods during certain years the Swap was in effect to those
same auction periods after the Swap's expiration in April 2008. See
Id. (e.g., $12.34/kW-month price in May 2007 compared to $6.52/kW-
month in May 2008). These comparisons, however, are flawed because
FERC changed the rules for the auction in May 2008, requiring, among
other things, that the pivotal suppliers bid zero, as would a
``price taker,'' thereby causing prices to fall to the competitive
floor. Given this significant rule change, these comparisons cannot
serve as a meaningful test for how the auctions would have cleared
had KeySpan, Astoria, and NRG been free, as they had been in the
past, to engage in strategic, tiered bidding strategies.
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2. With the KeySpan Swap in Place, KeySpan Bid Its Cap
With the Swap, capacity prices remained high. By providing KeySpan
with revenues from Astoria's capacity in addition to KeySpan's own
revenues, the Swap made bidding the cap KeySpan's most profitable
strategy regardless of its rivals' bids. Following entry of the
substantial amount of new capacity into the market in 2006, KeySpan
continued to bid its cap even though a significant portion of its
capacity went unsold. In contrast to the historic pattern following
significant supply increases, the market price of capacity did not
decline.
E. The Proposed Remedy
The proposed Final Judgment requires KeySpan to disgorge profits
gained as a result of its unlawful agreement in restraint of trade.
KeySpan is to surrender $12 million to the Treasury of the United
States.
II. Summary Of Comments
A. The Pennsylvania Public Utility Commission (PaPUC)
The PaPUC stated it was deeply concerned with the ``existence of a
sophisticated multi year effort by the defendant to evade competition''
and the impact of the defendant's conduct on electricity markets and
electricity prices. The PaPUC expressed its appreciation to the
Department of Justice for bringing this enforcement action, stating
that it does not oppose the proposed Final Judgment and explaining that
this enforcement action demonstrates that conduct in electricity
markets that is ``inimical to competition * * * may result in
prosecution and serious consequences under the antitrust laws.'' The
PaPUC concluded by noting that ``the PaPUC and other public and private
entities with a critical stake in the success of wholesale electric
generation competition have benefitted from studying the facts of this
case and will be better able to detect and deter similar schemes in the
future.''
B. New York State Consumer Protection Board (NYSCPB)
The NYSCPB commended the Department of Justice for pursuing the
improper collusive behavior at issue. NYSCPB expressed two concerns
with the settlement. First, it argued that the United States has a
burden to provide sufficient evidence for the court to determine the
total harm from the wrongful behavior, explain how the amount to be
disgorged will deter future
[[Page 42137]]
wrongdoing, and identify the responsible officers. Second, it argued
that the proposed Final Judgment is not in the public interest because
the disgorgement proceeds are remitted to the Treasury rather than to
the harmed electricity customers and concluded that the proposed Final
Judgment should contain a mechanism to distribute the proceeds to
customers or establish an energy efficiency program.
C. New York City Economic Development Corporation (NYCEDC)
The NYCEDC was ``highly appreciative'' of the enforcement effort
and commended using antitrust remedies to address anticompetitive
practices in the New York City energy sector. The NYCEDC criticized the
$12 million disgorgement as inadequate ``given the scale of unjust
enrichment to KeySpan.'' It asserted that there are ``professional
estimates'' and other evidence of the harm that the Court should use to
review the adequacy of the remedy, including a KeySpan statement of the
amount it made under the Swap and various independent estimates of
capacity prices if KeySpan had not entered the Swap.
D. New York State Public Service Commission (NYPSC)
NYPSC stated that the Department of Justice ``is to be commended
for its faithful enforcement of the antitrust laws to protect the
integrity of the electricity markets in New York City.'' It argued,
however, that the Court has no basis for evaluating whether the
proposed disgorgement will prevent KeySpan's unjust enrichment or
whether it is sufficient to deter anticompetitive conduct in the
future. It recommended that the Court order additional evidence to be
produced and asserted that ``anything less than full disgorgement''
would be inadequate for deterrence.
NYISC also asserted that because ``ratepayers may have no
recourse'' due to the filed rate doctrine, the remedy in the United
States' case should reflect the ``standard measure of damages,'' which
is the amount of the ``overcharge'' in the capacity market. It
concluded that payment to the U.S. Treasury instead of to consumers
``would be a manifestly unfair result'' and that the disgorged proceeds
should either be credited to ratepayers or used to establish an energy
efficiency program.
E. Consolidated Edison (Con Ed)
Con Ed argued that the settlement is not in the public interest
because it fails to provide payment to electricity consumers despite
the United States' recognition that ``private individuals could not
bring an antitrust suit here due to the barrier of the filed rate
doctrine.'' It argued that the filed rate doctrine should have no
application to the equitable distribution of disgorged funds to
consumers as a remedy in this case.
F. AARP
AARP asserted that the settlement is not in the public interest
because of the ``lack of any monetary remedy or other discernible
benefit for injured consumers, and the absence of a credible
deterrent.'' It claimed that there is an inadequate factual foundation
to determine the appropriateness of the amount of the remedy and its
deterrent effect. It further noted that the decree contains no
admission of guilt by KeySpan and no ``public shaming.''
AARP requested that the proposed Final Judgment be amended to
require an acknowledgment of wrongdoing, identification of total
``inflated prices'' for capacity, identification of the derivative
contracts at issue, and disgorgement of all profits. In the
alternative, AARP argued that the record should be augmented to show
the total profit ``achieved by all sellers in the NYISO capacity
market,'' an estimate of the ``total damage and economic harm'' to
consumers in the entire state of New York, the revenues KeySpan
received under the Swap, and the rationale for accepting less than full
disgorgement and for not providing any remedy to benefit injured
customers.
G. Nelson M. Stewart
Mr. Stewart urged the United States not to ``accept a plea'' from
KeySpan. He alleged that KeySpan and related entities committed fraud,
perjury, and forgery with respect to construction contracts wholly
unrelated to the capacity market or the Swap.
III. Standards Governing the Court's Public Interest Determination
Under the Tunney Act
As discussed in detail in the Competitive Impact Statement, the
Court, in making the public interest determination called for by the
Tunney Act, is required to consider certain factors relating to the
competitive impact of the judgment and whether it adequately remedies
the harm alleged in the complaint. See 15 U.S.C. 16(e)(1)(A) & (B)
(listing factors to be considered).
This public interest inquiry is necessarily a limited one, as the
United States is entitled to deference in crafting its antitrust
settlements, especially with respect to the scope of its complaint and
the adequacy of its remedy. See generally United States v. Microsoft
Corp., 56 F.3d 1448, 1458-62 (D.C. Cir. 1995); United States v. SBC
Commc'ns, 489 F. Supp. 2d 1, 12-17 (D.D.C. 2007). Although the Tunney
Act was designed to prevent ``judicial rubberstamping'' of proposed
Unites States consent decrees, the ``Court's function is not to
determine whether the proposed [d]ecree results in the balance of
rights and liabilities that is the one that will best serve society,
but only to ensure that the resulting settlement is `within the reaches
of the public interest.''' United States v. Alex Brown & Sons, 963 F.
Supp. 235, 238 (S.D.N.Y. 1997) (quoting Microsoft, 56 F.3d at 1460)
(emphasis in original), aff'd sub nom, United States v. Bleznak, 153
F.3d 16 (2d Cir. 1998).
With respect to the scope of the complaint, the Tunney Act review
does not provide for an examination of possible competitive harms the
United States did not allege. See, e.g., Microsoft, 56 F.3d at 1459
(holding that the district judge may not reach beyond the complaint to
evaluate claims that the government did not make).
With respect to the sufficiency of the proposed remedy, a district
court should accord due respect to the United States's views of the
nature of the case, its perception of the market structure, and its
predictions as to the effect of proposed remedies. See, e.g., SBC, 489
F. Supp. 2d at 17 (United States entitled to deference as to
predictions about the efficacy of its remedies). Under this standard,
the United States need not show that a settlement will perfectly remedy
the alleged antitrust harm; rather, it need only provide a factual
basis for concluding that the settlement is a reasonably adequate
remedy for the alleged harm. Id.\9\
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\9\ Tunney Act review is not so that the court can engage in an
``unrestricted evaluation of what relief would best serve the
public,'' United States v. BNS, Inc., 858 F.2d 456, 462 (9th Cir.
1988) (citing United States v. Bechtel Corp., 648 F.2d 660, 666 (9th
Cir. 1981)), or determine the relief ``that will best serve
society,'' Bechtel, 648 F.2d at 666, but simply for the court to
determine whether the proposed decree is within the reaches of the
public interest ``even if it falls short of the remedy the court
would impose on its own.'' United States v. AT&TCo., 552 F. Supp.
131, 151 (D.D.C. 1982).
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IV. Response to the New York Commentors and AARP
Disgorgement serves the public interest by depriving KeySpan of
ill-gotten gains, thereby deterring KeySpan and others from engaging in
similar anticompetitive conduct in the future. No other remedy would be
as effective to fulfill the remedial goals of the Sherman Act to
``prevent and restrain''
[[Page 42138]]
antitrust violations.\10\ Given that the KeySpan Swap has now expired
and KeySpan no longer owns the generating assets associated with the
anticompetitive conduct, injunctive relief against KeySpan would not be
meaningful.\11\
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\10\ U.S.C. 4 (investing district courts with equitable
jurisdiction to ``prevent and restrain'' violations of the antitrust
laws).
\11\ The disgorgement here seeks to prevent anticompetitive
conduct and, in this way, is similar in focus to the traditional
antitrust remedy of injunctive relief.
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The comments of the New York Public Service Commission, the New
York State Consumer Protection Board, the New York City Economic
Development Corporation, and Consolidated Edison Company (collectively
the ``New York Commentors'') and AARP have two central objections: (1)
That the $12 million dollar disgorgement is inadequate to serve its
remedial purpose, and (2) that the disgorged proceeds, rather than
being remitted to the Treasury, should directly or indirectly benefit
electricity consumers who paid higher electricity bills or be used to
fund programs that benefit electricity consumers. The United States has
carefully considered these objections but finds that they do not
warrant modification of the proposed Final Judgment.
A. The Proposed Remedy Is Appropriate and Deters Anticompetitive
Conduct
The New York Commentors argue that disgorgement of $12 million is
an inadequate remedy that will not serve as an effective deterrent,
especially when compared to KeySpan's approximately $49 million net
revenues earned under the Swap and the increased prices paid by
electricity consumers. Such concerns are misplaced.
Disgorgement in and of itself constitutes significant and
meaningful relief. This is the first time that the United States has
sought disgorgement under the Sherman Act. Parties contemplating
anticompetitive agreements similar to the KeySpan Swap now will have to
take into account possible disgorgement, thereby directly affecting
their incentives to engage in illegal behavior. Disgorgement is
particularly appropriate here as the anticompetitive conduct at issue
may not be subject to other remedies. For example, absent disgorgement,
KeySpan likely would retain all the benefits of its anticompetitive
conduct because the filed rate doctrine creates significant obstacles
to the collection of damages.\12\
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\12\ See Keogh v. Chicago & NW. Ry. Co., 260 U.S. 156 (1922);
see also, infra, Sec. IV.B.
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Had the case proceeded to trial, the United States would have
sought disgorgement of the approximately $49 million in net revenues
that KeySpan received under the Swap,\13\ contending that these net
revenues reflected the value that KeySpan received from trading the
uncertainty of competing for the certainty of the bid-the-cap strategy.
The United States recognizes that it has not proved its case at trial
and that ``a court considering a proposed settlement does not have
actual findings that the defendant { ] engaged in illegal practices, as
would exist after a trial.'' \14\ The $12 million disgorgement amount
is the product of settlement and accounts for litigation risk and
costs. As courts have stressed, it is altogether appropriate to
consider litigation risk and the context of settlement when evaluating
whether a proposed remedy is in the public interest.\15\
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\13\ The NYPSC suggests that the disgorgement calculation should
also include the ``profits gained by KeySpan through the unlawfully
higher price of capacity.'' NYPSC Comments at 14 & n.5. The NYPSC
appears to be contending that, for example, if KeySpan sold 1600 MW
at its cap of approximately $12/kW-month under its anticompetitive
Swap strategy but would have sold 2400 MW at a lower price (assume
$8/kW-month), then KeySpan gained an additional profit of $6.4
million (1600 MW x $4/kW-month). This contention is misplaced, as it
fails to account for revenues from the additional volume that
KeySpan would have sold at the lower clearing price and thereby
ignores the net auction revenues that KeySpan would have earned in
the but-for world.
\14\ SBC, 489 F. Supp. 2d at 15 (citing Microsoft, 56 F.3d at
1461).
\15\ ``It is therefore inappropriate for the judge to measure
the remedies in the decree as if they were fashioned after trial.
Remedies which appear less than vigorous may well reflect an
underlying weakness in the government's case, and for the district
judge to assume that the allegations have been formally made out is
quite unwarranted.'' Microsoft, 56 F.3d at 1461; see also SBC, 489
F. Supp. 2d at 15 (``[R]oom must be made for the government to grant
concessions in the negotiation process for settlements.'')
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Commentors nevertheless assert that anything less than full
disgorgement is inadequate as it would not deter the conduct at issue.
This position ignores the fact that the loss to KeySpan of $12 million
in Swap revenues would have had a deterrent effect on KeySpan's
incentive to enter into the Swap. The United States contends that the
Swap removed any incentive for KeySpan to bid competitively, locking it
into bidding its cap instead of evaluating competitive choices, each of
which could have resulted in different market clearing prices for
capacity.\16\ The violation was based on the anticompetitive effect of
the agreement on KeySpan's incentives to compete, not on a specific
lower price that would have resulted absent the Swap.\17\ In evaluating
whether to pursue an anticompetitive Swap, KeySpan would have engaged
in a cost-benefit analysis weighing the returns from the
anticompetitive strategy against the returns of various potential
competitive bidding strategies. While we cannot quantify with certainty
KeySpan's bid levels or the outcome of the market clearing price that
would have resulted but for the Swap, depriving KeySpan of $12 million
in Swap revenues would have reduced the value to KeySpan of engaging in
the anticompetitive Swap strategy, thereby shifting the results of
KeySpan's cost benefit analysis toward competitive strategies rather
than entering into the Swap.\18\
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\16\ See Complaint, ]] 4-5.
\17\ See CIS at 6-7.
\18\ KeySpan would have had two revenue streams to consider when
deciding upon a bidding strategy: revenues directly from sales of
capacity in the auctions and revenues from the Swap. It is likely
that KeySpan absent the Swap would have earned more in auction
revenues from tiered bidding strategies than from bidding its cap.
Indeed, if this were not the case, the Swap would not have altered
how KeySpan bid. KeySpan earned more total revenues by bidding its
cap when accounting for earnings it receives with the Swap in
effect. The disgorgement remedy here serves to reduce the additional
earnings the Swap would have provided KeySpan.
---------------------------------------------------------------------------
Moreover, it is improper to consider the adequacy of the
disgorgement amount by comparing $12 million to some measure of
overcharges to consumers in the electricity market. Disgorgement is not
aimed at making consumers whole. As this Court has previously
recognized, the purpose of disgorgement is to deprive the violator of
unjust enrichment rather than to compensate victims of the violation.
\19\ The extent of market harm is not relevant, as once a violation has
been established, a district court ``possesses the equitable power to
grant disgorgement without inquiring whether, or to what extent,
identifiable private parties have been damaged by [the
violation].''\20\ Such an inquiry would require the Court to assess the
price of capacity that would have prevailed absent the Swap,\21\ a
[[Page 42139]]
problematic exercise given the uncertainty of determining market
outcomes absent the Swap.\22\
---------------------------------------------------------------------------
\19\ SEC v. Bear Stearns & Co., Inc., 626 F. Supp. 2d 402, 406
(S.D.N.Y. 2009).
\20\ SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985). See also
SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (``Whether or not
[any victims] may be entitled to money damages is immaterial [to
disgorgement].'')
\21\ Such an assessment is disfavored under the filed rate
doctrine in cases where private claimants seek damages for
overcharges. See, e.g. Arkansas Louisiana Gas Company v. Hall, 453
U.S. 571, 580-81 (1981) (``In the case before us, the Louisiana
Supreme Court's award of damages to respondents was necessarily
supported by an assumption that the [different] rate respondents
might have filed with the [regulator] was reasonable. Otherwise,
there would have been no basis for that court's conclusion * * *
that the [regulator] would have approved the rate. But under the
filed rate doctrine, the [regulator] alone is empowered to make that
judgment, and until it has done so, no rate other than the one on
file may be charged.'')
\22\ Given the difficulty of definitively estimating the harm to
the market and its irrelevance to the questions relating to the
adequacy of the disgorgement remedy, the United States has no
obligation, as AARP asserts, to provide estimates of total economic
harm and profits received by all market participants resulting from
the alleged violation.
---------------------------------------------------------------------------
B. Disgorgement Proceeds Should Be Remitted to the U.S. Treasury
Several commentors argued that KeySpan's $12 million disgorgement
payment should be made to entities other than the U.S. Treasury in
order to benefit the electricity customers in New York City who paid
higher prices as a result of KeySpan's conduct. The United States
shares the commentors' concern for the New York City ratepayers and,
indeed, brought this case and sought disgorgement in order to deter
future anticompetitive agreements like the KeySpan Swap. The United
States has carefully considered the suggested alternative uses for the
disgorgement proceeds but has determined that payment to the U.S.
Treasury is the most appropriate result in this circumstance. The
alternative distribution plans proposed by commentors seek, in effect,
to restore funds to ratepayers. The United States, however,
specifically chose to seek disgorgement, rather than restitution, as a
remedy for this violation. As discussed in the CIS, disgorgement is
particularly appropriate on the facts of this case to fulfill the
remedial goals of the Sherman Act.\23\ Disgorgement also provides
finality, certainty, avoidance of transaction costs, and potential to
do the most good for the most people.\24\
---------------------------------------------------------------------------
\23\ CIS at 9-10.
\24\ See Bear Stearns, 626 F. Supp. 2d at 419 (directing the
transfer of remaining disgorgement related settlement funds to the
Treasury to be used by the Government for its operations).
---------------------------------------------------------------------------
Legal concerns would arise with a remedy based on restitution that
sought to directly or indirectly reimburse New York City ratepayers.
Such a remedy would raise questions relating to the filed rate
doctrine, which bars remedies (such as damages) that result, in effect,
in payment by customers and receipt by sellers of a rate different from
that on file for the regulated service.\25\ Some of the commentors
recognize the doctrine's potential limitation on their own ability to
seek such reimbursement directly. They do not discuss the fact that
regulators such as the FERC and the NYPSC seeking to offer refunds may
also be constrained by the doctrine and its corollary bar to
retroactive ratemaking.\26\ The mechanisms suggested by the commentors
could be seen as an end run around those well-established doctrines. In
this case, payment to the U.S. Treasury avoids this unnecessary and
thorny issue.
---------------------------------------------------------------------------
\25\ See generally Square D (o. Niagara Frontier, 476 U.S. 409,
423 (1986).
\26\ See, e.g., Ark/a, 453 U.S. at 578 (``Not only do the courts
lack authority to impose a different rate than the one approved by
the Commission, but the Commission itself has no power to alter a
rate retroactively. * * * This rule bars `the Commission's
retroactive substitution of an unreasonably high or low rate with a
just and reasonable rate.' ''(citations omitted)). Con Ed--a
commentor here--directly requested that FERC order refunds of the
higher cost of capacity due to KeySpan's behavior. The FERC declined
to grant them. New York Indep. Sys. Operator, Inc., 122 FERC ]
61,211 (2008) (March 7, 2008 Order).
---------------------------------------------------------------------------
Moreover, the Miscellaneous Receipts Act (``MRA'') states that ``an
official or agent of the Government receiving money for the Government
from any source shall deposit the money in the Treasury as soon as
practicable without deduction for any charge or claim.'' 31 U.S.C.
3302(b). Under this statute, members of the Executive Branch \27\ that
receive money for the United States are to remit such funds directly to
the U.S. Treasury. A purpose of the statute is to protect Congress's
appropriations authority by ensuring that money collected from various
sources cannot be used for programs not authorized by law. The proposed
remedy avoids any issues of compliance with the MRA.\28\
---------------------------------------------------------------------------
\27\ The MRA applies to the Department of Justice as a member of
the Executive Branch. We are not aware of its application to
independent agencies such as the Securities and Exchange Commission.
\28\ In addition to legal concerns, distribution of the
disgorged funds to entities other than the Treasury also would raise
practical concerns. Distribution directly to the numerous individual
electricity consumers would have high administrative costs relative
to the overall disgorgement amount. Distribution to the electricity
companies that purchased capacity from generators for ultimate
refund to consumers could involve monitoring and compliance issues.
And, the funding of an energy efficiency program would also raise
administrative issues (and would be attenuated from the harm alleged
in the Complaint).
---------------------------------------------------------------------------
V. Response to Comments of Nelson M. Stewart
Mr. Stewart's comment alleges fraud, perjury, and forgery committed
by KeySpan and its subsidiary KSI Contracting. The allegations concern
conduct that is wholly unrelated to the capacity market or the KeySpan
Swap and are unrelated to the antitrust violations that the United
States alleges in its Complaint. As noted above, in making its public
interest determination in accordance with the Tunney Act, it would be
``error for the judge to inquire into allegations outside the
complaint.'' Microsoft, 56 F.3d at 1463. These Tunney Act proceedings,
therefore, are not an appropriate venue for the consideration of Mr.
Stewart's claims.
VI. Conclusion
After careful consideration of the public comments, the United
States remains of the view that the proposed Final Judgment provides an
effective and appropriate remedy for the antitrust violation alleged in
the Complaint and that its entry would therefore be in the public
interest. Plaintiffs' chosen remedy in this case deprives KeySpan of
ill-gotten gains, effectively deters the harmful behavior, and
establishes the United States's willingness to seek disgorgement in
appropriate cases. The PaPUC (as well as other commentors) noted that
the action has established an important antitrust enforcement precedent
in regulated energy markets and that, as a result, it and other public
and private entities with a critical stake in the success of wholesale
electric generation competition will be better able to detect and deter
similar schemes in the future.\29\ Based on the factors set forth in
the Tunney Act, entry of the proposed Final Judgment is in the public
interest.
---------------------------------------------------------------------------
\29\ E.g., PaPUC Comments at 3.
---------------------------------------------------------------------------
Pursuant to section 16(d) of the Tunney Act, the United States is
submitting the public comments and this Response to the Federal
Register for publication. This Response is also being provided to each
of the commentors. After the comments and this Response are published
in the Federal Register, the United States will move this Court to
enter the proposed Final Judgment.
Dated: June 11, 2010.
Respectfully submitted,
/s/--------------------------------------------------------------------
Jade Alice Eaton,
[email protected]
Trial Attorney, U.S. Department of Justice, Antitrust Division,
Transportation, Energy & Agriculture Section, 450 Fifth Street, NW.,
Suite 8000, Washington, DC 20004. Telephone: (202) 307-6316.
Facsimile: (202) 307-2784.
Nelson M. Stewart,
PO Box 1833
Quogue, N.Y. 11959
(646) 258 9369
April 10, 2010
Donna N. Kooperstein, Chief, Transportation, Energy and Agriculture
Section, Antitrust Division, 115. Department of Justice, 450 5th St.
NW., Suite 8000, Washington, DC 20530
Re: United States of America, U.S. Department of Justice, Antitrust
Division v. Keyspan Corporation.
[[Page 42140]]
Dear Ms. Kooperstein, In accordance with the details of the
February 22, 2010 press release issued by the United States Department
of Justice I am writing to urge you not to accept the plea from Keyspan
Energy that now awaits approval from the United States District Court.
Keyspan Energy has been the subject of numerous investigations
resulting from questionable conduct over the years. In many instances
the company simply paid a fine and admitted no wrongdoing. Particularly
with large corporations like Keyspan Energy, the profit gained from
this behavior is usually much more substantial than the fines levied.
Consider the golden parachute payments to William Catacasinos and other
executives (a $1.5 million settlement was paid to the NYS Attorney
General's Office) and the sale of $29 Million in stock by Keyspan's
CFO, COO and President prior to the publication of substantial losses
related to the acquisition of Roy Kay, Inc. I would contend that such
penalties fail to alter misconduct and increase the temptation to push
the boundaries of unethical conduct. Where one might expect the
compliance office to guard against such conduct, the compliance office
of Keyspan Energy and its parent company National Grid appears to
ignore these actions and, on at least one occasion, even assisted in an
attempt to retaliate against someone who endeavored to report them.
In 2008 I attempted to follow up on my third effort to notify
Keyspan Energy/National Grid of fraud, perjury, forgery and accounting
fraud committed by employees of Keyspan Energy, its wholly owned
subsidiary 1(51 Contracting (The former Roy Kay, mc) and their
attorneys. These highly unethical and illegal acts stem from two
contract actions filed by my company related to work performed for the
now infamous Roy Kay, Inc./KSI Contracting. On this third attempt I
spoke with Margaret Ireland of the National Grid Compliance Office and
detailed a number of these allegations. I further explained that the
attorney defending this matter, Mark Rosen of McElroy, Mulvaney,
Deutsche and Carpenter, UP, had used illegal and highly unethical
tactics to prevent further discovery of the conduct I alleged. Ms.
Ireland asked me to send her whatever recent documentation I had and
said she would look into the matter. Having received no response I
called again and asked if she would like me to send more documentation.
Ms. Ireland stated she had not had time to look into the documents I
had sent but I should call again at a later time. The document in
Attachment a is the only response I have ever received from National
Grid or Keyspan regarding the information I submitted to Ms. Ireland.
It is the direct result of a message I left for Ms. Ireland with the
National Grid compliance office after several failed attempts to
contact her as she had suggested. Mr. Rosen's email is a continuation
of the threats made in his letter of December 27, 2007 (See page of
Attachment b) in response to my previous attempts to contact the
defendants concerning the conduct of their employees and Mr. Rosen. To
date I have made no less than five attempts to report this conduct to
the compliance offices of Keyspan and National Grid. Mr. Rosen's letter
and email are the only responses I have ever received. A copy of the
documents sent to Ms. Ireland are included as Attachment c.
Mr. Rosen and his clients have good reason to thwart any discovery
related to Roy Kay, Inc/KSI Contracting. In response to our initial
claims to recover monies from work performed for Roy Kay, Inc/KSI
Contracting the defendants produced two forged contracts and purported
them to be genuine. One contract forged the signature of our company's
president, Nelson Stewart, Sr. and the other reduced the amount of the
original contract from $750,000.00 to $250,000.00 and altered the
original date from March 15, 2002 to May 14, 2002 (despite the fact
that the date of the signature page, which is identical on their
contract and the genuine contract, reads March 15, 2002). The
defendants also submitted false, unsubstantiated back charges and
several of the statements made by employees of the defendants have
proved to be untrue. In over seven years of litigation the defendants
have never produced a single document that would refute or explain the
evidence we have submitted.
The documentation we have been able to obtain from third parties
provide evidence that Roy Kay/KSI Contracting was altering accounting
documents and omitting information from job records to make it appear
as though work performed by subcontractors was performed by KSI
Contracting. What were actually liabilities to Roy Kay, Inc/KSI
Contracting appear to have been misrepresented as money owed to the
company. While the documents we obtained are only relevant to the two
projects our company worked on, Roy Kay, Inc/KSI Contracting was
involved in up to twenty-six projects at the time. Losses from Roy Kay,
Inc/KSI Contracting, well over $100 Million in the third quarter of
2002 alone, were a thorn in the side of Keyspan Energy and company
executives were desperate to stop them (Please see Attachment d). If
this same conduct was found to be present at these other projects the
amount of money being misrepresented would be enormous.
The ability to report allegations of unethical and criminal conduct
to the compliance office of a publicly traded corporation without the
threat of retaliation is a fairly reasonable expectation. Most first
year law students, if not most lay people, would know that that
represented parties to a litigation may discuss issues related to that
litigation. I am not an attorney and neither is my business partner. My
attempts to communicate with Ms Ireland were not improper. Yet this was
the second time Mr. Rosen attempted to prevent such communication.
Knowledge of the facts and the law mean little to Mr. Rosen and his
clients. What is most important is the use of any tactic, however
unethical, to deter continued discovery of the assertions raised in
these matters. That the compliance office would refer this matter back
to the same attorney who played a substantial role in the allegations
at issue illustrates that these practices are systemic throughout the
company. Keyspan's refusal to even consider these allegations is bad
enough. Threats of further abuse of the legal process by their attorney
in this matter demonstrate that the compliance offices of Keyspan
Energy and National Grid exist simply to pay tip service to the ideal
of ethical and legal business conduct. When these ideals become an
inconvenience the compliance office not only steps aside but, as
evidenced by attachment a, actively participates in attempting to
remove that inconvenience.
The conduct of Keyspan Energy's compliance office in this matter is
indicative of a pattern that has led to numerous allegations of
misconduct over the years. I respectfully submit to the Department of
Justice that fines have done little to correct the conduct of this
company in the past and cannot be expected to alter such conduct in the
future. It is worth noting that Mr. Rosen and his clients, no doubt
encouraged by the support they have received thus far, continue the
same pattern of obstructive and improper conduct to this day in the
above referenced actions. For much the same reason that an independent
auditor oversees the accounting statements of a public company, a
separate compliance office, free from the influence of Keyspan Energy
and National Grid, should be charged with the responsibility of
enforcing the
[[Page 42141]]
ethical business standards to which both companies publicly claim to
aspire. To deter the kind of behavior that is now before the United
States District Court, Keyspan needs a truly independent compliance
office that will respond to allegations of unethical practices in a
diligent and appropriate manner. It is clear that the current
management lacks the will to impose these standards on itself. Without
this kind of impartial supervision of company conduct the next
mendacious scheme will likely be a simple matter of time.
I truly appreciate the opportunity to voice an opinion in this
matter and I thank you for your consideration.
Sincerely,
Nelson Stewart
List of Attachments
Please Note: The documents I have submitted and the allegations I
have raised are by no means a complete account of the actions of
Keyspan Energy and KSI Contracting with respect to these matters. There
are well over 1,500 documents related to these matters.
In consideration of the two-month time constraint the court is
acting under I have attempted to be as brief as possible while
providing an informative sample of the unethical conduct of both
Keyspan Energy and its compliance office. Additional documentation can
he made available at your request.
Attachment a
This email was sent to my attorney in response to a phone call I
placed to Margaret Ireland, compliance officer for National Grid.
National Grid is the parent company of Keyspan Energy. Together with
attachment b it is the only response I have ever received from Keyspan
Energy regarding the allegations I raised.
Attachment b
This letter was sent in response to our numerous demands upon Mr.
Rosen and his clients for the production of documents. The court did
not accept Mr. Rosen's attempts to blame the plaintiffs for his failure
to produce witnesses and documents. A motion to strike the defendants'
answer in this matter was granted by the court on December 22, 2008.
Attachment c
These letters were sent to several members of the National Grid
Compliance Office by return-receipt mail. They came back unsigned for.
When Ms. Ireland of National Grid asked me to send her a copy of some
of the allegations I had related to her I sent the letter to Vincent
Miseo, Claims Attorney for Federal Insurance, (Federal issued the
payment and performance bond on one of the projects) along with my
letter to the NYS Insurance Department because they included the most
recent developments with respect to these actions. Two previous letters
containing substantial documentation of our allegations were sent on
June 28, 2006 and October 24, 2006. A copy of these documents can be
made available at your request.
Attachment d
The attached exchange between Keyspan executives demonstrates the
frustration resulting from the Roy Kay losses. Keyspan eventually
offset these losses by hiring out the remaining work on these projects
to subcontractors and later refusing to pay them. Many of those who
attempted to collect these sums in Court were met with the same tactics
described in this letter.
http://wwss.justice.gov/atr/cases/f259700//259704-7pdf
United States District Court for the Southern District of New York
United States of America, Plaintiff vs. KeySpan Corporation,
Defendant.
Civil Action No. 10-cv-1415 (WHP)
Comments of the New York City Economic Development Corporation Made
Pursuant to the Antitrust Procedures and Penalties Act
The New York City Economic Development Corporation (``NYCEDC''),
acting on its own behalf and on that of the City of New York City as
electricity ratepayers in the market affected by the conduct of the
Defendant, hereby files comments on the proposed Final Judgment in the
above-captioned matter. These comments are responsive to a Notice
published at 75 FR 9946, Proposed Final Judgment and competitive impact
Statement, on March 4, 2010.
I. Interest of Title, New York City Economic Development Corporation,
and of the City of New York as Electric Ratepayers in the New York
Market
The City of New York (``City'') and NYCEDC, along with other
commercial and residential electricity ratepayers located in the
jurisdiction of the City, are directly affected by the operation of the
electric capacity market administered by the New York Independent
System Operator (CCNYISO). The City is geographically coextensive with
NYISO Zone J, one of several regions that comprise the NYISO's New York
Control Area, which is itself coextensive with the State of New York.
NYISO Zone J forms the relevant geographic market affected by the
conduct of KeySpan set out in the Complaint filed in this matter by the
Department of Justice on February 22, 2010. The relevant geographic and
product market in the action brought by the Department of Justice
against KeySpan is described in the Complaint as the ``New York City
Installed Capacity Market'' or ``NYC Capacity.'' \1\
---------------------------------------------------------------------------
\1\ Complaint herein at page 4.
---------------------------------------------------------------------------
Even more than most urban areas in the nation, New York City and
its residents and businesses are particularly dependent on electricity
for transportation and other critical energy needs. The costs borne by
City ratepayers are among the highest in the continental United States,
as was recognized by the Electric Energy Market Competition Task Force
\2\ in its Draft Report to Congress pursuant to section 1815 of the
Federal Energy Policy Act of 2005.
---------------------------------------------------------------------------
\2\ Draft Report to Congress on Competition in the Wholesale and
Retail Markets for Electric Energy, at pp. 20-22, 73 (issued June 5,
2006).
---------------------------------------------------------------------------
NYCEDC, acting through its Energy Policy Department, serves as
Mayor Michael Bloomberg's principal energy policy adviser, and also
serves as the Chair of the City's Energy Policy Task Force, and the New
York City Energy Planning Board. NYCEDC also serves as a catalyst for
City economic development, capital investment, and growth. All of these
concerns are vitally dependent on the provision of reliable energy at
just and reasonable prices. The City is also a voting member in the
NYISO governance structure as a large governmental end user.
II. Summary and Background
As noted in the materials submitted to the Court in this matter, a
very large increment of in-City electric capacity, some 1000 megawatts
(``MW''), entered the City market in early 2006. However, in
contravention of basic economic theory, this addition resulted in no
reduction in NYISO capacity prices, and in at least some instances,
those prices actually rose. The premise of deregulated energy and
capacity markets in New York as conceived by the New York State Public
Service Commission (``NYSPSC'') was in large measure based on the
presumed salutary effects of rivalrous market behavior, including the
expected value of new entrants in enhancing consumer welfare, and in
moderating prices in the constrained New York electricity market.
[[Page 42142]]
However, as the Complaint herein alleges, actions taken by KeySpan
in violation of the Sherman Act had the effect of negating the
beneficial effects associated with the arrival of new, highly efficient
generation facilities. KeySpan's bidding practices, coupled with its
artful use of a derivative financial instrument to leverage its already
dominant market position as the City's largest generator, permitted it
to distort the capacity market, and to impose artificially high
capacity prices on City consumers. The imposition of these artificial
prices resulted, as the Department of Justice notes, in unjust
enrichment to KeySpan. Moreover, because of the manner in which the
NYISO capacity operates and clears based on the highest bid that is
accepted, the illegal conduct alleged here also served to provide
supranormal capacity revenue prices to Zone J generation capacity
providers at large, thereby exacerbating the already great consumer
harm (done to ratepayers by the conduct described in the Complaint.
III. Discussion
The NYISO capacity market was intended to set the clearing price as
a function of the free interplay of the forces of supply and demand.
Here, however, that process was distorted through a form of market
gaming by KeySpan.
More than ten years ago, when the New York State energy markets
were deregulated by the NYSPSC, the City power plants were divested in
an effort to reduce the potential for market power abuse. However, as
the Complaint herein describes, the in-City capacity market is an
oligopoly, with three dominant generation suppliers known as the
divested generation owners (``DGOs''). This was true during the
operative period of the illegal conduct alleged by the Department of
Justice (``DOJ'') Antitrust Division here, and it remains true today.
KeySpan was a pivotal bidder, i.e., at least a portion of its capacity
was needed to permit the market to clear. Moreover, it was the largest
generation supplier in the City, with some 2400 megawatts of capacity.
In recognition of the market power enjoyed by DGO, the Federal
Energy Regulatory Commission imposed capacity bid caps on them. KeySpan
was given the highest bid cap dollar value, which actually served to
increase the effect of the market-distorting conduct that the Complaint
herein describes, as it permitted the highest possible clearing price
in the relevant market. Economic withholding, the practice of pricing
bids at artificially high prices, was permitted by the NYISO market
rules so long as KeySpan bid at or below its fixed bid cap amount. The
NYISO Services Tariff, Attachment H, Section 2.4 defines economic
withholding in the energy market as ``submitting bids for an Electric
Facility that are unjustifiably high so that (i) the Electric Facility
is not or will not he dispatched or scheduled, or (ii) the bids will
set a market clearing price.''
DGOs are prohibited by FERC-imposed NYISO market rules from
physically withholding capacity in the periodic capacity auctions. In
practice, however, as the Complaint here details, the form of economic
withholding practiced by KeySpan achieved virtually the same end:
Causing capacity prices to clear at supranormal levels.
The addition in early 2006 of a very large increment of new in-City
capacity--1000 megawatts--failed to lower capacity prices, thus to a
degree refuting the promise of the demand curve addition to the New
York Control Area market earlier approved by the Commission. Indeed, in
some instances the capacity clearing prices in 2006 actually increased
compared to the equivalent 2005 auction levels, a result that was
clearly anomalous.
These bidding practices distorted the capacity market and imposed
excessive prices on the consuming public, while enriching incumbent
capacity providers in a manner that exceeded even the generous existing
capacity compensation formula. The price of a commodity should decrease
as the supply of that commodity increases. This theory underlies the
capacity demand curve market design that was implemented by the NYISO,
and approved by the Federal Energy Regulatory Commission in 2003. The
Commission observed in its Order that the price would gradually fall as
the amount of available capacity beyond 1 18 percent of peak load.\3\
---------------------------------------------------------------------------
\3\ May 2003 Demand Curve Order in FERC Docket ERO3-647-009 at
p. 3, ] 5; the Commission's decision also referenced a NYISO
estimate that a 1% increase in capacity in the State would result in
average consumer savings of $100 million annually. Id. at p. 6, ] 9
and at p. 16, fit 23.
---------------------------------------------------------------------------
As noted above, in early 2006, approximately 1,000 MW of new
capacity was added in the City, markedly increasing the amount that
could be bid into the periodic NYISO capacity auctions.\4\ Yet, the
price of capacity remained at the maximum permissible price cap level.
---------------------------------------------------------------------------
\4\ In early 2006, two new 500 MW combined-cycle, gas-fired
power plants entered service in New York City. These were the SCS/
Astoria, operated by Astoria Energy LLC, a subsidiary of SCS Energy
LLC, and the New York Power Authority's new Poletti unit in Astoria,
Queens. See Securities & Exchange Commission Form 8-K filed by
KeySpan Corporation, May 4, 2006, Accession Number 0001062379-06-
000054; KeySpan First Quarter 2006 Earnings Conference Call, p. 9
(held May 4, 2006).
---------------------------------------------------------------------------
The conduct of KeySpan as set out in the Complaint raised critical
market power issues in the period of 2006-2008 and raised prices for
some three million Zone J electric ratepayers. The illegal conduct
alleged here was only stopped when the NYSPSC exercised its supervisory
authority over KeySpan in early 2008, and compelled the company to bid
in the Zone J capacity market as a price-taker, i.e., at a zero price.
This action effectively eliminated the ability of KeySpan to raise
capacity prices.
In the case of KeySpan, the issue of its status and role as the
largest of the pivotal capacity DGO bidders was heightened by its use
of a contractual arrangement with Morgan Stanley to financially
purchase 1,800 MW of capacity in the New York City market for a period
of three years at a fixed price of $7.57 per kW-month.\5\ Under the
contractual terms, KeySpan would profit to the extent that the City
capacity price cleared above that level. The combination of its own
very large generation presence, and this financial arrangement gave
KeySpan a direct or indirect interest in the price of some 4200 MW of
in-City capacity.
---------------------------------------------------------------------------
\5\ Securities & Exchange Commission Form 8-K filed by KeySpan
Corporation, May 4, 2006, Accession Number 0001062379-06-000054;
KeySpan First Quarter 2006 Earnings Conference Call, p. 9 (held May
4, 2006).
---------------------------------------------------------------------------
IV. Analysis of Proposed Disgorgement Remedy
As was observed by the New York State Department of Public Service
in its comments herein,\6\ there are two primary concerns: (1) The
amount of the disgorgement fund amount that is appropriate here, and
(2) the proper recipients of the disgorgement funds. The City and
NYCEDC are in accord with the view expressed by NYSPSC that the
proposed $12 million disgorgement is inadequate given the scale of the
unjust enrichment to KeySpan here. We also believe that a credit for
the disgorgement amount could readily be provided to the victims of the
conduct here through credits provided through the NYISO wholesale
market. Such credits would flow in the wholesale market operated by the
NYISO to the load serving entities (``LSEs''), who would be compelled
by the NYSPSC to maintain those funds as bill credits available to the
retail customers of the LSEs. This process
[[Page 42143]]
would avoid the kinds of customer apportionment issues and transaction
costs that might otherwise present insuperable obstacles to the process
of attempting to fashion disgorgement remedies intended to reach some
three million electric ratepayers in the New York City market.
---------------------------------------------------------------------------
\6\ Tunney Act Comments of the New York State Public Service
Commission re U.S. v. KeySpan, Case No. 10-cv-14l5 (Comments filed
April 30, 2010).
---------------------------------------------------------------------------
As to the proper amount of disgorgement that should be required of
KeySpan, there are available in the record some professional estimates
of the harm that was done to the City capacity market. There are also
some available figures from KeySpan that bear to some degree on the
same question. These estimates and corporate statements should provide
guidance to the Court in exercising its judgment concerning the
adequacy of the proposed settlement.
In early 2006, KeySpan publicly expressed confidence that average
City capacity prices would in fact exceed the contractual level of
$7.57, and observed that as of the first monthly summer capacity
auction period in 2006, the Zone J capacity price settled at $12.71 per
kW-month. Clearly, such corporate confidence concerning maintenance of
capacity clearing prices was not misplaced: as a dominant entity it was
in a position, even when acting unilaterally, to make capacity prices
clear well above the contractual level established in the Morgan
Stanley agreement. Regarding the gain attributable to the conduct
challenged here by DOJ as violative of the Sherman Act, at least a
portion of the benefits were disclosed by the company itself: KeySpan
stated its gain attributable to the Morgan Stanley agreement was $44.3
million in the period from May through September of 2006.\7\ Given the
workings of the market clearing process, the overall adverse impact on
City energy consumers flowing from the practices described in the
Complaint was of course far larger.
---------------------------------------------------------------------------
\7\ Interrogatory Response to DPS Request No. 75, Subpart 14 in
New York State PSC Case No. 06-M-0878, relating to the proposed
KeySpan-National Grid merger (response dated September 21, 2006).
---------------------------------------------------------------------------
An initial New York State Department of Public Service (``NYSDPS'')
analysis of the price level for the NYISO capacity auctions early June
of 2006 revealed the price to be in large part the product of a failure
to bid some 800 MW into the May and June 2006 auctions. Having
conducted a preliminary review of the auction numbers, NYSDPS
representatives indicated that economic withholding appeared to have
effectively kept capacity prices considerably higher than they would
have been had the remaining 800 MW been bid into the auction:
Based on NYISO posted data, it appears that about 800 MW of NYC
capacity went unsold in the spot auctions for May and June 2006.
This implies higher prices in both the NYC and statewide capacity
markets, compared to an auction where all available NYC supplies had
cleared.
If all available NYC capacity had been sold, the NYC UCAP price
would have dropped by about $7.26/kW-month (from $12.71 to $5.45).
In addition, the NYS UCAP price could have dropped by as much as
1.28kW month.\8\
---------------------------------------------------------------------------
\8\ Discussion presentation by NYSDPS, ``In-City Capacity Market
Performance'' at NYISO stakeholder meeting of the ICAP Working
Group, June 12, 2006, available at: nyiso.com/public/webdocs/committees/bicicapwg/meeting_ materials/2006-06-12/in--city--
capacity--markey--performance--nydps.pdf.
This preliminary analysis by DPS was borne out in later estimates
offered by the NYISO's own Independent Market Monitor, Dr. David B.
---------------------------------------------------------------------------
Patton:
Prior to 2006, nearly all of the ICAP [Installed Capacity] in
New York City was scheduled or sold in the NYISO capacity markets.
Beginning in January 2006, more than 1000 MW new capacity has been
installed in NYC. Given that the marginal cost of selling capacity
is close to zero for most units, the amount of capacity sold in New
York City under the NYC Locality Demand Curve would have increased
by this amount if the market were performing competitively. However,
the total ICAP sales actually fell slightly after 500 MW of new
capacity at Poletti became available in early 2006. This occurred
because one incumbent supplier reduced its sales by approximately
the same amount as the new capacity at Poletti. This supplier
routinely offered the bulk of this unsold Capacity into the Energy
market, which indicates that it could have been sold in the Capacity
market with little additional cost.
The unsold Capacity quantities increased in May 2006 when an
additional 500 MW of Capacity from the SCS/Astona Energy LLC
facility came online.
The unsold Capacity in question was not sold because the
supplier offered the Capacity at a price that was higher than the
Capacity Demand Curve price levels that would have allowed the
Capacity to clear. In particular. the DGO supplier offered the
Capacity at the level of its offer cap, which exceeded $12 per KW-
month in the Summer Capability Period. Had all Capacity been sold,
the price during the May auction would have cleared at less than $6
per KW-month.\9\
---------------------------------------------------------------------------
\9\ Affidavit of NYISO market Monitor Dr. David B. Patton in
FERC Docket Number ERO7-360-000, at page 4 of 19 (filed December 22,
2006)[emphasis added]
It is thus clear, as Dr. Patton states, that the withholding of
capacity took place, and moreover, that such withholding materially
affected its price--more than doubling what would otherwise be the
capacity market clearing price.
The foregoing is very important to this Court's assessment of
whether the $12 million disgorgement cut amount proposed to be imposed
on KeySpan in this matter is one that can be said to be in the interest
of justice, and therefore should be approved for entry of a Final
Judgment herein.
Moreover, the Court is not solely reliant on even such well-
supported opinions as those advanced by Public Service Staff and by Dr.
Patton estimating the excessive capacity charges imposed on City
consumers. There is at least one other extrinsic form of evidence that
can readily be accessed from an incontrovertible source.
A well recognized economic analytic tool in assessing antitrust
damages is the during and after test that examines market activity
during the period of illegal conduct and the period when that activity
came to an end. The NYISO maintains extensive records of capacity
prices in the various auctions that it operates. Attached as Exhibit A
to this document is a summary of capacity clearing prices in the period
between 2006, when the alleged conduct violating the Sherman Act began,
during the succeeding period, and after the action of the NYSPSC put a
stop to the conduct in question in early 2008 with its Order mandating
that KeySpan bid into the various NYISO capacity auctions as price
taker. Exhibit A was taken directly from the NYISO website, and these
prices and other capacity price auction results from recent years are
publicly accessible there.\10\
Zone J is reflected in Exhibit A as ``NYC'' and the prices
reflected therein are telling and directly confirm the views of Dr.
Patton on the effect of the conduct under scrutiny here. For example,
in the six-month 2006 summer capability period strip auction (May-
November), prices in NYC were $12.35 per kW-month, and $12.37 in the
comparable period for 2007. However, by the summer strip auction of
2008, after the alleged illegal conduct had been halted, the NYC
auction price fell to $6.50 per kW-month, and even in 2009 it was
$6.75. The pattern in the monthly NYISO auction results is very
similar: the May and June auctions in 2007 closed at $12.34 and $1 1.40
respectively, while the comparable results after the cessation of the
market conduct challenged in the Complaint here were $6.52 and $6.49
respectively. The NYISO spot auction for capacity reveals a very
similar pattern as well.
Armed with these numbers and the respective amounts of capacity
affected 1800 MW in the Morgan Stanley agreement, and KeySpan's own
offered capacity in the various NYISO auctions,
[[Page 42144]]
one can readily ascertain at least an informed estimate of the impact
on Zone J consumers of the overcharges associated with the conduct
here.
V. Role of the Justice Department
One final observation: NYCEDC and the City are highly appreciative
of the involvement of the Department of Justice and its Antitrust
Division in this matter, and commend their action in utilizing Sherman
and Clayton Act remedies to address anticompetitive practices in the
New York City energy sector.
As has been noted, the City energy and capacity markets remain
highly concentrated and bear the classic indicia of an oligopoly
market: few significant suppliers, high barriers to entry, and
accompanying high prices. Conduct similar to that outlined in the
Complaint here may well occur in the future as it has in the recent
past. While FERC has markedly increased its enforcement efforts in the
period since the passage of the Federal Energy Policy Act of 2005, the
record here also illustrates the continuing need for DOJ scrutiny of
anticompetitive practices in the City's energy markets. The substantial
penalties available to address Sherman Act violations will serve as a
deterrent to market manipulation such as that seen here. Continued
vigilance by the Antitrust Division will also operate to discourage
illegal conduct, and will thereby enhance consumer welfare.
VI. Conclusion
For the foregoing reasons, the NYCEDC and the City ask that the
Court carefully review the record before it, take judicial notice of
publicly available evidence at FERC and at the NYISO, and examine the
proposed Final Judgment with a view toward arriving at a result that
will be equitable and will advance the interests of justice.
May 3, 2010
Respectfully submitted,
/s/Michael I. Delaney
Michael J. Delaney, Director--Energy Regulatory Affairs,
City of New York,
New York City Economic Development Corporation,
110 William Street, 4th Floor,
New York, NY 10038,
(212) 312-3787,
[email protected].
Attachment
Exhibit A--View Strip Auction Summary
BILLING CODE 4410-11-M
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BILLING CODE 4410-11-C
In the United States District Court for the Southern District of New
York
Civil Case No. 10-CIV-1415
United States of America, Petitioner v. KeySpan Corporation,
Respondent.
Comments of Consolidated Edison Company of New York, Inc.
Dated: May 3, 2010
Comments of Consolidated Edison Company of New York, Inc.
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h) and in response to the March 4, 2010 Notice published in the
Federal Register, U.S. Department of Justice, Antitrust Division,
United States v. KeySpan Corporation, Proposed Final Judgment and
Competitive Impact Statement, 75 FR 9946 (Mar. 4, 2010), Consolidated
Edison Company of New York, Inc. (``Con Edison'' or the ``Company'')
hereby files these comments with respect to the settlement agreement
entered into between the United States Department of Justice (``DOT'')
and KeySpan Corporation (``KeySpan'').
I. Preliminary Statement
This case involves an antitrust violation that limited or
restrained competition in the market for electric generating capacity
in New York City for almost two years. Con Edison commends the DOJ for
investigating and condemning the agreement entered into by KeySpan. As
DOJ has advised the Court, the likely effect of that agreement was to
increase the prices paid for electricity by consumers in New York City.
In fact, once the subject agreement ceased to operate, the market price
for capacity indeed declined. DOJ Complaint at ] 33. The DOJ's proposed
consent judgment in this case requires that KeySpan disgorge $12
million of the profits it gained from its illegal agreement.
Unfortunately, however, the consent judgment does not provide for
any of these disgorged funds to go the persons ultimately harmed by
KeySpan's illegal conduct--the consumers subjected to the artificially
inflated prices. The Competitive Impact Statement (``CIS'') does not
appear to address this alternative or explain why it was omitted. As a
result of this shortcoming the proposed consent judgment does not
acceptably satisfy the public interest standard as required by the
Tunney Act. Indeed, it leaves the victims of KeySpan's antitrust
violation without any remedy. This Court should not approve the
proposed consent judgment until it is amended so that any monetary
payments made by KeySpan are
[[Page 42151]]
distributed to the New York City retail electricity consumers who were
harmed by its antitrust violations.
II. Background
On February 22, 2010, the DOJ entered into a consent judgment with
KeySpan proposing to settle a civil antitrust proceeding brought by DOJ
to remedy a violation of Section 1 of the Sherman Act, 15 U.S.C. 1. The
relief provided in the proposed Final Judgment calls for KeySpan to pay
the sum of $12 million to the United States government. Final Judgment
at III.A. This payment by KeySpan represents ``a portion of its ill
gotten gains from its recent illegal behavior.'' 75 FR 9951.
According to the DOJ, this illegal behavior consisted of KeySpan
entering into an anticompetitive agreement that would raise electricity
prices to New York City consumers: ``KeySpan entered into an agreement
in the form of a financial derivative [`the KeySpan Swap Agreement']
essentially transferring to KeySpan, the largest supplier of electric
generating capacity in the New York City market, the capacity of its
largest competitor. 75 Fed. Reg. at 9947. The DOJ's CIS states that
``[t]he likely effect of the Swap Agreement was to increase capacity
prices for the retail electricity suppliers who must purchase capacity,
and, in turn, to increase the prices consumers pay for electricity.''
75 FR at 9947.
III. The Proposed Consent Judgment Fails To Satisfy Tile Public
Interest Because It Fails To Provide for a Remedy to the Electric
Consumers Victimized by Tile Antitrust Violation
Before entering a proposed consent judgment in antitrust cases
brought by the United States, a reviewing court must ``determine that
the entry of such judgment is in the public interest.'' 15 U.S.C. 1
6(e)(1). In making that determination, the court is required to
consider:
(A) The competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and modification,
duration of relief sought, anticipated effects of alternative remedies
actually considered, whether its terms are ambiguous, and any other
competitive considerations bearing upon the adequacy of such judgment
that the court deems necessary to a determination of whether the
consent judgment is in the public interest; and
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and individuals
alleging specific injury from the violations set forth in the complaint
including consideration of the public benefit, if any, to be derived
from a determination of the issues at trial.
15 USCS Sec. 16(e)(1)(A) & (B) (emphasis added).
As this statutory language makes clear, this Court must consider
(i) whether the Government has met its duty of considering the
appropriate remedies, (ii) whether the remedies in the proposed
judgment cure the injuries flowing to the general public from the
violation, and (iii) whether the remedies are adequate. Unfortunately,
the remedy proposed in the consent judgment falls short in each of
these respects.
The settlement is not in the public interest because it does not
provide relief to the individuals that have been harmed by KeySpan's
actions under the KeySpan Swap Agreement. The DOJ's CIS makes it
explicit that the individuals ultimately harmed by KeySpan's actions
are New York City's electricity consumers who were subjected to higher
prices for electricity by reason of KeySpan's illegal conduct. While
the DOJ commendably condemned KeySpan's anticompetitive actions, which
artificially raised New York City capacity prices, and sought an
equitable remedy disgorging profits, its proposed remedy is inadequate
in that it provides for KeySpan to pay the $12 million to the U.S.
Treasury rather than to the individuals who ultimately were harmed.
Unless these funds are paid to the consumers who were injured, the
effects of the violation stated in the CIS are not cured and the
proposed consent judgment is inadequate. Without providing relief to
these parties, the settlement fails to satisfy the public interest
standard.
As noted above, the effects of the antitrust violation on New York
City electricity consumers are acknowledged clearly in DOJ's own
filings with the Court. According to the DOJ, the KeySpan Swap
Agreement unlawfully restrained competition in New York City's electric
capacity market because it enabled KeySpan, which already possessed
market power in the New York City capacity market, to ``enter into an
agreement that gave it a financial interest in the capacity of
Astoria--KeySpan's largest competitor.'' 75 FR at 9947. The Keyspan
Swap Agreement ``effectively eliminated KeySpan's incentive to compete
for sales'' ' of capacity. 75 Fed. Reg. at 9948. The net result ``was
to alter KeySpan's bidding in the NYC Capacity Market auctions.'' 75
Fed. Reg. at 9948. ``But for the Swap, installed capacity likely would
have been procured at a lower price in New York City from May 2006
through February 2008.'' 75 Fed. Reg. at 9951. In other words, the
KeySpan Swap Agreement enabled KeySpan to unlawfully and artificially
raise capacity prices in New York City to the detriment of New York's
retail electricity consumers.
In New York, ``sellers of retail electricity must purchase a
product from generators known as `installed capacity.' '' 75 FR 9947.
The capacity price becomes part of the price of retail energy that is
charged to retail consumers. Thus, any artificial increase in the price
of capacity in New York City was initially borne by Load Serving
Entities or ``LSEs'' (i.e., retail sellers) and then passed on to their
retail customers. As DOJ itself states, the ultimate effect of the
KeySpan Swap Agreement ``was to increase capacity prices for the retail
electricity suppliers who must purchase capacity, and in turn, to
increase the prices consumers pay for electricity.'' 75 FR 9949. As a
generator in New York City, KeySpan knew that LSEs, like Con Edison,
were required to buy capacity from the market on behalf of their retail
electric customers. In fact, the New York Independent System Operator
(``NYISO'') ``requires retail providers of electricity to customers in
the New York City region to purchase 80% of their capacity from
generators in that City region.'' 75 Fed. Reg. at 9947. Thus, KeySpan
knew that the increases in the price of capacity caused by the KeySpan
Swap Agreement were going to be paid, and, in fact were paid, for by
New York City LSEs and their retail electric customers.
Thus, unlike objectors to the remedies proposed in United States v.
Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995), who argued that
additional remedies should be imposed for injuries not pleaded in DOJ's
Complaint, Con Edison's comments here focus on the fact that the
proposed decree does not remedy the injury that DOJ specifically
identifies in its Complaint and CIS. Nor does Con Edison in effect seek
any change in the Complaint as filed. All that Con Edison requests is
that the Court exercise its powers in equity to modify a proposed
decree whose ``impact * * * upon the public generally and individuals
alleging specific injury from the violations set forth in the
complaint'' is manifestly to fail to remedy those injuries. 15 USCS
Sec. 16(e)(1)(B).
Equity, along with the standards for reviewing this settlement,
calls for those consumers that were the ultimate victims of the KeySpan
Swap Agreement to be the beneficiaries of whatever relief is provided
for in the
[[Page 42152]]
consent judgment (the $12 million payment). DOJ acknowledges that there
is no adequate remedy here at law for individuals harmed by KeySpan's
antitrust violation. 75 FR 9951. The reason is that private individuals
could not bring an antitrust suit here due to the barrier of the filed
rate doctrine. See Arkansas La. Gas Co. v. Hall, 453 U.S. 571, 577
(1981); Keogh v. Chicago & NW. Ry. Co., 260 U.S. 156 (1922). Where, as
here, no remedy exists at law, courts have broad authority to design
equitable relief that ensures fairness in light of the circumstances.
As the Supreme Court has made clear: ``[t]he essence of a court's
equity power lies in its inherent capacity to adjust remedies in a
feasible and practical way to eliminate the conditions or redress the
injuries caused by unlawful action. Equitable remedies must be flexible
if these underlying principles are to be enforced with fairness and
precision.'' Freeman v. Pitts, 503 U.S. 467, 487 (1992) (emphasis
added). For example, when courts employ the ``equitable remedy'' of
piercing the corporate veil, they are not ``imposing [ ] liability''
but rather ``remedying the fundamental unfairness that would
[otherwise] result.'' Trustees of Nat'l Elevator Industry v. Lutyk, 332
F.3d 188, 193 n.6 (3d Cir. 2003) (emphasis added, internal quotations
omitted). ``[T]hus, the theory of harm alleged may affect the scope of
the remedy that equity demands.'' Id; see also Taylor v. FTC), 339 F.
App'x. 995, 999 (Fed. Cir. 2009) (``district court's equity
jurisdiction provides broad and flexible power to deliver justice in
unique factual circumstances * * * to [the] court's best estimation'').
In the circumstances of this case, the theory of harm (i.e., the
competitive injury) involves capacity prices that have been
artificially increased as a result of the KeySpan Swap Agreement. In
order to fairly redress that injury, the remedy, even if limited,
should flow to the injured retail electricity consumers who paid those
higher prices.
No basis exists on formalistic grounds to refrain from providing a
remedy to the consumers injured by KeySpan's antitrust violation by
distributing to them the $12 million disgorged by KeySpan from its
illegal scheme. No party should be heard to rebuff this appropriate
relief by arguing that the KeySpan Swap Agreement was with a counter-
party, which entered into that transaction in arms-length bargaining,
rather than consumers. That would exalt form over substance. It would
also ignore the impact that the KeySpan Swap Agreement had on the New
York City capacity market. As the DOJ's own CIS explicitly states, the
ultimate effect of the antitrust violation was ``to increase the prices
consumers pay for electricity.'' Equitable remedies are needed because
they ensure ``that substance will not give way to form [and] that
technical considerations will not prevent substantial justice from
being done.'' Pepper v. Littan, 308 U.S. 295, 305 (1939); Chase
Manhattan Bank v. Brown & E. Ridge Partners, 243 A.D.2d 81, 84 (NY.
App. Div. 4th Dep't 1998) (``a court of equity looks to the substance
of the action, not its form''); see also Hechinger Liquidation Trust v.
BankBoston Retail Fin. Inc., 287 B.R. 145, 151-52 (D. Del. 2002)
(citing Pepper and Chase in concluding that ``the court should not
employ a mechanical and formalistic'' approach).
The DOJ does not explain in the CIS why it did not address the
provision of relief to New York City consumers. Though it cites to the
filed rate doctrine, DOJ appears to recognize that the filed rate
doctrine does not apply to the disgorgement payments involved in the
proposed consent judgment. Nor does the filed rate doctrine present any
barrier to including in the judgment an equitable remedy in the form of
payments to New York City consumers. The profits required to be
disgorged by the proposed consent judgment are KeySpan's profits
stemming from the KeySpan Swap Agreement, not from its sales of
electric capacity under a filed rate. The KeySpan Swap Agreement is a
private financial contract between KeySpan and the financial services
company which was not filed with FERC. The KeySpan Swap Agreement is
thus not part of the filed rate.\1\ Accordingly, the filed rate
doctrine is not a bar to providing relief to consumers in this case.
Though the practical effects of restitution and disgorgement differ
they are both equitable remedies. Restitution ultimately flows to the
injured party, but it is neither a form of ``damages'' nor a means of
providing ``compensation for past injuries.'' See Ellett Bros., Inc. v.
US. Fidelity & Guaranty Co., 275 F.3d 384, 388 (4th Cir. 2001)
(``Restitution and disgorgement require payment of defendant's ill-
gotten gains, not compensation of the [injured party's] loss.'').
Moreover, courts have interpreted statutes in a manner that does not
interfere with a court's traditional equity powers, unless Congress
clearly makes that ``desire plain.'' Hecht Co. v. Bowles, 321 U.S. 321,
329-30 (1944) (``The essence of equity jurisdiction has been the power
* * * to do equity and to mould each decree to the necessities of the
particular case.''). The filed rate doctrine, in short, has no
application to the equitable distribution of the disgorged funds as a
remedy in this case.
---------------------------------------------------------------------------
\1\ It is the NYISO Market Administration and Control Areas
Services (``Services Tariff'') that is the filed rate. All of the
rules, procedures and pricing formulas associated with the NYISO's
capacity auctions are contained in the Services Tariff which is on
file at the Federal Energy Regulatory Commission (``FERC''). Thus,
the filed rate is encompassed within the pages of the Services
Tariff. It does not include the KeySpan Swap Agreement which is an
extrinsic private contract.
---------------------------------------------------------------------------
Finally, it is not a bar to providing relief to consumers that the
precise amount of harm to them has not been calculated. KeySpan's
conduct may have caused much greater injury than the $12 million it has
agreed to disgorge. Equity does not allow a party to take advantage of
imprecision that a wrongdoer is responsible for creating. While
KeySpan's wrongdoing may have made it difficult to calculate the extent
of the harm to consumers, the DOJ's duty is to protect the general
public, and its own findings that the likely effect of the violation
was to raise prices, make it apparent that an adequate equitable remedy
requires distribution of the disgorged funds to the consumers that were
harmed.
Such relief would, at least, partially offset the economic damage
inflicted upon New York City's electricity consumers. Accordingly, any
relief in the form of monetary payments provided for by this consent
judgment should be for the benefit of New York City's retail electric
consumers. One method to effectuate such relief would be to provide for
payments to be made to New York City LSEs in proportion to the amount
of capacity that they procured during the May 2006 through February
2008 time period, with the proviso that such payments be distributed to
end use consumers in proportion to their relative demand during this
period. Alternatively, the Court could direct the NYISO to equitably
distribute the payments among consumers.
IV. Conclusion
Con Edison respectfully requests that the Court find that the
proposed consent judgment is not in the public interest until and
unless any monetary payments disgorged by KeySpan are used to provide
relief to New York City's electricity consumers.
Dated: May 3, 2010, New York City.
Respectfully submitted,
Consolidated Edison Company of New York, Inc.
By: Neil H. Butterklee, Assistant General Counsel, Consolidated
Edison Company
[[Page 42153]]
of New York, Inc.
April 30, 2010
BY ELECTRONIC MAIL
Donna N. Kooperstein, Chief, Transportation, Energy, and Agriculture
Section, Antitrust Division, U.S. Department of Justice, 450 Fifth
Street, NW., Suite 8000, Washington, DC 20530.
Re: United States v. KeySpan Corporation; Proposed Final Judgment,
Stipulation and Competitive Impact Statement
Dear Ms. Kooperstein: The New York State Consumer Protection Board
(``NYSCPB'') appreciates the invitation, provided in the Federal
Register dated March 4, 2010, to discuss the appropriateness of the
proposed Final Judgment, Stipulation and Competitive Impact Statement
that have been filed with the United States District Court for the
Southern District of New York in United States of America v. KeySpan
Corp., CMI Case No. 10-CIV-1415. The NYSCPB is pleased that the United
States Department of Justice (``USDOJ'') has pursued the improper
collusive behavior of KeySpan Corporation (``KeySpan'' or ``Company'')
in New York City's capacity market.\1\ For almost two years, KeySpan
was able to maintain artificially high capacity prices in New York City
by controlling, through a third party, the bids of its main competitor
and receiving that competitor's capacity revenues. The filed documents
call this arrangement ``the KeySpan Swap.''
---------------------------------------------------------------------------
\1\ USDOJ's action is especially commendable when compared to
the failure of the Federal Energy Regulatory Commission (FERC'') to
take any action to protect consumers from KeySpan's conduct.
---------------------------------------------------------------------------
The NYSCPB believes that, for two reasons, entry of the proposed
Final Judgment is not in the public interest. First, KeySpan has agreed
to disgorge only $12 million, when the evidence is overwhelming that
the Company's illicit conduct burdened New York Cit's energy consumers
by at least $68 million and perhaps as much as several hundred million
dollars in over payments.\2\ Second, the ill-gotten gains should be
paid to the victims of KeySpan's improper behavior, New York City's
energy consumers, not to the Federal government.
---------------------------------------------------------------------------
\2\ The NYSCPB's comments rely on data contained in the
affidavit accompanying the comments of the New York State Public
Service Commission (``NYSPSC''). The NYSCPB supports the analyses
and recommendations in the NYSPSC's comments as well as those in the
comments of the City of New York.
---------------------------------------------------------------------------
Statement of Interest
The NYSCPB is an agency in the Executive Branch of New York State
government statutorily charged with ``* * * representing the interests
of consumers of the state before Federal, state and local
administrative and regulatory agencies. \3\ Further, pursuant to
Executive Order No. 45, the NYSCPB is authorized to:
---------------------------------------------------------------------------
\3\ New York Executive Law Sec. 553(2)(d).
---------------------------------------------------------------------------
Act as an advocate before other state and Federal entities by:
(a) representing the interests of consumers in proceedings of
Federal, state and local administrative and regulatory agencies where
the State Director deems the proceeding to affect the interest of
consumers.
The NYSCPB has also been designated by the New York State
Independent System Operator, Inc. (``NYISO'') as the ``Statewide
Consumer Advocate,'' representing the interests of the State's
residential, small business and farm electricity users in the NYISO
governance process. The Agency has fully participated in the NYISO's
stakeholder process since the inception of the organization in the late
1990's and has made numerous filings with the FERC.
Comments
The Competitive Impact Statement asserts that the ``proposed Final
Judgment remedies [KeySpan's] violation by requiring KeySpan to
disgorge profits obtained through the anticompetitive agreement.'' The
NYSCPB respectfully disagrees. According to the NYSPSC, the KeySpan
Swap unjustly enriched the Company by more than $68 million and imposed
continued high electricity costs on consumers in amounts that could
total hundreds of millions of dollars. Viewed in this context,
disgorgement of $12 million will not deter the Company or other
companies from engaging in anticompetitive conduct in the future. Not
only is the penalty less than 20 percent of the ill-gotten gains, but
it is so small compared to the Company's annual earnings that.
shareholders would not notice it. Instead, the settlement should
reflect KeySpan's wrongful gains from the swap, its wrongful gains from
its capacity sales outside the swap, and the harm to consumers due to
high capacity prices that were caused by the swap.
USDOJ has not sustained its burden to provide sufficient evidence
for the Court to determine that a $12 million settlement is adequate
reimbursement for KeySpan's unjust enrichment, or deter such anti-
competitive conduct in the future. The NYSCPB agrees with the NYSPSC
that USDOJ should be required to disclose the total amount of KeySpan's
wrongful gains, and explain how, in light of these gains, a $12 million
settlement would adequately recover KeySpan's unjust enrichment and
deter such illegal practices. In addition, the managers who perpetuated
this illegal conduct will likely suffer no negative consequences as a
result of the settlement. Indeed, it is likely they received hefty
bonuses as the illicit revenues began rolling in. Further, at the very
least, the names of the managers who approved or condoned this behavior
should be made public.
The proposed Final Judgment is also flawed because the people
harmed by the Company's conduct would not receive any benefit from its
remedy. Transferring $12 million to the Federal government would
produce no impact on the economic lives of New York City energy
consumers. A fairer and appropriate course of action would be to return
the ill-gotten gains to the people from whom they were taken, primarily
the electric customers in New York City (Zone J of the capacity market
operated by the NYISO.) One way this could be accomplished would be to
provide a credit to load serving entities within Zone J that could be
used to offset the cost of current purchases. The NYSCPB recognizes,
however, that it would be the NYISO's responsibility to implement such
a credit mechanism. We recommend that the Court direct USDOJ to contact
the NYISO to discuss the feasibility of implementing this mechanism.
If the credit mechanism proves impractical, as a substitute, we
recommend using the money for expansion of energy efficiency programs
in Zone J. Two New York State entities administer energy efficiency
programs for low-income New Yorkers. The New York State Division of
Housing and Community Renewal administers the Federally funded
Weatherization Assistance Program and the New York State Energy
Research and Development Authority administers the state-funded EmPower
New York program. Annual and other reports by independent third-parties
demonstrate that both of these entities ably administer well-designed
energy efficiency and weatherization programs that lower the energy
burden for low-income New Yorkers and reduce energy prices for everyone
by lessening demand. The NYSCPB urges the Court to direct USDOJ to
discuss with these State entities the process by which the funds could
be transferred. We recommend transfer of the funds to these two State
entities in equal shares, with the qualification that the funds must be
used to expand their ongoing work in Zone J.
[[Page 42154]]
Conclusion
The proposed Final Judgment should be rejected because it is not in
the public interest. The Court should direct urge the parties to
increase the amount of ill-gotten gains to be disgorged and require all
disgorged funds to inure to the benefit of New York City energy
consumers.
Thank you for consideration of our comments in this matter.
Respectfully yours,
Mindy A. Bockstein,
Chairperson and Executive Director.
Tariq N. Niazi,
Director of Utility Intervention.
Saul A. Rigberg,
Intervenor Attorney.
May 17, 2010
Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture
Section. Antitrust Division. United States Department of Justice, 450
Fifth Street, NW., Suite 8000, Washington, DC 20530.
RE: Comments of the Pennsylvania Public Utility Commission on United
States v. Keyspan Corporation Proposed Final Judgment and Competitive
Impact Settlement, 1O-civ-1415 (USDC--Southern District, New York)
Dear Ms. Kooperstein: The Pennsylvania Public Utility Commission
\1\ (``PaPUC'') herewith files these comments under the provisions of
the Tunney Act, 15 U.S.C. 16(d), with respect to the Proposed Final
Judgment and Competitive impact Settlement in the matter of United
States v. Keyspan Corporation presently before the United States
District Court for the Southern District of New York, Civil Action 10-
civ-1415.
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\1\ The PaPUC is a state administrative commission created by
the General Assembly of the Commonwealth of Pennsylvania and charged
with the regulation of electric utilities, transmission siting and
licensing of generation suppliers within the Commonwealth of
Pennsylvania. 66 Pa.C.S. A., Sec. 101, et seq.
---------------------------------------------------------------------------
In 1997, the General Assembly enacted the Electric Generation
Customer Choice and Competition Act, 66 Pa.C.S. Sec. 2801 et seq,
restructuring Pennsylvania's traditional vertically integrated electric
utilities and opening up retail markets to competition. As Pennsylvania
is largely, and soon will be wholly within the control area of PJM
interconnection, L.L.C., a FERC-jurisdictional Regional Transmission
Organization, the competitiveness of Pennsylvania's retail electric
markets is heavily dependent on the competitive results of the PJM
electric generation wholesale markets. Approximately 80% of the
delivered price of retail electricity is attributable to the wholesale
cost of generation.
As a state public utility regulatory agency in a state that has,
for more than a decade, supported both wholesale and retail competition
in the electric power generation markets, we are deeply concerned by
allegations contained in the complaint that appear to conclusively
establish the existence of a sophisticated multi-year effort by the
defendant to evade competition in the New York installed capacity
market, resulting in higher retail electricity prices for retail users
of electricity. The effort appears to have been carefully calculated
and executed so as to avoid action by New York state authorities,
Federal regulators and antitrust enforcers.
This concern is heightened by the fact that the Federal Energy
Regulatory Commission, which has regulatory jurisdiction over the New
York City wholesale generation market, was apparently unable to detect
or deter the behavior recited in the instant Complaint.\2\ As the
complaint recites, during the 2006-2009 period, Keyspan was faced with
the prospect of new competition in the New York City capacity market
which had the prospect of substantially reducing its future capacity
revenues. Unable to purchase control of its competitor and unwilling to
risk head-to-head competition, Keyspan purchased a financial interest
in the capacity sales of its competitor through a third party
(``Keyspan Swap''). In turn, the third party sought and obtained a
hedging agreement with the competitor Astoria to reduce its
counterparty risk. The result was to make Keyspan indifferent with
respect to competition, as it would receive revenue either through
bidding into the capacity market or through its swap.
---------------------------------------------------------------------------
\2\ In 2007, the New York 150 sought, pursuant to Section 205 of
the Federal Power Act to file capacity mitigation and market
remediation tariffs to address perceived exercises of market power
in the New York City capacity market. FERC rejected the proposed
behavioral remediation tariffs and instead directed a staff
investigation. New York Independent System Operator. Inc., 118 FERC
] 61,182 (2007) (``2007 FERC Order''). In the staff review of the
allegations filed with respect to the New York City capacity market,
it was apparently concluded, inter a/ia, that while Keyspan's
actions did not violate any provision tariff or of the Federal Power
Act, there was a potential problem with buyer's market power, (i.e.,
a potential for exercise of monopsony), and directed the New York
ISO to file tariffs to address this purely theoretical concern.
---------------------------------------------------------------------------
It appears from the factual recitations of the Complaint that
Keyspan's scheme had a high likelihood of success.\3\ This would seem
to elevate the danger that New York City load serving entities, and
ultimately the public could suffer competitive injury without remedy or
the protection of the laws of New York State, or of the United States.
That would seem to elevate the seriousness of the defendant's offense.
Moreover, it is not clear that the facts in this case are limited in
time and place; while the tariff rules in question in this case apply
to a specific geographic location and time period, the general method
employed by the defendant to avoid competition (i.e., the purchase of a
financial interest in the operations of a competitor through a third
party) is not so limited.
---------------------------------------------------------------------------
\3\ The facts appear to establish that there was a sophisticated
effort by Keyspan to immunize its transactions from regulatory
review by seeking to characterize them as ordinary and usual
business transactions.
---------------------------------------------------------------------------
Because the PaPUC is a state regulatory agency with limited
jurisdiction and power under Pennsylvania law, we must rely heavily
upon the effective enforcement of the antitrust Jaws of the United
States to protect the public and the competitive wholesale and retail
electric generation markets.
The PaPUC understands that there has been a degree of difficulty
associated with detecting and prosecuting the actions recited in this
case; we do not oppose the proposed Stipulation and Final Judgment,
although we cannot state whether the equitable and financial penalties
in the Final Judgment result iii the full remedy of injury to the
public from execution of the scheme.
This proceeding demonstrates that even if conduct inimical to
competition is not effectively proscribed under the Federal Power Act,
it may result in prosecution and serious consequences under the
antitrust laws of the United States. The PaPUC and other public and
private entities with a critical stake in the success of wholesale
electric generation competition have benefitted from studying the facts
of this case and will be better able to detect and deter similar
schemes in the future.
Lastly, the PaPUC would like to convey our thanks to the U.S.
Department of Justice--Antitrust Division for enforcing competition law
in wholesale electricity markets and sanctions against a scheme that
manifestly reduced competition and raised prices in the New York City
capacity market.
Very truly yours,
Bohdan R. Pankiw,
Chief Counsel, Pennsylvania Public Utility Commission.
cc: James H. Cawley, Chairman
[[Page 42155]]
Tyrone J. Christy, Vice Chairman
Wayne E. Gardner, Commissioner
Robert F. Powelson, Commissioner
May 14, 2010
Donna N. Kooperstein, Chief, Transportation, Energy, arid Agriculture
Section, Antitrust Division, U.S. Department of Justice, 450 Fifth
Street, NW., Suite 8000, Washington, DC 20530
Re: Public Notice Inviting Tunney Act Comments in United States v.
Keyspan, SDNY Civil Action No. 10-cv-1415 (WIIP), 75 Fed. Reg. 9946,
March 4, 2010.
Dear Ms. Kooperstein: AARP submits these comments in response to
the above-referenced notice regarding the proposed settlement of United
States v. Keyspan, SDNY Civil Action No. 10-cv-1415 (WHP). AARP is a
nonpartisan, nonprofit organization that helps people over the age of
50 to have independence, choice, and control in ways that are
beneficial to them and society as a whole.\3\ AARP has millions of
members, including more than 2,500,000 members who reside in New
York.\4\ AARP is greatly concerned about the threats to health and
safety of vulnerable citizens caused by New York's high electricity
costs.\5\ Because the cost of utilities has skyrocketed, many low and
middle-income families and older people must now choose between paying
their energy bills for heating and cooling and paying for other
essentials such as food and medicine. AARP works to protect consumers
from excessive rates and charges such as were set and charged by
KeySpan and passed through to consumers. As consumers, AARP members
depend upon the protection of the antitrust laws from the unlawful
exercise of monopoly or market power and the enforcement of the
antitrust laws by DOJ and the courts.
---------------------------------------------------------------------------
\3\ For more information about AARP see http://www.aarp.org/.
\4\ For more information about AARP's New York state office, see
http://www.aarp.org/states/ny/.
\5\ New York residential electric rates are currently third
highest in the nation, second only to Hawaii and Connecticut. Energy
Information Agency, Electric Power Monthly, April, 2010, Year to
Date, available at http://www.eia.doe.gov/cneaf/images/xls.gif.
---------------------------------------------------------------------------
The United States Department of Justice Antitrust Division
(``DOJ'') filed a Complaint against KeySpan Corporation (``KeySpan'')
on February 22, 2010. The Complaint alleges violation of Section 1 of
the Sherman Act in connection with KeySpan's successful efforts to
inflate prices paid for wholesale electric capacity from May 2006 to
February 2009 in a spot market operated by the New York Independent
System Operator (``NYISO'').\1\ Keyspan achieved this price inflation
using a strategy of economic withholding, by bidding the maximum
possible amount in order to drive up the market clearing price paid to
all sellers in the NYISO in-City capacity auction market. Keyspan also
entered into a financial derivative swap contract with Morgan Stanley,
which functioned to create an interest in sales of a major competitor,
providing a stream of payments to KeySpan to offset diminished sales
due its withholding strategy to raise prices.
---------------------------------------------------------------------------
\1\ The Complaint is available at http://www.justice.gov/atr/cases/f255500/255507htm.
---------------------------------------------------------------------------
On the same day the Complaint was filed, DOJ and Keyspan filed and
moved for entry of a Proposed Final Judgment that would settle and
discontinue this action. Under the terms of the Proposed Final
Judgment, Keyspan would pay $12 million to the U.S. Treasury, with no
admission of any wrongdoing, and the Complaint would be dismissed. The
Proposed Final Judgment would provide no monetary remedy or other
benefit for the consumers who paid higher prices for electricity due to
the antitrust law violation described in the Complaint.\2\ As required
by the Antitrust Procedures and Penalties Act (the ``TunneyAct''), 15
U.S.C. 16(e)-(f), DOJ filed a Competitive impact Statement recommending
approval by the Court of the Proposed Final Judgment. The Tunney Act
requires public notice and an opportunity for public participation and
input to both DOJ and the Court prior to the Court's review and
decision on the settlement of an antitrust case.
---------------------------------------------------------------------------
\2\ The Proposed Final Judgment is available at http://www.justice.gov/atr/cases/f255500/2555O9.htm.
---------------------------------------------------------------------------
AARP members in New York state were adversely affected by the
inflated capacity charges due to the alleged antitrust violations.\6\
The inflated charges for capacity were paid in the first instance by
load-serving utilities, such as Consolidated Edison Company of New
York, Inc. (``Con Edison''), which then passed through all the
excessive charges to retail customers. ``The exercise of supplier
market power, through economic withholding, leads to higher capacity
prices, and a wealth transfer from consumers to suppliers.'' \7\ Con
Edison estimated the inflated costs in 2006 to be approximately $159
Million.\8\ Of that amount, $119 million was paid by New York City area
utilities, and $39 million was paid by utilities in the rest of the
state. The amount of capacity overcharges for 2007 and until NYISO
rules were changed in early 2008 have not been identified.
---------------------------------------------------------------------------
\6\ ``Every Con Ed customer in the five boroughs overpaid an
average total of at least $40 over two years during a price-fixing
scheme set up by the owners of a giant Queens power plant, the feds
charge in a court case that would let the alleged gougers get away
with most of the gains.'' Bill Sanderson, $157 M Power Abuse, N.Y.
Post, March 9, 2010, available at http://www.nypost.com/f/printlnews/local/power_abuse_SgLN9psbhjopRMEGU68fgK.
\7\ Affidavit of Peter Cramton, Ph.D., Feb. 8, 2007, attached as
Exhibit A to Answer and Request for Leave to File Answer of
Consolidated Edison Company of New York, Inc., Orange and Rockland
Utilities, Inc., Mutliple Intervenors and the City of New York, in
FERC Docket No. ER07-360, Re New York Independent System Operator,
available at http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=11248666.
\8\ See Motion to Comment of Consolidated Edison Company of New
York, Inc., etc., Re New York Independent System Operator, FERC
Docket No. ER07-360 (Jan. 27, 2009), p. 2 and Affidavit of Stuart
Nachmias, ] 13-14, available at http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=11236060.
---------------------------------------------------------------------------
AARP urges DOJ not to settle the action as proposed and urges the
Court not to approve the Proposed Final Judgment. AARP's reasons for
disapproval, set forth in greater detail below, include, foremost, the
lack of any monetary remedy or other discernible benefit for injured
consumers, and the absence of a credible deterrent that would
discourage others from exercising market power in the NYTSO markets in
violation of the antitrust laws. Also, there is no factual foundation
in the record
to determine appropriateness of the $12 Million
disgorgement of profits;
to determine the portion of the profits received by
KeySpan that would be disgorged;
to quantify the harm to markets and consumers caused by
the antitrust law violation described in the Complaint;
to determine the basis for arriving at the $12.1 million
partial disgorgement and its appropriateness;
to clearly identify the swap contract and its terms which
violated the antitrust laws; and
to determine if the settlement is adequate to redress the
antitrust law violation that occurred.
The public interest may be harmed by the settlement if, instead of
the intended deterrent effect, it sends a message that antitrust
violators who inflate prices through the exercise of market power in
NYISO markets can (i) escape serious consequences, (ii) have no
obligation to return illegally obtained profits to those injured by the
antitrust violation described in the Complaint, (iii) make no admission
of wrongdoing, and (iv) disgorge only an unstated portion of their
profits from their unlawful scheme. Also, the proposed settlement may
tacitly condone the future use by others of private financial
derivative swap contracts to compensate sellers
[[Page 42156]]
who employ anomalous withholding or bidding strategies to exert market
power and inflate clearing prices in the NYISO or other organized
electricity spot markets elsewhere in the nation.
Information filed in other proceedings suggests that the amount of
disgorgement is not adequate, that the settlement will not deter use of
private derivative contracts to support anomalous bidding in NYISO
markets, and that the requisite factual foundation needed to support
the proposed settlement is absent. At a minimum, further proceedings
are needed to develop an adequate factual record upon which it would be
possible for the Court to determine whether a proposal to compromise
this antitrust action is in the public interest.
No Sufficient Factual Foundation Exists to Support a Conclusion
That the Proposed Settlement Is a Reasonably Adequate Remedy or in the
Public Interest
The Tunney Act proceeding is critically important because it tests,
through public participation and the sunlight of public scrutiny,
whether an adequate factual foundation exists to support a finding that
the public interest would be advanced if a civil antitrust case brought
by the United States is settled through compromise with the alleged
violator. The Tunney Act provides, in relevant part:
Before entering any consent judgment proposed by the United States
under this section, the court shall determine that the entry of such
judgment is in the public interest. For the purpose of such
determination, the court shall consider
(A) the competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and modification,
duration of relief sought, anticipated effects of alternative remedies
actually considered, whether its terms are ambiguous, and any other
competitive considerations bearing upon the adequacy of such
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and individuals
alleging specific injury from the violations set forth in the complaint
including consideration of the public benefit, if any, to be derived
from a determination of the issues at trial.
15 USC 16(e)(l). As shown below, the necessary foundation of record
support needed to answer even the most basic questions about the
proposed settlement is lacking.
The Complaint filed by DOJ alleges that KeySpan violated Section 1
of the Sherman Act \9\ by adopting an economic withholding strategy in
the NYISO capacity market--bidding high to drive clearing prices up.
Attendant to the withholding strategy was the possible consequence that
not all its capacity would be sold at the maximum price that KeySpan
bid, and that other competitors who bid lower would make sales and
receive the high price set by KeySpan. To compensate itself for lost
sales due to its withholding strategy, KeySpan entered into a financial
derivative swap contract, which in effect gave it a financial interest
in the capacity sales of a major new competitor. According to the
Complaint:
---------------------------------------------------------------------------
\9\ ``Every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce among
the several States, or with foreign nations, is declared to be
illegal. Every person who shall make any contract or engage in any
combination or conspiracy hereby declared to be illegal shall be
deemed guilty of a felony, and, on conviction thereof, shall be
punished by fine not exceeding $100,000,000 if a corporation, or, if
any other person, $1,000,000, or by imprisonment not exceeding 10
years, or by both said punishments, in the discretion of the
court.'' 15 U.S.C. 1.
---------------------------------------------------------------------------
On January 18, 2006, [KeySpan] and a financial services company
executed an agreement (the ``KeySpan Swap'') that ensured that KeySpan
would
On January 18, 2006, [KeySpan] and a financial services company
executed an agreement (the ``KeySpan Swap'') that ensured that KeySpan
would withhold substantial output from the New York City electricity
generating capacity market * * *. The likely effect of the KeySpan swap
was to increase prices for the retail electricity suppliers who must
purchase capacity, and, in turn, to increase the prices consumers pay
for electricity.
Complaint, page 1. The contract was between KeySpan and Morgan
Stanley, and Morgan Stanley entered into a reciprocal financial
derivative arrangement with Astoria Generating, a major new competitor
of KeySpan.\10\ One of the conditions of the swap contract provided for
its termination if the closing for the purchase of the competitor power
plant by Astoria Generating did not occur. The swap contract is not in
the record of this case but an excerpt is available in a FERC filing
made by Con Edison.
---------------------------------------------------------------------------
\10\ ``On January 18, 2006, KeySpan entered into an
International SWAP Dealers Association Master Agreement for a fixed
for float unforced capacity financial swap (the ``Agreement'') with
Morgan Stanley Capital Group Inc. (``Morgan Stanley''). The
Agreement has a three year term that began on May 1, 2006. The
notional quantity is 1,800,000kw (the ``Notional Quantity'') of In-
City Unforced Capacity and the fixed price is $757/kWmonth (``Fixed
Price''), subject to adjustment upon the occurrence of certain
events. Cash settlement occurs on a monthly basis based on the In-
City Unforced Capacity price determined by the relevant New York
Independent System Operator (``NYISO'') Spot Demand Curve Auction
Market (``Floating Price''). For each monthly settlement period, the
price difference equals the Fixed Price minus the Floating Price If
such price difference is less than zero, Morgan Stanley will pay
KeySpan an amount equal to the product of (a) the Notional Quantity
and (b) the absolute value of such price difference. Conversely, if
such price difference is greater than zero, KeySpan will pay Morgan
Stanley an amount equal to the product of (a) the Notional Quantity
and (b) the absolute value of such price difference. This derivative
instrument does not qualify for hedge accounting treatment under
SFAS 133 and is subject to fair value accounting treatment; although
currently there is no observable market reference to value this
derivative instrument. As noted, this is a financial derivative
instrument and is unrelated to any physical production of
electricity'' Keyspan Form 10-Q, Annual Report, June 30, 2006,
available at http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHTML1?ID=45704O2&SessionID=35GoWWvvg9LHL17.
---------------------------------------------------------------------------
Because all sellers are paid the same market clearing price in the
NYISO capacity market auctions, a single seller who achieves a higher
clearing price through an unlawful scheme ensures that all sellers reap
the benefit of that inflated price, with the consequence that every
megawatt of electric capacity sold, even by those sellers not
participating in the scheme, is overpriced, to the detriment of
consumers. The Complaint does not quantify the amount of higher prices
obtained through KeySpan's scheme or the attendant cost borne by
consumers. The Complaint simply alleges that ``KeySpan had revenues of
approximately $850 million in 2006 and $700 million in 2007 from the
sale of energy and capacity at its Ravenswood facility.'' Complaint, ]
6. The Complaint does not indicate the portion of these KeySpan
revenues attributable to the illegal scheme. Nor does the Complaint
indicate the total NYISO capacity market revenue or the portion of that
which was inflated due to KeySpan's scheme and ultimately paid by
consumers.\11\
---------------------------------------------------------------------------
\11\ As discussed infra, there are indications that the price of
capacity was increased by KeySpan's gambit by approximately $157
million in 2006.
---------------------------------------------------------------------------
Despite the absence of any indication in the Complaint as to the
amount of total damage to markets and consumers through the inflated
capacity prices, and despite the absence of any assertion regarding
KeySpan's share of those inflated charges, the DOJ Competitive Impact
Statement asserts:
The proposed Final Judgment remedies this violation by requiring
KeySpan to disgorge profits obtained through the anticompetitive
agreement.\12\
---------------------------------------------------------------------------
\12\ DOJ Competitive Impact Statement, p. 8. (Emphasis added).
The Competitive Impact Statement is available at http://www.justice.gov/atr/cases/f255500/255578.htm.
---------------------------------------------------------------------------
How can it possibly be said the proposed settlement ``remedies this
[[Page 42157]]
violation'' if there is no identification anywhere in the Complaint,
the Proposed Final Judgment, or the Competitive Impact Statement of the
amount of damage to markets and to consumers caused by KeySpan's
anticompetitive conduct? There is simply no factual foundation in the
record to support DOJ's assertion that the proposed compromise of the
action ``remedies this violation.''
The Competitive Impact Statement places great emphasis upon the
agreement of KeySpan to pay $12 million to the United States Treasury.
But there is no provision in the Proposed Final Judgment which would
remedy or address the harm to AARP members and other consumers caused
by KeySpan's successful efforts to inflate prices in the NYISO markets.
The Competitive Impact Statement refers frequently to disgorgement
of profits by KeySpan under the Proposed Final Judgment, possibly
creating an impression that KeySpan will not be allowed to benefit from
its scheme (even if other sellers do, due to the design of the NYISO
market):
The proposed Final Judgment remedies this violation by requiring
KeySpan to disgorge profits obtained through the anticompetitive
agreement * * *. Disgorgement will deter KeySpan and others from future
violations of the antitrust laws. [p. 1]
The proposed Final Judgment requires KeySpan to disgorge profits
gained as a result of its unlawful agreement restraining trade. [p. 8]
Disgorgement is necessary to protect the public interest by
depriving KeySpan of the fruits of its ill-gotten gains and deterring
KeySpan and others from engaging in similar Anticompetitive conduct in
the future. Absent disgorgement, KeySpan would be likely to retain all
the benefits of its anticompetitive conduct. [p. 9]
Disgorgement here will also serve to restrain KeySpan and others
from participating in similar anticompetitive conduct. [p. 10]
A disgorgement remedy should deter Keyspan and others from engaging
in similar conduct. [p.11-12] \13\
---------------------------------------------------------------------------
\13\ DOJ Competitive Impact Statement. (Emphasis added).
---------------------------------------------------------------------------
Contrary to the impression cast by the above assertions, a $12
million payment by KeySpan as proposed would not amount to full
disgorgement of its profits from the antitrust law violation described
in the Complaint. Rather, it would represent only some undesignated
portion of KeySpan's profits from the illegal scheme. The Competitive
Impact Statement acknowledges that the proposed settlement does not
require KeySpan to give up all its profits from the scheme:
Requiring KeySpan to disgorge a portion of its ill-gotten gains
from its recent illegal behavior is the only effective way of achieving
relief against KeySpan, while sending a strong message to those
considering similar anticompetitive conduct.\14\
---------------------------------------------------------------------------
\14\ Id., p. 10.
---------------------------------------------------------------------------
How can the the public know or Court determine if the proposed $12
million payment by KeySpan is appropriate when it represents only ``a
portion of its ill-gotten gains''? What portion? What is the reason, if
any, for requiring KeySpan to give up less than 100% disgorgement of
profits? DOJ has not explained its rationale for accepting less than
full disgorgement of KeySpan's ``ill-gotten gains from its recent
illegal behavior.\15\
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
The Competitive Impact Statement asserts that ``[b]ut for the Swap,
installed capacity likely would have been procured at a lower price in
New York City from May 2006 through February 2008.'' \16\ Hut, as
discussed above, there is no indication in the record of the total
amount of ``ill-gotten gains'' received byKeySpan due to the antitrust
violations, or of the total amount by which market prices were elevated
due to the scheme. An estimate of the total market price inflation in
2006 was made by Con Edison, a purchaser in the NYISO capacity market:
---------------------------------------------------------------------------
\16\ DOJ Competitive Impact Statement, p. 7.
---------------------------------------------------------------------------
The resulting harm to consumers was quite significant. Economic
withholding caused the price of capacity to remain close to $13/kW-
month instead of decreasing to less than $6 per kWmonth, a price that
[NYISO Market Monitor] Dr. Patton said would exist under competitive
market conditions * * *. As calculated by Con Edison witness Stuart
Nachmias, the impact on New York State's consumers of economic
withholding during the 2006 Capability Year on was approximately $157
million, of which approximately $119 million impacted New York City
consumers alone * * *.\17\
---------------------------------------------------------------------------
\17\ Re New York Independent System Operator, Inc., FERC Docket
No. ERO7-360.000, Motion to Comment of Consolidated Edison Company
of New York, Inc., and Orange and Rockland Utilities, Inc., p. 2,
available at http:/elibrary.ferc.gov/idmws/common/
opennat.asp?fileID=11236060.
---------------------------------------------------------------------------
This estimate was only for 2006. It also indicates that about $38
million in higher costs ($157 million total minus $119 million in New
York City) were experienced in the rest of New York State in 2006 due
to the KeySpan withholding. The scheme continued until March 2008,
according to the Competitive Impact Statement, when NYISO rules were
changed. KeySpan's share of the prices raised by dint of its
anticompetitive actions is not known by AARP. According to a FERC Staff
Report, the KeySpan--Morgan Stanley swap agreement identified in the
Complaint as violative of antitrust law ``produces almost $35 million
in annual revenue.'' \18\ If so, remitting just $12 million to the
government, about one-third of the revenue from the derivative, plus
the enhancement of market prices paid for capacity sold at excessive
prices in addition to the income from the financial derivative
contract, could be a good deal for KeySpan. But it would be a very bad
result for consumers, markets, competition, and public confidence in
Federal antitrust law enforcement.
---------------------------------------------------------------------------
\18\ Findings of a Non-Public Investigation of Potential Market
Manipulation by Suppliers in the Ne York City Capacity Market, FERC
Enforcement Staff Report, at, (Feb. 28, 2008), P. 21, available at
http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=11605597.
---------------------------------------------------------------------------
With no remedy for consumers who overpaid, and without a factual
foundation in the record as to how much KeySpan profited from its
gambit to inflate NYISO market prices, there is no way to assess
whether the proposed $12 million payment to the government would be a
meaningful or appropriate remedy. Although a 2008 FERC Staff Report
perceived no violation of FERC orNYISO rules, and exonerated KeySpan
and Morgan Stanley, the Court should not ignore the fact that the FERC
Staff Report did not emerge from an open proceeding with the benefit of
discovery, public testimony, or cross examination by interested
intervening parties. Indeed, the ineffectiveness of FERC, which
eventually approved a prospective change in NYISO market rules in 2008,
highlights the patchwork nature of jurisdiction over energy markets and
derivatives,\19\ and
[[Page 42158]]
underscores the importance of vigorous antitrust law enforcement by DOJ
to address, remedy, and deter anticompetitive conduct in the NYISO
electricity markets.
---------------------------------------------------------------------------
\19\ ``Three Federal statutes, the Commodity Exchange Act (CEA),
the Energy Policy Act of 2005 (EPAct 2005), and the Energy
Independence and Security Act of 2007 (ElSA) all prohibit
manipulation of various energy commodities and empower Federal
agencies to impose penalties on manipulators Unlike the EPAct 2005
or the EISA, the CEA does distinguish between market power
manipulations and fraud-based manipulations. However, a series of
poorly reasoned legal decisions have undermined the efficacy of the
CEA as a tool for combating market power manipulation. The EPAcI
2005 and EISA are both based on section 10b(5) of the Securities and
Exchange Act, and focus on fraud-based manipulations. As a result,
they are ill-suited to address market power manipulation, and
attempts to use them to do so will inevitably lead to further legal
confusions. * * * The FERC and FTC antimanipulation rules are newer,
and have not been extensively tested in litigation, but from an
economist's perspective, these rules (and the statutes that
authorize them) are completely misguided and hopelessly ill-suited
to reach the kinds of manipulative conduct most likely to occur in
energy markets. * * * Manipulation is a potentially serious problem
in all derivatives markets, energy included. Craig Pirrong, Energy
Market Manipulation: Definition, Diagnosis, and Deterrence, 31
Energy Law Journal 1-2 (2010) (Emphasis added).
---------------------------------------------------------------------------
In justification of the proposed settlement, the DOJ Competitive
Impact Statement is replete with references to the putative deterrent
effects the Proposed Final Judgment would have, claiming it would
discourage future transgressions by NYISO market participants:
Disgorgement will deter KeySpan and others from future violations
of the antitrust laws. [p. 2]
See International Boxing Club v. United States, 358 U.S.242, 253
(1959) (relief should ``deprive `the antitrust defendants of the
benefits of their conspiracy,' '' * * * The Second Circuit has held
that disgorgement is among a district court's inherent equitable
powers, and is a ``well-established remedy * * * to prevent wrongdoers
from unjustly enriching themselves through violations, which has the
effect of deterring subsequent fraud.'' SEC v. Cavanagh, 445 F.3d 105,
116-17 (2d Cir. 2006). [p. 8-9].
Disgorgement is necessary to protect the public interest by
depriving KeySpan of the fruits of its ill-gotten gains and deterring
KeySpan and others from engaging in similar anticompetitive conduct in
the future. Absent disgorgement, KeySpan would be likely to retain all
the benefits of its anticompetitive conduct. {p. 9].
A disgorgement remedy should deter Keyspan and others from engaging
in similar conduct. [p.11] \20\
---------------------------------------------------------------------------
\20\ DOJ Competitive Impact Statement. (Emphases added).
---------------------------------------------------------------------------
There is no explanation in the DOJ Competitive impact Statement as
to why only a portion of profits is being disgorged, what the total
profits were, what portion is being disgorged, or how the disgorgement
of part of the profits from an antitrust violation would possibly work
to deter others from future efforts to inflate prices in the nation's
electricity spot markets. The record is devoid of any explanation
underlying DOJ's conclusion that only partial disgorgement of
unquantified profits in this case would somehow deter similar conduct
in the organized electric spot markets or send ``a strong message to
those considering similar anticompetitive conduct.'' \21\ Indeed, DOJ,
in its Competitive Impact Statement, suggests content and significance
of the Proposed Final Judgment well beyond its text. DOJ states
---------------------------------------------------------------------------
\21\ Id.,p. 1O.
---------------------------------------------------------------------------
The proposed Final Judgment remedies this violation by requiring
KeySpan to disgorge profits obtained through the anticompetitive
agreement.\22\
---------------------------------------------------------------------------
\22\ Competitive Impact Statement, p. 2.
---------------------------------------------------------------------------
Actually, the Proposed Final Judgment simply states that:
plaintiff and KeySpan, through their respective attorneys, having
consented to the entry of this Final Judgment without trial or
adjudication of any issue of fact or law, for settlement purposes only,
and without this Final Judgment constituting any evidence against or an
admission by KeySpan with respect to any allegation contained in the
Complaint.\23\
---------------------------------------------------------------------------
\23\ Proposed Final Judgment, para. 1 (Emphasis added,).
---------------------------------------------------------------------------
On its face, the Proposed Final Judgment does not contain language
identifying any ``violation,'' does not mention profit disgorgement,
does not state KeySpan will ``disgorge profits,'' and does not
determine that the swap agreement was ``anticompetitive.'' as suggested
by the DOJ Competitive Impact Statement.
There is no provision in the Proposed Final Judgment one could
point to as even a rhetorical or symbolic ``shaming'' that might deter
similar future conduct of sellers concerned with their good will and
public image. Rather, the Proposed Final Judgment simply would require
a payment to the government with no admission of wrongdoing, no
acknowledgment of any anticompetitive conduct, and no remedy for
consumers harmed. The ``message'' conveyed by the $12 million payment
to other market participants may simply be that it was a nuisance
settlement equal to the cost of a handful of New York lawyers for a
couple of years. If the $12 million payment is only a fraction of
KeySpan's ill-gotten gain; if all sellers in the NYISO or other
organized electricity markets benefit from a successful exercise of
market power by any one of them; if the cost of apprehension is small
or nonexistent compared to the benefits; then other market participants
may be emboldened to try similar strategies if the Proposed Final
Judgment permitting such results is approved. In the NYISO and
similarly designed electricity markets where all sellers benefit from
the wrongdoing of the one who illegally drives prices up, the proposed
settlement may only incent further testing of the limits and
exploitation of markets and consumers.
Analogous to bid rigging schemes where the winner secretly pays a
part of his excessive profits to other sellers who deliberately overbid
far in excess of the winning ``low'' bid, the same result might be
obtained by sellers in the organized electricity spot markets such as
those of the NYISO, using a financial intermediary and derivative
contracts to compensate the high bidder who raises the price but
sacrifices some sales to do so. The DOJ Competitive Impact Statement
does not sufficiently identify the details of the swap contract
arrangements made by KeySpan with Morgan Stanley to ensure that KeySpan
would receive additional benefits when sales were made by competitors
at higher prices due to KeySpan's economic withholding.
When all sellers benefit from any successful price-raising gambit
in NYISO and similar organized electricity markets, the real
``message'' conveyed by this case to those entertaining an exercise of
market power in violation of antitrust law, if the settlement is
approved, could be ``go for it.'' If the gambit is discovered, the
market participant can escape civil antitrust liability in an antitrust
case brought by DOJ four years later by simply agreeing to cede an
unspecified portion of one's profits, with no admission of wrongdoing.
Thus, if approved, the Proposed Final Judgment may only encourage
sellers to exploit the nation's electricity spot markets and consumers,
with confidence that if they are caught by DOJ, they will not be
ordered to provide a remedy to exploited consumers, but merely required
to pay some portion of unlawfully obtained profits to the government.
AARP Recommendations
AARP recommends that DOJ renegotiate, or the Court modify, the
Proposed Final Judgment to require the following:
1. Acknowledgment of wrongdoing and violation of the antitrust law
by KeySpan as described in the Complaint;
2. Identification of the harm to markets and consumers including
the total cost of the inflated prices in the NYISO capacity market due
to KeySpan's anticompetitive conduct;
3. Identification of derivative contracts which violated the
antitrust laws, and any other ``determinative'' documents under the
Tunney Act;\24\
---------------------------------------------------------------------------
\24\ The DOJ Competitive Impact Statement asserts that there are
no ``determinative'' documents required to be submitted under the
Tunney Act. See United States v. Central Contracting Co., Inc., 537
F. Supp. 571 (E.D. Va. 1982) (``The Court simply cannot accept an
interpretation of legislation that permits the government to assert
in 172 out of 188 cases that it considered neither documents nor any
other materials determinative in reaching its conclusion to enter
into a consent decree'').
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[[Page 42159]]
4. Disgorgement by KeySpan of all profits it realized through the
scheme to inflate prices;
5. Refunding by KeySpan of its profits from antitrust violations to
reduce the harm to consumers, and other measures to protect consumers
and deter similar schemes to exercise market power in violation of the
antitrust laws.
Under the Tunney Act, there must be a ``factual foundation for the
government's decisions such that its conclusions regarding the proposed
settlement are reasonable.'' United States v. SBC Commc'ns, Inc., 489
F. Supp. 2d1, 15-16 (D.D.C. 2007). For the reasons previously stated,
the Proposed Final Judgment is not supported by the record as it now
stands, and the requisite ``factual foundation'' for compromise of the
action as proposed by DOJ and KeySpan is lacking. Accordingly, the
request of DOJ arid KeySpan for Tunney Act approval of the Proposed
Final Judgment should not be granted by the Court.
Alternatively, the Court should require DOJ to supplement the
record, if DOJ does not renegotiate the proposed settlement or provide
further factual support in response to these or other comments, or
conduct a public hearing to determine whether the Proposed Final
Judgment is in the public interest. Obtaining additional evidence is an
appropriate way to assure protection of the public interest in a Tunney
Act proceeding:
In addition, the Court found there to be insufficient material in
the record, which consisted largely or exclusively of unverified legal
pleadings, to allow the Court to adequately discharge its duties under
the Tunney Act. * * * Rather than hold an evidentiary hearing, the
Court ordered the government to provide further materials that would
allow the Court to make the public interest determination required by
the Tunney Act. The Court allowed the government to decide exactly what
types of materials were appropriate to submit. The Court also provided
the other parties and amici the opportunity to respond to this
supplemental filing.
United States v. SBC Commc'ns, Inc., 489 F. Supp. 2d 1 (D.D.C.
2007).\25\ AARP believes augmentation of the record in this case should
include additional evidence sufficient to address, at a minimum, the
following matters:
---------------------------------------------------------------------------
\25\ If DOJ supplements the record the public should have an
opportunity to comment on new material offered to justify the
proposed settlement or any modification of it.
---------------------------------------------------------------------------
1. The total amount of inflated profits achieved by all sellers in
the NYISO capacity market due to the antitrust law violation identified
in the Complaint, and an estimate of the total damage and economic harm
to electricity consumers in New York City and the rest of the state;
2. The total amount of inflated profits received by KeySpan due to
the antitrust violation identified in the Complaint;
3. The relationship of any proposed disgorgement to the total
profits received by KeySpan from the violation identified in the
Complaint;
4. The amount of revenue received by KeySpan under its financial
swap agreement with Morgan Stanley;
5. The rationale for not requiring full disgorgement of profits due
to the antitrust violation, if the settlement proposal is not modified
and partial disgorgement is still proposed;
6. The rationale for not providing any remedy to benefit customers
injured by the antitrust violation identified in the Complaint, if the
settlement proposal is not modified and no financial or other remedy
for consumers is proposed.
Thank you for your consideration.
Respectfully submitted,
AARP, New York State Office.
AARP
In the United States District Court for the Southern District of New
York
Civil Case No. 10-CIV-1415
United States of America, Petitioner v. KeySpan Corporation,
Respondent.
Comments of the Public Service Commission of the State Of New York,
Pursuant to the Antitrust Procedures and Penalties Act, on the Proposed
Final Judgment
Summary
The Public Service Commission of the State of New York (``PSC'')
submits these comments pursuant to the Antitrust Procedures and
Penalties Act, 15 U.s.c. 16(b)-(h), in response to the notice published
in the Federal Register on March 4, 2010, in this matter. U.S. Dep't
ofJustice, Antitrust Div., United States v. Keyspan Corporation,
Proposed Final Judgment and Competitive Impact Statement, 75 FR 9946
(March 4, 2010).
DOJ is to be commended for its faithful enforcement of the
antitrust law to protect the integrity of electricity markets in New
York City. The electric capacity market for New York City is highly
concentrated. The antitrust law is properly applied in this case to
address wrongful anti-competitive practices of KeySpan Corporation
(``KeySpan''). DOJ's enforcement of the antitrust law is critical to
protect consumers against the harmful effects of KeySpan's anti-
competitive conduct in this particular case and, more generally, to
protect the public interest in the integrity of the newly-created
competitive electricity markets.
DOJ proposes to settle this litigation by having KeySpan pay the
United States government $12 million. DOJ asserts such a settlement
will be in the public interest because KeySpan's payment of $12 million
into the U.S. Treasury will prevent KeySpan's unjust enrichment, and
deter others from agreeing not to compete in the future. However,
because DOJ has not offered any information as to how much KeySpan
profited from its unlawful conduct, the Court has no basis for
evaluating whether the proposed $1 2 million settlement will prevent
KeySpan's unjust enrichment or is sufficient to deter such conduct in
the future. Therefore, the Court should direct DOJ to supplement the
record to show how much KeySpan gained by virtue of its anti-
competitive conduct. Only in this way can the Court evaluate whether
the proposed settlement would be in the public interest. POINT 1,
below.
As explained more fully below, it is highly probable that KeySpan's
gains were well in excess of $12 million. Its net profits under the
complained-of ``swap'' agreement amounted to nearly $68 million. The
proposed $12 million settlement would not prevent KeySpan's unjust
enrichment, and would not deter such conduct in the future. POINT II,
below.
Finally, KeySpan's unlawful anti-competitive conduct harmed
consumers to an extent far exceeding both the proposed $12 million
settlement and KeySpan's nearly $68 million net profit under the swap.
The costs to consumers, in the form of excessive electricity costs
caused by KeySpan's unlawful agreement, may well exceed hundreds of
millions of dollars over a two-year period. Proceeds from any
settlement should be used to benefit ratepayers, who were greatly
harmed by KeySpan's wrongful conduct. POINT Ill, below.
Background
In this civil antitrust action, brought by the United States
Department of Justice (``DOJ'') under Section 1 of the Sherman Act, 15
U.S.C. 1, the government seeks equitable and other relief against
KeySpan for violating the antitrust law. According to DOJ, KeySpan
entered into an agreement (the
[[Page 42160]]
``KeySpan Swap'' or the ``swap'') with an unnamed financial services
company (the ``FSC'') which, in purpose and effect, ensured that
KeySpan would ``withhold substantial output from the New York City
electricity generating capacity market. * * *'' 75 FR 9947. DOJ states
that ``[t]he likely effect of the Keyspan Swap was to increase capacity
prices for the retail electricity suppliers who must purchase capacity,
and, in turn, to increase the prices consumers pay for electricity.''
75 FR 9947.
According to DOJ, the KeySpan Swap was an agreement that unlawfully
restrained competition in New York City's electric capacity market.
KeySpan entered into the swap agreement to protect itself against
increased losses from its preferred bidding strategy, due to the entry
of new competitors into the market. 75 FR 9947. Under the swap
agreement, KeySpan, which already possessed substantial market power in
the highly concentrated and constrained New York City capacity market,
``enter[ed] into an agreement that gave it a financial interest in the
capacity of Astoria--KeySpan's largest competitor.'' 75 FR 9947. By
giving KeySpan revenues not only from its own sales, but also from the
capacity sales of its largest competitor, the KeySpan Swap
``effectively eliminated KeySpan's incentive to compete for sales'' of
capacity. 75 FR 9948. Thus, ``[t]he clear tendency of the KeySpan Swap
was to alter KeySpan's bidding in the NYC Capacity Market auctions.''
75 FR 9948. After entering into the swap, KeySpan was able to continue
bidding its capacity into the market at the highest level allowed,
knowing any losses from foregone sales would be more than offset by
profits from the swap and from its remaining sales. 75 FR 9948.
As a result, electric capacity prices remained unlawfully inflated,
and KeySpan was paid, under the terms of the swap agreement, as much as
$67.8 million. Attached Affidavit of Thomas Paynter dated April 27,2010
(``Paynter Affidavit'') ] 15. In addition, the elimination of
competitive pressures, due to KeySpan's anti-competitive agreement,
imposed unnecessary costs on consumers which may total hundreds of
millions of dollars.
DOJ's proposal, however, does not include enough information to
allow the Court to find, as is required under the Tunney Act, 15 U.S.C.
16e(1), that the settlement would be in the public interest. DOJ
asserts the public interest will be served by preventing KeySpan's
unjust enrichment, but DOJ has not offered any estimates of how much
money KeySpan made by agreeing, with its biggest competitor, not to
compete. For the same reason, DOJ has not offered enough information to
assess its claim that the settlement will deter such unlawful conduct
in the future, Finally, the proposed settlement will do nothing to
address the substantial harm to competitiveness of the market that
KeySpan caused. For these reasons, the Court should direct DOJ to
supplement the record with information about how much KeySpan profited,
and how much KeySpan harmed the integrity of the electricity markets.
Finally the Court should require that proceeds of any settlement be
used to ameliorate the harm KeySpan caused to electric ratepayers in
the downstate New York area.
Point I: DOJ Has Not Provided Enough Information to Determine Whether
the Proposed Settlement is in the Public Interest
Before entering any consent judgment proposed by the United States,
the Court must first determine that entry of such a judgment ``is in
the public interest.'' 15 USCS Sec. 16(e)(1). In doing so, ``the court
shall consider--
(A) the competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and modification,
duration of relief sought, anticipated effects of alternative remedies
actually considered, whether its terms are ambiguous, and any other
competitive considerations bearing upon the adequacy of such judgment
that the court deems necessary to a determination of whether the
consent judgment is in the public interest; and
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and individuals
alleging specific injury from the violations set forth in the complaint
including consideration of the public benefit, if any, to be derived
from a determination of the issues at trial.
15 USCS Sec. 16(e)(1)(A) & (B).
In seeking the Court's approval, DOJ has the burden to ``provide a
factual basis for concluding that the settlements are reasonably
adequate remedies for the alleged harms.'' United States v. SBC
Communs., Inc., 489 F. Supp. 2d 1, 17 (D.D.C. 2007). In this case, DOJ
has not met this burden. Neither the competitive impact statement, nor
the proposed consent decree provides the information needed to evaluate
whether this settlement would be a reasonably adequate remedy for the
harm caused by KeySpan.
Under the proposed settlement, KeySpan would be required to pay the
United States government $12 million dollars. United States v. Keyspan
Corporation; Proposed Final Judgment and Competitive Impact Statement,
75 FR 9946, 9949 (March 4, 2010). According to DOJ, this amount
``remedies [KeySpan's] violation by requiring KeySpan to disgorge
profits obtained through the Anticompetitive agreement.'' 75 FR 9949.
DOJ asserts that ``[d]isgorgement is necessary to protect the public
interest by depriving KeySpan of the fruits of its ill-gotten gains and
deterring KeySpan and others from engaging in similar anticompetitive
conduct in the future.'' 75 FR 9949. Thus, according to DOJ, the public
interest is served because the proposed settlement will both prevent
KeySpan's unjust enrichment, and will deter such wrongful conduct in
the future.
Preventing any unjust enrichment on KeySpan's part is a legitimate
purpose of any proposed settlement. In fashioning relief in response to
a violation of the antitrust law, ``[o]ne of [the] objectives * * * is
to `deny to the defendant the fruits of its statutory violation.' ''
Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1232 (D.C. Cir. 2004)
(quoting United States v. Microsoft Corp., 253 F.3d 34, 103 (D.C. Cir.
2001)). However, the unstated premise underlying DOJ's claims (i.e.,
that disgorgement is necessary to prevent unjust enrichment and that a
$12 million penalty is adequate), is that KeySpan realized a gain of
$12 million. Yet DOJ has not offered anything to support this. The
Complaint, the Competitive Impact Statement, and the proposed Consent
Judgment are silent on the critical question of how much KeySpan
improperly gained by violating the antitrust law.
It is, of course, axiomatic that ``the fruits of a violation must
be identified before they may be denied.'' Massachusetts v. Microsoft
Corp., 373 F.3d 1199, 1232 (D.C. Cir. 2004). The lack of any
information as to how much KeySpan gained makes it virtually impossible
for the Court to meaningfully evaluate whether $12 million ``represents
a reasonable method of eliminating the consequences of the illegal
conduct.'' National Soc. of Professional Engineers v. United States,
435 U.S. 679, 698 (1978). This holds true both with respect to
depriving KeySpan of any unjust enrichment, and with respect to
evaluating whether the settlement will deter such wrongful conduct in
the future. Thus, on the current record, the Court has no basis for
finding the proposed settlement would be ``in the public interest.''
It is noteworthy that DOJ elsewhere implies KeySpan made more than
$12
[[Page 42161]]
million as a result of its anti-competitive conduct. More specifically,
DOJ indicates the $12 million settlement would effect only partial
disgorgement of KeySpan's gains. 75 FR 9951 (claiming that
``[r]equiring KeySpan to disgorge a portion of its ill-gotten gains * *
* is the only effective way of achieving relief against KeySpan * *
*.'') (emphasis added). If DOJ is actually seeking only partial
disgorgement, then the settlement would not prevent KeySpan's unjust
enrichment. Anything less than full disgorgement would a forliori not
strip KeySpan of its wrongful gains. Moreover, if $12 million
represents only a fraction of the total amount of KeySpan's unjust
enrichment, such a penalty would not deter future violations of the
antitrust law. Such a penalty may instead amount to nothing more than a
``cost of doing business.'' \1\ This possibility is not remote. As
discussed below in POINT H, it is highly probable that the total amount
of KeySpan's ill-gotten gains was much greater than $12 million.
---------------------------------------------------------------------------
\1\Arguably, even total disgorgement would have only a limited
deterrent effect. ``[T]o `limit the penalty * * * to disgorgement is
to tell a violator that he may [break the law] with virtual
impunity; if he gets away undetected, he can keep the proceeds, but
if caught, he simply has to be give back the profits of his wrong.'
'' SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402, 406 (S.D.N.Y.
2009) (quoting S.E.C. v. Rabinovich & Assoc., 2008 U.S. Dist. LEXIS
93595, 2008 WL 4937360, at *6 (S.D.N.Y. Nov. 18, 2008)).
---------------------------------------------------------------------------
Given that DOJ has not proffered enough information to enable the
Court to determine whether the proposed settlement is in the public
interest, DOJ should be directed to do so. Under the Tunney Act,
``[t]he court may `take testimony of Government officials or experts'
as it deems appropriate, 15 U.S.C. 16(f)(1); authorize participation by
interested persons, including appearances by amici curiae, Id. Sec.
16(f)(3); review comments and objections filed with the Government
concerning the proposed judgment, as well as the Government's response
thereto, Id. Sec. 16(f)(4); and `take such other action in the public
interest as the court may deem appropriate,' iii. Sec. 16(f)(5).''
Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1206 (D.C. Cit. 2004).
Requiring DOJ to adduce facts relating to how much KeySpan gained as a
result of its anticompetitive conduct will provide a record basis for
any public interest determination made by the Court. Cf S.E.C. v. Bank
of America Corp., ------ F. Supp.2d ------, 2010 U.S. Dist. LEXIS 15460
(S.D.N.Y. Feb. 22, 2010) (approving a proposed consent judgment
because, inter alia, after the court rejected an earlier proposed
settlement, the parties conducted extensive discovery which established
facts supporting the new proposal).
Point II--The Proposed Consent Decree Would Not Deter the Unlawful
Anticompetitive Conduct Identified By DOJ
KeySpan's swap, in both purpose and effect, violated the antitrust
law. Its purpose was to ``effectively eliminate[ I KeySpan's incentive
to compete for sales in the same way a purchase of Astoria or a direct
agreement between KeySpan and Astoria would have done.'' 75 FR 9948.
Thus, regardless of its effect on the market, the KeySpan Swap violated
the Sherman Act. Cf. Summit Health v. Pinhas, 500 U.S. 322, 330 (1991)
(``[B]ecause the essence of any violation of I [of the Sherman Act] is
the illegal agreement itself[,] rather than the overt acts performed in
furtherance of it, * * * proper analysis focuses, not upon actual
consequences, but rather upon the potential harm that would ensue if
the conspiracy were successful'').
The KeySpan Swap also violated the Sherman Act because of its
effect on the market. Its ``clear tendency'' was to alter KeySpan's
bidding, in order to prevent competition and keep prices high. 75 FR
9948 (col. 3). Cf. United States v. Stascuk, 517 F.2d 53, 60 & n.17
(7th Cir. Ill. 1975) (``The Federal power to protect the free market
may be exercised to punish conduct which threatens to impair
competition even when no actual harm results'')
KeySpan's ill-gotten gains far exceeded the $12 million payment DOJ
is seeking. DOJ alleges the KeySpan Swap was effective from January 16,
2006 until March, 2008.\2\ Under the swap agreement, if the market
price for capacity exceeded $7.57 per kW-month, the financial services
company (``FSC'') would pay KeySpan the difference between the market
price and $7.57, times 1800 MW. 75 FR 9950.
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\2\ DOJ asserts the swap agreement was effective from May, 2006,
through April, 2009. 75 FR 9950-51. According to DOJ, the
``effects'' of the swap continued only ``until'' March, 2008,
because the New York State Public Service Commission required
KeySpan to bid its New York City capacity at zero from March 2008
until KeySpan sold its Ravenswood plant. 75 FR 9951 & n. 2. However,
the analysis below assumes the swap remained ``effective'' between
the parties during March, 2008, because the PSC's requirement that
KeySpan bid at zero would not have triggered the agreement's
``regulatory out'' clause. This has bearing on the total amount of
KeySpan's gain under the swap agreement. Including March, 2008,
reduces KeySpan's total revenues under the swap because, during
March, 2008, the market price of capacity was below the $7.57 per
kW-month trigger in the swap agreement. Thus, for March, 2008,
KeySpan would have paid moneys to the FSC.
---------------------------------------------------------------------------
The average spot market price for capacity during the period from
May, 2006, through March, 2008, was $9.21/kW-month. After subtracting
the $7.57 per kW month amount specified under the swap agreement,
KeySpan's average revenues under the swap agreement were $1.64/kW-
month, times the 1800 MW covered by the swap agreement, for a period of
23 months. Multiplying these figures out yields a total of $67.8
million. Thus, under the swap agreement alone, KeySpan received
revenues of almost $68 million.\3\ Paynter Affidavit ] 15.
---------------------------------------------------------------------------
\3\ In addition, the FSC received $0.50/kW-month under the swap
agreement. Multiplying this amount by the 1800 MW covered by the
swap agreement, times the 23 month duration of the swap agreement,
yields total revenues to the FSC of approximately $20.7 million.
Paynter Affidavit ] 17. The FSC's profits are potentially relevant
because Astoria could have directly entered into a swap agreement
with a load-serving entity serving New York City. If such agreement
had a ``trigger'' price of $7.07, the load-serving entity would have
realized revenues of $89 million (i.e., $67 million, plus $21
million), which would have inured to the benefit of consumers.
Paynter Affidavit ] 18.
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The proposed $12 million payment would amount to only 17.7% of
KeySpan's direct revenues/net profits under the swap agreement. Thus,
if the Court approves this settlement, KeySpan would be able to retain
more that $55 million in ill-gotten gains, and the FSC would be able to
retain more than $20 million in additional ill gotten gains. Such a
settlement would clearly not materially prevent KeySpan's unjust
enrichment. Moreover, under any reasonable measure, the proposed
settlement would not deter KeySpan, or other market participants, from
engaging in such anti-competitive conduct in the future. Thus, the
proposed $12 million settlement would not satisfy either of DOJ's
rationales (i.e., preventing KeySpan's unjust enrichment, and deterring
such wrongful conduct in the future) for a judicial finding that the
settlement is in the public interest.
Point III--The Proposed Settlement Would Not Ameliorate the Ratepayer
Harm Caused by Keyspan
The Court Should Consider Ratepayer Harm
In determining whether the settlement is in ``the public
interest,'' the Court should also consider the impact of the proposed
settlement on the ratepayers that were harmed by KeySpan's anti-
competitive conduct. See 15 U.S.C. 16(e)(1)(B) (``the court shall
consider * * * the impact of entry of such judgment upon * * * the
public generally * * *'') \4\ DOJ acknowledges
[[Page 42162]]
ratepayers were harmed, in the form of inflated capacity prices,
because of KeySpan's conduct. According to DOJ, ``[w]ithout the Swap,
KeySpan likely would have chosen from a range of potentially profitable
competitive strategies in response to the entry of new capacity. Had it
done so, the price of capacity would have declined.'' 75 FR 9948.
Because KeySpan decided to withhold capacity rather than compete, it
realized ill-gotten gains on all of the capacity it sold, in addition
to the nearly $68 million KeySpan received directly under the terms of
the swap agreement itself.
---------------------------------------------------------------------------
\4\ Cf. United States v. SBC Communs., Inc., 489 F. Supp. 2d 1,
17 (D.D.C. 2007) (``the court should be concerned with any
allegations that the proposed settlement will injure a third
party'').
---------------------------------------------------------------------------
Yet DOJ also indicates that ratepayers may have no recourse under
the antitrust law because of the ``fried rate'' doctrine. 75 FR 9951.
Moreover, ratepayers may not be able to obtain any relief from FERC
because, in early 2008, FERC's Staff concluded there was no evidence
that KeySpan's bidding behavior violated FERC's Anti-Manipulation Rule,
18 CFR 1c2(a). FERC Docket Nos. IN08-2-000 & ELO7-39-000, Enforcement
Staff Report, Findings of a Non-Public Investigation of Potential
Market Manipulation by Suppliers in the New York City Capacity Market,
p. 17 (February 28, 2008). Thus, in this case ratepayers harmed by
KeySpan's anti-competitive conduct may have no meaningful recourse
under either the antitrust law or the Federal Power Act.
This lack of a remedy for customers is highly significant, given
the potential size of the harm to consumers caused by KeySpan's
violation of the antitrust law. DOJ has not offered any factual
information or analysis of how much KeySpan gained by maintaining
prices at an artificially high level in violation of the antitrust
laws, rather than choosing to bid at more competitive level. The
measure of disgorgement should reflect the profits gained by KeySpan
through the unlawfully higher price of capacity.\5\ The Court should
direct DOJ to address this defect in the settlement proposal. Cf.
Howard Hess Dental Labs. Inc. v. Dentsply Int'l, Inc., 424 F.3d 363,
374 (3d Cir. 2005) (``IlIhe standard method of measuring damages in
price enhancement cases is overcharge, [that is] the difference between
the actual price and the presumed competitive price multiplied by the
quantity purchased''); New York Julius Nasso Concrete Corp., 202 F.3d
82, 88-89 (2d Cir. 2000) (``Where * * * there is a dearth of market
information unaffected by the collusive action of the defendants, the
plaintiffs burden of proving damages, is, to an extent, lightened[,]
[and] the State need only provide the court with some relevant data
from which the district court can make a reasonable estimated
calculation of the harm suffered * * *.'') (citations and internal
quotations omitted); Id., 202 F.3d at 89 (``[T]o do otherwise would be
a perversion of fundamental principles of justice [and would] deny all
relief to the injured person, and thereby relieve the wrongdoer from
making any amends for his acts''); New York Hendrickson Bros., Inc.,
840 F.2d 1065, 1078 (2d Cir. 1988) (``The most elementary conceptions
of justice and public policy require that the wrongdoer shall bear the
risk of the uncertainty which his own wrong has created'') (quoting
Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946)); Fishman
v. Estate of Wirt, 807 F.2d 520, 551 (7th Cir. 111. 1986) (``The
concept of a `yardstick' measure of damages, that is, linking the
plaintiffs experience in a hypothetical free market to the experience
of a comparable firm in an actual free market, is also well
accepted'').
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\5\ That is, the analysis in the Paynter Affidavit shows a total
harm to ratepayers of $89 million from KeySpan's, and the FSC's,
financial interest in the 1800 MW controlled by the swap, even
without assuming any drop in spot market prices. However, KeySpan
also controlled an additional 2400 MW of capacity in the New York
City market. By continuing to bid at its cap (even after accounting
for KeySpan's additional lost sales due to the entry of new
generation into the market), KeySpan realized gains outside the swap
that, roughly speaking, equaled or exceeded the nearly $68 million
KeySpan received under the swap. The need for disgorgement of these
additional wrongful gains is underscored by the even larger consumer
harm KeySpan caused. If KeySpan had competed for sales, the
resulting declines in prices could easily have saved ratepayers
hundreds of millions of dollars.
---------------------------------------------------------------------------
If KeySpan's illegal conduct harmed consumers by preventing price
declines that could have totaled hundreds of millions of dollars, then
the proposed $12 million settlement is so low it would not be fair,
reasonable, adequate or in the public interest. Cf. SEC. v. Bank of
America Corp., 653 F. Supp.2d 507 (S.D.N.Y. 2009) disapproving a
proposed settlement in part because the proposed $33 million fine was
``a trivial penalty for a false statement that materially infected a
multi-billion-dollar merger''). But cf. SEC. v. Bank of America Corp.,
------ F. Supp.2d ------, 2010 U.S. Dist. LEXIS 15460 (S.D.N.Y. Feb.
22, 2010) (approving a $150 million fine even though it would have only
``a very modest impact on corporate practices or victim
compensation'').
Settlement Proceeds Should Be Used To Ameliorate The Ratepayer Harm
DOJ seeks disgorgement, through the exercise of the Court's
``inherent equitable powers * * *.'' 75 FR 9951. DOJ maintains the
public interest requires disgorgement to prevent KeySpan's unjust
enrichment. 75 FR 9951. The legal doctrine of unjust enrichment ``is an
old equitable remedy permitting the court in equity and good conscience
to disallow one to be unjustly enriched at the expense of another.''
Nimbus Techs., Inc. v. SunnData Prods., 2005 U.S. Dist. LEXIS 46509
(ND. Ala. Dec. 7,2005) (quoting Battles v. Atchison, 545 So. 2d 814,
815 (Ala. 1989)).
In this case, DOJ's proposed $12 million partial disgorgement of
KeySpan's ill gotten gains would be deposited in the United States
Treasury, and will not inure to the benefit of the ratepayers directly
harmed by KeySpan. KeySpan's wrongful conduct harmed consumers, and
damaged the credibility of the markets, by wrongly inflating capacity
prices. The cost may have totaled hundreds of millions of dollars.
Given the high level of consumer harm, the proceeds of any settlement
should be used to ameliorate the consumer harm KeySpan caused.
Depositing the settlement proceeds in the U.S. Treasury, as DOJ
proposes, would be a manifestly unfair result.
Accordingly, in the proper exercise of its equitable powers, the
Court should direct that proceeds of the settlement be used to benefit
the ratepayers that were directly and materially injured by KeySpan's
anti-competitive conduct. The need for such relief is particularly
acute in this case because consumers may not be able to obtain relief
under Section 4 of the Sherman Act, and may not be able to obtain
relief from FERC. Accordingly, settlement proceeds should be credited
to affected ratepayers (i.e., ratepayers within the New York
Independent System Operators' ``Zone J''). This approach will directly
address the harm KeySpan caused to consumers in New York City. If this
approach is unworkable, either because it would not be cost-effective
or would be unduly complex, then settlement proceeds should be used for
energy efficiency programs within New York City administered by the New
York State Energy Research and Development Authority. Promoting energy
efficiency would reduce the demand for electricity. This, in turn,
would both mitigate the market power of electric suppliers in New York
City and help reduce electricity prices going forward. Such a use of
settlement proceeds is particularly appropriate in this case, given the
ratepayer harm KeySpan caused and the potential unavailability of other
meaningful relief for those most directly affected by KySpan's anti-
competitive conduct.
[[Page 42163]]
Respectfully submitted,
Peter McGowan,
General Counsel.
By: Sean Mullany, Assistant Counsel of Counsel, Public Service
Commission of the State of New York.
Dated: April 30, 2010, Albany, New York.
Attachment: Affidavit of Thomas Paynter In Support of Comments of The
Public Service Commission of The State of New York, (April 27, 2010).
United States District Court for the Southern District of New York
United States of America, Petitioner V. Keyspan Corporation,
Respondent.
State of New York
ss.: County of Albany
Affidavit of Thomas Paynter in Support of Comments of the Public
Service Commission of the State of New York
Civil Case No. 10-CIV-1415
THOMAS PAYNTER, being duly sworn, deposes and says:
1. I am employed by the New York State Department of Public Service
(``DPS'' or ``Department'') as Supervisor of Regulatory Economics in
the Office of Regulatory Economics.
2. I received a Ph.D. in Economics from the University of
California at Berkeley (1985), with fields in econometrics and labor
economics. I have a B.A. in Physical Science and a BA. in Economics,
also from the University of California at Berkeley (1975). I am a
member of the American Economic Association.
3. From 1983 to 1986, I was an Assistant Professor of Economics at
Northern Illinois University, where I taught graduate and undergraduate
courses in economic theory. From 1986 to 1990, I was employed by the
Illinois Commerce Commission as a Senior Economic Analyst in the Policy
Analysis and Research Division; I was also a member of the Electricity
Subcommittee of the National Association of Regulatory Utility
Commissioners, and authored an article concerning coordination and
efficient pricing for independent power producers, ``Coordinating the
Competitors,'' published by The Electricity Journal in November 1990. I
joined the New York Department of Public Service in November of 1990.
4. My current responsibilities include analyzing competitive
issues, efficient pricing, marginal costs, regulatory policies, and
system planning. I am a member of a staff team responsible for
analyzing and commenting upon the pricing rules of the New York
Independent System Operator, Inc. (NYISO), which operates the New York
transmission system. I have participated in numerous NYTSO committee
meetings related to energy and transmission pricing, system planning,
and other issues.
5. I make this affidavit in support of the comments filed by the
Public Service Commission of the State of New York (``PSC'' or
``Commission'') pursuant to the Antitrust Procedures and Penalties Act,
15 U.S.C. 16(b)-(h), in response to the notice published in the Federal
Register on March 4, 2010, in connection with this matter. U.S. Dep't
of Justice, Antitrust Div., United States v. Keyspan Corporation,
Proposed Final Judgment and Competitive Impact Statement, 75 FR
9946 (March 4, 2010).
6. DOJ states that the KeySpan Swap was executed on January 16,
2006, and was effective from May, 2006, through April, 2009. 75 FR
9950-51. According to DOJ, the effects of the swap continued only until
March, 2008, because, as of March, 2008, the NYSPSC required KeySpan to
bid its NYC capacity into the market at zero until KeySpan sold its
Ravenswood plant. 75 FR 9951 & n. 2.
7. However, upon information and belief, the PSC's requirement that
KeySpan bid its NYC capacity into the market at zero did not trigger
the swap agreement's ``regulatory out'' clause. Therefore, upon
information and belief, the swap continued in effect until April, 2008,
when FERC lowered KeySpan's bid/price cap. Accordingly, the analysis
below assumes the swap agreement remained in force during the Month of
March, 2008. [Note that this assumption effectively reduces the
estimate of the amount of KeySpan's net revenues/profits under the swap
agreement because, during the month of March, 2008, the actual price of
capacity was below the $7.57 per kWmonth trigger under the swap
agreement (discussed below). As a result, during the month of March,
2008, KeySpan would have been paying moneys to the financial services
company (``FSC''), rather than receiving moneys from the FSC.
8. Under the KeySpan Swap, if the market price for capacity was
above $7.57 per kW-month, the FSC would pay KeySpan the difference
between the market price and $7.57, limes 1800 MW; if the market price
for capacity was below $7.07, KeySpan would pay the FSC the difference,
limes 1800 MW. 75 FR 9950 (col. 3). Thus, a comparison of the actual
market price for capacity during the period from May, 2006, through and
including March, 2008, and the $7.57/kW month ``trigger'' (or
``strike'') price for KeySpan, will reveal the total net revenues/
profits KeySpan received from the FSC under the KeySpan Swap.\1\
---------------------------------------------------------------------------
\1\ KeySpan and the FSC likely incurred some costs in preparing
the swap agreements (which would make their profits under the swap
something less than their net revenues), but this analysis assumes
those Costs were not very significant.
---------------------------------------------------------------------------
9. Regarding the actual market prices of capacity during the period
of the KeySpan Swap, KeySpan's bid caps were seasonally ``shaped,'' in
order to reflect higher summer prices, and lower winter prices, due to
differences between summer and winter supply. For the summer 2006
period (i.e., May-October 2006), the unforced capacity (``UCAP'') spot
price cleared at the level of KeySpan's bid cap of $12.71/kW-month.\2\
---------------------------------------------------------------------------
\2\ In describing the $7.57/kW-month and $7.07/kW-month
``trigger'' prices under the KeySpan and Astoria swap agreements,
DOJ refers only to ``the market price for capacity''. See, e.g., 75
FR 9950. More specifically, the ``trigger'' prices under the swap
agreements referred to the actual ``unforced capacity'' spot market
prices. Similarly, in describing actual market prices, my analysis
refers to the actual unforced capacity (``UCAP'') spot market
clearing prices.
---------------------------------------------------------------------------
``[A] generator's unforced capacity (UCAP) is its installed
capacity ([UCAP) discounted or `de rated' by its forced outage rate (or
equivalent forced outage rate demand (EFORd)). The forced outage rate
equals the historical percentage of the generator's maximum output lost
to forced outages when such output is demanded. The translation of
installed into unforced capacity can be represented mathematically as
follows: UCAP = ICAP x (1 - EFORd) * * *'' Kystian-Ravenswood, LLC
FERC, 474 F.3d 804, 807 (D.C. Cir. 2007).
10. For the winter 2006-07 period (i.e., November 2006-April 2007),
the UCAP spot price cleared at KeySpan's bid cap of $5.84/kW-month.
11. For the summer 2007 period (i.e., May-October 2007), the UCAP
spot price cleared at KeySpan's bid cap of $12.72/kW-month.
12. For the winter 2007-08 period, the spot price cleared at
KeySpan's bid cap of $5.77/kW-month for 4 months (i.e., November 2007-
February 2008), and then cleared at the lower statewide prices of
$1.05/kW-month during March, 2008, and at $0.75/kW-month during April,
2008.
13. The lower price during April, 2008 reflects the fact that
FERC's new mitigation measures forced KeySpan and other New York City
electricity suppliers to bid their capacity into the market at or near
$0.
14. To compare the actual UCAP spot market prices to the swap
prices of $7.57/kW-month (for KeySpan), and $7.07/kW-month (for the
FSC), one can
[[Page 42164]]
refer to the average spot price over the twenty-three month period of
the KeySpan Swap (i.e., May, 2006, through and including March, 2008).
This consists of twenty-two months at KeySpan's bid cap, and one month
(i.e., March, 2008) at the lower statewide price of $1.05/kW-month.
15. Over those twenty-three months, the actual average UCAP spot
price was $9.21/kW-month. Based on the difference between this amount
and the threshold price specified under the swap agreement (i.e.,
$7.57/kW-month), the revenues to KeySpan under the swap agreement were
$1.64/kW-month, multiplied by the 1800 MW of UCAP covered by the swap
agreement, and further multiplied by the twenty-three month effective
period of the swap agreement. This yields a total of revenues to
KeySpan under the swap agreements of $67.8 million.
16. The FSC's corresponding agreement with Astoria specified that,
if the market price for capacity was above $7.07 per kW-month, Astoria
would pay the FSC the difference, times 1800 MW; if the market price
was below $7.07, the FSC would pay Astoria the difference, times 1800
MW. 75 jkaLBgjster at 9948.
17. The differential between the ``trigger'' prices under the two
swap agreements (i.e., $7.57/kW-month for KeySpan, and $7.07/kW-month
for Astoria) represented the FSC's ``stake'' in the swap arrangement.
Because the actual average UCAP spot market price (i.e., $9.21/kW-
month) exceeded both the ``triggers'' under the swap agreements, the
FSC's total revenues can be calculated by multiplying that differential
(i.e., $0.50/kW-month) by 1800 MW, and further multiplying it by the
twenty-three month effective period of the swap agreements. Multiplying
these figures out yields total revenues to the FSC of $20.7 million.
18. The FSC's profits are potentially relevant because Astoria
could have directly entered into a swap agreement with a load-serving
entity serving New York City. If such agreement had a ``trigger'' price
of $7.07, the load-serving entity would have realized revenues of $89M
(i.e., $67 million, plus $21 million). Such revenues would have inured
to the benefit of ratepayers.
Thomas Paynter,
Supervisor of Regulatory Economics,
Office of Regulatory Economics,
Department of Public Service of the
State of New York.
Sworn to before me this 27th day of April, 2010.
Notary Public
Sean Mullany
Notary Public, State of New York
Regis. 02MU6180725
Qualified in Albany County
My Commission Expires January 14, 2012.
[FR Doc. 2010-16321 Filed 7-19-10; 8:45 am]
BILLING CODE 4410-11-M