On February 22, 2010, the United States District Court for the Southern District of New York issued a Final Judgment relating to a settlement reached of a Department of Justice (“DOJ”) Complaint against KeySpan Corporation (“KeySpan”) regarding certain activity allegedly engaged in by KeySpan in the electric generating capacity markets in New York City (the “Settlement“). The civil antitrust action alleged violations of Section 1 of the Sherman Act. KeySpan agreed to pay $12 million to resolve the matter. Interestingly, nearly two years to the day prior to the announcement of the Settlement, the Enforcement Staff of the Federal Energy Regulatory Commission (“FERC”) released a report of its investigation of KeySpan’s activities (“Enforcement Report“). The FERC investigation was closed without a finding of violation of fraudulent behavior or other violations of the FERC regulations. The Enforcement Report had reported KeySpan’s 2007 receipt of a DOJ Civil Investigative Demand. FERC did, however, approve various changes designed to improve the market mitigation measures in the New York City capacity market in an initial order and an order on rehearing. Further rehearing remains pending.
The DOJ Complaint alleged that KeySpan, described as the largest seller of installed capacity in the New York City market, was able to bid at or near the applicable bid cap between 2003 and 2005 without risking the loss of sales, due to the dearth of competitors able to serve the New York City market. In early 2006, in light of planned new generating facilities that were expected to interfere with its ability to maximize advantage from that strategy, KeySpan entered into a swap arrangement with a financial services provider, having a term from May 2006 through April 2009. The financial services counterparty is not named in the DOJ Complaint. However, the Enforcement Report indicates the swap agreement was with Morgan Stanley Capital Group Inc.
The DOJ Complaint indicates that the swap provided for payment to KeySpan when capacity prices were above a certain strike price for 1800 MW, an amount of capacity roughly equivalent to that owned by KeySpan’s largest competitor in the New York City market, Astoria Generating Company (“Astoria”). In addition to its execution of the swap with KeySpan, the financial services provider entered into a hedge with Astoria, pursuant to which Astoria paid the financial services provider when clearing prices were above a certain strike price.
The DOJ Complaint alleged that the swap had a “clear tendency” of altering KeySpan’s bidding and its incentive to compete for sales. Because KeySpan gained a financial interest in Astoria’s capacity, the swap made continuing to bid the cap profitable to KeySpan despite bidding pressure from its few competitors. KeySpan continued to bid the cap after entering into the swap even though “a significant portion” of its capacity was left unsold. Prices finally declined when, in conjunction with the planned sale of a KeySpan affiliate, the State of New York required KeySpan to bid its capacity at zero starting in March 2008.