United States v. Keyspan Corporation; Proposed Final Judgment and Competitive Impact Statement, 9946-9953 [2010-4545]

Agencies

• Antitrust Division
• Department of Justice

[Federal Register Volume 75, Number 42 (Thursday, March 4, 2010)]
[Notices]
[Pages 9946-9953]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-4545]


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DEPARTMENT OF JUSTICE

Antitrust Division


United States v. Keyspan Corporation; Proposed Final Judgment and 
Competitive Impact Statement

    Notice is hereby given pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h), that a proposed Final Judgment, 
Stipulation and Competitive Impact Statement have been filed with the 
United States District Court for the Southern District of New York in 
United States of America v. KeySpan Corp., Civil Case No. 10-CIV-1415. 
On February 22, 2010, the United States filed a Complaint alleging that 
KeySpan Corporation (``KeySpan'') entered into an agreement with a 
financial services company, the likely effect of which was to increase 
prices in the New York City (NYISO Zone J) Capacity Market, in 
violation of Section 1 of the Sherman Act, 15 U.S.C. 1. The proposed 
Final Judgment, filed the same time as the Complaint, requires KeySpan 
to pay the government $12 million dollars.
    Copies of the Complaint, proposed Final Judgment and Competitive 
Impact Statement are available for inspection at the Department of 
Justice, Antitrust Division, Antitrust Documents Group, 450 Fifth 
Street, NW., Suite 1010, Washington, DC 20530 (telephone: 202-514-
2481), on the Department of Justice's Web site at https://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 
these materials may be obtained from the Antitrust Division upon 
request and payment of the copying fee set by Department of Justice 
regulations.
    Public comment is invited within 60 days of the date of this 
notice. Such comments, and responses thereto, will be published in the 
Federal Register and filed with the Court. Comments should be directed 
to 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 (telephone: 202-307-
6349).

Patricia A. Brink,
Deputy Director of Operations and Civil Enforcement.

United States District Court for the Southern District of New York

Civil Action No.: 10-cv-1415 (WHP)

ECF CASE

    United States of America, U.S. Department of Justice, Antitrust 
Division, 450 5th Street, NW., Suite 8000, Washington, DC 20530, 
Plaintiff, v. Keyspan Corporation, 1 Metrotech Center, Brooklyn, NY 
11201, Defendant.

Received: February 22, 2010

Complaint

    The United States of America, acting under the direction of the 
Attorney General of the United States, brings this civil antitrust 
action under Section 4 of the Sherman Act, as amended, 15 U.S.C.

[[Page 9947]]

4, to obtain equitable and other relief from defendant's violation of 
Section 1 of the Sherman Act, as amended, 15 U.S.C. 1.
    On January 18, 2006, KeySpan Corporation (``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, a market that was 
created to ensure the supply of sufficient generation capacity for New 
York City consumers of electricity. The 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.

I. Introduction

    1. Between 2003 and 2006, KeySpan, the largest seller of 
electricity generating capacity (``installed capacity'') in the New 
York City market, earned substantial revenues due to tight supply 
conditions. Because purchasers of capacity required almost all of 
KeySpan's output to meet expected demand, KeySpan's ability to set 
price levels was limited only by a regulatory ceiling (called a ``bid 
cap''). Indeed, the market price for capacity was consistently at or 
near KeySpan's bid cap, with KeySpan sacrificing sales on only a small 
fraction of its capacity.
    2. But market conditions were about to change. Two large, new 
electricity generation plants were slated to come on line in 2006 (with 
no exit expected until at least 2009), breaking the capacity shortage 
that had kept prices at the capped levels.
    3. KeySpan could prevent the new capacity from lowering prices by 
withholding a substantial amount of its own capacity from the market. 
This ``bid the cap'' strategy would keep market prices high, but at a 
significant cost--the sacrificed sales would 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. 
This ``competitive strategy'' could earn KeySpan more than bidding its 
cap, but it carried a risk--KeySpan's competitors could undercut its 
price and take sales away, making the strategy less profitable than 
``bidding the cap.''
    4. KeySpan searched for a way to avoid both the revenue decline 
from bidding its cap and the revenue risks of competitive bidding. It 
decided to enter an agreement that gave it a financial interest in the 
capacity of Astoria--KeySpan's largest competitor. By providing KeySpan 
revenues on a larger base of sales, such an agreement would make a 
``bid the cap'' strategy more profitable than a successful competitive 
bid strategy. Rather than directly approach its competitor, KeySpan 
turned to a financial services company to act as the counterparty to 
the agreement--the KeySpan Swap--recognizing that the financial 
services company would, and in fact did, enter an offsetting agreement 
with Astoria (the ``Astoria Hedge'').
    5. With KeySpan deriving revenues from both its own and Astoria's 
capacity, the KeySpan Swap removed any incentive for KeySpan to bid 
competitively, locking it into bidding its cap. Capacity prices 
remained as high as if no entry had occurred.

II. Defendant

    6. KeySpan Corporation is a New York corporation with its principal 
place of business in New York City. During the relevant period of the 
allegations in this Complaint, KeySpan owned approximately 2,400 
megawatts of electricity generating capacity at its Ravenswood 
electrical generation facility, which is located in New York City. 
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.

III. Jurisdiction and Venue

    7. The United States files this complaint under Section 4 of the 
Sherman Act, 15 U.S.C. 4, seeking equitable relief from defendant's 
violation of Section 1 of the Sherman Act, 15 U.S.C. 1.
    8. This court has jurisdiction over this matter pursuant to 15 
U.S.C. 4 and 28 U.S.C. 1331 and 1337.
    9. Defendant waives any objection to venue and personal 
jurisdiction in this judicial district for the purpose of this 
Complaint.
    10. Defendant engaged in interstate commerce during the relevant 
period of the allegations in this Complaint; KeySpan's electric 
generating units interconnected with generating units across the 
country, and KeySpan regularly sold electricity to customers outside 
New York.
    11. One generation facility located in New Jersey supplies capacity 
to the New York City installed capacity market.

IV. The New York City Installed Capacity Market

    12. Sellers of retail electricity must purchase a product from 
generators known as ``installed capacity.'' Installed capacity is a 
product created by the New York Independent System Operator (``NYISO'') 
to ensure that sufficient generation capacity exists to meet expected 
electricity needs. Companies selling electricity to consumers in New 
York City are required to make installed capacity payments that relate 
to their expected peak demand plus a share of reserve capacity (to 
cover extra facilities needed in case a generating facility breaks 
down). These payments assure that retail electric companies do not sell 
more electricity than the system can deliver and also encourage 
electric generating companies to build new facilities as needed.
    13. The price for installed capacity has been set through auctions 
administered by the NYISO. The rules under which these auctions are 
conducted have changed from time to time. Unless otherwise noted, the 
description of the installed capacity market in the following 
paragraphs relates to the period May 2003 through March 2008.
    14. Because transmission constraints limit the amount of energy 
that can be imported into the New York City area from the power grid, 
the NYISO requires retail providers of electricity to customers in New 
York City to purchase 80% of their capacity from generators in that 
region. The NYISO operates separate capacity auctions for the New York 
City region (also known as ``In-City'' and ``Zone J''). The NYISO 
organizes the auctions to serve two distinct seasonal periods, summer 
(May through October) and winter (November through April). For each 
season, the NYISO conducts seasonal, monthly and spot auctions in which 
capacity can be acquired for all or some of the seasonal period.
    15. In each of the types of auctions, capacity suppliers offer 
price and quantity bids. Supplier bids are ``stacked'' from lowest-
priced to highest, and compared to the total amount of demand being 
satisfied in the auction. The offering price of the last bid in the 
``stack'' needed to meet requisite demand establishes the market price 
for all capacity bid into that auction. Capacity bid at higher than 
this price is unsold, as is any excess capacity bid at what becomes the 
market price.
    16. The New York City Installed Capacity (``NYC Capacity'') Market 
constitutes a relevant geographic and product market.
    17. The NYC Capacity Market is highly concentrated, with three 
firms--KeySpan, NRG Energy, Inc. (``NRG'') and Astoria Generating 
Company (a joint venture of Madison Dearborn Partners, LLC and US Power 
Generating Company, which purchased the Astoria generating assets from 
Reliant Energy,

[[Page 9948]]

Inc. in February 2006)--controlling a substantial portion of generating 
capacity in the market. Because purchasers of capacity require at least 
some of each of these three suppliers' output to meet expected demand, 
the firms are subject to a bid and price cap for nearly all of their 
generating capacity in New York City and are not allowed to sell that 
capacity outside of the NYISO auction process. The NYISO-set bid cap 
for KeySpan is the highest of the three firms, followed by NRG and 
Astoria.
    18. KeySpan possessed market power in the NYC Capacity Market.
    19. It is difficult and time-consuming to build or expand 
generating facilities within the NYC Capacity Market given limited 
undeveloped space for building or expanding generating facilities and 
extensive regulatory obligations.

V. Keyspan's Plan To Avoid Competition

    20. From June 2003 through December 2005, KeySpan set the market 
price in the New York City spot auction by bidding its capacity at its 
cap. Given extremely tight supply and demand conditions, KeySpan needed 
to withhold only a small amount of capacity to ensure that the market 
cleared at its cap.
    21. KeySpan anticipated that the tight supply and demand conditions 
in the NYC Capacity Market would change in 2006, due to the entry of 
approximately 1000 MW of new generation. Because of the addition of 
this new capacity, KeySpan would have to withhold significantly more 
capacity from the market and would earn substantially lower revenues if 
it continued to bid all of its capacity at its bid cap. KeySpan 
anticipated that demand growth and retirement of old generation units 
would restore tight supply and demand conditions in 2009.
    22. KeySpan could no longer be confident that ``bidding the cap'' 
would remain its best strategy during the 2006-2009 period. It 
considered various competitive bidding strategies under which KeySpan 
would compete with its rivals for sales by bidding more capacity at 
lower prices. These strategies could potentially produce much higher 
returns for KeySpan but carried the risk that competitors would 
undercut its price and take sales away, making the strategy less 
profitable than ``bidding the cap.''
    23. KeySpan also considered acquiring Astoria's generating assets, 
which were for sale. This 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 the cap'' its best strategy. KeySpan consulted with a 
financial services company about acquiring the assets. But KeySpan soon 
concluded that its acquisition of its largest competitor would raise 
serious market power issues.
    24. Instead of purchasing the Astoria assets, KeySpan decided to 
acquire a financial interest in substantially all of 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.
    25. KeySpan did not approach Astoria directly and instead sought a 
counterparty to enter into a financial agreement providing KeySpan with 
payments derived from the market clearing price for an amount of 
capacity essentially equivalent to what Astoria owned. KeySpan 
recognized the counterparty would need simultaneously to enter into an 
agreement with another capacity supplier that would offset the 
counterparty's payments to KeySpan, and KeySpan knew that Astoria was 
the only supplier with sufficient capacity to do so. KeySpan turned to 
the same financial services company that it had consulted about the 
potential acquisition of Astoria's assets. The financial services 
company agreed to serve as the counterparty but, as expected, informed 
KeySpan that the agreement was contingent on the financial services 
company also entering into an offsetting agreement with the owner of 
the Astoria generating assets.

VI. The Agreements

    26. On or about January 9, 2006, KeySpan and the financial services 
company finalized the terms of the KeySpan Swap. Under the agreement, 
if the market price for capacity was above $7.57 per kW-month, the 
financial services company would pay KeySpan the difference between the 
market price and $7.57 times 1800 MW; if the market price was below 
$7.57, KeySpan would pay the financial services company the difference 
times 1800 MW.
    27. The KeySpan Swap was executed on January 18, 2006. The term of 
the KeySpan Swap ran from May 2006 through April 2009.
    28. On or about January 9, 2006, the financial services company and 
Astoria finalized the terms of the Astoria Hedge. Under that agreement, 
if the market price for capacity was above $7.07 per kW-month, Astoria 
would pay the financial services company the difference times 1800 MW; 
if the market price was below $7.07, Astoria would be paid the 
difference times 1800 MW.
    29. The Astoria Hedge was executed on January 11, 2006. The term of 
the Astoria Hedge ran from May 2006 through April 2009, matching the 
duration of the KeySpan Swap.

VII. The Competitive Effect of the Keyspan Swap

    30. The clear tendency of the KeySpan Swap was to alter KeySpan's 
bidding in the NYC Capacity Market auctions.
    31. Without 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. By transferring a financial interest in Astoria's capacity to 
KeySpan, however, the Swap effectively eliminated 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. By providing 
KeySpan 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.
    32. After the KeySpan Swap went into effect in May 2006, KeySpan 
consistently bid its capacity at its cap even though a significant 
portion of its capacity went unsold. Despite the addition of 
significant new generating capacity in New York City, the market price 
of capacity did not decline.
    33. In August 2007, the State of New York conditioned the sale of 
KeySpan to a new owner on the divestiture of KeySpan's Ravenswood 
generating assets and required KeySpan to bid its New York City 
capacity at zero from March 2008 until the divestiture was completed. 
Since March 2008, the market price for capacity has declined.
    34. But for the KeySpan Swap, installed capacity likely would have 
been procured at a lower price in New York City from May 2006 through 
February 2008.
    35. The KeySpan Swap produced no countervailing efficiencies.

VIII. Violation Alleged

    36. Plaintiff incorporates the allegations of paragraphs 1 through 
35 above.
    37. KeySpan entered into an agreement the likely effect of which 
has been to increase prices in the NYC Capacity Market, in violation of 
Section 1 of the Sherman Act, 15 U.S.C. 1.

[[Page 9949]]

IX. Prayer for Relief

    Wherefore, Plaintiff prays:
    1. That the Court adjudge and decree that the KeySpan Swap 
agreement constitutes an illegal restraint in the sale of installed 
capacity in the New York City market in violation of Section 1 of the 
Sherman Act;
    2. That plaintiff shall have such other relief, including equitable 
monetary relief, as the nature of this case may require and as is just 
and proper to prevent the recurrence of the alleged violation and to 
dissipate the anticompetitive effects of the violation; and
    3. That plaintiff recover the costs of this action.

    Dated this 22nd day of February 2010.
Respectfully Submitted,

Christine A. Varney,
Assistant Attorney General.

Molly S. Boast,
Deputy Assistant Attorney General.

William F. Cavanaugh, Jr.,
Deputy Assistant Attorney General.

Donna N. Kooperstein,
Chief.
William H. Stalling,
Assistant Chief.
Transportation, Energy & Agriculture Section Suite 8000.

Patricia A. Brink,
Deputy Director of Operations.

Jade Alice Eaton,
J. Richard Doidge,
John W. Elias,
Trial Attorneys.

U.S. Department of Justice, Antitrust Division, Transportation, 
Energy & Agriculture Section, 450 5th Street, NW., Suite 8000, 
Washington, DC 20530, Telephone: (202) 353-1560, Facismilie (202) 
616-2441, jade.eaton@usdoj.gov.

United States District Court for the Southern District of New York

ECF Case

Civil Action No. 10-cv-1415 (WHP)

    United States of America, Plaintiff, v. Keyspan Corporation, 
Defendant.

Received: February 22, 2010

Final Judgment

    Whereas plaintiff United States of America filed its Complaint 
alleging that Defendant KeySpan Corporation (``KeySpan'') violated 
Section 1 of the Sherman Act, 15 U.S.C. 1, and 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:
    Now, therefore, before the taking of any testimony and without 
trial or adjudication of any issue of fact or law herein, and upon the 
consent of the parties hereto, it is hereby ordered, adjudged, and 
decreed:

 1. Jurisdiction

    This Court has jurisdiction of the subject matter herein and of 
each of the parties consenting hereto. The Complaint states a claim 
upon which relief may be granted against KeySpan under Sections 1 and 4 
of the Sherman Act, 15 U.S.C. 1 and 4.

 2. Applicability

    This Final Judgment applies to KeySpan and each of its successors, 
assigns, and to all other persons in active concert or participation 
with it who shall have received actual notice of the Settlement 
Agreement and Order by personal service or otherwise.

3. Relief

    A. Within thirty (30) days of the entry of this Final Judgment, 
KeySpan shall pay to the United States the sum of twelve million 
dollars ($12,000,000.00).
    B. The payment specified above shall be made by wire transfer. 
Before making the transfer, KeySpan shall contact Janie Ingalls, of the 
Antitrust Division's Antitrust Documents Group, at (202) 514-2481 for 
wire transfer instructions.
    C. In the event of a default in payment, interest at the rate of 
eighteen (18) percent per annum shall accrue thereon from the date of 
default to the date of payment.

 4. Retention of Jurisdiction

    This Court retains jurisdiction to enable any party to this Final 
Judgment to apply to this Court at any time for further orders and 
directions as may be necessary or appropriate to carry out or construe 
this Final Judgment, to modify any of its provisions, to enforce 
compliance, and to punish violations of its provisions.

5. Public Interest Determination

    Entry of this Final Judgment is in the public interest. The parties 
have complied with the requirements of the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16, including making copies available to the 
public of this Final Judgment, the Competitive Impact Statement, and 
any comments thereon and plaintiff's responses to comments. Based upon 
the record before the Court, which includes the Competitive Impact 
Statement and any comments and response to comments filed with the 
Court, entry of this Final Judgment is in the public interest.

Dated:

United States District Judge.

United States District Court for the Southern District of New York

ECF Case

Civil Action No. 10-cv-1415 (WHP)

    United States of America, Plaintiff, v. Keyspan Corporation, 
Defendant.

Filed 02/23/2010

Competitive Impact Statement

    Plaintiff United States of America (``United States''), pursuant to 
Section 2(b) of the Antitrust Procedures and Penalties Act (``APPA'' or 
``Tunney Act''), 15 U.S.C. 16(b)-(h), files this Competitive Impact 
Statement relating to the proposed Final Judgment submitted for entry 
in this civil antitrust proceeding.

I. Nature and Purpose of the Proceedings

    The United States brought this lawsuit against Defendant KeySpan 
Corporation (``KeySpan'') on February 22, 2010, 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'') essentially transferring 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 who must 
purchase capacity, and, in turn, to increase the prices consumers pay 
for electricity.
    The proposed Final Judgment remedies this violation by requiring 
KeySpan to disgorge profits obtained through the anticompetitive 
agreement. Under the terms of the proposed Final Judgment, KeySpan will 
surrender $12 million to the Treasury of the United States. 
Disgorgement will deter KeySpan and others from future violations of 
the antitrust laws.
    The United States and KeySpan have stipulated that the proposed 
Final Judgment may be entered after compliance with the APPA, unless 
the United States withdraws its consent. Entry of the proposed Final 
Judgment would terminate this action, except that this Court would 
retain jurisdiction to construe, modify, and enforce the

[[Page 9950]]

proposed Final Judgment and to punish violations thereof.

II. Description of the Events Giving Rise to the Alleged Violation of 
the Antitrust Laws

A. The Defendant

    KeySpan Corporation is a New York corporation with its principal 
place of business in New York City. During the relevant period of the 
allegations in this Complaint, KeySpan owned approximately 2400 
megawatts of electricity generating capacity at its Ravenswood 
electrical generation facility, which is located in New York City. 
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.

B. The Market

    In the state of New York, sellers of retail electricity must 
purchase a product from generators known as installed capacity 
(``capacity'').\1\ 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 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 customers in New York City to purchase 80% 
of their capacity from generators in that region. Thus, the New York 
City Installed Capacity (``NYC Capacity'') Market constitutes a 
relevant geographic and product market.
---------------------------------------------------------------------------

    \1\ Except where noted otherwise, this description pertains to 
the market conditions that existed from May 2003 through March 2008.
---------------------------------------------------------------------------

    The price for installed capacity 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 can be acquired for all or 
some of the seasonal period. Capacity suppliers offer price and 
quantity bids in each of these three auctions. 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 excess capacity bid at what 
becomes the market price.
    The NYC Capacity Market was highly concentrated during the relevant 
period, with three firms--Astoria, NRG Energy, Inc., and KeySpan--
controlling a substantial portion of the market's generating capacity. 
These three were designated as pivotal suppliers by the Federal Energy 
Regulatory Commission, 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 Alleged Violation

1. KeySpan Assesses Plans for Changed Market Conditions
    From June 2003 through December 2005, almost all installed capacity 
in the market was needed to meet demand. With these tight market 
conditions, KeySpan could sell almost 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.
    KeySpan anticipated that the tight supply and demand conditions in 
the NYC Capacity Market would end in 2006 due to the entry into the 
market of approximately 1000 MW of generation capacity, and would not 
return until 2009 with the retirement of old generation units and 
demand growth.
    KeySpan could no longer be confident that ``bid the cap'' would 
remain its best strategy during the 2006-2009 period. The ``bid the 
cap'' strategy would keep market prices high, but at a significant 
cost. KeySpan would have to withhold a significant additional amount of 
capacity to account for the new entry. The additional withholding would 
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. KeySpan considered various 
competitive bidding strategies. These 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, making 
the strategy potentially less profitable than bidding the cap.
    KeySpan also considered acquiring Astoria's generating assets, 
which were for sale. This 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 consulted with a financial 
services company about acquiring the assets, but soon concluded that 
its acquisition of its largest competitor would raise market power 
issues.
2. KeySpan Pursues an Anticompetitive and Unlawful Agreement
    Instead of purchasing the Astoria assets, KeySpan decided 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. The 
competitive effect of doing so would be similar to that of actually 
purchasing Astoria's capacity.
    KeySpan did not approach Astoria directly and instead sought a 
counterparty to enter into a financial agreement providing KeySpan with 
payments derived from the market clearing price for an amount of 
capacity essentially equivalent to what Astoria owned. KeySpan 
recognized the counterparty would need simultaneously to enter into an 
agreement with another capacity supplier that would offset the 
counterparty's payments to Keyspan, and KeySpan knew that Astoria was 
the only supplier with sufficient capacity to do so. KeySpan turned to 
the same financial services company that it had consulted about the 
potential acquisition of Astoria's assets. The financial services 
company agreed to serve as the counterparty, but, as expected, informed 
KeySpan that the agreement was contingent on the financial services 
company also entering into an offsetting agreement with the owner of 
the Astoria generating assets (the ``Astoria Hedge'').
    On or about January 9, 2006, KeySpan and the financial services 
company finalized the terms of the KeySpan Swap. Under the agreement, 
if the market price for capacity was above $7.57 per kW-month, the 
financial services company would pay KeySpan the difference between the 
market price and $7.57 times 1800 MW; if the market price was below 
$7.57, KeySpan would pay the financial services company the difference 
times 1800 MW. The KeySpan Swap was executed on January 18, 2006. The 
term of the KeySpan

[[Page 9951]]

Swap ran from May 2006 through April 2009.
    On or about January 9, 2006, the financial services company and 
Astoria finalized terms to the Astoria Hedge. Under that agreement, if 
the market price for capacity was above $7.07 per kW-month, Astoria 
would pay the financial services company the difference times 1800 MW; 
if the market price was below $7.07, Astoria would be paid the 
difference times 1800 MW. The Astoria Hedge was executed on January 11, 
2006. The term of the Astoria Hedge ran from May 2006 through April 
2009, matching the duration of the KeySpan Swap.
3. The Effect of the KeySpan Swap
    The clear tendency of the KeySpan Swap was to alter KeySpan's 
bidding in the NYC Capacity Market auctions.
    Without 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 would have 
declined. The swap, however, effectively eliminated KeySpan's incentive 
to compete for sales. By adding revenues from Astoria's capacity to 
KeySpan's own, the KeySpan Swap made bidding the cap KeySpan's most 
profitable strategy regardless of its rivals' bids.
    After the KeySpan Swap went into effect in May 2006, KeySpan 
consistently bid its capacity into the capacity auctions at its cap 
even though a significant portion of its capacity went unsold. Despite 
the addition of significant new generating capacity in New York City, 
the market price of capacity did not decline.
    By transferring a financial interest in Astoria's capacity to 
KeySpan, the Swap effectively eliminated 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. 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.\2\ The Swap produced 
no countervailing efficiencies.
---------------------------------------------------------------------------

    \2\ The effects of the swap continued until March 2008, at which 
time changes in regulatory conditions eliminated KeySpan's ability 
to affect the market price. KeySpan was sold to another company in 
August 2007. The State of New York conditioned its approval of the 
acquisition on the divestiture of KeySpan's Ravenswood generating 
assets and required KeySpan to bid its New York City capacity at 
zero from March 2008 until the divestiture was completed. Since 
then, the market price for capacity has declined.
---------------------------------------------------------------------------

III. Explanation of the Proposed Final Judgment

    The proposed Final Judgment requires KeySpan to disgorge profits 
gained as a result of its unlawful agreement restraining trade. KeySpan 
is to surrender $12 million to the Treasury of the United States.

A. Disgorgement Is Available Under the Sherman Act

    Although the Antitrust Division has not previously sought 
disgorgement as a remedy under the Sherman Act, district courts have 
the authority to order such equitable relief. The Supreme Court has 
held that ``[u]nless a statute in so many words, or by a necessary and 
inescapable inference, restricts the court's jurisdiction in equity, 
the full scope of that jurisdiction is to be recognized and applied.'' 
Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946); Mitchell v. 
Robert De Mario Jewelry, Inc., 361 U.S. 288, 291 (1960). Nothing in the 
Sherman Act negates this inherent authority. Section 4 of the Sherman 
Act invests district courts with broad equitable power to ``prevent and 
restrain'' violations of the antitrust laws and provides that such 
violations may be ``enjoined or otherwise prohibited.'' 15 U.S.C. 4. 
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,' '' quoting Schine Chain Theatres v. 
United States, 334 U.S. 110, 128 (1948)); United States v. U.S. Steel 
Corp., 251 U.S. 417, 452 (1920) (Sherman Act's ``command is necessarily 
submissive to the conditions which may exist and the usual powers of a 
court of equity to adapt its remedies to those conditions''). 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). See also SEC v. 
Fischbach, 133 F.3d 170, 175 (2d Cir. 1997); SEC v. Commonwealth Chem. 
Secs., Inc., 574 F.2d 90, 102 (2d Cir. 1978) (Friendly, J.).\3\
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    \3\ The Second Circuit has also permitted disgorgement under 
civil RICO, which confers jurisdiction to ``prevent and restrain 
violations,'' 18 U.S.C. 1964(a). See United States v. Carson, 52 
F.3d 1173, 1181 (2d Cir. 1995) (``As a general rule, disgorgement is 
among the equitable powers available to the district court by virtue 
of * * * Sec.  1964''). The DC Circuit, however, has held that 
disgorgement categorically is unavailable under civil RICO. See 
United States v. Philip Morris, 396 F.3d 1190, 1192, 1202 (DC Cir. 
2005) (interlocutory appeal) (Philip Morris I); United States v. 
Philip Morris, 566 F.3d 1095, 1108 (DC Cir. 2009) (appeal after 
final judgment) (Philip Morris II). The Supreme Court denied the 
government's petition to review the interlocutory decision in Philip 
Morris I, 126 S. Ct. 478 (2005), but on February 19, 2010, the 
United States asked the Supreme Court to review Philip Morris II. In 
United States v. Loew's, Inc., 189 F. Supp. 373 (S.D.N.Y. 1960), 
this Court declined to order defendants to renegotiate contracts 
with third parties, or to refund money to third parties under those 
renegotiated contracts. Id. at 398-99 & n.13.
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B. Disgorgement Is Appropriate in This Case

    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. A private lawsuit for 
damages against KeySpan would face significant obstacles imposed by the 
filed rate doctrine. See Keogh v. Chicago & N.W. Ry. Co., 260 U.S. 156 
(1922). The filed rate doctrine also makes it unlikely that 
disgorgement will lead to duplicative monetary remedies.
    Furthermore, no other remedy would be as effective to fulfill the 
remedial goals of the Sherman Act to ``prevent and restrain'' antitrust 
violations. Injunctive relief would not be meaningful, given the facts 
in this case. The specific agreement at issue--the KeySpan Swap--has, 
by its terms, expired and the anticompetitive conduct is unlikely to 
reoccur as KeySpan no longer owns the Ravenswood generation assets.
    Disgorgement here will also serve to restrain KeySpan and others 
from participating in similar anticompetitive conduct. 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.

IV. Remedies Available to Potential Private Litigants

    Section 4 of the Clayton Act, 15 U.S.C. 15, provides that any 
person who has been injured as a result of conduct prohibited by the 
antitrust laws may bring suit in federal court to recover three times 
the damages the person has suffered, as well as costs and reasonable 
attorneys' fees. Entry of the proposed Final Judgment will neither 
impair nor assist the bringing of any private antitrust damage action. 
Under the provisions of Section 5(a) of the Clayton Act, 15 U.S.C. 
16(a), the proposed Final Judgment has no prima facie effect in

[[Page 9952]]

any subsequent private lawsuit that may be brought against KeySpan.

V. Procedures Available for Modification of the Proposed Final Judgment

    The United States and the defendant have stipulated that the 
proposed Final Judgment may be entered by the Court after compliance 
with the provisions of the APPA, provided that the United States has 
not withdrawn its consent. The APPA conditions entry upon the Court's 
determination that the proposed Final Judgment is in the public 
interest.
    The APPA provides a period of at least sixty (60) days preceding 
the effective date of the proposed Final Judgment within which any 
person may submit to the United States written comments regarding the 
proposed Final Judgment. Any person who wishes to comment should do so 
within sixty (60) days of the date of publication of this Competitive 
Impact Statement in the Federal Register, or the last date of 
publication in a newspaper of the summary of this Competitive Impact 
Statement, whichever is later. All comments received during this period 
will be considered by the United States, which remains free to withdraw 
its consent to the proposed Final Judgment at any time prior to the 
Court's entry of judgment. The comments and the response of the United 
States will be filed with the Court and published in the Federal 
Register.
    Written comments should be submitted to: Donna N. Kooperstein, 
Chief, Transportation, Energy & Agriculture Section, Antitrust 
Division, United States Department of Justice, 450 Fifth Street, NW., 
Suite 8000, Washington, DC 20530.
    The proposed Final Judgment provides that the Court retains 
jurisdiction over this action, and the parties may apply to the Court 
for any order necessary or appropriate for the modification, 
interpretation, or enforcement of the Final Judgment.

VI. Alternatives to the Proposed Final Judgment

    The United States considered, as an alternative to the proposed 
Final Judgment, a full trial on the merits against Defendant. The 
United States is satisfied, however, that the disgorgement of profits 
is an appropriate remedy in this matter. A disgorgement remedy should 
deter Keyspan and others from engaging in similar conduct. Given the 
facts of this case, the proposed Final Judgment would protect 
competition as effectively as would any other equitable remedy 
available through litigation, but avoids the time, expense, and 
uncertainty of a full trial on the merits of the Complaint.

VII. Standard of Review Under the APPA for Proposed Final Judgment

    The Clayton Act, as amended by the APPA, requires that proposed 
consent judgments in antitrust cases brought by the United States be 
subject to a sixty-day comment period, after which the court shall 
determine whether entry of the proposed Final Judgment ``is in the 
public interest.'' 15 U.S.C. 16(e)(1). In making that determination, 
the court, in accordance with the statute as amended in 2004, 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 U.S.C. 16(e)(1)(A) & (B). In considering these statutory factors, 
the court's inquiry is necessarily a limited one as the United States 
is entitled to ``broad discretion to settle with the defendant within 
the reaches of the public interest.'' United States v. Microsoft Corp., 
56 F.3d 1448, 1461 (DC Cir. 1995); see generally United States v. SBC 
Commc'ns, Inc., 489 F. Supp. 2d 1 (D.D.C. 2007) (assessing public 
interest standard under the Tunney Act); United States v. InBev N.V./
S.A., 2009-2 Trade Cas. (CCH) ] 76,736, 2009 U.S. Dist. LEXIS 84787, 
No. 08-1965 (JR), at *3 (D.D.C. Aug. 11, 2009) (noting that the court's 
review of a consent judgment is limited and only inquires ``into 
whether the government's determination that the proposed remedies will 
cure the antitrust violations alleged in the complaint was reasonable, 
and whether the mechanism to enforce the final judgment are clear and 
manageable'').\4\
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    \4\ The 2004 amendments substituted ``shall'' for ``may'' in 
directing relevant factors for a court to consider and amended the 
list of factors to focus on competitive considerations and to 
address potentially ambiguous judgment terms. Compare 15 U.S.C. 
16(e) (2004), with 15 U.S.C. 16(e)(1) (2006); see also SBC Commc'ns, 
489 F. Supp. 2d at 11 (concluding that the 2004 amendments 
``effected minimal changes'' to Tunney Act review).
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    Under the APPA a court considers, among other things, the 
relationship between the remedy secured and the specific allegations 
set forth in the United States' complaint, whether the decree is 
sufficiently clear, whether enforcement mechanisms are sufficient, and 
whether the decree may positively harm third parties. See Microsoft, 56 
F.3d at 1458-62. With respect to the adequacy of the relief secured by 
the decree, a court may not ``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)); see also Microsoft, 56 F.3d 
at 1460-62; United States v. Alcoa, Inc., 152 F. Supp. 2d 37, 40 
(D.D.C. 2001); InBev, 2009 U.S. Dist. LEXIS 84787, at *3. Courts have 
held that:

[t]he balancing of competing social and political interests affected 
by a proposed antitrust consent decree must be left, in the first 
instance, to the discretion of the Attorney General. The court's 
role in protecting the public interest is one of insuring that the 
government has not breached its duty to the public in consenting to 
the decree. The court is required to determine not whether a 
particular decree is the one that will best serve society, but 
whether the settlement is ``within the reaches of the public 
interest.'' More elaborate requirements might undermine the 
effectiveness of antitrust enforcement by consent decree.

Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted).\5\ In 
determining whether a proposed settlement is in the public interest, a 
district court ``must accord deference to the government's predictions 
about the efficacy of its remedies, and may not require that the 
remedies perfectly match the alleged violations.'' SBC Commc'ns, 489 F. 
Supp. 2d at 17; see also Microsoft, 56 F.3d at 1461 (noting the need 
for courts to be ``deferential to the government's predictions as to 
the effect of the proposed remedies''); United States v. Archer-
Daniels-Midland Co., 272 F. Supp. 2d 1, 6 (D.D.C. 2003) (noting that 
the court should grant due respect to the United States' prediction as 
to the effect of proposed remedies, its perception of the market 
structure, and its views of the nature of the case).
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    \5\ Cf. BNS, 858 F.2d at 464 (holding that the court's 
``ultimate authority under the [APPA] is limited to approving or 
disapproving the consent decree''); United States v. Gillette Co., 
406 F. Supp. 713, 716 (D. Mass. 1975) (noting that, in this way, the 
court is constrained to ``look at the overall picture not 
hypercritically, nor with a microscope, but with an artist's 
reducing glass''). See generally Microsoft, 56 F.3d at 1461 
(discussing whether ``the remedies [obtained in the decree are] so 
inconsonant with the allegations charged as to fall outside of the 
`reaches of the public interest' '').

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[[Page 9953]]

    Courts have greater flexibility in approving proposed consent 
decrees than in crafting their own decrees following a finding of 
liability in a litigated matter. ``[A] proposed decree must be approved 
even if it falls short of the remedy the court would impose on its own, 
as long as it falls within the range of acceptability or is `within the 
reaches of public interest.' '' United States v. Am. Tel. & Tel. Co., 
552 F. Supp. 131, 151 (D.D.C. 1982) (citations omitted) (quoting United 
States v. Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975)), aff'd 
sub nom. Maryland v. United States, 460 U.S. 1001 (1983); see also 
United States v. Alcan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 
1985) (approving the consent decree even though the court would have 
imposed a greater remedy). To meet this standard, the United States 
``need only provide a factual basis for concluding that the settlements 
are reasonably adequate remedies for the alleged harms.'' SBC Commc'ns, 
489 F. Supp. 2d at 17.
    Moreover, the court's role under the APPA is limited to reviewing 
the remedy in relationship to the violations that the United States has 
alleged in its Complaint, and does not authorize the court to 
``construct [its] own hypothetical case and then evaluate the decree 
against that case.'' Microsoft, 56 F.3d at 1459; see also InBev, 2009 
U.S. Dist. LEXIS 84787, at *20 (``[T]he `public interest' is not to be 
measured by comparing the violations alleged in the complaint against 
those the court believes could have, or even should have, been 
alleged.''). Because the ``court's authority to review the decree 
depends entirely on the government's exercising its prosecutorial 
discretion by bringing a case in the first place,'' it follows that 
``the court is only authorized to review the decree itself,'' and not 
to ``effectively redraft the complaint'' to inquire into other matters 
that the United States did not pursue. Microsoft, 56 F.3d. at 1459-60. 
Courts ``cannot look beyond the complaint in making the public interest 
determination unless the complaint is drafted so narrowly as to make a 
mockery of judicial power.'' SBC Commc'ns, 489 F. Supp. 2d at 15.
    In its 2004 amendments, Congress made clear its intent to preserve 
the practical benefits of utilizing consent decrees in antitrust 
enforcement, adding the unambiguous instruction that ``[n]othing in 
this section shall be construed to require the court to conduct an 
evidentiary hearing or to require the court to permit anyone to 
intervene.'' 15 U.S.C. 16(e)(2). This language effectuates what 
Congress intended when it enacted the Tunney Act in 1974, as Senator 
Tunney explained: ``[t]he court is nowhere compelled to go to trial or 
to engage in extended proceedings which might have the effect of 
vitiating the benefits of prompt and less costly settlement through the 
consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement of 
Senator Tunney). Rather, the procedure for the public interest 
determination is left to the discretion of the court, with the 
recognition that the court's ``scope of review remains sharply 
proscribed by precedent and the nature of Tunney Act proceedings.'' SBC 
Commc'ns, 489 F. Supp. 2d at 11.\6\
---------------------------------------------------------------------------

    \6\ See United States v. Enova Corp., 107 F. Supp. 2d 10, 17 
(D.D.C. 2000) (noting that the ``Tunney Act expressly allows the 
court to make its public interest determination on the basis of the 
competitive impact statement and response to comments alone''); 
United States v. Mid-Am. Dairymen, Inc., 1977-1 Trade Cas. (CCH) ] 
61,508, at 71,980 (W.D. Mo. 1977) (``Absent a showing of corrupt 
failure of the government to discharge its duty, the Court, in 
making its public interest finding, should * * * carefully consider 
the explanations of the government in the competitive impact 
statement and its responses to comments in order to determine 
whether those explanations are reasonable under the 
circumstances.''); S. Rep. No. 93-298, 93d Cong., 1st Sess., at 6 
(1973) (``Where the public interest can be meaningfully evaluated 
simply on the basis of briefs and oral arguments, that is the 
approach that should be utilized.'').
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VIII. Determinative Documents

    There are no determinative materials or documents within the 
meaning of the APPA that the United States considered in formulating 
the proposed Final Judgment.

Dated: February 22, 2010.

Respectfully submitted,

For Plaintiff The United States of America

David E. Altschuler,
Jade Alice Eaton,
Trial Attorneys, United States Department of Justice, Antitrust 
Division, Transportation, Energy & Agriculture Section, 450 5th 
Street, NW., Suite 8000, Washington, DC 20530, Telephone: (202) 307-
6316, david.altschuler@usdoj.gov, jade.eaton@usdoj.gov.

[FR Doc. 2010-4545 Filed 3-3-10; 8:45 am]
BILLING CODE 4410-11-P