United States v. Keyspan Corporation; Public Comments and Response on Proposed Final Judgment, 42134-42164 [2010-16321]

Agencies

• Antitrust Division
• Department of Justice

[Federal Register Volume 75, Number 138 (Tuesday, July 20, 2010)]
[Notices]
[Pages 42134-42164]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16321]


-----------------------------------------------------------------------

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 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 
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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \2\ To respond to the concerns raised by the submitted comments, 
this Response provides greater detail beyond the allegations in the 
Complaint.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \3\ Except where noted otherwise, this description pertains to 
the market conditions that existed from May 2003 through March 2008.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \12\ See Keogh v. Chicago & NW. Ry. Co., 260 U.S. 156 (1922); 
see also, infra, Sec.  IV.B.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.'')
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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,
 jade.eaton@usdoj.gov

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.

https://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 enrichin