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


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DEPARTMENT OF JUSTICE

Antitrust Division


United States v. Keyspan Corporation; Public Comments and 
Response on Proposed Final Judgment

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)-(h), the United States hereby publishes below the comments 
received on the proposed Final Judgment in United States v. Keyspan 
Corporation. Civil Action No. 1:10-CV-01415-WHP, which were filed in 
the United States District Court for the Southern District of New York 
on June 11, 2010, together with the response of the United States to 
the comments.
    Copies of the comments and the response are available for 
inspection at the Department of Justice Antitrust Division, 450 Fifth 
Street, NW., Suite 1010, Washington, DC 20530 (telephone: 202-514-
2481), on the Department of Justice's Web site at http://www.justice.gov/atr, and at the Office of the Clerk of the United 
States District Court for the Southern District of New York. Copies of 
any of these materials may be obtained upon request and payment of a 
copying fee.

Patricia A. Brink,
Deputy Director of Operations.

In the United States District Court for the Southern District of New 
York

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

Civil Action No.: 1:10-cv-01415-WHP
Hon. William H. Pauley III

Plaintiff United States's Response to Public Comments

    Pursuant to the requirements of the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h) (``Tunney Act''), the United States 
hereby responds to the public comments received regarding the proposed 
Final Judgment in this case. After careful consideration, the United 
States continues to believe that the relief sought in the proposed 
Final Judgment will provide an effective and appropriate remedy for the 
antitrust violation alleged in the Complaint. The United States will 
move the Court for entry of the proposed Final Judgment after the 
public comments and this Response have been published in the Federal 
Register, pursuant to 15 U.S.C. 16(d).\1\
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    \1\ The United States and KeySpan will submit an amended 
proposed Final Judgment that takes account of the retention of 
jurisdiction concerns expressed by the Court with respect to Section 
IV of the proposed Final Judgment.
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    The United States brought this lawsuit against Defendant KeySpan 
Corporation (``KeySpan'')to remedy a violation of Section 1 of the 
Sherman Act, 15 U.S.C. 1. On January 18, 2006, KeySpan entered into an 
agreement in the form of a financial derivative (the ``KeySpan Swap'') 
that essentially transferred to KeySpan, the largest supplier of 
electricity generating capacity in the New York City market, the 
capacity of its largest competitor. The KeySpan Swap ensured that 
KeySpan would withhold substantial output from the capacity market, a 
market that was created to ensure the supply of sufficient generation 
capacity for the millions of New York City consumers of electricity. 
The likely effect of this agreement was to increase capacity prices for 
the retail electricity suppliers that must purchase capacity and, in 
turn, to increase the prices consumers pay for electricity.
    Simultaneously with the filing of the Complaint, the United States 
filed a proposed Final Judgment (to be modified pursuant to the Court's 
direction, see, supra, n. 1) and a

[[Page 42135]]

Stipulation signed by the United States and KeySpan consenting to the 
entry of the proposed Final Judgment after compliance with the 
requirements of the Tunney Act. Pursuant to those requirements, the 
United States filed a Competitive Impact Statement (``CIS'') in this 
Court on February 23, 2010; published the proposed Final Judgment and 
CIS in the Federal Register on March 4, 2010, see United States v. 
KeySpan corporation, 75 FR 9946-01, 2010 WL 723203; and published 
summaries of the terms of the proposed Final Judgment and CIS, together 
with directions for the submission of written comments relating to the 
proposed Final Judgment, in The Washington Post for seven days 
beginning on March 10, 2010 and ending on March 16, 2010 and in The New 
York Post beginning on March 11, 2010 and ending on March 17, 2010. The 
60-day period for public comments ended on May 16, 2010. The United 
States received seven comments, as described below, which are attached 
hereto.\2\
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    \2\ To respond to the concerns raised by the submitted comments, 
this Response provides greater detail beyond the allegations in the 
Complaint.
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1. Background

A. The United States's Investigation of the Transaction

    On November 21, 2006, the United States opened its investigation 
into the transaction at issue and its impact on the market. During the 
course of its extensive investigation, the United States received and 
considered over a million pages of documents and analyzed significant 
amounts of complex data, including bidding data from market 
participants. The United States issued Civil Investigative Demands to 
market participants and other entities with relevant information, 
interviewed market participants and the market's regulators, and 
conducted detailed economic analyses.
    The United States considered the potential competitive effects of 
the KeySpan Swap in light of all relevant circumstances and concluded, 
as the Complaint alleges, that the KeySpan Swap was an anticompetitive 
agreement in violation of Section 1 of the Sherman Act.

B. The New York City installed Capacity Market

    In the state of New York, sellers of retail electricity must 
purchase a product from generators known as ``capacity:'' \3\ 
Electricity retailers are required to purchase capacity in an amount 
equal to their expected peak energy demand plus a share of reserve 
capacity. These payments for capacity assure that retail electric 
companies do not use more electricity than the system can deliver and 
encourage electric generating companies to build new facilities as 
needed. Because transmission constraints limit the amount of energy 
that can be imported into the New York City area from the power grid, 
the New York Independent System Operator (``NYISO'') requires retail 
providers of electricity to consumers in New York City to purchase 80% 
of their capacity from generators in that region. The New York City 
Installed Capacity (``NYC Capacity'') Market constitutes a relevant 
geographic and product market.
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    \3\ Except where noted otherwise, this description pertains to 
the market conditions that existed from May 2003 through March 2008.
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    The price for installed capacity in New York City has been set 
through auctions administered by the NYISO. The NYISO organizes the 
auctions to serve two distinct seasonal periods, summer (May though 
October) and winter (November through April). For each season, the 
NYISO conducts seasonal, monthly, and spot auctions in which capacity 
for New York City can be acquired for all or some of the seasonal 
period. Capacity suppliers offer price and quantity bids in each of 
these three auctions. Suppliers may bid all of their capacity at a 
single price or in separate increments of capacity at different prices. 
Supplier bids are ``stacked'' from lowest-priced to highest. The stack 
is then compared to the amount of demand. The offering price of the 
last bid in the ``stack'' needed to meet requisite demand establishes 
the market price for all capacity sold into that auction. Any capacity 
bid at higher than this price is unsold, as is any capacity bid at what 
becomes the market price not needed to meet demand.
    The NYC Capacity Market was highly concentrated during the relevant 
period, with three firms--KeySpan, Astoria, and NRG Energy, Inc.--
controlling a substantial portion of the market's generating capacity. 
These three firms were designated as ``pivotal'' suppliers by the 
Federal Energy Regulatory Commission (``FERC''), meaning that at least 
some of each of these three suppliers' output was required to satisfy 
demand. The three firms were subject to bid and price caps--KeySpan's 
being the highest for nearly all of their generating capacity in New 
York City and were not allowed to sell their capacity outside of the 
NYISO auction process.

C. The Anticompetitive Agreement

    As discussed more fully in the CIS, in the tight market conditions 
that existed from June 2003 through December 2005, almost all capacity 
in the New York City market was needed to meet demand, and KeySpan 
could sell nearly all of its capacity into the market even while 
bidding at its cap. KeySpan did so, and the market cleared at the price 
established by the cap, with only a small fraction of KeySpan's 
capacity remaining unsold.
    Those tight conditions in the NYC Capacity Market were expected to 
end in 2006 due to the entry of approximately 1,000MW of new generating 
capacity, with excess supply of capacity forecast to last into 2009. 
The increased supply meant KeySpan could no longer be confident that 
``bid the cap'' would remain its most profitable strategy during the 
2006-2009 period. While bidding the cap would keep market prices high, 
doing so also would entail withholding sales of substantially more 
capacity. The additional withholding could reduce KeySpan's revenues by 
as much as $90 million a year. Alternatively, KeySpan could compete 
with its rivals for sales by bidding more capacity at lower prices, 
which could potentially produce much higher returns for KeySpan than 
bidding the cap, but carried the risk that competitors would undercut 
its price and take sales away.
    KeySpan contemplated acquiring Astoria's generating assets, which 
were for sale. The acquisition would have solved the problem that new 
entry posed for KeySpan's revenue stream, as Astoria's capacity would 
have provided KeySpan with sufficient additional revenues to make 
continuing to bid its cap its best strategy. KeySpan, however, soon 
concluded that the market power issues raised by an acquisition of its 
largest competitor would imperil the contemplated transaction. Instead 
of purchasing the Astoria assets outright, KeySpan devised a plan to 
acquire a financial interest in Astoria's capacity. KeySpan would pay 
Astoria's owner a fixed revenue stream in return for the revenues 
generated from Astoria's capacity sales in the auctions. Rather than 
directly approach its competitor, KeySpan turned to a financial 
services company to act as the counterparty to the derivative agreement 
the KeySpan Swap recognizing that the financial services company would, 
and in fact did, enter an offsetting agreement with Astoria (the 
``Astoria Hedge'').\4\
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    \4\ Although KeySpan knew about Astoria's role in the 
transaction, the financial services company did not inform Astoria 
about KeySpan. It appears that Astoria believed that the financial 
services company had found a counter-party other than a competing 
supplier of capacity to offset the financial services company's 
market risk from the Astoria Hedge.

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[[Page 42136]]

    The KeySpan Swap remained in effect from May 1, 2006 through April 
30, 2008. During that two year period, KeySpan earned approximately $49 
million in net revenues under the Swap.\5\
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    \5\ The New York Public Service Commission (``NYPSC'') estimated 
KeySpan's net revenues under the KeySpan Swap at $67.8 million for 
the period May 2006 through March 2008. See NYPSC Comment, Paynter 
Affidavit at ] 15. The estimate, however, fails to reflect the fact 
that the terms of the KeySpan Swap imposed a ceiling on the spot 
auction clearing price used to determine revenues under the Swap. 
This ceiling is based on the average of the bid caps for KeySpan, 
Astoria and NRG. Using this ceiling for the appropriate months, 
KeySpan's net Swap revenues were approximately $61 .2 million for 
the May 2006 through March 2008 period. The NYPSC estimate also 
fails to include the last month of the Swap (April 2008) in which 
KeySpan had to pay out approximately $12.2 million.
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D. The Anticompetitive Effect of the KeySpan Swap

    The clear tendency of the KeySpan Swap was to alter KeySpan's 
bidding behavior in the NYC Capacity Market auctions. The KeySpan Swap 
effectively eliminated KeySpan's incentive to compete for sales by 
lowering price. As a result, KeySpan bid its cap, causing capacity 
market prices to clear at a level higher than likely would have 
occurred absent the agreement.
1. Likely Bidding Scenarios Absent the KeySpan Swap
    Absent the Swap, KeySpan likely would have chosen from a range of 
potentially profitable competitive strategies in response to the entry 
of new capacity and, had it done so, the price of capacity likely would 
have declined. Although one cannot confidently predict the price level 
that would have occurred but for the Swap, it is likely that oligopoly 
pricing in this highly concentrated market would have been the outcome; 
i.e., prices would have fallen below the cap levels but would have 
remained above levels that would have prevailed under perfect 
competition.\6\
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    \6\ The New York City Economic Development Corporation 
(``NYCEDC'') comments cite an affidavit submitted in a FERC 
proceeding by the NYISO market monitor, David Patton, for the 
proposition that, had all capacity been sold, prices would have 
cleared under $6/kW month, which is less than half the level of the 
pivotal suppliers' caps (which were above $ 121kw month). NYCEDC 
Comments at 9; see also AARP Comments at 11. Dr. Patton described 
the effect all suppliers would have had on the auction if bidding as 
``price-takers'' (i.e., a ``perfectly competitive'' outcome), but he 
does not opine that suppliers actually would have bid in this manner 
absent the Swap.
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    In considering how to bid when the new capacity entered the market, 
the key suppliers KeySpan, Astoria and NRG (each of which would have 
remained pivotal) would have sought to mitigate the risk of lost sales 
that could occur if they bid too high and their capacity was not taken 
(i.e., volume risk) and the risk of low price from competitive bidding 
(i.e., price risk). To protect against these risks, these suppliers 
likely would have bid increments of capacity at different price levels 
(``tiered bids'') rather than bid all of their capacity at a single 
price. The strategic tiering of bids at relatively high prices would 
have made sense for these suppliers because it would have preserved the 
possibility of obtaining the rewards of discounting (selling a greater 
volume of capacity) while simultaneously mitigating the price risk of 
discounting.
    The United States believes that, absent the KeySpan Swap, KeySpan 
and the other pivotal suppliers would have engaged in tiered bidding 
upon the entry of new generation capacity in 2006.\7\ In other words, 
in the but-for world, tiered bidding strategies at prices lower than 
the cap would have been compelling for KeySpan and the other pivotal 
suppliers because they offered significant upside, and these suppliers 
would have been able to structure their tiered bids to limit their 
downside risk relative to bidding their caps. As a result, market 
prices likely would have cleared at a level below the cap but above 
competitive levels.\8\ This view is consistent with the pattern 
observed during prior periods of excess capacity, when prices did not 
fall to perfectly competitive levels.
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    \7\ If all the pivotal suppliers used tiered bidding, it is more 
likely, at any given clearing price, that withholding would be 
shared (i.e., that each would lose some sales) rather than one 
supplier taking on the high cost of being the sole withholder of 
capacity and losing the greatest share of sales.
    \8\ NYCEDC claims that the effect of the Swap was to ``more than 
doubl[e] what would otherwise be the market clearing price'' and 
that, absent the Swap, prices would have fallen to competitive 
levels. NYCEDC Comment at 9-10. In an attempt to show that prices 
but for the Swap would have fallen dramatically to levels consistent 
with perfect competition, NYCEDC compares prices for specific 
auction periods during certain years the Swap was in effect to those 
same auction periods after the Swap's expiration in April 2008. See 
Id. (e.g., $12.34/kW-month price in May 2007 compared to $6.52/kW-
month in May 2008). These comparisons, however, are flawed because 
FERC changed the rules for the auction in May 2008, requiring, among 
other things, that the pivotal suppliers bid zero, as would a 
``price taker,'' thereby causing prices to fall to the competitive 
floor. Given this significant rule change, these comparisons cannot 
serve as a meaningful test for how the auctions would have cleared 
had KeySpan, Astoria, and NRG been free, as they had been in the 
past, to engage in strategic, tiered bidding strategies.
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2. With the KeySpan Swap in Place, KeySpan Bid Its Cap
    With the Swap, capacity prices remained high. By providing KeySpan 
with revenues from Astoria's capacity in addition to KeySpan's own 
revenues, the Swap made bidding the cap KeySpan's most profitable 
strategy regardless of its rivals' bids. Following entry of the 
substantial amount of new capacity into the market in 2006, KeySpan 
continued to bid its cap even though a significant portion of its 
capacity went unsold. In contrast to the historic pattern following 
significant supply increases, the market price of capacity did not 
decline.

E. The Proposed Remedy

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

II. Summary Of Comments

A. The Pennsylvania Public Utility Commission (PaPUC)

    The PaPUC stated it was deeply concerned with the ``existence of a 
sophisticated multi year effort by the defendant to evade competition'' 
and the impact of the defendant's conduct on electricity markets and 
electricity prices. The PaPUC expressed its appreciation to the 
Department of Justice for bringing this enforcement action, stating 
that it does not oppose the proposed Final Judgment and explaining that 
this enforcement action demonstrates that conduct in electricity 
markets that is ``inimical to competition * * * may result in 
prosecution and serious consequences under the antitrust laws.'' The 
PaPUC concluded by noting that ``the PaPUC and other public and private 
entities with a critical stake in the success of wholesale electric 
generation competition have benefitted from studying the facts of this 
case and will be better able to detect and deter similar schemes in the 
future.''

B. New York State Consumer Protection Board (NYSCPB)

    The NYSCPB commended the Department of Justice for pursuing the 
improper collusive behavior at issue. NYSCPB expressed two concerns 
with the settlement. First, it argued that the United States has a 
burden to provide sufficient evidence for the court to determine the 
total harm from the wrongful behavior, explain how the amount to be 
disgorged will deter future

[[Page 42137]]

wrongdoing, and identify the responsible officers. Second, it argued 
that the proposed Final Judgment is not in the public interest because 
the disgorgement proceeds are remitted to the Treasury rather than to 
the harmed electricity customers and concluded that the proposed Final 
Judgment should contain a mechanism to distribute the proceeds to 
customers or establish an energy efficiency program.

C. New York City Economic Development Corporation (NYCEDC)

    The NYCEDC was ``highly appreciative'' of the enforcement effort 
and commended using antitrust remedies to address anticompetitive 
practices in the New York City energy sector. The NYCEDC criticized the 
$12 million disgorgement as inadequate ``given the scale of unjust 
enrichment to KeySpan.'' It asserted that there are ``professional 
estimates'' and other evidence of the harm that the Court should use to 
review the adequacy of the remedy, including a KeySpan statement of the 
amount it made under the Swap and various independent estimates of 
capacity prices if KeySpan had not entered the Swap.

D. New York State Public Service Commission (NYPSC)

    NYPSC stated that the Department of Justice ``is to be commended 
for its faithful enforcement of the antitrust laws to protect the 
integrity of the electricity markets in New York City.'' It argued, 
however, that the Court has no basis for evaluating whether the 
proposed disgorgement will prevent KeySpan's unjust enrichment or 
whether it is sufficient to deter anticompetitive conduct in the 
future. It recommended that the Court order additional evidence to be 
produced and asserted that ``anything less than full disgorgement'' 
would be inadequate for deterrence.
    NYISC also asserted that because ``ratepayers may have no 
recourse'' due to the filed rate doctrine, the remedy in the United 
States' case should reflect the ``standard measure of damages,'' which 
is the amount of the ``overcharge'' in the capacity market. It 
concluded that payment to the U.S. Treasury instead of to consumers 
``would be a manifestly unfair result'' and that the disgorged proceeds 
should either be credited to ratepayers or used to establish an energy 
efficiency program.

E. Consolidated Edison (Con Ed)

    Con Ed argued that the settlement is not in the public interest 
because it fails to provide payment to electricity consumers despite 
the United States' recognition that ``private individuals could not 
bring an antitrust suit here due to the barrier of the filed rate 
doctrine.'' It argued that the filed rate doctrine should have no 
application to the equitable distribution of disgorged funds to 
consumers as a remedy in this case.

F. AARP

    AARP asserted that the settlement is not in the public interest 
because of the ``lack of any monetary remedy or other discernible 
benefit for injured consumers, and the absence of a credible 
deterrent.'' It claimed that there is an inadequate factual foundation 
to determine the appropriateness of the amount of the remedy and its 
deterrent effect. It further noted that the decree contains no 
admission of guilt by KeySpan and no ``public shaming.''
    AARP requested that the proposed Final Judgment be amended to 
require an acknowledgment of wrongdoing, identification of total 
``inflated prices'' for capacity, identification of the derivative 
contracts at issue, and disgorgement of all profits. In the 
alternative, AARP argued that the record should be augmented to show 
the total profit ``achieved by all sellers in the NYISO capacity 
market,'' an estimate of the ``total damage and economic harm'' to 
consumers in the entire state of New York, the revenues KeySpan 
received under the Swap, and the rationale for accepting less than full 
disgorgement and for not providing any remedy to benefit injured 
customers.

G. Nelson M. Stewart

    Mr. Stewart urged the United States not to ``accept a plea'' from 
KeySpan. He alleged that KeySpan and related entities committed fraud, 
perjury, and forgery with respect to construction contracts wholly 
unrelated to the capacity market or the Swap.

III. Standards Governing the Court's Public Interest Determination 
Under the Tunney Act

    As discussed in detail in the Competitive Impact Statement, the 
Court, in making the public interest determination called for by the 
Tunney Act, is required to consider certain factors relating to the 
competitive impact of the judgment and whether it adequately remedies 
the harm alleged in the complaint. See 15 U.S.C. 16(e)(1)(A) & (B) 
(listing factors to be considered).
    This public interest inquiry is necessarily a limited one, as the 
United States is entitled to deference in crafting its antitrust 
settlements, especially with respect to the scope of its complaint and 
the adequacy of its remedy. See generally United States v. Microsoft 
Corp., 56 F.3d 1448, 1458-62 (D.C. Cir. 1995); United States v. SBC 
Commc'ns, 489 F. Supp. 2d 1, 12-17 (D.D.C. 2007). Although the Tunney 
Act was designed to prevent ``judicial rubberstamping'' of proposed 
Unites States consent decrees, the ``Court's function is not to 
determine whether the proposed [d]ecree results in the balance of 
rights and liabilities that is the one that will best serve society, 
but only to ensure that the resulting settlement is `within the reaches 
of the public interest.''' United States v. Alex Brown & Sons, 963 F. 
Supp. 235, 238 (S.D.N.Y. 1997) (quoting Microsoft, 56 F.3d at 1460) 
(emphasis in original), aff'd sub nom, United States v. Bleznak, 153 
F.3d 16 (2d Cir. 1998).
    With respect to the scope of the complaint, the Tunney Act review 
does not provide for an examination of possible competitive harms the 
United States did not allege. See, e.g., Microsoft, 56 F.3d at 1459 
(holding that the district judge may not reach beyond the complaint to 
evaluate claims that the government did not make).
    With respect to the sufficiency of the proposed remedy, a district 
court should accord due respect to the United States's views of the 
nature of the case, its perception of the market structure, and its 
predictions as to the effect of proposed remedies. See, e.g., SBC, 489 
F. Supp. 2d at 17 (United States entitled to deference as to 
predictions about the efficacy of its remedies). Under this standard, 
the United States need not show that a settlement will perfectly remedy 
the alleged antitrust harm; rather, it need only provide a factual 
basis for concluding that the settlement is a reasonably adequate 
remedy for the alleged harm. Id.\9\
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    \9\ Tunney Act review is not so that the court can engage in an 
``unrestricted evaluation of what relief would best serve the 
public,'' United States v. BNS, Inc., 858 F.2d 456, 462 (9th Cir. 
1988) (citing United States v. Bechtel Corp., 648 F.2d 660, 666 (9th 
Cir. 1981)), or determine the relief ``that will best serve 
society,'' Bechtel, 648 F.2d at 666, but simply for the court to 
determine whether the proposed decree is within the reaches of the 
public interest ``even if it falls short of the remedy the court 
would impose on its own.'' United States v. AT&TCo., 552 F. Supp. 
131, 151 (D.D.C. 1982).
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IV. Response to the New York Commentors and AARP

    Disgorgement serves the public interest by depriving KeySpan of 
ill-gotten gains, thereby deterring KeySpan and others from engaging in 
similar anticompetitive conduct in the future. No other remedy would be 
as effective to fulfill the remedial goals of the Sherman Act to 
``prevent and restrain''

[[Page 42138]]

antitrust violations.\10\ Given that the KeySpan Swap has now expired 
and KeySpan no longer owns the generating assets associated with the 
anticompetitive conduct, injunctive relief against KeySpan would not be 
meaningful.\11\
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    \10\ U.S.C. 4 (investing district courts with equitable 
jurisdiction to ``prevent and restrain'' violations of the antitrust 
laws).
    \11\ The disgorgement here seeks to prevent anticompetitive 
conduct and, in this way, is similar in focus to the traditional 
antitrust remedy of injunctive relief.
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    The comments of the New York Public Service Commission, the New 
York State Consumer Protection Board, the New York City Economic 
Development Corporation, and Consolidated Edison Company (collectively 
the ``New York Commentors'') and AARP have two central objections: (1) 
That the $12 million dollar disgorgement is inadequate to serve its 
remedial purpose, and (2) that the disgorged proceeds, rather than 
being remitted to the Treasury, should directly or indirectly benefit 
electricity consumers who paid higher electricity bills or be used to 
fund programs that benefit electricity consumers. The United States has 
carefully considered these objections but finds that they do not 
warrant modification of the proposed Final Judgment.

A. The Proposed Remedy Is Appropriate and Deters Anticompetitive 
Conduct

    The New York Commentors argue that disgorgement of $12 million is 
an inadequate remedy that will not serve as an effective deterrent, 
especially when compared to KeySpan's approximately $49 million net 
revenues earned under the Swap and the increased prices paid by 
electricity consumers. Such concerns are misplaced.
    Disgorgement in and of itself constitutes significant and 
meaningful relief. This is the first time that the United States has 
sought disgorgement under the Sherman Act. Parties contemplating 
anticompetitive agreements similar to the KeySpan Swap now will have to 
take into account possible disgorgement, thereby directly affecting 
their incentives to engage in illegal behavior. Disgorgement is 
particularly appropriate here as the anticompetitive conduct at issue 
may not be subject to other remedies. For example, absent disgorgement, 
KeySpan likely would retain all the benefits of its anticompetitive 
conduct because the filed rate doctrine creates significant obstacles 
to the collection of damages.\12\
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    \12\ See Keogh v. Chicago & NW. Ry. Co., 260 U.S. 156 (1922); 
see also, infra, Sec.  IV.B.
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    Had the case proceeded to trial, the United States would have 
sought disgorgement of the approximately $49 million in net revenues 
that KeySpan received under the Swap,\13\ contending that these net 
revenues reflected the value that KeySpan received from trading the 
uncertainty of competing for the certainty of the bid-the-cap strategy. 
The United States recognizes that it has not proved its case at trial 
and that ``a court considering a proposed settlement does not have 
actual findings that the defendant { ] engaged in illegal practices, as 
would exist after a trial.'' \14\ The $12 million disgorgement amount 
is the product of settlement and accounts for litigation risk and 
costs. As courts have stressed, it is altogether appropriate to 
consider litigation risk and the context of settlement when evaluating 
whether a proposed remedy is in the public interest.\15\
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    \13\ The NYPSC suggests that the disgorgement calculation should 
also include the ``profits gained by KeySpan through the unlawfully 
higher price of capacity.'' NYPSC Comments at 14 & n.5. The NYPSC 
appears to be contending that, for example, if KeySpan sold 1600 MW 
at its cap of approximately $12/kW-month under its anticompetitive 
Swap strategy but would have sold 2400 MW at a lower price (assume 
$8/kW-month), then KeySpan gained an additional profit of $6.4 
million (1600 MW x $4/kW-month). This contention is misplaced, as it 
fails to account for revenues from the additional volume that 
KeySpan would have sold at the lower clearing price and thereby 
ignores the net auction revenues that KeySpan would have earned in 
the but-for world.
    \14\ SBC, 489 F. Supp. 2d at 15 (citing Microsoft, 56 F.3d at 
1461).
    \15\ ``It is therefore inappropriate for the judge to measure 
the remedies in the decree as if they were fashioned after trial. 
Remedies which appear less than vigorous may well reflect an 
underlying weakness in the government's case, and for the district 
judge to assume that the allegations have been formally made out is 
quite unwarranted.'' Microsoft, 56 F.3d at 1461; see also SBC, 489 
F. Supp. 2d at 15 (``[R]oom must be made for the government to grant 
concessions in the negotiation process for settlements.'')
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    Commentors nevertheless assert that anything less than full 
disgorgement is inadequate as it would not deter the conduct at issue. 
This position ignores the fact that the loss to KeySpan of $12 million 
in Swap revenues would have had a deterrent effect on KeySpan's 
incentive to enter into the Swap. The United States contends that the 
Swap removed any incentive for KeySpan to bid competitively, locking it 
into bidding its cap instead of evaluating competitive choices, each of 
which could have resulted in different market clearing prices for 
capacity.\16\ The violation was based on the anticompetitive effect of 
the agreement on KeySpan's incentives to compete, not on a specific 
lower price that would have resulted absent the Swap.\17\ In evaluating 
whether to pursue an anticompetitive Swap, KeySpan would have engaged 
in a cost-benefit analysis weighing the returns from the 
anticompetitive strategy against the returns of various potential 
competitive bidding strategies. While we cannot quantify with certainty 
KeySpan's bid levels or the outcome of the market clearing price that 
would have resulted but for the Swap, depriving KeySpan of $12 million 
in Swap revenues would have reduced the value to KeySpan of engaging in 
the anticompetitive Swap strategy, thereby shifting the results of 
KeySpan's cost benefit analysis toward competitive strategies rather 
than entering into the Swap.\18\
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    \16\ See Complaint, ]] 4-5.
    \17\ See CIS at 6-7.
    \18\ KeySpan would have had two revenue streams to consider when 
deciding upon a bidding strategy: revenues directly from sales of 
capacity in the auctions and revenues from the Swap. It is likely 
that KeySpan absent the Swap would have earned more in auction 
revenues from tiered bidding strategies than from bidding its cap. 
Indeed, if this were not the case, the Swap would not have altered 
how KeySpan bid. KeySpan earned more total revenues by bidding its 
cap when accounting for earnings it receives with the Swap in 
effect. The disgorgement remedy here serves to reduce the additional 
earnings the Swap would have provided KeySpan.
---------------------------------------------------------------------------

    Moreover, it is improper to consider the adequacy of the 
disgorgement amount by comparing $12 million to some measure of 
overcharges to consumers in the electricity market. Disgorgement is not 
aimed at making consumers whole. As this Court has previously 
recognized, the purpose of disgorgement is to deprive the violator of 
unjust enrichment rather than to compensate victims of the violation. 
\19\ The extent of market harm is not relevant, as once a violation has 
been established, a district court ``possesses the equitable power to 
grant disgorgement without inquiring whether, or to what extent, 
identifiable private parties have been damaged by [the 
violation].''\20\ Such an inquiry would require the Court to assess the 
price of capacity that would have prevailed absent the Swap,\21\ a

[[Page 42139]]

problematic exercise given the uncertainty of determining market 
outcomes absent the Swap.\22\
---------------------------------------------------------------------------

    \19\ SEC v. Bear Stearns & Co., Inc., 626 F. Supp. 2d 402, 406 
(S.D.N.Y. 2009).
    \20\ SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985). See also 
SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (``Whether or not 
[any victims] may be entitled to money damages is immaterial [to 
disgorgement].'')
    \21\ Such an assessment is disfavored under the filed rate 
doctrine in cases where private claimants seek damages for 
overcharges. See, e.g. Arkansas Louisiana Gas Company v. Hall, 453 
U.S. 571, 580-81 (1981) (``In the case before us, the Louisiana 
Supreme Court's award of damages to respondents was necessarily 
supported by an assumption that the [different] rate respondents 
might have filed with the [regulator] was reasonable. Otherwise, 
there would have been no basis for that court's conclusion * * * 
that the [regulator] would have approved the rate. But under the 
filed rate doctrine, the [regulator] alone is empowered to make that 
judgment, and until it has done so, no rate other than the one on 
file may be charged.'')
    \22\ Given the difficulty of definitively estimating the harm to 
the market and its irrelevance to the questions relating to the 
adequacy of the disgorgement remedy, the United States has no 
obligation, as AARP asserts, to provide estimates of total economic 
harm and profits received by all market participants resulting from 
the alleged violation.
---------------------------------------------------------------------------

B. Disgorgement Proceeds Should Be Remitted to the U.S. Treasury

    Several commentors argued that KeySpan's $12 million disgorgement 
payment should be made to entities other than the U.S. Treasury in 
order to benefit the electricity customers in New York City who paid 
higher prices as a result of KeySpan's conduct. The United States 
shares the commentors' concern for the New York City ratepayers and, 
indeed, brought this case and sought disgorgement in order to deter 
future anticompetitive agreements like the KeySpan Swap. The United 
States has carefully considered the suggested alternative uses for the 
disgorgement proceeds but has determined that payment to the U.S. 
Treasury is the most appropriate result in this circumstance. The 
alternative distribution plans proposed by commentors seek, in effect, 
to restore funds to ratepayers. The United States, however, 
specifically chose to seek disgorgement, rather than restitution, as a 
remedy for this violation. As discussed in the CIS, disgorgement is 
particularly appropriate on the facts of this case to fulfill the 
remedial goals of the Sherman Act.\23\ Disgorgement also provides 
finality, certainty, avoidance of transaction costs, and potential to 
do the most good for the most people.\24\
---------------------------------------------------------------------------

    \23\ CIS at 9-10.
    \24\ See Bear Stearns, 626 F. Supp. 2d at 419 (directing the 
transfer of remaining disgorgement related settlement funds to the 
Treasury to be used by the Government for its operations).
---------------------------------------------------------------------------

    Legal concerns would arise with a remedy based on restitution that 
sought to directly or indirectly reimburse New York City ratepayers. 
Such a remedy would raise questions relating to the filed rate 
doctrine, which bars remedies (such as damages) that result, in effect, 
in payment by customers and receipt by sellers of a rate different from 
that on file for the regulated service.\25\ Some of the commentors 
recognize the doctrine's potential limitation on their own ability to 
seek such reimbursement directly. They do not discuss the fact that 
regulators such as the FERC and the NYPSC seeking to offer refunds may 
also be constrained by the doctrine and its corollary bar to 
retroactive ratemaking.\26\ The mechanisms suggested by the commentors 
could be seen as an end run around those well-established doctrines. In 
this case, payment to the U.S. Treasury avoids this unnecessary and 
thorny issue.
---------------------------------------------------------------------------

    \25\ See generally Square D (o. Niagara Frontier, 476 U.S. 409, 
423 (1986).
    \26\ See, e.g., Ark/a, 453 U.S. at 578 (``Not only do the courts 
lack authority to impose a different rate than the one approved by 
the Commission, but the Commission itself has no power to alter a 
rate retroactively. * * * This rule bars `the Commission's 
retroactive substitution of an unreasonably high or low rate with a 
just and reasonable rate.' ''(citations omitted)). Con Ed--a 
commentor here--directly requested that FERC order refunds of the 
higher cost of capacity due to KeySpan's behavior. The FERC declined 
to grant them. New York Indep. Sys. Operator, Inc., 122 FERC ] 
61,211 (2008) (March 7, 2008 Order).
---------------------------------------------------------------------------

    Moreover, the Miscellaneous Receipts Act (``MRA'') states that ``an 
official or agent of the Government receiving money for the Government 
from any source shall deposit the money in the Treasury as soon as 
practicable without deduction for any charge or claim.'' 31 U.S.C. 
3302(b). Under this statute, members of the Executive Branch \27\ that 
receive money for the United States are to remit such funds directly to 
the U.S. Treasury. A purpose of the statute is to protect Congress's 
appropriations authority by ensuring that money collected from various 
sources cannot be used for programs not authorized by law. The proposed 
remedy avoids any issues of compliance with the MRA.\28\
---------------------------------------------------------------------------

    \27\ The MRA applies to the Department of Justice as a member of 
the Executive Branch. We are not aware of its application to 
independent agencies such as the Securities and Exchange Commission.
    \28\ In addition to legal concerns, distribution of the 
disgorged funds to entities other than the Treasury also would raise 
practical concerns. Distribution directly to the numerous individual 
electricity consumers would have high administrative costs relative 
to the overall disgorgement amount. Distribution to the electricity 
companies that purchased capacity from generators for ultimate 
refund to consumers could involve monitoring and compliance issues. 
And, the funding of an energy efficiency program would also raise 
administrative issues (and would be attenuated from the harm alleged 
in the Complaint).
---------------------------------------------------------------------------

V. Response to Comments of Nelson M. Stewart

    Mr. Stewart's comment alleges fraud, perjury, and forgery committed 
by KeySpan and its subsidiary KSI Contracting. The allegations concern 
conduct that is wholly unrelated to the capacity market or the KeySpan 
Swap and are unrelated to the antitrust violations that the United 
States alleges in its Complaint. As noted above, in making its public 
interest determination in accordance with the Tunney Act, it would be 
``error for the judge to inquire into allegations outside the 
complaint.'' Microsoft, 56 F.3d at 1463. These Tunney Act proceedings, 
therefore, are not an appropriate venue for the consideration of Mr. 
Stewart's claims.

VI. Conclusion

    After careful consideration of the public comments, the United 
States remains of the view that the proposed Final Judgment provides an 
effective and appropriate remedy for the antitrust violation alleged in 
the Complaint and that its entry would therefore be in the public 
interest. Plaintiffs' chosen remedy in this case deprives KeySpan of 
ill-gotten gains, effectively deters the harmful behavior, and 
establishes the United States's willingness to seek disgorgement in 
appropriate cases. The PaPUC (as well as other commentors) noted that 
the action has established an important antitrust enforcement precedent 
in regulated energy markets and that, as a result, it and other public 
and private entities with a critical stake in the success of wholesale 
electric generation competition will be better able to detect and deter 
similar schemes in the future.\29\ Based on the factors set forth in 
the Tunney Act, entry of the proposed Final Judgment is in the public 
interest.
---------------------------------------------------------------------------

    \29\ E.g., PaPUC Comments at 3.
---------------------------------------------------------------------------

    Pursuant to section 16(d) of the Tunney Act, the United States is 
submitting the public comments and this Response to the Federal 
Register for publication. This Response is also being provided to each 
of the commentors. After the comments and this Response are published 
in the Federal Register, the United States will move this Court to 
enter the proposed Final Judgment.

Dated: June 11, 2010.

Respectfully submitted,
/s/--------------------------------------------------------------------
Jade Alice Eaton,
 [email protected]

Trial Attorney, U.S. Department of Justice, Antitrust Division, 
Transportation, Energy & Agriculture Section, 450 Fifth Street, NW., 
Suite 8000, Washington, DC 20004. Telephone: (202) 307-6316. 
Facsimile: (202) 307-2784.

Nelson M. Stewart,
PO Box 1833
Quogue, N.Y. 11959
(646) 258 9369

April 10, 2010

Donna N. Kooperstein, Chief, Transportation, Energy and Agriculture 
Section, Antitrust Division, 115. Department of Justice, 450 5th St. 
NW., Suite 8000, Washington, DC 20530

Re: United States of America, U.S. Department of Justice, Antitrust 
Division v. Keyspan Corporation.


[[Page 42140]]


    Dear Ms. Kooperstein, In accordance with the details of the 
February 22, 2010 press release issued by the United States Department 
of Justice I am writing to urge you not to accept the plea from Keyspan 
Energy that now awaits approval from the United States District Court. 
Keyspan Energy has been the subject of numerous investigations 
resulting from questionable conduct over the years. In many instances 
the company simply paid a fine and admitted no wrongdoing. Particularly 
with large corporations like Keyspan Energy, the profit gained from 
this behavior is usually much more substantial than the fines levied. 
Consider the golden parachute payments to William Catacasinos and other 
executives (a $1.5 million settlement was paid to the NYS Attorney 
General's Office) and the sale of $29 Million in stock by Keyspan's 
CFO, COO and President prior to the publication of substantial losses 
related to the acquisition of Roy Kay, Inc. I would contend that such 
penalties fail to alter misconduct and increase the temptation to push 
the boundaries of unethical conduct. Where one might expect the 
compliance office to guard against such conduct, the compliance office 
of Keyspan Energy and its parent company National Grid appears to 
ignore these actions and, on at least one occasion, even assisted in an 
attempt to retaliate against someone who endeavored to report them.
    In 2008 I attempted to follow up on my third effort to notify 
Keyspan Energy/National Grid of fraud, perjury, forgery and accounting 
fraud committed by employees of Keyspan Energy, its wholly owned 
subsidiary 1(51 Contracting (The former Roy Kay, mc) and their 
attorneys. These highly unethical and illegal acts stem from two 
contract actions filed by my company related to work performed for the 
now infamous Roy Kay, Inc./KSI Contracting. On this third attempt I 
spoke with Margaret Ireland of the National Grid Compliance Office and 
detailed a number of these allegations. I further explained that the 
attorney defending this matter, Mark Rosen of McElroy, Mulvaney, 
Deutsche and Carpenter, UP, had used illegal and highly unethical 
tactics to prevent further discovery of the conduct I alleged. Ms. 
Ireland asked me to send her whatever recent documentation I had and 
said she would look into the matter. Having received no response I 
called again and asked if she would like me to send more documentation. 
Ms. Ireland stated she had not had time to look into the documents I 
had sent but I should call again at a later time. The document in 
Attachment a is the only response I have ever received from National 
Grid or Keyspan regarding the information I submitted to Ms. Ireland. 
It is the direct result of a message I left for Ms. Ireland with the 
National Grid compliance office after several failed attempts to 
contact her as she had suggested. Mr. Rosen's email is a continuation 
of the threats made in his letter of December 27, 2007 (See page of 
Attachment b) in response to my previous attempts to contact the 
defendants concerning the conduct of their employees and Mr. Rosen. To 
date I have made no less than five attempts to report this conduct to 
the compliance offices of Keyspan and National Grid. Mr. Rosen's letter 
and email are the only responses I have ever received. A copy of the 
documents sent to Ms. Ireland are included as Attachment c.
    Mr. Rosen and his clients have good reason to thwart any discovery 
related to Roy Kay, Inc/KSI Contracting. In response to our initial 
claims to recover monies from work performed for Roy Kay, Inc/KSI 
Contracting the defendants produced two forged contracts and purported 
them to be genuine. One contract forged the signature of our company's 
president, Nelson Stewart, Sr. and the other reduced the amount of the 
original contract from $750,000.00 to $250,000.00 and altered the 
original date from March 15, 2002 to May 14, 2002 (despite the fact 
that the date of the signature page, which is identical on their 
contract and the genuine contract, reads March 15, 2002). The 
defendants also submitted false, unsubstantiated back charges and 
several of the statements made by employees of the defendants have 
proved to be untrue. In over seven years of litigation the defendants 
have never produced a single document that would refute or explain the 
evidence we have submitted.
    The documentation we have been able to obtain from third parties 
provide evidence that Roy Kay/KSI Contracting was altering accounting 
documents and omitting information from job records to make it appear 
as though work performed by subcontractors was performed by KSI 
Contracting. What were actually liabilities to Roy Kay, Inc/KSI 
Contracting appear to have been misrepresented as money owed to the 
company. While the documents we obtained are only relevant to the two 
projects our company worked on, Roy Kay, Inc/KSI Contracting was 
involved in up to twenty-six projects at the time. Losses from Roy Kay, 
Inc/KSI Contracting, well over $100 Million in the third quarter of 
2002 alone, were a thorn in the side of Keyspan Energy and company 
executives were desperate to stop them (Please see Attachment d). If 
this same conduct was found to be present at these other projects the 
amount of money being misrepresented would be enormous.
    The ability to report allegations of unethical and criminal conduct 
to the compliance office of a publicly traded corporation without the 
threat of retaliation is a fairly reasonable expectation. Most first 
year law students, if not most lay people, would know that that 
represented parties to a litigation may discuss issues related to that 
litigation. I am not an attorney and neither is my business partner. My 
attempts to communicate with Ms Ireland were not improper. Yet this was 
the second time Mr. Rosen attempted to prevent such communication. 
Knowledge of the facts and the law mean little to Mr. Rosen and his 
clients. What is most important is the use of any tactic, however 
unethical, to deter continued discovery of the assertions raised in 
these matters. That the compliance office would refer this matter back 
to the same attorney who played a substantial role in the allegations 
at issue illustrates that these practices are systemic throughout the 
company. Keyspan's refusal to even consider these allegations is bad 
enough. Threats of further abuse of the legal process by their attorney 
in this matter demonstrate that the compliance offices of Keyspan 
Energy and National Grid exist simply to pay tip service to the ideal 
of ethical and legal business conduct. When these ideals become an 
inconvenience the compliance office not only steps aside but, as 
evidenced by attachment a, actively participates in attempting to 
remove that inconvenience.
    The conduct of Keyspan Energy's compliance office in this matter is 
indicative of a pattern that has led to numerous allegations of 
misconduct over the years. I respectfully submit to the Department of 
Justice that fines have done little to correct the conduct of this 
company in the past and cannot be expected to alter such conduct in the 
future. It is worth noting that Mr. Rosen and his clients, no doubt 
encouraged by the support they have received thus far, continue the 
same pattern of obstructive and improper conduct to this day in the 
above referenced actions. For much the same reason that an independent 
auditor oversees the accounting statements of a public company, a 
separate compliance office, free from the influence of Keyspan Energy 
and National Grid, should be charged with the responsibility of 
enforcing the

[[Page 42141]]

ethical business standards to which both companies publicly claim to 
aspire. To deter the kind of behavior that is now before the United 
States District Court, Keyspan needs a truly independent compliance 
office that will respond to allegations of unethical practices in a 
diligent and appropriate manner. It is clear that the current 
management lacks the will to impose these standards on itself. Without 
this kind of impartial supervision of company conduct the next 
mendacious scheme will likely be a simple matter of time.
    I truly appreciate the opportunity to voice an opinion in this 
matter and I thank you for your consideration.

Sincerely,

Nelson Stewart

List of Attachments

    Please Note: The documents I have submitted and the allegations I 
have raised are by no means a complete account of the actions of 
Keyspan Energy and KSI Contracting with respect to these matters. There 
are well over 1,500 documents related to these matters.
    In consideration of the two-month time constraint the court is 
acting under I have attempted to be as brief as possible while 
providing an informative sample of the unethical conduct of both 
Keyspan Energy and its compliance office. Additional documentation can 
he made available at your request.

Attachment a

    This email was sent to my attorney in response to a phone call I 
placed to Margaret Ireland, compliance officer for National Grid. 
National Grid is the parent company of Keyspan Energy. Together with 
attachment b it is the only response I have ever received from Keyspan 
Energy regarding the allegations I raised.

Attachment b

    This letter was sent in response to our numerous demands upon Mr. 
Rosen and his clients for the production of documents. The court did 
not accept Mr. Rosen's attempts to blame the plaintiffs for his failure 
to produce witnesses and documents. A motion to strike the defendants' 
answer in this matter was granted by the court on December 22, 2008.

Attachment c

    These letters were sent to several members of the National Grid 
Compliance Office by return-receipt mail. They came back unsigned for. 
When Ms. Ireland of National Grid asked me to send her a copy of some 
of the allegations I had related to her I sent the letter to Vincent 
Miseo, Claims Attorney for Federal Insurance, (Federal issued the 
payment and performance bond on one of the projects) along with my 
letter to the NYS Insurance Department because they included the most 
recent developments with respect to these actions. Two previous letters 
containing substantial documentation of our allegations were sent on 
June 28, 2006 and October 24, 2006. A copy of these documents can be 
made available at your request.

Attachment d

    The attached exchange between Keyspan executives demonstrates the 
frustration resulting from the Roy Kay losses. Keyspan eventually 
offset these losses by hiring out the remaining work on these projects 
to subcontractors and later refusing to pay them. Many of those who 
attempted to collect these sums in Court were met with the same tactics 
described in this letter.

http://wwss.justice.gov/atr/cases/f259700//259704-7pdf

United States District Court for the Southern District of New York

    United States of America, Plaintiff vs. KeySpan Corporation, 
Defendant.

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

Comments of the New York City Economic Development Corporation Made 
Pursuant to the Antitrust Procedures and Penalties Act

    The New York City Economic Development Corporation (``NYCEDC''), 
acting on its own behalf and on that of the City of New York City as 
electricity ratepayers in the market affected by the conduct of the 
Defendant, hereby files comments on the proposed Final Judgment in the 
above-captioned matter. These comments are responsive to a Notice 
published at 75 FR 9946, Proposed Final Judgment and competitive impact 
Statement, on March 4, 2010.

I. Interest of Title, New York City Economic Development Corporation, 
and of the City of New York as Electric Ratepayers in the New York 
Market

    The City of New York (``City'') and NYCEDC, along with other 
commercial and residential electricity ratepayers located in the 
jurisdiction of the City, are directly affected by the operation of the 
electric capacity market administered by the New York Independent 
System Operator (CCNYISO). The City is geographically coextensive with 
NYISO Zone J, one of several regions that comprise the NYISO's New York 
Control Area, which is itself coextensive with the State of New York. 
NYISO Zone J forms the relevant geographic market affected by the 
conduct of KeySpan set out in the Complaint filed in this matter by the 
Department of Justice on February 22, 2010. The relevant geographic and 
product market in the action brought by the Department of Justice 
against KeySpan is described in the Complaint as the ``New York City 
Installed Capacity Market'' or ``NYC Capacity.'' \1\
---------------------------------------------------------------------------

    \1\ Complaint herein at page 4.
---------------------------------------------------------------------------

    Even more than most urban areas in the nation, New York City and 
its residents and businesses are particularly dependent on electricity 
for transportation and other critical energy needs. The costs borne by 
City ratepayers are among the highest in the continental United States, 
as was recognized by the Electric Energy Market Competition Task Force 
\2\ in its Draft Report to Congress pursuant to section 1815 of the 
Federal Energy Policy Act of 2005.
---------------------------------------------------------------------------

    \2\ Draft Report to Congress on Competition in the Wholesale and 
Retail Markets for Electric Energy, at pp. 20-22, 73 (issued June 5, 
2006).
---------------------------------------------------------------------------

    NYCEDC, acting through its Energy Policy Department, serves as 
Mayor Michael Bloomberg's principal energy policy adviser, and also 
serves as the Chair of the City's Energy Policy Task Force, and the New 
York City Energy Planning Board. NYCEDC also serves as a catalyst for 
City economic development, capital investment, and growth. All of these 
concerns are vitally dependent on the provision of reliable energy at 
just and reasonable prices. The City is also a voting member in the 
NYISO governance structure as a large governmental end user.

II. Summary and Background

    As noted in the materials submitted to the Court in this matter, a 
very large increment of in-City electric capacity, some 1000 megawatts 
(``MW''), entered the City market in early 2006. However, in 
contravention of basic economic theory, this addition resulted in no 
reduction in NYISO capacity prices, and in at least some instances, 
those prices actually rose. The premise of deregulated energy and 
capacity markets in New York as conceived by the New York State Public 
Service Commission (``NYSPSC'') was in large measure based on the 
presumed salutary effects of rivalrous market behavior, including the 
expected value of new entrants in enhancing consumer welfare, and in 
moderating prices in the constrained New York electricity market.

[[Page 42142]]

    However, as the Complaint herein alleges, actions taken by KeySpan 
in violation of the Sherman Act had the effect of negating the 
beneficial effects associated with the arrival of new, highly efficient 
generation facilities. KeySpan's bidding practices, coupled with its 
artful use of a derivative financial instrument to leverage its already 
dominant market position as the City's largest generator, permitted it 
to distort the capacity market, and to impose artificially high 
capacity prices on City consumers. The imposition of these artificial 
prices resulted, as the Department of Justice notes, in unjust 
enrichment to KeySpan. Moreover, because of the manner in which the 
NYISO capacity operates and clears based on the highest bid that is 
accepted, the illegal conduct alleged here also served to provide 
supranormal capacity revenue prices to Zone J generation capacity 
providers at large, thereby exacerbating the already great consumer 
harm (done to ratepayers by the conduct described in the Complaint.

III. Discussion

    The NYISO capacity market was intended to set the clearing price as 
a function of the free interplay of the forces of supply and demand. 
Here, however, that process was distorted through a form of market 
gaming by KeySpan.
    More than ten years ago, when the New York State energy markets 
were deregulated by the NYSPSC, the City power plants were divested in 
an effort to reduce the potential for market power abuse. However, as 
the Complaint herein describes, the in-City capacity market is an 
oligopoly, with three dominant generation suppliers known as the 
divested generation owners (``DGOs''). This was true during the 
operative period of the illegal conduct alleged by the Department of 
Justice (``DOJ'') Antitrust Division here, and it remains true today. 
KeySpan was a pivotal bidder, i.e., at least a portion of its capacity 
was needed to permit the market to clear. Moreover, it was the largest 
generation supplier in the City, with some 2400 megawatts of capacity.
    In recognition of the market power enjoyed by DGO, the Federal 
Energy Regulatory Commission imposed capacity bid caps on them. KeySpan 
was given the highest bid cap dollar value, which actually served to 
increase the effect of the market-distorting conduct that the Complaint 
herein describes, as it permitted the highest possible clearing price 
in the relevant market. Economic withholding, the practice of pricing 
bids at artificially high prices, was permitted by the NYISO market 
rules so long as KeySpan bid at or below its fixed bid cap amount. The 
NYISO Services Tariff, Attachment H, Section 2.4 defines economic 
withholding in the energy market as ``submitting bids for an Electric 
Facility that are unjustifiably high so that (i) the Electric Facility 
is not or will not he dispatched or scheduled, or (ii) the bids will 
set a market clearing price.''
    DGOs are prohibited by FERC-imposed NYISO market rules from 
physically withholding capacity in the periodic capacity auctions. In 
practice, however, as the Complaint here details, the form of economic 
withholding practiced by KeySpan achieved virtually the same end: 
Causing capacity prices to clear at supranormal levels.
    The addition in early 2006 of a very large increment of new in-City 
capacity--1000 megawatts--failed to lower capacity prices, thus to a 
degree refuting the promise of the demand curve addition to the New 
York Control Area market earlier approved by the Commission. Indeed, in 
some instances the capacity clearing prices in 2006 actually increased 
compared to the equivalent 2005 auction levels, a result that was 
clearly anomalous.
    These bidding practices distorted the capacity market and imposed 
excessive prices on the consuming public, while enriching incumbent 
capacity providers in a manner that exceeded even the generous existing 
capacity compensation formula. The price of a commodity should decrease 
as the supply of that commodity increases. This theory underlies the 
capacity demand curve market design that was implemented by the NYISO, 
and approved by the Federal Energy Regulatory Commission in 2003. The 
Commission observed in its Order that the price would gradually fall as 
the amount of available capacity beyond 1 18 percent of peak load.\3\
---------------------------------------------------------------------------

    \3\ May 2003 Demand Curve Order in FERC Docket ERO3-647-009 at 
p. 3, ] 5; the Commission's decision also referenced a NYISO 
estimate that a 1% increase in capacity in the State would result in 
average consumer savings of $100 million annually. Id. at p. 6, ] 9 
and at p. 16, fit 23.
---------------------------------------------------------------------------

    As noted above, in early 2006, approximately 1,000 MW of new 
capacity was added in the City, markedly increasing the amount that 
could be bid into the periodic NYISO capacity auctions.\4\ Yet, the 
price of capacity remained at the maximum permissible price cap level.
---------------------------------------------------------------------------

    \4\ In early 2006, two new 500 MW combined-cycle, gas-fired 
power plants entered service in New York City. These were the SCS/
Astoria, operated by Astoria Energy LLC, a subsidiary of SCS Energy 
LLC, and the New York Power Authority's new Poletti unit in Astoria, 
Queens. See Securities & Exchange Commission Form 8-K filed by 
KeySpan Corporation, May 4, 2006, Accession Number 0001062379-06-
000054; KeySpan First Quarter 2006 Earnings Conference Call, p. 9 
(held May 4, 2006).
---------------------------------------------------------------------------

    The conduct of KeySpan as set out in the Complaint raised critical 
market power issues in the period of 2006-2008 and raised prices for 
some three million Zone J electric ratepayers. The illegal conduct 
alleged here was only stopped when the NYSPSC exercised its supervisory 
authority over KeySpan in early 2008, and compelled the company to bid 
in the Zone J capacity market as a price-taker, i.e., at a zero price. 
This action effectively eliminated the ability of KeySpan to raise 
capacity prices.
    In the case of KeySpan, the issue of its status and role as the 
largest of the pivotal capacity DGO bidders was heightened by its use 
of a contractual arrangement with Morgan Stanley to financially 
purchase 1,800 MW of capacity in the New York City market for a period 
of three years at a fixed price of $7.57 per kW-month.\5\ Under the 
contractual terms, KeySpan would profit to the extent that the City 
capacity price cleared above that level. The combination of its own 
very large generation presence, and this financial arrangement gave 
KeySpan a direct or indirect interest in the price of some 4200 MW of 
in-City capacity.
---------------------------------------------------------------------------

    \5\ Securities & Exchange Commission Form 8-K filed by KeySpan 
Corporation, May 4, 2006, Accession Number 0001062379-06-000054; 
KeySpan First Quarter 2006 Earnings Conference Call, p. 9 (held May 
4, 2006).
---------------------------------------------------------------------------

IV. Analysis of Proposed Disgorgement Remedy

    As was observed by the New York State Department of Public Service 
in its comments herein,\6\ there are two primary concerns: (1) The 
amount of the disgorgement fund amount that is appropriate here, and 
(2) the proper recipients of the disgorgement funds. The City and 
NYCEDC are in accord with the view expressed by NYSPSC that the 
proposed $12 million disgorgement is inadequate given the scale of the 
unjust enrichment to KeySpan here. We also believe that a credit for 
the disgorgement amount could readily be provided to the victims of the 
conduct here through credits provided through the NYISO wholesale 
market. Such credits would flow in the wholesale market operated by the 
NYISO to the load serving entities (``LSEs''), who would be compelled 
by the NYSPSC to maintain those funds as bill credits available to the 
retail customers of the LSEs. This process

[[Page 42143]]

would avoid the kinds of customer apportionment issues and transaction 
costs that might otherwise present insuperable obstacles to the process 
of attempting to fashion disgorgement remedies intended to reach some 
three million electric ratepayers in the New York City market.
---------------------------------------------------------------------------

    \6\ Tunney Act Comments of the New York State Public Service 
Commission re U.S. v. KeySpan, Case No. 10-cv-14l5 (Comments filed 
April 30, 2010).
---------------------------------------------------------------------------

    As to the proper amount of disgorgement that should be required of 
KeySpan, there are available in the record some professional estimates 
of the harm that was done to the City capacity market. There are also 
some available figures from KeySpan that bear to some degree on the 
same question. These estimates and corporate statements should provide 
guidance to the Court in exercising its judgment concerning the 
adequacy of the proposed settlement.
    In early 2006, KeySpan publicly expressed confidence that average 
City capacity prices would in fact exceed the contractual level of 
$7.57, and observed that as of the first monthly summer capacity 
auction period in 2006, the Zone J capacity price settled at $12.71 per 
kW-month. Clearly, such corporate confidence concerning maintenance of 
capacity clearing prices was not misplaced: as a dominant entity it was 
in a position, even when acting unilaterally, to make capacity prices 
clear well above the contractual level established in the Morgan 
Stanley agreement. Regarding the gain attributable to the conduct 
challenged here by DOJ as violative of the Sherman Act, at least a 
portion of the benefits were disclosed by the company itself: KeySpan 
stated its gain attributable to the Morgan Stanley agreement was $44.3 
million in the period from May through September of 2006.\7\ Given the 
workings of the market clearing process, the overall adverse impact on 
City energy consumers flowing from the practices described in the 
Complaint was of course far larger.
---------------------------------------------------------------------------

    \7\ Interrogatory Response to DPS Request No. 75, Subpart 14 in 
New York State PSC Case No. 06-M-0878, relating to the proposed 
KeySpan-National Grid merger (response dated September 21, 2006).
---------------------------------------------------------------------------

    An initial New York State Department of Public Service (``NYSDPS'') 
analysis of the price level for the NYISO capacity auctions early June 
of 2006 revealed the price to be in large part the product of a failure 
to bid some 800 MW into the May and June 2006 auctions. Having 
conducted a preliminary review of the auction numbers, NYSDPS 
representatives indicated that economic withholding appeared to have 
effectively kept capacity prices considerably higher than they would 
have been had the remaining 800 MW been bid into the auction:

    Based on NYISO posted data, it appears that about 800 MW of NYC 
capacity went unsold in the spot auctions for May and June 2006. 
This implies higher prices in both the NYC and statewide capacity 
markets, compared to an auction where all available NYC supplies had 
cleared.
    If all available NYC capacity had been sold, the NYC UCAP price 
would have dropped by about $7.26/kW-month (from $12.71 to $5.45).
    In addition, the NYS UCAP price could have dropped by as much as 
1.28kW month.\8\
---------------------------------------------------------------------------

    \8\ Discussion presentation by NYSDPS, ``In-City Capacity Market 
Performance'' at NYISO stakeholder meeting of the ICAP Working 
Group, June 12, 2006, available at: nyiso.com/public/webdocs/committees/bicicapwg/meeting_ materials/2006-06-12/in--city--
capacity--markey--performance--nydps.pdf.

    This preliminary analysis by DPS was borne out in later estimates 
offered by the NYISO's own Independent Market Monitor, Dr. David B. 
---------------------------------------------------------------------------
Patton:

    Prior to 2006, nearly all of the ICAP [Installed Capacity] in 
New York City was scheduled or sold in the NYISO capacity markets. 
Beginning in January 2006, more than 1000 MW new capacity has been 
installed in NYC. Given that the marginal cost of selling capacity 
is close to zero for most units, the amount of capacity sold in New 
York City under the NYC Locality Demand Curve would have increased 
by this amount if the market were performing competitively. However, 
the total ICAP sales actually fell slightly after 500 MW of new 
capacity at Poletti became available in early 2006. This occurred 
because one incumbent supplier reduced its sales by approximately 
the same amount as the new capacity at Poletti. This supplier 
routinely offered the bulk of this unsold Capacity into the Energy 
market, which indicates that it could have been sold in the Capacity 
market with little additional cost.
    The unsold Capacity quantities increased in May 2006 when an 
additional 500 MW of Capacity from the SCS/Astona Energy LLC 
facility came online.
    The unsold Capacity in question was not sold because the 
supplier offered the Capacity at a price that was higher than the 
Capacity Demand Curve price levels that would have allowed the 
Capacity to clear. In particular. the DGO supplier offered the 
Capacity at the level of its offer cap, which exceeded $12 per KW-
month in the Summer Capability Period. Had all Capacity been sold, 
the price during the May auction would have cleared at less than $6 
per KW-month.\9\
---------------------------------------------------------------------------

    \9\ Affidavit of NYISO market Monitor Dr. David B. Patton in 
FERC Docket Number ERO7-360-000, at page 4 of 19 (filed December 22, 
2006)[emphasis added]

    It is thus clear, as Dr. Patton states, that the withholding of 
capacity took place, and moreover, that such withholding materially 
affected its price--more than doubling what would otherwise be the 
capacity market clearing price.
    The foregoing is very important to this Court's assessment of 
whether the $12 million disgorgement cut amount proposed to be imposed 
on KeySpan in this matter is one that can be said to be in the interest 
of justice, and therefore should be approved for entry of a Final 
Judgment herein.
    Moreover, the Court is not solely reliant on even such well-
supported opinions as those advanced by Public Service Staff and by Dr. 
Patton estimating the excessive capacity charges imposed on City 
consumers. There is at least one other extrinsic form of evidence that 
can readily be accessed from an incontrovertible source.
    A well recognized economic analytic tool in assessing antitrust 
damages is the during and after test that examines market activity 
during the period of illegal conduct and the period when that activity 
came to an end. The NYISO maintains extensive records of capacity 
prices in the various auctions that it operates. Attached as Exhibit A 
to this document is a summary of capacity clearing prices in the period 
between 2006, when the alleged conduct violating the Sherman Act began, 
during the succeeding period, and after the action of the NYSPSC put a 
stop to the conduct in question in early 2008 with its Order mandating 
that KeySpan bid into the various NYISO capacity auctions as price 
taker. Exhibit A was taken directly from the NYISO website, and these 
prices and other capacity price auction results from recent years are 
publicly accessible there.\10\
    Zone J is reflected in Exhibit A as ``NYC'' and the prices 
reflected therein are telling and directly confirm the views of Dr. 
Patton on the effect of the conduct under scrutiny here. For example, 
in the six-month 2006 summer capability period strip auction (May-
November), prices in NYC were $12.35 per kW-month, and $12.37 in the 
comparable period for 2007. However, by the summer strip auction of 
2008, after the alleged illegal conduct had been halted, the NYC 
auction price fell to $6.50 per kW-month, and even in 2009 it was 
$6.75. The pattern in the monthly NYISO auction results is very 
similar: the May and June auctions in 2007 closed at $12.34 and $1 1.40 
respectively, while the comparable results after the cessation of the 
market conduct challenged in the Complaint here were $6.52 and $6.49 
respectively. The NYISO spot auction for capacity reveals a very 
similar pattern as well.
    Armed with these numbers and the respective amounts of capacity 
affected 1800 MW in the Morgan Stanley agreement, and KeySpan's own 
offered capacity in the various NYISO auctions,

[[Page 42144]]

one can readily ascertain at least an informed estimate of the impact 
on Zone J consumers of the overcharges associated with the conduct 
here.

V. Role of the Justice Department

    One final observation: NYCEDC and the City are highly appreciative 
of the involvement of the Department of Justice and its Antitrust 
Division in this matter, and commend their action in utilizing Sherman 
and Clayton Act remedies to address anticompetitive practices in the 
New York City energy sector.
    As has been noted, the City energy and capacity markets remain 
highly concentrated and bear the classic indicia of an oligopoly 
market: few significant suppliers, high barriers to entry, and 
accompanying high prices. Conduct similar to that outlined in the 
Complaint here may well occur in the future as it has in the recent 
past. While FERC has markedly increased its enforcement efforts in the 
period since the passage of the Federal Energy Policy Act of 2005, the 
record here also illustrates the continuing need for DOJ scrutiny of 
anticompetitive practices in the City's energy markets. The substantial 
penalties available to address Sherman Act violations will serve as a 
deterrent to market manipulation such as that seen here. Continued 
vigilance by the Antitrust Division will also operate to discourage 
illegal conduct, and will thereby enhance consumer welfare.

VI. Conclusion

    For the foregoing reasons, the NYCEDC and the City ask that the 
Court carefully review the record before it, take judicial notice of 
publicly available evidence at FERC and at the NYISO, and examine the 
proposed Final Judgment with a view toward arriving at a result that 
will be equitable and will advance the interests of justice.

May 3, 2010
Respectfully submitted,

/s/Michael I. Delaney
Michael J. Delaney, Director--Energy Regulatory Affairs,
City of New York,
New York City Economic Development Corporation,
110 William Street, 4th Floor,
New York, NY 10038,
(212) 312-3787,
[email protected].

Attachment

Exhibit A--View Strip Auction Summary

BILLING CODE 4410-11-M
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[GRAPHIC] [TIFF OMITTED] TN20JY10.019

BILLING CODE 4410-11-C

In the United States District Court for the Southern District of New 
York

Civil Case No. 10-CIV-1415

    United States of America, Petitioner v. KeySpan Corporation, 
Respondent.

Comments of Consolidated Edison Company of New York, Inc.

Dated: May 3, 2010

Comments of Consolidated Edison Company of New York, Inc.

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)-(h) and in response to the March 4, 2010 Notice published in the 
Federal Register, U.S. Department of Justice, Antitrust Division, 
United States v. KeySpan Corporation, Proposed Final Judgment and 
Competitive Impact Statement, 75 FR 9946 (Mar. 4, 2010), Consolidated 
Edison Company of New York, Inc. (``Con Edison'' or the ``Company'') 
hereby files these comments with respect to the settlement agreement 
entered into between the United States Department of Justice (``DOT'') 
and KeySpan Corporation (``KeySpan'').

I. Preliminary Statement

    This case involves an antitrust violation that limited or 
restrained competition in the market for electric generating capacity 
in New York City for almost two years. Con Edison commends the DOJ for 
investigating and condemning the agreement entered into by KeySpan. As 
DOJ has advised the Court, the likely effect of that agreement was to 
increase the prices paid for electricity by consumers in New York City. 
In fact, once the subject agreement ceased to operate, the market price 
for capacity indeed declined. DOJ Complaint at ] 33. The DOJ's proposed 
consent judgment in this case requires that KeySpan disgorge $12 
million of the profits it gained from its illegal agreement.
    Unfortunately, however, the consent judgment does not provide for 
any of these disgorged funds to go the persons ultimately harmed by 
KeySpan's illegal conduct--the consumers subjected to the artificially 
inflated prices. The Competitive Impact Statement (``CIS'') does not 
appear to address this alternative or explain why it was omitted. As a 
result of this shortcoming the proposed consent judgment does not 
acceptably satisfy the public interest standard as required by the 
Tunney Act. Indeed, it leaves the victims of KeySpan's antitrust 
violation without any remedy. This Court should not approve the 
proposed consent judgment until it is amended so that any monetary 
payments made by KeySpan are

[[Page 42151]]

distributed to the New York City retail electricity consumers who were 
harmed by its antitrust violations.

II. Background

    On February 22, 2010, the DOJ entered into a consent judgment with 
KeySpan proposing to settle a civil antitrust proceeding brought by DOJ 
to remedy a violation of Section 1 of the Sherman Act, 15 U.S.C. 1. The 
relief provided in the proposed Final Judgment calls for KeySpan to pay 
the sum of $12 million to the United States government. Final Judgment 
at III.A. This payment by KeySpan represents ``a portion of its ill 
gotten gains from its recent illegal behavior.'' 75 FR 9951.
    According to the DOJ, this illegal behavior consisted of KeySpan 
entering into an anticompetitive agreement that would raise electricity 
prices to New York City consumers: ``KeySpan entered into an agreement 
in the form of a financial derivative [`the KeySpan Swap Agreement'] 
essentially transferring to KeySpan, the largest supplier of electric 
generating capacity in the New York City market, the capacity of its 
largest competitor. 75 Fed. Reg. at 9947. The DOJ's CIS states that 
``[t]he likely effect of the Swap Agreement was to increase capacity 
prices for the retail electricity suppliers who must purchase capacity, 
and, in turn, to increase the prices consumers pay for electricity.'' 
75 FR at 9947.

III. The Proposed Consent Judgment Fails To Satisfy Tile Public 
Interest Because It Fails To Provide for a Remedy to the Electric 
Consumers Victimized by Tile Antitrust Violation

    Before entering a proposed consent judgment in antitrust cases 
brought by the United States, a reviewing court must ``determine that 
the entry of such judgment is in the public interest.'' 15 U.S.C. 1 
6(e)(1). In making that determination, the court is required to 
consider:
    (A) The competitive impact of such judgment, including termination 
of alleged violations, provisions for enforcement and modification, 
duration of relief sought, anticipated effects of alternative remedies 
actually considered, whether its terms are ambiguous, and any other 
competitive considerations bearing upon the adequacy of such judgment 
that the court deems necessary to a determination of whether the 
consent judgment is in the public interest; and
    (B) the impact of entry of such judgment upon competition in the 
relevant market or markets, upon the public generally and individuals 
alleging specific injury from the violations set forth in the complaint 
including consideration of the public benefit, if any, to be derived 
from a determination of the issues at trial.
    15 USCS Sec.  16(e)(1)(A) & (B) (emphasis added).
    As this statutory language makes clear, this Court must consider 
(i) whether the Government has met its duty of considering the 
appropriate remedies, (ii) whether the remedies in the proposed 
judgment cure the injuries flowing to the general public from the 
violation, and (iii) whether the remedies are adequate. Unfortunately, 
the remedy proposed in the consent judgment falls short in each of 
these respects.
    The settlement is not in the public interest because it does not 
provide relief to the individuals that have been harmed by KeySpan's 
actions under the KeySpan Swap Agreement. The DOJ's CIS makes it 
explicit that the individuals ultimately harmed by KeySpan's actions 
are New York City's electricity consumers who were subjected to higher 
prices for electricity by reason of KeySpan's illegal conduct. While 
the DOJ commendably condemned KeySpan's anticompetitive actions, which 
artificially raised New York City capacity prices, and sought an 
equitable remedy disgorging profits, its proposed remedy is inadequate 
in that it provides for KeySpan to pay the $12 million to the U.S. 
Treasury rather than to the individuals who ultimately were harmed.
    Unless these funds are paid to the consumers who were injured, the 
effects of the violation stated in the CIS are not cured and the 
proposed consent judgment is inadequate. Without providing relief to 
these parties, the settlement fails to satisfy the public interest 
standard.
    As noted above, the effects of the antitrust violation on New York 
City electricity consumers are acknowledged clearly in DOJ's own 
filings with the Court. According to the DOJ, the KeySpan Swap 
Agreement unlawfully restrained competition in New York City's electric 
capacity market because it enabled KeySpan, which already possessed 
market power in the New York City capacity market, to ``enter into an 
agreement that gave it a financial interest in the capacity of 
Astoria--KeySpan's largest competitor.'' 75 FR at 9947. The Keyspan 
Swap Agreement ``effectively eliminated KeySpan's incentive to compete 
for sales'' ' of capacity. 75 Fed. Reg. at 9948. The net result ``was 
to alter KeySpan's bidding in the NYC Capacity Market auctions.'' 75 
Fed. Reg. at 9948. ``But for the Swap, installed capacity likely would 
have been procured at a lower price in New York City from May 2006 
through February 2008.'' 75 Fed. Reg. at 9951. In other words, the 
KeySpan Swap Agreement enabled KeySpan to unlawfully and artificially 
raise capacity prices in New York City to the detriment of New York's 
retail electricity consumers.
    In New York, ``sellers of retail electricity must purchase a 
product from generators known as `installed capacity.' '' 75 FR 9947. 
The capacity price becomes part of the price of retail energy that is 
charged to retail consumers. Thus, any artificial increase in the price 
of capacity in New York City was initially borne by Load Serving 
Entities or ``LSEs'' (i.e., retail sellers) and then passed on to their 
retail customers. As DOJ itself states, the ultimate effect of the 
KeySpan Swap Agreement ``was to increase capacity prices for the retail 
electricity suppliers who must purchase capacity, and in turn, to 
increase the prices consumers pay for electricity.'' 75 FR 9949. As a 
generator in New York City, KeySpan knew that LSEs, like Con Edison, 
were required to buy capacity from the market on behalf of their retail 
electric customers. In fact, the New York Independent System Operator 
(``NYISO'') ``requires retail providers of electricity to customers in 
the New York City region to purchase 80% of their capacity from 
generators in that City region.'' 75 Fed. Reg. at 9947. Thus, KeySpan 
knew that the increases in the price of capacity caused by the KeySpan 
Swap Agreement were going to be paid, and, in fact were paid, for by 
New York City LSEs and their retail electric customers.
    Thus, unlike objectors to the remedies proposed in United States v. 
Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995), who argued that 
additional remedies should be imposed for injuries not pleaded in DOJ's 
Complaint, Con Edison's comments here focus on the fact that the 
proposed decree does not remedy the injury that DOJ specifically 
identifies in its Complaint and CIS. Nor does Con Edison in effect seek 
any change in the Complaint as filed. All that Con Edison requests is 
that the Court exercise its powers in equity to modify a proposed 
decree whose ``impact * * * upon the public generally and individuals 
alleging specific injury from the violations set forth in the 
complaint'' is manifestly to fail to remedy those injuries. 15 USCS 
Sec.  16(e)(1)(B).
    Equity, along with the standards for reviewing this settlement, 
calls for those consumers that were the ultimate victims of the KeySpan 
Swap Agreement to be the beneficiaries of whatever relief is provided 
for in the

[[Page 42152]]

consent judgment (the $12 million payment). DOJ acknowledges that there 
is no adequate remedy here at law for individuals harmed by KeySpan's 
antitrust violation. 75 FR 9951. The reason is that private individuals 
could not bring an antitrust suit here due to the barrier of the filed 
rate doctrine. See Arkansas La. Gas Co. v. Hall, 453 U.S. 571, 577 
(1981); Keogh v. Chicago & NW. Ry. Co., 260 U.S. 156 (1922). Where, as 
here, no remedy exists at law, courts have broad authority to design 
equitable relief that ensures fairness in light of the circumstances.
    As the Supreme Court has made clear: ``[t]he essence of a court's 
equity power lies in its inherent capacity to adjust remedies in a 
feasible and practical way to eliminate the conditions or redress the 
injuries caused by unlawful action. Equitable remedies must be flexible 
if these underlying principles are to be enforced with fairness and 
precision.'' Freeman v. Pitts, 503 U.S. 467, 487 (1992) (emphasis 
added). For example, when courts employ the ``equitable remedy'' of 
piercing the corporate veil, they are not ``imposing [ ] liability'' 
but rather ``remedying the fundamental unfairness that would 
[otherwise] result.'' Trustees of Nat'l Elevator Industry v. Lutyk, 332 
F.3d 188, 193 n.6 (3d Cir. 2003) (emphasis added, internal quotations 
omitted). ``[T]hus, the theory of harm alleged may affect the scope of 
the remedy that equity demands.'' Id; see also Taylor v. FTC), 339 F. 
App'x. 995, 999 (Fed. Cir. 2009) (``district court's equity 
jurisdiction provides broad and flexible power to deliver justice in 
unique factual circumstances * * * to [the] court's best estimation'').
    In the circumstances of this case, the theory of harm (i.e., the 
competitive injury) involves capacity prices that have been 
artificially increased as a result of the KeySpan Swap Agreement. In 
order to fairly redress that injury, the remedy, even if limited, 
should flow to the injured retail electricity consumers who paid those 
higher prices.
    No basis exists on formalistic grounds to refrain from providing a 
remedy to the consumers injured by KeySpan's antitrust violation by 
distributing to them the $12 million disgorged by KeySpan from its 
illegal scheme. No party should be heard to rebuff this appropriate 
relief by arguing that the KeySpan Swap Agreement was with a counter-
party, which entered into that transaction in arms-length bargaining, 
rather than consumers. That would exalt form over substance. It would 
also ignore the impact that the KeySpan Swap Agreement had on the New 
York City capacity market. As the DOJ's own CIS explicitly states, the 
ultimate effect of the antitrust violation was ``to increase the prices 
consumers pay for electricity.'' Equitable remedies are needed because 
they ensure ``that substance will not give way to form [and] that 
technical considerations will not prevent substantial justice from 
being done.'' Pepper v. Littan, 308 U.S. 295, 305 (1939); Chase 
Manhattan Bank v. Brown & E. Ridge Partners, 243 A.D.2d 81, 84 (NY. 
App. Div. 4th Dep't 1998) (``a court of equity looks to the substance 
of the action, not its form''); see also Hechinger Liquidation Trust v. 
BankBoston Retail Fin. Inc., 287 B.R. 145, 151-52 (D. Del. 2002) 
(citing Pepper and Chase in concluding that ``the court should not 
employ a mechanical and formalistic'' approach).
    The DOJ does not explain in the CIS why it did not address the 
provision of relief to New York City consumers. Though it cites to the 
filed rate doctrine, DOJ appears to recognize that the filed rate 
doctrine does not apply to the disgorgement payments involved in the 
proposed consent judgment. Nor does the filed rate doctrine present any 
barrier to including in the judgment an equitable remedy in the form of 
payments to New York City consumers. The profits required to be 
disgorged by the proposed consent judgment are KeySpan's profits 
stemming from the KeySpan Swap Agreement, not from its sales of 
electric capacity under a filed rate. The KeySpan Swap Agreement is a 
private financial contract between KeySpan and the financial services 
company which was not filed with FERC. The KeySpan Swap Agreement is 
thus not part of the filed rate.\1\ Accordingly, the filed rate 
doctrine is not a bar to providing relief to consumers in this case. 
Though the practical effects of restitution and disgorgement differ 
they are both equitable remedies. Restitution ultimately flows to the 
injured party, but it is neither a form of ``damages'' nor a means of 
providing ``compensation for past injuries.'' See Ellett Bros., Inc. v. 
US. Fidelity & Guaranty Co., 275 F.3d 384, 388 (4th Cir. 2001) 
(``Restitution and disgorgement require payment of defendant's ill-
gotten gains, not compensation of the [injured party's] loss.''). 
Moreover, courts have interpreted statutes in a manner that does not 
interfere with a court's traditional equity powers, unless Congress 
clearly makes that ``desire plain.'' Hecht Co. v. Bowles, 321 U.S. 321, 
329-30 (1944) (``The essence of equity jurisdiction has been the power 
* * * to do equity and to mould each decree to the necessities of the 
particular case.''). The filed rate doctrine, in short, has no 
application to the equitable distribution of the disgorged funds as a 
remedy in this case.
---------------------------------------------------------------------------

    \1\ It is the NYISO Market Administration and Control Areas 
Services (``Services Tariff'') that is the filed rate. All of the 
rules, procedures and pricing formulas associated with the NYISO's 
capacity auctions are contained in the Services Tariff which is on 
file at the Federal Energy Regulatory Commission (``FERC''). Thus, 
the filed rate is encompassed within the pages of the Services 
Tariff. It does not include the KeySpan Swap Agreement which is an 
extrinsic private contract.
---------------------------------------------------------------------------

    Finally, it is not a bar to providing relief to consumers that the 
precise amount of harm to them has not been calculated. KeySpan's 
conduct may have caused much greater injury than the $12 million it has 
agreed to disgorge. Equity does not allow a party to take advantage of 
imprecision that a wrongdoer is responsible for creating. While 
KeySpan's wrongdoing may have made it difficult to calculate the extent 
of the harm to consumers, the DOJ's duty is to protect the general 
public, and its own findings that the likely effect of the violation 
was to raise prices, make it apparent that an adequate equitable remedy 
requires distribution of the disgorged funds to the consumers that were 
harmed.
    Such relief would, at least, partially offset the economic damage 
inflicted upon New York City's electricity consumers. Accordingly, any 
relief in the form of monetary payments provided for by this consent 
judgment should be for the benefit of New York City's retail electric 
consumers. One method to effectuate such relief would be to provide for 
payments to be made to New York City LSEs in proportion to the amount 
of capacity that they procured during the May 2006 through February 
2008 time period, with the proviso that such payments be distributed to 
end use consumers in proportion to their relative demand during this 
period. Alternatively, the Court could direct the NYISO to equitably 
distribute the payments among consumers.

IV. Conclusion

    Con Edison respectfully requests that the Court find that the 
proposed consent judgment is not in the public interest until and 
unless any monetary payments disgorged by KeySpan are used to provide 
relief to New York City's electricity consumers.

Dated: May 3, 2010, New York City.

Respectfully submitted,

Consolidated Edison Company of New York, Inc.

By: Neil H. Butterklee, Assistant General Counsel, Consolidated 
Edison Company

[[Page 42153]]

of New York, Inc.

April 30, 2010

BY ELECTRONIC MAIL

Donna N. Kooperstein, Chief, Transportation, Energy, and Agriculture 
Section, Antitrust Division, U.S. Department of Justice, 450 Fifth 
Street, NW., Suite 8000, Washington, DC 20530.

Re: United States v. KeySpan Corporation; Proposed Final Judgment, 
Stipulation and Competitive Impact Statement

    Dear Ms. Kooperstein: The New York State Consumer Protection Board 
(``NYSCPB'') appreciates the invitation, provided in the Federal 
Register dated March 4, 2010, to discuss the appropriateness of the 
proposed Final Judgment, Stipulation and Competitive Impact Statement 
that have been filed with the United States District Court for the 
Southern District of New York in United States of America v. KeySpan 
Corp., CMI Case No. 10-CIV-1415. The NYSCPB is pleased that the United 
States Department of Justice (``USDOJ'') has pursued the improper 
collusive behavior of KeySpan Corporation (``KeySpan'' or ``Company'') 
in New York City's capacity market.\1\ For almost two years, KeySpan 
was able to maintain artificially high capacity prices in New York City 
by controlling, through a third party, the bids of its main competitor 
and receiving that competitor's capacity revenues. The filed documents 
call this arrangement ``the KeySpan Swap.''
---------------------------------------------------------------------------

    \1\ USDOJ's action is especially commendable when compared to 
the failure of the Federal Energy Regulatory Commission (FERC'') to 
take any action to protect consumers from KeySpan's conduct.
---------------------------------------------------------------------------

    The NYSCPB believes that, for two reasons, entry of the proposed 
Final Judgment is not in the public interest. First, KeySpan has agreed 
to disgorge only $12 million, when the evidence is overwhelming that 
the Company's illicit conduct burdened New York Cit's energy consumers 
by at least $68 million and perhaps as much as several hundred million 
dollars in over payments.\2\ Second, the ill-gotten gains should be 
paid to the victims of KeySpan's improper behavior, New York City's 
energy consumers, not to the Federal government.
---------------------------------------------------------------------------

    \2\ The NYSCPB's comments rely on data contained in the 
affidavit accompanying the comments of the New York State Public 
Service Commission (``NYSPSC''). The NYSCPB supports the analyses 
and recommendations in the NYSPSC's comments as well as those in the 
comments of the City of New York.
---------------------------------------------------------------------------

Statement of Interest

    The NYSCPB is an agency in the Executive Branch of New York State 
government statutorily charged with ``* * * representing the interests 
of consumers of the state before Federal, state and local 
administrative and regulatory agencies. \3\ Further, pursuant to 
Executive Order No. 45, the NYSCPB is authorized to:
---------------------------------------------------------------------------

    \3\ New York Executive Law Sec.  553(2)(d).
---------------------------------------------------------------------------

    Act as an advocate before other state and Federal entities by:
    (a) representing the interests of consumers in proceedings of 
Federal, state and local administrative and regulatory agencies where 
the State Director deems the proceeding to affect the interest of 
consumers.
    The NYSCPB has also been designated by the New York State 
Independent System Operator, Inc. (``NYISO'') as the ``Statewide 
Consumer Advocate,'' representing the interests of the State's 
residential, small business and farm electricity users in the NYISO 
governance process. The Agency has fully participated in the NYISO's 
stakeholder process since the inception of the organization in the late 
1990's and has made numerous filings with the FERC.

Comments

    The Competitive Impact Statement asserts that the ``proposed Final 
Judgment remedies [KeySpan's] violation by requiring KeySpan to 
disgorge profits obtained through the anticompetitive agreement.'' The 
NYSCPB respectfully disagrees. According to the NYSPSC, the KeySpan 
Swap unjustly enriched the Company by more than $68 million and imposed 
continued high electricity costs on consumers in amounts that could 
total hundreds of millions of dollars. Viewed in this context, 
disgorgement of $12 million will not deter the Company or other 
companies from engaging in anticompetitive conduct in the future. Not 
only is the penalty less than 20 percent of the ill-gotten gains, but 
it is so small compared to the Company's annual earnings that. 
shareholders would not notice it. Instead, the settlement should 
reflect KeySpan's wrongful gains from the swap, its wrongful gains from 
its capacity sales outside the swap, and the harm to consumers due to 
high capacity prices that were caused by the swap.
    USDOJ has not sustained its burden to provide sufficient evidence 
for the Court to determine that a $12 million settlement is adequate 
reimbursement for KeySpan's unjust enrichment, or deter such anti-
competitive conduct in the future. The NYSCPB agrees with the NYSPSC 
that USDOJ should be required to disclose the total amount of KeySpan's 
wrongful gains, and explain how, in light of these gains, a $12 million 
settlement would adequately recover KeySpan's unjust enrichment and 
deter such illegal practices. In addition, the managers who perpetuated 
this illegal conduct will likely suffer no negative consequences as a 
result of the settlement. Indeed, it is likely they received hefty 
bonuses as the illicit revenues began rolling in. Further, at the very 
least, the names of the managers who approved or condoned this behavior 
should be made public.
    The proposed Final Judgment is also flawed because the people 
harmed by the Company's conduct would not receive any benefit from its 
remedy. Transferring $12 million to the Federal government would 
produce no impact on the economic lives of New York City energy 
consumers. A fairer and appropriate course of action would be to return 
the ill-gotten gains to the people from whom they were taken, primarily 
the electric customers in New York City (Zone J of the capacity market 
operated by the NYISO.) One way this could be accomplished would be to 
provide a credit to load serving entities within Zone J that could be 
used to offset the cost of current purchases. The NYSCPB recognizes, 
however, that it would be the NYISO's responsibility to implement such 
a credit mechanism. We recommend that the Court direct USDOJ to contact 
the NYISO to discuss the feasibility of implementing this mechanism.
    If the credit mechanism proves impractical, as a substitute, we 
recommend using the money for expansion of energy efficiency programs 
in Zone J. Two New York State entities administer energy efficiency 
programs for low-income New Yorkers. The New York State Division of 
Housing and Community Renewal administers the Federally funded 
Weatherization Assistance Program and the New York State Energy 
Research and Development Authority administers the state-funded EmPower 
New York program. Annual and other reports by independent third-parties 
demonstrate that both of these entities ably administer well-designed 
energy efficiency and weatherization programs that lower the energy 
burden for low-income New Yorkers and reduce energy prices for everyone 
by lessening demand. The NYSCPB urges the Court to direct USDOJ to 
discuss with these State entities the process by which the funds could 
be transferred. We recommend transfer of the funds to these two State 
entities in equal shares, with the qualification that the funds must be 
used to expand their ongoing work in Zone J.

[[Page 42154]]

Conclusion

    The proposed Final Judgment should be rejected because it is not in 
the public interest. The Court should direct urge the parties to 
increase the amount of ill-gotten gains to be disgorged and require all 
disgorged funds to inure to the benefit of New York City energy 
consumers.
    Thank you for consideration of our comments in this matter.

Respectfully yours,

Mindy A. Bockstein,
Chairperson and Executive Director.

Tariq N. Niazi,
Director of Utility Intervention.

Saul A. Rigberg,
Intervenor Attorney.

May 17, 2010

Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture 
Section. Antitrust Division. United States Department of Justice, 450 
Fifth Street, NW., Suite 8000, Washington, DC 20530.

RE: Comments of the Pennsylvania Public Utility Commission on United 
States v. Keyspan Corporation Proposed Final Judgment and Competitive 
Impact Settlement, 1O-civ-1415 (USDC--Southern District, New York)

    Dear Ms. Kooperstein: The Pennsylvania Public Utility Commission 
\1\ (``PaPUC'') herewith files these comments under the provisions of 
the Tunney Act, 15 U.S.C. 16(d), with respect to the Proposed Final 
Judgment and Competitive impact Settlement in the matter of United 
States v. Keyspan Corporation presently before the United States 
District Court for the Southern District of New York, Civil Action 10-
civ-1415.
---------------------------------------------------------------------------

    \1\ The PaPUC is a state administrative commission created by 
the General Assembly of the Commonwealth of Pennsylvania and charged 
with the regulation of electric utilities, transmission siting and 
licensing of generation suppliers within the Commonwealth of 
Pennsylvania. 66 Pa.C.S. A., Sec.  101, et seq.
---------------------------------------------------------------------------

    In 1997, the General Assembly enacted the Electric Generation 
Customer Choice and Competition Act, 66 Pa.C.S. Sec.  2801 et seq, 
restructuring Pennsylvania's traditional vertically integrated electric 
utilities and opening up retail markets to competition. As Pennsylvania 
is largely, and soon will be wholly within the control area of PJM 
interconnection, L.L.C., a FERC-jurisdictional Regional Transmission 
Organization, the competitiveness of Pennsylvania's retail electric 
markets is heavily dependent on the competitive results of the PJM 
electric generation wholesale markets. Approximately 80% of the 
delivered price of retail electricity is attributable to the wholesale 
cost of generation.
    As a state public utility regulatory agency in a state that has, 
for more than a decade, supported both wholesale and retail competition 
in the electric power generation markets, we are deeply concerned by 
allegations contained in the complaint that appear to conclusively 
establish the existence of a sophisticated multi-year effort by the 
defendant to evade competition in the New York installed capacity 
market, resulting in higher retail electricity prices for retail users 
of electricity. The effort appears to have been carefully calculated 
and executed so as to avoid action by New York state authorities, 
Federal regulators and antitrust enforcers.
    This concern is heightened by the fact that the Federal Energy 
Regulatory Commission, which has regulatory jurisdiction over the New 
York City wholesale generation market, was apparently unable to detect 
or deter the behavior recited in the instant Complaint.\2\ As the 
complaint recites, during the 2006-2009 period, Keyspan was faced with 
the prospect of new competition in the New York City capacity market 
which had the prospect of substantially reducing its future capacity 
revenues. Unable to purchase control of its competitor and unwilling to 
risk head-to-head competition, Keyspan purchased a financial interest 
in the capacity sales of its competitor through a third party 
(``Keyspan Swap''). In turn, the third party sought and obtained a 
hedging agreement with the competitor Astoria to reduce its 
counterparty risk. The result was to make Keyspan indifferent with 
respect to competition, as it would receive revenue either through 
bidding into the capacity market or through its swap.
---------------------------------------------------------------------------

    \2\ In 2007, the New York 150 sought, pursuant to Section 205 of 
the Federal Power Act to file capacity mitigation and market 
remediation tariffs to address perceived exercises of market power 
in the New York City capacity market. FERC rejected the proposed 
behavioral remediation tariffs and instead directed a staff 
investigation. New York Independent System Operator. Inc., 118 FERC 
] 61,182 (2007) (``2007 FERC Order''). In the staff review of the 
allegations filed with respect to the New York City capacity market, 
it was apparently concluded, inter a/ia, that while Keyspan's 
actions did not violate any provision tariff or of the Federal Power 
Act, there was a potential problem with buyer's market power, (i.e., 
a potential for exercise of monopsony), and directed the New York 
ISO to file tariffs to address this purely theoretical concern.
---------------------------------------------------------------------------

    It appears from the factual recitations of the Complaint that 
Keyspan's scheme had a high likelihood of success.\3\ This would seem 
to elevate the danger that New York City load serving entities, and 
ultimately the public could suffer competitive injury without remedy or 
the protection of the laws of New York State, or of the United States. 
That would seem to elevate the seriousness of the defendant's offense. 
Moreover, it is not clear that the facts in this case are limited in 
time and place; while the tariff rules in question in this case apply 
to a specific geographic location and time period, the general method 
employed by the defendant to avoid competition (i.e., the purchase of a 
financial interest in the operations of a competitor through a third 
party) is not so limited.
---------------------------------------------------------------------------

    \3\ The facts appear to establish that there was a sophisticated 
effort by Keyspan to immunize its transactions from regulatory 
review by seeking to characterize them as ordinary and usual 
business transactions.
---------------------------------------------------------------------------

    Because the PaPUC is a state regulatory agency with limited 
jurisdiction and power under Pennsylvania law, we must rely heavily 
upon the effective enforcement of the antitrust Jaws of the United 
States to protect the public and the competitive wholesale and retail 
electric generation markets.
    The PaPUC understands that there has been a degree of difficulty 
associated with detecting and prosecuting the actions recited in this 
case; we do not oppose the proposed Stipulation and Final Judgment, 
although we cannot state whether the equitable and financial penalties 
in the Final Judgment result iii the full remedy of injury to the 
public from execution of the scheme.
    This proceeding demonstrates that even if conduct inimical to 
competition is not effectively proscribed under the Federal Power Act, 
it may result in prosecution and serious consequences under the 
antitrust laws of the United States. The PaPUC and other public and 
private entities with a critical stake in the success of wholesale 
electric generation competition have benefitted from studying the facts 
of this case and will be better able to detect and deter similar 
schemes in the future.
    Lastly, the PaPUC would like to convey our thanks to the U.S. 
Department of Justice--Antitrust Division for enforcing competition law 
in wholesale electricity markets and sanctions against a scheme that 
manifestly reduced competition and raised prices in the New York City 
capacity market.

Very truly yours,

Bohdan R. Pankiw,
Chief Counsel, Pennsylvania Public Utility Commission.

cc: James H. Cawley, Chairman

[[Page 42155]]

Tyrone J. Christy, Vice Chairman
Wayne E. Gardner, Commissioner
Robert F. Powelson, Commissioner
May 14, 2010
Donna N. Kooperstein, Chief, Transportation, Energy, arid Agriculture 
Section, Antitrust Division, U.S. Department of Justice, 450 Fifth 
Street, NW., Suite 8000, Washington, DC 20530
Re: Public Notice Inviting Tunney Act Comments in United States v. 
Keyspan, SDNY Civil Action No. 10-cv-1415 (WIIP), 75 Fed. Reg. 9946, 
March 4, 2010.

    Dear Ms. Kooperstein: AARP submits these comments in response to 
the above-referenced notice regarding the proposed settlement of United 
States v. Keyspan, SDNY Civil Action No. 10-cv-1415 (WHP). AARP is a 
nonpartisan, nonprofit organization that helps people over the age of 
50 to have independence, choice, and control in ways that are 
beneficial to them and society as a whole.\3\ AARP has millions of 
members, including more than 2,500,000 members who reside in New 
York.\4\ AARP is greatly concerned about the threats to health and 
safety of vulnerable citizens caused by New York's high electricity 
costs.\5\ Because the cost of utilities has skyrocketed, many low and 
middle-income families and older people must now choose between paying 
their energy bills for heating and cooling and paying for other 
essentials such as food and medicine. AARP works to protect consumers 
from excessive rates and charges such as were set and charged by 
KeySpan and passed through to consumers. As consumers, AARP members 
depend upon the protection of the antitrust laws from the unlawful 
exercise of monopoly or market power and the enforcement of the 
antitrust laws by DOJ and the courts.
---------------------------------------------------------------------------

    \3\ For more information about AARP see http://www.aarp.org/.
    \4\ For more information about AARP's New York state office, see 
http://www.aarp.org/states/ny/.
    \5\ New York residential electric rates are currently third 
highest in the nation, second only to Hawaii and Connecticut. Energy 
Information Agency, Electric Power Monthly, April, 2010, Year to 
Date, available at http://www.eia.doe.gov/cneaf/images/xls.gif.
---------------------------------------------------------------------------

    The United States Department of Justice Antitrust Division 
(``DOJ'') filed a Complaint against KeySpan Corporation (``KeySpan'') 
on February 22, 2010. The Complaint alleges violation of Section 1 of 
the Sherman Act in connection with KeySpan's successful efforts to 
inflate prices paid for wholesale electric capacity from May 2006 to 
February 2009 in a spot market operated by the New York Independent 
System Operator (``NYISO'').\1\ Keyspan achieved this price inflation 
using a strategy of economic withholding, by bidding the maximum 
possible amount in order to drive up the market clearing price paid to 
all sellers in the NYISO in-City capacity auction market. Keyspan also 
entered into a financial derivative swap contract with Morgan Stanley, 
which functioned to create an interest in sales of a major competitor, 
providing a stream of payments to KeySpan to offset diminished sales 
due its withholding strategy to raise prices.
---------------------------------------------------------------------------

    \1\ The Complaint is available at http://www.justice.gov/atr/cases/f255500/255507htm.
---------------------------------------------------------------------------

    On the same day the Complaint was filed, DOJ and Keyspan filed and 
moved for entry of a Proposed Final Judgment that would settle and 
discontinue this action. Under the terms of the Proposed Final 
Judgment, Keyspan would pay $12 million to the U.S. Treasury, with no 
admission of any wrongdoing, and the Complaint would be dismissed. The 
Proposed Final Judgment would provide no monetary remedy or other 
benefit for the consumers who paid higher prices for electricity due to 
the antitrust law violation described in the Complaint.\2\ As required 
by the Antitrust Procedures and Penalties Act (the ``TunneyAct''), 15 
U.S.C. 16(e)-(f), DOJ filed a Competitive impact Statement recommending 
approval by the Court of the Proposed Final Judgment. The Tunney Act 
requires public notice and an opportunity for public participation and 
input to both DOJ and the Court prior to the Court's review and 
decision on the settlement of an antitrust case.
---------------------------------------------------------------------------

    \2\ The Proposed Final Judgment is available at http://www.justice.gov/atr/cases/f255500/2555O9.htm.
---------------------------------------------------------------------------

    AARP members in New York state were adversely affected by the 
inflated capacity charges due to the alleged antitrust violations.\6\ 
The inflated charges for capacity were paid in the first instance by 
load-serving utilities, such as Consolidated Edison Company of New 
York, Inc. (``Con Edison''), which then passed through all the 
excessive charges to retail customers. ``The exercise of supplier 
market power, through economic withholding, leads to higher capacity 
prices, and a wealth transfer from consumers to suppliers.'' \7\ Con 
Edison estimated the inflated costs in 2006 to be approximately $159 
Million.\8\ Of that amount, $119 million was paid by New York City area 
utilities, and $39 million was paid by utilities in the rest of the 
state. The amount of capacity overcharges for 2007 and until NYISO 
rules were changed in early 2008 have not been identified.
---------------------------------------------------------------------------

    \6\ ``Every Con Ed customer in the five boroughs overpaid an 
average total of at least $40 over two years during a price-fixing 
scheme set up by the owners of a giant Queens power plant, the feds 
charge in a court case that would let the alleged gougers get away 
with most of the gains.'' Bill Sanderson, $157 M Power Abuse, N.Y. 
Post, March 9, 2010, available at http://www.nypost.com/f/printlnews/local/power_abuse_SgLN9psbhjopRMEGU68fgK.
    \7\ Affidavit of Peter Cramton, Ph.D., Feb. 8, 2007, attached as 
Exhibit A to Answer and Request for Leave to File Answer of 
Consolidated Edison Company of New York, Inc., Orange and Rockland 
Utilities, Inc., Mutliple Intervenors and the City of New York, in 
FERC Docket No. ER07-360, Re New York Independent System Operator, 
available at http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=11248666.
    \8\ See Motion to Comment of Consolidated Edison Company of New 
York, Inc., etc., Re New York Independent System Operator, FERC 
Docket No. ER07-360 (Jan. 27, 2009), p. 2 and Affidavit of Stuart 
Nachmias, ] 13-14, available at http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=11236060.
---------------------------------------------------------------------------

    AARP urges DOJ not to settle the action as proposed and urges the 
Court not to approve the Proposed Final Judgment. AARP's reasons for 
disapproval, set forth in greater detail below, include, foremost, the 
lack of any monetary remedy or other discernible benefit for injured 
consumers, and the absence of a credible deterrent that would 
discourage others from exercising market power in the NYTSO markets in 
violation of the antitrust laws. Also, there is no factual foundation 
in the record
     to determine appropriateness of the $12 Million 
disgorgement of profits;
     to determine the portion of the profits received by 
KeySpan that would be disgorged;
     to quantify the harm to markets and consumers caused by 
the antitrust law violation described in the Complaint;
     to determine the basis for arriving at the $12.1 million 
partial disgorgement and its appropriateness;
     to clearly identify the swap contract and its terms which 
violated the antitrust laws; and
     to determine if the settlement is adequate to redress the 
antitrust law violation that occurred.
    The public interest may be harmed by the settlement if, instead of 
the intended deterrent effect, it sends a message that antitrust 
violators who inflate prices through the exercise of market power in 
NYISO markets can (i) escape serious consequences, (ii) have no 
obligation to return illegally obtained profits to those injured by the 
antitrust violation described in the Complaint, (iii) make no admission 
of wrongdoing, and (iv) disgorge only an unstated portion of their 
profits from their unlawful scheme. Also, the proposed settlement may 
tacitly condone the future use by others of private financial 
derivative swap contracts to compensate sellers

[[Page 42156]]

who employ anomalous withholding or bidding strategies to exert market 
power and inflate clearing prices in the NYISO or other organized 
electricity spot markets elsewhere in the nation.
    Information filed in other proceedings suggests that the amount of 
disgorgement is not adequate, that the settlement will not deter use of 
private derivative contracts to support anomalous bidding in NYISO 
markets, and that the requisite factual foundation needed to support 
the proposed settlement is absent. At a minimum, further proceedings 
are needed to develop an adequate factual record upon which it would be 
possible for the Court to determine whether a proposal to compromise 
this antitrust action is in the public interest.
    No Sufficient Factual Foundation Exists to Support a Conclusion 
That the Proposed Settlement Is a Reasonably Adequate Remedy or in the 
Public Interest
    The Tunney Act proceeding is critically important because it tests, 
through public participation and the sunlight of public scrutiny, 
whether an adequate factual foundation exists to support a finding that 
the public interest would be advanced if a civil antitrust case brought 
by the United States is settled through compromise with the alleged 
violator. The Tunney Act provides, in relevant part:
    Before entering any consent judgment proposed by the United States 
under this section, the court shall determine that the entry of such 
judgment is in the public interest. For the purpose of such 
determination, the court shall consider
    (A) the competitive impact of such judgment, including termination 
of alleged violations, provisions for enforcement and modification, 
duration of relief sought, anticipated effects of alternative remedies 
actually considered, whether its terms are ambiguous, and any other 
competitive considerations bearing upon the adequacy of such
    (B) the impact of entry of such judgment upon competition in the 
relevant market or markets, upon the public generally and individuals 
alleging specific injury from the violations set forth in the complaint 
including consideration of the public benefit, if any, to be derived 
from a determination of the issues at trial.
    15 USC 16(e)(l). As shown below, the necessary foundation of record 
support needed to answer even the most basic questions about the 
proposed settlement is lacking.
    The Complaint filed by DOJ alleges that KeySpan violated Section 1 
of the Sherman Act \9\ by adopting an economic withholding strategy in 
the NYISO capacity market--bidding high to drive clearing prices up. 
Attendant to the withholding strategy was the possible consequence that 
not all its capacity would be sold at the maximum price that KeySpan 
bid, and that other competitors who bid lower would make sales and 
receive the high price set by KeySpan. To compensate itself for lost 
sales due to its withholding strategy, KeySpan entered into a financial 
derivative swap contract, which in effect gave it a financial interest 
in the capacity sales of a major new competitor. According to the 
Complaint:
---------------------------------------------------------------------------

    \9\ ``Every contract, combination in the form of trust or 
otherwise, or conspiracy, in restraint of trade or commerce among 
the several States, or with foreign nations, is declared to be 
illegal. Every person who shall make any contract or engage in any 
combination or conspiracy hereby declared to be illegal shall be 
deemed guilty of a felony, and, on conviction thereof, shall be 
punished by fine not exceeding $100,000,000 if a corporation, or, if 
any other person, $1,000,000, or by imprisonment not exceeding 10 
years, or by both said punishments, in the discretion of the 
court.'' 15 U.S.C. 1.
---------------------------------------------------------------------------

    On January 18, 2006, [KeySpan] and a financial services company 
executed an agreement (the ``KeySpan Swap'') that ensured that KeySpan 
would
    On January 18, 2006, [KeySpan] and a financial services company 
executed an agreement (the ``KeySpan Swap'') that ensured that KeySpan 
would withhold substantial output from the New York City electricity 
generating capacity market * * *. The likely effect of the KeySpan swap 
was to increase prices for the retail electricity suppliers who must 
purchase capacity, and, in turn, to increase the prices consumers pay 
for electricity.
    Complaint, page 1. The contract was between KeySpan and Morgan 
Stanley, and Morgan Stanley entered into a reciprocal financial 
derivative arrangement with Astoria Generating, a major new competitor 
of KeySpan.\10\ One of the conditions of the swap contract provided for 
its termination if the closing for the purchase of the competitor power 
plant by Astoria Generating did not occur. The swap contract is not in 
the record of this case but an excerpt is available in a FERC filing 
made by Con Edison.
---------------------------------------------------------------------------

    \10\ ``On January 18, 2006, KeySpan entered into an 
International SWAP Dealers Association Master Agreement for a fixed 
for float unforced capacity financial swap (the ``Agreement'') with 
Morgan Stanley Capital Group Inc. (``Morgan Stanley''). The 
Agreement has a three year term that began on May 1, 2006. The 
notional quantity is 1,800,000kw (the ``Notional Quantity'') of In-
City Unforced Capacity and the fixed price is $757/kWmonth (``Fixed 
Price''), subject to adjustment upon the occurrence of certain 
events. Cash settlement occurs on a monthly basis based on the In-
City Unforced Capacity price determined by the relevant New York 
Independent System Operator (``NYISO'') Spot Demand Curve Auction 
Market (``Floating Price''). For each monthly settlement period, the 
price difference equals the Fixed Price minus the Floating Price If 
such price difference is less than zero, Morgan Stanley will pay 
KeySpan an amount equal to the product of (a) the Notional Quantity 
and (b) the absolute value of such price difference. Conversely, if 
such price difference is greater than zero, KeySpan will pay Morgan 
Stanley an amount equal to the product of (a) the Notional Quantity 
and (b) the absolute value of such price difference. This derivative 
instrument does not qualify for hedge accounting treatment under 
SFAS 133 and is subject to fair value accounting treatment; although 
currently there is no observable market reference to value this 
derivative instrument. As noted, this is a financial derivative 
instrument and is unrelated to any physical production of 
electricity'' Keyspan Form 10-Q, Annual Report, June 30, 2006, 
available at http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHTML1?ID=45704O2&SessionID=35GoWWvvg9LHL17.
---------------------------------------------------------------------------

    Because all sellers are paid the same market clearing price in the 
NYISO capacity market auctions, a single seller who achieves a higher 
clearing price through an unlawful scheme ensures that all sellers reap 
the benefit of that inflated price, with the consequence that every 
megawatt of electric capacity sold, even by those sellers not 
participating in the scheme, is overpriced, to the detriment of 
consumers. The Complaint does not quantify the amount of higher prices 
obtained through KeySpan's scheme or the attendant cost borne by 
consumers. The Complaint simply alleges that ``KeySpan had revenues of 
approximately $850 million in 2006 and $700 million in 2007 from the 
sale of energy and capacity at its Ravenswood facility.'' Complaint, ] 
6. The Complaint does not indicate the portion of these KeySpan 
revenues attributable to the illegal scheme. Nor does the Complaint 
indicate the total NYISO capacity market revenue or the portion of that 
which was inflated due to KeySpan's scheme and ultimately paid by 
consumers.\11\
---------------------------------------------------------------------------

    \11\ As discussed infra, there are indications that the price of 
capacity was increased by KeySpan's gambit by approximately $157 
million in 2006.
---------------------------------------------------------------------------

    Despite the absence of any indication in the Complaint as to the 
amount of total damage to markets and consumers through the inflated 
capacity prices, and despite the absence of any assertion regarding 
KeySpan's share of those inflated charges, the DOJ Competitive Impact 
Statement asserts:
    The proposed Final Judgment remedies this violation by requiring 
KeySpan to disgorge profits obtained through the anticompetitive 
agreement.\12\
---------------------------------------------------------------------------

    \12\ DOJ Competitive Impact Statement, p. 8. (Emphasis added). 
The Competitive Impact Statement is available at http://www.justice.gov/atr/cases/f255500/255578.htm.
---------------------------------------------------------------------------

    How can it possibly be said the proposed settlement ``remedies this

[[Page 42157]]

violation'' if there is no identification anywhere in the Complaint, 
the Proposed Final Judgment, or the Competitive Impact Statement of the 
amount of damage to markets and to consumers caused by KeySpan's 
anticompetitive conduct? There is simply no factual foundation in the 
record to support DOJ's assertion that the proposed compromise of the 
action ``remedies this violation.''
    The Competitive Impact Statement places great emphasis upon the 
agreement of KeySpan to pay $12 million to the United States Treasury. 
But there is no provision in the Proposed Final Judgment which would 
remedy or address the harm to AARP members and other consumers caused 
by KeySpan's successful efforts to inflate prices in the NYISO markets.
    The Competitive Impact Statement refers frequently to disgorgement 
of profits by KeySpan under the Proposed Final Judgment, possibly 
creating an impression that KeySpan will not be allowed to benefit from 
its scheme (even if other sellers do, due to the design of the NYISO 
market):
    The proposed Final Judgment remedies this violation by requiring 
KeySpan to disgorge profits obtained through the anticompetitive 
agreement * * *. Disgorgement will deter KeySpan and others from future 
violations of the antitrust laws. [p. 1]
    The proposed Final Judgment requires KeySpan to disgorge profits 
gained as a result of its unlawful agreement restraining trade. [p. 8]
    Disgorgement is necessary to protect the public interest by 
depriving KeySpan of the fruits of its ill-gotten gains and deterring 
KeySpan and others from engaging in similar Anticompetitive conduct in 
the future. Absent disgorgement, KeySpan would be likely to retain all 
the benefits of its anticompetitive conduct. [p. 9]
    Disgorgement here will also serve to restrain KeySpan and others 
from participating in similar anticompetitive conduct. [p. 10]
    A disgorgement remedy should deter Keyspan and others from engaging 
in similar conduct. [p.11-12] \13\
---------------------------------------------------------------------------

    \13\ DOJ Competitive Impact Statement. (Emphasis added).
---------------------------------------------------------------------------

    Contrary to the impression cast by the above assertions, a $12 
million payment by KeySpan as proposed would not amount to full 
disgorgement of its profits from the antitrust law violation described 
in the Complaint. Rather, it would represent only some undesignated 
portion of KeySpan's profits from the illegal scheme. The Competitive 
Impact Statement acknowledges that the proposed settlement does not 
require KeySpan to give up all its profits from the scheme:
    Requiring KeySpan to disgorge a portion of its ill-gotten gains 
from its recent illegal behavior is the only effective way of achieving 
relief against KeySpan, while sending a strong message to those 
considering similar anticompetitive conduct.\14\
---------------------------------------------------------------------------

    \14\ Id., p. 10.
---------------------------------------------------------------------------

    How can the the public know or Court determine if the proposed $12 
million payment by KeySpan is appropriate when it represents only ``a 
portion of its ill-gotten gains''? What portion? What is the reason, if 
any, for requiring KeySpan to give up less than 100% disgorgement of 
profits? DOJ has not explained its rationale for accepting less than 
full disgorgement of KeySpan's ``ill-gotten gains from its recent 
illegal behavior.\15\
---------------------------------------------------------------------------

    \15\ Id.
---------------------------------------------------------------------------

    The Competitive Impact Statement asserts that ``[b]ut for the Swap, 
installed capacity likely would have been procured at a lower price in 
New York City from May 2006 through February 2008.'' \16\ Hut, as 
discussed above, there is no indication in the record of the total 
amount of ``ill-gotten gains'' received byKeySpan due to the antitrust 
violations, or of the total amount by which market prices were elevated 
due to the scheme. An estimate of the total market price inflation in 
2006 was made by Con Edison, a purchaser in the NYISO capacity market:
---------------------------------------------------------------------------

    \16\ DOJ Competitive Impact Statement, p. 7.
---------------------------------------------------------------------------

    The resulting harm to consumers was quite significant. Economic 
withholding caused the price of capacity to remain close to $13/kW-
month instead of decreasing to less than $6 per kWmonth, a price that 
[NYISO Market Monitor] Dr. Patton said would exist under competitive 
market conditions * * *. As calculated by Con Edison witness Stuart 
Nachmias, the impact on New York State's consumers of economic 
withholding during the 2006 Capability Year on was approximately $157 
million, of which approximately $119 million impacted New York City 
consumers alone * * *.\17\
---------------------------------------------------------------------------

    \17\ Re New York Independent System Operator, Inc., FERC Docket 
No. ERO7-360.000, Motion to Comment of Consolidated Edison Company 
of New York, Inc., and Orange and Rockland Utilities, Inc., p. 2, 
available at http:/elibrary.ferc.gov/idmws/common/
opennat.asp?fileID=11236060.
---------------------------------------------------------------------------

    This estimate was only for 2006. It also indicates that about $38 
million in higher costs ($157 million total minus $119 million in New 
York City) were experienced in the rest of New York State in 2006 due 
to the KeySpan withholding. The scheme continued until March 2008, 
according to the Competitive Impact Statement, when NYISO rules were 
changed. KeySpan's share of the prices raised by dint of its 
anticompetitive actions is not known by AARP. According to a FERC Staff 
Report, the KeySpan--Morgan Stanley swap agreement identified in the 
Complaint as violative of antitrust law ``produces almost $35 million 
in annual revenue.'' \18\ If so, remitting just $12 million to the 
government, about one-third of the revenue from the derivative, plus 
the enhancement of market prices paid for capacity sold at excessive 
prices in addition to the income from the financial derivative 
contract, could be a good deal for KeySpan. But it would be a very bad 
result for consumers, markets, competition, and public confidence in 
Federal antitrust law enforcement.
---------------------------------------------------------------------------

    \18\ Findings of a Non-Public Investigation of Potential Market 
Manipulation by Suppliers in the Ne York City Capacity Market, FERC 
Enforcement Staff Report, at, (Feb. 28, 2008), P. 21, available at 
http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=11605597.
---------------------------------------------------------------------------

    With no remedy for consumers who overpaid, and without a factual 
foundation in the record as to how much KeySpan profited from its 
gambit to inflate NYISO market prices, there is no way to assess 
whether the proposed $12 million payment to the government would be a 
meaningful or appropriate remedy. Although a 2008 FERC Staff Report 
perceived no violation of FERC orNYISO rules, and exonerated KeySpan 
and Morgan Stanley, the Court should not ignore the fact that the FERC 
Staff Report did not emerge from an open proceeding with the benefit of 
discovery, public testimony, or cross examination by interested 
intervening parties. Indeed, the ineffectiveness of FERC, which 
eventually approved a prospective change in NYISO market rules in 2008, 
highlights the patchwork nature of jurisdiction over energy markets and 
derivatives,\19\ and

[[Page 42158]]

underscores the importance of vigorous antitrust law enforcement by DOJ 
to address, remedy, and deter anticompetitive conduct in the NYISO 
electricity markets.
---------------------------------------------------------------------------

    \19\ ``Three Federal statutes, the Commodity Exchange Act (CEA), 
the Energy Policy Act of 2005 (EPAct 2005), and the Energy 
Independence and Security Act of 2007 (ElSA) all prohibit 
manipulation of various energy commodities and empower Federal 
agencies to impose penalties on manipulators Unlike the EPAct 2005 
or the EISA, the CEA does distinguish between market power 
manipulations and fraud-based manipulations. However, a series of 
poorly reasoned legal decisions have undermined the efficacy of the 
CEA as a tool for combating market power manipulation. The EPAcI 
2005 and EISA are both based on section 10b(5) of the Securities and 
Exchange Act, and focus on fraud-based manipulations. As a result, 
they are ill-suited to address market power manipulation, and 
attempts to use them to do so will inevitably lead to further legal 
confusions. * * * The FERC and FTC antimanipulation rules are newer, 
and have not been extensively tested in litigation, but from an 
economist's perspective, these rules (and the statutes that 
authorize them) are completely misguided and hopelessly ill-suited 
to reach the kinds of manipulative conduct most likely to occur in 
energy markets. * * * Manipulation is a potentially serious problem 
in all derivatives markets, energy included. Craig Pirrong, Energy 
Market Manipulation: Definition, Diagnosis, and Deterrence, 31 
Energy Law Journal 1-2 (2010) (Emphasis added).
---------------------------------------------------------------------------

    In justification of the proposed settlement, the DOJ Competitive 
Impact Statement is replete with references to the putative deterrent 
effects the Proposed Final Judgment would have, claiming it would 
discourage future transgressions by NYISO market participants:
    Disgorgement will deter KeySpan and others from future violations 
of the antitrust laws. [p. 2]
    See International Boxing Club v. United States, 358 U.S.242, 253 
(1959) (relief should ``deprive `the antitrust defendants of the 
benefits of their conspiracy,' '' * * * The Second Circuit has held 
that disgorgement is among a district court's inherent equitable 
powers, and is a ``well-established remedy * * * to prevent wrongdoers 
from unjustly enriching themselves through violations, which has the 
effect of deterring subsequent fraud.'' SEC v. Cavanagh, 445 F.3d 105, 
116-17 (2d Cir. 2006). [p. 8-9].
    Disgorgement is necessary to protect the public interest by 
depriving KeySpan of the fruits of its ill-gotten gains and deterring 
KeySpan and others from engaging in similar anticompetitive conduct in 
the future. Absent disgorgement, KeySpan would be likely to retain all 
the benefits of its anticompetitive conduct. {p. 9].
    A disgorgement remedy should deter Keyspan and others from engaging 
in similar conduct. [p.11] \20\
---------------------------------------------------------------------------

    \20\ DOJ Competitive Impact Statement. (Emphases added).
---------------------------------------------------------------------------

    There is no explanation in the DOJ Competitive impact Statement as 
to why only a portion of profits is being disgorged, what the total 
profits were, what portion is being disgorged, or how the disgorgement 
of part of the profits from an antitrust violation would possibly work 
to deter others from future efforts to inflate prices in the nation's 
electricity spot markets. The record is devoid of any explanation 
underlying DOJ's conclusion that only partial disgorgement of 
unquantified profits in this case would somehow deter similar conduct 
in the organized electric spot markets or send ``a strong message to 
those considering similar anticompetitive conduct.'' \21\ Indeed, DOJ, 
in its Competitive Impact Statement, suggests content and significance 
of the Proposed Final Judgment well beyond its text. DOJ states
---------------------------------------------------------------------------

    \21\ Id.,p. 1O.
---------------------------------------------------------------------------

    The proposed Final Judgment remedies this violation by requiring 
KeySpan to disgorge profits obtained through the anticompetitive 
agreement.\22\
---------------------------------------------------------------------------

    \22\ Competitive Impact Statement, p. 2.
---------------------------------------------------------------------------

    Actually, the Proposed Final Judgment simply states that:
    plaintiff and KeySpan, through their respective attorneys, having 
consented to the entry of this Final Judgment without trial or 
adjudication of any issue of fact or law, for settlement purposes only, 
and without this Final Judgment constituting any evidence against or an 
admission by KeySpan with respect to any allegation contained in the 
Complaint.\23\
---------------------------------------------------------------------------

    \23\ Proposed Final Judgment, para. 1 (Emphasis added,).
---------------------------------------------------------------------------

    On its face, the Proposed Final Judgment does not contain language 
identifying any ``violation,'' does not mention profit disgorgement, 
does not state KeySpan will ``disgorge profits,'' and does not 
determine that the swap agreement was ``anticompetitive.'' as suggested 
by the DOJ Competitive Impact Statement.
    There is no provision in the Proposed Final Judgment one could 
point to as even a rhetorical or symbolic ``shaming'' that might deter 
similar future conduct of sellers concerned with their good will and 
public image. Rather, the Proposed Final Judgment simply would require 
a payment to the government with no admission of wrongdoing, no 
acknowledgment of any anticompetitive conduct, and no remedy for 
consumers harmed. The ``message'' conveyed by the $12 million payment 
to other market participants may simply be that it was a nuisance 
settlement equal to the cost of a handful of New York lawyers for a 
couple of years. If the $12 million payment is only a fraction of 
KeySpan's ill-gotten gain; if all sellers in the NYISO or other 
organized electricity markets benefit from a successful exercise of 
market power by any one of them; if the cost of apprehension is small 
or nonexistent compared to the benefits; then other market participants 
may be emboldened to try similar strategies if the Proposed Final 
Judgment permitting such results is approved. In the NYISO and 
similarly designed electricity markets where all sellers benefit from 
the wrongdoing of the one who illegally drives prices up, the proposed 
settlement may only incent further testing of the limits and 
exploitation of markets and consumers.
    Analogous to bid rigging schemes where the winner secretly pays a 
part of his excessive profits to other sellers who deliberately overbid 
far in excess of the winning ``low'' bid, the same result might be 
obtained by sellers in the organized electricity spot markets such as 
those of the NYISO, using a financial intermediary and derivative 
contracts to compensate the high bidder who raises the price but 
sacrifices some sales to do so. The DOJ Competitive Impact Statement 
does not sufficiently identify the details of the swap contract 
arrangements made by KeySpan with Morgan Stanley to ensure that KeySpan 
would receive additional benefits when sales were made by competitors 
at higher prices due to KeySpan's economic withholding.
    When all sellers benefit from any successful price-raising gambit 
in NYISO and similar organized electricity markets, the real 
``message'' conveyed by this case to those entertaining an exercise of 
market power in violation of antitrust law, if the settlement is 
approved, could be ``go for it.'' If the gambit is discovered, the 
market participant can escape civil antitrust liability in an antitrust 
case brought by DOJ four years later by simply agreeing to cede an 
unspecified portion of one's profits, with no admission of wrongdoing. 
Thus, if approved, the Proposed Final Judgment may only encourage 
sellers to exploit the nation's electricity spot markets and consumers, 
with confidence that if they are caught by DOJ, they will not be 
ordered to provide a remedy to exploited consumers, but merely required 
to pay some portion of unlawfully obtained profits to the government.

AARP Recommendations

    AARP recommends that DOJ renegotiate, or the Court modify, the 
Proposed Final Judgment to require the following:
    1. Acknowledgment of wrongdoing and violation of the antitrust law 
by KeySpan as described in the Complaint;
    2. Identification of the harm to markets and consumers including 
the total cost of the inflated prices in the NYISO capacity market due 
to KeySpan's anticompetitive conduct;
    3. Identification of derivative contracts which violated the 
antitrust laws, and any other ``determinative'' documents under the 
Tunney Act;\24\
---------------------------------------------------------------------------

    \24\ The DOJ Competitive Impact Statement asserts that there are 
no ``determinative'' documents required to be submitted under the 
Tunney Act. See United States v. Central Contracting Co., Inc., 537 
F. Supp. 571 (E.D. Va. 1982) (``The Court simply cannot accept an 
interpretation of legislation that permits the government to assert 
in 172 out of 188 cases that it considered neither documents nor any 
other materials determinative in reaching its conclusion to enter 
into a consent decree'').

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

[[Page 42159]]

    4. Disgorgement by KeySpan of all profits it realized through the 
scheme to inflate prices;
    5. Refunding by KeySpan of its profits from antitrust violations to 
reduce the harm to consumers, and other measures to protect consumers 
and deter similar schemes to exercise market power in violation of the 
antitrust laws.
    Under the Tunney Act, there must be a ``factual foundation for the 
government's decisions such that its conclusions regarding the proposed 
settlement are reasonable.'' United States v. SBC Commc'ns, Inc., 489 
F. Supp. 2d1, 15-16 (D.D.C. 2007). For the reasons previously stated, 
the Proposed Final Judgment is not supported by the record as it now 
stands, and the requisite ``factual foundation'' for compromise of the 
action as proposed by DOJ and KeySpan is lacking. Accordingly, the 
request of DOJ arid KeySpan for Tunney Act approval of the Proposed 
Final Judgment should not be granted by the Court.
    Alternatively, the Court should require DOJ to supplement the 
record, if DOJ does not renegotiate the proposed settlement or provide 
further factual support in response to these or other comments, or 
conduct a public hearing to determine whether the Proposed Final 
Judgment is in the public interest. Obtaining additional evidence is an 
appropriate way to assure protection of the public interest in a Tunney 
Act proceeding:
    In addition, the Court found there to be insufficient material in 
the record, which consisted largely or exclusively of unverified legal 
pleadings, to allow the Court to adequately discharge its duties under 
the Tunney Act. * * * Rather than hold an evidentiary hearing, the 
Court ordered the government to provide further materials that would 
allow the Court to make the public interest determination required by 
the Tunney Act. The Court allowed the government to decide exactly what 
types of materials were appropriate to submit. The Court also provided 
the other parties and amici the opportunity to respond to this 
supplemental filing.
    United States v. SBC Commc'ns, Inc., 489 F. Supp. 2d 1 (D.D.C. 
2007).\25\ AARP believes augmentation of the record in this case should 
include additional evidence sufficient to address, at a minimum, the 
following matters:
---------------------------------------------------------------------------

    \25\ If DOJ supplements the record the public should have an 
opportunity to comment on new material offered to justify the 
proposed settlement or any modification of it.
---------------------------------------------------------------------------

    1. The total amount of inflated profits achieved by all sellers in 
the NYISO capacity market due to the antitrust law violation identified 
in the Complaint, and an estimate of the total damage and economic harm 
to electricity consumers in New York City and the rest of the state;
    2. The total amount of inflated profits received by KeySpan due to 
the antitrust violation identified in the Complaint;
    3. The relationship of any proposed disgorgement to the total 
profits received by KeySpan from the violation identified in the 
Complaint;
    4. The amount of revenue received by KeySpan under its financial 
swap agreement with Morgan Stanley;
    5. The rationale for not requiring full disgorgement of profits due 
to the antitrust violation, if the settlement proposal is not modified 
and partial disgorgement is still proposed;
    6. The rationale for not providing any remedy to benefit customers 
injured by the antitrust violation identified in the Complaint, if the 
settlement proposal is not modified and no financial or other remedy 
for consumers is proposed.
    Thank you for your consideration.

Respectfully submitted,

AARP, New York State Office.

AARP

In the United States District Court for the Southern District of New 
York

Civil Case No. 10-CIV-1415

    United States of America, Petitioner v. KeySpan Corporation, 
Respondent.

Comments of the Public Service Commission of the State Of New York, 
Pursuant to the Antitrust Procedures and Penalties Act, on the Proposed 
Final Judgment

Summary

    The Public Service Commission of the State of New York (``PSC'') 
submits these comments pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.s.c. 16(b)-(h), in response to the notice published 
in the Federal Register on March 4, 2010, in this matter. U.S. Dep't 
ofJustice, Antitrust Div., United States v. Keyspan Corporation, 
Proposed Final Judgment and Competitive Impact Statement, 75 FR 9946 
(March 4, 2010).
    DOJ is to be commended for its faithful enforcement of the 
antitrust law to protect the integrity of electricity markets in New 
York City. The electric capacity market for New York City is highly 
concentrated. The antitrust law is properly applied in this case to 
address wrongful anti-competitive practices of KeySpan Corporation 
(``KeySpan''). DOJ's enforcement of the antitrust law is critical to 
protect consumers against the harmful effects of KeySpan's anti-
competitive conduct in this particular case and, more generally, to 
protect the public interest in the integrity of the newly-created 
competitive electricity markets.
    DOJ proposes to settle this litigation by having KeySpan pay the 
United States government $12 million. DOJ asserts such a settlement 
will be in the public interest because KeySpan's payment of $12 million 
into the U.S. Treasury will prevent KeySpan's unjust enrichment, and 
deter others from agreeing not to compete in the future. However, 
because DOJ has not offered any information as to how much KeySpan 
profited from its unlawful conduct, the Court has no basis for 
evaluating whether the proposed $1 2 million settlement will prevent 
KeySpan's unjust enrichment or is sufficient to deter such conduct in 
the future. Therefore, the Court should direct DOJ to supplement the 
record to show how much KeySpan gained by virtue of its anti-
competitive conduct. Only in this way can the Court evaluate whether 
the proposed settlement would be in the public interest. POINT 1, 
below.
    As explained more fully below, it is highly probable that KeySpan's 
gains were well in excess of $12 million. Its net profits under the 
complained-of ``swap'' agreement amounted to nearly $68 million. The 
proposed $12 million settlement would not prevent KeySpan's unjust 
enrichment, and would not deter such conduct in the future. POINT II, 
below.
    Finally, KeySpan's unlawful anti-competitive conduct harmed 
consumers to an extent far exceeding both the proposed $12 million 
settlement and KeySpan's nearly $68 million net profit under the swap. 
The costs to consumers, in the form of excessive electricity costs 
caused by KeySpan's unlawful agreement, may well exceed hundreds of 
millions of dollars over a two-year period. Proceeds from any 
settlement should be used to benefit ratepayers, who were greatly 
harmed by KeySpan's wrongful conduct. POINT Ill, below.

Background

    In this civil antitrust action, brought by the United States 
Department of Justice (``DOJ'') under Section 1 of the Sherman Act, 15 
U.S.C. 1, the government seeks equitable and other relief against 
KeySpan for violating the antitrust law. According to DOJ, KeySpan 
entered into an agreement (the

[[Page 42160]]

``KeySpan Swap'' or the ``swap'') with an unnamed financial services 
company (the ``FSC'') which, in purpose and effect, ensured that 
KeySpan would ``withhold substantial output from the New York City 
electricity generating capacity market. * * *'' 75 FR 9947. DOJ states 
that ``[t]he likely effect of the Keyspan Swap was to increase capacity 
prices for the retail electricity suppliers who must purchase capacity, 
and, in turn, to increase the prices consumers pay for electricity.'' 
75 FR 9947.
    According to DOJ, the KeySpan Swap was an agreement that unlawfully 
restrained competition in New York City's electric capacity market. 
KeySpan entered into the swap agreement to protect itself against 
increased losses from its preferred bidding strategy, due to the entry 
of new competitors into the market. 75 FR 9947. Under the swap 
agreement, KeySpan, which already possessed substantial market power in 
the highly concentrated and constrained New York City capacity market, 
``enter[ed] into an agreement that gave it a financial interest in the 
capacity of Astoria--KeySpan's largest competitor.'' 75 FR 9947. By 
giving KeySpan revenues not only from its own sales, but also from the 
capacity sales of its largest competitor, the KeySpan Swap 
``effectively eliminated KeySpan's incentive to compete for sales'' of 
capacity. 75 FR 9948. Thus, ``[t]he clear tendency of the KeySpan Swap 
was to alter KeySpan's bidding in the NYC Capacity Market auctions.'' 
75 FR 9948. After entering into the swap, KeySpan was able to continue 
bidding its capacity into the market at the highest level allowed, 
knowing any losses from foregone sales would be more than offset by 
profits from the swap and from its remaining sales. 75 FR 9948.
    As a result, electric capacity prices remained unlawfully inflated, 
and KeySpan was paid, under the terms of the swap agreement, as much as 
$67.8 million. Attached Affidavit of Thomas Paynter dated April 27,2010 
(``Paynter Affidavit'') ] 15. In addition, the elimination of 
competitive pressures, due to KeySpan's anti-competitive agreement, 
imposed unnecessary costs on consumers which may total hundreds of 
millions of dollars.
    DOJ's proposal, however, does not include enough information to 
allow the Court to find, as is required under the Tunney Act, 15 U.S.C. 
16e(1), that the settlement would be in the public interest. DOJ 
asserts the public interest will be served by preventing KeySpan's 
unjust enrichment, but DOJ has not offered any estimates of how much 
money KeySpan made by agreeing, with its biggest competitor, not to 
compete. For the same reason, DOJ has not offered enough information to 
assess its claim that the settlement will deter such unlawful conduct 
in the future, Finally, the proposed settlement will do nothing to 
address the substantial harm to competitiveness of the market that 
KeySpan caused. For these reasons, the Court should direct DOJ to 
supplement the record with information about how much KeySpan profited, 
and how much KeySpan harmed the integrity of the electricity markets. 
Finally the Court should require that proceeds of any settlement be 
used to ameliorate the harm KeySpan caused to electric ratepayers in 
the downstate New York area.

Point I: DOJ Has Not Provided Enough Information to Determine Whether 
the Proposed Settlement is in the Public Interest

    Before entering any consent judgment proposed by the United States, 
the Court must first determine that entry of such a judgment ``is in 
the public interest.'' 15 USCS Sec.  16(e)(1). In doing so, ``the court 
shall consider--
    (A) the competitive impact of such judgment, including termination 
of alleged violations, provisions for enforcement and modification, 
duration of relief sought, anticipated effects of alternative remedies 
actually considered, whether its terms are ambiguous, and any other 
competitive considerations bearing upon the adequacy of such judgment 
that the court deems necessary to a determination of whether the 
consent judgment is in the public interest; and
    (B) the impact of entry of such judgment upon competition in the 
relevant market or markets, upon the public generally and individuals 
alleging specific injury from the violations set forth in the complaint 
including consideration of the public benefit, if any, to be derived 
from a determination of the issues at trial.
    15 USCS Sec.  16(e)(1)(A) & (B).
    In seeking the Court's approval, DOJ has the burden to ``provide a 
factual basis for concluding that the settlements are reasonably 
adequate remedies for the alleged harms.'' United States v. SBC 
Communs., Inc., 489 F. Supp. 2d 1, 17 (D.D.C. 2007). In this case, DOJ 
has not met this burden. Neither the competitive impact statement, nor 
the proposed consent decree provides the information needed to evaluate 
whether this settlement would be a reasonably adequate remedy for the 
harm caused by KeySpan.
    Under the proposed settlement, KeySpan would be required to pay the 
United States government $12 million dollars. United States v. Keyspan 
Corporation; Proposed Final Judgment and Competitive Impact Statement, 
75 FR 9946, 9949 (March 4, 2010). According to DOJ, this amount 
``remedies [KeySpan's] violation by requiring KeySpan to disgorge 
profits obtained through the Anticompetitive agreement.'' 75 FR 9949. 
DOJ asserts that ``[d]isgorgement is necessary to protect the public 
interest by depriving KeySpan of the fruits of its ill-gotten gains and 
deterring KeySpan and others from engaging in similar anticompetitive 
conduct in the future.'' 75 FR 9949. Thus, according to DOJ, the public 
interest is served because the proposed settlement will both prevent 
KeySpan's unjust enrichment, and will deter such wrongful conduct in 
the future.
    Preventing any unjust enrichment on KeySpan's part is a legitimate 
purpose of any proposed settlement. In fashioning relief in response to 
a violation of the antitrust law, ``[o]ne of [the] objectives * * * is 
to `deny to the defendant the fruits of its statutory violation.' '' 
Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1232 (D.C. Cir. 2004) 
(quoting United States v. Microsoft Corp., 253 F.3d 34, 103 (D.C. Cir. 
2001)). However, the unstated premise underlying DOJ's claims (i.e., 
that disgorgement is necessary to prevent unjust enrichment and that a 
$12 million penalty is adequate), is that KeySpan realized a gain of 
$12 million. Yet DOJ has not offered anything to support this. The 
Complaint, the Competitive Impact Statement, and the proposed Consent 
Judgment are silent on the critical question of how much KeySpan 
improperly gained by violating the antitrust law.
    It is, of course, axiomatic that ``the fruits of a violation must 
be identified before they may be denied.'' Massachusetts v. Microsoft 
Corp., 373 F.3d 1199, 1232 (D.C. Cir. 2004). The lack of any 
information as to how much KeySpan gained makes it virtually impossible 
for the Court to meaningfully evaluate whether $12 million ``represents 
a reasonable method of eliminating the consequences of the illegal 
conduct.'' National Soc. of Professional Engineers v. United States, 
435 U.S. 679, 698 (1978). This holds true both with respect to 
depriving KeySpan of any unjust enrichment, and with respect to 
evaluating whether the settlement will deter such wrongful conduct in 
the future. Thus, on the current record, the Court has no basis for 
finding the proposed settlement would be ``in the public interest.''
    It is noteworthy that DOJ elsewhere implies KeySpan made more than 
$12

[[Page 42161]]

million as a result of its anti-competitive conduct. More specifically, 
DOJ indicates the $12 million settlement would effect only partial 
disgorgement of KeySpan's gains. 75 FR 9951 (claiming that 
``[r]equiring KeySpan to disgorge a portion of its ill-gotten gains * * 
* is the only effective way of achieving relief against KeySpan * * 
*.'') (emphasis added). If DOJ is actually seeking only partial 
disgorgement, then the settlement would not prevent KeySpan's unjust 
enrichment. Anything less than full disgorgement would a forliori not 
strip KeySpan of its wrongful gains. Moreover, if $12 million 
represents only a fraction of the total amount of KeySpan's unjust 
enrichment, such a penalty would not deter future violations of the 
antitrust law. Such a penalty may instead amount to nothing more than a 
``cost of doing business.'' \1\ This possibility is not remote. As 
discussed below in POINT H, it is highly probable that the total amount 
of KeySpan's ill-gotten gains was much greater than $12 million.
---------------------------------------------------------------------------

    \1\Arguably, even total disgorgement would have only a limited 
deterrent effect. ``[T]o `limit the penalty * * * to disgorgement is 
to tell a violator that he may [break the law] with virtual 
impunity; if he gets away undetected, he can keep the proceeds, but 
if caught, he simply has to be give back the profits of his wrong.' 
'' SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402, 406 (S.D.N.Y. 
2009) (quoting S.E.C. v. Rabinovich & Assoc., 2008 U.S. Dist. LEXIS 
93595, 2008 WL 4937360, at *6 (S.D.N.Y. Nov. 18, 2008)).
---------------------------------------------------------------------------

    Given that DOJ has not proffered enough information to enable the 
Court to determine whether the proposed settlement is in the public 
interest, DOJ should be directed to do so. Under the Tunney Act, 
``[t]he court may `take testimony of Government officials or experts' 
as it deems appropriate, 15 U.S.C. 16(f)(1); authorize participation by 
interested persons, including appearances by amici curiae, Id. Sec.  
16(f)(3); review comments and objections filed with the Government 
concerning the proposed judgment, as well as the Government's response 
thereto, Id. Sec.  16(f)(4); and `take such other action in the public 
interest as the court may deem appropriate,' iii. Sec.  16(f)(5).'' 
Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1206 (D.C. Cit. 2004). 
Requiring DOJ to adduce facts relating to how much KeySpan gained as a 
result of its anticompetitive conduct will provide a record basis for 
any public interest determination made by the Court. Cf S.E.C. v. Bank 
of America Corp., ------ F. Supp.2d ------, 2010 U.S. Dist. LEXIS 15460 
(S.D.N.Y. Feb. 22, 2010) (approving a proposed consent judgment 
because, inter alia, after the court rejected an earlier proposed 
settlement, the parties conducted extensive discovery which established 
facts supporting the new proposal).

Point II--The Proposed Consent Decree Would Not Deter the Unlawful 
Anticompetitive Conduct Identified By DOJ

    KeySpan's swap, in both purpose and effect, violated the antitrust 
law. Its purpose was to ``effectively eliminate[ I KeySpan's incentive 
to compete for sales in the same way a purchase of Astoria or a direct 
agreement between KeySpan and Astoria would have done.'' 75 FR 9948. 
Thus, regardless of its effect on the market, the KeySpan Swap violated 
the Sherman Act. Cf. Summit Health v. Pinhas, 500 U.S. 322, 330 (1991) 
(``[B]ecause the essence of any violation of I [of the Sherman Act] is 
the illegal agreement itself[,] rather than the overt acts performed in 
furtherance of it, * * * proper analysis focuses, not upon actual 
consequences, but rather upon the potential harm that would ensue if 
the conspiracy were successful'').
    The KeySpan Swap also violated the Sherman Act because of its 
effect on the market. Its ``clear tendency'' was to alter KeySpan's 
bidding, in order to prevent competition and keep prices high. 75 FR 
9948 (col. 3). Cf. United States v. Stascuk, 517 F.2d 53, 60 & n.17 
(7th Cir. Ill. 1975) (``The Federal power to protect the free market 
may be exercised to punish conduct which threatens to impair 
competition even when no actual harm results'')
    KeySpan's ill-gotten gains far exceeded the $12 million payment DOJ 
is seeking. DOJ alleges the KeySpan Swap was effective from January 16, 
2006 until March, 2008.\2\ Under the swap agreement, if the market 
price for capacity exceeded $7.57 per kW-month, the financial services 
company (``FSC'') would pay KeySpan the difference between the market 
price and $7.57, times 1800 MW. 75 FR 9950.
---------------------------------------------------------------------------

    \2\ DOJ asserts the swap agreement was effective from May, 2006, 
through April, 2009. 75 FR 9950-51. According to DOJ, the 
``effects'' of the swap continued only ``until'' March, 2008, 
because the New York State Public Service Commission required 
KeySpan to bid its New York City capacity at zero from March 2008 
until KeySpan sold its Ravenswood plant. 75 FR 9951 & n. 2. However, 
the analysis below assumes the swap remained ``effective'' between 
the parties during March, 2008, because the PSC's requirement that 
KeySpan bid at zero would not have triggered the agreement's 
``regulatory out'' clause. This has bearing on the total amount of 
KeySpan's gain under the swap agreement. Including March, 2008, 
reduces KeySpan's total revenues under the swap because, during 
March, 2008, the market price of capacity was below the $7.57 per 
kW-month trigger in the swap agreement. Thus, for March, 2008, 
KeySpan would have paid moneys to the FSC.
---------------------------------------------------------------------------

    The average spot market price for capacity during the period from 
May, 2006, through March, 2008, was $9.21/kW-month. After subtracting 
the $7.57 per kW month amount specified under the swap agreement, 
KeySpan's average revenues under the swap agreement were $1.64/kW-
month, times the 1800 MW covered by the swap agreement, for a period of 
23 months. Multiplying these figures out yields a total of $67.8 
million. Thus, under the swap agreement alone, KeySpan received 
revenues of almost $68 million.\3\ Paynter Affidavit ] 15.
---------------------------------------------------------------------------

    \3\ In addition, the FSC received $0.50/kW-month under the swap 
agreement. Multiplying this amount by the 1800 MW covered by the 
swap agreement, times the 23 month duration of the swap agreement, 
yields total revenues to the FSC of approximately $20.7 million. 
Paynter Affidavit ] 17. The FSC's profits are potentially relevant 
because Astoria could have directly entered into a swap agreement 
with a load-serving entity serving New York City. If such agreement 
had a ``trigger'' price of $7.07, the load-serving entity would have 
realized revenues of $89 million (i.e., $67 million, plus $21 
million), which would have inured to the benefit of consumers. 
Paynter Affidavit ] 18.
---------------------------------------------------------------------------

    The proposed $12 million payment would amount to only 17.7% of 
KeySpan's direct revenues/net profits under the swap agreement. Thus, 
if the Court approves this settlement, KeySpan would be able to retain 
more that $55 million in ill-gotten gains, and the FSC would be able to 
retain more than $20 million in additional ill gotten gains. Such a 
settlement would clearly not materially prevent KeySpan's unjust 
enrichment. Moreover, under any reasonable measure, the proposed 
settlement would not deter KeySpan, or other market participants, from 
engaging in such anti-competitive conduct in the future. Thus, the 
proposed $12 million settlement would not satisfy either of DOJ's 
rationales (i.e., preventing KeySpan's unjust enrichment, and deterring 
such wrongful conduct in the future) for a judicial finding that the 
settlement is in the public interest.

Point III--The Proposed Settlement Would Not Ameliorate the Ratepayer 
Harm Caused by Keyspan

The Court Should Consider Ratepayer Harm

    In determining whether the settlement is in ``the public 
interest,'' the Court should also consider the impact of the proposed 
settlement on the ratepayers that were harmed by KeySpan's anti-
competitive conduct. See 15 U.S.C. 16(e)(1)(B) (``the court shall 
consider * * * the impact of entry of such judgment upon * * * the 
public generally * * *'') \4\ DOJ acknowledges

[[Page 42162]]

ratepayers were harmed, in the form of inflated capacity prices, 
because of KeySpan's conduct. According to DOJ, ``[w]ithout the Swap, 
KeySpan likely would have chosen from a range of potentially profitable 
competitive strategies in response to the entry of new capacity. Had it 
done so, the price of capacity would have declined.'' 75 FR 9948. 
Because KeySpan decided to withhold capacity rather than compete, it 
realized ill-gotten gains on all of the capacity it sold, in addition 
to the nearly $68 million KeySpan received directly under the terms of 
the swap agreement itself.
---------------------------------------------------------------------------

    \4\ Cf. United States v. SBC Communs., Inc., 489 F. Supp. 2d 1, 
17 (D.D.C. 2007) (``the court should be concerned with any 
allegations that the proposed settlement will injure a third 
party'').
---------------------------------------------------------------------------

    Yet DOJ also indicates that ratepayers may have no recourse under 
the antitrust law because of the ``fried rate'' doctrine. 75 FR 9951. 
Moreover, ratepayers may not be able to obtain any relief from FERC 
because, in early 2008, FERC's Staff concluded there was no evidence 
that KeySpan's bidding behavior violated FERC's Anti-Manipulation Rule, 
18 CFR 1c2(a). FERC Docket Nos. IN08-2-000 & ELO7-39-000, Enforcement 
Staff Report, Findings of a Non-Public Investigation of Potential 
Market Manipulation by Suppliers in the New York City Capacity Market, 
p. 17 (February 28, 2008). Thus, in this case ratepayers harmed by 
KeySpan's anti-competitive conduct may have no meaningful recourse 
under either the antitrust law or the Federal Power Act.
    This lack of a remedy for customers is highly significant, given 
the potential size of the harm to consumers caused by KeySpan's 
violation of the antitrust law. DOJ has not offered any factual 
information or analysis of how much KeySpan gained by maintaining 
prices at an artificially high level in violation of the antitrust 
laws, rather than choosing to bid at more competitive level. The 
measure of disgorgement should reflect the profits gained by KeySpan 
through the unlawfully higher price of capacity.\5\ The Court should 
direct DOJ to address this defect in the settlement proposal. Cf. 
Howard Hess Dental Labs. Inc. v. Dentsply Int'l, Inc., 424 F.3d 363, 
374 (3d Cir. 2005) (``IlIhe standard method of measuring damages in 
price enhancement cases is overcharge, [that is] the difference between 
the actual price and the presumed competitive price multiplied by the 
quantity purchased''); New York Julius Nasso Concrete Corp., 202 F.3d 
82, 88-89 (2d Cir. 2000) (``Where * * * there is a dearth of market 
information unaffected by the collusive action of the defendants, the 
plaintiffs burden of proving damages, is, to an extent, lightened[,] 
[and] the State need only provide the court with some relevant data 
from which the district court can make a reasonable estimated 
calculation of the harm suffered * * *.'') (citations and internal 
quotations omitted); Id., 202 F.3d at 89 (``[T]o do otherwise would be 
a perversion of fundamental principles of justice [and would] deny all 
relief to the injured person, and thereby relieve the wrongdoer from 
making any amends for his acts''); New York Hendrickson Bros., Inc., 
840 F.2d 1065, 1078 (2d Cir. 1988) (``The most elementary conceptions 
of justice and public policy require that the wrongdoer shall bear the 
risk of the uncertainty which his own wrong has created'') (quoting 
Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946)); Fishman 
v. Estate of Wirt, 807 F.2d 520, 551 (7th Cir. 111. 1986) (``The 
concept of a `yardstick' measure of damages, that is, linking the 
plaintiffs experience in a hypothetical free market to the experience 
of a comparable firm in an actual free market, is also well 
accepted'').
---------------------------------------------------------------------------

    \5\ That is, the analysis in the Paynter Affidavit shows a total 
harm to ratepayers of $89 million from KeySpan's, and the FSC's, 
financial interest in the 1800 MW controlled by the swap, even 
without assuming any drop in spot market prices. However, KeySpan 
also controlled an additional 2400 MW of capacity in the New York 
City market. By continuing to bid at its cap (even after accounting 
for KeySpan's additional lost sales due to the entry of new 
generation into the market), KeySpan realized gains outside the swap 
that, roughly speaking, equaled or exceeded the nearly $68 million 
KeySpan received under the swap. The need for disgorgement of these 
additional wrongful gains is underscored by the even larger consumer 
harm KeySpan caused. If KeySpan had competed for sales, the 
resulting declines in prices could easily have saved ratepayers 
hundreds of millions of dollars.
---------------------------------------------------------------------------

    If KeySpan's illegal conduct harmed consumers by preventing price 
declines that could have totaled hundreds of millions of dollars, then 
the proposed $12 million settlement is so low it would not be fair, 
reasonable, adequate or in the public interest. Cf. SEC. v. Bank of 
America Corp., 653 F. Supp.2d 507 (S.D.N.Y. 2009) disapproving a 
proposed settlement in part because the proposed $33 million fine was 
``a trivial penalty for a false statement that materially infected a 
multi-billion-dollar merger''). But cf. SEC. v. Bank of America Corp., 
------ F. Supp.2d ------, 2010 U.S. Dist. LEXIS 15460 (S.D.N.Y. Feb. 
22, 2010) (approving a $150 million fine even though it would have only 
``a very modest impact on corporate practices or victim 
compensation'').

Settlement Proceeds Should Be Used To Ameliorate The Ratepayer Harm

    DOJ seeks disgorgement, through the exercise of the Court's 
``inherent equitable powers * * *.'' 75 FR 9951. DOJ maintains the 
public interest requires disgorgement to prevent KeySpan's unjust 
enrichment. 75 FR 9951. The legal doctrine of unjust enrichment ``is an 
old equitable remedy permitting the court in equity and good conscience 
to disallow one to be unjustly enriched at the expense of another.'' 
Nimbus Techs., Inc. v. SunnData Prods., 2005 U.S. Dist. LEXIS 46509 
(ND. Ala. Dec. 7,2005) (quoting Battles v. Atchison, 545 So. 2d 814, 
815 (Ala. 1989)).
    In this case, DOJ's proposed $12 million partial disgorgement of 
KeySpan's ill gotten gains would be deposited in the United States 
Treasury, and will not inure to the benefit of the ratepayers directly 
harmed by KeySpan. KeySpan's wrongful conduct harmed consumers, and 
damaged the credibility of the markets, by wrongly inflating capacity 
prices. The cost may have totaled hundreds of millions of dollars. 
Given the high level of consumer harm, the proceeds of any settlement 
should be used to ameliorate the consumer harm KeySpan caused. 
Depositing the settlement proceeds in the U.S. Treasury, as DOJ 
proposes, would be a manifestly unfair result.
    Accordingly, in the proper exercise of its equitable powers, the 
Court should direct that proceeds of the settlement be used to benefit 
the ratepayers that were directly and materially injured by KeySpan's 
anti-competitive conduct. The need for such relief is particularly 
acute in this case because consumers may not be able to obtain relief 
under Section 4 of the Sherman Act, and may not be able to obtain 
relief from FERC. Accordingly, settlement proceeds should be credited 
to affected ratepayers (i.e., ratepayers within the New York 
Independent System Operators' ``Zone J''). This approach will directly 
address the harm KeySpan caused to consumers in New York City. If this 
approach is unworkable, either because it would not be cost-effective 
or would be unduly complex, then settlement proceeds should be used for 
energy efficiency programs within New York City administered by the New 
York State Energy Research and Development Authority. Promoting energy 
efficiency would reduce the demand for electricity. This, in turn, 
would both mitigate the market power of electric suppliers in New York 
City and help reduce electricity prices going forward. Such a use of 
settlement proceeds is particularly appropriate in this case, given the 
ratepayer harm KeySpan caused and the potential unavailability of other 
meaningful relief for those most directly affected by KySpan's anti-
competitive conduct.


[[Page 42163]]


Respectfully submitted,

Peter McGowan,
General Counsel.

By: Sean Mullany, Assistant Counsel of Counsel, Public Service 
Commission of the State of New York.

Dated: April 30, 2010, Albany, New York.

Attachment: Affidavit of Thomas Paynter In Support of Comments of The 
Public Service Commission of The State of New York, (April 27, 2010).

United States District Court for the Southern District of New York

    United States of America, Petitioner V. Keyspan Corporation, 
Respondent.

 State of New York
ss.: County of Albany

Affidavit of Thomas Paynter in Support of Comments of the Public 
Service Commission of the State of New York
 Civil Case No. 10-CIV-1415

    THOMAS PAYNTER, being duly sworn, deposes and says:
    1. I am employed by the New York State Department of Public Service 
(``DPS'' or ``Department'') as Supervisor of Regulatory Economics in 
the Office of Regulatory Economics.
    2. I received a Ph.D. in Economics from the University of 
California at Berkeley (1985), with fields in econometrics and labor 
economics. I have a B.A. in Physical Science and a BA. in Economics, 
also from the University of California at Berkeley (1975). I am a 
member of the American Economic Association.
    3. From 1983 to 1986, I was an Assistant Professor of Economics at 
Northern Illinois University, where I taught graduate and undergraduate 
courses in economic theory. From 1986 to 1990, I was employed by the 
Illinois Commerce Commission as a Senior Economic Analyst in the Policy 
Analysis and Research Division; I was also a member of the Electricity 
Subcommittee of the National Association of Regulatory Utility 
Commissioners, and authored an article concerning coordination and 
efficient pricing for independent power producers, ``Coordinating the 
Competitors,'' published by The Electricity Journal in November 1990. I 
joined the New York Department of Public Service in November of 1990.
    4. My current responsibilities include analyzing competitive 
issues, efficient pricing, marginal costs, regulatory policies, and 
system planning. I am a member of a staff team responsible for 
analyzing and commenting upon the pricing rules of the New York 
Independent System Operator, Inc. (NYISO), which operates the New York 
transmission system. I have participated in numerous NYTSO committee 
meetings related to energy and transmission pricing, system planning, 
and other issues.
    5. I make this affidavit in support of the comments filed by the 
Public Service Commission of the State of New York (``PSC'' or 
``Commission'') pursuant to the Antitrust Procedures and Penalties Act, 
15 U.S.C. 16(b)-(h), in response to the notice published in the Federal 
Register on March 4, 2010, in connection with this matter. U.S. Dep't 
of Justice, Antitrust Div., United States v. Keyspan Corporation,
    Proposed Final Judgment and Competitive Impact Statement, 75 FR 
9946 (March 4, 2010).
    6. DOJ states that the KeySpan Swap was executed on January 16, 
2006, and was effective from May, 2006, through April, 2009. 75 FR 
9950-51. According to DOJ, the effects of the swap continued only until 
March, 2008, because, as of March, 2008, the NYSPSC required KeySpan to 
bid its NYC capacity into the market at zero until KeySpan sold its 
Ravenswood plant. 75 FR 9951 & n. 2.
    7. However, upon information and belief, the PSC's requirement that 
KeySpan bid its NYC capacity into the market at zero did not trigger 
the swap agreement's ``regulatory out'' clause. Therefore, upon 
information and belief, the swap continued in effect until April, 2008, 
when FERC lowered KeySpan's bid/price cap. Accordingly, the analysis 
below assumes the swap agreement remained in force during the Month of 
March, 2008. [Note that this assumption effectively reduces the 
estimate of the amount of KeySpan's net revenues/profits under the swap 
agreement because, during the month of March, 2008, the actual price of 
capacity was below the $7.57 per kWmonth trigger under the swap 
agreement (discussed below). As a result, during the month of March, 
2008, KeySpan would have been paying moneys to the financial services 
company (``FSC''), rather than receiving moneys from the FSC.
    8. Under the KeySpan Swap, if the market price for capacity was 
above $7.57 per kW-month, the FSC would pay KeySpan the difference 
between the market price and $7.57, limes 1800 MW; if the market price 
for capacity was below $7.07, KeySpan would pay the FSC the difference, 
limes 1800 MW. 75 FR 9950 (col. 3). Thus, a comparison of the actual 
market price for capacity during the period from May, 2006, through and 
including March, 2008, and the $7.57/kW month ``trigger'' (or 
``strike'') price for KeySpan, will reveal the total net revenues/
profits KeySpan received from the FSC under the KeySpan Swap.\1\
---------------------------------------------------------------------------

    \1\ KeySpan and the FSC likely incurred some costs in preparing 
the swap agreements (which would make their profits under the swap 
something less than their net revenues), but this analysis assumes 
those Costs were not very significant.
---------------------------------------------------------------------------

    9. Regarding the actual market prices of capacity during the period 
of the KeySpan Swap, KeySpan's bid caps were seasonally ``shaped,'' in 
order to reflect higher summer prices, and lower winter prices, due to 
differences between summer and winter supply. For the summer 2006 
period (i.e., May-October 2006), the unforced capacity (``UCAP'') spot 
price cleared at the level of KeySpan's bid cap of $12.71/kW-month.\2\
---------------------------------------------------------------------------

    \2\ In describing the $7.57/kW-month and $7.07/kW-month 
``trigger'' prices under the KeySpan and Astoria swap agreements, 
DOJ refers only to ``the market price for capacity''. See, e.g., 75 
FR 9950. More specifically, the ``trigger'' prices under the swap 
agreements referred to the actual ``unforced capacity'' spot market 
prices. Similarly, in describing actual market prices, my analysis 
refers to the actual unforced capacity (``UCAP'') spot market 
clearing prices.
---------------------------------------------------------------------------

    ``[A] generator's unforced capacity (UCAP) is its installed 
capacity ([UCAP) discounted or `de rated' by its forced outage rate (or 
equivalent forced outage rate demand (EFORd)). The forced outage rate 
equals the historical percentage of the generator's maximum output lost 
to forced outages when such output is demanded. The translation of 
installed into unforced capacity can be represented mathematically as 
follows: UCAP = ICAP x (1 - EFORd) * * *'' Kystian-Ravenswood, LLC 
FERC, 474 F.3d 804, 807 (D.C. Cir. 2007).
    10. For the winter 2006-07 period (i.e., November 2006-April 2007), 
the UCAP spot price cleared at KeySpan's bid cap of $5.84/kW-month.
    11. For the summer 2007 period (i.e., May-October 2007), the UCAP 
spot price cleared at KeySpan's bid cap of $12.72/kW-month.
    12. For the winter 2007-08 period, the spot price cleared at 
KeySpan's bid cap of $5.77/kW-month for 4 months (i.e., November 2007-
February 2008), and then cleared at the lower statewide prices of 
$1.05/kW-month during March, 2008, and at $0.75/kW-month during April, 
2008.
    13. The lower price during April, 2008 reflects the fact that 
FERC's new mitigation measures forced KeySpan and other New York City 
electricity suppliers to bid their capacity into the market at or near 
$0.
    14. To compare the actual UCAP spot market prices to the swap 
prices of $7.57/kW-month (for KeySpan), and $7.07/kW-month (for the 
FSC), one can

[[Page 42164]]

refer to the average spot price over the twenty-three month period of 
the KeySpan Swap (i.e., May, 2006, through and including March, 2008). 
This consists of twenty-two months at KeySpan's bid cap, and one month 
(i.e., March, 2008) at the lower statewide price of $1.05/kW-month.
    15. Over those twenty-three months, the actual average UCAP spot 
price was $9.21/kW-month. Based on the difference between this amount 
and the threshold price specified under the swap agreement (i.e., 
$7.57/kW-month), the revenues to KeySpan under the swap agreement were 
$1.64/kW-month, multiplied by the 1800 MW of UCAP covered by the swap 
agreement, and further multiplied by the twenty-three month effective 
period of the swap agreement. This yields a total of revenues to 
KeySpan under the swap agreements of $67.8 million.
    16. The FSC's corresponding agreement with Astoria specified that, 
if the market price for capacity was above $7.07 per kW-month, Astoria 
would pay the FSC the difference, times 1800 MW; if the market price 
was below $7.07, the FSC would pay Astoria the difference, times 1800 
MW. 75 jkaLBgjster at 9948.
    17. The differential between the ``trigger'' prices under the two 
swap agreements (i.e., $7.57/kW-month for KeySpan, and $7.07/kW-month 
for Astoria) represented the FSC's ``stake'' in the swap arrangement. 
Because the actual average UCAP spot market price (i.e., $9.21/kW-
month) exceeded both the ``triggers'' under the swap agreements, the 
FSC's total revenues can be calculated by multiplying that differential 
(i.e., $0.50/kW-month) by 1800 MW, and further multiplying it by the 
twenty-three month effective period of the swap agreements. Multiplying 
these figures out yields total revenues to the FSC of $20.7 million.
    18. The FSC's profits are potentially relevant because Astoria 
could have directly entered into a swap agreement with a load-serving 
entity serving New York City. If such agreement had a ``trigger'' price 
of $7.07, the load-serving entity would have realized revenues of $89M 
(i.e., $67 million, plus $21 million). Such revenues would have inured 
to the benefit of ratepayers.

Thomas Paynter,
Supervisor of Regulatory Economics,
Office of Regulatory Economics,
Department of Public Service of the
State of New York.

Sworn to before me this 27th day of April, 2010.

Notary Public

Sean Mullany
Notary Public, State of New York
Regis. 02MU6180725
Qualified in Albany County

My Commission Expires January 14, 2012.

[FR Doc. 2010-16321 Filed 7-19-10; 8:45 am]
BILLING CODE 4410-11-M