U.S. v. Keyspan Corp..

• Decision Date: 02 February 2011
• Docket Number: No. 10 Civ. 1415(WHP).,10 Civ. 1415(WHP).
• Citation: 763 F.Supp.2d 633
• Parties: UNITED STATES of America, Plaintiff,v.KEYSPAN CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

763 F.Supp.2d 633

UNITED STATES of America, Plaintiff,

v.KEYSPAN CORPORATION, Defendant.

No. 10 Civ. 1415(WHP).

United States District Court, S.D. New York.

Feb. 2, 2011.

Molly S. Boast (argued), Donna N. Kooperstein, Jade Alice Eaton, J. Richard Doidge, John W. Elias, William H. Stallings, U.S. Department of Justice, Antitrust Division, Washington, D.C., for Plaintiff.John H. Lyons, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for Defendant.

MEMORANDUM & ORDER

WILLIAM H. PAULEY III, District Judge:

Plaintiff United States of America (the “United States” or “Government”) moves pursuant to § 2(b) of the Antitrust Procedures and Penalties Act (the “Tunney Act”), 15 U.S.C. § 16(b)-(h) for entry of a final judgment (the “Consent Decree”) settling its antitrust claims against Defendant Keyspan Corporation (“Keyspan”). This application presents a novel issue of law: whether the Department of Justice can seek disgorgement for a Sherman Act violation. This Court answers that question in the affirmative. For the following reasons, the Government's motion for entry of the Consent Decree is granted.

BACKGROUND

The Complaint alleges that Keyspan, an electricity generator, manipulated New York City electricity prices using a swap agreement (the “Swap”) in violation of § 1 of the Sherman Act. (Compl. ¶ 37.) Specifically, the Swap provided Keyspan with an indirect financial interest in the sale of electricity generating capacity by its largest competitor, Astoria Generating Company (“Astoria”). That financial interest obviated Keyspan's need to bid competitively during the sale of its own electricity generating capacity at auction. (Compl. ¶¶ 4–5, 30.) According to the Complaint, Keyspan's anticompetitive bidding drove up capacity prices as a whole and, in turn, increased the cost of electricity to consumers in New York City. (Compl. Preamble, ¶¶ 4–5, 30.)

I. The New York City Electricity Market From May 2003 to March 2008

The New York Independent System Operator (“NYISO”) regulates the sale of electricity in New York City by companies that generate electricity (“generators”) to companies retailing electricity to consumers (“retailers”). ( See Compl. ¶¶ 12–14, 17.) The NYISO requires retailers to purchase a product known as “installed capacity” from generators. (Compl. ¶¶ 12–14.) The price of installed capacity is established through seasonal, monthly, and spot auctions administered by the NYISO. (Compl. ¶ 14; Competitive Impact Statement (“CIS”) dated Feb. 22, 2010 at 3.) During those auctions, generators offer capacity by submitting price and quantity “bids,” which are then “stacked” from lowest- to highest-priced and compared to demand from retailers. (Compl. ¶ 14; CIS at 3.) The offering price of the last bid required to meet demand establishes the market price for all installed capacity sold in that auction (the “Clearing Price”). (Compl. ¶ 15.) Any capacity bid at a higher price is unsold, as is any capacity bid at the Clearing Price in excess of demand. (Compl. ¶ 15.)

The New York City electricity market is highly concentrated, with three generators—Keyspan, NRG Energy, Inc., and Astoria—“controlling a substantial portion of generating capacity....” (Compl. ¶ 17.) Accordingly, from 2003 to 2008, Keyspan possessed market power in the New York City capacity market. (Compl. ¶ 18.) As major electricity generators, the three firms were designated by the Federal Energy Regulatory Commission as “pivotal suppliers,” meaning a portion of each firm's output was vital to satisfy capacity demand. (CIS at 4.) The firms were also required to sell their capacity through NYISO's auctions and were subject to bid and price caps. (CIS at 4.) Keyspan had the highest bid and price cap of the three firms. (CIS at 4.)

II. Keyspan's Anticompetitive Conduct

From June 2003 to December 2005, demand for installed capacity was high. (CIS at 4.) As a result, Keyspan was able to sell nearly all of its installed capacity, even while offering it at the highest possible price, i.e., “bidding its cap.” (CIS at 4.) However, tight supply and demand conditions were expected to end in 2006 with the planned entry of additional capacity.¹ Accordingly, Keyspan anticipated that bidding its cap would be less profitable and began investigating options for preserving its profit margins. (CIS at 4–5.)

While Keyspan initially considered purchasing Astoria's assets, it concluded that such an acquisition would raise market power concerns. (CIS at 5.) Instead, Keyspan decided to acquire an indirect financial interest in Astoria's capacity sales. (CIS at 5.) On January 18, 2006, Keyspan entered into the Swap with a financial services company (the “Bank”). (CIS at 6.) The parties' obligations under the Swap were price dependent. If the Clearing Price was above $7.57 per kW-month, the Bank was required to pay Keyspan a multiple of the difference between those two prices. (CIS at 6.) In contrast, if the Clearing Price was below $7.57, Keyspan was required to pay the Bank a multiple of the difference. (CIS at 6.)

According to the Complaint, Keyspan recognized that (i) the Bank would have to enter into a separate swap agreement with another generator to offset its payments to Keyspan and (ii) Astoria was the only generator with sufficient capacity to do so. (CIS at 5.) As expected, the Bank conditioned the Swap on the execution of a suitable offsetting agreement. On January 9, 2006, the Bank entered into an offsetting swap with Astoria. (CIS at 6.)

The Complaint alleges that the Swap eliminated Keyspan's incentive to pursue competitive bidding strategies by allowing it to continue to bid its cap, even though much of its capacity was unsold. (Compl. ¶¶ 31–32.). Absent the Swap, Keyspan would have bid its capacity at lower prices in response to the entry of additional capacity into the market, thereby causing capacity prices to decline. (Compl. ¶ 22, 31–34.)

The anticompetitive effects of the Swap continued until March 2008. (CIS at 7 n. 2.) Keyspan was sold in August 2007 and New York conditioned its approval of the sale on Keyspan bidding its New York City capacity at zero from March 2008 until the divestiture was completed. (CIS 7 n. 2). According to the Government, from May 2006 to April 2008, Keyspan earned approximately $49 million in net revenues under the Swap. (Pl. United States's Resp. to Public Comments (“Gov't Resp.”) dated June 11, 2010 at 6; Declaration of Oliver M. Richard (“Richard Decl.”) dated Oct. 26, 2010, ECF No. 37.)

III. The Consent Decree & Tunney Act Requirements

The Consent Decree requires Keyspan to pay $12 million to the United States Treasury and imposes no further obligations. Pursuant to the requirements of the Tunney Act, the Government filed a Competitive Impact Statement (“CIS”) on February 23, 2010; published the proposed Consent Decree and the CIS in the Federal Register on March 4, 2010; and published summaries of those documents and directions for the submission of written comments in The Washington Post and in The New York Post. The 60–day period for public comments ended on May 16, 2010. Six entities and one individual commented on the Consent Decree. (Gov't Resp. at 2.)

On June 11, 2010, the Government filed its Response to Public Comments. On July 20, 2010, the Government moved for entry of the Consent Decree. On August 12, 2010, this Court permitted the Public Service Commission of the State of New York (“PSCNY”) to file a reply to the Government's Response to Public Comments. On October 12, 2010, this Court held a hearing (the “October Hearing”), posed questions to the parties, and directed the Government to provide a declaration concerning its calculations of Keyspan's net revenues under the Swap. On October 26, 2010, the Government submitted the declaration of Oliver M. Richard, Assistant Chief in the Economic Litigation Section of the Antitrust Division of the Department of Justice, which described those calculations.

DISCUSSION

I. Legal Standard

The Tunney Act requires a court reviewing an antitrust consent decree to determine whether the decree is “in the public interest.” 15 U.S.C. § 16(e)(1); see also United States v. Int'l Bus. Mach. Corp., 163 F.3d 737, 740 (2d Cir.1998). The statute does not define the meaning of “in the public interest,” but directs a court to consider:

(A) the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration of relief sought, anticipated effects of alternative remedies actually considered, whether its terms are ambiguous, and any other competitive considerations bearing upon the adequacy of such judgment that the court deems necessary to a determination of whether the consent judgment is in the public interest; and

(B) the impact of entry of such judgment upon competition in the relevant market or markets, upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial.

15 U.S.C. § 16(e)(1).

“While the Tunney Act was designed to prevent ‘judicial rubber stamping’ of proposed Government consent decrees, the Court's role in making the public interest determination is nonetheless limited. 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, Inc., 963 F.Supp. 235, 238 (S.D.N.Y.1997) (quoting United States v. Microsoft Corp., 56 F.3d 1448, 1460 (D.C.Cir.1995)). In making this determination, “[t]he [c]ourt is not permitted to reject the proposed remedies merely because the court believes other remedies are preferable. [Rather], the relevant inquiry is whether there is a factual...