Michael Giberson
The Justice Department of the United States has agreed to a $12 million settlement with KeySpan Corporation on a Sherman antitrust act claim. The allegation was that KeySpan manipulated the New York ISO capacity market price in its part of the state from May 2006 through February 2008, reaping an estimated $49 million in excess revenue. More specifically, the allegation was the KeySpan entered into a contract in restrain of trade. The $12 million settlement agreed to between Justice and KeySpan reflects the estimated excess profits that KeySpan gained by the scheme.
KeySpan held market power in the NYISO capacity market for the New York City and Long Island area, and for years they used their market power to keep the price they were paid for capacity at the highest level the market rules allowed. However, market entry by a new competitor in 2006 threatened their price-maximizing strategy.
In response, KeySpan entered into a contract with Morgan Stanley that gave KeySpan a significant economic interest in the capacity market revenues of the new competitor. Morgan Stanley agreed to the contract with KeySpan only on condition it could engage with another counterparty to offset the risk; the counterparty Morgan Stanley secured turned out to be KeySpan’s competitor. (In fact, the competitor was the only party well suited to the deal Morgan Stanley needed to balance its risk, something that KeySpan knew would be the case.) With the deal arranged, KeySpan could continue to profit by offering its own capacity at the maximum allowed price, pushing the capacity price to its upper limit. So it did.
Complaints filed with the Federal Energy Regulatory Commission lead to rulings in KeySpan’s favor. FERC concluded that while KeySpan clearly used its market position and financial positions to maximize the capacity price it was paid, KeySpan had not violated NYISO market rules in doing so. A rule that established a maximum offer cap is not violated when a party offers capacity at the allowed maximum, even if the effect is a market price higher than it would be otherwise. FERC further concluded that the company had not violated laws against energy market manipulation.
The Justice Department claimed that KeySpan violated Section 1 of the Sherman Act, namely that the company entered into an agreement in restraint of trade. It seems a somewhat novel application of the Sherman Act, especially if KeySpan’s actions were otherwise in compliance with laws and market rules. That said, KeySpan’s actions deterred competition that would have brought benefits to consumers in the region, and it is a broader purpose of NYISO’s market rules to promote competition in New York’s power market.
$12 million seems like a too-modest remedy.
NOTES:
- See the Justice department complaint and more documents on the Justice antitrust section website.
- A FERC staff report provides details on the KeySpan actions and explains the reasons for FERC’s finding in favor of the company.
