In a rare move, the United States Department of Justice (DOJ) has taken antitrust enforcement action against a participant in a regional market overseen by the Federal Energy Regulatory Commission (FERC). Specifically, DOJ investigated and filed a Sherman Act Section 1 complaint against Keyspan Corporation with respect to a “swap” transaction pertaining to the New York Installed Capacity market operated by the New York Independent System Operator, Inc. This action may signal DOJ’s willingness to supplement FERC’s oversight over regional energy markets.
A stipulation entered into between Keyspan Corporation and the DOJ on February 18, 2009, provides for Keyspan to pay into the United States Treasury $ 12 million as monetary equitable relief. The Complaint alleged that Keyspan’s expired swap with Morgan Stanley under which Keyspan obtained payments whenever the clearing price of the New York City Installed Capacity Market (“in-city ICAP”) exceeded $ 7.57 per kw-month equal to the price differential times 1800 mw, roughly the capacity that Keyspan’s largest competitor could offer into the market, unlawfully retrained trade in violation of section 1 of the Sherman Act. The Complaint alleges that Keyspan had market power in the market, and was subject to an offer price cap, but faced the potential of lost profits if it consistently offered prices at its offer cap because its competitors, principally Astoria, could profitably underbid the capped price level.
The DOJ Complaint alleges that Keyspan considered acquiring Astoria, but determined that the acquisition would face challenges based upon market power concerns. Instead, Keyspan decided to mitigate the effect of Astoria underbidding Keyspan by acquiring the swap, which the DOJ characterizes in the Complaint as conferring a financial interest in Astoria’s generation. The Complaint alleges that the swap “ensured” that Keyspan would continue to offer its capacity at the highest permitted prices.In the stipulation the DOJ obtained no prospective injunctive relief and the basis for the $ 12 million equitable payment is not disclosed.
The FERC Enforcement Staff had previously reviewed the Keyspan swap and recommended against enforcement based upon a number of factors, including the public disclosure of the swap by Keyspan and an agency position that the exercise of market power alone does not constitute market manipulation. FERC Enforcement Staff also appeared to have reached a conclusion that Keyspan’s behavior was not altered by the swap, whereas the DOJ Complaint alleges that the swap likely altered Keyspan’s bidding and “ensured” that Keyspan would withhold output through persisting in bidding its capacity at the highest permitted price despite the opportunity cost of some of its capacity being idle (and therefore withheld) as a result of this strategy.
Had Keyspan acquired an actual interest in Astoria’s generation, the acquisition or retention of those assets could have been challenged under Section 7 of the Clayton Act and would have been subject to premerger review in addition to FERC approval. Because Keyspan was not alleged to have engaged in any predatory or exclusionary conduct, the DOJ was not able to challenge its withholding of output under the prohibition of monopolization of section 2 of the Sherman Act. The Complaint alleges that the swap agreement is an agreement in restraint of trade in violation of section 1 of the Sherman Act because it reduced Keyspan’s incentive to compete and enabled the exercise of market power by “ensuring” that Keyspan would withhold output.
The absence of any prospective injunction against a defined class of swaps in the Stipulation perhaps indicates difficulty in defining in advance a class of financial transactions that could be actionable under the theory of the Complaint. Under the allegations of the Complaint the contested swap resulted from a conscious effort to emulate the benefits of owning the Astoria capacity after having determined that acquisition of that capacity “would raise serious market power issues.” These developments illustrate the importance of assessing the purpose and intended market effect of financial transactions in energy markets in light of the same considerations of market structure conduct and performance as inform the assessment of mergers and other agreements with the potential to reduce rivalry in the market.