KeySpan Corp. has been ordered to disgorge unjust profits and pay $12 million for an antitrust violation that involved the taking of a financial interest in the electricity capacity sales of its largest competitor in the New York City market, a move that likely led to higher retail electricity prices in the city over a two-year period, the Department of Justice (DOJ) said last week.

The DOJ's Antitrust Division filed a civil antitrust complaint in U.S. District Court for the Southern District of New York, along with a proposed settlement requiring KeySpan to disgorge profits and pay $12 million that, if approved by the court, would resolve the lawsuit.

The complaint alleges that KeySpan, a subsidiary of London-based National Grid Plc, and an unnamed financial services company entered into an agreement in January 2006 that gave KeySpan a financial interest in the electricity capacity sales of competitor Astoria Generating Co. At the time of the agreement, Brooklyn, NY-based KeySpan was the largest seller of electricity capacity in the New York City market, DOJ said.

By providing KeySpan revenues from Astoria's sales as well as its own, the agreement with the financial services company had the anticompetitive effect of eliminating KeySpan's incentive to sell its electricity capacity at lower prices, DOJ said. As a result, retail electricity prices in New York City were likely higher than they would have been without the agreement. The anticompetitive effects of the agreement remained in effect until March 2008, according to the department.

Astoria was formed in 2006 by an investor group led by Madison Dearborn Partners and New York City-based US Power Generating Co.

KeySpan considered buying Astoria outright but realized that the transaction would raise serious market power issues, according to the DOJ complaint filed in court. Instead KeySpan entered into a swap agreement with the unnamed financial services company to acquire substantially all of Astoria's capacity. The swap transaction "effectively eliminated KeySpan's incentive to compete for [electricity capacity] sales in the same way a purchase of Astoria or a direct agreement between KeySpan and Astoria would have done," it noted.

DOJ said the "KeySpan swap constitutes an illegal restraint in the sale of installed capacity in the New York City market in violation...of the Sherman Act."

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