Declaration of Oliver M. Richard : U.S. v. KeySpan Corporation

This document is available in two formats: this web page (for browsing content) and PDF (comparable to original document formatting). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. For an official signed copy, please contact the Antitrust Documents Group.

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA,

Plaintiff,

KEYSPAN CORPORATION,

Defendant.

)
)
)
)
)
)
)
)
)
)
)
)

ECF Case

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

Filed: 10/26/10

DECLARATION OF OLIVER M. RICHARD

Oliver M. Richard declares:

1. I am the Assistant Chief in the Economic Litigation Section of the Antitrust Division of the United States Department of Justice.

2. I received a Ph.D. in Managerial Economics and Decision Sciences from the J.L. Kellogg Graduate School of Management at Northwestern University in 1997. I received a B.A in Economics and Mathematics from Swarthmore College in 1991 and studied under a fellowship grant from the European Commission at the Institut D'Economie Industrielle in 1996.

3. From 1997 to 2004, I taught economics at the Simon School of Business at the University of Rochester. I joined the Antitrust Division in 2004 as a Research Economist and became an Assistant Chief in 2007. I have published in leading peer-reviewed economics journals.

4. My current responsibilities involve supervising economic work performed by staff economists relating to electricity, energy, transportation and telecommunication matters. I have supervised economics staff in numerous antitrust investigations in the electricity industry, including investigations involving electricity generation capacity auctions like the auction underlying the present matter.

5. I submit this declaration in support of the Plaintiff United States's Response to Public Comments filed with the Court on June 11, 2010 and in response to the request made by the Court of the United States at a status conference on October 12, 2010. This declaration describes the net revenues KeySpan received under its January 18, 2006 financial derivative agreement relating to the New York City Installed Capacity Market (the "KeySpan Swap") with a financial services company ("FSC") during the twenty-four month period from May 2006 through April 2008.

6. The New York Independent System Operator ("NYISO") conducts three types of auctions for New York City capacity for each month of the summer and winter seasons: a strip auction, a monthly auction, and a spot auction. The market prices set in each of these auctions are published by the NYISO on its website.⁽¹⁾

7. During the relevant period, the NYISO also established separate bid caps for each of the three owners of divested generation ("DGOs") in New York City, i.e., KeySpan, Astoria and NRG. These caps are published by the NYISO on its website.⁽²⁾

8. KeySpan filed a copy of the KeySpan Swap agreement under a Form 8-K with the Securities and Exchange Commission on January 24, 2006.⁽³⁾ The relevant document in the Form 8-K filing for determining the revenues under the KeySpan Swap is titled "Appendix A - Form of Confirmation."

9. Under the terms of the KeySpan Swap:

If the spot auction clearing price for capacity was above $7.57 per kW-month, the FSC would pay KeySpan the difference between (a) the lesser of (i) the spot auction clearing price for the relevant month or (ii) the average of the three DGOs' bid cap and (b) $7.57, times 1,800,000 kW (i.e., 1800 MW).

Example 1: If in a given month the spot auction clearing price is $12.71 (which is above $7.57) and the average of the three DGOs' bid cap is $12.49, then the lesser is $12.49. The difference between $12.49 and $7.57 equals $4.92.
Multiplying $4.92 by 1,800,000 kW yields $8,862,000, which is the amount of revenues Keyspan would earn that month under this example.

If the spot auction clearing price for capacity was below $7.57 per kW-month, KeySpan would pay the FSC the difference between (a) the lesser of (i) the spot auction clearing price for the relevant month or (ii) the average of the three DGOs' bid cap and (b) $7.57, times 1,800,000 kW (i.e., 1800 MW).

Example 2: If in a given month the spot auction clearing price is $5.84 (which is below $7.57) and the average of the three DGOs' bid cap is $5.74, then the lesser is $5.74. The difference between $5.74 and $7.57 equals -$1.83.
Multiplying -$1.83 by 1,800,000 kW yields -$3,294,000 and, thus, Keyspan would pay $3,294,000 to the FSC that month under this example.

10. Applying these formulas and using public information from the NYISO website on spot auction prices and the DGO bid caps, I calculate that KeySpan received net revenues of $48,960,000. I have attached as Exhibit 1 to my declaration a table summarizing my calculations.

11. With the exception of March and April 2008, the spot auction clearing price was equal, each month, to Keyspan's bid cap. It is my understanding that the drop in spot auction price during the these last two months of the relevant period reflects the effect of a New York State Public Service Commission's ("NYSPSC") order requiring KeySpan to bid its capacity at zero in these two months.

In accordance with 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge and belief.

Dated: 10/26/10

_______________/s/________________
Oliver M. Richard
Assistant Chief, Economic Litigation Section
Antitrust Division
United States Department of Justice
450 5th Street, N.W.
Washington, D.C. 20530

Exhibit 1
KeySpan's Swap Revenues

Swap Revenue Calculations May 06-April 08

Columns
(1) (2)

Year/Month Auction Type Month Spot Auction Clearing Price Average of DGO Bid Caps Lesser of columns (1) and (2) KeySpan
Swap Revenue* Cumulative Total

2006 05 Spot May $ 12.71 $ 12.49 $ 12.49 $8,862,000 $8,862,000

2006 06 Spot June $ 12.71 $ 12.49 $ 12.49 $8,862,000 $17,724,000

2006 07 Spot July $ 12.71 $ 12.49 $ 12.49 $8,862,000 $26,586,000

2006 08 Spot August $ 12.71 $ 12.49 $ 12.49 $8,862,000 $35,448,000

2006 09 Spot September $ 12.71 $ 12.49 $ 12.49 $8,862,000 $44,310,000

2006 10 Spot October $ 12.71 $ 12.49 $ 12.49 $8,862,000 $53,172,000

2006 11 Spot November $ 5.84 $ 5.74 $ 5.74 -$3,294,000 $49,878,000

2006 12 Spot December $ 5.84 $ 5.74 $ 5.74 -$3,294,000 $46,584,000

2007 01 Spot January $ 5.84 $ 5.74 $ 5.74 -$3,294,000 $43,290,000

2007 02 Spot February $ 5.84 $ 5.74 $ 5.74 -$3,294,000 $39,996,000

2007 03 Spot March $ 5.84 $ 5.74 $ 5.74 -$3,294,000 $36,702,000

2007 04 Spot April $ 5.84 $ 5.74 $ 5.74 -$3,294,000 $33,408,000

2007 05 Spot May $ 12.72 $ 12.50 $ 12.50 $8,874,000 $42,282,000

2007 06 Spot June $ 12.72 $ 12.50 $ 12.50 $8,874,000 $51,156,000

2007 07 Spot July $ 12.72 $ 12.50 $ 12.50 $8,874,000 $60,030,000

2007 08 Spot August $ 12.72 $ 12.50 $ 12.50 $8,874,000 $68,904,000

2007 09 Spot September $ 12.72 $ 12.50 $ 12.50 $8,874,000 $77,778,000

2007 10 Spot October $ 12.72 $ 12.50 $ 12.50 $8,874,000 $86,652,000

2007 11 Spot November $ 5.77 $ 5.67 $ 5.67 -$3,420,000 $83,232,000

2007 12 Spot December $ 5.77 $ 5.67 $ 5.67 -$3,420,000 $79,812,000

2008 01 Spot January $ 5.77 $ 5.67 $ 5.67 -$3,420,000 $76,392,000

2008 02 Spot February $ 5.77 $ 5.67 $ 5.67 -$3,420,000 $72,972,000

2008 03 Spot March $ 1.05 $ 5.67 $ 1.05 -$11,736,000 $61,236,000

2008 04 Spot April $ 0.75 $ 5.67 $ 0.75 -$12,276,000 $48,960,000

Total Swap Revenues for Keyspan from 05/2006 through 04/2008 $48,960,000

* Computed as (Lesser - $7.57) times 1,800,000 kW (1800 MW)
Positive values are payments made to KeySpan in summer months
Negative values are payments made by KeySpan in winter months

FOOTNOTES

1. See, e.g., http://icap.nyiso.com/ucap/public/auc_view_spot_detail.do, reporting the spot auction price in New York City for May 2006.

2. See, e.g., http://www.nyiso.com/public/webdocs/products/icap/auctions/Summer-2006/documents/ShapedPriceCaps06-07.pdf, reporting DGO caps for Summer 2006.

3. http://www.sec.gov/Archives/edgar/data/1062379/000106237906000004/0001062379-06-000004-index.htm