- KeySpan, an electric generator, realized that prices for electric generation would be going down as more capacity came online.
- It decided to keep up prices by cutting back its own generation.
- But that’s dumb, because then it wouldn’t be able to sell much electricity at the high prices, which would mainly benefit its competitors.
- So it decided to buy its main competitor, cut back generation, but still sell plenty of electricity at high prices.
- But it “concluded that its acquisition of its largest competitor would raise serious market power issues” and so would raise problems with antitrust and electric grid regulators.
- So it said “aha, a swap!”
- And it synthetically acquired the capacity of its largest competitor (Astoria Generating) by entering into a swap with Morgan Stanley where it effectively bought that capacity at $7.57 a kilowatt-month.
- And Morgan Stanley hedged that trade by entering into a swap where it effectively bought the capacity from Astoria at $7.07 a kilowatt-month.
- Attentive readers will note that that’s a $0.50 difference, so Morgan Stanley made $0.50 per kW-month for about three years, for total revenue of around $21.6mm.*
So what do you make of it? The complaint sounds terrible, but then it would, and Morgan Stanley isn’t talking (and not admitting or denying etc. etc.), so we’ve only got one side of the story and maybe it’s exaggerated. But if you believe the complaint then everyone at KeySpan and Morgan Stanley knew that they were structuring this deal to get around antitrust requirements that they knew would make it impossible for KeySpan to buy Astoria directly. That’s certainly one possibility – everyone was as criminal as criminal can be – and, yeah, sure, probably, though the relatively low-dollar-value settlement might suggest otherwise.
But I like imagining the other possibilities in which someone was taking advantage of someone else’s naïveté. Read more »