The Federal Energy Regulatory Commission ordered the trading firm GreenHat Energy LLC to pay $179 million in civil penalties for wreaking havoc in the PJM Interconnection LLC's financial transmission trading rights markets.
GreenHat, founded in 2014 by a group of former JPMorgan Chase & Co. employees, engaged in a four-stage scheme, according to FERC's Nov. 5 order (IN18-9).
Financial transmission rights, or FTRs, allow holders to hedge electricity delivery costs in the day-ahead markets. A holder of an FTR is entitled to revenues if congestion occurs between two points on the grid in the same direction as stated in the contract and is charged if congestion occurs in the opposite direction. Market participants can purchase FTRs through monthly, annual and long-term auctions as well as in the secondary, or bilateral, market.
In the long-running GreenHat debacle, the firm through 2018 amassed "a huge FTR portfolio" with "virtually no upfront cash," bought primarily long-term FTRs, planned to not pay for any losses at settlement and generated cash for the company's founders by selling profitable FTRs to third parties at a discount, FERC said.
The scheme, eventually resulting in a huge default, saddled PJM members with roughly $179 million in losses.
"In other words, respondents intentionally misled PJM to enable GreenHat to buy FTRs that it otherwise would not have been able to afford to buy and extract profits from the PJM FTR market with the intent to default on their portfolio losses," the agency said.
The commission further found that GreenHat violated the Federal Power Act by trading in a way to minimize collateral requirements, "with the intent not to pay" for its losses at settlement.
FERC also concluded that GreenHat violated the statute by submitting bids into PJM's FTR auctions with the aim of raising the auction clearing price for FTRs purchased by Shell Energy North America (US) LP, "thereby interfering with a well-functioning market."
The commission, therefore, directed GreenHat to pay the U.S. government a civil penalty of $179 million to be distributed to affected PJM members. It also ordered two of GreenHat's founders — John Bartholomew and Kevin Ziegenhorn — to each pay $25 million in civil penalties.
In addition, the agency directed GreenHat, Bartholomew, Ziegenhorn, and the estate of a third GreenHat founder, Andrew Kittell, to disgorge a little more than $13 million in unjust profits and interest. Kittell committed suicide in January, an act Kittell's lawyers have blamed on the FERC investigation. All the parties are jointly and severally liable for payment of the disgorgement amount.
Commissioner James Danly dissented from FERC's Nov. 5 order.
Acknowledging deep skepticism with GreenHant's explanations in the proceeding, Danly nevertheless argued that FERC's Office of Enforcement failed to prove its case. Danly specifically faulted the office for failing to depose any of the key third-party actors mentioned in its report.
"Enforcement asks us to accept certain inferences drawn from those documents that it claims reflect third party confirmation of its allegations," Danly said. "But enforcement provides the commission with no evidence that the third-party witnesses in fact agree with its inferences."
Lawyers representing Bartholomew and Ziegenhorn declined to comment. Lawyers for the Kittell estate did not immediately respond to a request for comment. If the parties refuse to pay penalties after 60 days, FERC will need to ask a district court to affirm and enforce them.
Following the GreenHat default, PJM won approval for new measures designed to avoid the risk of default in its FTR markets.
Those reforms include "know your customer" procedures that allow the grid operator to process a significantly greater amount of information regarding credit risk on an initial and ongoing basis.