Notingthat a virtual trading company and its primary owner already submitted "almost90 pages of argument and multiple affidavits and exhibits" to supporttheir assertion that market manipulation allegations leveled against them areunfounded, FERC on May 6 rejected their motion to compel the to provide additionaldata regarding the mechanics of its market design.
Indoing so, the commission recalled that Etracom LLC and Michael Rosenberg, whoalso serves as the company's principal trader, decided not to have their casebe heard by a FERC administrative law judge even though hearing procedurestypically grant parties the right to conduct discovery. Instead, they chose tohave the commission proceed directly to the penalty assessment phase presumablyso the matter will be eligible for court review more quickly.
"Respondentscannot seek both the perceived benefits of … 'penalty assessment' proceduresand the discovery rights afforded to litigants in administrative proceedings atthe commission," FERC said in its May 6 .
FERCin July 2015 issued abrief notice of alleged violations explaining that enforcement staff hadpreliminarily found that Etracom and Rosenberg had run afoul of the commission'santi-manipulation rules. In a show-cause order (IN16-2) the following December, FERCdirected Etracom and Rosenberg to explain why they should not be fined $2.4million and $100,000, respectively, and the company should not be required todisgorge $315,072 in unjust profits, plus interest, for allegedly manipulatingCAISO's energy markets.
Astaff report attached to that order asserted that Etracom in May 2011 submittedand cleared uneconomic virtual supply transactions with the goal ofartificially lowering the day-ahead locational marginal price and creatingimport congestion at the New Melones intertie — a move that "greatlybenefited" Etracom's congestion revenue rights positions sourced at thatintertie. According to staff, the company lost $42,481 on its virtual supplyoffers while earning more than seven times that amount as a result of its CRRpositions during the weeks at issue.
Formallyresponding to those allegations, Etracom and Rosenberg that any "perceived harms"that purportedly resulted from their trading activity were actually caused bymarket dysfunction. The trading activity at issue was simply a rational attemptto profit from the congestion caused by a predicted record hydro event based on"market fundamentals and published price signals," they said.
AlthoughEtracom and Rosenberg insisted that FERC should find that they did not engagein market manipulation and terminate the proceeding, if the agency does not doso they elected to have a federal district court review the case de novo ratherthan have a FERC administrative law judge hold a hearing on the matter.
Nevertheless,Etracom and Rosenberg subsequently filed a motion asking that CAISO be required to disclose certainmaterials and information related to "multiple market design flaws andsoftware pricing/modeling errors which caused the markets at issue in thisproceeding to be dysfunctional." FERC staff that motion, arguing that thedata sought by the respondents "is irrelevant, overly broad, undulyburdensome and seeks confidential and proprietary commercial information thatis not relevant to any of the claims or defenses in this case."
FERCsided with staff, explaining in its May 6 order that although it has theauthority to grant the motion based on a Federal Power Act provision statingthat it "may investigate any facts, conditions, practices, or matterswhich it may find necessary or proper," it decided to exercise itsdiscretion and dismiss the motion instead. Etracom and Rosenberg have describedin detail the purported flaws and errors and explained how those problems ledto market dysfunction that sent incorrect price signals, and thus "we findthat respondents have not demonstrated that their request for additionalinformation from CAISO is necessary," the commission said.
Moreover,Etracom and Rosenberg waited over four months after CAISO's market monitoringdepartment refused to provide the requested information before asking FERC tointervene, yet they provided "no explanation or rationale for the timingof the motion at this point in the proceeding," according to the order.
Thecommission nevertheless said if Etracom and Rosenberg believe they must conductdiscover in order to defend themselves against staff's allegations, the agencywould be willing to "entertain a request" to withdraw their decisionto move straight to the penalty assessment phase.
FERC'sposition that Etracom and Rosenberg are not entitled to conduct discoveryshould they decide not to have their case heard by an administrative law judgeis especially significant given the debate that has taken place in at least oneother proceeding currently making its way through the courts. The respondentsin that proceeding (IN15-3) — Powhatan Energy Fund LLC, trader Houlian Chen andtwo funds controlled by Chen — insistthat FERC staff's position is that the de novo review undertaken by a federaldistrict court after the agency assesses a penalty that subsequently goesunpaid "can be a perfunctory review" based solely on the materialscontained in FERC's administrative record.