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GDF SUEZ agrees to pay $81.8M to settle FERC market manipulation accusations

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GDF SUEZ agrees to pay $81.8M to settle FERC market manipulation accusations

FERC on Feb. 1 approved a settlement agreement in which GDF SUEZ Energy Marketing NA agreed to disgorge $40.8 million in undue profits and pay a $41 million civil penalty to resolve commission staff's allegations that it engaged in market manipulation.

At issue is the company's use of the lost opportunity cost, or LOC, credits the PJM Interconnection pays out to ensure that generating units are compensated for any revenues they lose by following the grid operator's dispatch instructions.

Staff alleged that between May 2011 and September 2013 GDF SUEZ engaged in a scheme to increase the LOC credits it receives by targeting the credits paid for combustion turbine units that clear the day-ahead market and are not dispatched in the real-time market.

The potential for entities to manipulate PJM's markets to receive excess LOC credits has been well known for some time now. In fact, a divided FERC in September 2015 approved tariff changes revising PJM's rules to address concerns that they created incentives for market sellers to alter their bidding behavior based on their eligibility to collect LOC payments.

While the majority found that the proposal would reduce incentives for market misconduct, then-Commissioner Philip Moeller dissented, asserting that implementing the revisions without also making changes to ensure that generators can recover their legitimate fuel costs "is inappropriate."

The settlement agreement comes after FERC made its investigation of GDF SUEZ public through a notice that did not offer much detail into the suspect behavior.

Filling in those missing details, the FERC order approving the settlement said after GDF SUEZ took over commercial operations of four power plants located in PJM in March 2011, it realized that the LOCs could produce profits when the units cleared PJM's day-ahead market but were not dispatched in the real-time market.

Thus, staff alleged that starting around June 2011, GDF SUEZ began offering one or more of the units into PJM's day-ahead market at below-cost when it anticipated that PJM would not dispatch the unit(s) in the real-time market so it could obtain LOCs when the discounted units were expected to otherwise be out of the money.

Specifically, staff determined that the company's offers did not reflect the price at which it wanted to generate power, but rather the price at which it could obtain LOCs during periods when the discounted units likely could not have been operated profitably.

Staff further determined that GDF SUEZ began discounting the cost-based offers for the units when it discounted their price-based offers so the LOCs it received for the units would continue to be based on the discounted offer and would be higher than if based on the units' estimated costs. And when it expected that a unit would be dispatched in the real-time market, staff said the company typically offered the unit at or above cost and did not discount its day-ahead energy offer.

Staff said GDF SUEZ halted the suspicious behavior after being questioned about it in September 2013 and cooperated fully with the investigation. After completing that investigation, staff determined that the company's bidding strategy was contrary to supply and demand fundamentals and impaired the functioning of the LOC provisions of the PJM market.

Pursuant to the approved stipulation and consent agreement. GDF SUEZ neither admitted nor denied it violated FERC's anti-manipulation rule but agreed to disgorge $40.8 million, including interest, to PJM. It also agreed to pay a civil penalty of $41 million to the U.S. Treasury and to submit an annual compliance monitoring report. (FERC docket IN17-2)