Casting arguments aimed at disproving market manipulation charges as "irrelevant," "fiction" and "groundless," staff with the U.S. Federal Energy Regulatory Commission's Office of Enforcement stood by its recommendation that penalties be assessed against Vitol Inc. and one of its energy traders.
Vitol faces penalties of $6 million and could have to disgorge $1.23 million, plus interest, in unjust profits for allegedly engaging in a cross-product market manipulation scheme in 2013. The alleged architect of the scheme — Federico Corteggiano, the co-head of Vitol's financial transmission rights trading operation — was hit with a proposed $800,000 penalty.
Responding to FERC's July show-cause order, Vitol and Corteggiano in August denied any wrongdoing and asserted that continuing the enforcement probe could create uncertainty that undermines the public interest and chills market activity.
In a Sept. 20 filing, FERC's enforcement staff countered that Vitol and Corteggiano's assertion was ironic because the trading behavior under scrutiny was flagged by a market participant for investigation. It also was simply wrong, given that "enforcement against manipulation protects the fairness, integrity, and smooth operation of the markets, thereby encouraging participation," staff said.
Deflecting attention
Vitol contended that it saw a profitable trading opportunity and "prudently and lawfully" delivered power to a location where the market signaled strong demand. It added that the California ISO did not disclose that the unusually high $388.11/MWh published price that influenced its trading behavior was an artificial price based on a CAISO pricing algorithm that was disconnected from actual supply and demand. FERC later approved tariff changes eliminating that "degenerate" pricing practice.
But FERC enforcement staff alleged that Vitol sold electric power at a financial loss in CAISO's day-ahead market to eliminate export congestion that had the potential to cause $1.23 million in losses to Vitol's congestion revenue rights.
"Respondents' answers seek to deflect attention from their manipulative conduct by focusing on the irrelevant issue of degenerate pricing," enforcement staff said. "Staff has never alleged that Corteggiano knew the price was degenerate, nor did he need that knowledge to manipulate prices at Cragview."
Rather, enforcement staff asserted that Corteggiano knew, given his prior experience with partial derates at CAISO interties, that "unusually high congestion costs could arise" and that he "could eliminate those congestion costs — which he called 'phantom congestion' — by flowing power in the opposite direction of the derate."
Staff alleged that Corteggiano used that knowledge to manipulate prices twice at partially derated CAISO interties: once in 2010 at the Silver Peak intertie when he worked at Deutsche Bank and again in 2013 for Vitol at the Cascade intertie, which is the subject of the current enforcement action.
License to manipulate
Staff rebutted Vitol's argument that it could not be penalized because degenerate prices violated CAISO's tariff. Even if a tariff violation were found, that would not give Vitol "license to manipulate prices at Cragview," staff said. "An imperfect market is as entitled to protection from manipulators as an ideal one — and sometimes more in need of it, as Corteggiano's repeated conduct has borne out."
Vitol and Corteggiano argued that the daily sale of 5 MW of energy from Oct. 28, 2013, to Nov. 1, 2013, was "consistent with supply and demand and contributed to the formation of a market-based price."
Enforcement staff said that was "fiction," asserting that the company's intent "was to eliminate, not capture, the $388.11/MWh price." And it successfully did so "every single hour that they imported power at Cragview during the partial derate of the Cascade intertie," staff said.
Rather than contribute to market-based prices, staff continued, the imports "subverted CAISO's day-ahead market by unlawfully manipulating prices that otherwise would have been set" based on the CAISO tariff's provisions for calculating prices.
Beyond those factual discrepancies, staff said Vitol and Corteggiano's legal arguments were "groundless."
Though Corteggiano consulted with Vitol's legal and compliance team ahead of making the trades, staff said that legal defense was "unavailing because Corteggiano did not disclose key facts" to that team, particularly that the 5-MW sales "could eliminate the congestion costs at Cragview, and with it the $388.11/MWh price that Corteggiano falsely represented to them he was pursuing." (FERC docket IN14-4)
Jasmin Melvin is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.
