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US FERC filing sets in motion Powhatan trial; statute of limitations argument expected

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US FERC filing sets in motion Powhatan trial; statute of limitations argument expected

The US Federal Energy Regulatory Commission this week restated its caseagainst Powhatan Energy Fund and others for allegedly manipulating PJMInterconnection's electricity markets in 2010, jumpstarting districtcourt action on the matter after a long procedural fight over the scopeof de novo review under the Federal Power Act.

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FERC has alleged that Powhatan, Houlian "Alan" Chen and two firms Chenfounded manipulated the market by executing large volumes of "washtrades" to collect excessive amounts of marginal loss surplus allocationpayments, also called transmission loss credits (IN15-3). The up-tocongestion trades at issue have since been barred from being eligible toreceive MLSA credits.

Powhatan and the others have consistently denied that they engaged inmarket manipulation and, during FERC's investigation, mounted a publiccampaign involving leading energy market thinkers, including former FERCofficials and well-known power market experts, to defend their name.Powhatan even released non-public documents linked to the commission'sinvestigation.

FERC Monday filed an amended complaint, again asking the US DistrictCourt for the Eastern District of Virginia in Richmond to affirm itsfinding of market manipulation and assessment of $29.8 million in finesas well as disgorgement of roughly $4.7 million of unjust profits (FERCv. Powhatan Energy Fund, et al., 3:15-cv-00452).

The amended complaint was filed in accordance with a December 28 courtorder that followed District Judge M. Hannah Lauck's decision that sameday, finding that Powhatan and the other respondents in the case were"entitled to a trial de novo governed by the Federal Rules of CivilProcedure and the Federal Rules of Evidence." FERC 0 FOR 6 ON DE NOVO RULINGS

In recent years, companies embroiled in power market manipulation battlesin federal district courts have pushed for discovery rights and full jurytrials, while FERC's attorneys held to the argument that the judgesalready had everything they needed to rule from the investigative oradministrative record submitted to the court by the commission.

Lauck's decision gives Powhatan and the others an opportunity to usediscovery to obtain testimony and cross-examine witnesses. It also marksthe sixth defeat in court for FERC on that issue.

Powhatan, Chen and the two firms he founded have 30 days from FERC'sfiling to submit responsive pleadings, after which FERC will have 21 daysto respond followed by a 14-day window for replies from the respondents.

"The whole thing is completely nuts on pretty much every level," KevinGates, one of the principals at Powhatan, said Wednesday. "We're 7.5years deep into an investigation, and FERC has done everything in itspower to deny us basic due-process rights and bully us into a settlement.Powhatan is blessed to have the resources and will to fight."

Gates said his attorneys would be submitting a motion to dismiss theamended complaint that would likely raise a statute-of-limitationsargument.

Chen's attorney made such an argument in a motion to dismiss FERC'soriginal complaint in 2015. That motion was denied without prejudice asLauck sought to first focus on firming up the contested meaning of a denovo review.

With the procedural battle behind them, Gates said: "We can resubmit ourmotion to dismiss. Since the statute-of-limitations argument has beenvalidated by the Barclays judge, I'm guessing that our attorneys will bequite keen to put that argument back in front of Judge Lauck." OTHER COURTS HAVE YET TO WEIGH IN ON STATUTE OF LIMITATIONS

Gates comments refer to the US District Court for the Eastern District ofCalifornia's dismissal of a defendant in the long-running power marketmanipulation case against Barclays Bank and several former traders afterfinding that FERC's actions against him were time-barred by the five-yearstatute of limitations found in 28 U.S.C. 2462, a federal statute ontiming of enforcement proceedings.

That court's September 29 decision on the statute of limitations foundthat FERC's issuance of an order to show cause and notice of proposedpenalty did not satisfy the statute of limitations in enforcement cases.The Barclays case has since been settled (FERC v. Barclays Bank, et al.,2:13-cv-02093).

An industry attorney said if a similar statute-of-limitations ruling weremade in the Powhatan case, it would eliminate a significant portion ofthe days upon which misconduct allegedly occurred that could beconsidered at trial and, in turn, lessen the penalty FERC could impose.

But Lauck is not bound by the California district judge's decision, andcould make a statute-of-limitations interpretation that finds FERC'sorder to show cause is indeed sufficient, the attorney said.

Nevertheless, Powhatan's legal team previously asserted that FERC wasattempting to retroactively impose a penalty on trading behavior thatbenefited from a flaw in PJM's tariff design, but was otherwise legal inthe summer of 2010 when undertaken. The consequences of bad market designand ambiguous standards should be borne by FERC, not Powhatan, the 2015motion to dismiss insisted.

Further, their attorneys argue that all money is green, so as long astraders are following the rules of the market, they can make moneywithout concern for the source of the money.

FERC, they say, has instead tried to pretend that there are permissiblegreen dollars and forbidden purple dollars. And those purple dollars areforbidden for no defensible reason "but simply because FERC says so afterthe trading at issue has already occurred, which raises obviousconstitutional due process/fair notice problems," they said in a courtfiling. -- Jasmin Melvin, jasmin.melvin@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com