The US Federal Energy Regulatory Commission is asking a trading fund and others to respond to allegations that they manipulated PJM Interconnection energy markets and explain why they should not be required to pay close to $30 million in civil penalties.
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The firm at the center of the allegations, Powhatan Energy Fund, has for months waged a public campaign against the commission for its investigation into the firm, releasing formerly non-public documents and having former FERC officials and well-known market experts defend the firm's actions.
Until now, FERC commissioners had declined to respond to the firm's concerns, citing commission precedent to keep enforcement investigations non-public.
As such, FERC's order to show cause issued Wednesday marks the first official action taken by FERC commissioners on the matter. The order asks trader Houlian "Alan" Chen, two firms founded by Chen (CU Fund and HEEP Fund), and Powhatan to respond to staff's findings that they allegedly manipulated PJM markets in 2010 and that they should pay millions in civil penalties.
Specifically, Powhatan faces penalties of $16.8 million under the order, with CU Fund and HEEP Fund facing combined penalties of $12 million. Chen on his own faces penalties of $1 million for trades executed "through and on behalf of" HEEP Fund, Powhatan and CU Fund.
FERC enforcement staff allege that the parties involved "conceived of a fraudulent scheme" involving up-to congestion (UTC) transactions in PJM. UTC bids allow market participants to say how much they are willing to pay for congestion between two nodes by specifying a spread limit between the locational marginal price at both points. If the day-ahead congestion between those two price points is less than the bid, the transaction will clear and the bidder will be charged the day-ahead price of congestion between the two nodes.
FERC staff allege that Chen, working on his own and with Powhatan, sought to inflate trading volumes of UTC bids to "wrongfully collect large amounts" of marginal loss surplus allocation payments, under which entities trading power receive surplus payments from transmission line loss charges.
"The OE staff report alleges that, with Powhatan's knowledge and encouragement, Chen placed UTC trades in opposite directions on the same paths, in the same volumes, during the same hours for the purpose of creating the illusion of bona fide UTC trading and thereby to capture large amounts of MLSA that PJM distributed at that time to UTC transactions with paid transmission," the order said.
Thursday's order followed a staff notice of alleged violations in August, where enforcement officials said they had preliminarily determined the firms and Chen had allegedly violated market manipulation rules.
The parties in the case have 30 days to respond.
Kevin Gates, one of the principals at Powhatan, said in a statement Thursday that staff's allegations "continue to make no sense." Citing the protections of checks and balances provided by the US political system, Gates said that "we intend to engage the commission in a professional dialogue and are hopeful that this issue can be resolved outside of a courtroom."
Gates as well denied the allegations against Chen, saying he "did nothing wrong and didn't violate any law."
In a statement made at Thursday's monthly FERC meeting, Commissioner Philip Moeller sought to address what he feels is a "common misperception about one element of our enforcement process."
"In the show-cause order, the commission noted that issuance of the staff report does not indicate commission adoption or endorsement of staff's findings," Moeller said. "This statement reflects the commission's long-standing practice not to pre-judge the findings made in staff reports. Instead, the commission will consider the entire record in this proceeding to determine whether the assessment of civil penalties is appropriate."