On January 22, 2013, the Federal Energy Regulatory Commission (Commission) approved the January 14, 2013 settlement between its Office of Enforcement (Enforcement) and Deutsche Bank Energy Trading LLC (Deutsche Bank) to resolve an Order to Show Cause proceeding and Enforcement’s investigation under Part 1b of the Commission’s regulations, 18 C.F.R. Part 1b (2012), into Deutsche Bank’s conduct in the markets of the California Independent System Operator Corporation (CAISO). Under the settlement, Deutsche Bank stipulates to the facts; neither admits nor denies the violations; agrees to pay a civil penalty of $1.5 million; agrees to disgorge unjust profits of $172,645, plus interest; and agrees to implement improved compliance training and procedures.
Enforcement opened a non-public, preliminary investigation of Deutsche Bank following a June 15, 2010 referral by the CAISO Department of Market Monitoring related to Deutsche Bank’s scheduling and trading practices in the CAISO markets for the period January 29, 2010 through March 24, 2010 (Referral Period) at the Silver Peak intertie. Enforcement concluded that Deutsche Bank violated the Commission’s Anti-Manipulation Rule, 18 CFR § 1c.2, by trading in one product, physical exports at Silver Peak, with the intent to benefit a second product, its Congestion Revenue Rights (CRR) position at Silver Peak. In a CRR market, the holder of a CRR is subject to various risks, including the risk that a derate will affect the value of the CRR. When CAISO derated the Silver Peak intertie, allowing no net energy to flow in the import direction and limiting flows in the export direction, import congestion at Silver Peak caused Deutsche Bank to lose money on its CRR position. Deutsche Bank traders developed a new Export Strategy under which they exported physical energy at the Silver Peak intertie in order to eliminate the import congestion that was causing losses to Deutsche Bank’s CRR positions. Through its Export Strategy, Deutsche Bank sought to negate the adverse impact the derate at Silver Peak had on the value of its CRR position. Deutsche Bank lost money consistently on its physical transactions, which were not consistent with the fundamentals underlying the market price of Silver Peak, e.g., supply and demand, but rather were undertaken with the intent to change the value of CRRs. Deutsche Bank thus injected false and deceptive information into the marketplace and affected the price at Silver Peak, which hindered the proper functioning of the physical market at Silver Peak as well as the CRR market.
Enforcement also concluded that Deutsche Bank’s designation of its physical trades as Wheeling-Through transactions violated the accuracy requirements of Commission regulations, 18 CFR § 35.41(b). In its Export Strategy, Deutsche Bank scheduled its exports at Silver Peak with imports of equal amount at the Summit intertie, designating the majority of the paired bids as Wheeling-Through transactions. Appendix A of the CAISO Tariff defines a “Wheeling-Through Transaction” as “the use of the CAISO Controlled Grid for the transmission of Energy from a resource located outside the CAISO Controlled Grid to serve a Load located outside the transmission and Distribution System of a Participating [Transmission Operator].” Because Deutsche Bank’s transactions lacked both an external resource and an external Load served, they did not meet the tariff’s requirements for Wheeling-Through transactions, thereby violating the Commission’s regulation requiring the submission of accurate schedules, 18 CFR § 35.41(b), and the identical provision of the CAISO Tariff.
In determining the appropriate remedy, Enforcement considered the factors described in section 316A(b) of the Federal Power Act and in the Revised Policy Statement on Penalty Guidelines. Enforcement’s considerations included the fact that: (1) Deutsche Bank’s conduct undermined the proper functioning of the CAISO markets, (2) the conduct was committed with the knowledge of supervisory personnel, (3) Deutsche Bank and its staff’s cooperated in staff’s investigation, and (4) Deutsche Bank did not have an effective compliance program (despite the fact that the Deutsche Bank Compliance Handbook stated that “engaging in physical trading designed to benefit financial transactions” merited “heightened review” as potential manipulation, the trading personnel did not seek review of the Export Strategy).
- Press Release: https://www.ferc.gov/media/news-releases/2013/2013-1/01-22-13.asp
- Order Approving Stipulation and Consent Agreement: https://www.ferc.gov/EventCalendar/Files/20130122124910-IN12-4-000.pdf