On Friday, February 7, 2014 the Federal Energy Regulatory Commission (FERC) approved a Stipulation and Consent Agreement between FERC Enforcement Staff and Louis Dreyfus Energy Services L.P. (LDES) in Docket No. IN12-6-000, 146 FERC ¶ 61,072 (2014). The conduct at issue involved the “FTR Group” at LDES which traded in virtual supply bids, virtual demand bids and Financial Transmission Rights (FTRs) in the Midcontinent Independent System Operator, Inc. (MISO) markets.

LDES stipulates to the facts in the Consent Agreement, but neither admits nor denies the violations.  LDES agrees to:

  1. pay to MISO disgorgement of $3,334,000 plus interest of $383,743;
  2. pay a civil penalty of $4,072,257 to the United States Treasury; and
  3. implement procedures to improve compliance in the future, subject to monitoring via submission of semi-annual reports for two years.

In addition, one of the LDES traders, Xu Cheng, individually will pay a civil penalty of $310,000 to the United States Treasury.  The virtual supply, virtual demand and FTR trading occurred from November 2009 through February 2010.


Virtual supply bids and virtual demand bids are cleared in the day-ahead market and are settled in the real-time market.  There is no obligation to buy or sell physical power with a virtual demand bid and virtual supply bid; the trade’s profits or losses come from settlement difference between the day-ahead price and the real-time price.  Virtual bidding promotes convergence between Day-Ahead and Real Time energy prices.

However, virtual supply bids and virtual demand bids also have the potential to affect day-ahead congestion at a given node because they are bid and cleared in the day-ahead market.  Moreover, a large volume of virtual supply bids and/or virtual demand bids can increase or decrease nearby day-ahead congestion enough to affect the value of FTRs that “source” or “sink” at that same node or other nearby nodes.  This increase in the value of FTRs can be profitable even if the settlement of the underlying virtual bid(s) results in a loss.  This is precisely what occurred in the instant proceeding.

LDES Trading Activity

LDES’s FTR Group started trading FTRs at a particular MISO node (Velva) in North Dakota and it made little to no profit on these trades.   However, profits on the FTRs began to accrue in November of 2009 when LDES’s trader submitted virtual demand bids at the same node.  By the end of February 2010, the FTR Group had realized profits of $3,334,000 on its FTRs that were directly attributable to the virtual demand bids at the Velva node.   This was the case even though over the same period the virtual demand bids produced losses.  FERC Enforcement Staff also noted that in March of 2010, when LDES’s FTR positions at Velva dropped off substantially, the FTR Group also stopped its virtual trading at the Velva node.

In addition to the monetary fines and disgorgement of profits mentioned earlier, LDES is to institute new policies and associated processes to review and document the purpose of each virtual transaction it executes in MISO.  These processes include incorporating into its trading software a log for each virtual trade made.  The log must be retained for three years and identify: (i) the trader that submitted the trade to MISO; and (ii) the primary congestion that the FTR group was attempting to capture with the trade or other reason for the trade.  The processes also require LDES to identify a single computer that LDES shall use for at least three years to conduct all of its virtual trades in MISO.  The computer is to include software that automatically records key strokes and screen shots.

Finally, LDES is to submit semi-annual compliance monitoring reports to Enforcement for two years following the Effective Date of the Consent Agreement.  Each report is to:

  1. identify any known violations of FERC regulations that occurred during the applicable period, including a description of the nature of the violation and what steps were taken to rectify the situation;
  2. describe all compliance measures and procedures related to compliance with FERC regulations that LDES instituted or modified during the applicable period;
  3. describe all FERC-related compliance training that LDES administered concerning such products during the applicable period, including the dates of the training, the topics covered, and the procedures used to confirm which personnel attended.

In addition, each compliance monitoring report must include an affidavit executed by one of LDES’s officers stating that the report is true and accurate to the best of his/her knowledge.