On March 6, 2015, the Federal Energy Regulatory Commission (FERC) issued an Order to Show Cause and Notice of Proposed Penalty (Order) to City Power Marketing, LLC and K. Stephen Tsingas (jointly, Respondents). The Order requires the Respondents to show cause why they should not be found to have violated the Federal Power Act and the Commission’s regulations prohibiting market manipulation by engaging in fraudulent Up To Congestion (UTC) transactions in PJM Interconnection L.L.C.’s (PJM) energy markets. The Order also requires City Power to show cause why it should not be found to have violated the Commission’s rules by making false statements and material omissions related to the existence of instant messages between partners in City Power discussing the alleged fraudulent conduct.
The Order directs the Respondent show cause why they should not be required to disgorge profits and be assessed civil penalties in the following amounts:
- City Power and Mr. Tsingas: Jointly and severally disgorge unjust profits of $1,278,358
- City Power: $14,000,000 civil penalty
- Tsingas: $1,000,000 civil penalty
The Enforcement Staff Report and Recommendation (OE Report) attached to the Order provides additional details concerning the FERC’s allegations against the Respondents. Specifically, the OE Report alleges that the Respondents manipulated PJM by entering into large volumes of “sham” UTC transactions as a means of collecting more than $2 million in Marginal Loss Surplus Allocation (MLSA) payments that were intended for “legitimate transactions.” Staff claims that these trades were designed to do the opposite of what Staff describes as the purpose of UTC trading–to encourage beneficial arbitrage. Staff asserts that such conduct qualifies as market manipulation because the Respondents’ trades “gave the false appearance that City Power was seeking to conduct trades aimed at profiting from spread changes, when in fact the trades were designed to minimize or eliminate spreads to provide a pretext to reserve paid transmission and collect MLSA.” Also, Staff alleges that Mr. Tsingas tried to hide instant messages that discussed the Respondents’ trades, violating the Commission’s regulation that requires firms like City Power to be candid in communications with FERC Staff.
FERC’s Order requires the Respondents to file an answer by April 6, 2015. In their answer, the Respondents have the option to choose between (1) a hearing before an Administrative Law Judge at FERC or (2) an immediate penalty assessment by the Commission. If the Respondents elect option (2), they can refuse to pay any assessed penalty for 60 days, at which time FERC would be required to institute an action in Federal district court. The court would then review de novo the entire matter and enter a judgment enforcing, modifying, or setting aside the penalty assessment against the Respondents. Other entities have recently elected this alternative approach to challenging OE’s conclusions that they engaged in market manipulation.
FERC’s position in this proceeding is consistent with other proceedings where it has expressed disfavor with linked transactions, where a party enters into one transaction to affect a second transaction. FERC Staff appears to believe that such transactions are manipulative because they violate the purpose of virtual trading in electricity markets and do not have any legitimate business purpose other than to obtain financial benefits.