On August 5, 2014, FERC’s Office of Enforcement (OE) issued a Notice of Alleged Violations (NAV) asserting that Powhatan Energy Fund, LLC, HEEP Fund, Inc., CU Fund Inc., and Houlian (Alan) Chen (jointly Powhatan) engaged in improper and manipulative Up to Congestion (UTC) trading in PJM markets.   The NAV alleges that, between June 1, 2010 and August 3, 2010, Powhatan engaged in UTC transactions “designed to falsely appear to be spread trades, as a vehicle for collecting certain payments (called Marginal Loss Surplus Allocation or MLSA) from PJM.”  In addition, the NAV claims that Powhatan’s strategy involved the use of wash trades – or offsetting – for the same number of MWh at the same trading points in order to cancel out the financial effects of these trades while continuing to capture MLSA payments.  FERC has long prohibited wash trades.

While the NAV contains few details regarding Powhatan’s alleged market manipulation, Powhatan earlier this year created a website (www.ferclitigation.com) that contains substantial information regarding its dispute with OE.  OE treats communications and documents regarding investigations as confidential, but Powhatan elected to forego confidentiality and to post several documents describing OE’s investigation into Powhatan’s conduct.  These documents make clear that OE believes that Powhatan’s trading strategy involved scheduling UTC transactions in a manner designed to maximize MLSA revenue.  In response, Powhatan states, among other claims, that it had no knowledge at the time that its trades would be considered improper, as they violated no FERC or PJM rules.  PJM has subsequently modified its tariff to preclude trades like Powhatan’s.  Powhatan also posted several videos from noted experts on energy market manipulation on the website.  The experts claim that Powhatan’s conduct does not constitute improper market manipulation.

NAVs often indicate that FERC has authorized OE to begin settlement discussions with the parties identified in the NAV.  In this case, it seems unlikely that settlement discussions will be fruitful, given Powhatan’s aggressive posture to date.  In fact, Powhatan’s entire response to OE’s preliminary findings is a two-sentence letter from counsel that reads:  “Your preliminary findings make no sense.  Should you choose to proceed with a public notice against Powhatan and/or Huntrise, please be advised that they will respond publicly and forcefully.”

If, as expected, settlement negotiations between Powhatan and OE fail, and FERC wishes to pursue OE’s claims against Powhatan, the next step is for FERC to issue an Order to Show Cause.  The Show Cause order would contain details regarding Powhatan’s alleged market manipulation and would establish formal hearing procedures to resolve those allegations.  If the allegations are proven, FERC could impose substantial civil penalties on Powhatan under Federal Power Act (FPA) Section 316A(b).  As OE’s claims against Powhatan arise under the FPA rather than the Natural Gas Act, Powhatan could opt to forego litigation before FERC.  Instead, Powhatan could decide to force FERC to impose civil penalties.  At that point, Powhatan could seek de novo review of the entire matter in federal district court under Section 31(d)(3)(b) of the FPA (which is applicable to violations under Part II of the FPA via FPA Section 316A(b)).  Other entities, including Barclays Bank, that are challenging OE’s conclusions that they engaged market manipulation have pursued the path of district court review.  Those cases remain pending in the federal courts.