On August 22, 2017, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order Approving Stipulation and Consent Agreement with City Power Marketing, LLC (“City Power”) and its owner, K. Stephen Tsingas (“Tsingas”).1 This was the first order approving an enforcement settlement issued since the Commission re-established a quorum with the addition of Chairman Chatterjee and Commissioner Powelson.
The Order resolved allegations that City Power and Tsingas had engaged in market manipulation in violation of the Federal Power Act2 and the Commission’s Market Manipulation Rule3 by engaging in certain proscribed trading behavior in PJM Interconnection, Inc. (“PJM”), and had violated FERC’s regulation applicable to power marketers requiring a duty of candor in communications with, inter alia, the Commission or FERC’s Enforcement Staff. 4 City Power and Tsingas stipulated to the facts recited in the Stipulation and Consent Agreement, but neither admitted nor denied that they violated the Federal Power Act or FERC’s regulations.
City Power is a virtual trader that has traded in PJM since 2006, and Tsingas is the company’s sole owner. FERC Enforcement Staff conducted an investigation of three types of City Power’s Up-To Congestion (“UTC”) trades in 2010:
- So-called “round trip” trades in which a trader would place trades from location A to location B, and simultaneously place offsetting trades from location B to location A, allegedly to eliminate price risk and to collect marginal loss surplus allocations (“MLSA”).5
- Allegedly “uneconomic” trades placed between two pricing nodes that were mathematically equivalent (e., had a spread of zero), allegedly solely to collect MLSA payments.6
- Allegedly “uneconomic” trades between two nodes with very small price spreads, in which traders allegedly paid transmission charges equal to five times the price spread during the relevant period (even though zero cost transmission service was available) allegedly to collect MLSA payments.7
Following the investigation, the Commission issued an Order to Show Cause why City Power and Tsingas’ trading behavior did not constitute market manipulation.8
The Commission subsequently issued an Order Assessing Civil Penalties, finding that the three types of trades constituted a scheme to engage in fraudulent UTC transactions, thereby violating the prohibitions against market manipulation.9 FERC concluded that City Power and Tsingas had engaged in “round trip” trading for the majority of the relevant period and instituted the second trading strategy for an eight-day period, but abandoned it and replaced it with the third trading strategy when Tsingas’ trading partner expressed concern about the former strategy.10
The Commission also found that, although Tsingas and his trading partner “extensively” used instant messages in connection with the trading strategies, Tsingas misled Enforcement Staff about the existence of these instant messages through testimony and data responses. Further, neither City Power nor Tsingas produced any instant messages during the investigation, but Enforcement Staff subsequently obtained the instant messages.11 The Commission found that this conduct violated the Commission’s regulations.12
The Order required City Power to pay a civil penalty of $14 million and Tsingas to pay a civil penalty of $1 million. The Order also required disgorgement of $1.3 million in unjust profits. The Order further imposed joint and several liability for City Power’s civil penalty and the disgorgement amount.
When City Power and Tsingas failed to make the required payments, FERC filed an action in the U.S. District Court for the District of Columbia. After the court denied defendants’ motion to dismiss and FERC’s summary judgment motion, the parties engaged in mediation suggested by the court. That effort resulted in the Stipulation and Consent Agreement approved by FERC.
Under the Stipulation and Consent Agreement, the civil penalty amounts and payment obligations differ from those in the Order Assessing Civil Penalties. City Power will pay a $9 million civil penalty (a decrease of $5 million from the original amount) and Tsingas will pay a $1.42 million civil penalty (an increase of $420 thousand from the original amount). Although the disgorgement amount remains the same ($1.3 million), Tsingas, and not City Power, will pay the disgorgement amount. Furthermore, whereas the Order Assessing Civil Penalties imposed joint and several liability for City Power’s civil penalty, the Stipulation and Consent Agreement provides:
Solely for the purpose of resolving this matter through settlement, the Commission agrees that it (or any entity assigned to collect) will not now nor in the future assert that Tsingas is personally liable for the penalty against City Power under this Agreement, whether under a theory of joint and several liability or otherwise.13
City Power’s civil penalty payment is due within 30 days. Tsingas agreed to a ten-year payment plan pursuant to which he will make an initial payment of $825 thousand within 60 days, annual payments of $50 thousand for the first three years thereafter, annual payments of $175 thousand for the next three years, and annual payments of $305 thousand for the remaining four years. All of Tsingas’ payments will be directed to PJM (which is to receive the disgorgement amount for the benefit of PJM ratepayers) until the disgorgement amount has been satisfied, and will thereafter be made to the United States Treasury as a civil penalty.
Tsingas also agreed to a three-year trading ban for himself, or anyone acting on his behalf, from any transaction within FERC’s jurisdiction. The ban, however, does not extend to any business in which Tsingas has an ownership interest as long as he “does not personally engage or participate in, directly or indirectly, or otherwise operate or consult about, any trading transaction within the Commission’s jurisdiction. . . .”14