On August 5, 2014, the Federal Energy Regulatory Commission’s (FERC) Office of Enforcement issued a notice of alleged violation (NAV) in the Powhatan Energy Fund case. FERC alleges that Powhatan trader Alan Chen manipulated the PJM power market with uneconomic trading activity designed solely to collect payments for surplus losses in violation of FERC Rule 1c.2.
Specifically, FERC enforcement staff alleges that for a two-month period in 2010, Chen engaged in up-to-congestion transactions in PJM designed to falsely appear as spread trades, on behalf of Powhatan and on his own account through two other funds Chen owned and controlled. Up-to-congestion transactions are virtual products that let traders say how much in congestion charges they will pay to move power between two nodes. Chen’s allegedly manipulative trading strategy involved placing millions of megawatt hours, of offsetting trades between the same two trading points, in the same volumes and the same hours to offset the financial consequences from a spread between the two trading points. FERC has made numerous changes to the PJM up-to-congestion tariff rules, and during this period in 2010, up-to-congestion traders were allocated payments for surplus transmission losses associated with associated transmission reservations (even when there was no charge for the transmission reservations). FERC alleges that Chen entered into these up-to-congestion trades with no intention other than to collect surplus loss payments and that this constituted market manipulation.
The NAV comes after a months-long publicity campaign by Powhatan against FERC during the FERC preliminary investigation. Powhatan set up a website and used social media platforms to make public and criticize FERC’s investigative process and interpretation of its anti-market manipulation authority. Powhatan succeeded in bringing the case to national attention when it became a key issue during Norman Bay’s confirmation process to the FERC chair position. As director of FERC’s Office of Enforcement during the Powhatan investigation, Bay was a key target for Powhatan’s publicity campaign. FERC issued the NAV a day after Bay was sworn in as FERC commissioner – a move described by RTO Insider as Bay’s “last act as Enforcement Chief.”
The Powhatan case is one of several currently in process where market participants are pushing back against FERC market manipulation enforcement authority. As with the Barclays case in U.S. District Court in the Eastern District of California and the Lincoln Paper case in the U.S. District Court in Massachusetts, the resolution of the Powhatan case has significant implications for the future of FERC oversight of energy markets.