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FERC Imposes $15 Million Penalty On Power Marketer, Trader

July 6, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

FERC issued civil penalties totaling $15 million to City Power Marketing, LLC and an individual trader finding that their behavior concerning Up-To Congestion transactions amount to market manipulation

"We find that City Power Marketing, LLC (City Power) and K. Stephen Tsingas (Mr. Tsingas) (collectively, Respondents) violated section 222 of the Federal Power Act (FPA) and section 1c.2 of the Commission's regulations, which prohibit energy market manipulation, through a scheme to engage in fraudulent Up-To Congestion (UTC) transactions in PJM Interconnection, L.L.C.'s (PJM) energy markets to garner excessive amounts of certain credit payments to transmission customers," FERC said

"We also find that in the course of responding to the Commission's Office of Enforcement Staff's (OE Staff) investigation into its UTC trading conduct, City Power violated section 35.41(b) of the Commission's regulations, which, in relevant part, prohibits a seller, such as City Power, from submitting false or misleading information or omitting material information to Commission staff, by making false and misleading statements and material omissions related to instant message (IM) communications discussing Respondents' UTC trading scheme," FERC said

FERC assessed civil penalties in the following amounts: $14,000,000 against City Power and $1,000,000 against Mr. Tsingas. The Commission further directed City Power and Mr. Tsingas to disgorge unjust profits, plus applicable interest, in the amount of $1,278,358.

"From July 4 to July 30, 2010 (Manipulation Period), Respondents designed and implemented a fraudulent UTC trading scheme to receive excessive amounts of MLSA [Marginal Loss Surplus Allocation] payments. To do this, Respondents intentionally placed high volumes of three categories of UTC trades: (1) 'round-trip' trades that canceled each other out by placing the first leg of the trade from locations A to B, and simultaneously placing a second leg of equal volume from locations B to A; (2) trades between two PJM nodes (SOUTHIMP-SOUTHEXP) that are import and export pricing points of the same PJM interface designed to have equivalent prices; and (3) trades between two PJM nodes (NCMPAIMP-NCMPAEXP) that historically had a very small price spread and in most hours failed to generate spreads greater than the transaction costs associated with the trades. We will refer to these three categories of trades (round-trip, SOUTHIMP-SOUTHEXP, and NCMPAIMP-NCMPAEXP trades) collectively as 'Loss Trades,' which is how Respondents referred to them. The contemporaneous evidence shows that Respondents artificially created these Loss Trades solely to reserve transmission service to enable them to collect excessive MLSA payments during the Manipulation Period," FERC said.

"Respondents knew that most of their Loss Trades would net no or a very minimal profit based on price spreads alone and that all of their Loss Trades would result in a loss after considering transaction costs. By making these trades, Respondents collected MLSA payments exceeding the transaction costs they incurred for the trades, and yielded a significant profit, as they expected," FERC said.

"We disagree with Respondents' argument that their Loss Trades did not constitute fraud because, they allege, the trades did not inject false information or give a false impression to other market participants or the market in general. Respondents' Loss Trades were manipulative. With respect to Respondents' round-trip trades, Respondents placed separate bids for each leg of their transaction, just as other market participants would place routine arbitrage-based UTC trades. As a result, the two separate legs of Respondents' offsetting trades were not connected and falsely appeared to PJM as legitimate UTC trades, thus concealing their fraudulent nature and purpose. Similarly, with respect to the SOUTHIMP-SOUTHEXP trades, Respondents placed their trades as if they were routine arbitrage-based UTC trades on nodes that were mathematically equivalent—which resulted in a zero spread, as Respondents intended. And with respect to Respondents' NCMPAIMP-NCMPAEXP trades, Respondents placed their trades as if they were routine arbitrage-based UTC trades between nodes with small price spreads primarily, if not solely, with the intent to garner MLSA payments. For all three of these Loss Trade strategies, Respondents deceived PJM into disbursing MLSA payments by creating the false impression that City Power was trading to arbitrage price differentials when, in fact, it was engaging in trades solely to collect MLSA payments to the detriment of other market participants. Further indication of Respondents' deception is shown by their July 16, 2010 abandonment of their SOUTHIMP-SOUTHEXP trading strategy in favor of beginning to trade NCMPAIMP-NCMPAEXP. Respondents specifically became concerned that their SOUTHIMP-SOUTHEXP transactions would be discovered by PJM or the PJM Independent Market Monitor (IMM) and transitioned to NCMPAIMP-NCMPAEXP because its low price spreads would provide the appearance of legitimate trades, while still providing large quantities of MLSA payments," FERC said

"Moreover, we find that Respondents' round-trip UTC transactions constitute wash trades, and that all market participants had notice that wash trades violate section 222 of the FPA and the Commission's Anti-Manipulation Rule. Respondents' round-trip UTC trades were designed to ensure that both legs of a transaction would cancel each other out, thereby eliminating any associated price spread risk. As we have noted, trades that are pre-arranged to cancel each other out and involve no economic risk are wash trades, which are inherently fraudulent," FERC said

Docket No. IN15-5

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