FERC Issues $1.5 Million Fine Against Trading Company, $1 Million Fine Against Individual Trader

October 28, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The Federal Energy Regulatory Commission (FERC) issued an order finding that, "Vitol Inc. (Vitol) and Federico Corteggiano (Corteggiano) (collectively, Respondents) violated section 222(a) of the Federal Power Act (FPA) and section 1c.2(a) of the Commission’s regulations, which prohibit energy market manipulation, through a scheme to sell physical power at a loss in the California Independent System Operator Corporation’s (CAISO) wholesale electric market in order to eliminate congestion that they expected to cause losses on Vitol’s congestion revenue rights (CRRs)."

In its order, FERC stated, "In light of the seriousness of these violations and the lack of effort by Respondents to remedy their violations, we find that it is appropriate to assess civil penalties pursuant to section 316A of the FPA in the following amounts: $1,515,738 against Vitol and $1,000,000 against Corteggiano. The Commission further directs Vitol to disgorge unjust profits, plus applicable interest, pursuant to section 309 of the FPA, in the following amount: $1,227,143."

Under FERC's notice of show cause process, the Respondents previously elected for a de novo review of any FERC penalty by a federal district court. As such, the Respondents noted that, "any adjudication in this matter will occur in federal court rather than in an administrative proceeding."

In its order, FERC stated, "[B]ased on the totality of the evidence in the record, we find that Respondents’ imports in the CAISO day-ahead market from October 28 through November 1, 2013 at the Cascade intertie constituted a fraudulent device, scheme, or artifice to defraud the CAISO market and market participants. The preponderance of the evidence demonstrates that Respondents submitted physical import bids at the Cascade intertie with the intent to eliminate congestion, thereby lowering the Cragview LMP, to economically benefit Respondents’ CRR position, and we find those actions constitute fraud. In addition, we have considered Respondents’ arguments and defenses and find them unpersuasive."

In its order, FERC stated, "The Commission has consistently found that “cross-market” schemes in which market participants trade in one market with the intent to move prices in a particular direction to benefit positions in a related market are manipulative. In so finding, the Commission has relied on a number of indicia of fraud, such as: a consistent pattern of trading in a direction that would tend to move the price to the benefit of a related financial position; changes in trading behavior during periods when manipulation is alleged as compared to trading during other time periods when manipulation is not alleged; trading that is uneconomic in nature; communications among traders substantiating the scheme; and the failure of a company to adequately explain the relevant positions and trading behavior. We find that these indicia are present here and that they demonstrate that Respondents engaged in a fraudulent scheme."

In its order, FERC stated, "During the period of October 28 through November 1, 2013, Respondents devised a scheme to submit physical import transactions at the Cragview Pnode to eliminate congestion on the Cascade intertie, thereby lowering the LMP at Cragview, to benefit their CRR position ... [A]mong the evidence we have considered in reaching this conclusion is: (i) the timing and pattern of Respondents’ physical import transactions at Cragview from October 28-November 1, 2013, which varied significantly from Respondents’ normal trading strategy and which correlated with the exact dates Respondents’ CRRs would be affected; (ii) the fact that Respondents were indifferent to the profitability of their physical imports at Cragview; (iii) Respondents’ communications, testimony, and evidence substantiating the existence of a scheme to defraud; and (iv) Respondents’ failure to offer credible and relevant explanations for their imports at Cragview from October 28-November 1, 2013."

In its order, FERC stated, "Based on the totality of the evidence in the record, the Commission finds that Respondents acted with fraudulent intent by engaging in physical transactions to prevent losses on their CRR position, not to profit based on supply and demand fundamentals,272 and that, by trading for this purpose, Respondents injected false and deceptive information into the marketplace."

In its order, FERC stated, "We find that Respondents were indifferent to the profitability of their day-ahead offers at Cragview from October 28-November 1, 2013. Specifically, we find that this indifference to profitability, as evidenced by Respondents’ day-after-day unprofitable price-taker offers, is evidence of their fraudulent scheme to eliminate congestion at the Cascade intertie, thereby lowering the Cragview LMPs during the Cascade intertie derate and benefitting their exposed CRR position."

In its order, FERC stated, "It is an indicium of Respondents’ fraudulent purpose that, while they assert that the purpose of the physical import transactions was to respond to and profit from the 'high price signal' at Cragview, the reality is that Respondents on net lost money on every day they transacted the physical imports. Still, despite the lack of financial return, Respondents continued to place the same money-losing trades. After the first day of trading, Vitol saw that its import of power at the Cascade intertie eliminated the $388.11 price and that the net flow on the Cascade intertie for every hour was exactly the amount of Vitol’s imports (5 MW), indicating that its import set the price. Yet, Vitol continued to bid for the rest of the week and take losses on the physical trades, even though it had the option to change its bids for later in the week. Further, Vitol submitted the bids as $1 price-taker bids, which did not guarantee that Vitol would cover its transmission and scheduling fees, as Corteggiano originally proposed."

In its order, FERC stated, "Further evidence that Vitol and Corteggiano’s intent was not to profit from a physical sale, but rather to manipulate the price and protect Vitol’s CRR position, is found in the period preceding the October trades at issue. The high price at Cragview had appeared in July 2013, but Vitol undertook no purchases or sales of physical energy at that time. Yet when faced with the prospect of substantial losses to the CRRs, Vitol moved with alacrity – by flattening its positions post-November 1 and looking for power to buy for the days prior thereto on which it held CRR positions that were at risk by virtue of the derate. When the potential consequences of the Cascade derate emerged in October 2013, moreover, Corteggiano kept his fellow financial trader, Brignone, informed of the emerging plans for addressing potential losses. But Brignone was not a trader in physical products; the most logical explanation for why Corteggiano kept him informed is the common interest the two shared in the company’s positions in financial products, including their CRR positions, which stood to lose substantial sums as a result of the derate. As we explained in ETRACOM and reinforce here, significant deviations from typical trading behavior are relevant indicia of manipulative intent."

In its order, FERC stated that the $1.5 million fine for Vitol is a departure from its guidelines which would have resulted in a range of $.5 million to $5 million.

In its order, FERC stated, "A strict application of the Penalty Guidelines to Vitol’s conduct would, considering all of the facts and circumstances in this matter, be unfair and unreasonable and apportion too large a penalty to Vitol because it would not adequately account for conduct that was conceived of and primarily carried out by an individual trader. As discussed above, we find that Vitol bears substantial responsibility for the manipulative conduct addressed in this order and will assess a civil penalty against Vitol that appropriately accounts for this responsibility. The scheme was conceived of and executed by Vitol employees, using Vitol resources, to benefit Vitol’s CRR position. Nevertheless, we conclude that Corteggiano was the primary actor responsible for the market manipulation addressed in this order. He devised the scheme, proposed it to others, worked to facilitate its approval, and intended to, and did, benefit a CRR position that was booked to his account. Moreover, he had previously engaged in similar behavior that was investigated by OE Staff. In addition, the record in this proceeding suggests that Corteggiano deliberately withheld material information about the manipulative scheme from Vitol’s compliance officers when discussing the relevant actions. Under those circumstances, a strict application of the Penalty Guidelines to Vitol’s conduct would not adequately account for Corteggiano’s role in this matter, and thus we find that it is appropriate to depart from the Penalty Guidelines in this case."

Docket No. IN14-4

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