Constellation to Pay $135 Million, Disgorge $110 Million Under Settlement Related to FERC Market Manipulation Investigation

FERC has approved a settlement between its Office of Enforcement and Constellation Energy Commodities Group (CCG) to resolve an investigation into whether Constellation violated the Commission's Anti-Manipulation Rule, under which Constellation has agreed to pay a civil penalty of $135 million and will disgorge unjust profits of $110 million, including interest.

FERC said that, "Enforcement determined that CCG intended to and did manipulate the NYISO and ISO-NE DA [day ahead] markets for the benefit of its CFDs [contracts for differences] during the Months of Interest [September 2007 through December 2008]."

"Enforcement determined that this manipulation of the physical and virtual markets and the respective DA prices resulted in widespread economic losses to market participants who bought and sold energy in the DA markets of ISO-NE and the NYISO. In addition, this manipulation distorted price discovery for all market participants, which contributes not only to trading decisions, but to a variety of industry-wide determinations," FERC said.

CCG neither admits nor denies that the trading behaviors examined by Enforcement violated the Commission's rules, regulations, or policies.

In January 2008, Enforcement opened a preliminary, non-public investigation pursuant to Part 1b of the Commission's regulations of CCG's physical power trading in and around the NYISO control area after receiving two anonymous hotline calls related to that trading. After commencing that investigation, Enforcement observed through its own surveillance activities that CCG was engaging in virtual trading in the NYISO that was unprofitable, FERC said.

In addition, FERC said that on February 19, 2009, the NYISO Department of Market Monitoring and Performance (MMP) informed Enforcement that it had decided to apply mitigation measures against CCG related to its virtual bidding behavior in the NYISO, because its virtual load trading in NYISO Zone A had contributed to an unwarranted divergence of locational based marginal prices between the day-ahead (DA) and real-time (RT) markets.

"When the NYISO investigated CCG's virtual trading activity in its markets for purposes of examining unwarranted divergence, CCG stated in its communications with the NYISO, that its decisions to participate in the NYISO virtual market were based on market fundamentals and omitted the fact that the virtual trading was directly related to its CFDs," FERC said.

However, FERC said that, "Enforcement determined that during the Months of Interest, CCG violated the Anti-Manipulation Rule by entering into virtual transactions and DA physical schedules without regard for their profitability, but with the intent of impacting DA prices in the NYISO and ISO-NE to the benefit of certain significant CFD positions held by CCG."

"Enforcement also determined that as part of this scheme, CCG combined the use of virtual transactions with DA physical schedules to impact DA prices in NYISO and ISO-NE to benefit the CFD positions that priced off a component of those impacted DA prices," FERC said.

"Based on these findings, Enforcement determined that: (1) CCG's virtual and physical trading activities during the Months of Interest constituted a fraudulent device, scheme or artifice and that CCG engaged in a course of business that operated as a fraud upon the NYISO and ISO-NE markets; (2) CCG intended to manipulate the NYISO and ISO-NE DA markets for the benefit of its CFD positions during the Months of Interest; and (3) CCG's manipulative scheme was in connection with transactions subject to the jurisdiction of the Commission all in violation of 18 C.F.R. § 1c," FERC said.

"Enforcement determined that CCG violated 18 C.F.R. § 35.41(b) by providing inaccurate and misleading information to the NYISO. Specifically, Enforcement determined that CCG denied that its virtual transactions were related to its CFD positions and instead told the NYISO that the transactions were independent of the CFD positions and were entered into based on market fundamentals," FERC said.

The disgorgement of $110 million shall be paid as follows: (i) $6 million to be divided equally among and paid directly to the NYISO, ISO-NE, PJM, the Midwest ISO, Southwest Power Pool, and the California ISO for use in the enhancement of their surveillance capabilities; and (ii) to a fund set up for the benefit of electric energy consumers in the affected states and from which state agencies in those affected states may make requests for apportionment by a Commission Administrative Law Judge. That fund will be divided among the affected states in the ISOs as follows: NYISO ($78 million); ISO-NE ($20 million); and PJM ($6 million).

FERC said that in establishing the amount under settlement, "Enforcement considered that: CCG's conduct was serious and was committed willfully and intentionally; CCG's conduct was committed through the participation or oversight of CCG's Managing Director of Portfolio Management and Trading and therefore involved upper management; the conduct involved more than 100,000 MWh of electricity and continued for more than 250 days; CCG's compliance program was not effective at the time; and CCG's actions caused harm and impacted the DA price in the Commission's jurisdictional markets."

As part of the settlement, CCG is required to monitor and preserve for no less than five years trader communications, including but not limited to Instant Messages (IMs), emails, and telephone calls