FERC Formally Alleges Manipulation of Up-To Congestion Transactions by Traders

FERC yesterday issued a formal Staff notice of alleged violations, "that in a nonpublic investigation pursuant to 18 C.F.R. Part 1b, the staff of the Office of Enforcement of the Federal Energy Regulatory Commission has preliminarily determined that Houlian (Alan) Chen, HEEP Fund Inc., and CU Fund Inc., and Powhatan Energy Fund, LLC, violated the Commission’s Anti-Manipulation Rule, 18 C.F.R. § 1c.2 (2014) by engaging in manipulative Up To Congestion trading in the PJM Regional Transmission Organization between June and August 2010."

Powhatan Energy had already disclosed the presence of a FERC investigation in an aggressive public pushback (click here for website) against allegations it has called fatally flawed and "nonsense."

In the notice, FERC states, "Staff alleges that between June 1, 2010 and August 3, 2010, Chen (on behalf of Powhatan, HEEP Fund, or CU Fund) engaged in Up To Congestion transactions in PJM designed to falsely appear to be spread trades, as a vehicle for collecting certain payments (called 'Marginal Loss Surplus Allocation,' or MLSA) from PJM. Staff alleges that Chen’s 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—an intentional effort to cancel out the financial consequences from any spread between the two trading points while capturing large amounts of MLSA payments. Staff alleges this strategy amounted to wash trading, which has long been prohibited by the Commission."

In various previous responses to FERC Staff made public by Powhatan Energy, the company has said that, "each of the Up-to Congestion Transactions had a legitimate economic purpose," which, "preclude[s] an inference of scienter, which is fatal to any claim of market manipulation, [and also] belies any suggestion that the Trades at issue were 'wash trades.'"

The HEEP Fund has also said that, "The trading activity at issue was consistent with price signals approved by the Commission, added value to the PJM markets and assumed market risks, and contained absolutely no deceptive or fraudulent element."

Link: FERC Notice