FERC Proposes $30 Million In Penalties Against Power Traders For Alleged Manipulation

FERC issued an order to show cause to Powhatan Energy Fund and related parties directing parties to show cause that they have not engaged in what FERC alleges are fraudulent Up To Congestion (UTC) transactions in PJM, and why they should not be subject to $30 million in penalties, plus disgorgement.

The show cause order was specifically issued to Houlian "Alan" Chen; HEEP Fund, Inc.; CU Fund, Inc.; and Powhatan Energy Fund, LLC.

FERC is seeking penalties as follows:

• Powhatan Energy Fund: $16,800,000

• CU Fund: $10,080,000

• HEEP Fund: $1,920,000

• Chen: $1,000,000

FERC Enforcement Staff alleged that, "Chen devised and implemented a manipulative scheme to inflate trade volumes of UTCs – through a series of offsetting wash-like trades designed to wrongfully collect large amounts of market credits known as Marginal Loss Surplus Allocations (MLSA)."

Enforcement Staff alleges that, "with Powhatan's knowledge and encouragement, Chen placed UTC trades in opposite directions on the same paths, in the same volumes, during the same hours for the purpose of creating the illusion of bona fide UTC trading and thereby to capture large amounts of MLSA that PJM distributed at that time to UTC transactions with paid transmission."

Staff alleged that, "Their round trip UTC trades created the false appearance of arbitraging price differentials in order to deceptively collect MLSA. The evidence shows that Chen, acting on his own behalf and on behalf of (and with the knowledge and agreement of) Powhatan, arranged these trades with the intention and purpose of washing out the spread component of the UTC transaction and profiting instead on MLSA. It is fair to infer from the factual record that Respondents knew that this round trip UTC trading strategy was antithetical to legitimate price arbitrage that promotes price convergence; they knew that the Commission and PJM would have considered the strategy inappropriate or manipulative; and that they intentionally executed their scheme despite knowing that their round trip UTC trades had no legitimate purpose and could impair, obstruct, or defeat a well-functioning market."

"There is no question that the sham UTC trades were uneconomic on their own merits, because the essence of the UTC trade – the spread component – was washed out. UTC trade pairs flowing A-to-B and B-to-A in the same hours and volumes will never yield a profit on the congestion spread and will always incur transaction costs. So the only way the trades could generate a profit was by collecting more in MLSA than they would have to pay in transaction costs," Staff alleged

Powhatan Energy Fund previously established a website to rebut FERC's claims (click here)

Link to FERC Staff Report

Docket No. IN15-3