FERC Fines Power Trader $26 Million

FERC issued an order assessing a civil penalty of $26 million on Coaltrain Energy, L.P. for what FERC ruled were violations of FERC's anti-manipulation rules resulting from what FERC called Coaltrain’s "fraudulent Up-To Congestion (UTC) transactions in PJM Interconnection."

"[W]e find that Coaltrain Energy, L.P. (Coaltrain), Coaltrain’s co-owners Peter Jones and Shawn Sheehan, and Coaltrain traders Robert Jones, Jeff Miller, and Jack Wells (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 ruled

"We also find that in the course of responding to the Commission’s Office of Enforcement Staff’s (OE Staff) investigation about its UTC trading conduct, Coaltrain violated section 35.41(b) of the Commission’s regulations, which, in relevant part, prohibits a seller, such as Coaltrain, from submitting false or misleading information to or omitting material information from Commission staff," FERC ruled

"In light of the seriousness of these violations, we find that it is appropriate to assess civil penalties pursuant to section 316A(b) of the FPA in the following amounts: $26,000,000 against Coaltrain (jointly and severally with Messrs. Peter Jones and Sheehan); $5,000,000 against Mr. Peter Jones; $5,000,000 against Mr. Sheehan; $1,000,000 against Mr. Robert Jones; $500,000 against Mr. Miller; and $500,000 against Mr. Wells. The Commission further directs Coaltrain, Mr. Peter Jones, and Mr. Sheehan to disgorge, jointly and severally, unjust profits, plus applicable interest, pursuant to section 309 of the FPA, in the amount of $4,121,894," FERC ruled

FERC said that similar to other recently adjudicated cases, Coaltrain traded UTCs, "not to profit based on price spread arbitrage, as the product was designed, but instead, to profit solely or primarily from a transmission credit that had nothing to do with the underlying product."

"Between June 15 and September 2, 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 knowingly executed high volumes of three categories of UTC trades: (i) trades between two PJM nodes (SouthImp-SouthExp) that are import and export pricing points of the same PJM interface designed to have equivalent prices; (ii) 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; and (iii) trades on 38 other paths between or among PJM nodes that also had small price spreads and in most hours failed to generate spreads greater than the transaction costs," FERC said in its order

"Respondents’ OCL [Over-Collected-Losses] Trades were manipulative because they were executed for the sole or primary purpose of targeting and garnering MLSA payments. Additionally, they were manipulative because they falsely appeared to PJM as being placed for the market design purpose of arbitraging price spreads, thus concealing their fraudulent nature and purpose. Respondents placed these trades as if they were routine arbitrage-based UTC trades on nodes that historically had zero, near-zero, or 'low-risk' price spreads in order to profit solely, or primarily, from MLSA. Thus, Respondents deceived PJM into disbursing MLSA payments by creating the false impression that Coaltrain was trading to arbitrage price differentials when, in fact, it was engaging in trades solely or primarily to collect MLSA payments to the detriment of other market participants," FERC ruled

"When used appropriately, UTC trades in PJM permit financial traders to profit by arbitraging market prices between two locations in the day-ahead and real-time markets. Respondents’ testimony and the contemporaneous evidence makes clear that Respondents understood this market design purpose, yet intentionally placed fraudulent OCL Trades that did not try to arbitrage price differences. Respondents knew that most of their OCL Trades would net no or a minimal profit based on price spreads alone and that their OCL Trades would overwhelmingly result in losses after considering transaction costs. But they placed the trades in large volumes nonetheless because they knew they would capture MLSA payments that would offset and exceed the transaction costs," FERC ruled

Coaltrain had argued that market fundamentals, not MLSA, drove Coaltrain’s OCL Trades and that this, in turn, demonstrated that Coaltrain viewed the trades as possessing risk, and therefore such traders were not manipulative. Coaltrain had argued that it was economically rational to take all costs and credits into account, including MLSA credits, when placing their OCL Trades and that to the extent possible, economically rational traders will incorporate all available information to evaluate the costs, benefits and risks of trades. Coaltrain also argued that when the Commission approved the MLSA allocation methodology proposed by PJM in 2010, the Commission did not state that MLSA could not be considered when entering a UTC trade. Moreover, Coaltrain argued that its OCL strategy was consistent with behavior that the Commission has found acceptable.

Coaltrain alleged that no reasonable person could have predicted that FERC would retroactively outlaw UTC trades associated with MLSA, executed in compliance with a tariff, when the Commission in Black Oak specifically required PJM to revise its tariff to provide MLSA in connection with UTCs associated with paid transmission reservations.

Docket No. IN16-4