This week’s enforcement update covers the following:
- FERC Staff issues notice of alleged violations against GDF SUEZ;
- FERC files motion to affirm civil penalties against ETRACOM; and
- FERC files brief in TOTAL appeal proceeding in Fifth Circuit.
The bench trial in the CFTC’s case against DRW is underway. On November 28, Judge Richard Sullivan denied the motions to strike testimony filed by the CFTC in its market manipulation case against defendants DRW Investments, LLC and Donald R. Wilson pending in the U.S. District Court for the Southern District of New York. In denying the motion, Judge Sullivan noted that the CFTC failed to submit its motion by the November 4 deadline to file motions in limine and failed to request leave to file this motion at the pretrial conference. In addition, on November 29, the CFTC filed its response to the defendants’ motion to exclude portions of a CFTC expert declaration, which Judge Sullivan granted in part. The trial in this proceeding began on December 1. The parties gave opening statements, and the court heard testimony from a number of DRW traders, including Wilson.
On November 22, PJM’s Independent Market Monitor (IMM) filed a complaint regarding a rule change to PJM’s capacity market approved by the PJM Markets and Reliability Committee (MRC). At the November 17 MRC meeting, the MRC approved—over objections from the IMM—changes to PJM’s Manual 18 to delete language that imposed conditions on early replacement transactions. In response, the IMM filed a complaint at FERC arguing that the modified rules are unjust and unreasonable, inconsistent with competitive markets, and allow behavior that defeats a well-functioning market. The IMM argues that the modified rules “provide incentives to offer paper capacity in the PJM capacity market and to suppress market prices for actual physical capacity in the PJM market.” According to the IMM, “The modified rules allow behavior that would otherwise be considered prohibited market manipulation because behavior permitted under the modified rules defeats PJM’s well functioning market for physical capacity.”
Also on November 22, PJM’s IMM filed a complaint requesting a market participant, American Electric Power Service Corp. (AEP), to provide the IMM with certain information that AEP allegedly refused to provide in response to information requests. According to the complaint, the IMM requested that AEP provide the data from which AEP calculates the variable operations and maintenance expense component of its cost-based offers, which was requested in order to determine whether the level of AEP’s cost inputs for cost-based offers raise market power concerns. The IMM claims that it is unable to obtain such information from an alternative source, so the IMM requests that FERC require AEP to provide the requested information within two weeks.
On November 21, FERC approved CAISO’s proposal to keep in place a number of tariff revisions related to the limited operability of the Aliso Canyon natural gas storage facility. The filing makes permanent three CAISO tariff provisions that would otherwise have expired on November 30: (1) allowing scheduling coordinators to rebid commitment costs in CAISO’s real-time market if they were not committed in the day-ahead market or residual unit commitment process; (2) ensuring that CAISO’s short-term unit commitment process does not commit resources that did not submit bids into the real-time market unless they were scheduled or committed in the day-ahead market or had a real-time must-offer obligation; and (3) allowing scheduling coordinators to seek after-the-fact recovery of unrecovered commitment costs that exceed the commitment cost bid cap as a result of actual marginal fuel procurement costs, pursuant to a FPA section 205 filing at FERC. FERC found that CAISO’s proposed revisions are just and reasonable because they constitute appropriate improvements upon CAISO’s current tariff provisions that should result in a more efficient unit commitment process and enhance cost recovery.
Trader pleads guilty to spoofing and wire fraud, and settles manipulation and spoofing case with CFTC. On November 9, Navinder Singh Sarao pled guilty in the U.S. District Court for the Northern District of Illinois to one count of spoofing and one count of wire fraud related to the “flash crash” in 2010. On the same day, the CFTC announced that it submitted a proposed Consent Order that would resolve its civil enforcement action in the U.S. District Court for the Northern District of Illinois against Sarao. The CFTC’s complaint charged Sarao, along with his company Nav Sarao Futures Limited PLC, with unlawfully manipulating and spoofing with regard to the E-mini S&P 500 near month futures contract (E-mini S&P). In the proposed Consent Order, Sarao admits to the allegations in the CFTC complaint that Sarao: (a) successfully manipulated the E-mini S&P on at least 12 days between April 27, 2010 and March 10, 2014 (including the May 6, 2010 “flash crash” day); (b) attempted to manipulate the E-mini S&P tens of thousands of times between April 2010 and April 17, 2015; (c) placed tens of thousands of bids and offers that he intended to cancel before execution (i.e., spoof orders) between July 16, 2011 and April 17, 2015; and (d) employed or attempted to employ a manipulative device, scheme, or artifice to defraud in connection with his spoof orders between August 15, 2011 and April 17, 2015. On November 17, Judge Andrea R. Wood approved the Consent Order against Sarao, which requires him to pay a $25,743.174.52 civil monetary penalty and $12,871,587.26 in disgorgement. The Court’s order also imposes permanent trading and registration bans against Sarao.
On November 17, FERC’s Office of Enforcement released its 2016 Report on Enforcement. The Report shows continued focus on fraud and market manipulation, serious violations of mandatory Reliability Standards, anticompetitive conduct and conduct that threatens the transparency of regulated markets.
On October 24, FERC and ETRACOM filed a joint status report in the U.S. District Court for the Eastern District of California. FERC argues that the court need not address discovery at this time because the proper and best mechanism for resolving this case is a motion to affirm designed to allow the court to review the administrative record supporting the FERC’s Order Assessing Penalties. According to FERC, this approach is similar to the procedures adopted by Judge Nunley in the Barclays case before the same court. On the other hand, ETRACOM argues that the “de novo” review proceeding is governed by the Federal Rules of Civil Procedure, so it is entitled to discovery and a trial as judges have ruled in FERC’s enforcement cases against Maxim Power and City Power. ETRACOM attached as an exhibit its first request to FERC for production of documents, which it served to FERC on October 7.
On October 25, the DC Circuit ruled that it lacked jurisdiction to take up a lawsuit brought against FERC for inaction on ISO-NE’s controversial capacity auction conducted in 2014. Public Citizen and Connecticut sued FERC after FERC deadlocked 2-2 on a vote over whether it should block or investigate the results of the ISO-NE annual forward capacity auction (FCA 8). The tie vote at FERC, with one Commissioner vacancy at the time, allowed the auction results to stand. In reviewing FERC’s inaction, the DC Circuit held, “In sum, we hold FERC’s deadlock does not constitute agency action, and the Notices describing the effects of the deadlock are not reviewable orders under the FPA.” The DC Circuit’s opinion suggests that the challengers should take their complaints to Congress: “Any unfairness associated with this outcome inheres in the very text of the FPA. Accordingly, it lies with Congress, not this Court, to provide the remedy.”
On October 25, TOTAL filed its opening brief in the Fifth Circuit in its declaratory judgment action against FERC. As it argued before the district court, TOTAL argues that FERC must go to federal court to prove its allegations of market manipulation under the Natural Gas Act (NGA). TOTAL claims that FERC cannot force respondents in such cases to defend themselves in an in-house agency proceeding before a FERC administrative law judge, subject only to deferential review in a federal appellate court. According to TOTAL, Section 24 of the NGA declares that federal district courts have “exclusive jurisdiction of violations” of the NGA and of “all” suits and actions to “enforce any liability or duty created by” the NGA.