21 March 2016

Energy Enforcement Update

This week’s enforcement update covers ETRACOM’s answer to FERC’s Order to Show Cause, FERC Enforcement’s reply to Coaltrain’s de novo review election, and items from FERC’s monthly open meeting.

ETRACOM files answer to FERC Order to Show Cause.  On February 16, ETRACOM LLC (ETRACOM) and its principal member and primary trader Michael Rosenberg filed an answer to FERC’s Order to Show Cause.  ETRACOM’s answer denies the FERC Enforcement’s allegations and urges the Commission to terminate the proceeding.  According to the answer, ETRACOM and Michael Rosenberg did not engage in market manipulation at New Melones in connection with its virtual supply transactions and Congestion Revenue Rights (CRRs).  The answer includes accompanying affidavits from Dr. Shaun D. Ledgerwood, Dr. William W. Hogan, and Arie Kapulkin, as well as a declaration from Rosenberg.

The answer and supporting materials argue that: (1) Staff has not found a single contemporaneous document or any evidence showing that ETRACOM intended to set the price with its low virtual offers, singularly cause congestion, or impact its CRR positions; (2) the outcomes occurred entirely due to significant, undisclosed, and unknowable market design flaws and software pricing/modeling errors, which impermissibly altered price formation in violation of the CAISO tariff and caused the alleged harm; and (3) 2011 was a high hydro season, and fundamental and technical indicators supported ETRACOM’s expectation of low hour-ahead prices at New Melones (even if they did not occur).

As we previously reported, FERC ordered ETRACOM and Rosenberg to show cause why they should not be found to have violated FERC’s anti-manipulation rule by submitting virtual supply transactions at the New Melones intertie at the border of the CAISO market in order to affect power prices and economically benefit ETRACOM’s CRRs sourced at that location.  The Enforcement Staff Report alleges that in May 2011, ETRACOM submitted and cleared uneconomic virtual supply transactions intended to artificially lower the day-ahead LMP and create import congestion at New Melones, which greatly benefited ETRACOM’s CRR positions sourced at New Melones.  The order proposes the following penalties: (i) a civil penalty of $2,400,000 against ETRACOM; (ii) a civil penalty of $100,000 against Rosenberg and (iii) disgorgement of $315,072 plus interest in unjust profits.

Staff now has 30 days to file a reply.  ETRACOM and Rosenberg previously elected de novo review of the law and facts in federal district court, if the Commission decides to proceed.

FERC Enforcement files reply to Coaltrain notice of election in Docket No. IN16-4.  On February 17, FERC Enforcement Staff filed a reply to Coaltrain and the six individual respondents’ election of de novo review under section 31(d)(3) of the Federal Power Act.  The reply states that neither the Constitution nor Congress require district courts to preside over full trials when conducting a de novo review of the Commission’s penalty orders.  According to Staff, the de novo review provision of section 31(d)(3) simply means that the district court has the discretion to take a “fresh” look when deciding whether to affirm penalty orders, and will decide for itself whether additional discovery or live testimony is necessary and appropriate.  Staff claims that the FPA does have an avenue—and only one avenue—that guarantees an opportunity for a trial, which is the FERC administrative hearing option under section 31(d)(2).  Thus, Enforcement Staff would not oppose if the respondents requested to revoke their election if made before the Commission issues an order addressing the Order to Show Cause.

FERC denies GenOn request for clarification on Enforcement referral.  On February 18, FERC denied rehearing of its October 30, 2015 order suspending GenOn Energy Management, LLC’s (GenOn) proposed Reactive Power Tariff for five months.  FERC’s October order also referred GenOn’s filing to the Office of Enforcement for further examination.  On rehearing, GenOn requested that the Commission clarify the basis for, and evidence supporting, the five-month suspension and why GenOn was referred to the Office of Enforcement.  FERC’s rehearing order rejected GenOn’s contention that the Commission must identify an associated violation of law when it refers a matter to the Office of Enforcement.  According to FERC, the decision to commence an enforcement action is committed to the Commission’s broad discretion to initiate enforcement matters.  Moreover, the Commission says that it did identify the issue to be examined by the Office of Enforcement: “GenOn may have continued to receive payments for Reactive Service for units that were no longer capable of providing that service.”

FERC announces new rehearing team.  At its open meeting on February 18, FERC announced that it has deployed a new team of lawyers within its Office of General Counsel to streamline its appeals process.  This new “rehearing group” will focus on rehearing requests.  Robert Kennedy (formerly of Chairman Norman Bay’s office) will lead the group, which he said aims to streamline FERC decisions and make their legal arguments more consistent in case of challenge in federal court.

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