FERC Issues Order Assessing Civil Penalties Against ETRACOM
On Friday, June 17, 2016, the Federal Energy Regulatory Commission (the “Commission”) issued an Order Assessing Civil Penalties against ETRACOM LLC (“ETRACOM”) and ETRACOM’s founding member and majority owner, Michael Rosenberg (together, “Respondents”).1 The Commission held that the Respondents violated section 222 of the Federal Power Act and section 1c.2 of the Commission’s regulations (the “Anti-Manipulation Rule”). Specifically, the Commission found that between May 14, 2011 and May 31, 2011 (the “Manipulation Period”), ETRACOM and Rosenberg engaged in a “cross-commodity” scheme in which they submitted virtual supply offers at the New Melones intertie at the border of the California Independent System Operator (“CAISO”) wholesale electric market with the intent to lower power prices artificially at New Melones in order to increase the value of ETRACOM’s Congestion Revenue Rights (“CRRs”) positions that settled based upon power prices at that location. Respondents offered two primary defenses to Staff’s allegations, each of which the Commission rejected: (1) that CAISO was not a well-functioning market and (2) that ETRACOM based its trading activity on market fundamentals.
Consistent with Staff’s recommendation, the Commission assessed $2.4 million in civil penalties against ETRACOM and $100,000 in penalties against Rosenberg. Additionally, the Commission ordered ETRACOM to disgorge $315,072 in unjust profits.
The Products at Issue and the Commission’s Allegations
Read full article at The National Law Review
The alleged scheme in the ETRACOM Assessment Order involved CRRs and virtual transactions. CRRs are “financial instruments that settle at an amount equal to the difference in day-ahead congestion costs between two locations,” a source and a sink.2 The CRR holder receives a payment if the congestion in a given hour is in the same direction as the CRR position, and the holder incurs a charge if congestion occurs in the opposite direction. CRR values fluctuate based upon changes in locational marginal prices (“LMP”) at their source and sink. Virtual transactions can take the form of supply offers and demand bids. Either trade can alter the value of a CRR position because, although they settle financially, virtual supply and demand transactions are evaluated in CAISO’s day-ahead market process along with physical power supply and demand transactions. Virtual transactions can therefore affect day-ahead LMPs and, consequently, CRRs with a source or sink that has the same LMP. Such was the case, the Commission concluded, with ETRACOM’s trading.
The Commission observed a significant change in ETRACOM’s trading of virtual transactions and CRRs at the New Melones intertie in early May 2011. In April 2011, ETRACOM’s CRRs at New Melones profited from import congestion into CAISO.3 These positions netted ETRACOM approximately $195,000 in profits.4 During this same period, ETRACOM engaged in virtual transactions at 22 locations, but not at New Melones. ETRACOM acquired larger CRR positions that profited from import congestion into CAISO at New Melones beginning in early May.5 But then the economics of that position changed significantly. Although ETRACOM profited on its New Melones intertie CRR position from import congestion for the first week of May, the second week brought unexpected export congestion in most off-peak hours.6 The reverse in congestion resulted in a $23,624 loss for ETRACOM on its CRR position.
According to the Commission, Rosenberg then devised a manipulative scheme for ETRACOM to enter into uneconomic virtual trades to restore the profitability of the New Melones CRR positions by sending false supply signals into the market and driving down power prices in the day-ahead market at New Melones. The false supply signals were intended to restore the import congestion from which ETRACOM’s CRR positions would profit.