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FERC, Powhatan continue debate in Court filings

Arguments grow more refined as case ages

Rockville, MD (November 12, 2015) –FERC and Powhatan Energy Fund continued their legal battle in court with the most recent briefs arguing whether the commission gave the firm proper notice that the up-to congestion trades at issue were manipulative. The court is the US District Court for the Eastern District of Virginia – Richmond Division.

The commission filed a response to Powhatan (UMT, Oct-21) late last month that argued the firm had enough notice with the Anti-Manipulation Rule.

"This case does not involve retroactive application of a new regulation," FERC said. "Perhaps most fundamentally, this is not an instance where the commission has attempted a novel and expansive application of limited authority. The commission's actions are, instead, deeply rooted in its fundamental power to protect the public from fraud and manipulation in the energy markets."

The Anti-Manipulation Rule said "fraud is a very fact-specific violation, the permutations of which are limited only by imagination of the perpetrator." That makes coming up with a list of prohibited activities ahead of time impossible, it added.

General pronouncements about fraud and prohibitions of circular trading carry no weight given FERC's actions in the "Black Oak" proceedings that made the trading strategy possible, Powhatan said.

The trades at issue were up-to congestion (UTC) transactions that Powhatan admitted were paired trades that sent "electricity around in a circle." Such circular trades offset so no money is at risk, but they were profitable because FERC let UTC deals collect marginal loss surplus allocation (MLSA) payments during the summer of 2010 after a complaint filed by financial marketers.

Once Powhatan's and others' trades were discovered, the commission ended MLSA payments to UTC transactions. The firm argued that fact showed the commission never explicitly banned its trades.

"If it had already been 'clear' that the trading was prohibited, there would have been no reason for FERC to change the tariff," the firm said.

Enacting that new tariff while "pretending" that the anti-manipulation rule prohibited the conduct at issue all along is an attempt to apply a new duty on Powhatan and its trader Houlian Chen after-the-fact, it added. That goes against precedent in a case where a defunct airline regulator fined a bank for not holding deposits in a separate account, but the regulations never set up that rule, the firm argued.

FERC's rules at all times made clear that such circular trading was prohibited – the commission specifically did so after an Enron strategy called "Death Star" was discovered in the Western Energy Crisis and that prohibition was included in the Anti-Manipulation Rule, the commission said. That makes this different from the trip deposits case.

The commission's brief also made arguments about the proceedings that led to UTC deals getting MLSA, which Powhatan said is a completely new argument. The brief argued FERC rejected an initial attempt by financial marketers to get MLSA payments for all virtual deals because it felt that would give them too much incentive to simply chase the payments through volume trades.

UTC deals were seen as different because traders actually had to reserve transmission to place them.

"The commission rejected a proposed method of distributing MLSA because it could create incentives to do sham trading to collect the credits, instead accepting a narrower approach," FERC said. "It also repeatedly made clear that the purpose of virtual trading is arbitrage (seeking to profit from changes in price spreads)."

Powhatan argued that such claims went against what FERC had been saying during its five-year probe of it and Chen. The firm quoted the FERC staff report that caused the commission to issue its order to show cause as saying the "concern about volume trading necessarily applies equally to the subset of virtual trades that later become eligible for MLSA, namely UTC trades with paid transmission."

Some of the same lawyers who drafted that report drafted the brief Powhatan was responding to and it shows that orders were far from clear on whether its trades were legal. Given that the orders themselves are unclear, Powhatan argued the court had to dismiss the case.

This story was originally published in Utility Markets Today (http://www.utilitymarketstoday.com/public/FERC-Powhatan-continue-debate-in-Court-filings.cfm?ref=PressRelease) on November 12, 2015, and has been slightly edited for this format. To read more articles like this one, sign up for a Free Trial to Utility Markets Today.

UTILITY MARKETS TODAY is published 245 times per year on business days by Modern Markets Intelligence Inc. UMT's mission is to deliver exclusive news chronicling ongoing efforts to build competitive wholesale and retail energy markets with in-depth analysis on why some fail and others succeed.

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