In what appears to be the most significant enforcement action in its history, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) on Friday, March 9 approved a Stipulation and Consent Agreement with Constellation Energy Commodities Group (“Constellation”) that imposes a record civil penalty of $135 million and requires the disgorgement of $110 million in unjust profits.  The basis for the action against Constellation was an alleged violation of the Commission’s Anti-Manipulation Rule and the Commission’s regulation prohibiting the submission of inaccurate information.  The total remedial sanction of $245 million is by far the largest such action by the Commission since Congress increased its enhanced civil penalty authority in the Energy Policy Act of 2005.  As part of the Stipulation and Consent Agreement, Constellation neither admitted nor denied wrongdoing.

The March 9 order dates back to an investigation into Constellation trading activity that started in 2008.  The primary substantive allegation was that Constellation manipulated the price of physical power through virtual and physically-settled transactions in the New York ISO market (and to a lesser extent the PJM Interconnection and New England ISO) to benefit swap positions that Constellation held.   FERC’s Office of Enforcement alleged that Constellation entered into a pattern of trades in the New York ISO that were knowingly unprofitable in their own right, but were designed to move settlement prices in the ISO markets up or down to benefit a non-ISO swap position.  This pattern of virtual and physical trading activities, concluded the Office of Enforcement, constituted an intentional “fraudulent device, scheme or artifice” in connection with FERC jurisdictional markets and therefore constituted unlawful market manipulation under 18 C.F.R. § 1c.2.

The Office of Enforcement also alleged that Constellation violated the prohibition on submitting false and misleading information, found at 18 C.F.R. § 35.41(b), by repeatedly providing false information to the New York ISO regarding the intent of its virtual and physical trading in the New York ISO markets.

The $110 million disgorgement will mostly be put into a fund for the “benefit of electric energy consumers in the affected states” governed by the New York ISO, the PJM Interconnection and the New England ISO.  A FERC Administrative Law Judge will hear requests for apportionment of those funds among the affected states.   The $135 million civil penalty will be paid to the United States Treasury.  The order also requires significant ongoing compliance actions including record retention, trading documentation, reporting obligations, and a ban on Constellation employing certain implicated traders in the trading of physical and financial energy.

A copy of FERC’s order in the Constellation enforcement action can be found here.

In a separate order, also issued after the close of markets on Friday, March 9, the Commission conditionally approved the proposed merger of Constellation Energy Group, Inc. and Exelon Corporation.