On May 29, 2015, FERC assessed civil penalties against Powhatan Energy Fund LLC (“Powhatan”), Dr. Houlian Chen, and two funds owned by Dr. Chen, HEEP Fund, LLC (“HEEP”) and CU Fund, Inc. (“CU Fund”) (collectively, “Parties”) for market manipulation in PJM Interconnection L.L.C.’s (“PJM”) energy markets.  In doing so, FERC held that the Parties engaged in fraudulent Up-To Congestion (“UTC”) transactions to garner excessive amounts of transmission credits.  The civil penalties include a $16.8 million penalty against Powhatan, a $10.8 million penalty against CU Fund, a $1.92 million penalty against HEEP, and a $1 million penalty against Dr. Chen.  FERC also ordered disgorgements against Powhatan for $3,465,108, CU Fund for $1,080,576, and HEEP for $173,100.

In August 2010, FERC’s Office of Enforcement (“Enforcement”) initiated an investigation after PJM forwarded a market participant’s referral complaining of unusually high volumes of transmission reservations in PJM.  Additionally, in January 2011, PJM’s Independent Market Monitor submitted a similar referral to Enforcement regarding offsetting UTC trades that were akin to “wash trades,” which are a violation of FERC regulations.  After completing its investigation, Enforcement issued its preliminary findings in August 2013 that the Parties created a scheme to receive excess Marginal Loss Surplus Allocation (“MLSA”) payments from PJM by artificially creating round-trip UTC trades – thereby eliminating any associated price spread risk between two points – solely to reserve transmission service and collect the corresponding MLSA payments.  Notably, Enforcement recommended that the Parties be assessed civil penalties for the Parties’ actions.

In response to Enforcement’s allegations, the Parties argued that their UTC transactions were not manipulation, but rather permissible trades executed for a legitimate economic purpose.  The Parties further argued that their trades were not manipulative because they were permissible through a PJM tariff “loophole,” and that the trades never involved active deception or active concealment.

FERC, however, disagreed with the Parties’ arguments.  FERC stated that the UTC trades were fraudulent and provided no benefit to the PJM market.  Furthermore, FERC concluded that the Parties “knew that their round-trip UTC trades would net no market position, and that on their own these round-trip trades would not generate a profit or a loss based on price spreads. But, by making these trades, [the Parties] collected MLSA payments exceeding the transaction costs they incurred for the trades, and yielding a significant profit, as they expected.”  FERC also disagreed that the trades were valid under a PJM loophole, noting that an entity does not need to “violate a tariff, rule or regulations to commit fraud.”  Finally, FERC stated that the lack of express prohibition of UTC trades in PJM’s tariff does not create a loophole or make the Parties’ action legal.  Instead, FERC concluded that the Parties knowingly and intentionally devised and participated in the fraudulent scheme, which constituted market manipulation in violation of FERC’s Anti-Manipulation Rule and the Federal Power Act.

A copy of the order is available here.