On February 1, 2017 FERC issued an order approving a settlement between its Office of Enforcement (“Enforcement”) and Houston-based power marketer GDF SUEZ Energy Marketing NA, Inc. (“GSEMNA”) following an investigation into whether GSEMNA violated FERC’s anti-manipulation regulations from May 2011 to September 2013. As part of the agreement, GSEMNA neither admitted to nor denied the alleged market manipulation violations, but agreed to be subject to monitoring and annual compliance reporting as well as to pay a disgorgement of $40.8 million in unjust profits and a civil penalty of $41 million to the U.S. Treasury.

The alleged market manipulation behavior involved so-called “lost opportunity cost credits” (“LOCs”) awarded in the PJM Interconnection, L.L.C. (“PJM”) wholesale electric market. PJM provides LOCs to encourage generators to keep their units as part of PJM’s resource pool, thereby allowing PJM to control their output and maintain system reliability. Combustion turbine units that clear PJM’s day-ahead market but are not dispatched in the real-time market receive LOCs as a substitute form of compensation to help minimize the lost opportunity costs stemming from not being dispatched. The LOC formula, however, was not adjusted to reflect the costs associated with operation, such as the start-up and no-load costs that apply to dispatched generators. As a result, a generator that cleared the day-ahead market could earn more money by not being dispatched and receiving a LOC instead.

According to the Order, around June 2011, GSEMNA implemented a strategy to profit from LOCs. GSEMNA would identify certain affiliate-owned combustion generating units that were unlikely to be dispatched in the real-time market, and bid the units into the day-ahead market at below-cost offers, thereby more easily clearing the day-ahead market. GSEMNA would then collect LOCs when the units were not dispatched. According to Enforcement, GSEMNA’s strategy of offering combustion units into the day-ahead market at discounted prices resulted in the company obtaining day-ahead commitments and LOCs at times when the units would be out of the money had they not been offered at discounted prices.

Enforcement began questioning GSEMNA in September 2013 and eventually opened an investigation, with which the company fully cooperated. Enforcement ultimately concluded that GSEMNA violated FERC’s anti-manipulation rule by engaging in a strategy to target and inflate the receipt of LOCs in PJM in a manner that impaired the PJM market and was contrary to supply and demand fundamentals.

This Order approving the enforcement settlement, found here, is one of two such orders released this past week. The second order approved a $36,000 settlement between Enforcement and Covanta Haverhill Associates LP following the company’s alleged failure to provide instantaneous metered power output data as required by ISO New England’s tariff.