On May 20, 2021, FERC issued a Show Cause Order directing GreenHat Energy, LLC (“GreenHat”) and its owners to show why they did not violate the Federal Power Act, FERC’s regulations, the PJM Interconnection, L.L.C. (“PJM”) Tariff, and the PJM Operating Agreement by manipulating PJM’s Financial Transmission Rights (“FTR”) market, generating $13 million in unjust profits and imposing $179 million in losses on PJM members. FERC also directed GreenHat and its owners to file an answer with FERC within 30 days showing why they should not be required to disgorge $13 million in unjust profits, plus interest, and to pay civil penalties totaling $229 million. FERC’s order is accompanied by a report from FERC’s Office of Enforcement (“OE Report”). Commissioner James Danly issued a separate concurring statement.

As the OE Report explains, FTRs are longer-term financial instruments whose returns depend on Day-Ahead congestion prices across a future period. PJM market participants can buy and sell FTRs in PJM auctions or trade FTRs with each other through bilateral agreements. Utilities can use FTRs to hedge against future congestion, and PJM also permits financial firms to trade FTRs for speculative purposes. An FTR makes or loses money based on the difference between congestion prices at a source and sink node during a specified future period (a month, quarter, year, or three years). Thus, if the congestion price spread is higher than the FTR purchase price for any specific hour over the settlement period, the FTR holder is credited for the difference; if lower, the FTR holder is charged the difference. However, an FTR holder neither receives from nor pays any money to PJM on an FTR until its settlement date, which can be as much as three years later. Until the FTR’s settlement date, PJM’s applicable credit rules only required the purchaser to put up a fraction of the settlement amount in cash.

The OE Report alleges that over four years, GreenHat built up the largest FTR portfolio in PJM without regard for the economic merits of the FTRs it was purchasing. According to OE Staff’s Report, GreenHat sold the positively-valued FTRs from its portfolio in bilateral agreements with Shell Energy North America (“Shell”) and later, Boston Energy Trading & Marketing. Knowing that Shell would be offering the same FTRs into the PJM auction, the OE Report alleges that GreenHat submitted bids for these FTRs at inflated prices, artificially driving up the price at which Shell was able to sell those FTRs and gaining larger immediate cash proceeds per the terms of its bilateral deals. The OE Report also alleges that when PJM raised concerns in the spring of 2017 that GreenHat was headed towards default, GreenHat falsely told PJM that Shell owed GreenHat $62 million.

The OE Report goes on to allege that when GreenHat’s portfolio collapsed in 2018, GreenHat failed to pay for the losses, and PJM declared GreenHat in default on June 12, 2018. Under PJM Tariff rules, losses on defaulted portfolios are socialized among all PJM members. OE Staff concluded that GreenHat engaged in market manipulation that resulted in approximately $179 million in losses to PJM market participants and generated more than $13 million in unjust profits for GreenHat’s owners.

Commissioner James Danly’s concurring statement expressed his support for the Show Cause Order, explaining his belief that FERC has responsibility to issue an official pronouncement as to whether GreenHat engaged in fraud or manipulation. Commissioner Danly also provided guidance to the parties on issues to address in their submissions in response to the Show Cause Order.

FERC’s Show Cause Order and the OE Report are available here.