United States: FERC Finds That Private Complainants Failed To Prove Market Manipulation In Capacity Market

On May 6, 2011, the Federal Energy Regulatory Commission (FERC) issued Opinion No. 513, an order affirming an Administrative Law Judge's finding that the Attorney General of Connecticut, the Connecticut Department of Public Utility Control, and the Connecticut Office of Consumer Counsel (Complainants), failed to show that Brookfield Energy Marketing Inc., Constellation Energy Commodities Group, Inc., and Shell Energy North America (US), L.P. (Respondents) engaged in market manipulation during the "Transition Period" leading up to the implementation of the ISO-NE Forward Capacity Market. Richard Blumenthal, Attorney General for the State of Connecticut, et al. v. ISO New England, Inc., et al., 135 FERC ¶ 61,117 (2011). This order is significant because of its discussion of scienter and the interplay between Sections 205 and 206 (just and reasonable rates) and Section 222 (anti-manipulation) of the Federal Power Act (FPA). The case is also noteworthy because it is the first fully litigated proceeding involving alleged manipulation in organized electric markets, and because it was instigated by a complaint filed by private parties.

Background

FERC affirmed an Administrative Law Judge's Initial Decision finding that Complainants failed to show that Respondents—suppliers of capacity in ISO-NE—acted with the requisite scienter when making energy supply offers at or near the $1,000/MWh price cap contained in ISO-NE's tariff for capacity-backed energy during the Transition Period. During the Transition Period fixed monthly capacity payments were higher in NYISO than ISO-NE so there was an economic incentive for capacity suppliers to export capacity to ISO-NE. The Complainants alleged that Respondents "were paid at least $50.9 million for capacity over the Northern New York AC interface, energy which Respondents . . . never intended to provide." 135 FERC ¶ 61,117 at P 10. However, FERC found that "Respondents fully intended to deliver their capacity-backed energy in the unlikely event ISO-NE called on it, and that each [Respondent] had procedures in place to ensure the energy actually could be delivered if necessary." Id. at P 36.

No showing of scienter

Under FERC's policies, a complainant must satisfy the following three elements to prove a manipulation violation: the entity (1) uses a fraudulent device, scheme or artifice, or makes a material misrepresentation or a material omission as to which there is a duty to speak under a Commission-filed tariff, Commission order, rule or regulation, or engages in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity, (2) with the requisite scienter, (3) in connection with the purchase or sale of natural gas or electric energy or transportation of natural gas or transmission of electric energy subject to the jurisdiction of the Commission. See Prohibition of Energy Market Manipulation, Order No. 670, 71 Fed. Reg. 4244 (Jan. 26, 2006), FERC Stats. & Regs. ¶ 31,202, at P 49 (2006), order denying reh'g, 114 FERC ¶ 61,300 (2006). The three elements "do not include effects of the alleged behavior on market prices or applicable remedies." 135 FERC ¶ 61,117 at P 12.

Relying on a "mix of the scienter benchmarks, including knowing and intentional conduct, as well as recklessness," Complainants alleged that Respondents made capacity sales when they "knew or should have known the accompanying energy would never in fact be available to New England customers . . . [and they] acted with willful blindness to the effects of their transactions to New England customers." Id. at P 40. FERC found, however, that Complainants did not prove that Respondents had the "requisite scienter" for manipulation. FERC pointed out that neither ISO-NE's tariff nor the FPA contained a "reasonable price" requirement below the $1,000 MWh price cap, Id. at P 41, explained that "Respondents' higher-priced capacity offers had value," and found that "in the context of the New England market at the time, [the $1,000 MWh offers were] legitimate—and [that] does not alone evidence recklessness or intent to deceive." Id. at P 43. Complainants also argued that scheduling differences between NYISO and ISO-NE showed that Respondents could not have changed their bids in the NYISO market if ISO-NE called upon their capacity, effectively preventing them from supplying energy to ISO-NE. See Id. P 49. FERC concluded that there was evidentiary support that NYISO operators could make manual changes, despite the scheduling differences, to allow the energy to flow into ISO-NE, and Respondents were able to deliver the energy if necessary. See Id. at P 51.

Interaction between the "just and reasonable" standard and the anti-manipulation rule

Complainants asserted that the "just and reasonable" standard contained in FPA §§ 205 and 206 applied to their claims. The Commission disagreed, and explained that its analysis was governed by Section 222 of the FPA and 18 C.F.R. § 1c.2, not Sections 205 and 206 of the FPA. Id. at P 37. FERC further explained that "[f]raud . . . is not measured by whether, in fact, unjust and unreasonable rates resulted" and "a claim that a rate is unjust and unreasonable is not probative of whether market manipulation occurred." Id. Also, FERC stated "[e]vidence of a Tariff violation is not dispositive of whether Respondents engaged in market manipulation." Id. at P 41. Finally, FERC stated that Complainant should have submitted their complaint under FPA § 306, not § 206, which applies only to rate changes for public utility tariffs. Id. at P 38.

Private party manipulation claims and litigation

Even though this case is not the first anti-manipulation proceeding initiated by a complaint from private parties, it is the first one involving organized electricity markets that was fully litigated. Significantly, too, FERC Enforcement Staff opposed Complainants' claims. See Id. at PP 32-35. Even though FERC's Anti-Manipulation Rule does not provide for private right of action, see FPA § 222(b) and 18 C.F.R. § 1c.2(b), FERC previously held in this proceeding that "a person alleging energy market manipulation is not foreclosed from bringing such an allegation before the Commission pursuant to section 306 of the FPA which, . . . expressly permits a complaint to be brought to the Commission for any violation of the FPA." See Richard Blumenthal, Attorney General for the State of Connecticut v. ISO New England, Inc., et al., 128 FERC ¶ 61,182 at P 56 (2009).

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