On August 5, 2014, the Federal Energy Regulatory Commission ("FERC") issued a public Staff Notice of Alleged Violations ("NAV") regarding alleged manipulative Up To Congestion trading by Powhatan Energy Fund (Powhatan) in the PJM energy market. The NAV states that FERC's Office of Enforcement ("OE") "has preliminarily determined that Houlian (Alan) Chen, HEEP Fund Inc., and CU Fund Inc., and Powhatan Energy Fund, LLC, violated the Commission's Anti-Manipulation Rule, 18 C.F.R. § 1c.2 (2014) by engaging in manipulative Up To Congestion trading in the PJM Regional Transmission Organization between June and August 2010."
OE Staff alleges that between June 1, 2010 and August 3, 2010, Chen (on behalf of Powhatan, HEEP Fund, or CU Fund) engaged in Up To Congestion transactions in PJM designed to falsely appear to be spread trades, which allowed Powhatan to collect marginal loss surplus allocation payments from PJM. OE Staff claims that Chen made "millions of megawatt hours of offsetting trades" between the same two trading points, with the same volumes and for the same hours, to cancel out the financial consequences from any spread between the points while capturing marginal loss surplus payments from PJM. OE Staff characterizes this trading strategy as wash trading, which is prohibited by FERC. OE Staff's allegations are further laid out in OE Staff's August 9, 2013 Preliminary Findings letter, which was made public by Powhatan in February.
Although the NAV is FERC's first public issuance regarding this investigation, Powhatan has been publicly challenging FERC's allegations for several months. On February 28, 2014, Powhatan launched a public website – http://www.ferclitigation.com – containing a summary of the exchanges between FERC and Powhatan's legal representatives, position papers from twelve independent experts, and other materials supporting Powhatan's defense. Powhatan claims that FERC's investigation violates its due process because prior to FERC OE's investigation, there was no FERC order or express regulation to put Powhatan on notice that the trades were unlawful. In addition, Powhatan maintains that it entered into the Up To Congestion transactions in an open, transparent manner without concealment or misrepresentation, and that it is not manipulative to take advantage of market flaws.
NAVs often come after OE Staff has received settlement authority, but Powhatan has consistently indicated that it will fight the allegations, stating that it will "respond publicly and forcefully" to any such public notice. If OE Staff continues, the next step would be an Order to Show Cause and Notice of Proposed Penalty. In turn, Powhatan would have the opportunity to formally respond to FERC's allegations and elect either: (1) an administrative hearing before a FERC administrative law judge; or (2) more likely, that FERC promptly assess a civil penalty (if FERC finds a violation) and then go to federal district court for de novo review, as has been done in other recent enforcement cases under the Federal Power Act.
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