On January 6, 2016, FERC issued an order directing Coaltrain Energy, L.P. ("Coaltrain"), Coaltrain's co-owners Peter Jones and Shawn Sheehan, and traders/analysts Robert Jones, Jeff Miller, Jack Wells, and Adam Hughes (collectively, "Respondents"), to show cause why they should not be found to have violated FERC's Anti-Manipulation Rule and section 222 of the Federal Power Act ("FPA") by engaging in fraudulent Up To Congestion ("UTC") transactions in PJM Interconnection L.L.C.'s ("PJM") energy markets. The order to show cause follows FERC's Office of Enforcement's ("Enforcement") report alleging that Respondents inflated trade volumes of UTCs through transactions designed to collect large amounts of Marginal Loss Surplus Allocations ("MLSA").
In August 2010, Enforcement initiated an investigation after PJM asked Enforcement to investigate Respondents' conduct. In the report submitted to FERC in December 2015, Enforcement alleged that Respondents conceived and implemented a fraudulent scheme in connection with PJM's UTC markets from June 15, 2010 until September 2, 2010. Enforcement alleged that the Respondents inflated trade volumes of UTCs through transactions designed to collect large amounts of MLSA market credits, which are based on trading volume. Specifically, Enforcement stated that Respondents executed sham UTC trades on paths with zero or near-zero price spreads so that Respondents would not profit from price differentials between the day-ahead and real-time markets, but rather to minimize or avoid such price spreads altogether and only profit from MLSA payments. Enforcement further alleged that, although the UTC transactions themselves often resulted in a loss, the subsequent MLSA payments resulted in a net positive gain. Finally, Enforcement alleged that Respondents omitted large numbers of documents responsive to Enforcement's data requests that provided important evidence of Respondents' conduct and intent.
In its order to show cause, FERC ordered Respondents to explain why they should not be found to have violated FERC's Anti-Manipulate Rule and section 222 of the FPA. FERC further directed Coaltrain to show cause why it should not be found to have violated 18 C.F.R. § 35.41(b) through false and misleading statements and material omissions of the documents that were responsive to Enforcement's data requests. In addition, FERC directed (1) Coaltrain, Peter Jones, and Shawn Sheehan to show cause why they should not be jointly and severally required to disgorge unjust profits of $4,121,894; and (2) all Respondents to show cause why they should not be assessed civil penalties totaling $38,250,000. Finally, FERC directed Peter Jones and Shawn Sheehan to show cause why they should not be held jointly and severally liable for civil penalties assessed against Coaltrain.
Respondents' alleged conduct is similar to the conduct in other recent cases, including Powhatan Energy Fund LLC and City Power Marketing, LLC, in which FERC assessed civil penalties for alleged manipulation of PJM's UTC markets. In Powhatan, FERC found that the parties engaged in round-trip UTC transactions – thereby eliminating any associated price spread risk between two points – solely to reserve transmission service and collect the corresponding MLSA payments (see June 8, 2015 edition of the WER). In City Power Marketing, the parties allegedly devised a similar scheme along the same two paths that Coaltrain allegedly used—SouthImp-Exp and NCMPAImp-Exp.
A copy of the order is available here.
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