On October 29, 2021, the Federal Energy Regulatory Commission ("FERC" or the "Commission") issued an Order Approving Stipulation and Consent Agreement (the "Consent Agreement") between the Office of Enforcement ("OE") and Dr. Houlian Chen, HEEP Fund, Inc. ("HEEP Fund"), and CU Fund, Inc. ("CU Fund" and, together with Dr. Chen and HEEP Fund, the "Chen Defendants").1 The Consent Agreement resolved, as it pertains to the Chen Defendants: (i) the Commission's claims against them for violations of section 222 of the Federal Power Act ("FPA") and 18 C.F.R. § 1c.2; and (ii) the Commission's lawsuit captioned FERC v. Powhatan Energy Fund LLC, et al., No 3:15-cv-00452 (MHL) (the "Federal Court Lawsuit").2 The Chen Defendants neither admitted nor denied the violations and agreed to pay $600,000 in disgorgement to PJM Interconnection, L.L.C. ("PJM"). Dr. Chen also agreed to a two-year trader ban from FERCjurisdictional markets and to participate in the Federal Court Lawsuit as a witness against Powhatan Energy Fund, LLC ("Powhatan"). The $600,000 payment is less than five percent of the more than $13 million in penalties and disgorgement assessed and sought by FERC from the Chen Defendants in the Federal Court Lawsuit. 3
PJM operates both a day-ahead market and a real-time market in which generation is scheduled and dispatched to correct for variations between the day-ahead schedule and actual demand for electricity. Up To Congestion ("UTC") transactions are financial transactions that permit market participants to arbitrage the difference between the day-ahead and real-time congestion prices at different locations in PJM's territory. Undera PJM's rules at the time when the alleged violations occurred, PJM required market participants to reserve transmission service relating to their UTC trades, resulting in those participants becoming eligible to receive financial compensation in the form of transmission credits, Marginal Loss Surplus Allocation ("MLSA") payments. 4
On December 17, 2014, the Commission issued an Order to Show Cause and Notice of Proposed Penalty (the "OSC") that required the Powhatan and Chen Defendants to show cause why they should not be found to have violated section 222 of the FPA and section 1c.2 of the Commission's regulations, by engaging in fraudulent UTC transactions in PJM's energy markets and why penalties should not be assessed. 5 OE alleged that from June 1, 2010 to August 3, 2010, Powhatan and the Chen Defendants designed and implemented a market manipulation scheme involving UTC trading where they "ma[de] equal and opposite trades between the same two points (i.e., a trade from A to B paired with a trade from B to A)." 6 OE alleged that "these 'round trip' trades would cancel out [their] price risk and allow [them] to increase profits by ramping up [their] trading volume enormously." 7
The defendants have long maintained that no violations occurred and that merely taking advantage of a market inefficiency, such as using UTC transactions to collect MLSA payments, did not rise to the level of fraud and constitute a violation. 8 Powhatan has maintained that the UTC transactions that it and Dr. Chen entered into were lawful based on existing PJM market rules.9 The defendants have contended that they simply exposed a loophole in then-existing energy market rules.10
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1 177 FERC ¶ 61,076 at P 1 (2021).
2 Consent Agreement at P 1.
3 151 FERC ¶ 61,179 at P 2 (2015) (hereinafter "Penalty Assessment").
4 Penalty Assessment at P 2.
5 149 FERC ¶ 61,261 at P 1 (2014).
6 OSC, Appendix A (hereinafter "Staff Report"), at p. 2.
7 Staff Report at p. 2.
8 See, e.g., Houlian Chen, et al., FERC Docket No. IN15-3-000, Response in Opposition to Order to Show Cause and Notice of Proposed Penalty at pp. 3-4 (Feb. 2, 2015) ("Response in Opposition").
9 Response in Opposition at pp. 3-4.
10 Id. at pp. 7-8.
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