POWER July 2017 - 18

FERC Civil Penalty Order
Underscores Need for
Companies to Invest in
Compliance Training
Glenn Benson
T
he Federal Energy Regulatory Commission (FERC) approved a
settlement with GDF SUEZ Energy Marketing NA Inc. (GSEMNA)
in February 2017, in which GSEMNA agreed to pay civil
penalties of $41 million and disgorge an additional $40.8 million
of profits to settle allegations that it violated FERC's market manipulation
regulations when offering energy into the wholesale
electric markets administered by PJM Interconnection LLC. This
is the largest civil penalty FERC has imposed since JP Morgan and
Barclays Bank were each required to pay hundreds of millions of
dollars in July 2013.
FERC's penalty against GSEMNA is just the latest in a series of
orders FERC has issued over a number of years involving companies
that sought to profit by exploiting market design flaws, not
realizing FERC would deem their activities to be market manipulation
rather than legitimate arbitrage.
Companies participating in the U.S. wholesale electric markets
administered by regional transmission organizations and independent
system operators need to ensure their traders, officers,
and employees receive periodic compliance training so that they
do not run afoul of FERC's views on market manipulation.
Lost Opportunity Costs
In its settlement, GSEMNA stipulated to having adopted and
implemented a bidding strategy focused on profiting from lost
opportunity cost (LOC) credits, as opposed to from the sale of
energy from 12 combustion turbine (CT) units. PJM provides LOCs
to CT units to give them an incentive to maintain their resources
as PJM pool-scheduled resources, which allows PJM to control
their output to manage system operations and ensure reliability.
Under PJM's tariff, CTs receive LOCs if they clear the day-ahead
(DA) market and are subsequently directed by PJM to reduce output
or are not dispatched in the real-time (RT) market. During
the time when the alleged violation took place, PJM utilized a
formula for calculating LOCs that did not deduct the start-up and
no-load costs the generator would have incurred if dispatched.
This provided CTs an opportunity to earn a greater profit when
they received LOCs than they would earn if they were dispatched.
GSEMNA previously expected low profits from the 12 CTs in PJM's
energy market because of the infrequency with which they were
dispatched. The strategy it devised, however, would allow it to
boost the profitability of the units without changing the economics
of the units or the frequency with which they were dispatched.
Specifically, GSEMNA determined that it could bid the CTs in
the DA market at a discount below each unit's costs, thereby
18
allowing the units to clear the DA market when they otherwise
probably would not have, and enabling GSEMNA to profit from the
LOCs when the units were predictably not dispatched. GSEMNA
employed a probabilistic, risk/reward approach whereby it would
discount a given CT unit's DA offer based on its assessment of
the likelihood the CT would not be dispatched, weighing the risk
of running the unit at a loss if dispatched against the potential
reward of LOCs if it was not dispatched.
This strategy allowed GSEMNA to obtain DA commitments and
LOCs at times when the units were uneconomical and would not,
and should not, have cleared. FERC's Office of Enforcement concluded
that GSEMNA's strategy departed from " supply and demand
fundamentals and impaired the functioning of the LOC provisions
of the PJM market and PJM's unit commitment process. " The offers
GSEMNA made in the DA market did not reflect the price it
wanted for its energy, but instead the price at which it could
clear and then receive LOCs. This, the Office of Enforcement concluded,
was contrary to the purpose of LOCs to compensate generators
for lost opportunity costs due to PJM's decision not to
dispatch a CT. The Office of Enforcement took the position that
GSEMNA had fraudulently " gamed " the market to obtain LOCs.
Ensure Compliance Within Your Company
Importantly, companies are expected to know how FERC has
treated other investigations of possible market manipulation.
FERC does not believe GSEMNA was operating in a gray area.
While companies increasingly are litigating FERC's decisions on
alleged gaming in court, FERC has made clear that it views such
trading strategies as prohibited market manipulation.
Companies participating in wholesale electric markets should
hold periodic and regular compliance training sessions for their
traders, supervisors, and managers involved in offering generating
resources in organized markets regarding FERC's regulations
governing energy trading, including specific training on market
behavior that may violate FERC's rules against market manipulation.
Trainers need to be knowledgeable about how FERC has
handled specific situations and be able to delineate what is lawful
and what is unlawful or of questionable legality. This will
allow companies to chart a course that safeguards them from
investigations, while not needlessly inhibiting them from engaging
in legitimate and profitable activities. ■
-Glenn Benson (glennbenson@dwt.com) is a partner in
Davis Wright Tremaine LLP's energy practice
in the firm's Washington, D.C., office.
www.powermag.com
POWER | July 2017
http://www.powermag.com

POWER July 2017

Table of Contents for the Digital Edition of POWER July 2017

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