On March 9, 2012, FERC issued its largest enforcement penalty to date as part of its approval of a settlement between FERC’s Office of Enforcement and Constellation Energy Commodities Group (Constellation ECG). The settlement resolves the investigation into whether Constellation ECG violated the Commission’s Anti-Manipulation Rule, 18 C.F.R. § 1c.2, and the Commission’s regulation prohibiting the submission of inaccurate information, 18 C.F.R § 35.41(b).
Penalty - Constellation ECG has agreed to pay a civil penalty of $135,000,000 and to disgorge unjust profits of $110,000,000, including interest. The disgorgement shall be paid as follows: (i) $6,000,000 to be divided equally among and paid directly to the NYISO, ISO-NE, PJM, the Midwest ISO, Southwest Power Pool, and the California ISO for use in the enhancement of their surveillance capabilities; and (ii) to a fund set up for the benefit of electric energy consumers in the affected states and from which state agencies in those affected states may make requests for apportionment by a FERC judge. That fund will be divided among the affected states in the ISOs as follows: NYISO ($78,000,000); ISO-NE ($20,000,000); and PJM ($6,000,000). This distribution is based on the results of the relative harm determined to have occurred on each organized market as a result of Constellation ECG’s trading. Constellation ECG neither admits nor denies that the trading behaviors violated the Commission’s rules, regulations, or policies.
In addition, Constellation ECG has instituted additional compliance measures such as: (i) regular monitoring of profit and loss concentrations in virtual transactions and physical schedules of electric energy; (ii) reviewing and documenting the purpose of virtual transactions. Constellation ECG is required to monitor and preserve for no less than five years trader communications, including but not limited to Instant Messages (IMs), emails, and telephone calls; and (iii) submitting semi-annual compliance monitoring reports to FERC for 2 years.
Investigation - In January 2008, FERC began a non-public investigation Constellation ECG’s physical power trading in and around the New York Independent System Operator’s (NYISO) control area after receiving two anonymous hotline calls related to that trading. Enforcement Staff observed through its own surveillance activities that Constellation ECG was engaging in virtual trading in the NYISO that was unprofitable. In addition, in February 2009, the NYISO Department of Market Monitoring and Performance (MMP) informed Enforcement Staff that it had decided to apply mitigation measures against Constellation ECG related to its virtual bidding behavior in the NYISO, because its virtual load trading in NYISO Zone A had contributed to an unwarranted divergence of locational based marginal prices between the day-ahead (DA) and real-time (RT) markets. Enforcement Staff opened a second preliminary, non-public investigation to determine whether Constellation ECG employed a scheme of trading in the NYISO virtual market to move DA prices in a direction that would benefit its financial contract for differences (CFD) positions. Enforcement Staff examined certain data related to Constellation ECG East Power Trading Group (East Traders) from January 1, 2007 through February 28, 2009 and, as a result, focused its investigation on trading activity by certain members of the East Traders over a sixteen month period from September 2007 through December 2008. During this investigated period, Constellation ECG participated in energy trading in markets including the NYISO, ISO-NE and PJM, while the East Traders participated in the virtual markets in the NYISO and PJM and in the scheduling of DA physical power between the NYISO and ISO-NE, PJM and IESO. Constellation ECG's East Traders also held CFDs during this period, including: swaps that priced off the average DA prices in the NYISO and ISO-NE; swaps that priced off the RT price in PJM; financial transmission rights (FTRs) in ISO-NE and PJM; and transmission congestion contracts (TCCs) in the NYISO.
Enforcement Staff found a repetitive pattern to the virtual and DA physical trading. While the practice varied somewhat from month-to-month and zone-to-zone, the trading behavior can be summarized as follows: (i) when the net CFD position which settled off the average DA price of a region was short, the Constellation ECG traders at issue entered virtual supply in the Zone/region on which the CFD settled and/or scheduled the import of DA power into the region on which the CFD settled; and (ii) when the net CFD position which settled off the average DA price of a Zone/region was long, the Constellation Energy traders at issue entered virtual load in the Zone/region on which the CFD settled and/or scheduled an export of DA power from the region on which the CFD settled to a neighboring ISO. Moreover, the virtual and physical transactions scheduled by the East Traders were routinely unprofitable.
Findings - Enforcement Staff concluded that from September 2007 through December 2008, Constellation ECG violated the Commission’s Anti-Manipulation Rule (18 C.F.R. § 1c.2) by entering into virtual transactions and DA physical schedules without regard for their profitability, but with the intent of impacting DA prices in the NYISO and ISO-NE to the benefit of certain significant CFD positions held by Constellation ECG. It determined that as part of this scheme, Constellation ECG combined the use of virtual transactions with DA physical schedules to impact DA prices in NYISO and ISO-NE to benefit the CFD positions that priced off a component of those impacted DA prices. Enforcement Staff also found that Constellation ECG impacted the DA price in the various markets in which they engaged in this trading behavior to the benefit of their CFD positions. Enforcement Staff determined that: (1) Constellation ECG’s virtual and physical trading activities constituted a fraudulent device, scheme or artifice and that Constellation ECG engaged in a course of business that operated as a fraud upon the NYISO and ISO-NE markets; (2) Constellation ECG intended to manipulate the NYISO and ISO-NE DA markets for the benefit of its CFD positions during the Months of Interest; and (3) Constellation ECG’s manipulative scheme was in connection with transactions subject to the jurisdiction of the Commission all in violation of 18 C.F.R. § 1c.2.
Additionally, Enforcement Staff concluded that Constellation ECG violated FERC regulations (18 C.F.R. § 35.41(b)) that require power marketers, such as Constellation ECG, to “provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with . . . Commission-approved independent system operators, or jurisdictional transmission providers, unless Seller exercises due diligence to prevent such occurrences” by providing inaccurate and misleading information to the NYISO. Specifically, Constellation ECG denied that its virtual transactions were related to its CFD positions and instead told the NYISO that the transactions were independent of the CFD positions and were entered into based on market fundamentals.