On March 30, 2018, the U.S. District Court for the Southern District of Ohio issued an order1 substantially denying defendants’ Motion to Dismiss the Federal Energy Regulatory Commission’s (FERC or the “Commission”) Complaint in FERC v. Coaltrain Energy, L.P., a market manipulation enforcement case where FERC has assessed penalties and disgorgement of approximately $42 million against Coaltrain and certain individual owners and employees.2
The case is one of several enforcement actions involving alleged manipulation by energy traders in the PJM market who traded “Up-To-Congestion” (UTC) financial products for the alleged purpose of collecting out-of-market rebates rather than for the intended purpose of speculating on and arbitraging locational price differences.3 These types of market “gaming” theories of manipulation—in which FERC does not allege that a market participant violated specific market rules, but rather traded inconsistently with their purpose—have been controversial and viewed as potentially vulnerable in court, at least where the conduct did not also involve some other clear misrepresentation or more obvious fraud. The March 30 Order, therefore, is significant, since the court is now the second federal district court in UTC cases to endorse FERC’s expansive view of its anti-manipulation authority.4
Brief Summary of FactsThe court discusses FERC’s factual allegations (which are accepted as true for purposes of a motion to dismiss) at some length, but the essence of the alleged manipulative scheme is as follows: Defendants traded financial (or “virtual”) UTC instruments in PJM, which FERC argues are designed to allow market participants to hedge their portfolio or speculate for profit on the difference between prices at two energy trading points—more precisely, on the differences between the “congestion” component of how electricity prices are determined at those “nodal” trading points. When UTC speculators predict price differences, they can make a profit, but their trading can also benefit PJM market participants by adding liquidity to markets and helping to converge market prices, thereby leading to more just and reasonable prices consistent with FERC’s core mission.
During the period at issue, the summer of 2010, UTC trades qualified for what is essentially a rebate5 to users of the PJM transmission system, to the extent UTC traders paid for reservations on the transmission system. The details of how, why, and in what amounts PJM calculated and distributed these rebates to market participants are not essential to understanding the alleged manipulative scheme. What matters is that UTC traders who paid for transmission would receive a pro rata share of these rebates like all other market participants. What FERC alleges—as it has in the other UTC cases—is that the defendants traded specifically to capture those rebates.
Combining these two points—the purpose of UTC trades and the ability of UTC traders to get rebates—leads to the core of FERC’s market manipulation allegation. FERC claims that the defendants knowingly traded UTCs not to find price differences but rather to find locations where there were minimal or no price differences, because the true goal of the trading was not arbitrage (as FERC says it should have been) but rather to get rebates. And FERC alleges that trading UTCs in this way was a manipulative gaming of the PJM market rules, as market participants should only trade UTCs for their intended purpose rather than as a mechanism to collect rebates designed for other market participants engaged in legitimate trading.
Defendants dispute many aspects of the facts and legal issues at the heart of FERC’s case and will undoubtedly press those arguments as the case proceeds. But the key point for market participants at this stage is to understand that the court agreed that if FERC could prove these allegations as a matter of fact, the agency’s theory of market manipulation is legally valid.
March 30 OrderThe most significant aspect of...
