FERC Proposes $2.4 Million Civil Penalty for CAISO Power Trading Activities
On December 16, 2015, the Federal Energy Regulatory Commission (FERC or the Commission) issued an Order to Show Cause and Notice of Proposed Penalty (OSC) directing ETRACOM LLC and its principal member and trader, Michael Rosenberg, to show cause why they should not be found to have violated FERC’s Anti-Manipulation Rule in connection with certain allegedly uneconomic virtual supply trading activities in the California Independent System Operator (CAISO) wholesale electricity market, which FERC claims were intended to benefit ETRACOM’s Congestion Revenue Rights (CRRs) positions. In the OSC, FERC proposes to assess civil penalties of $2.4 million and $100,000 against ETRACOM and Rosenberg, respectively, and to require ETRACOM to disgorge $315,072 plus interest in unjust profits. The ETRACOM case is the latest in a series of cases in which FERC’s Office of Enforcement (OE) has alleged that market participants have violated the Anti-Manipulation Rule by engaging in uneconomic transactions for the purpose of affecting market prices to benefit related positions.
The Allegation
The OE Staff Report appended to the OSC details OE’s allegations with respect to ETRACOM’s virtual trading activities. OE alleges that in May 2011, ETRACOM submitted virtual supply offers at the New Melones intertie in CAISO in order to affect power prices to benefit ETRACOM’s CRRs at that location. Virtual transactions allow a market participant to make financial sales or purchases of energy in the day-ahead market, with the requirement that they buy back (or sell back) that energy in the real-time market (making or losing money based on the day-ahead/real-time price differential). CRRs are a financial product offered by CAISO which settles off the difference in the day-ahead congestion costs between two locations (a source location and a sink location). The New Melones intertie is located in eastern central California and connects a hydroelectric generating resource located in the SMUD/WAPA balancing authority area with CAISO. In 2011, only WAPA could submit bids for physical imports or exports at New Melones, but CAISO still allowed for virtual bidding at the intertie.
OE states that ETRACOM’s CRR positions sourced at New Melones were very profitable in early May, but on May 8 began to experience a decline in profitability due to unexplained export congestion at New Melones. OE alleges that between May 14 and 31 – in response to that decline in profitability – ETRACOM submitted and cleared uneconomic virtual supply offers with the intent to benefit its New Melones-sourced CRRs by creating import congestion and lowering the day-ahead price at New Melones. OE claims that ETRACOM’s virtual supply transactions during the relevant time consistently lost money, but that ETRACOM’s profits on its New Melones CRR positions more than doubled. According to OE, ETRACOM’s virtual trading activities lost $42,481, but enabled ETRACOM to earn an estimated $315,072 in unjust profits related to its CRR positions. OE states that ETRACOM ceased trading virtual supply at New Melones on May 31, and that its June CRR positions were substantially smaller.
