Beginning in July of this year, PJM noticed that some of its market participants appeared to be taking unfair advantage of certain of its power market settlement rules. These rules permit non-firm transmission customers to receive an allocation of the PJM marginal losses surplus which exceeds such participants’ cost of transmission service. FERC has announced that it will conduct a non-public, formal investigation – with subpoena power – to determine whether this behavior constitutes unlawful market manipulation. This investigation will have an obvious and direct impact on PJM market participants because FERC’s Office of Enforcement will move swiftly to collect information and undertake its investigation in earnest.
However, the investigation will have important implications beyond PJM and should be watched closely by the industry. This investigation should signal to all participants in bulk power markets how FERC, and the current leadership of the Office of Enforcement, will carry out their duties and use the anti-manipulation authority granted to the agency in the Energy Policy Act of 2005. In particular, Staff will examine the boundaries of what behaviors constitute, on the one hand, “unlawful market manipulation” as opposed to, on the other hand, trades that are merely made in compliance with a flawed market design/tariff. Specifically, PJM told the Commission that several market participants “have been able to clear large volumes of megawatt hours of Up-To Congestion transactions with no risk of any settlement in either the day-ahead or balancing markets. However, because such transactions were eligible for a marginal loss allocation, the cleared megawatts on the reserved transmission service resulted in a sizeable allocation of the marginal loss surplus based on the large megawatt hour quantity of cleared transactions.”
Unlike most FERC enforcement actions, which are non-public and do not provide Staff with subpoena authority, this investigation, while labeled as non-public, has been launched publicly and Staff of the Office of Enforcement has been given subpoena power by the Commission. Pursuant to the terms of the order, the Director of the Office of Enforcement, and employees designated by the Director, shall have authority to administer oaths and affirmations, subpoena witnesses, compel their attendance and testimony, take evidence, compel the filing of special reports and responses to interrogatories, gather information, and require the production of any books, papers, correspondence, memoranda, contracts, agreements, or other records. How Enforcement Staff conducts this investigation will likely be a template for future investigations of this type. The source of this issue appears to be the PJM Tariff power market settlement rules. PJM has filed a tariff amendment under FPA Section 205 to fix the problem, with a proposed mid-September effective date. FERC has not yet moved pursuant to Section 206 to investigate the justness and reasonableness of the tariff provisions at issue, nor has it set a refund effective date. FERC could find that such FPA 206 refund protection is necessary to protect customers in this instance.
Troutman Sanders’ Energy Practice Group has long been a leader in the industry and has a wealth of experience in FERC enforcement actions. Please call us if you need any assistance regarding this matter.
Daniel L. Larcamp
Amie V. Colby
David B. Rubin
Jeffrey M. Jakubiak
William R. Derasmo