On August 25, 2014, staff at the Federal Energy Regulatory Commission (FERC Enforcement) issued a Notice of Alleged Violations (NAV) against City Power Marketing, LLC, and its principal owner, K. Stephen Tsingas. The Notice said that FERC Enforcement has preliminarily determined that City Power and Tsingas violated the Commission's Anti-manipulation rule through Up To Congestion (UTC) trading in the PJM market. FERC Enforcement has defined UTC as "a virtual product that earns or loses money on the change between the Day ahead market and the Real time market of the spread in prices between two price nodes in PJM's system." See Preliminary Findings of Enforcement Staff's Investigation in Powhatan Energy Fund, LLC, http://ferclitigation.com/wp-content/uploads/0005-FERC-Preliminary-Findings-August-9-2013-2002899_1.pdf. FERC Enforcement also alleged that City Power made false statements and omitted material information during the investigation.
FERC Enforcement claims that Tsingas, on behalf of City Power, engaged in UTC transactions "that were designed to appear to be spread trades but that were in fact a vehicle to collect certain payments" called Marginal Loss Surplus Allocation (MLSA) from PJM. Enforcement maintains that these transactions were riskless trades merely designed to collect MLSA payments and did not provide any benefit to the markets.
This is the second recent NAV issued by FERC Enforcement in the past few weeks involving UTC transactions. On August 6, 2014, Enforcement issued a NAV against Powhatan and its chief trader, Dr. Houlian Chen, for also engaging in riskless UTC trades. The Powhatan matter has the same Enforcement docket number (IN10-5-000) indicating that Enforcement has possibly opened a number of investigations concerning UTC trading. This case also continues a FERC Enforcement trend in charging individual traders with wrongdoing in addition to the company. See, e.g., Oceanside Power; IN10-5-000, Powhatan; IN10-5-000, Richard Silkman, IN12-13-000; and Barclays Bank PLC, IN08-000.
While the only thing we know about the City Power case is what is contained in the four paragraph NAV, we know a great deal about the Powhatan case because Powhatan has taken the unusual step of making public much of the investigative record in that case. See http://ferclitigation.com/legal-back-and-forth/. Powhatan has vowed to fight the allegations against it. At this time, City Power has not publicly responded to the allegations.
- Trading that may be viewed as riskless, or that seeks to make out-of-market payments a profit center may be viewed by FERC Enforcement as manipulative.
- Traders must vet with Compliance any trading strategies that profit from, or could be perceived as profiting from, anomalies in market rules without taking on risk and/or adding value.