The Federal Energy Regulatory Commission (FERC) has accused Powhatan Energy Fund and its key trader of market manipulation four years after beginning to investigate if the firm used "wash trading" to collect millions of dollars in power market rebates.
The trades at issue occurred in the PJM Interconnection between July 2010 and August of that year, when Houston-based power trader Alan Chen scheduled so-called up-to-congestion transactions on behalf of Powhatan and two funds he runs called HEEP Fund and CU Fund.
FERC staff in a notice of violation issued yesterday alleged that Chen, Powhatan, HEEP Fund and CU Fund all violated its anti-manipulative regulations.
The notice said Chen intentionally made "millions of megawatt hours of offsetting trades" to cancel out financial risks of the trades as he collected rebates from transmission losses. This strategy was effectively wash trading and has "long been prohibited," FERC staff said in the notice.
Up-to-congestion transactions are virtual products that let traders say how much in congestion charges they will pay to move power between two nodes. In late 2009 the transactions started receiving payments for transmission losses that were paid by PJM. The payments are called the marginal surplus loss allocation. The economic rationale for those transactions is to let market participants hedge in the day-ahead energy market against exposure to real-time price differentials resulting from congestion along transmission paths.
Chen after he noticed the payments in November 2009 allegedly changed his trading strategy to maximize the payments while minimizing his financial risks through offsetting trades, FERC said in preliminary findings released last year. Though those findings were non-public, Powhatan publicly posted on a website all of its correspondences with FERC to support its argument that it was being investigated for transactions that were legal.
FERC staff in preliminary findings said that between February and August of 2010, Chen lost $6.7mn on the actual trades and PJM transmission charges but earned $11.5mn in rebates, for a profit of $4.7mn. The notice of violation released yesterday did not specify why it was only focusing on trades in July and August of 2010. FERC does not comment on open investigations.
The years-long federal investigation into the trades became a key issue during the confirmation of Norman Bay to become the eventual FERC chairman. Bay was the director of FERC's Office of Enforcement throughout the investigation. FERC issued the notice of violation a day after Bay was sworn in as a FERC member.
Powhatan investors Richard Gates and Kevin Gates strongly criticized Bay throughout his nomination process. Powhatan has complained that FERC's investigation of the trades has been ongoing for years without formal charges, creating legal expenses and "aggravation" over trades the firm argues were legal.
Chen declined to comment and Powhatan's attorney did not respond to messages seeking comment.
ck/ee
Send comments to feedback@argusmedia.com
If you would like to review other ArgusMedia.com content options, request more information about Argus' energy news, data and analysis services.
Copyright © 2014 Argus Media Ltd - www.ArgusMedia.com - All rights reserved.
