There’s been a lot of talk in the industry about new super powers for market enforcement, conferred by Congress on FERC in last year’s energy legislation. But this hasn’t been the case entirely....
The Powhatan Matter
Market manipulation versus the right to make a profit.
Now that President Obama has nominated the current Federal Energy Regulatory Commission enforcement chief Norman Bay to serve as FERC's next chairman, perhaps the time is right to weigh allegations by Harvard Professor William Hogan and others that FERC has gone overboard in policing wholesale power markets.
As Hogan tells it, FERC appears far too ready these days to find market manipulation. And that's especially true, the professor would argue, in cases where the trader seeks openly to exploit a market defect that is widely known, and even more so when the commission has acknowledged publicly that the defect is problematic, but has let the matter stand without fixing.
Hogan states his case and recommends a possible solution in a white paper he wrote and posted on his web site this past winter. (See, "Electricity Market Design Flaws and Market Manipulation," Feb. 3, 2014, available at www.whogan.com.) It discusses the generic problem of what to do when exploitable loopholes emerge in the regional wholesale power markets - the very markets that he has helped design in theory. But the paper also focuses on a particular recent case still under investigation at FERC: a case involving allegations of certain trading activity by Dr. Houlian ("Alan") Chen, involving the use of "Up to Congestion" contracts in PJM to capture monetary credits for transmission line losses, that FERC's enforcement staff says was undertaken on behalf of various investment funds, including Huntrise Energy Fund LLC and Powhatan Energy Fund LLC, during the interval from February 1 to August 3, 2010 (See, Preliminary Findings of Enforcement Staff's Investigation of Up-to-Congestion Transactions, FERC Docket, IN10-5, filed Aug. 9, 2013.)
We'll get to those allegations shortly. But’s what’s most remarkable here is how Hogan has linked his web site to a separate site, complete with videos, in which a dozen prominent experts in securities law, electric industry regulation, and power market trading lend their names to a crusade to bring FERC to heel: to argue that FERC’s enforcement division was wrong for alleging manipulation in the Powhatan case.
Some of these experts appear on camera in short videos on the web site to make the case directly that Dr. Chen’s trading activity was not manipulative, including Hogan himself, plus Susan Court, a former director of enforcement at FERC, and Larry Harris, former chief economist for the SEC (Securities and Exchange Commission). The video-hosting site is not overly easy to locate. Try looking up http://ferclitigation.com. But you can also reach it directly from Bill Hogan's archive of white papers. Go first to www.whogan.com, click on the link to "papers," and from there find the link to the February white paper. Then click on the link immediately to the right labeled "Powhatan Matter." There you go. You've found it.
Back in January, attorney William McSwain, representing the respondents, had sent a private letter to each of FERC's commissioners (LaFleur,