The Federal Energy Regulatory Commission has determined that Vitol and an individual, Federico Corteggiano, engaged in violations of the Commission’s prohibition on energy market manipulation through a scheme to sell physical power at a loss in the California Independent System Operator Corporation’s (CAISO) wholesale electric market in order to eliminate congestion that they expected to cause losses on Vitol’s congestion revenue rights (CRRs).
Vitol trades and markets oil, power, and other energy-related products throughout the U.S.
FERC enforcement staff over the summer alleged that Vitol Inc. and Corteggiano engaged in the violations of the Commission’s prohibition on energy market manipulation.
“From October 28 through November 1, 2013, Respondents [Vitol and Corteggiano] sold one product – electric power – at a financial loss in CAISO’s day-ahead market to benefit its separate financial product – Respondents’ Congestion Revenue Rights (CRRs). Corteggiano, co-head of Vitol’s financial transmission rights (FTR) trading operation, was the architect of this scheme,” and enforcement staff report said.
CRRs and FTRs are synonymous. Different energy markets use different names for this financial product.
The enforcement staff report alleged that Vitol and Corteggiano sold physical power at a loss at the Cragview node in CAISO’s day-ahead market from October 28 through November 1, 2013, in order to eliminate congestion costs that they expected would negatively affect Vitol’s CRRs.
On Vitol’s behalf, Corteggiano purchased CRRs sourcing at Cragview in CAISO’s annual CRR auction for 2013.
Cragview is the scheduling point for the Cascade intertie, and its locational marginal price (LMP) reflects one hundred percent of the congestion on the intertie. In mid-October 2013, CAISO derated the Cascade intertie to “0” in only the export direction, while still allowing imports. During the derate, an unusually high LMP appeared at Cragview due to congestion costs. The congestion costs caused Vitol’s and Corteggiano’s CRRs to lose money on October 18 and 19. CAISO management confirmed to Corteggiano that these costs were due to “phantom congestion” resulting from bids, and not actual imports, and could be eliminated by physical imports. Corteggiano then purchased 5MW of power from Morgan Stanley and submitted it as an import bid at Craigview. Although Vitol lost money on the imports, it avoided much greater CRR losses. (Corteggiano had been able to purchase counter-flow CRRs for November and December to avoid losses in those months in the monthly auction but did not have that opportunity for October once the derating occurred.)
In the July order, the Commission directed Vitol to show cause why it should not be required to disgorge unjust profits of $1,227,143, plus interest, and further directed Vitol and Corteggiano to show cause why they should not be assessed civil penalties of $6,000,000 and $800,000, respectively.
FERC issued order in late October
In an Oct. 25 order assessing civil penalties (Docket No. IN14-4), FERC said that Vitol and Corteggiano violated Section 222 of the Federal Power Act (FPA) and FERC’s anti-manipulation rule.
The Commission said that based on the totality of the evidence in the record, it found that Vitol and Corteggiano’s imports in the CAISO day-ahead market from October 28 through November 1, 2013 at the Cascade intertie “constituted a fraudulent device, scheme, or artifice to defraud the CAISO market and market participants.”
FERC said the preponderance of the evidence demonstrates that Vitol and Corteggiano submitted physical import bids at the Cascade intertie with the intent to eliminate congestion, thereby lowering the Cragview LMP, to economically benefit their CRR position, “and we find those actions constitute fraud.”
Vitol, Corteggiano respond to allegations
Vitol and Corteggiano argued that FERC Office of Enforcement staff failed to state a claim for manipulation because Vitol’s imports at Cragview were consistent with supply and demand fundamentals and therefore there was no basis to allege that the physical sales were deceptive.
Corteggiano also argued that the Cragview trade was in accord with supply and demand and not deceptive in any respect. To find manipulation, Corteggiano argued that the Commission would have to disbelieve all the facts, which are supported by contemporaneous, direct evidence.
He argued that the Cragview trade was made in response to a published $388.11/MWh price that he believed would recur during the next scheduled derate, and which was confirmed by CAISO as being a “valid” price.
Corteggiano explained that, in response to the price and intending to profit, Vitol purchased 5 MW of physical power in an arms-length deal at fair market prices for the days of October 28 through November 1, 2013, offered the 5 MW for delivery at Cragview, sold the 5 MW at Cragview’s LMP, and delivered the 5 MW to Cragview, all in compliance with CAISO’s market rules and regulations.
Corteggiano asserted that the Cragview trade was consistent with the forces of supply and demand and contributed to the formation of a market price.
FERC not persuaded by defenses offered by Vitol and Corteggiano
But in its late October order, FERC noted that it considered the arguments and defenses offered by Vitol and Corteggiano and find them to be unpersuasive.
FERC said that it has consistently found that “cross-market” schemes in which market participants trade in one market with the intent to move prices in a particular direction to benefit positions in a related market are manipulative.
In so finding, the Commission has relied on a number of indicia of fraud, such as:
- A consistent pattern of trading in a direction that would tend to move the price to the benefit of a related financial position;
- Changes in trading behavior during periods when manipulation is alleged as compared to trading during other time periods when manipulation is not alleged;
- Trading that is uneconomic in nature;
- Communications among traders substantiating the scheme; and
- The failure of a company to adequately explain the relevant positions and trading behavior
“We find that these indicia are present here and that they demonstrate that Respondents engaged in a fraudulent scheme,” FERC said.
“Based on the totality of the evidence in the record, the Commission finds that Respondents acted with fraudulent intent by engaging in physical transactions to prevent losses on their CRR position, not to profit based on supply and demand fundamentals, and that, by trading for this purpose, Respondents injected false and deceptive information into the marketplace,” FERC went on to say.
Moreover, the Commission does not agree with the arguments offered by Vitol and Corteggiano that Office of Enforcement staff needed to present evidence of material misrepresentations, omissions, or the employment of a deceptive device, such as a wash trade.
Vitol and Corteggiano “injected false information into the market that their transactions were undertaken for a legitimate economic purpose, when they were actually undertaken for a manipulative purpose, which operated as a fraud or deceit and impaired the functioning of the market.”
Penalties
Consistent with its prior order, FERC directed Vitol to disgorge unjust profits, plus applicable interest, in the amount of $1,227,143.
However, the Commission deviated from the prior civil penalties that were under consideration, finding that it was appropriate to assess civil penalties of $1,515,738 against Vitol and $1,000,000 against Corteggiano.
It said that a strict application of penalty guidelines to Vitol’s conduct would, considering all of the facts and circumstances in this matter, be unfair and unreasonable “and apportion too large a penalty to Vitol because it would not adequately account for conduct that was conceived of and primarily carried out by an individual trader.”
FERC said that Vitol bears substantial responsibility for the manipulative conduct addressed in the order and that it would assess a civil penalty against Vitol that appropriately accounts for this responsibility. “The scheme was conceived of and executed by Vitol employees, using Vitol resources, to benefit Vitol’s CRR position,” the order said.
“Nevertheless, we conclude that Corteggiano was the primary actor responsible for the market manipulation addressed in this order. He devised the scheme, proposed it to others, worked to facilitate its approval, and intended to, and did, benefit a CRR position that was booked to his account,” the Commission said.
“Moreover, he had previously engaged in similar behavior that was investigated by OE [Office of Enforcement] Staff. In addition, the record in this proceeding suggests that Corteggiano deliberately withheld material information about the manipulative scheme from Vitol’s compliance officers when discussing the relevant actions. Under those circumstances, a strict application of the penalty guidelines to Vitol’s conduct would not adequately account for Corteggiano’s role in this matter, and thus we find that it is appropriate to depart from the penalty guidelines in this case.”
