Electricity Markets

FERC orders firm to respond to FTR manipulation allegations

The Federal Energy Regulatory Commission (FERC) recently ordered GreenHat Energy LLC and its owners to explain why they should not pay a total of $229 million in civil penalties and disgorge nearly $13.1 million in unjust profits for alleged electric market manipulation.

In a report attached to FERC’s May 20 order to show cause, FERC’s Office of Enforcement staff alleges that the GreenHat parties violated the Federal Power Act and the PJM Interconnection LLC’s tariff and operating agreement by engaging in a manipulative scheme in the financial transmission rights (FTR) market.

The order directs GreenHat, John Bartholomew and Kevin Ziegenhorn to show why they should not be assessed civil penalties of $179 million, $25 million, and $25 million, respectively.

GreenHat, Bartholomew, Ziegenhorn and the estate of Andrew Kittell, who was the third owner of the company, also must explain why they should not be required to disgorge $13.1 million in unjust profits, plus interest. Issuance of the order does not indicate Commission adoption or endorsement of the staff report.

FERC noted that between 2015 and 2018, GreenHat acquired the largest FTR portfolio in PJM.  In June 2018, it defaulted on the portfolio, leaving other PJM members, including many utilities serving retail customers, to cover more than $179 million in losses over the next three years. At the time of its default in 2018, GreenHat had only $559,447 in collateral on deposit with PJM.

FERC Enforcement staff alleges that GreenHat’s conduct was unlawful in several ways. Among them are that GreenHat sent false price signals into the PJM market by purchasing FTRs based not on expected profitability but on which FTRs it could acquire with minimal collateral, GreenHat made deliberately false statements to PJM to try to avoid a collateral call and GreenHat rigged FTR auctions by using inside information about Shell Energy North America (US) LP’s offers (on the seller side of the auction) in designing its own bids for the same FTRs (on the buyer side of the auction). 

Although the alleged scheme generated enormous losses that were borne by all other PJM members, it was highly profitable for GreenHat’s owners, FERC said. 

Kittell, Bartholomew and Ziegenhorn realized that although GreenHat’s enormous portfolio was unprofitable overall, it included some “winners,” that is, FTRs that increased in value after GreenHat bought them.  GreenHat made four deals in which it sold winners to third parties for a total of $13.1 million in cash.

According to the Enforcement staff report, this alleged scheme is an example of a type of fraud in which perpetrators acquire assets with no intent to pay for them, and then try to turn the assets into immediate cash for themselves.

The GreenHat parties have 30 days to respond to the Commission’s order.

Commissioner Danly concurrence

In a concurrence on the FERC order, Commissioner James Danly said that he supports the Commission’s issuance of an Order to Show Cause. “As the primary regulator of PJM’s FTR market, the Commission has the responsibility to make an official public determination as to whether or not GreenHat’s default was the result of fraud or manipulation,” he wrote.

“But my support for the issuance of the Order to Show Cause is based solely on my belief that the Commission has the responsibility to issue an official pronouncement as to whether GreenHat engaged in fraud or manipulation. My support of this order should not be read as an indication that I have reached any conclusions at this time on the ultimate question of GreenHat’s liability.  I am issuing this concurring statement to provide some guidance to the parties as to what I believe would be helpful for them to address in their submissions in response to the show cause order,” he said.

Based on his review of the Enforcement Staff Report and Recommendation, Danly said he has questions and concerns about both Enforcement’s and GreenHat’s positions, which he details in his concurrence, which is available here.