Federal Energy Regulatory Commission enforcement staff is alleging that Vitol Inc. and an individual, Federico Corteggiano, engaged in violations of the Commission’s prohibition on energy market manipulation by selling physical power at a loss in the California Independent System Operator’s market in order to eliminate congestion that they expected to cause losses on Vitol’s congestion revenue rights.
The case presents allegations by FERC enforcement staff of Vitol and Corteggiano’s violations of the Commission’s prohibition on energy market manipulation, FERC noted in a July 10 order (Docket No. IN14-4-000). Vitol trades and markets oil, power, and other energy-related products throughout the U.S.
The allegations arose out of an investigation conducted by enforcement staff and are described in an enforcement staff report and recommendation. “Issuance of this order does not indicate Commission adoption or endorsement of the enforcement staff report,” FERC noted.
“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,” the enforcement staff report said.
CRRs and FTRs are synonymous. Different energy markets use different names for this financial product.
The enforcement staff report, which is attached to FERC’s order, alleges 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, FERC said in the order. The congestion costs caused Vitol’s and Corteggiano’s CRRs to lose money.
CAISO announced that identical derates would occur during the week of October 28 through November 1 and on additional dates later in November and in December. FERC said in the order that Vitol and Corteggiano were able to protect against losses on their CRR positions for November and December by buying counter-flow CRRs in the CRR auctions for those months (i.e., “flattening” the CRR position).
However, because the monthly CRR auction for October had closed, it was too late for them to flatten their CRR position for the last week of October.
Vitol and Corteggiano faced over $1.2 million in potential losses on their CRRs during that week’s scheduled partial derate. They therefore imported physical power in the day-ahead market at an offering price of $1/MWh, which prevented a recurrence of the congestion costs that they had observed during the October 18-19 derate.
Vitol and Corteggiano “undertook the import transactions in disregard of market fundamentals and were indifferent to whether they made a profit on them,” FERC said in the order. They lost money on the imports but avoided a far larger loss on their CRRs. Enforcement staff explain that “the Commission has found to be fraudulent cross-market schemes in which a market participant improperly trades in one market with the intent to move prices in a particular.” Engaging in a fraudulent scheme is prohibited by FERC’s Anti-Manipulation Rule.
The enforcement staff report alleges that Vitol avoided a loss of $1,227,143 on its CRRs through its manipulative trading, and staff recommends that Vitol pay this amount, plus interest, in disgorgement. Staff also recommends that Respondents pay civil penalties.
Staff’s recommended penalties are predicated on its finding that Vitol and Corteggiano caused $2,515,738 in market harm in the form of (a) $2,429,385 in reduced funding of CAISO’s CRR balancing account, and (b) $86,353 in losses suffered by the holders of CRR counter-flow positions at Cragview.
In light of the allegations contained in the enforcement staff report, the Commission directed Vitol and Corteggiano to respond to the FERC order, which also serves as the notice of proposed penalty required pursuant to Section 31 of the Federal Power Act.
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. They may also seek a modification of those amounts consistent with Section 31(d)(4) of the FPA.
FERC said that in their answers to the order, Vitol and Corteggiano have the option to choose between either (a) an administrative hearing before an administrative law judge at the Commission prior to the assessment of a penalty, or (b) a prompt penalty assessment by the Commission.