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September 19, 2014

September 18, 2014

FERC Issues $2.5M Sanction in Electric Market Manipulation Investigation: Company Pursued Wheeling Transactions to Benefit Other Electric Transactions at Same Point

On November 19, 2012, FERC approved a stipulation and settlement agreement with Gila River Power, LLC, in which Gila River admitted to manipulating the California ISO (CAISO) electric market by arranging nonexistent wheeling transactions to artificially reduce congestion on an interface used as a critical import path to the CAISO market. FERC concluded that this behavior violated FERC’s prohibition on electric market manipulation and the prohibitions on the submission of inaccurate information in electric marketing activities in FERC’s market-based tariff regulations and the CAISO tariff.

According to FERC, two marketing strategies were the basis for the allegation of market manipulation, both of which depended on the submission of inaccurate information to CAISO.

Under the “Standalone Wheel” strategy, Gila River would bid a “Wheeling Through” transaction to import energy into CAISO at an uncongested import node and “wheel” the transaction to a congested import node, where it would be exported out of CAISO. However, Gila River had neither a resource outside CAISO to import nor a load outside CAISO to serve. Gila River profited on these transactions because they were bid into the CAISO market such that Gila River would only be awarded the bid for the Standalone Wheel when the price at the import node was higher than the price at the export node and when it covered Gila River’s transmission costs outside CAISO.

Under the “Adjustment Wheel” strategy, Gila River would arrange nonexistent wheeling transactions to reduce the congestion at its main import point to the CAISO market at Palo Verde. In the Day-Ahead market, Gila River would submit a Wheeling-Through bid linking a purported export at a congested import node to a purported import at an uncongested node. At the same time, Gila River would submit an import bid at the congested import node, typically Palo Verde. Because the Wheeling-Through bid created counterflow at the congested import node, raising the price at that node, Gila River’s imports into CAISO at that point received a higher price. After the Day-Ahead market settled, Gila River would then redirect its imports to the now less-congested import point without creating congestion and direct its other imports to the designated import leg of the Adjustment Wheel. Finally, Gila River would buy back both legs of the Adjustment Wheel, which effectively cancelled it.

FERC explained that submitting wheeling transactions when Gila River lacked both a supporting resource and load for the transaction violated the obligation (set out in FERC’s market-based tariff regulations and the CAISO tariff) of entities with market-based rate authority to submit accurate schedules. FERC also explained that arranging a fraudulent transaction at a single point (i.e., the Wheeling-Through transaction to an export at Palo Verde) with the intent to benefit another transaction at the same point (i.e., the import transaction at Palo Verde) constituted market manipulation. Rather than being based on market fundamentals, these transactions were based on the submission of “false and deceptive information” intended to increase the value of Gila River’s imports into the CAISO market, providing the “fraudulent device, scheme or artifice” or “material misrepresentation” that is necessary to establish market manipulation.

To settle these violations—which Gila River admitted to—Gila River agreed to pay a civil penalty of $2.5 million to disgorge $911,553 in profits, plus interest, and to implement several compliance improvements. FERC considered Gila River’s cooperation as a mitigating factor in determining the appropriate sanction, noting that Gila River had been open and transparent during the investigation, assisting FERC’s enforcement personnel in identifying critical facts and developing a sound method for identifying the profits that Gila River achieved through its marketing strategies.

Copyright © 2014 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

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About this Author

Partner

Mark R. Haskell is a partner in Morgan Lewis's Energy Practice. Mr. Haskell's practice focuses on Federal Energy Regulatory Commission (FERC) matters, including FERC investigations, litigation and related court appeals, as well as Commodity Futures Trading Commission (CFTC) investigations affecting the energy industry.

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Partner

John D. McGrane is a partner in Morgan Lewis's Energy Practice. Mr. McGrane has more than 30 years of experience representing electric utilities and other participants in the electric power industry. He is listed in Chambers USA: America's Leading Lawyers for Business, Chambers Global: The World’s Leading Lawyers, and The Best Lawyers in America as one of America's leading energy attorneys.

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