PJM Complaint of Market Manipulation Denied

On April 2, 2009, FERC denied the two principle allegations in a complaint by PJM Interconnection, LLC (“PJM”) against a member company, Power Edge LLC (“Power Edge”) and several of its affiliates (collectively, “Tower Companies”), claiming Tower Companies manipulated PJM’s financial transmission rights (“FTR”) when Power Edge defaulted in December 2007.

On March 7, 2008, PJM filed a complaint with FERC against Tower Companies seeking civil penalties and a disgorgement of profits for engaging in market manipulation and fraud. PJM claimed that Tower Companies perpetrated fraud by concentrating high-risk or losing positions in Power Edge and causing Power Edge to default while hedging risks in more profitable affiliates. PJM also asserted that Power Edge was deliberately under- or de-capitalized in order to trigger Power Edge’s demise.

PJM accused Tower Companies of colluding to purchase FTR positions in different affiliates, and many of those positions were in locations that offset to Power Edge’s counterflow FTRs. FTRs are financial instruments that allow their holder to receive, or obligate it to pay, the difference in price between two nodes: a source and a sink. By putting these positions in affiliates, and not in Power Edge, PJM claimed the Tower Company affiliates were enriched while exacerbating Power Edge’s default which Tower Companies allowed to happen through under-capitalization. PJM believed this allowed the costs of Power Edge’s default to increase and be spread among other PJM members while Tower Companies profited from low-risk FTR positions, instead of off-setting the harm of Power Edge’s failure. PJM initially claimed the cost to PJM’s members was $80 million, but the ultimate socialized cost was actually $51.7 million.

After PJM filed their complaint, FERC held the complaint in abeyance to allow the Office of Enforcement to complete an ongoing investigation. The Office of Enforcement is still conducting an investigation into other allegations, but FERC found that Tower Companies did not engage in market manipulation and fraud in this matter. FERC’s investigation showed there was insufficient evidence to show two crucial elements of market manipulation: 1) fraudulent device, scheme, or artifice, and (2) specific intent to defraud. FERC also did not find that Tower Companies de-capitalized Power Edge. In fact, the Commission found Power Edge made several attempts to become profitable after its FTR positions became effective, and this included the infusion of millions of dollars into Power Edge up until the month prior to the default.

In a separate order, the Commission directed PJM to return excess collateral and revenues to Tower Companies. The Tower Companies filed a complaint against PJM arguing that PJM improperly withheld over $25 million in FTR revenue or excess FTR collateral pending the outcome on the allegations of manipulating the financial transmission rights. The order was without prejudice to PJM seeking an order from the district court to preserve the funds for litigation in the district court. PJM has already filed a civil suit in Delaware alleging that by manipulating the FTR market, Tower Companies violated the Racketeering Influenced and Corrupt Organizations Act. Tower Companies has also filed suit in the Federal District Court of Pennsylvania against PJM seeking compensatory damages bases on claims of conversion and contract breach.

The orders are available on the Commission’s website under dockets EL08-44 and EL08-49.