Trader Who Helped Develop Market Now Twice Accused of Gaming It

(Bloomberg) -- No one knows more about one of the darkest corners of the California power market than Federico Corteggiano.

Nine years ago, he led a team at Deutsche Bank AG that allegedly manipulated congestion costs on California’s transmission lines for the company’s financial benefit. Three years after that, regulators say he struck again for his latest employer, Vitol Group.

For Corteggiano, knowledge was power: He helped design the software that makes the market run. Now he’s facing $800,000 in fines while Vitol, one of the world’s biggest energy traders, could be fined $6 million, according to a report by staff for the Federal Energy Regulatory Commission. The filing says Vitol has been ordered to show cause why they shouldn’t be penalized. A final ruling will be made by the agency’s commissioners.

Corteggiano, who has a Ph.D. in power systems engineering, manipulated the market to prevent potential losses of more than $1.2 million on a bet he made on the use of a high voltage power line in California, according to the staff filing. By adjusting the flow of electricity he eliminated the potential problem, the staff report says.

Corteggiano, who generated at least $13 million in profits for Vitol in 2013, didn’t answer his phone Thursday or respond to a request for comment via social media. Vitol didn’t respond to questions, but issued a statement in the wake of the FERC filing.

Vitol Statement

The company “regrets the FERC’s decision to issue an Order to Show Cause against it and denies all of FERC’s allegations,” a representative said in the emailed statement. “Vitol believes that its conduct was lawful and intends to defend itself in the appropriate forum.”

Corteggiano’s actions, though, are more evidence that the arcane, multibillion dollar transmission-rights markets that have attracted banks and brokers in recent years can be vulnerable to abuse. And they’re another blow to a California power industry beset by Enron Corp. at the turn of the century, and wildfires more recently.

Corteggiano was a senior software engineer at Nexant Inc. where he helped create software for operating the Congestion Revenue Rights, or CRR, market that he’s now twice been involved with manipulating. He next worked at Citadel Investment Group for two years, where he did quantitative research for a CRR trading desk.

Deutsche Bank

He joined Deutsche Bank in 2009, serving as co-head of the Financial Transmission Rights, or FTR, trading desk, the group eventually involved in manipulating the congestion market. Deutsche Bank settled that dispute in 2013 by paying a $1.5 million penalty and disgorging the $172,645 in benefits that it got from the trades.

Corteggiano left for Vitol that May, according to his Linkedin profile.

At Vitol, Corteggiano lost $240,000 over two days in October 2013 before determining that a planned one-way shutdown of the line could potentially cost the company $1.2 million more, according to the staff report. With “deep knowledge” of financial transmission rights and 12 years experience, he knew he could stop the losses if he could eliminate the appearance of congestion on the line.

He then convinced Vitol to buy a tiny amount of power and import it across a rarely traded hub, a move designed to erase the congestion that caused his losses, according to the filing. Vitol officials told the regulators they went along with Corteggiano because they believed his claim it wouldn’t benefit his congestion holdings.

The power used in the arrangement cost the company a few thousands dollars, but ended up preventing the $1.2 million additional losses, the regulator found.

--With assistance from Stephen Cunningham.

To contact the reporter on this story: Christopher Martin in New York at cmartin11@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Reg Gale, Pratish Narayanan

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