U.S. Proposes $242 Million in Penalties for Traders
(Bloomberg) -- The top U.S. energy regulator has proposed forcing three power traders, all veterans of JPMorgan Chase & Co., to pay a total of $242 million for allegedly manipulating an obscure of corner of the country’s largest electricity market.
The Federal Energy Regulatory Commission accused GreenHat Energy LLC and its owners of placing bets on potential grid bottlenecks, known as the financial transmission rights market, that sent false price signals, according to statement Thursday. The wagers cost utilities and other traders in the PJM Interconnection market more than $179 million in losses.
“Today’s order offers another reminder that the Commission has a solemn responsibility to investigate and penalize participants that engage in market manipulation,” FERC Chairman Richard Glick said Thursday during a FERC meeting.
The move comes after the number of FERC probes into wrongdoing in energy markets fell to a record low last year under the Trump Administration. Glick has made it a priority to step up investigation since he was appointed to lead the agency by the Biden Administration earlier this year.
FERC proposed civil penalties totaling $179 million to GreenHat and fines of $25 million each to two of its owners: John Bartholomew and Kevin Ziegenhorn. The agency also proposed ordering them to surrender nearly $13.1 million in profits.
A third GreenHat owner, Andrew Kittell, died in January. His estate is being asked to respond to the allegations. The parties have 30 days to respond.
GreenHat started placing the bets in auctions held by PJM Interconnection LLC, which operates the country’s largest power market, in 2015 and kept building positions into 2018. The company kept placing the bets even as other market participants flagged PJM about the risk before it defaulted on a $1.2 million payment in June 2018 and those losses have ballooned 150 times. At the time of the default, GreenHat had less than $560,000 in collateral on deposit with the grid operator.
GreenHat rigged the auctions by using inside information about sell offers made by a unit of Royal Dutch Shell Plc to design its own bids to buy those same transmission rights from the energy giant, the commission said Thursday. The three owners of the firm had realized “their enormous portfolio” was not expected to be profitable overall, but some of the FTRs did gain value after GreenHat bought them. GreenHat then sold these “winners” in four deals to third parties for a total of $13.1 million.
“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,” FERC said in the FERC statement.
Shell didn’t immediately respond to a request seeking comment, nor did lawyers representing Bartholomew and Ziegenhorn. Lawyers representing Kittell’s estate declined to comment.
This default by a small, new trader was the largest any U.S. grid had experienced of any kind, until the freeze that struck Texas in February left the state’s power market facing a nearly $3 billion shortfall. GreenHat’s default forced the previous PJM chief executive out. PJM also hired a new chief risk officer reporting to the board and sparked a review of credit policies across grids.
Market participants have already been charged $180.5 million for GreenHat’s bad bets when factoring related costs and those losses will continue to widen until the last positions are liquidated this month, according to the market monitor’s most recent report.
FERC’s enforcement team has been investigating GreenHat’s trading behavior since at least 2018, bringing fresh scrutiny on trading activity by Kittell and Bartholomew just a few years after they were part of a team investigated at JPMorgan, according to filings. In 2013, the bank settled a case alleging its traders manipulated the California power market for a record $410 million fine at the time.
FERC Commissioner James Danly concurred with the GreenHat order, calling in light of the massive default, in the monthly meeting. “It’s necessary for the commission to make an official pronouncement on whether or not there was manipulation.”
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