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PJM Files Complaint Alleging Coordinated Manipulation of Markets

March 17, 2008
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The PJM Interconnection has filed a complaint with FERC accusing seven private investment funds and New York-based Tower Research Capital LLC (TRC) and affiliate Tower Research Capital Investments LLC (TRCI) of manipulating the financial transmission rights (FTR) market and day-ahead energy market of the regional transmission system, thus distorting energy prices and payments to FTR holders.

The seven investment fund companies named in the complaint include Accord Energy LLC, BJ Energy LLC, Franklin Power LLC, GLE Trading LLC, Ocean Power LLC, Pillar Fund LLC and Power Edge LLC. All of the fund companies are affiliated, with some managed by TRC and others by TRCI. Several of the fund companies cited TRCI, a financial services company, as their ultimate parent.

All are accused of engaging in activities to manipulate PJM's FTR market. "One of the fund companies, Power Edge, which experienced substantial losses in the PJM market, may have fraudulently distributed monies out of [its fund] and otherwise intentionally withheld cash on hand that could have been used to pay its obligations, choosing instead to default and have other PJM members cover its losses, effecting a fraud upon the PJM market participants," PJM said in its complaint [EL08-44].

PJM said Power Edge alone has defaulted on million of dollars. Through January of this year, Power Edge's total default was pegged at approximately $37 million, and through the end of the 12 months for which its FTRs were purchased the level of default is expected to rise to more than $50 million. At the same time, affiliate BJ Energy earned approximately $10.4 million in net revenues from its activities in PJM's FTR markets, according to PJM. It asked for BJ Energy's profits to be disgorged and used to offset Power Edge's default, decreasing the amount of the default that PJM members must cover.

In addition to disgorging "unjust" revenues and profits, PJM has called on the Federal Energy Regulatory Commission (FERC)to impose civil penalties on the investment fund companies in connection with their alleged manipulation of the markets; issue a remedial order prohibiting the Tower companies (and their affiliates, including future affiliates) from participating in the PJM markets, and to investigate the companies' alleged manipulative and fraudulent conduct.

"The Tower companies engaged in fraudulent trading activities to benefit the financial position of some affiliates by creating congestion and distorting the value of FTRs and locational marginal prices, while adversely affecting the financial position of another affiliate, Power Edge, that the Tower companies knew would default on its obligations to PJM, causing all other members to bear the cost of the default," PJM said.

FTRs are rights to receive transmission congestion credits. The holder of an FTR is entitled to credits of transmission congestion charges for a period specified in the auction. PJM holds annual, quarterly and monthly auctions to allow market participants to purchase and sell FTRs.

Power Edge "seriously miscalculated" the FTR market. "As a consequence of warmer weather than typical this fall and, more importantly, an extended planned transmission outage that commenced in late November, Power Edge's position deteriorated significantly and it defaulted on its obligations to PJM."

Power Edge defaulted on a payment of $2.3 million for November 2007 market activity, $19.9 million for December 2007 market activity and $16 million for market activity in January 2008, according to PJM.

"PJM estimates that Power Edge will be liable for substantial additional amounts on its counterflow positions pertaining to the remainder of the planning period for which it holds FTR positions, through May 31," it noted.

The complaint came just days after PJM called on FERC to take action to prevent defaults on trades involving FTR positions in the regional transmission organization, which are leaving its members holding the bag (see NGI, March 10).

In January, with an estimated $20 million in member defaults looming, PJM asked FERC to approve changes to the default allocation provisions of its operating agreement to allow PJM to set off market participants' defaults in the FTR market against revenues otherwise owed to affiliated companies and against collateral held by PJM.

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