Bob Fallon, Engleman Fallon, PLLC, 202 464-1331,

The most interesting part of FERC Enforcement’s annual report is not what Enforcement did in the prior year but what they did not do – what they decided not to prosecute.   In its annual report for 2018, FERC Enforcement strongly suggested that capacity market arbitrage, i.e., offering capacity in a base auction with the intent not to serve load but to buy back the obligation at much lower incremental auction prices, would be manipulative conduct.  But FERC did not prosecute because the company was able to justify its actions in purchasing the capacity. at p. 31

The case involved a demand response provider (DSP) and whether the DSP engaged in capacity market arbitrage.  An anonymous whistleblower at the DSP wrote a detailed letter to a market monitor alleging that the DSP engaged in a form of fraudulent “capacity market arbitrage,” specifically it offered capacity in the base auction not with the intent to meet its obligation with new demand response customers but to buy back the capacity obligation at much lower incremental auction prices, thereby making a profit.  The market monitor then referred the matter to FERC Enforcement. Enforcement investigated, found no fraudulent activity – in part because the company and its former employees “provided reasonable, specific, and verifiable explanations – and closed the investigation without further action.

Enforcement’s non-action provides important compliance lessons. First, FERC likely views capacity market arbitrage as illegal. Enforcement confirmed that the DSP greatly increased its capacity sales in a particular base auction and then reaped a substantial windfall through buying back bids in an incremental auction.  Thus, companies must bid in a capacity auction with an intent to serve load not profit from their bids by buying them back in a later incremental auction.

Second, during compliance training, I always stress to clients that any time there is a significant change in prior bidding activity, they must contemporaneously document the reason for the change. (For further compliance tips, check out the Engleman Fallon, PLLC web site, In this case, the company increased capacity sales in the base auctions in anticipation of expanded business.  That business did not materialize thereby necessitating the large buy-back.  FERC did not fine the company because the company and many of its former employees provided “verifiable explanations of the business expansion plan” thereby supporting the significant change in the base capacity auction.

Notice that Enforcement used the word “verifiable” in describing the explanations that the company gave. Companies are less likely to be successful in defending against Enforcement actions if they cannot justify their actions using documentation  — contemporaneous — to the time of the alleged manipulative conduct.  Coaltrain Energy, L.P., et. al., 155 FERC ¶ 61,204 at P 7 (2016) (contemporaneous statements and actions, as well as testimony, trade data, and other evidence, demonstrate that company chose to engage in UTC trades solely or primarily to garner excessive MLSA payments in a manner inconsistent with the market design of UTC transactions.)  Companies are more likely to lose Enforcement cases when their attempted justifications – provided after the fact – do not mesh with their documentation contemporaneous to their actions.   Id. at P 200 (“To the extent that the company relied on the Black Oak decisions as affirmation that their trades were allowed, no one has brought to our attention contemporaneous evidence that Respondents relied on the Black Oak decisions when they designed and implemented their OCL Strategy.”) Conversely, companies are more likely to be successful in defending against an Enforcement action when contemporaneous documentation – from the time of the alleged manipulative conduct – support their after-the-fact justifications for that conduct. See e.g., PJM Interconnection, L.L.C. v. Accord Energy, et. al., 127 FERC ¶ 61,007 (2009) (contemporaneous records supported defense that company did not intend to fail or contrive to do so but rather support that company failed contrary to their expectations and despite their efforts.)  That is why it is so important that when your bids or actions significantly deviate from prior periods or by market locations, you contemporaneously document why you took those actions.

Third, this case shows that FERC market manipulation investigations can come at a company from all different directions, (1) from the market monitor, (2) by calls to the FERC Enforcement hotline from either whistleblowers or losing competitors, (3) through the oversight activities of the Enforcement Division of Analytics and Surveillance or as in this case (4) a whistleblower complaint to the market monitor who forwarded it on to FERC.  While a company may still have to spend and incur the expense of defending itself against a FERC Enforcement action, it can significantly improve its chances of success by contemporaneously documenting transactions that might later attract the attention of FERC Enforcement.