On November 5, 2021, over the dissent of Commissioner James P. Danly, the Federal Energy Regulatory Commission ("FERC" or the "Commission") determined that from September 2014 to June 2018 (the "Relevant Period"), GreenHat Energy, LLC ("GreenHat") and the other respondents engaged in a scheme to amass Financial Transmission Rights ("FTR") positions in the PJM Interconnection, L.L.C. ("PJM") market that had little or no associated collateral requirements, sell the few profitable FTRs they acquired, extract the revenues from the company for personal benefit, and abandon the company to go bankrupt, leaving PJM market participants to foot the bill.1 Besides being one of the largest civil penalty assessments ever imposed by the Commission, the Order and Commissioner Danly's dissent raise several interesting legal issues, which we discuss below. They include the reliance on inferences from circumstantial evidence to establish scienter, the Commission's role in the Order to Show Cause ("OSC") process, the statute of limitations, and disgorgement.2

The Commission found that GreenHat, John Bartholomew, Kevin Ziegenhorn, and Luan Troxel, in her capacity as Executor of the Estate of Andrew Kittell (the "Kittell Estate") (collectively, the "Respondents")3 violated anti-manipulation provisions of the Federal Power Act ("FPA") and the Commission's regulations (the "Anti-Manipulation Rule") by engaging in a manipulative scheme in the FTR market operated by PJM. It also found that the Respondents committed related violations of the PJM Open Access Transmission Tariff ("Tariff") and PJM's Amended and Restated Operating Agreement ("Operating Agreement"). The Commission ordered the following penalties and disgorgement based upon the Respondents' violations:

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Commissioner Danly dissented based upon his determination that staff of the Office of Enforcement ("OE") failed to establish the alleged violations by a preponderance of the evidence.

Procedural History4

The GreenHat investigation began on June 25, 2018, when OE received a tip through the Enforcement Hotline from Kevin Kelley, CEO of an FTR trading firm called Roscommon Analytics. Kelley explained that he had met with Kittell in the fall of 2016 to discuss GreenHat's business and possible transactions with Roscommon. Kelley believed GreenHat's business to be "a classic case of market manipulation, taking advantage of market rules to defraud other participants."5 OE opened an investigation and began issuing data requests. GreenHat produced documents initially, but appears to have stopped cooperating around the time when the Commission ordered a non-public formal investigation on December 3, 2019, and referred the case to the Department of Justice. GreenHat stopped responding to data requests and, when Respondents sat for depositions, they invoked their Fifth Amendment right against self-incrimination.6

PJM FTR Market and Credit Requirements

PJM is the Regional Transmission Organization (or "RTO") that operates the wholesale electricity market and coordinates the transmission of electricity in the District of Columbia and 13 states. It is the largest RTO in the U.S. and serves around 65 million people. PJM's operating procedures, market rules, and transmission planning and expansion protocols are contained in its Tariff. In addition to running day-ahead and real-time energy auctions, PJM conducts periodic auctions for FTRs, which are purely financial instruments with returns that depend on day-ahead congestion prices across a future period.

Utilities may use FTRs to hedge against congestion charges they could incur from electric grid congestion in the PJM footprint; however, PJM also permits financial firms such as GreenHat to trade FTRs for speculative purposes.7 An FTR has a positive or negative value for a given hour "based on the difference (or 'spread') between the congestion prices at two nodes specific to the FTR - the node where energy enters the system (the 'source') and the node where the energy leaves the system (the 'sink') during that hour." 8 The FTR has a positive value for the hour when the congestion price at the sink is higher than the source and has a negative value when the converse occurs.

During the Relevant Period, FTRs could be purchased in auctions for periods of a month, a quarter, a year, or three years. Importantly, the acquirer of an FTR in an auction did not pay the purchase price until the later settlement date for that particular FTR. Depending upon the term of the FTR, the settlement date was as much as three years later.9 Significantly, until that date, the only cash the purchaser had to put up was collateral calculated pursuant to PJM's formula. However, market participants could buy and sell FTRs bilaterally outside of the PJM-administered FTR market, which was a way for an FTR holder to generate cash prior to settlement. Under PJM's Tariff, losses on defaulted FTRs were "socialized" among all other PJM members, even though the other members may never have owned any FTRs.

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Footnotes

1. GreenHat Energy, LLC, et al., 177 FERC 61,073 PP 1, 30 (2021) (hereinafter "Penalty Assessment")

2. We summarized the Commission's Order to Show Cause and Notice of Proposed Penalty ("OSC") against the Respondents in a May 28, 2021 Client Alert, available here

3. The Commission did not find that the Kittell Estate itself participated in the alleged unlawful scheme, only that the Kittell Estate represented Mr. Kittell after his passing. Mr. Kittell passed away on January 6, 2021. On May 4, 2021, the San Diego Probate Court named Troxel, Kittell's spouse, executor of Mr. Kittell's estate.

4. We do not seek to reiterate the entire procedural history, which the Commission has done at paragraphs 12-24 of its Penalty Assessment.

5. Penalty Assessment at P 12.

6. Id. at P 14. The precise date of the referral to the Department of Justice does not appear to be public, but Respondents argued that the Commission had "'effectively silenc[ed]'" them by referring the matter to the Department of Justice "'early.'" Id. at P 136 n330.

7. Id. at P 4.

8. Id. at P 5.

9. Id. at PP 5-6

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