Recent enforcement actions by the Federal Energy Regulatory Commission on alleged manipulation of US power markets are “alarming” and set a dangerous precedent that departs from previous cases, a Harvard professor and former International Association for Energy Economics president told energy traders gathered in New York City this week.
FERC is endangering the functioning of power markets across the country by extending its definition of market manipulation in ways that are “extremely dangerous” and could “unravel the entire power market” Kennedy School of Government professor of Global Energy Policy William Hogan told the Platts Nodal Trading Conference in a keynote address this week.
“It should not be the case that price-taking, profit-maximizing behavior is treated as manipulation and pursued through an enforcement action,” Hogan said, referring to a recent spate of cases arising from the agency and citing one involving Deutsche Bank in particular.
FERC has not historically had a reputation in Washington of being an aggressive agency, despite a comprehensive multi-year rulemaking series set underway in part in reaction to the collapse of Enron as well as a recent push to promote both renewable energy and energy efficiency through market design. The agency has hired a number of new prosecutors too, Exelon Business Services Vice President David Dardis said at the Platts conference, and the agency is now pursuing a larger number of cases.
Traditionally FERC has used a “stand-alone profit” standard to determine fraud and manipulation in power markets, requiring demonstration of a deliberate and knowing plan by the accused entity or its traders to manipulate markets. The extreme complexity of power markets – where transactions for virtual power in the forward market are continuously transformed into real-time delivery – often makes direct manipulation difficult if market power addressed separately by regulators in market design can’t be proved. That means successful market manipulation in power markets has often confusingly involved losing money on power to profit on a separate trade impacted by power market moves elsewhere.
But recent enforcement actions have instead seemed to rely on “non-fraud fraud,” Hogan said, and the Commission seems to be punishing what it considers “bad acts” rather than fraud as traditionally defined.
Power markets already often struggle with liquidity issues as financial entities hesitate to embrace their complexity and power providers often lack the remit or trading wherewithal to engage. Driving out traders by prosecuting them based on social goals their activities threaten, like ensuring profitability for certain types of generation, would only worsen the problem and destabilize the market, Hogan said.
“[Regulators] should not impose on traders the responsibility of the [system operator],” Hogan said. “There is no design that can rule out all short-term deviation from perfection.”
