A small Philadelphia energy trading firm, charged by the Federal Energy Regulatory Commission with market manipulation, has fired back at the agency with a delightful in-your-face response. Dissecting FERC’s show cause order claiming that Powhatan Energy Fund manipulated the PJM market, Powhatan’s law firm, Drinker Biddle & Reath, makes it clear it is ready for a knock-down, drag-out brawl.
The Powhatan response says bluntly that the report of FERC’s Office of Enforcement (OE) staff claiming illegal manipulation “is a pile of nonsense. The staff has done a disservice to the commission by throwing this nonsense in the commission’s lap and basically saying – here, you deal with it. The arguments in the report as so off-base, so easily rebutted, that they show that the staff simply cannot be reasoned with here.”
The Powhatan response takes direct aim at Commissioner Norman Bay, who headed the enforcement office. “Communicating with the staff in this matter – even communicating with the former director of enforcement himself, now-Commissioner Norman Bay – has been akin to beating one’s head against the wall.” Commenting on some of the due process issues raised by the OE report, Powhatan says, “There is nothing complicated or ambiguous about this. You don’t have to be a constitutional law professor or claim to be an expert on energy markets to understand the import of the relevant orders here. All you have to do is know how to read.” Bay is a former constitutional law professor at the University of New Mexico.
The OE staff report says Powhatan exploited “loopholes” in the PJM rules in order to increase its chances to make a profit on energy trades. For purposes of argument, Powhatan says, “So what? One can never be guilty of market manipulation simply by taking advantage of a flawed market design, or a ‘loophole.’” The Powhatan response adds that “as a matter of common sense, there is no illegal connotation to the world ‘loophole.’ To the contrary, there is an assumption of legality.” Powhatan asserts that “finding and exploiting market inefficiencies (or loopholes) is what traders do. They look to maximize profits within the existing rules, even if those rules are flawed.”
While most of FERC’s market manipulation cases have been settled, usually with payment of a big fine and signed confidentiality agreements, Powhatan appears to be itching for a fight. The filing concludes, “This investigation has been so poorly conceived and poorly executed that it does a disservice to the commission. If this case proceeds any further, it will be a train wreck for FERC. That serves nobody’s purposes.”