Constellation Settles Market Manipulation Allegations with Record-Setting Penalty

An agreement reached between the Federal Energy Regulatory Commission (FERC) and Constellation Energy Commodities Group will require the company to pay $245 million to settle FERC allegations that the company manipulated power markets run by the New York Independent System Operator (ISO) and ISO New England between September 2007 and December 2008. The penalty is the largest ever imposed by FERC under the expanded enforcement authority assigned to the federal body in 2005.

The agreement stems from a determination by FERC enforcement staff that Constellation “engaged in manipulation that resulted in economic losses to market participants who bought and sold energy in the day-ahead markets of ISO New England and the New York Independent System Operator,” FERC Chair Jon Wellinghoff said in a statement last week. “Enforcement Staff also determined that this manipulation distorted price discovery for all market participants.”

It concludes a “lengthy and complex investigation” and is “a landmark case that will have long term benefits for all electric market consumers,” Wellinghoff added.

Under the agreement, Constellation—a company that last week completed a merger agreement with Exelon Corp.—will pay a civil penalty of $135 million and disgorge what FERC deemed were “unjust profits” valued at $110 million. FERC also said that employees involved in trading activities concerning the case had been removed from positions that performed duties related to managing, directing, or engaging in wholesale physical and financial energy trading.

"While Constellation disagrees with the FERC staff’s claims, we believe it is in the interest of all parties to settle this case and avoid expensive, protracted litigation,” said Mayo A. Shattuck III, former chairman, president and chief executive officer of Constellation, days before the merger closed. Shattuck now serves as executive chairman of Exelon Corp.

Shattuck said the $110 million disgorgement amount would be disbursed in two ways: “First, Constellation will provide $1 million each to six U.S. regional grid operators for the purpose of improving their surveillance and analytic capabilities. The remainder will be deposited in a fund that will be administered by a FERC administrative law judge. State agencies in New York, New England and PJM (the regional grid operator for 13 states and the District of Columbia) will be eligible to make claims against the fund on behalf of electric energy consumers in those states.”

The agreement reached last week requires Constellation to institute a policy and process to monitor profit and loss concentrations in virtual transactions and physical schedules of electric energy and to review and document the purpose of virtual transactions. The company will additionally develop and enforce policies that require that communications by its traders, including but not limited to instant messaging (IMs), email, and phone calls be preserved and a system should be set up whereby such communications will be regularly monitored by its compliance group for potential irregularities.

“It is my hope and belief that this order again reinforces this Commission’s commitment to protecting the integrity of the markets that are subject to our oversight and protecting the interests of consumers dependent on those markets,” Wellinghoff said. “Compliance, not penalties, remains my primary goal. To that end, the Stipulation and Consent Agreement is instructive regarding the characteristics of a robust compliance program.”

Wellinghoff went on to outline four points he said wholesale market participants should focus on: “First, do not trade uneconomically on one position in order to benefit the value of another. Second, senior management will be held accountable. Senior management has an obligation to proactively monitor for market manipulation and to pursue concerns once brought to their attention. Third, tell the truth, the whole truth, and nothing but the truth when questioned. Finally, understand that the Commission will be vigorous in using its anti-manipulation authority to protect consumers.”

Sources: POWERnews, FERC, Constellation Energy