The Federal Energy Regulatory Commission (FERC) approved a settlement with GDF SUEZ Energy Marketing NA Inc. (GSEMNA) in February 2017, in which GSEMNA agreed to pay civil penalties of $41 million and disgorge an additional $40.8 million of profits to settle allegations that it violated FERC’s market manipulation regulations when offering energy into the wholesale electric markets administered by PJM Interconnection LLC. This is the largest civil penalty FERC has imposed since JP Morgan and Barclays Bank were each required to pay hundreds of millions of dollars in July 2013.

FERC’s penalty against GSEMNA is just the latest in a series of orders FERC has issued over a number of years involving companies that sought to profit by exploiting market design flaws, not realizing FERC would deem their activities to be market manipulation rather than legitimate arbitrage.

Companies participating in the U.S. wholesale electric markets administered by regional transmission organizations and independent system operators need to ensure their traders, officers, and employees receive periodic compliance training so that they do not run afoul of FERC’s views on market manipulation.

Lost Opportunity Costs

In its settlement, GSEMNA stipulated to having adopted and implemented a bidding strategy focused on profiting from lost opportunity cost (LOC) credits, as opposed to from the sale of energy from 12 combustion turbine (CT) units. PJM provides LOCs to CT units to give them an incentive to maintain their resources as PJM pool-scheduled resources, which allows PJM to control their output to manage system operations and ensure reliability.

Under PJM’s tariff, CTs receive LOCs if they clear the day-ahead (DA) market and are subsequently directed by PJM to reduce output or are not dispatched in the real-time (RT) market. During the time when the alleged violation took place, PJM utilized a formula for calculating LOCs that did not deduct the start-up and no-load costs the generator would have incurred if dispatched. This provided CTs an opportunity to earn a greater profit when they received LOCs than they would earn if they were dispatched.

GSEMNA previously expected low profits from the 12 CTs in PJM’s energy market because of the infrequency with which they were dispatched. The strategy it devised, however, would allow it to boost the profitability of the units without changing the economics of the units or the frequency with which they were dispatched.

Specifically, GSEMNA determined that it could bid the CTs in the DA market at a discount below each unit’s costs, thereby allowing the units to clear the DA market when they otherwise probably would not have, and enabling GSEMNA to profit from the LOCs when the units were predictably not dispatched. GSEMNA employed a probabilistic, risk/reward approach whereby it would discount a given CT unit’s DA offer based on its assessment of the likelihood the CT would not be dispatched, weighing the risk of running the unit at a loss if dispatched against the potential reward of LOCs if it was not dispatched.

This strategy allowed GSEMNA to obtain DA commitments and LOCs at times when the units were uneconomical and would not, and should not, have cleared. FERC’s Office of Enforcement concluded that GSEMNA’s strategy departed from “supply and demand fundamentals and impaired the functioning of the LOC provisions of the PJM market and PJM’s unit commitment process.” The offers GSEMNA made in the DA market did not reflect the price it wanted for its energy, but instead the price at which it could clear and then receive LOCs. This, the Office of Enforcement concluded, was contrary to the purpose of LOCs to compensate generators for lost opportunity costs due to PJM’s decision not to dispatch a CT. The Office of Enforcement took the position that GSEMNA had fraudulently “gamed” the market to obtain LOCs.

Ensure Compliance Within Your Company

Importantly, companies are expected to know how FERC has treated other investigations of possible market manipulation. FERC does not believe GSEMNA was operating in a gray area. While companies increasingly are litigating FERC’s decisions on alleged gaming in court, FERC has made clear that it views such trading strategies as prohibited market manipulation.

Companies participating in wholesale electric markets should hold periodic and regular compliance training sessions for their traders, supervisors, and managers involved in offering generating resources in organized markets regarding FERC’s regulations governing energy trading, including specific training on market behavior that may violate FERC’s rules against market manipulation. Trainers need to be knowledgeable about how FERC has handled specific situations and be able to delineate what is lawful and what is unlawful or of questionable legality. This will allow companies to chart a course that safeguards them from investigations, while not needlessly inhibiting them from engaging in legitimate and profitable activities. ■

Glenn Benson ( is a partner in Davis Wright Tremaine LLP’s energy practice in the firm’s Washington, D.C., office.