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The Federal Energy Regulatory Commission on Dec. 17 issued an order alleging that an individual, Houlian "Alan" Chen, and three funds engaged in fraudulent "Up To Congestion" (UTC) transactions in the PJM Interconnection’s markets. Along with Chen, the order involves HEEP Fund Inc., CU Fund Inc. and Powhatan Energy Fund LLC.

The case presents allegations by the FERC Office of Enforcement (OE) staff of a violation of the commission’s prohibition of energy market manipulation by Chen, HEEP Fund, CU Fund and Powhatan Energy Fund, FERC said in the order.

FERC said that an OE staff report alleges that Chen, trading on behalf of HEEP Fund and Powhatan Energy Fund, "conceived of a fraudulent scheme in connection with the UTC markets operated by PJM; that he communicated the details of that fraudulent scheme to the principals of Powhatan Energy Fund, who knowingly encouraged him to implement it; and that he did implement it on behalf of Powhatan Energy Fund, HEEP Fund, and, later, CU Fund."

FERC noted that "issuance of this order does not indicate Commission adoption or endorsement of the OE staff report."

"This is a matter in which a successful and experienced trader — a man who had profitably traded in the PJM Interconnection (PJM) market for years, consistently pursuing legitimate arbitrage opportunities — decided to cheat," FERC OE staff alleged in the report, which was attached to the FERC order.

"Through his meticulous study of the market, Chen discovered a method to make money ‘almost risk-free’ by, in the words of Kevin Gates, the fund manager who partnered with Chen in this enterprise through Powhatan, ‘moving electricity around in a circle,’" the report alleged.

The report said that Chen’s "manipulation involved a product in PJM called ‘Up-to Congestion’ (UTC), which functions as a swap of the difference or ‘spread’ between the price of electricity at two locations in the day-ahead market and the same two points in the real-time market. Arbitrageurs of UTC can profit when the price spread between those locations moves favorably from the day-ahead to the real-time market, and lose money when the price movement is unfavorable."

According to the report, in late 2009, Chen learned that PJM "had begun to distribute pro rata shares of a pool of funds called the marginal loss surplus allocation (MLSA, sometimes called ‘transmission loss credits’ or ‘TLC’) to UTC trades."
 
The MLSA is a pool of surplus money arising from the fact that PJM charges buyers more for transmission losses than it distributes to sellers. Previously, PJM had distributed MLSA only to market participants trading physical power.

"Soon after he began receiving MLSA, Chen figured out that the amount of MLSA was relatively predictable and that it could, during periods of high load, be greater than the transaction costs of scheduling UTC trades — costs that were themselves predictable," the report alleges.

Chen "then figured out that he could do enormous volumes of wash-like trades and thereby qualify to receive payments of the MLSA, intended for bona fide transactions. In essence, Chen realized he could be paid simply for placing trades — and in particular, trades that cancelled one another out. Instead of contacting PJM, Chen shared this insight with Kevin Gates and the other investors in Powhatan, who, though they knew this opportunity was ‘something that nature shouldn’t allow’ and would be shut down as soon as it was discovered, eagerly endorsed a strategy of gaming the PJM settlement system with a series of non-bona fide wash-type trades designed to collect large amounts of MLSA from sheer trading volume without taking a position in the market," the OE staff report alleged.

The report at a later point alleged that "Chen’s scheme was to execute pairs of large volume UTC trades in identical volumes and hours and in opposite directions on the same paths — paths where Chen had every expectation that the UTC trades would clear."

Like wash trades, "these transactions left Chen with no net position in the market, but created the illusion of bona fide market activity. PJM’s automated settlement software, however, was not programmed to detect this particular scheme, so it awarded these trades MLSA. The scheme was highly profitable, because PJM’s predictable allocations of MLSA were substantially greater than the predictable transaction costs associated with the same transactions," the report said.

"In sum, Chen went into PJM’s UTC marketplace, where market participants are assumed either to be hedging physical transactions or promoting market efficiency by speculating on congestion price movements between the day-ahead and real-time markets, but he did neither of those things. He hedged nothing, provided no good, no service, nor any other benefit to the market, took no meaningful risk and yet came away with over $10 million that should have gone to bona fide market participants, and, ultimately, in large part to ratepayers in PJM," the report alleged.

The report said that Chen is a native of the Zhejing Province in the People’s Republic of China and holds a doctorate in power engineering from Tsinghua University in Beijing.

He came to the United States in 1995 to perform postgraduate work at Drexel University, OE staff said in the report. According to the report, he subsequently worked as an analyst at a succession of companies, including Entergy, Enron and UBS. Chen’s responsibilities included creating and using models to forecast power prices.

"In 2005, Chen left UBS to join Merrill Lynch Commodities, where he gained his first exposure to UTC transactions. After Merrill Lynch decided not to pursue UTC trading, Chen left to create his own firm, HEEP Fund, Inc. He subsequently founded CU Fund in June 2010," the report said.

The FERC order directs Chen, HEEP Fund, CU Fund and Powhatan Energy Fund "to show cause why they should not be found to have violated" a section of the Commission’s regulations and Section 222 of the Federal Power Act "by engaging in fraudulent" UTC transactions in PJM’s energy markets.

They must also show cause why they should not be assessed civil penalties as follows: Powhatan Energy Fund: $16,800,000; CU Fund: $10,080,000; HEEP Fund: $1,920,000; and Chen: $500,000 for trades executed through and on behalf of HEEP Fund and Powhatan and an additional $500,000 for trades executed through and on behalf of CU Fund.

Commissioner Philip Moeller at the agency's monthly meeting on Dec. 18 read from a statement related to the case.

In the statement posted on FERC's website, Moller said "I believe there is a common misperception about one element of our enforcement process. And my statement today is an attempt to clarify that misperception."

In the show-cause order, "the Commission noted that issuance of the staff report does not indicate Commission adoption or endorsement of staff’s findings. This statement reflects the Commission’s long-standing practice not to pre-judge the findings made in staff reports. Instead, the Commission will consider the entire record in this proceeding to determine whether the assessment of civil penalties is appropriate," Moeller said in the statement.

When FERC began its investigation, brothers Kevin and Richard Gates, two of the principal owners of Powhatan, decided to engage in a public fight with FERC over the investigation, including the establishment of a website on which they posted many of the documents from the non-public phase of the investigation, as well as statements of support from economists.—PAUL CIAMPOLI

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National Information Solutions Cooperative

TESSCO

In a Dec. 18 order, the Federal Energy Regulatory Commission said that the California Independent System Operator Corporation (CAISO) has fully complied with the regional requirements of the commission's Order No. 1000. At the same time, FERC issued its first orders addressing the inter-regional transmission coordination and cost allocation requirements of Order No. 1000.

Order No. 1000, which was issued in 2011, requires neighboring transmission planning regions to identify and jointly evaluate inter-regional transmission facilities — facilities located in two or more neighboring transmission planning regions. Such facilities may be more efficient or cost-effective solutions to the transmission needs of individual regions, the commission said, but noted that the order does not require an inter-regional transmission plan or interconnection-wide planning.

In the first of two inter-regional orders it issued on Dec. 18, FERC conditionally accepted compliance filings by PJM Interconnection and its transmission-owning members and by the Midcontinent Independent System Operator (MISO) and its transmission owners. All are subject to further compliance filings.

FERC said the grid operators’ proposed revisions to their existing joint operating agreement partially comply with Order No. 1000, but the commission rejected MISO’s proposal to remove from the joint operating agreement the cost allocation method for cross-border baseline reliability projects. Compliance filings are due within 60 days.

The second inter-regional order conditionally accepts, subject to further compliance, filings by CAISO and members of the ColumbiaGrid, Northern Tier Transmission Group and WestConnect transmission planning regions. Among the issues to be addressed in the compliance filings, due in 60 days, is common tariff language to revise and incorporate CAISO’s method for determining the regional benefits of a proposed inter-regional transmission facility. (Docket No. ER13-1447-000)

The order also grants in part, subject to modifications also due in 60 days, the Bonneville Power Administration’s petition for a declaratory order seeking a determination that revisions to its open-access transmission tariff (OATT) substantially conform to, or are superior to, the pro forma OATT as modified by Order No. 1000.

"With today’s order on its regional compliance plan, CAISO becomes the first region to fully comply with the regional requirements of Order No. 1000," the commission said. —JEANNINE ANDERSON

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SEDC, Inc.

Congressional appropriators have directed the Federal Energy Regulatory Commission to regularly report to Congress about the status and financial effect of a capacity zone in New York.

The move was made in a report accompanying the $1.1 trillion spending bill that recently passed the Senate at the request of Sen. Chuck Schumer (D-N.Y.) and Reps. Chris Gibson (R-N.Y.) and Sean Maloney (D-N.Y.).  

At issue is the New York Independent System Operator’s Lower Hudson Valley capacity zone.

A press release posted on Maloney’s website said that FERC will be required to report quarterly on actions and costs to consumers related to the new capacity zone.  

Schumer has raised questions about the zone for more than a year. Schumer first voiced concerns about the zone in November 2013 when he called on FERC to delay an order implementing the new zone.

In September, he was joined by Sen. Kirsten Gillibrand (D-N.Y.), along with Gibson, Maloney, Rep. Eliot Engel (D-N.Y.) and Rep. Nita Lowey (D-N.Y.), in asking FERC to reverse its decision supporting creation of the zone.

The Sept. 15, 2014 letter was sent to FERC Chairman Cheryl LaFleur. In their letter to LaFleur, Schumer and the other lawmakers from New York said that the zone has resulted in a "significant and unwarranted price increase" for Lower Hudson Valley electric consumers. "Estimates indicate that the annual increase in electric prices associated with the" zone will reach approximately $280 million, the lawmakers told LaFleur.—PAUL CIAMPOLI

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Utilities & Energy Compliance & Ethics Conference

EVENTS CALENDAR


2015

Joint Action Workshop

Key West, Florida
January 11-13

Webinar – Energy Efficiency: Measurement and Evaluation of Program Effectiveness
January 13

Winter Education Institute
Anaheim, California
February 2-6

Webinar – Energy Efficiency: Implementing an Energy Efficiency Portfolio
February 10


For a full APPA Events Calendar, visit Publicpower.org.


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Utilismart Corporation

CLASSIFIEDS

Executive director and CEO— NMPP Energy in Lincoln is seeking an executive director and CEO. NMPP Energy is one of the most complex joint action agencies in public power, operating four major lines of business in the areas of wholesale electricity, wholesale and retail natural gas, and energy-related services. The four operating entities under the NMPP Energy umbrella include the Nebraska Municipal Power Pool, the Municipal Energy Agency of Nebraska, the National Public Gas Agency, and the Public Alliance for Community Energy. Collectively, NMPP Energy serves nearly 200 member communities in six Midwest and Rocky Mountain states with a single shared staff of approximately 60 people. Consolidated revenues for all four operating entities are approximately $170 million. NMPP Energy is governed by four separate boards of directors that operate with the coordination of a 12-member joint operating committee (JOC) that is comprised of three officers from each of the operating boards. There are more than 150 total board members, many of whom sit on more than one of NMPP Energy operating entity boards, each with a vote on every issue. The executive director and CEO will work directly with each board, report to the JOC, and set the professional "tone" for the entire enterprise. This position must consistently elevate performance metrics, financial results, and service delivery for the benefit of member/owners in each of the affiliated energy entities that make up NMPP Energy. The executive director and CEO is responsible for attracting and hiring competent staff, developing "best in class" business practices, working effectively with multiple boards and external stakeholders, and fostering a stimulating and creative work experience for all employees. The executive director and CEO is the public face of NMPP Energy. Qualifications: Qualified candidates must be visionaries and strategic thinkers. He or she must possess excellent interpersonal skills, negotiations skills, and executive-level oral and written communication talents. Experience working with, and preferably reporting to, a similar governing body to that of NMPP Energy is ideal. Candidates should have a track record of progressively responsible assignments advancing into senior executive leadership, preferably with a public power entity. Candidates should possess significant electric industry experience with a strong understanding of power markets. In addition, NMPP desires candidates with financial acumen and knowledge of retail and wholesale gas supply. The successful candidate will have a customer service orientation and will focus on member needs. Compensation: NMPP Energy will provide a competitive base salary and a full complement of fringe benefits. Apply: Please submit resumes by email to kmoore@mfpllc.us by Dec. 22.

Safety and environmental compliance coordinator— The city of Redding, California, is seeking a highly qualified individual to direct and monitor the electric utility’s health, safety, and environmental compliance programs. Qualifications: A bachelor's degree, plus related experience is required. Apply: View a detailed job announcement and apply online at www.ci.redding.ca.us. Apply by Dec. 31. EOE/FAAE.

Communications and governmental relations manager— The Cowlitz Public Utility District in Longview, Washington, is recruiting for a communications and government relations manager. Compensation: Salary depends on qualifications. Apply: The deadline to apply is Jan. 5, 2015. Qualification requirements, guidelines on how to apply, and detailed information can be found at www.cowlitzpud.org.

Auditor III— Santee Cooper in Moncks Corner, South Carolina, is recruiting for an auditor III. The successful candidate will be responsible for planning and performing financial, operational, and compliance audits across multiple disciplines and in accordance with the Standards for the Professional Practice of Internal Auditing. The individual provides an independent control and appraisal function to examine and evaluate the adequacy and effectiveness of internal controls. The individual will also provide analysis, appraisals, recommendations, professional counsel, and other pertinent information to assist management in the discharge of their duties. Qualifications: A bachelor's degree in accounting, finance, business administration, or a related field and a minimum of five years of directly related experience is required. Public accounting or utility experience, a professional certification (CPA, CIA), and/or an advanced degree is preferred. The individual must be highly skilled in the use of personal computers and Microsoft Office applications. The individual must possess strong verbal and written communications skills, and the ability to communicate with all levels within the organization. Santee Cooper will consider an Auditor II position with these qualifications: a bachelor's degree in accounting, finance, business administration, or a related field, and a minimum of two years of directly related experience.A CPA, CIA, or related professional certification is preferred. Apply: Visit the Santee Cooper website.

Electrical engineer— The Electrical District No. Two in Casa Grande, Arizona, has an immediate opening for a senior-level electrical engineer. Electrical District No. Two is a growing electric system, serving 6,500 customers in central Arizona, close to the Phoenix and Tucson metropolitan areas. The position responsibilities include: design of the overhead and underground distribution system, load current and voltage calculations, system planning, metering, overhead and underground construction standards, transmission and substation maintenance, system protection studies, SCADA, distribution automation, AMR, AutoCAD, and ESRI GIS. The position reports to the general manager. Qualifications: A Bachelor of Science degree in electrical engineering with an emphasis in power systems is preferred. Excellent computer and communication skills, and at least five years’ experience in electric system design and operation is required. The ideal candidate must have a high level of initiative and excellent oral and written communications skills. Compensation: The starting salary will be dependent upon experience and education. Compensation includes excellent benefits: NRECA pension, 401(k), and medical, dental, vision, and life insurance. Apply: For a detailed position profile, please contact Fran Seitz by email: fran@hireseitz.com; or phone: 303/730-1424. You can also contact Steve Dowdy by email: sdowdy@dowdyrecuriting.com; or phone: 303/816-0047.


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Visit the Career Center at PublicPower.org. Our career center allows job seekers to upload resumes, and recruiters to obtain resumes from job seekers. Classified ads in Public Power Daily and Public Power Weekly cost 70 cents per word for APPA members, and 80 cents per word for nonmembers, for a one-week run. Job posting subscriptions are available in packages of five, 10, or unlimited for a full year. The weekly deadline for placing a classified ad is every Thursday at 12 p.m. (Eastern time). If you have questions about classified ads, please write to jobs@publicpower.org, or call 202/467-2958.

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Naylor Association Solutions


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Naylor Association Solutions

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