FERC threatened GreenHat Energy and its owners with $229 million in civil penalties Thursday over the company’s 890 million MWh default of its financial transmission rights portfolio in PJM in 2018.

In a report released as part of a commission Order to Show Cause, FERC Office of Enforcement staff alleged that GreenHat’s owners violated the Federal Power Act and PJM’s tariff and Operating Agreement by engaging in a “manipulative scheme” in the FTR market. The show-cause order directs the participants to demonstrate why GreenHat should not be assessed a civil penalty of $179 million and owners John Bartholomew and Kevin Ziegenhorn assessed civil penalties of $25 million each (IN18-9).

GreenHat, Bartholomew, Ziegenhorn and the estate of Andrew Kittell, who was the third owner of the company, must also explain why they should not be required to disgorge $13.1 million in unjust profits, plus interest. Kittell died in California in January at the age of 50.

“Enforcement staff’s investigation and report raise very serious allegations about market manipulation that cost consumers in the PJM market nearly $180 million,” FERC Chair Richard Glick said. “This commission takes very seriously our responsibility to ensure that FERC-jurisdictional markets operate competitively and free from fraudulent schemes that harm other market participants and impose excessive, unjust costs on consumers.”

GreenHat acquired the largest FTR portfolio in PJM between 2015 and 2018 but defaulted on the portfolio in June 2018, leaving PJM stakeholders to cover more than $179 million in the market to the present. When the company defaulted, FERC said, GreenHat had only $559,447 in collateral on deposit with PJM. (See Doubling Down — with Other People’s Money.)

Enforcement alleged that GreenHat’s conduct was “unlawful” in several ways, including:

• sending false price signals into the PJM market by purchasing FTRs “based not on expected profitability” but on the FTRs it could acquire with “minimal” collateral;
• making deliberately false statements to PJM to try to avoid a collateral call; and
• rigging FTR auctions by using inside information about Shell Energy North America’s seller-side auction offers in designing its own buyer-side bids for the same FTRs.

In April, FERC rejected GreenHat’s contention that the commission erred in its November order in a dispute between the company and Shell, partially granting Shell’s petition for declaratory order (EL20-49). (See FERC Rejects GreenHat Arguments in Shell Case.)

PJM agreed to pay two trading firms $12.5 million to end a dispute over the GreenHat default under a settlement filed with FERC in October 2019. Apogee Energy Trading and Boston Energy Trading and Marketing (BETM) accepted credits of $5 million and $7.5 million, respectively, to resolve claims of economic harm that resulted from the RTO’s decision to not liquidate GreenHat’s entire portfolio of FTRs during the 2018/19 planning period. (See PJM to Pay $12.5 M to Settle GreenHat Dispute.)

Enforcement’s report said that while the alleged portfolio scheme created “enormous losses that were borne by all other PJM members,” the actions were “highly profitable” for GreenHat and its owners. The investigation found GreenHat made four deals in which it sold FTRs for a total of $13.1 million.

PJM’s Board of Managers commissioned a report on the GreenHat debacle in October 2018, four months after the default. The report, released in March 2019, led to the resignations of several prominent PJM officials, including CEO Andy Ott in May of that year. (See Report: ‘Naive’ PJM Underestimated GreenHat Risks.)

FERC said the GreenHat parties have 30 days to respond to the commission’s order.

“Today’s order offers another reminder that the commission has a solemn responsibility to investigate and penalize participants that engage in market manipulation,” Glick said. “This is going to continue to be an important priority of mine.”

Commissioner James Danly issued a concurrence with the order, saying he still has questions he wants answered that will aid his decision on the issue.

“In the light of this massive default, it’s necessary for the commission to make an official pronouncement on whether or not there was manipulation,” Danly said.