By Michael Brooks

PJM is entitled to recoup $28 million in line-loss credits paid to virtual traders, FERC ruled last week, reaffirming a  2011 decision that the D.C. Circuit Court of Appeals ordered it to justify.

In its response to the court’s 2013 remand, the commission found that repayment of the refunds would not have a negative impact on the PJM market (EL08-14). If anything, FERC said, “recoupment will have a positive effect on the market because market participants know they will not be permitted to retain erroneously paid refunds.”

PJM told the commission that it has already recovered $9 million of the approximately $37 million the RTO paid out to virtual traders through its marginal loss surplus allocation (MLSA), which refunds a portion of transmission loss charges to companies who contribute to the fixed costs of the grid.

PJM collects transmission loss charges to account for electricity lost as it flows over the lines, but because the RTO treats every transmission as the last in the system, its collections exceed actual losses. MLSA was approved by FERC in 2006 to account for this.

FERC decided in 2008 that up-to-congestion traders were entitled to the refunds but reversed its policy in 2011. The D.C. Circuit upheld the reversal but told the commission it had to justify why the traders should be required to pay back their refunds. (See Split Decision for Financial Traders on PJM Line-Loss Collections.)

“We have determined that the virtual marketers … should be required to repay refunds, with interest, to put the parties back in the positions in which they would have found themselves if the commission had not erred in requiring refunds in the first place,” FERC said.

In its remand, the court agreed with virtual traders Black Oak Energy, EPIC Merchant Energy and SESCO Enterprises — whose December 2007 complaint originally spurred FERC to allow them to collect refunds — that the commission’s order to repay the refunds threatened to undermine the markets.

“Recoupment interjects regulatory uncertainty into a setting in which participants rely on the finality and predictability of commission rulings to assure a well-functioning marketplace,” the companies told FERC in 2014. They complained that the order reflected a new policy, one without any time limits, parameters or sufficient notice.

FERC said, however, that it found sufficient legal precedent for its decision, citing cases in which it has required parties be made whole after it had made an error.

The commission also said that the companies “were on notice that the refunds paid based on the initial commission order were in question” and that they “had sufficient reason to preserve those funds in the event that the commission (or a court) subsequently reversed the commission’s initial determination.”

A Long, Messy History

FERC’s 2011 reversal resulted in a Pandora’s Box of market manipulation cases for the commission’s Office of Enforcement.

It was through the MLSA that Powhatan Energy Fund made millions making what FERC contends were riskless UTC trades to cash in on the credits. (See PJM UTC Case Likely Headed to Court After FERC Notice.)

The company is now battling FERC in federal court over the commission’s effort to collect $34.5 million in penalties and disgorged profits. In a brief to the court filed last month asking it to dismiss the case, Powhatan argued that FERC “approved the inclusion of virtual traders in the allocation of [transmission-loss credits] with no limitation other than that the traders pay into the fixed costs of the system, which as the commission expressly recognized, would include UTC transactions.”

“Despite having had the opportunity to circumscribe the very conduct at issue in this matter, the commission did not ask PJM to limit or qualify the virtual traders’ receipt of rebates for UTC transactions, nor did the commission issue any pronouncement or order advising virtual traders that it would consider trading for the rebates wrongful conduct,” Powhatan told the Eastern District Court of Virginia.

FERC countered in its own brief, saying that it had rejected an MLSA method that credited all virtual transactions for fear of it leading to an increase in trades meant solely to cash in on the credits. “It would be impossible for a reasonable person acting in good faith to read these orders and conclude that the commission was indifferent to whether traders engaged in circular trades solely to collect MLSA, regardless of whether those trades paid for transmission or not,” FERC told the court.

City Power Marketing, fined $15 million for similar allegations, filed a motion in the D.C. Circuit Nov. 2 to dismiss the case. In September, FERC issued the same charges against Coaltrain Energy. (See FERC Charges Third Firm with UTC Scam in PJM.)