By Michael Brooks

An energy trading company’s use of employee-monitoring software provided FERC investigators with evidence documenting its strategy of making riskless up-to-congestion transactions to collect line-loss credits from PJM, officials said last week.

FERC last week issued a show cause order demanding more than $42 million from Coaltrain Energy (IN16-4).

The commission used email and instant messages in lodging similar allegations against Powhatan Energy Fund and City Power Marketing. FERC’s Office of Enforcement found an additional source of evidence in their investigation of Coaltrain — the company’s use of Spector 360, software that logs users’ every keystroke and automatically takes screenshots every 20 seconds.

The commission said Enforcement staff was tipped off to the software’s existence by a former Coaltrain employee in June 2012, almost two years after it had begun its investigation into the company. Coaltrain employees initially claimed they had forgotten about the software when Enforcement made its original data requests and repeatedly delayed releasing the logs when asked for them, FERC said.

When Enforcement finally gained access to the Spector 360 logs, they received a voluminous amount of information — about 10 GB per employee — detailing the company’s actions in the summer of 2010, including emails, instant messages, Internet search and browsing history and, perhaps most important, internal logs of every single trade the company made over that time period.

A Familiar Story

Prior to June 2010, Coaltrain specialized in UTC trading, correctly predicting the changes in spreads between PJM’s real-time and day-ahead markets. This “spread strategy” involved complex analyses of transmission constraints and the impacts on LMPs. The company was very successful at these legitimate trades, FERC noted, earning profits of $12.8 million in 2008 and $18.7 million in 2010.

Coaltrain changed its trading strategy once it learned it could make more money from PJM’s marginal loss surplus allocation (MLSA) program, which refunds a portion of transmission loss charges to companies who contribute to the fixed costs of the grid. (See FERC: PJM Entitled to Recoup Line-Loss Credits.)

The company “discovered that they could profit from MLSA payments alone if UTC price spreads could be minimized or avoided entirely,” FERC said. Coaltrain devised a new “OCL strategy” — “over-collected losses” being its internal term for MLSA.

The allegations are similar to those against Powhatan and City Power. In fact, FERC said, when PJM released a report on June 1, 2010, showing how much in MLSA it had paid to companies, the Spector 360 logs show that Coaltrain co-owner Peter Jones sent City Power founder Stephen Tsingas an instant message congratulating him on collecting nearly $16 million in credits.

A few days later, Coaltrain employees began searching PJM’s website and Google for more information on MLSA, the Spector 360 logs show.

From June 15 to Sept. 10, 2010, Coaltrain traded 4.61 million MWh, losing more than $96,000 on the UTC price spreads and $3.83 million in transaction costs. However, it collected $8.05 million in MLSA payments, resulting in a profit of about $4.12 million.

“In contrast to the spread strategy that involved a complicated analysis using congestion-based constraints, the OCL strategy did not rely on constraints at all,” FERC said. “While there is voluminous evidence showing that [Coaltrain’s] strategy was designed not to profit from price spreads but instead to capture MLSA, a contemporaneous comment from [Adam] Hughes — who designed the software tools [the traders] used to carry out their scheme — sums it up: ‘create application to find deals for loss credits.’”

Severe Penalties

FERC is seeking $38.25 million in civil penalties from Coaltrain, its two owners and four employees, along with the $4.12 million in profits.

Enforcement staff said that it is seeking severe penalties because Coaltrain lied to them about the information it had logged using Spector 360. In comparison, the commission has assessed $29.8 million in penalties against Powhatan and $15 million against City Power.

“Coaltrain misrepresented material facts about relevant documents in an effort to hide them from Enforcement and made false and misleading statements concerning those documents as well as the availability of their witnesses to testify,” FERC said.

Coaltrain issued a statement Tuesday insisting it “was always responsive” to FERC’s information requests.

“The existence of computer monitoring software was disclosed to FERC and its staff in filings at the commission in 2009, which is before the investigation even began. When asked for the materials, Coaltrain cooperated with its former vendor to obtain a new license and provide the information requested. Suggestions that there was any delay in responding to FERC are erroneous and uninformed by the facts,” the company said. “Coaltrain is eager to cooperate with FERC to resolve this matter and has cooperated at every step of the process.”

FERC noted that Coaltrain’s owners had terminated an employee in their previous company, Energy Endeavors, based on the information received through the software about his activities.

In 2009, Jones and fellow owner Shawn Sheehan discovered that employee Moussa Kourouma was attempting to form his own energy trading business, in violation of a non-compete clause in his employment contract. The owners were able to use Spector 360 to track Kourouma’s activity down to his bank transactions.

Based on this information, they were able to protest Kourouma’s filing for market-based rate authority for his new company to trade in PJM. FERC said that in a confidential affidavit attached to the protest, Sheehan said the information came from “a commercially available software program for monitoring employee use.”

“The company regularly used Spector 360, and any claims that they ‘forgot’ about it are false,” FERC said.

The commission issued a Notice of Alleged Violation in September. (See FERC Charges Third Firm with UTC Scam in PJM.) Coaltrain has until Feb. 6 to respond to the Order to Show Cause.