FERC on Friday said it had determined that GreenHat Energy and its owners violated the Federal Power Act by “engaging in a manipulative scheme” in PJM’s financial transmission rights market, issuing a total of $242 million in fines for the company’s 890 million MWh default in 2018 (IN18-9).

The commission assessed civil penalties of $179 million on the company and $25 million each on owners John Bartholomew and Kevin Ziegenhorn. FERC also directed GreenHat, Bartholomew, Ziegenhorn and the estate of Andrew Kittell to disgorge more than $13 million in unjust profits, plus applicable interest.

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.)

“Respondents, over several years, deliberately carried out one of the largest frauds in the history of organized energy markets, leading to the largest default in the history of those markets, resulting in losses of more than $179 million,” FERC said in its ruling. “Staff notes that Bartholomew and Ziegenhorn showed no commitment to compliance, did not self-report their violations and provided limited cooperation.”

FERC Findings

The commission found that GreenHat and its owners violated the FPA in four different ways, calling it a “classic fraud,” similar to a “bust-out” scheme involving selling assets that one does not intend to pay for. The violations cited by the commission included:

• engaging in a manipulative scheme in PJM’s FTR market to acquire a portfolio made up of primarily long-term FTRs with “virtually no supporting, upfront capital, planning not to pay for losses at settlement” and selling profitable FTRs to third parties at a discount to obtain cash for the owners;
• buying FTRs not based on market considerations but to accumulate as many FTRs as possible “with minimal collateral, thereby engaging in a course of conduct for the purpose of impairing, obstructing or defeating a well functioning market”;
• making false statements to PJM concerning money supposedly owed by Shell Energy North America with the intent to convince the RTO not to proceed with a planned margin call; and
• submitting inflated bids into the PJM long-term FTR auction to “artificially raise the clearing price” of FTRs that Shell had purchased from GreenHat and offered for sale in the auction.

FERC said the Office of Enforcement found documents showing GreenHat’s “continued reliance” on the PJM Credit Calculator, instead of “traditional market fundamentals,” to purchase FTRs “despite multiple indications that such strategy was resulting in an increasingly negative portfolio for the firm.” The office said the owners failed to provide any “reasonable economic rationale” for using the calculator.

The commission said staff also discovered emails during the investigation “demonstrating that GreenHat sought to sell its profitable FTRs to third parties using other valuation methodologies” rather than the calculator, while “continuing to grow its negative portfolio using the PJM Credit Calculator.”

“Respondents intentionally misled PJM to enable GreenHat to buy FTRs that it otherwise would not have been able to afford to buy and extract profits from the PJM FTR market with the intent to default on their portfolio losses,” FERC said.

Kittell Estate

The decision is slightly complicated by an ongoing investigation by the Department of Energy’s Office of the Inspector General (OIG) into an email exchange between FERC Enforcement’s Division of Investigations (DOI) lawyers Thomas Olson and Steven Tabackman regarding the GreenHat case. FERC released the emails in October after Olson, who is part of the litigation staff in the GreenHat proceeding, disclosed them to Enforcement management.

The estate of Kittell, who killed himself by jumping off the San Diego-Coronado Bridge in California on Jan. 6, made a filing for FERC to drop its enforcement action and investigate the two employees. (See Estate of GreenHat’s Kittell Lobbies FERC to End Enforcement Action.)

The commission said the email exchange between Olson and Tabackman “addressed procedural matters that might arise under California probate law” in a proceeding addressing the Kittell estate, but it was not a conversation about the “issue currently before the commission in this proceeding.”

FERC said with the OIG investigating the matter, it was not ruling on the Kittell estate motion “at this time” and will instead “address the merits of the motion” in a separate order once the OIG rules on the case.

Danly Dissent

Danly dissented from the views of the commission, saying, “Enforcement failed to provide the proof necessary to meet its burden.”

Having reviewed GreenHat’s answer and Enforcement’s reply, Danly said he remained “deeply skeptical” of GreenHat’s explanations, but he said his skepticism is “irrelevant.” He said it was not necessary for GreenHat to prove its innocence, but it was for Enforcement to “prove its case to a preponderance of the evidence.”

Danly had harsh words for PJM, saying the RTO was partially to blame for the result of the default.

“While not the subject of the instant proceeding, we would do well to keep in mind the share of the blame that must rightly be assigned to PJM,” Danly said.