Trades and rebates collected by an energy-trading fund controlled by two West Chester brothers "cost more than 20 market participants at least $100,000 each," with "Exelon, American Electric Power and Dominion Resources each losing more than $1 million," the power-markets industry newsletter RTO Insider reports here, citing data from the Norristown-based PJM Interconnection regulator's office which oversees the PJM wholesale electric power-trading market where the Powhatan fund made millions in 2010. More on the Gates brothers in my March 2014 report here.
The Federal Energy Regulatory Commission’s Office of Enforcement in December told Powhatan that its staff calculated the fund ought to pay nearly $30 million to settle accusations Powhatan traders illegally exploited a system that sometimes paid investors to take certain positions on power investments, as a way to ensure the markets stays liquid and attractive to traders. Powhatan is controlled by Kevin and Richard Gates, who are twin brothers. Read FERC's statement here.
The Gateses and their lawyers, backed by ex-FERC officials they have contracted as expert witnesses, say they have done nothing wrong, and that it's not their fault the market allowed them to make millions. "There is nothing inherently fraudulent about taking advantage of a market inefficiency or 'loophole'," according to their response to FERC, filed Monday. Powhatan's response, written by William McSwain of Philadelphia's Drinker Biddle & Reath, called FERC's complaint " a pile of nonsense." Read it on Powhatan's Web site here.
Citing a voice recording of PJM's market monitor, Joe Bowring, talking to an unidentified trader, Powhatan also contends regulators were aware of similar trades and payments at the time they were made, and did not consider them illegal until after the fact. FERC (corrected) says Bowring may have been illegally recorded under Pennsylvania law, which requires both parties to a recorded phone conversation must give advance consent to being taped.
In its own statement, PJM said markets are designed to provide "just and reasonable prices," and said Powhatan doesn't appreciate its wholesale electric market's "legal and regulatory framework," reported RTO Insider, which is published by former Inquirer and Bloomberg LP energy writer Richard Heidorn, in an article principally written by former Wilmington News-Journal reporter and onetime Exelon/Peco spokesman Ted Caddell.
Powhatan called on the commission to reject its own staff conclusion and absolve the firm of wrongdoing. Rich Gates told me FERC staff have another 30 days to respond again, then the FERC board will decide whether to take action. The Gates brothers have vowed to fight FERC in court if the agency doesn't drop its case, which the Gates contend is a result of political shifts over the years in FERC commissioners' positions on the value of private-market trades as a way to help price electricity.