Chesco brothers face battle with federal energy regulators

Richard (left) and Kevin Gates. The Malvern natives are accused by the Federal Energy Regulatory Commission of market manipulation.

Two Chester County brothers are fighting back against federal regulators.

The Powhatan Energy Fund, owned by Malvern natives Richard and Kevin Gates, made millions in the energy market in 2010.

The government said it was too much.

Late last month, federal regulators hit their energy fund and its associates with a $34.5 million fine for market manipulation.

But the identical twins, who graduated from Conestoga High School in 1990, say they plan to ignore the fine, which will likely force the Federal Energy Regulatory Commission to take them to federal court.

Through a detailed website, on Twitter, and in Washington, the Gates brothers have tried to portray their battle over millions as a David-and-Goliath fight against "heavy-handed" FERC.

Created in 1977, FERC oversees the nation's interstate transmission and pricing of energy resources, including electricity, natural gas, and oil.

"Any time [regulators] level the term market manipulator, you're automatically presumed as a bad person. But we have kind of been able to turn the tables a little bit by going public, by exposing them as being abusive regulators," Richard Gates, 43, said in an interview this month.

But the regulators say trades on behalf of the Gates brothers' Powhatan Energy Fund gamed the market, the purpose of which is to minimize costs to the ultimate consumer.

FERC says Houlian "Alan" Chen, a trader contracted by Powhatan, made nearly $5 million through fraudulent transactions, according to case documents.

The transactions, which occurred in PJM Interconnection, the region's wholesale electricity market based in Valley Forge, are not something the average household consumer would notice.

Chen used a credit program offered by the regional energy market under which traders could receive credits from PJM Interconnection for making trades. He made many low- or no-risk trades just to earn such credits, FERC says. In effect, the agency says, he traded in order to accumulate the credits, rather than incidentally earning them as the result of regular, legitimate trading.

In documents, the agency said the Gates brothers encouraged Chen's "manipulative scheme" to "wrongfully collect" the credits.

The brothers, who also run the West Chester-based portfolio management firm TFS Capital, say Chen may have been taking advantage of a loophole in the rules. But if he were, they said, it would not make him guilty of market manipulation.”

FERC's rules did not explicitly prohibit such activity at the time, said Eric Smith, associate director at Tulane Energy Institute, part of the business school at Tulane University. That means the case calls into question whether traders should have to guess at the moral intentions behind FERC's rules.

It could have consequences for energy markets in the rest of the country, Smith said.

"This could be setting some precedent, particularly if it comes out strongly in favor of FERC . . . fining people for not divining their intent," he said.

FERC had no comment, said commission spokesman Craig Cano.

Joseph Bowring, the market monitor for PJM, said, "We strongly support the FERC action in this case."

As of Sunday, 30 days had already passed since the May 29 order issuing the fines. After the 60-day deadline, FERC will take action in a U.S. District Court, it said in documents.

There, the Gates twins believe they will have more freedom to argue their case than they have in the last five years of FERC proceedings, Richard Gates said.

"We'll finally have our equal playing field," he said.