Fed. Energy Regulatory Comm'n v. Coaltrain Energy, L.P.
| Citation | 501 F.Supp.3d 503 |
| Decision Date | 18 November 2020 |
| Docket Number | Case No. 2:16-cv-732 |
| Parties | FEDERAL ENERGY REGULATORY COMMISSION, Plaintiff, v. COALTRAIN ENERGY, L.P., et al., Defendants. |
| Court | U.S. District Court — Southern District of Ohio |
Thomas P. Olson, Catherine Collins, Colin Chazen, Jessica Boston Wack, Kevin M. Dinan, Carol Ann Clayton, Federal Energy Regulatory Commission, Washington, DC, for Plaintiff.
James A. King, Jay A. Yurkiw, Kathleen M. Trafford, Porter Wright Morris & Arthur, Columbus, OH, Christopher J. Polito, Pro Hac Vice, Kenneth W. Irvin, Pro Hac Vice, Mark D. Hopson, Pro Hac Vice, Terence T. Healey, Pro Hac Vice, Sidley Austin LLP, Washington, DC, for Defendant Coaltrain Energy, L.P.
H. Ritchey Hollenbaugh, Carl A. Aveni, II, Carlile Patchen & Murphy LLP, Columbus, OH, Robert N. Weiner, Pro Hac Vice, Sandra E. Rizzo, Pro Hac Vice, Arnold & Porter LLP, Washington, DC, for Defendants Peter Jones, Robert Jones, Jack Wells.
D. Michael Crites, Justin Michael Burns, Dinsmore & Shohl, LLP, Columbus, OH, Joseph B. Williams, Pro Hac Vice, Norton Rose Fulbright US LLP, Washington, DC, William J. Leone, Pro Hac Vice, Norton Rose Fulbright US LLP, Denver, CO, for Defendants Shawn Sheehan, Jeff Miller.
The Federal Energy Regulatory Commission ("FERC" or "Commission") brings this action against Coaltrain Energy, L.P. ("Coaltrain"), Peter Jones ("P. Jones"), Shawn Sheehan ("Sheehan"), Jeff Miller ("Miller"), Robert Jones ("R. Jones"), and Jack Wells ("Wells") (collectively, "Defendants") pursuant to section 31(d)(3)(B) of the Federal Power Act ("FPA"), 16 U.S.C. § 823(d)(3)(B), seeking to enforce FERC's May 27, 2016 order assessing civil penalties against Defendants. Compl., ECF No. 1. Defendants move for summary judgment, ECF Nos. 75, 76, 80, 81, and FERC moves for partial summary judgment, ECF No. 74. Sheehan also moves for leave to file an Amended Motion for Summary Judgment, ECF No. 83,1 and P. Jones, R. Jones, and Wells move for leave to file a document under seal, ECF No. 94.2
FERC is the administrative agency tasked with, among other things, ensuring the just and reasonable prices of wholesale electricity through regulation and policing. Compl. ¶ 7, ECF No. 1. Coaltrain was a limited partnership and a licensed Seller of energy commodities under Commission rules from March 31, 2009, until April 15, 2011. Id. at ¶ 8. P. Jones and Sheehan are the limited partners, or co-owners, of Coaltrain. Id. R. Jones, Miller, and Wells were energy traders at Coaltrain during the relevant timeframe. Id. at ¶¶ 11–13.
The energy markets are regionally operated by FERC-regulated Regional Transmission Organizations ("RTOs"). RTOs are tasked with balancing the minute-by-minute supply and demand requirements for electric power across their regions. PJM Interconnection, LLC ("PJM") is the largest RTO in the nation, covering 13 states, including Ohio.
PJM is an independent, non-profit entity that is tasked with operating the transmission grid and dispatch generation to match electricity use. Id. at ¶ 24. PJM uses market-based systems to provide electricity at the lowest possible cost to consumers and maintain the reliable operation of the electric grid. Id. at ¶ 26.
PJM operates a day-ahead market and a real-time market. Electricity traded on the day-ahead market is transmitted over power lines the following day, while electricity traded on the real-time market is transmitted over power lines that same day.
PJM offered market participants the ability to transact for both the physical delivery of electricity, as well as non-physical, financial (also referred to as virtual) transactions. Id. at ¶ 28. With respect to at least the PJM market, electricity prices vary based on the specific location ("node") in the market. There are thousands of nodes within the PJM market, many of which are in this judicial district. The market price for energy at a particular node is called the Locational Marginal Price ("LMP") and consists of (1) a basic energy price, (2) the cost of congestion4 (transmission constraints) at each node, and (3) the cost of line losses (the amount of electricity lost as heat during transmission).
Virtual trades are financial trades for which no generation of electricity is dispatched and no load is served. Virtual transactions carry no obligation to buy or sell electricity, but they affect day-ahead market prices as reflected by the LMPs. Virtual trades also benefit the wholesale electricity markets because they promote market efficiency, increase market liquidity, and create price convergence between the day-ahead and real-time markets. In other words, they help balance out the price of electricity and achieve more just and reasonable rates.
At issue in this case are specific virtual financial products called Up-To Congestion ("UTC") transactions, which allow traders to profit through price arbitrage—the process of correctly predicting that the difference in the price of electricity at two different nodes (known as the "price spread") will either widen or narrow from one day to the next. The UTC bid specifies a maximum, or "up-to", price spread between the two nodes that the bidder is willing to pay in the Day-Ahead Market. UTC trades allow arbitrageurs (a common name for market participants involved in these sorts of virtual trades) to "sell power at point A and buy power at point B in the [d]ay-ahead market ... if during the [r]eal-[t]ime market, the spread between those points increases, the arbitrageur makes money; if the spread decreases, it loses money." Compl. ¶ 29 (quoting Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 122 FERC ¶ 61,208, at n.85 (Mar. 6, 2008) ).
The Court in City Power provides a helpful illustration of how UTC trades are profitable:
A UTC trader might pick source A and sink B, specify 100MW, and say that the day-ahead price at B will be no more than $40/MW greater than at A. After the day-ahead market clears, it turns out the price at B is $120/MW and the price at A is $90/MW. Because the difference is less than the trader specified, her transaction clears, and she must pay $3000: the actual difference ($30/MW) times the number of megawatts (100). Luckily for the trader, the price spread grows between the day-ahead and real-time markets. In the real-time market, the price at B is up to $130/MW; at A, down to $85/MW. Hence, the trader receives $4500: the real-time price difference ($45/MW) times the number of megawatts (100). Taken as a whole (and ignoring certain transaction costs for the moment), the UTC turned a profit of $1500.
Apart from whether these virtual trades proved to be profitable, the market allocated traders a credit based on the volume of these and other trades. Id. at ¶ 2. This is because during the timeframe at issue, market participants that transacted in financial UTCs, which did not result in the physical transmission of electricity across the grid, were nonetheless still required to reserve capacity on transmission lines for each of their UTC transactions. Id. at ¶ 30; Bresler Dep. (Sept. 12, 2019) 38:5–9, ECF No. 75-6, at PAGEID # 4590. These transmission reservations could be either paid or unpaid. Traders could permissibly avoid paying for reservations in a variety of ways, including by exporting from PJM into the wholesale market region operated by the neighboring RTO. Alternatively, traders could pay a specified price per megawatt hour ("MWh") to reserve transmission between two nodes in the PJM market. Because there was a finite amount of transmission, reservations for financial trades thus prevent other market participants from using the reserved transmission unless PJM re-releases it into the day-ahead market later in the trading day. Compl. ¶ 31, ECF No. 1.
These credits are referred to by PJM as Marginal Loss Surplus Allocation ("MLSA") payments, and by Defendants as MLSA payments and also Overcollected Loss ("OCL") payments, but they mean the same thing.5 It is these credits that are at issue in this case. MLSA payments come from the surplus of money collected by PJM to account for transmission line losses. Transmission line losses represent the amount of electricity lost in the form of heat during its transmission. PJM charges line losses as one component of the LMP, which it uses to compensate generators for lost electricity. To send the appropriate price signals, PJM sets the price for line losses at the marginal, rather than average, rate. Doing so, however, causes PJM to collect more in line losses than it distributes to generators, hence why Defendants referred to as "over-collected loss" payments. The resulting surplus is distributed to market participants in the form of MLSA credits.
The purpose of UTC trading was arbitrage, i.e. finding the price spread, although MLSA payments could be considered in making transacting decisions. See Black Oak Energy, L.L.C., et al. , 167 F.E.R.C. ¶ 61,250, PP 33–34 (June 20, 2019) ; Matson Dep. (Sept. 18, 2019) 75, ECF No. 75-5, at PAGEID # 4351.
At first, PJM distributed MLSA only to physical trades. This is partly because the Commission was concerned about "perverse incentives" if virtual traders were allowed to collect MLSA credits. As early as 2008, the Commission expressed disapproval of trading for purposes other than arbitrage. For example, in its October 2008 Black Oak decision, the Commission was apprehensive to pay arbitrageurs any MLSA credits because "payment of the surplus to arbitrageurs that is unrelated to the transmission costs could distort decisions and reduce the value of arbitrage by creating an incentive for arbitrageurs to engage in purchase decisions, not because of price divergence, but simply to increase marginal line loss payments." 125 F.E.R.C. ¶ 61,042, P 43 (Oct. 16, 2008). P....
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