Fed. Energy Regulatory Comm'n v. Barclays Bank PLC

• Decision Date: 21 May 2015
• Docket Number: No. 2:13-cv-2093-TLN-DAD,2:13-cv-2093-TLN-DAD
• Court: U.S. District Court — Eastern District of California
• Parties: FEDERAL ENERGY REGULATORY COMMISSION, Plaintiff, v. BARCLAYS BANK PLC, DANIEL BRIN, SCOTT CONNELLY, KAREN LEVINE, and RYAN SMITH, Defendants.

FEDERAL ENERGY REGULATORY COMMISSION, Plaintiff, v. BARCLAYS BANK PLC, DANIEL BRIN, SCOTT CONNELLY, KAREN LEVINE,and RYAN SMITH, Defendants.

No. 2:13-cv-2093-TLN-DAD

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA

May 21, 2015

AMENDED ORDER

The matter is before the Court on Defendants Barclays Bank PLC ("Barclays"), Daniel Brin ("Brin"), Scott Connelly ("Connelly"), Karen Levine ("Levine"), and Ryan Smith's ("Smith") (collectively "Defendants") Motion to Dismiss or, in the Alternative, to Transfer (ECF No. 44) Plaintiff Federal Energy Regulatory Commission's ("FERC") Petition to Affirm Civil Penalties (ECF No. 1). For the reasons discussed below, Defendants' Motion is DENIED.

BACKGROUND

On July 16, 2013, following a multi-year investigation and proceeding, FERC issued an order assessing penalties against Defendants for engaging in manipulative trading in the electricity market in the western United States from November 2006 to December 2008. FERC now petitions this Court for an order affirming those penalties. 16 U.S.C. § 823b(d)(3)(B). Therelevant background and factual allegations are set forth more fully below.

I. Relevant Markets¹

As alleged in FERC's Petition, during the relevant time period, electricity was traded by Defendants at different locations in the United States, including Mid-Columbia ("MIDC"), Palo Verde ("PV"), South Path 15 ("SP"), and North Path 15 ("NP"). MIDC is a trading location in Washington located around hydroelectric facilities in the Columbia River Basin. PV is a trading location in Arizona that has a substantial amount of nuclear generation. NP is a trading zone that encompasses most of northern California. SP is a trading zone that encompasses most of southern California.³ (ECF No. 1 ¶¶ 17-18.)

Electricity at these locations traded as "peak" and "off-peak" products. Peak products included electricity delivered during the hours 7:00 AM to 10:00 PM, Monday through Saturday and excluding holidays. Off-peak products included electricity delivered all of Sunday, the hours 10:00 PM to 7:00 AM, Monday through Saturday and holidays. (ECF No. 1 ¶ 19.)

Electricity products could be either physical or financial. Physical products involved the obligation to deliver or receive physical electricity at a particular location during a particular time.⁴ Physical electricity was typically measured in megawatts-per-hour ("MW/h"), i.e. the number of megawatts of electricity delivered during a given hour. For example, a person with a "long" physical position (i.e. a net buyer) of 100 MW/h of peak electricity at MIDC for April 2007 had purchased a net volume of 100 MW/h of electricity at MIDC during each peak hour during April 2007, and thus had an obligation to take delivery of (i.e. receive) 100 MW/h atMIDC for each hour. (ECF No. 1 ¶ 21.)

Physical products could be priced at either a fixed price agreed to by the counterparties (e.g., $50 per MW/h) or at a published index price, that typically reflected the volume-weighted average price ("VWAP") of certain transactions made by electricity market participants. The relevant index for this case is the Intercontinental Exchange ("ICE") daily index, which was published by ICE each trading day based on the VWAP of all day-ahead fixed-price physical electricity transactions at a particular trading location. Many of the physical electricity transactions and related financial products during the relevant time period priced off of or settled against the ICE daily index. (ECF No. 1 ¶¶ 21-23.)

The ICE daily index was set by a methodology that calculates an index price based on the VWAP of all contributing volumes and prices traded on ICE. The volumes and prices that ICE used to calculate the daily index price were those trades that occurred in the day-ahead fixed-price physical market, a market commonly referred to as the "cash" or "dailies" market. In the dailies market, traders bought and sold electricity for physical delivery the following day at fixed prices (e.g., 25 MW/h of peak MIDC electricity for delivery the following day priced at $50 per MW/h). (ECF No. 1 ¶ 24.)

A physical position at index was physical electricity transacted at an index price as opposed to a fixed price (e.g., 25 MW/h of peak MIDC electricity priced at the ICE daily index). Index transactions could be for different lengths of time. For example, a trader could buy physical index electricity for a day (known as "daily index"), for the remaining days in a month (known as "balance of the month" or "BOM" index), for a month (known as "monthly index"), or for longer periods. Physical index transactions for lengths greater than a day still settled against the applicable daily index but did so each day as the index was set by the VWAP in the dailies. (ECF No. 1 ¶ 25.)

Unlike physical positions, financial positions did not entail physical obligations to deliver or receive electricity. Financial positions, including the "financial swaps" commonly traded by Defendants, were settled through an exchange of payments. A financial swap buyer paid a fixed price and received a floating price. For example, a buyer of a financial swap for MIDC peakelectricity during April, 2007 would pay a fixed price (e.g., $50 per MW/h) and receive the floating payment of the ICE daily index settlement for MIDC peak electricity for each day of the month. (ECF No. 1 ¶ 26.)

Market participants also traded "term" fixed-price physical products which were transactions to buy or sell physical power for a period of more than a day (e.g., 200 MW/h of peak MIDC electricity for April 2007 priced at $50 per MW/h). Fixed-price term positions had price risk that was equivalent to a financial swap because they established a position at a fixed price (e.g. $50) that could be measured against the ICE daily index settlement. However, they also had the physical obligation to make or receive delivery of physical power when those positions went to delivery each day. (ECF No. 1 ¶ 27.)

Market participants frequently traded the difference - known as a "spread" - between two locations by using a combination of financial swaps and/or physical positions. A trader was "long" the spread when he or she had a net long position in the premium market and a net short position in the other leg of the spread. If a trader had a net short position in the premium market and a net long position in the other leg, he or she was "short" the spread. (ECF No. 1 ¶¶ 29-30.)

Generally, the trading zones in California had higher prices than the locations outside California in the western U.S., and power generally flowed from PV and Northwestern states to the California zones. SP was generally a premium location over MIDC, NP, and PV. NP was generally a premium location over MIDC. (ECF No. 1 ¶¶ 31-32.)

II. Investigation and Penalty Assessment

As alleged in the Petition, in 2007 multiple market participants independently called FERC's Enforcement Hotline to report potentially manipulative trading by Barclays in physical electricity markets in the western United States. FERC's Office of Enforcement ("Enforcement") commenced an investigation in July, 2007. (ECF No. 1 ¶¶ 34-35.) On June 10, 2011, Enforcement issued Preliminary Findings Letters to Defendants stating that it had preliminary concluded that they had violated FERC's "Anti-Manipulation Rule," 18 C.F.R. § 1c.2. (See FERC's July 16, 2013 Order Assessing Civil Penalties, ECF No. 1-1 ¶ 9.) The Anti-Manipulation Rule provides in relevant part:

(a) It shall be unlawful for any entity, directly or indirectly, in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission,

(1) To use or employ any device, scheme, or artifice to defraud,

(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.

The Anti-Manipulation Rule was promulgated pursuant to the Federal Power Act ("FPA") § 222, 16 U.S.C. § 824v, enacted as part of the Energy Policy Act of 2005. Section 222 provides in relevant part:

It shall be unlawful for any entity (including an entity described in section 824(f) of this title), directly or indirectly, to use or employ, in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission, any manipulative or deceptive device or contrivance (as those terms are used in section 78j(b) of Title 15), in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of electric ratepayers.

On April 5, 2012, FERC issued a Notice of Alleged Violations ("NAV") to Defendants. On October 31, 2012, FERC issued an Order to Show Cause ("OSC"), with an attached report from Enforcement, ordering Defendants to show cause why 1) they should be found not to have violated FPA § 222 and the Anti-Manipulation Rule, and 2) why they should not be assessed civil penalties of $435 million against Barclays, $1 million against Brin, $15 million against Connelly, $1 million against Levine, and $1 million against Smith, and why Barclays should not be ordered to disgorge $34.9 million, plus interest, in unjust profits. (ECF No. 1-1 ¶¶ 9-12.)

The OSC also ordered Defendants to elect either an administrative hearing before an Administrative Law Judge prior to the assessment of a penalty, pursuant to 16 U.S.C. § 823b(d)(2), or elect to proceed under 16 U.S.C. § 823b(d)(3)(A), under which FERC was permitted to immediately assess penalties if FERC found a violation. On November 29, 2012,Defendants each elected the procedures of § 823b(d)(3)(A), thus opting for an immediate penalty assessment. (...