Dive Brief:

• The Federal Energy Regulatory Commission ordered GreenHat Energy and two of the trading firm's founders to pay $229.6 million in penalties and, along with the estate of a founder, return $13.1 million in unjust profits for allegedly manipulating a PJM Interconnection market.

• GreenHat's "manipulative scheme" in PJM's financial transmission rights (FTR) market resulted in $179 million in losses that were covered by the grid operator's members, FERC said in a decision released Friday.

• After GreenHat defaulted on its FTR portfolio in June 2018, PJM and other grid operators responded by beefing up the way they manage credit risks among market participants.

Dive Insight:

FERC ordered GreenHat, which no longer operates, to pay $179.6 million and company founders John Bartholomew and Kevin Ziegenhorn to pay $25 million each in civil penalties. The agency also ordered GreenHat, the founders and the estate of Andrew Kittell, another founder, to return $13.1 million in unjust profits.

Between 2015 and 2018, GreenHat acquired a massive FTR portfolio in PJM, according to FERC. In June 2018, the trading firm defaulted on the portfolio, leaving other PJM members to cover about $179 million in losses. PJM runs the grid and wholesale power markets in 13 Mid-Atlantic and Midwest states and the District of Columbia.

FERC contends GreenHat manipulated PJM's market for FTRs, which are used by utilities to hedge against congestion costs related to bottlenecks on the transmission system. Speculators also buy and sell them.

GreenHat's alleged market manipulation included acquiring an FTR portfolio made up of primarily long-term FTRs with almost no supporting, upfront capital, planning not to pay for losses at settlement, and obtaining cash for the founders by selling profitable FTRs to third parties at a discount, according to FERC.

In another sign of market manipulation, GreenHat bought the FTRs without considering market factors but to solely obtain as many as possible with minimal collateral, FERC said.

Also, company officials made false statements to PJM to avoid a planned margin call, according to FERC.

GreenHat submitted inflated bids into PJM's long-term FTR auction to drive up the clearing price of FTRs that Shell Energy North America bought from GreenHat and offered for sale in the auction, FERC said.

GreenHat, Bartholomew, Ziegenhorn and Kittell's estate denied the allegations during FERC's investigation, in part saying they bought the FTRs with the expectation their portfolio would be profitable and that the commission's enforcement office staff in its allegations pushed the bounds of market manipulation "far beyond any common understanding of fraud and deceit."

If the penalty is unpaid after 60 days, FERC said it will ask a district court to affirm it.

In its order, FERC doesn't say how GreenHat would pay the penalty. However, in setting the penalty, FERC said "there is a need to discourage and deter the fraudulent conduct and deceitful statements at issue in this matter."

FERC Commissioner James Danly dissented from the decision, saying he was "deeply" skeptical of GreenHat's explanations, but the enforcement office failed to prove its case.

GreenHat's founders worked for a JP Morgan Chase & Co. unit at the center of a market manipulation case at FERC that ended when the investment firm in 2013 agreed to pay $410 million to settle allegations it manipulated power markets in California and Michigan.

A lawyer for Bartholomew and Ziegenhorn declined to comment. 

Kittell, one of the GreenHat founders, died in January when he jumped off the San Diego-Coronado bridge. His lawyers said the FERC investigation drove him to his death.