By Scott DiSavino and Eileen O'Grady
NEW YORK/HOUSTON (Reuters) - The top U.S. energy regulator on Thursday warned power and natural gas traders that the agency has beefed up enforcement activity to discourage market manipulation, citing last week's record fine against Constellation Energy.
That's the message Federal Energy Regulatory Commission (FERC) Chairman Jon Wellinghoff told Reuters the agency is sending with a record $245 million fine against Baltimore-based Constellation Energy.
"The penalty amount will send the signal that you will not profit from market manipulation," Wellinghoff said. "It will cost you dearly. There is no profit to be made in manipulating the market; it will be a huge net loss for you."
Constellation agreed to pay a $135 million civil penalty and to disgorge unjust profits of $110 million. It was the largest penalty FERC has imposed since Congress expanded its enforcement authority in 2005 to prevent another electricity crisis like the one that hit California in 2000 and 2001.
Before the Constellation settlement FERC had only issued $172 million in fines since 2007.
FERC's enforcement staff determined Constellation engaged in manipulation in New York from September 2007 to December 2008, resulting in economic losses to market participants who bought and sold energy in the New York and New England power grids.
Specifics of the trading violations outlined in FERC's agreement with Constellation should also be viewed by industry as a message, commissioner Cheryl LaFleur told Reuters.
"The details of the settlement agreement which sets out what the alleged market manipulation was as well as the compliance that we are expecting from the companies going forward - whether intended as a message or not - it is a good message for people who are market participants to learn from," LaFleur said.
"It's good reading," she said.
More than 10 years after the collapse of Enron and the California energy crisis, which was exacerbated by illegal trading activity and cost companies billions of dollars, the need for constant market oversight remains, Wellinghoff said.
"It will always be necessary to have oversight and enforcement of these markets," Wellinghoff told Reuters. "You have to make sure people are trading and operating fairly and openly. There are going to be some people to test the limits and others who will go beyond the limits and actually engage in fraud, manipulation and abuse."
FERC has been building its enforcement office in the years since the California crisis.
"We're now maturing to a full robust office that has the capability to ensure these markets operate fairly for consumers," Wellinghoff said.
BEEFING UP ENFORCEMENT
Adding staff with analytical skills and energy market experience will allow the enforcement division "to dive deeper into the data and be able to bring cases where they are appropriate," he said.
Wellinghoff credited former New Mexico U.S. Attorney Norman Bay, named to lead the FERC enforcement office in 2009, for prosecutorial and energy market expertise.
As part of the Constellation settlement, FERC plans to grant $1 million to six regional transmission grid operators (RTOs), including New York and New England, to enable them to better analyze trading and price data.
"The RTOs are in a good position to identify discrepancies," FERC Commissioner John Norris told Reuters. "They deal with the power markets every day. We're trying to enhance our capacity to watch the market by enhancing the RTOs ability."
"My hope is people will realize there are serious repercussions for manipulation. We have a very strong investigations team, beefed up with a new division of analysis and surveillance. So the end goal is we have less to investigate," Norris said.
CONSTELLATION DENIES WRONGDOING
Constellation CEO Mayo Shattuck said the company did not admit to any wrongdoing but agreed to settle the case to avoid litigation and pave the way for its $7.9 billion merger with Chicago-based energy company Exelon Corp.
But Wellinghoff said in a statement that FERC would hold senior managers of "all companies" accountable for monitoring compliance. He said companies would be expected to refrain from making uneconomical trades on one position in order to lift the value of a different position.
FERC's enforcement unit said Constellation's inappropriate activity involved losing money in the New York physical power market to favorably influence payments it received under a separate financial market.
In a statement, Wellinghoff said companies would be expected to respond truthfully to questions about their trading, and also to realize that FERC "will be vigorous in using its anti-manipulation authority to protect consumers."
In addition to the civil penalty and profit disgorgement, Constellation had to remove the employees involved in the questionable trading activities from any position related to wholesale energy trading.
Shattuck said last week that Constellation believed its trading practices "were lawful portfolio risk management transactions." Wellinghoff's statement said "clearly that is not the case."
"The Stipulation and Consent Agreement sets forth a detailed description of the transactions that I believe Constellation knowingly and willfully engaged in that form the basis of enforcement staff's conclusion that Constellation engaged in market manipulation, fraud, and misrepresentation," Wellinghoff said.
(Reporting By Scott DiSavino in New York and Eileen O'Grady in Houston; Editing by David Gregorio)