Commissioner James Danly Statement
May 20, 2021
Docket No. IN18-9-000
In June of 2018, GreenHat Energy, LLC (GreenHat) defaulted on its obligations under the Financial Transmission Rights (FTR) market operated by PJM Interconnection, LLC (PJM). This was the largest default in the history of PJM’s FTR market, and it imposed approximately $179 million in losses on PJM Members. PJM was roundly and, in my view, justly, criticized for its deficient collateral requirements and oversight of GreenHat that allowed this default to occur.
However, PJM was not the only party at fault. Given the magnitude of the default, the Commission appropriately initiated an investigation of GreenHat and its owners (collectively GreenHat) by the Office of Enforcement (Enforcement). Now that Enforcement’s investigation is complete, I support the Commission’s issuance of an Order to Show Cause in this proceeding. As the primary regulator of PJM’s FTR market, the Commission has the responsibility to make an official public determination as to whether or not GreenHat’s default was the result of fraud or manipulation.
But my support for the issuance of the Order to Show Cause is based solely on my belief that the Commission has the responsibility to issue an official pronouncement as to whether GreenHat engaged in fraud or manipulation. My support of this order should not be read as an indication that I have reached any conclusions at this time on the ultimate question of GreenHat’s liability. I am issuing this concurring statement to provide some guidance to the parties as to what I believe would be helpful for them to address in their submissions in response to the Show Cause Order.
Based on my review of the Enforcement Staff Report and Recommendation (Staff Report), I have questions and concerns about both Enforcement’s and GreenHat’s positions. I list those concerns below, organized by Enforcement’s principal alleged violations. I request that both GreenHat and Enforcement address these issues in their submissions.
Allegations that GreenHat Committed Fraud by Purchasing FTRs Without Consideration of Value and With No Intent to Pay at Settlement
The crux of Enforcement’s primary manipulation claim is that GreenHat purchased FTRs based solely on the basis of minimizing its collateral obligations to PJM, and without regard to the actual value of the FTRs. Enforcement concludes that GreenHat intended to sell the “winners” and then walk away from the “losers” when GreenHat’s payment associated with those losing FTRs came due in the future.
Enforcement fails to address, however, the fact that the reason little or no collateral was required for the FTRs GreenHat purchased was because PJM itself had determined that those FTRs were, in the aggregate, valuable “winners.” PJM did not require GreenHat to post collateral for the purchase of these FTRs because PJM believed there was little risk that GreenHat would have a payment obligation when the time came for the FTRs to be settled.
Enforcement asserts that the values GreenHat said it placed on the FTRs it purchased were based on stale historic data that no one seriously would consider in valuing the FTRs. But Enforcement does not address the significance of the fact that PJM itself did rely on the data as representing the best available estimate of the FTRs’ value. Further PJM—and PJM’s Independent Market Monitor (IMM)—vigorously defended PJM’s methodology when FTR traders asserted that the values were incorrect based on more sophisticated valuation techniques, including forecasts of future power flows and mark-to-market valuations. Nor does Enforcement address the fact that PJM had every incentive to correctly evaluate the FTRs’ values, because those values were used to determine the amount of collateral PJM required for entities engaged in FTR trades.
What is more, Enforcement does not address the fact that, as the market operator and market monitor, respectively, PJM and the IMM had the greatest access to market data and the best ability to analyze that data. It is clear now, after the fact, that PJM’s values were profoundly wrong, but the fact that PJM and the IMM strongly supported the use of those values at the time would seem to undercut Enforcement’s allegations that GreenHat could not credibly claim to have relied on the values PJM placed on the FTRs that GreenHat purchased.
The only attempt by Enforcement in the Staff Report to address the significance of the PJM valuations is to assert there is no evidence GreenHat knew of the existence of PJM’s defenses of its values that were made in the pleadings PJM filed with the Commission and that other PJM statements were made after GreenHat had started purchasing FTRs and that PJM was not purporting to provide investment advice to FTR traders. In my view, this misses the essential point. The record shows that GreenHat did know it was using PJM’s method for valuing the FTRs being traded. It seems to me the fact that PJM clearly believed in the validity of its values undercuts Enforcement’s claim that no reasonable FTR trader would have relied on those values, even if GreenHat was not aware of the exact statements PJM made to defend its valuation methodology and PJM was not providing investment advice.
I am troubled by Enforcement’s failure to address the significance of PJM’s belief in its own valuation methodology and would like to hear more from it on this issue. I am also interested in GreenHat’s views.
Of course, just because PJM believed in its valuation methodology does not necessarily mean that GreenHat agreed with, or cared about, PJM’s conclusions. In that regard, the Staff Report cites to certain indirect evidence suggesting that GreenHat did not believe in PJM’s valuations, or at least was indifferent to those valuations except as they related to the amount of collateral required for the purchase of FTRs. This evidence includes two emails describing meetings the authors had with GreenHat in which GreenHat described its FTR strategy, a PowerPoint presentation GreenHat prepared for use in soliciting investments, valuations GreenHat used in its efforts to sell some of the FTRs in its portfolio that differed from the PJM values, and an internal GreenHat spreadsheet that Enforcement alleges shows a mark-to-auction calculation demonstrating that GreenHat’s FTR portfolio had a negative $36.5 million value. The Staff Report also cites to evidence indicating that GreenHat transferred the proceeds from FTR sales from its account to its owners at the same time it was telling its counterparties to those transactions that it was making the sales to support its business activities or to purchase FTRs in the next annual auction. Finally, the Staff Report asserts that GreenHat knew that trading based on the PJM values would be unprofitable because of losses GreenHat incurred when purchasing FTRs in 2014. I would like to hear more from GreenHat about the significance of this evidence and whether it supports Enforcement’s claims about GreenHat’s FTR strategy.
Also, although not specifically mentioned in the Staff Report, GreenHat’s conduct in purchasing such an unprecedentedly large number of FTRs also suggests that GreenHat was, at the very least, indifferent to the value of the FTRs it was purchasing. One would expect that, with such a large number of FTRs, GreenHat would have some concerns about its exposure if PJM’s values were not correct, as at least some other FTR traders were asserting. But instead of selling its FTRs or taking other steps to hedge its risk, GreenHat increased its purchases of FTRs with positive values assigned by PJM. This had the effect of reducing GreenHat’s collateral obligations under the FTR values that PJM was using, but it also greatly increased GreenHat’s potential exposure if those values turned out to be wrong. I would like to hear from GreenHat regarding the significance of the magnitude of GreenHat’s FTR purchases and GreenHat’s apparent lack of concern about the potential that PJM’s valuations might not be correct.
I also would like to hear from GreenHat about any documents that contradict Enforcement’s allegations about GreenHat’s FTR strategy or the valuation it internally placed on its FTR portfolio.
Finally, it appears to me that the email from Matt Arnold, quoted repeatedly in the Staff Report, does not actually describe the manipulative scheme Enforcement has alleged. That email reads as follows:
It’s three guys who put the portfolio together to exploit an arb in the way PJM calculates credit reserve requirements. Basically they could buy an FTR that was trading at a level under its PJM credit reserve (calculated on prior years pricing) and instantly have a position that was ATM from market price perspective but PJM would view it as ITM from a credit perspective. So PJM would issue them collateral that they could use to buy more FTRs. So basically it is a giant leveraged long position.
PJM eventually figured it out and they negotiated an agreement where some of their premium from bilateral sales would accrue to a credit reserve. There are no option positions per se, only an asymmetric payout profile. If the portfolio ever goes OTM to an extent that exceeds the credit reserve, they just shut down the LLC and walk away. But if there is extreme weather event or otherwise congestion prices spike, there is upside. Portfolio is almost entirely long except for some bilateral sales.
Nothing in this email suggests that GreenHat told Arnold that it purchased FTRs with the plan of selling the winners and walking away from the losers. Instead, one way to read this email is that Arnold believed GreenHat saw the opportunity, given “the way PJM calculates credit reserve requirements,” to make speculative bets that there would be an “extreme weather event or otherwise congestion prices [would] spike,” in which case “there is upside” and GreenHat could make a profit. These bets would have a very low cost because of PJM’s collateral requirements. And if such events did not happen and GreenHat’s portfolio was out of the money, “they just shut down the LLC and walk away.” I would like to hear from GreenHat and Enforcement as to: (a) whether this represents a more plausible description of GreenHat’s FTR strategy; and (b) if so, whether that strategy constitutes manipulation in violation of the anti-manipulation provisions of the Federal Power Act and the Commission’s Anti-Manipulation Rule.
Allegation that GreenHat Made False and Deceptive Statements to PJM About a Non‑Existent $62 Million Debt from Shell
Another important claim against GreenHat relates to the Pledge Agreement that GreenHat entered into with PJM in order to forestall a margin call. According to Enforcement, GreenHat’s statement made to PJM that the agreement covered $62 million in payments owed to it by Shell was “knowingly false.” Enforcement asserts that, instead, Shell had already fully paid for all FTRs covered by its agreements with GreenHat. If this is correct, then that potentially could represent an independent ground for a fraud or manipulation claim even if Enforcement’s allegations about GreenHat’s reasons for purchasing the FTRs in the first place were found to have no merit.
GreenHat contends that the parties could have reached agreement to pay prices entered into PJM’s FTR Center. While I agree with this, I also agree with the Commission’s previous finding that the mere entry of prices into the FTR Center does not establish a contractual obligation to purchase FTRs at that price. I would like to hear more from GreenHat about any additional evidence supporting its contention that the prices entered into the FTR Center were contractually-agreed prices that obligated Shell to pay more for the FTRs it purchased than was reflected in the letter agreements between GreenHat and Shell.
I also would like to hear more from both GreenHat and Enforcement about the evidence showing that there were negotiations between GreenHat and Shell as to the prices entered into PJM’s FTR Center. Enforcement alleges—convincingly—that entry of prices in these fields have no substantive effect on their own. However, the entry of prices in the fields could have substantive effect if the parties had a separate agreement giving such prices contractual significance. And Enforcement does not provide an explanation as to why the parties would engage in negotiations over the entries in the price field if they believed that such entries were irrelevant to contracts where all payments already had been made. I also would like to hear from GreenHat on this question, particularly whether there is any evidence, other than the evidence showing that there were negotiations over the price entries, suggesting there was a contractual agreement by Shell to pay GreenHat the amounts entered into the price fields.
I also note a concern I have with one of Enforcement’s allegations regarding the Pledge Agreement. Specifically, Enforcement alleges that GreenHat prevented PJM from contacting Shell to confirm the validity of GreenHat’s assertions that Shell owed an additional $62 million in payments. However, in footnote 124 of the Staff Report, Enforcement states that “on or about March 29, 2017, [Shell employee] Kolkmann explained the then-pending third deal with GreenHat and also the first two deals, which he said were completed and paid for.” This footnote appears to contradict Enforcement’s assertion that PJM was unable to ask Shell about GreenHat’s assertions. I would like to hear more about the significance of this conversation between Kolkmann and PJM, and also would like to know more about exactly what Kolkmann told PJM.
Further, I would note that the Staff Report does not assert that PJM in fact was unaware of Shell’s position that it did not owe any additional money under its first two agreements with GreenHat. Instead, Enforcement alleges only that GreenHat made false statements to PJM. Enforcement takes the position that GreenHat’s false statements alone constitute manipulation that violates the anti-manipulation provisions of the FPA and the Commission’s Anti-Manipulation rule, even if PJM did not rely on those false statements. I would like to hear GreenHat’s views on the significance of Kolkmonn’s interview statement in light of this limitation on allegations in the Staff Report.
In addition to my concerns about the substance of Enforcement’s allegations regarding the Pledge Agreement, I have a procedural concern as well. Ultimately, in order to evaluate Enforcement’s allegation, we will need to evaluate the validity of GreenHat’s contract claim that Shell owed it $62 million. If in fact Shell did have such a contractual obligation, then we could not find anything improper about GreenHat’s offer to pledge its rights to the $62 million owed by Shell as collateral. However, GreenHat is pursuing its contract claim in Texas state court and, only last month, the Commission reaffirmed that it will not address the merits of that claim but instead is deferring to the Texas courts. I agree with Enforcement that we nevertheless must evaluate GreenHat’s claim in this proceeding pursuant to our authority under the FPA to evaluate allegations of manipulation. However, I would like for GreenHat and Enforcement to address whether we should reach a decision on this question before the Texas court’s decision and, if so, how we should take the Texas proceeding into consideration.
Allegation that GreenHat Rigged PJM’s Long Term FTR Auctions by Repurchasing FTRs it Had Just Sold to Shell to Drive Up the Amount of Cash it Would Obtain from Shell
Enforcement’s third alleged violation is that GreenHat rigged PJM FTR auctions by using inside information to buy large volumes of FTRs it had just sold to Shell. If this allegation is true, it would clearly represent an independent ground for finding that GreenHat engaged in manipulation. However, I am concerned about what the record shows as to whether GreenHat actually had any inside information and whether its bids into the FTR auctions rigged the results of those auctions.
The Staff Report relies on the fact that GreenHat knew the terms of its transactions with Shell, but my understanding is that GreenHat did not have any other information as to whether Shell would offer any FTRs into a particular auction and, if so, the quantity of FTRs Shell would offer or the prices at which Shell would offer. I would like to hear from the parties whether my understanding is correct and, if so, whether the information that GreenHat had constitutes the type of inside information that cannot be used in bidding on FTRs on the same paths as the FTRs GreenHat sold to Shell. It is reasonable to conclude that GreenHat could make inferences about Shell’s possible offers as a consequence of its agreements with Shell, but does that constitute the unlawful use of inside information?
I also would like to hear the parties’ views as to scope of permissible FTR trades by GreenHat if the information regarding the transactions between GreenHat and Shell did constitute inside information. Should possession of such information have barred GreenHat from bidding to purchase any quantity of FTRs on the same paths as the FTRs it sold to Shell at any price, or would only certain types of bids constitute manipulation?
Further, it is not clear to me whether GreenHat’s agreements with Shell required Shell to sell the FTRs into any particular auction or that Shell’s obligation to pay GreenHat for the FTRs was contingent on the FTRs clearing in the FTR auctions. If the agreements did not obligate Shell to sell FTRs into any auction, it seems less likely that GreenHat could know with any certainty how Shell would offer into the auctions and would not have the incentive to bid for those paths simply to ensure payment from Shell. I would like to hear from the parties on this issue.
In addition, although the Staff Report details the FTRs that GreenHat purchased in the same auctions where Shell sold, the Staff Report provides no details on the extent to which GreenHat’s bids did not clear, or did not clear in such a way as to set the price paid for the FTRs it purchased. This information is crucial to Enforcement’s allegation because if GreenHat’s bids did not generally set the market price for the FTRs sold by Shell, those bids could not have rigged the market price. I would like to see more information and analysis on the question of whether and how GreenHat’s bids affected FTR prices in ways that increased the payments GreenHat received from Shell, and/or injected false information into the market.
Enforcement’s Allegation that GreenHat Violated the PJM Tariff and Operating Agreement
Enforcement’s final allegation is that GreenHat violated the PJM Tariff and Operating Agreement in two respects: (1) In defaulting on its obligations to settle its FTRs GreenHat violated tariff provisions obligating it to pay all bills arising in connection with the Operating Agreement; and (2) GreenHat made false certifications as to its valuations and risk management practices, and to the accuracy of its financial statements submitted to PJM.
With respect to the first alleged tariff violation, I am uncertain whether a payment default constitutes a tariff violation that can result in liability for civil penalties. Has the Commission ever assessed civil penalties as a consequence of a payment default? I would be interested in seeing a discussion of the precedent and the policy considerations involved.
With respect to the second alleged violation, I am interested in hearing from the parties whether GreenHat can be found to have submitted false certifications if: (1) GreenHat clearly stated the grounds for its certifications; and (2) the certifications were all based on the same FTR valuation methodology that PJM itself used.
I recognize that there are many other issues related to Enforcement’s allegations and GreenHat’s defenses with respect to each of the above allegations that I have not identified here. I am interested in hearing more from GreenHat and Enforcement on these issues as well. Only after considering these further submissions will I be able to reach a conclusion on the validity of Enforcement’s allegations.
Joint and Several Liability for the Kittell Estate
Finally, although I understand that it is the Commission’s typical practice to impose joint and several liability when it seeks disgorgement from individuals, I wonder whether joint and several liability for the Kittell Estate is appropriate in this proceeding to the extent that the Commission determines that violations occurred and disgorgement is appropriate. I request that the parties address this question in their submissions.
 GreenHat’s owners were John Bartholomew, Kevin Ziegenhorn, and Andrew Kittell. Mr. Kittell is now deceased, and the Commission has named his estate as a respondent to the Order to Show Cause and indicated that the estate is potentially liable for disgorgement of profits from the alleged manipulative scheme. As explained in Section V, one of the questions I have for the parties is whether the Kittell Estate should be held jointly and severally liable for any disgorgement the Commission determines should be made by GreenHat’s owners.
 See Staff Report at 17 (“GreenHat has offered no evidence, and Enforcement staff is aware of none, supporting the idea that a rational trader would ever buy financial instruments—much less accumulate the largest portfolio in an entire market—exclusively based on stale pricing information from as much as seven years before the time when the instruments settle.”).
 Id. at 83-85.
 Id. at 19 (citing Hotline email (Roscommon_00001) (Email from K. Kelley to Enforcement Hotline) (June 25, 2018)), 20-21 (citing MA-0000000062 (Email from M. Arnold to P. Dadone) (Sept. 5, 2017, 11:06)).
 Id. at 27-28 (citing GH_0004094, Passive Investing PJM FTR Market (PowerPoint presentation directed at potential investors) (Oct. 21, 2016)).
 Id. at 22 & n.58.
 Id. at 23.
 Id. at 32.
 Id. at 81.
 Id. at 20-21 (quoting MA-0000000062 (Email from M. Arnold to P. Dadone) (Sept. 5, 2017, 6:03 p.m.)) (emphasis added).
 Id. at 44.
 See Shell Energy North America (US), L.P., 175 FERC ¶ 61,025, at P 29 (2021) (“We therefore disagree with GreenHat’s contention that the PJM Tariff and the Commission’s orders from 1999 demonstrate that entering information into the FTR Center price field alone generates bilateral agreements between market participants.”).
 The Staff Report discusses the Kolkmann interview again at pages 99-101.
 There is no citation in the Staff Report to any document in the record detailing or summarizing the contents of this interview. My understanding is that the Commission is not in possession of any notes regarding this interview. I for one would be receptive to a motion by GreenHat requesting the issuance of a subpoena to Mr. Kolkmann to discover more details about the interview.
 Shell Energy, 175 FERC ¶ 61,025 at P 36 (“The Commission’s interpretation of the PJM Tariff in this declaratory order proceeding does not interfere with or prejudice the outcome of GreenHat’s litigation in Texas state court.”).
 Staff Report at 68 n.202
 Id. at 103-04.
 In response to GreenHat’s claim that its bids were not public, Enforcement asserts that “as courts have held under both the FPA and the securities laws, bids and offers in auctions can be deceptive even though they are not visible to other market participants, if they are not based on market fundamentals.” Id. at 104. Even if this is true as a general matter, I would like for Enforcement to explain how those cases could support the conclusion that GreenHat’s nonpublic bids injected false information into the market if they did not clear or set the price.
 Id. at 77-78.