A Pair to Draw to: "Twin Energy Traders Dare the FERC to Sue Them"

Matt Levine at Bloomberg View:

Two things that you can say about the Federal Energy Regulatory Commission, as a market regulator, are:

1. It produces the most incomprehensible prose of any market regulator,¹ and
   
2. Its markets have an unusual tendency to be gamed in embarrassing ways.
   

I suspect these facts are related. I posit that almost nobody, including at the FERC or its various regional power markets, can actually figure out how those markets' rules work. So they work badly. And while you have to be very smart to figure them out -- say, at the level of Blythe Masters, or electrical engineering Ph.D. Alan Chen -- once you have figured them out, they become comically easy to game. FERC builds markets with so many bells and whistles and buttons and valves that some of the buttons end up having no function but to dispense money. If you can find those buttons, what you do is just keep pressing them until the FERC notices and gets mad at you and starts scolding you incomprehensibly.

Here is a weird story about Powhatan Energy Fund, a "small Pennsylvania hedge fund," run by identical twin brothers Rich and Kevin Gates, who are delightfully pestering the FERC because it's thinking about suing them for market manipulation for finding one of those buttons.

The Gates twins are, or ought to be, legends of feistiness. Rich Gates got into Michael Lewis's "Flash Boys" by ripping himself off.² When FERC sent Powhatan its preliminary findings that Powhatan's trades (and those by a related fund called Huntrise) "constituted manipulative trading in the PJM market," Powhatan sent back the following response:

Your preliminary findings make no sense. Should you choose to proceed with a public notice against Powhatan and/or Huntrise, please be advised that they will respond publicly and forcefully.

That's it -- that was the whole response. Amazingly, it seems to have worked: The preliminary findings are from August 2013, the reply is from October, and FERC still hasn't brought a public case against Powhatan. (Its "investigation is moving forward," though.) But Powhatan has responded publicly and forcefully anyway, apparently mostly for fun. ("Going public 'was an insurance policy against our personal and professional reputations,' said Kevin Gates.") And it's trying to prevent Norman Bay, the FERC enforcement director who oversaw the investigation, from being named chairman of the FERC.

The story is, lorem ipsum dolor sit amet, consectetur adipiscing elit, wait, no, OK, focus, we are going to do this. The story is that Powhatan let Chen invest some of its money in the electricity markets, and he found a money-dispensing button. In the assortment of charges and rebates and bonuses and other miscellanea in the PJM regional electricity market, there was a payment called a "transmission loss credit": PJM charged electric customers money to cover the cost of line losses in electric transmission, and then paid that money to the people who supplied that electricity. But the FERC-imposed rules at PJM collected that money under one economically rational formula, and distributed it under another, arbitrary formula.³

The result was that, while normally the system charges you for trading electricity (because you have to pay for transmission lines), at some predictable times it instead paid you to trade electricity. So Chen traded tons of electricity at those times. And since just getting paid to trade is a good business -- much better than, like, trading....MORE