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Sending Up a Flare, Washington UTC Provides Guidance on Jurisdiction for Third-Party Solar Leases

August 1, 2014

This week, the Washington Utilities & Transportation Commission ("UTC") issued its long-awaited policy statement concerning UTC jurisdiction over third-party owners of net-metered electric facilities, such as roof-top solar systems. The Interpretive Statement indicates that the UTC likely would assert at least limited jurisdiction over third-party owners of rooftop systems who contract with ordinary homeowners. Much of the Interpretive Statement, however, is a cry for help addressed to the Washington legislature, urging it to enact legislation addressing the unique jurisdictional and regulatory issues arising in this unique context.

As noted here, the UTC last year concluded that Washington's net metering statute allows for third-party ownership of rooftop solar systems, opening the door to innovative financing structures that have allowed rapid growth of distributed solar power in other states. However, the UTC left open one critical legal question -- whether the third-party owners of net metered systems operating under such leasing structures would be subject to UTC jurisdiction, and therefore potentially subject to the full range of utility-style regulation. While the Interpretive Statement is likely to disappoint those looking for a definitive statement from the UTC, it provides useful guidance both as to the UTC's concerns with third-party financing arrangements and the type of regulation the UTC likely would impose in those situations where it asserts jurisdiction. While not definitive, the Interpretive Statement, along with Washington's lucrative incentives for solar development and a recent change in the state's building code reducing upfront engineering costs, should spur development of distributed generation in the state.

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Is Third-Party Financing for Energy Efficiency Ready for Prime Time?

July 29, 2014

In recent years, innovations in finance helped spark explosive growth in distributed generation technologies such as roof-top solar. New and creative rooftop leasing transactions allow third-party investors, rather than homeowners, to fund project development. These structures overcome high upfront costs, one of the primary barriers to energy investments for ordinary homeowners and small businesses, while creating solid returns for investors. Third-party investment in energy efficiency, by contrast, has lagged. Several recent developments suggest this may be about to change.

First, Wall Street's interest in large-scale energy efficiency investments is growing, as demonstrated by a new Wall Street investment funds dedicated to energy efficiency that have been capitalized to the tune of hundreds of millions of dollars. The strong investor interest in efficiency investments is not surprising given the potential profits. A McKinsey & Company study, for example, estimates that the United States has the potential to reduce non-transportation energy consumption by 23%, which would produce present-value savings of $1.2 trillion, creating a solid return on the $520 billion upfront investment required. Energy savings on this magnitude would also reduce greenhouse gas emissions by 1.1 gigatons, equivalent to taking the entire U.S. transportation fleet off the road.

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FERC Approves Energy Imbalance Market Tariffs, Paving Way for October Start-Up

June 20, 2014

At its monthly meeting yesterday, the Federal Energy Regulatory Commission ("FERC") approved tariffs that will allow the western Energy Imbalance Market ("EIM") to open as planned on October 1, 2014. The EIM is designed to allow economic dispatch at five-minute intervals of energy balancing resources in the footprint of participating utilities. The EIM is one of a number of initiatives undertaken by utilities in the West to address the problems created by the rapid expansion of non-dispatchable wind and solar resources. Because these resources produce output that can be both highly variable and unpredictable, they have created increasing demand for balancing resources that can respond rapidly to changes in generation output to maintain the balance between generation supply and electric demand necessary for reliable operation of the electric system.

Yesterday's FERC orders approve the EIM proposed jointly by PacifiCorp and the California Independent System Operator ("Cal-ISO"). The PacifiCorp-ISO EIM will employ the Cal-ISO's existing five-minute market mechanism to dispatch balancing resources in the EIM's footprint. Initially, the EIM will dispatch resources within California, as well as within the two balancing authorities operated by PacifiCorp, which are centered on its service territories in the Pacific Northwest and Utah. Participation in the EIM is voluntary and the system is designed to allow expansion through addition of new utility participants.

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FERC Proposes To Clarify Open Access Obligations for Owners of Generator Tie Lines

May 19, 2014

In a proposal that should clarify federal rules concern access to generator tie-lines, and therefore provide assurance to project developers and their financial backers, the Federal Energy Regulatory Commission ("FERC") at last week's monthly meeting proposed new rules to govern third-party access to such tie-lines. While at first blush, this issue may seem obscure, it has far-reaching consequences for both open access to and investment in the nation's electric system. The proposed rule also clarifies how FERC will reconcile two of its most important policy goals -- investment in new generation resources and open access to the nation's transmission grid.

The proposed rules are important because generator tie-lines often cover hundreds of miles and operate at extremely high voltages, especially when delivering power from generation resources located in remote, rural areas that otherwise have limited access to the backbone transmission grid. The proposed rules are therefore particularly important for wind generation and utility-scale solar, where the best resources are often located far from existing transmission lines. FERC's proposal notes several cases where tie-lines to link, for example, large wind generation projects to the grid span hundreds of miles and operate at voltages as high as 345-kV, and therefore look much like backbone transmission assets.

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Complicating "Coal By Wires" Regulation, Minnesota Court Strikes Down Greenhouse Gas Regulation

April 21, 2014

In a ruling with potentially far-reaching consequences for state-level attempts to regulate greenhouse gases, the U.S. District Court for the District of Minnesota on April 18 issued a ruling striking down key elements of Minnesota's Next Generation Energy Act ("NGEA"). For the Pacific Northwest, in particular, the ruling could complicate efforts by Washington, Oregon, and California to limit "coal by wires" -- the importation of coal-generated electricity from plants located in states like Montana and Arizona. State of North Dakota et al. v. Heydinger et al., No. 11-cv-3232 (SRN/SER) (issued April 18, 2014).

Passed by Minnesota's legislature in 2007, the NGEA is aimed at reducing the carbon footprint of electricity consumed in the state. The statute prohibits new power plants within Minnesota that "would contribute to state power sector emissions." To address the "coal by wires" problem, the statute also broadly prohibits importing power generated outside Minnesota if that generation "would contribute to statewide power sector carbon dioxide emissions," and also prohibits long-term power purchase contracts from facilities larger than 50 MW that would contribute to Minnesota's power sector carbon dioxide emissions.

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Texas Supreme Court Blows Away Wind Generator Claims, Finds Contracts Assigned Risk of Transmission Congestion to Generators

April 2, 2014

Transmission congestion between the wind-rich plans of western Texas and population centers to the east frequently force curtailment of deliveries of electricity from Texas wind farms. In a contract dispute worth tens of millions of dollars, the Supreme Court of Texas recently concluded that wind energy producer FPL Energy assumed the risk of transmission curtailments and therefore must pay contractual damages for delivery failures caused in large part by transmission curtailments. The decision, which turns on specific language addressing transmission curtailments in a contractual "Uncontrollable Forces" clause, once again underscores the peculiar importance of such clauses in energy contracts.

The Court also disallowed a lower court's $29 million judgment against FPL Energy under the liquidated damages provisions of the relevant contracts. The Court found that the liquidated damages clause was intended to compensate the purchaser for undelivered Renewable Energy Credits ("RECs"). The clause provided for recovery of $50 per each undelivered REC, an amount based on the penalty to be paid by utilities in Texas if they do not purchase enough RECs or renewable energy to satisfy the state's Renewable Portfolio Standard. The Court concluded that the liquidated damages provision crossed the line from an acceptable estimate of actual contract damages to an unacceptable contractual penalty for breach because it assumed TXU would pay the $50 penalty rate for all RECs not delivered, but in fact the Texas regulatory scheme excuses compliance for any RECs not delivered because of transmission constraints or curtailments. As a result, the liquidated damages provision required FPL Energy to pay approximately $29 million, whereas the actual losses suffered because the RECs were not delivered was only about $6 million, possibly less. Thus, there is an "unacceptable disparity" between the results of the liquidated damages provision and the actual damages incurred by TXU as a result of FPL's failure to deliver.

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Western PURPA War Update: Retreats, Advances, But Little Clarity

February 4, 2014

As we discussed last summer, the expansion of renewable energy generation, especially wind generation, has produced an escalating conflict between the Federal Energy Regulatory Commission ("FERC") and several Western states over the application of the Public Utility Regulatory Policies Act ("PURPA"). In recent months, at least one major conflict has been resolved, while other conflicts continue to develop. While future developments may depend upon whether newly-nominated FERC Chairman Norman Bay adopts the aggressive enforcement policy of his predecessor, Jon Wellinghoff, recent action provides some hints as to the future legal landscape.

PURPA is a 1978 law that, among other requirements, mandates that utilities purchase power produced by smaller renewable generators. Recent conflicts have arisen over PURPA's basic mandate, which requires utilities to purchase power from PURPA-eligible generators, called "Qualifying Facilities" or "QFs", at avoided-cost rates. Conflicts have also arisen from efforts to square PURPA with recent industry developments, such as ownership of Renewable Energy Credits and integration of variable renewable resources..

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Pew Study Documents Progress in Military Renewables, Reliability and Efficiency Efforts

January 28, 2014

The U.S. military is making substantial progress toward its goals of acquiring 3 GW of renewable energy by 2025, substantially reducing energy use, and improving the reliability of power delivery to military bases, according to a recent report from the Pew Charitable Trusts. The progress attained so far demonstrates the seriousness of the military's commitment to renewable energy, energy conservation, and reliability, and confirms that the Department of Defense ("DOD") energy initiatives represent a huge opportunity for private-sector energy developers.

The DOD initiatives arise from both Congressional mandates requiring increased use of renewable fuels and from recognition within the armed services that continued reliance on fossil fuels and an aging electric infrastructure creates unacceptable security vulnerabilities. For example, the Defense Science Board's influential 2008 report, "More Fight, Less Fuel," identified the military's continued reliance on fossil fuels, and the fragile supply lines associated with that dependence, as a major security problem for military operations around the world. "Unleashing the tether" that ties troops to vulnerable fuel supplies therefore became a major strategic objective. Similarly, the report concluded that serious security risks arise from the dependence of U.S. military bases on an aging electricity infrastructure that exposes bases to increasingly frequent power outages.

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"The California ISO-PacifiCorp Energy Imbalance Market Experiment: Can Public Power Avoid Assimilation?" Eric Christensen Publishes Article in January NWPPA Bulletin

January 28, 2014

We're proud to announce that GTH partner Eric Christensen has published an article in the January 2014 Northwest Public Power Association Bulletin. The article is available electronically here. We've inserted the text below:

Regulatory Update: The California ISO-PacifiCorp Energy Imbalance Market Experiment: Can Public Power Avoid Assimilation?
By Eric Christensen, Partner Gordon Thomas Honeywell

PacifiCorp and the California ISO are now cooperating to create an Energy Imbalance Market ("EIM") encompassing their collective service territories, which stretch from Utah to Southern California. For public power managers who follow "Star Trek", this development bring visions of the Borg, perhaps the most frightening foe dreamed up by the imaginative writers of "Star Trek: The Next Generation." The Borg is a half-technological, half-biological alien race with a collective hive-mind. With machine-like implacability, the Borg assimilates all other intelligent species, turning them into cyborgs without independent thought. When the heroic Captain Picard is captured and assimilated, and programmed to instruct the human race "you will be assimilated, resistance is futile," all hope appears lost. Development of the EIM forces public power to consider whether assimilation into the ISO and its mind-numbingly complex system of regulations and "structured" markets, is inevitable, whether resistance is futile, and what can be done to protect core public power values.

THE PACIFICORP-ISO PROPOSAL
As envisioned in the PacifiCorp-ISO scheme, the EIM would create a short-term market for balancing and regulating reserves, scheduled every 15 minutes and dispatched at 5-minute intervals. The core functions of the EIM would be provided by the ISO's automated 15-minute market. Dispatch would be optimized across the footprint of the Balancing Area Authorities ("BAAs") participating in the EIM, principally as a means of optimizing the use of balancing reserves to integrate wind generation and other intermittent resources. The PacifiCorp-ISO EIM is designed to allow other BAAs to easily join, with reduced balancing costs held out as an incentive. It is almost certain that NV Energy, the IOU serving Nevada, will join the EIM once regulators approve its sale to Warren Buffet's business empire, making it part of the same corporate family as PacifiCorp. It is easy to anticipate that other BAAs in the West might follow suit. The assimilation of BAAs across the West makes the assimilation of public power seem all the more inevitable.

It now appears nearly certain we will see some form of EIM in the West. Public power should take proactive steps to prevent assimilation, to achieve a peaceful co-existence with the EIM, and, ideally, to move the EIM in a direction that benefits public power. To achieve these goals, public power will need to engage actively in the ongoing PacifiCorp-ISO process and the parallel Northwest Power Pool process. Public power should also consider creative structural solutions that can both insulate us from the problems of an EIM and allow us greater control of our own destiny.

POTENTIAL PROBLEMS FOR PUBLIC POWER
Assimilation by the ISO creates a number of problems for public power. These include, for example, "mission creep," the concern that an EIM would establish a beachhead for a much intrusive entity, such as a west-wide RTO long opposed by public power. Similarly, there is concern that the EIM will lead toward substantially increased regulation by the Federal Energy Commission ("FERC"), particularly over the Bonneville Power Administration.

Two examples demonstrate the potential problems. First, Southern California public power entities operating within the California ISO have been subject to FERC regulation of their transmission rates where it was adjudged that their rates were an element of the ISO's FERC-jurisdictional rates. Second, attempts by both Maryland and New Jersey to deal with the inadequacies of the PJM market, which lacks a coherent mechanism for load-serving entities to secure long-term power supplies, have recently been struck down by federal courts as inconsistent with FERC's exclusive jurisdiction over the wholesale power market. Thus, experience with other RTO/ISO markets suggests that expansion of the EIM to a west-side RTO could create both greater FERC jurisdiction over western public power entities and undermine the ability of public power to secure long-term power supplies. These outcomes are, of course, antithetical to public power's core value of local control and its primary mission of assuring reliable and economical power to public power customer-owners.

The problem of expanded FERC jurisdiction is, in light of recent events, a particular concern with respect to Bonneville Power Administration ("BPA"). If BPA joins the EIM as an active participant, FERC may well assert that the rates it charges for power dispatched into the EIM are a component of FERC-jurisdictional wholesale rates charged by the EIM. This would subject BPA to greater FERC jurisdiction, shifting the focus of control over the agency toward Washington, DC, and away from the Pacific Northwest. And it may provide a lever for FERC to exert greater pressure on BPA to move toward a west-wide RTO.

As discussed in my May 2013 Bulletin article, the risks of mission creep and expanded FERC jurisdiction can be limited by including specific safeguards in the documents governing the EIM. In this article, I propose additional safeguards, including a publics-only EIM and additional measures that should be included in the EIM's governing documents.

STRUCTURAL SOLUTION: A PUBLICS-ONLY EIM
By moving aggressively to create its own EIM with membership limited to public power entities, public power can create a structural mechanism to limit both damaging proposals from the EIM and FERC jurisdiction over BPA and other publicly-owned utilities. Fundamentally, the proposed structure would bring together public power utilities, including but not necessarily limited to publics operating BAAs, to pool regulation and balancing reserves and to interact with the PacifiCorp-ISO EIM.
A publics-only EIM would have several advantages over an EIM with mixed public and IOU participation. Perhaps most importantly, the publics-only structure would create an attractive option for BPA, capturing most or all of the advantages that an EIM might create for BPA, but creating a bulwark against expanded FERC jurisdiction over the agency.

In addition, the publics-only EIM would keep public power's fate squarely in its own hands. Because FERC generally has no authority over public power, a publics-only EIM will be able to resist top-down mandates from FERC. If FERC attempts to force a publics-only structure into an expanded mandatory market along the lines of a West-wide RTO, the publics can resist without the same fear of regulatory consequences that would be inherent in an EIM where FERC-jurisdictional IOUs are participants.

Similarly, when faced with the question of adding new functions that would move the EIM toward a full-scale RTO, a publics-only RTO can consider adding new functions on the basis of their own merits, without concern that mandates from FERC would force their hand. Thus, this structure allows public power greater control of its own fate, limiting the extent to which FERC can use its expansive jurisdiction over IOUs as a lever to force its will on the West.

ADDITIONAL GOVERNANCE MEASURES
As currently planned, the EIM will operate using the ISO's 15-minute market system. This creates the danger that the ISO will become the default operator of the EIM across the West. With this underlying market structure, ensuring that public power, especially public power entities operating outside California, have an adequate voice in the EIM's operation becomes a challenge.

PacifiCorp and the ISO propose a "Transition Committee" to move toward an independent governing structure for the EIM, but it is not clear the proposed structure would result in fully representative governance. The Transition Committee would be composed of seven members, but, apart from EIM participants, there is no requirement that any particular segment of the industry be represented. This is particularly a problem for public power utilities without BAAs, which are likely to ultimately foot the bill for EIM costs but will not directly participate. And the long-term governance structure of the EIM is still to be developed. This process merits public power's careful attention.

In addition, public power should insist on a "Circuit Breaker" that would require the EIM to suspend operations if there are indications that the market is being manipulated or is otherwise functioning improperly. Circuit breakers of this type are a common feature of most commodity markets. When there are indications that a market participant is attempting to "corner" the market in particular commodity or is otherwise manipulating market prices or outcomes, the circuit breaker kicks in and trading is suspended in that market until appropriate measures are put in place to end the market abuse and make whole those market participants who have suffered from the manipulation.

A circuit breaker is particularly important for the EIM because credible concerns have been raised about market power in the transmission markets covered by the EIM and because the cost-benefit analyses performed so far suggest, at best, modest benefits for the EIM. It is simply not worth the risk of repeating the disaster of the 2000-01 Enron crisis in order to obtain these relatively modest benefits. A circuit breaker would provide market participants with the kind of immediate protection that was lacking in 2000-01, when Western public power waited for more than a year for FERC to take meaningful action to end widespread manipulation and dysfunction of the power markets, which cost hundreds of thousands their jobs and reduced regional economic output by tens of billions of dollars.

CONCLUSION
When all hope of avoiding assimilation by the Borg appears lost, Star Fleet throws all its remaining ships into a blockade around the inner Solar System. With some clever last-minute thinking by the crew of the U.S.S. Enterprise, the Borg's invasion is stopped and the human race is saved from assimilation. In the same way, the measures suggested here can create a blockade that protects core public power values, and prevents assimilation into FERC and the ISO.

FERC Files Suit Seeking Market Manipulation Penalties Against Barclays

October 10, 2013

Following last week's announcement that it has found evidence of manipulation in the Western markets by Constellation Energy Commodities Group, the Federal Energy Regulatory Commission ("FERC") yesterday took another major step in its battle to protect the electricity markets from manipulation by unscrupulous traders. Seeking to enforce nearly $500 million in penalties it assessed in July against Barclays Bank and four individual Barclays energy traders, FERC filed a lawsuit in the U.S. District Court for the Eastern District of California. (Case No. 2:13-at-01158, filed Oct. 9, 2013).

The case will blaze new legal ground because it is the first time FERC has used its power under Section 823b(d) of the Federal Power Act to enforce civil penalties against a power trader accused of market manipulation. Under those procedures, the District Court will conduct a review de novo of the law and facts found by FERC in its July order. Section 823b(d)'s de novo review standard is considerably more stringent that the "arbitrary and capricious" standard ordinarily applied by the courts when reviewing FERC orders.

If you have any questions about the lawsuit against Barclays and its traders, FERC's market manipulation rules, or other matters involving the energy industry, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group.

FERC Announces New Allegations of Western Electricity Market Manipulation

October 9, 2013

On October 4, the Federal Energy Regulatory Commission ("FERC") issued a terse announcement of its preliminary determination that Constellation Energy Commodities Group ("CECG") improperly manipulated the Western electricity markets. FERC issues such notices after its investigative staff has completed a non-public investigation of alleged misconduct, the subject of the investigation has had an opportunity to respond in writing, and FERC staff has considered that response. Hence, the notice is not a definitive statement that improper conduct has occurred, but it indicates that the staff is sufficiently confident in the evidence to announce its preliminary conclusions publicly.

The notice provides almost no details of the allegations against CECG. However, the nature of the violation specified in the notice, combined with a previous investigation resulting in a then-record fine against CECG, suggests that CECG may have been manipulating the California ISO's physical market prices to artificially benefit its financial positions in those markets.

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Federal Court Decision Illustrates Hazards of FERC-Jurisdictional Markets in the Pacific Northwest

October 7, 2013

The U.S. District Court for the District of Maryland last week issued an opinion striking down a "contract for differences" designed to ensure an adequate long-term power supply. The decision underscores some of the pitfalls that may be arise from creation of an "Energy Imbalance Market" ("EIM") or similar FERC-jurisdictional "centralized" markets here in the Pacific Northwest. PPL Energy Plus, LLC v. Nazarian, D. Md. No. MJG-12-1286 (issued Sept. 30, 2013).

The case arises from the struggles of the Maryland Public Service Commission ("MPSC") to address long-term power supplies in Maryland, particularly in constrained areas of the PJM market. The MPSC was concerned that in PJM -- the regional transmission organization ("RTO") that operates electric markets in the mid-Atlantic region, where prices are set based upon fluctuating Locational Marginal Price -- fails to provide adequate incentives for construction long-term power supplies. To address this problem, the MPSC approved a "contract for differences" between the local supplier and a generation developer. The contract creates a mechanism that effectively ensures a stable long-term price for generation by compensating the generation owner when short-term locational prices fall below the long-term guaranteed price.

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FERC Lifts Curtain on Market Manipulation Investigation, Settles Charges Against JP Morgan for $410 Million

July 30, 2013

Confirming rumors that have swirled for several weeks, the Federal Energy Regulatory Commission ("FERC") today today approved a settlement between JP Morgan Ventures Energy Corporation, the energy trading arm of financial giant JP Morgan, and FERC's Office of Enforcement. The settlement is eye-opening both for its $410 million price-tag and because it reveals for the first time details of the market manipulation schemes carried out by JP Morgan.

The market manipulation schemes -- identified as "Strategy A" through "Strategy H" in the settlement agreement -- arose from JP Morgan's attempts to extract value from under-performing assets it purchased from Bear Stearns as Bear Stearns spiraled into bankruptcy in 2008. These assets included a number of older gas-fired generators in Southern California, with a total of 4,000 MW of capacity, and an additional gas-fired generator in Michigan. The plants were built in the 1950s and '60s, and, because they used older technology, were relatively inefficient. Because they are inefficient, the plants were rarely dispatched in the "organized markets" operated by the California ISO and Midwest ISO, and therefore consistently lost money.

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Advancing Energy Storage, FERC Order Provides New Clarity on Treatment of Storage Technologies

July 24, 2013

At its July meeting, the Federal Energy Regulatory Commission ("FERC") issued final rule that lays the regulatory groundwork for energy storage, as well as improving the markets for many ancillary services. The final rule should provide much-needed regulatory clarity that will encourage deployment of many rapidly-advancing energy storage technologies.

The final rule addresses two major issues: regulatory requirements for selling ancillary services in interstate electricity markets and accounting requirements for energy storage. With respect to the sale of ancillary services, the rule modifies requirements for sellers of ancillary services to demonstrate that they lack market power in order to sell at market-based rates (often referred to as the "Avista policy"). The Avista policy has long been criticized because it is difficult or impossible to develop the data necessary to demonstrate a lack of market power for many ancillary service markets. For this reason, in the final rule, FERC concluded that the policy has become an "unreasonable barrier to entry" into ancillary services markets.

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FERC Affirms Nearly $500 Million in Penalties Against Barclays for Western Market Manipulation, JP Morgan Could Be Next

July 22, 2013

Last week, the Federal Energy Regulatory Commission ("FERC") affirmed that it will seek disgorgement of profits and penalties from Barclays Bank and a group of its individual traders totaling nearly $500 million. FERC's order, issued July 16, confirms findings from a show case order issued on Halloween Day of last year that Barclays systematically manipulated Western power markets between 2006 and 2008. We discussed the Halloween order in greater detail here. In the meantime, repeated press reports over the last week suggest that JP Morgan Chase will pay roughly $500 million to FERC to settle market manipulation claims. Together, these developments demonstrate that FERC has "grown adult teeth" in enforcing its anti-manipulation rules, including the new authority it was assigned in the Energy Policy Act of 2005.

In the show cause order issued last October after an extensive FERC staff investigation, FERC found that Barclays engaged in trading strategies designed to drive down the price of power sold at Western market hubs in order to artificially inflate the value of its portfolio of financial hedges. Last week's order rejects a variety of legal and factual challenges to the 2012 show cause order. As a result, FERC affirms its earlier findings that Barclays should be assessed a civil penalty of $435 million and required to disgorge $34.9 million in unjust profits, plus interest. In addition, FERC concludes that Barclays trader Scott Connelly should be assessed a $15 million civil penalty in his individual capacity, and individual traders Daniel Brin, Karen Levine, and Ryan Smith should be assessed civil penalties of $1 million each.

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