FERC settlement with Constellation largest since 2005

HOUSTON Mon Mar 12, 2012 6:52pm EDT

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HOUSTON (Reuters) - Constellation Energy Group Inc's $245 million settlement with regulators over charges of power market manipulation includes the largest fine handed out by the Federal Energy Regulatory Commission since 2005, the agency said on Monday.

A unit of Baltimore-based Constellation Friday agreed to pay a civil penalty of $135 million, return $110 million in unjust profits and reassign four traders following a FERC investigation into manipulation of the New York wholesale power market from September 2007 to December 2008.

Constellation admitted no wrongdoing in the settlement, which paved the way for Monday's completion of its $7.9 billion merger with Chicago-based Exelon Corp. The deal creates one of the largest U.S. power companies, with operations in 47 states and Canada.

Constellation has 10 days to pay the $135 million fine paid to the U.S. Treasury within 10 days of the settlement, FERC said, while the $110 million in disgorged profits will go into a fund to benefit electric customers in the affected regions.

"That's nothing to sneeze at; it's a really big number," said Paul Patterson, an energy analyst with Glenrock Associates in New York.

The Energy Policy Act of 2005 significantly increased the penalties FERC can impose to $1 million per day per violation, up from $10,000 per day per violation.

The fine against Constellation dwarfs FERC's $25 million fine related to the 2008 Florida blackout. Since 2007, FERC has issued $172 million in fines, excluding the Constellation fine, according to its website.

Of the $110 million in unjust profits, $78 million will go to the New York Independent System Operator. The New England grid agency will get $20 million and PJM will get $6 million.

In addition, $6 million will be divided equally among the grid agencies in New York, New England, PJM, the Midwest ISO, the Southwest Power Pool and the California ISO to be used to improve market surveillance capability.

In the agreement, FERC said its Office of Enforcement found that Constellation Energy Commodities Group traders violated rules prohibiting power market manipulation and submission of inaccurate information to any grid agency.

In a separate statement, the New York grid operator said its market monitor in 2008 first identified trading activity in its "virtual" trading markets by Constellation that led to consistent losses and caused a divergence in New York's day-ahead and real-time prices, "the opposite of what should happen when virtual trading works properly," the ISO said.

After New York moved to restrict Constellation trading in the virtual market, FERC launched an investigation to determine if Constellation's trading activity would have benefited its financial positions in the "contract for differences" market which is outside the New York ISO's view.

FERC said Constellation's own training materials said traders should not take losses to boost profits in a different market, saying that regulators would consider such activity market manipulation.

Constellation said it still did not believe that its practices violated rules, but agreed to the consent stipulation in order to end the investigation and move on with the merger.

"We believe Constellation's trading practices in question were lawful portfolio risk management transactions," said Mayo Shattuck, Constellation chief executive who became executive chairman of Exelon with the merger.

"Even so, these practices do not reflect Constellation's trading operations today, nor in the future," Shattuck said in a statement.

Constellation agreed to remove four traders from any jobs involving wholesale energy trading, take additional steps to improve its compliance program to "more clearly demonstrate the risk management purposes of its transactions" and retain written and phone records for five years.

(Reporting by Eileen O'Grady in Houston and Scott DiSavino in New York)

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