Was Hedge Fund Shutdown of MA Power Plant Part of a Withholding Strategy to Drive Up NE-ISO Capacity Market Prices?

Public Citizen is questioning whether the New England Independent System Operator’s (NE-ISO) capacity market auction was manipulated by a hedge fund, Energy Capital Partners.  The hedge fund, which has other power plants in the NE ISO region, and in New York, recently bought a power plant in Brayton, MA, and just five weeks later shut it down.

The owners claim they tried to market power from the plant at prices that would have been profitable, but had no takers, and only then shut the plant down.  Public Citizen argues in response that the shutdown scenario had to have been foreseen by sophisticated investors with other assets in the area that would benefit from a shutdown that would drive the capacity auction price higher.  Then, even though it would lose on the mothballed plant, its other plants would get higher prices for their capacity, and in addition they might profit from financial derivative contracts that ride on capacity prices.  “As a result, Public Citizen and others say, Energy Capital Partners reaped an extra $74 million for its other plants, in Dighton and Springfield, Dayville and Milford, Conn., and Albany, N.Y.”  Erin Allworth, Brayton Point power plant owner denies market manipulation, Boston Globe, April 28, 2014.  Energy Capital Partners has interests in a Rensselaer, N. Y.  power plant and in New Athens Generation at Athens, N.Y.

Public Citizen alleges, in part:

1. No less than three times in their April 25 filing, Energy Capital Partners mentions that Brayton Point is 53 years old, in an apparent attempt to underscore the advanced age of the power plant and, therefore, provide justification that the plant was uneconomical to continue operation past June 2017.
2. Such an argument would be convincing if Energy Capital Partners had actually owned the power plant for 53 years. Or 20 years. Or even 5 years. But Energy Capital Partners had owned Brayton Point for all of 5 weeks before it announced it would close the plant.
3. In the world of business, a firm announcing that an asset purchased just 5 weeks ago is actually uneconomical to operate would be called incompetent, and such a firm would have difficulty attracting capital and staying in business. But the managing partners of Energy Capital Partners are a highly sophisticated all-star crew of former Wall Street financiers: four of the five managing partners are Goldman Sachs veterans, and the firm’s vice-presidents and principals are alumni of JP Morgan, Morgan Stanley, Bank of America, Credit Suisse and other financial powerhouses. These are not your run-of-the-mill owners and operators of power plants. They are Wall Streeters highly motivated to exploit the intricacies of power markets to make as much money as possible for their Cayman Islands-based affiliates.
4. Private equity firms like Energy Capital Partners raise capital by offering limited partnerships to the super-wealthy: in the case of Energy Capital Partners, the minimum investment price for a limited partnership starts at $250,000, according to U.S. Securities and Exchange Commission filings.³
5. Sophisticated Wall Street bankers, backed by the world’s wealthiest clientele, do not have a tendency to spend $650 million of their partners’ money and then announce five weeks after the close of said purchase that the asset they just acquired is actually uneconomical and therefore must shut down.
6. To the contrary: Energy Capital Partners most likely realized before they acquired Brayton Point that the real value of the facility was not in operating it but closing it: the Wall Street whiz-kids at Energy Capital Partners understood the role Brayton Point could play as the centerpiece of a capacity withholding scheme that would provide windfall profits to their existing fleet of ISO-NE plants.
7. Central to executing the alleged scheme was having a fleet of existing power plants in ISO-NE that would reap windfall profits from the resulting higher capacity auction payments delivered to all generation owners.

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See Public Citizen’s Answer to the hedge fund’s filing in FERC  Docket No. ER14-1409.

Gerald Norlander

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