When federal regulators come knocking, most companies usually hire a Washington-connected lawyer to try to find a settlement that will get them out of trouble with the least possible damage, both financially and to their reputations.
Powhatan Energy Fund LLC, however, is fighting back — in this case against the Federal Energy Regulatory Commission, a little-known agency that the hedge fund accuses of trying to railroad it in a fight over profits from complex electricity futures trades.
Instead of accepting the usual D.C. lawyer-up-and-settle process, Kevin and Rich Gates, identical twins who run Powhatan, hired a former Marine sniper who graduated from Harvard Law School as their attorney, and created a website to make their case against FERC, laying out all the details of what is usually a private back-and-forth.
Most striking of all, the two brothers have taken aim at FERC’s chief of enforcement, Norman C. Bay, whom President Obama has nominated for a promotion as one of the agency’s five powerful commissioners.
“We’re FERC’s worst nightmare because we’re sophisticated, we’re knowledgeable and we’re outsiders to the industry, so we’re not beholden to the FERC,” said Kevin Gates. “They have a strong reputation of being aggressive, overly aggressive, to simply being a bully to using extortion and retribution in dealing with the industry they regulate.”
The combative approach is new territory for FERC, a powerful regulator that has landed in the spotlight in recent months as it takes on a more active role under Mr. Obama.
Republicans are lining up in opposition to Mr. Bay, but key Democrats are backing him despite concerns raised by Powhatan.
“When Pete Domenici testified for Norman Bay, I think that let everybody in this country know that follows energy policy closely that Norman Bay is a substantial guy,” said Committee Chairwoman Mary L. Landrieu, Louisiana Democrat.
Mr. Domenici, a New Mexico Republican who served as chairman of the committee while in the Senate, is backing Mr. Bay.
Powhatan’s case involves bets on the future prices of electricity. The Gates brothers had been making trades for about 18 months when PJM Interconnection, the energy transmission grid for the mid-Atlantic that is overseen by FERC, told them that a mistake had been made and the brothers were owed rebates on each of the trades.
PJM paid out $900,000 in rebates for the 18 months of trades, and the brothers figured it was time to increase their activity because the sheer volume of trades earned money, regardless of the eventual price of electricity.
FERC eventually changed its rules and then went after Powhatan, arguing that the trades it made after PJM told it about the rebates amounted to market manipulation because Powhatan was making “sham” trades and no longer bothered to calculate market risk in its strategy.
“We simply followed the government’s rules exactly as they had predicted, and made a lot of money to the point that we perhaps embarrassed them,” said Mr. Gates, putting the total amount of money Powhatan made at $5 million to $7.5 million.