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.
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Powhatan’s aggressive strategy faces its first test Wednesday when the Senate Energy and Natural Resources Committee votes on whether to recommend Mr. Bay’s nomination to the full Senate.
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.
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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.
FERC is seeking to claw back some of Powhatan’s earnings and assess penalties, Mr. Gates said.
“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.
The back-and-forth between Powhatan and FERC turned sour in 2012 and recently has been downright icy, according to documents Powhatan has posted at FERCLitigation.com.
Powhatan this year even accused FERC of breaking federal law by posting a private communication online. FERC removed the letter but refused to track down who was responsible for the posting.
FERC didn’t respond to a request for comment on the back-and-forth, and Mr. Bay, in replies to Senate Republicans, said he would be breaking secrecy rules if he talked about the investigation — even if it is to defend himself.
He said the confidentiality rules can be waived only with the approval of FERC commissioners. Last week, William M. McSwain, Powhatan’s attorney, fired off a letter asking the commissioners for approval so senators can “make a fully-informed decision” about Mr. Bay.
Mr. Gates said Powhatan is able to make a public stand because it has the resources to fight, but it’s not a regular player in the electricity markets, which means it doesn’t have to worry that FERC could punish it on other business before regulators.
Michael McKenna, a Republican energy lobbyist who helps clients with business at FERC, said folks are watching the Powhatan case, both in the energy world and beyond. They are eager to see whether forcing a public fight can be a winning strategy against a powerful government regulator.
“Nobody that I know has ever seen anything like this,” Mr. McKenna said. “It’s a different model, it’s a different approach, and if it’s successful, some people are going to try to mimic it. And not just people in the electricity industry, but you’re going to see companies at places like the [Securities and Exchange Commission, Commodity Futures Trading Commission], places like Justice — some CEOs are going to look at it and think that’s the right way to do it, that gets better results than trying to use lawyers to work behind closed doors.”
In the meantime, this week’s vote on Mr. Bay is proving problematic for Democrats for other reasons.
Mr. Obama wants to designate Mr. Bay as FERC chairman, which would mean demoting Cheryl LaFleur. The acting chairwoman is a Democrat who has won solid reviews from both sides of the aisle. Some Republican strategists wonder why Mr. Obama would demote a qualified woman to replace her with a less-qualified man.
Ms. Landrieu said there has been talk of a deal that would have Mr. Obama keep Ms. LaFleur as chairwoman in the near term in exchange for the Senate’s agreement to put Mr. Bay on the commission, with the understanding that he would be promoted to chairman once he has more experience.
If Mr. Bay’s nomination is derailed, it would be a significant embarrassment for Mr. Obama, whose previous nominee, Ron Binz, withdrew amid opposition from coal-state lawmakers and accusations that he misled senators about his ties to Democratic consultants.
• Stephen Dinan can be reached at firstname.lastname@example.org.
• S.A. Miller can be reached at email@example.com.
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