1 1 BEFORE THE UNITED STATES 2 FEDERAL ENERGY REGULATORY COMMISSION 3 4 - - - - - - - - - - - - - - - - - -x 5 In the Matter of: : 6 PJM UP-TO CONGESTION TRANSACTIONS. : 7 - - - - - - - - - - - - - - - - - -x 8 9 10 11 12 CONFIDENTIAL DEPOSITION OF HOULIAN CHEN 13 14 15 16 17 Washington, D.C. 18 Thursday, October 7, 2010 19 20 21 22 23 REPORTED BY: 24 SARA A. WICK, RPR, CRR 25 2 1 Deposition of HOULIAN CHEN, called for examination 2 pursuant to agreement of counsel, on Thursday, October 7, 3 2010, in Washington, D.C., at the Federal Energy Regulatory 4 Commission, 888 First Street Northeast, Hearing Room 2, at 5 9:34 a.m., before SARA A. WICK, RPR, CRR, a Notary Public 6 within and for the District of Columbia, when were present 7 on behalf of the respective parties: 8 9 W. BLAIR HOPKIN, ESQ. 10 ERIK C. BAPTIST, ESQ. 11 STEVEN TABACKMAN, ESQ. 12 LAUREN ROSENBLATT, ESQ. 13 Division of Investigations 14 Office of Enforcement 15 888 First Street Northeast 16 Washington, D.C. 20426 17 212-502-6038 18 blair.hopkin@ferc.gov 19 erik.baptist@ferc.gov 20 steven.tabackman@ferc.gov 21 lauren.rosenblatt@ferc.gov 22 On behalf of the FERC 23 24 -- continued -- 25 3 1 APPEARANCES (continued): 2 3 JOHN N. ESTES, III, ESQ. 4 DAVID J. HILL, ESQ. 5 Skadden, Arps, Slate, Meagher & Flom LLP 6 1440 New York Avenue Northwest 7 Washington, D.C. 20005 8 202-371-7000 9 john.estes@skadden.com 10 djhill@skadden.com 11 On behalf of the Witness 12 13 Also Present: Bikash Thapliya 14 15 16 17 18 19 20 21 22 23 24 25 4 1 P R O C E E D I N G S 2 Whereupon, 3 HOULIAN CHEN 4 was called as a witness and, having first been duly sworn, 5 was examined and testified as follows: 6 EXAMINATION 7 BY MR. TABACKMAN: 8 Q We are on the record in the matter of PJM Up-to 9 Congestion Transactions. My name is Steven Tabackman. 10 Mr. Chen, would you please state your name. 11 A Houlian Chen. 12 Q How do you spell that? 13 A H-o-u-l-i-a-n, and people call me -- normally 14 call me Alan. 15 Q Mr. Chen, you know that you have been sworn in 16 as a witness today in this matter, and you are under oath? 17 A Yes. 18 MR. TABACKMAN: I'd like to have marked as 19 Exhibit 1 the order of nonpublic formal investigation. I'm 20 providing copies to the witness and counsel. 21 MR. ESTES: Thank you. 22 (Exhibit Chen 1 identified.) 23 BY MR. TABACKMAN: 24 Q Mr. Chen, take your time. I'd like you to look 25 over Exhibit 1, and after you have, tell me whether you 5 1 have ever seen this exhibit before, this document before. 2 A Yes, I did. 3 Q And you understand that this is a formal 4 investigation ordered by the Federal Energy Regulatory 5 Commission concerning certain matters of public record but 6 that this is a nonpublic investigation? Do you understand 7 that? 8 A Yes, sir. 9 Q When did you first read the order? I don't want 10 to get into any conversations you've had with your counsel, 11 but just if you could tell me when you first saw this order 12 and when you read it. 13 A I don't recall the exact date, but I went to 14 FERC Web site and download and read it. 15 Q And why did you go to the FERC Web site to 16 download and read it? 17 A It's related to my companies. So I want to know 18 that -- what's in there. 19 Q Did you look at any of the documents that are 20 referenced in footnote 1 in connection with your review of 21 this order? 22 A Number 1, yes, I did. 23 Q And do you recall what documents you read? 24 A I attended that meeting on August 12th, the 25 presentation by PJM and by IMM president Dr. Bowering. 6 1 Q We can talk about that later. Apart from 2 attending the meeting, did you review any documents that 3 are referenced in this order, particularly the materials 4 that are referenced in paragraph 1 of the order? 5 MR. ESTES: Counsel, ambiguous as to the 6 reference beyond footnote 1. 7 BY MR. TABACKMAN: 8 Q It talks about certain things being a matter of 9 public record from PJM Interconnection and the independent 10 market monitor, Monitoring Analytics, LLC. 11 Have you read documents from either of those 12 entities apart from the meeting? 13 A Yes, I did. 14 Q And do you recall what it is that you read? 15 A One is, I believe, agenda. I know what topics 16 are going to be on the meeting. And also, they have some 17 discussions and what going to be filed in the filing to get 18 PJM member approval. 19 Q And are you a member of the members committee? 20 A Yes. 21 Q And are all members of PJM a part of the members 22 committee? 23 A I don't know, but it's not necessary. 24 Q Because this is a formal investigation, and even 25 if it weren't a formal investigation, the people that are 7 1 at the table with me, whom I will identify in a moment, are 2 all officers, federal officers for purposes of these 3 proceedings. To my immediate right is Lauren Rosenblatt, 4 an attorney with the division of investigation and Office 5 of Enforcement. To her right is Blair Hopkin, who I 6 believe you met earlier. To his right is Erik Baptist. 7 And to his right is Bikash Thapliya. And Mr. Thapliya is 8 in the division of market oversight, energy market 9 oversight, also within the Office of Enforcement. 10 You understand that because you are under oath 11 today, any statements that you make, if you were to make a 12 false statement, could subject you to penalties for making 13 false statements and/or for perjury, the False Statements 14 Statute being 18 United States Code Section 1001 and 15 perjury provisions also under Title XVIII of the Federal 16 Code. 17 Do you understand that? 18 A Yes. 19 Q And I'm sure your counsel has gone over with you 20 the obligation to tell the truth, and we will assume that 21 that's what you will do. I want to say, based on my 22 extensive experience on both sides of this table, it is -- 23 if you are inclined to be less than candid based on a 24 perception that, perhaps, there are documents we won't find 25 or people that we won't talk to that may know something 8 1 other than what you've told us today, that's a bad bet. We 2 are under no time constraints, we are under no limits as to 3 what we will look into. We will be as thorough as we can. 4 So I would simply urge you to follow the advice that I know 5 you've been given, which is to tell the truth in response 6 to the questions. 7 Do you follow that? 8 A Yes, sir. 9 Q Good. With respect to the questions, I am not 10 an expert in trading, and there will undoubtedly be times 11 that my question to you may be less than completely clear 12 to you. We need to have an understanding that if you don't 13 understand the question, you will tell me that. Okay? Do 14 we have that understanding? 15 A Yes, sir. 16 Q Because if we don't have that understanding, I 17 may think you're responding to A when, in fact, you're 18 thinking I said B, and then there will be a 19 misinterpretation. So we have to have that understanding, 20 that you will always, if there's anything that you don't 21 understand about my questions to you or the questions of 22 any of my colleagues, you will ask for clarification and 23 tell us what it is, perhaps, you don't understand or what 24 you think we mean or something like that, so that we can 25 have a meeting of the minds. 9 1 Are we agreed on that? 2 A Yes, sir. 3 Q You understand that in these proceedings you 4 have a right not to answer any question where a truthful 5 answer would subject you to criminal or other penalties, 6 and that's under the Fifth Amendment to the U.S. 7 Constitution. 8 Do you understand that? 9 A Yes, sir. 10 Q Are you sure? You look like you may not. It 11 may be because I'm speaking quickly. If I need to, I will 12 try to slow down. But do you understand your rights there? 13 A Yes. 14 Q You understand also that in a civil 15 investigation -- this is a civil investigation -- if you 16 were to claim your Fifth Amendment rights, we can draw 17 inferences that might be contrary to your interests as a 18 result of your making that assertion. 19 Do you understand that? 20 A I assume so, yes. 21 Q Let me see if I can explain it. In certain 22 proceedings, criminal proceedings, if a person asserts the 23 Fifth Amendment and says I don't want to answer a question 24 on the grounds that it may incriminate me, a factfinder 25 can't draw any inferences about what the answer might have 10 1 been or what that means that the person made that 2 assertion. But in a civil investigation, we can draw 3 inferences about the fact that you may refuse to answer 4 such a question. We can conclude that that might mean that 5 you did something that was wrong. We can do that in these 6 proceedings, and the Commission can do that. 7 Do you understand that? 8 A Yes, I understand. 9 Q You understand that in these proceedings today 10 your counsel may make objections. 11 Parenthetically, I will say that you can reserve 12 all objections except for foundation, the usual rules for 13 deposition. 14 But unless he asserts or you assert that the 15 answer would invade attorney-client privilege or Fifth 16 Amendment privilege, you will still answer the question. 17 Do you understand that? 18 A Yes, sir. 19 Q Sometimes I forget to take a break and go on for 20 longer than people are comfortable with. If you need to 21 take a break, you let me know. 22 Okay? 23 A Thank you. 24 Q If we are in the middle of a question and an 25 answer, though, if I've posed a question to you and you say 11 1 I want a break, I'm going to make you answer the question 2 before we take the break. 3 Okay? 4 A Yes. 5 Q At the end of these proceedings, Mr. Estes or 6 Mr. Hill will have an opportunity to ask you questions if 7 they want to that they may feel will clarify certain 8 matters that we've gone over that they feel need further 9 clarification, we didn't ask a certain question and they 10 may believe we got a misimpression, so that they will have 11 the opportunity to do that at the end of the proceedings. 12 Do you understand that? 13 A Yes, sir. 14 Q As I said, I will be asking most of the 15 questions. However, there may be questions from some of 16 the other attorneys or Mr. Thapliya. We will try to keep 17 that orderly and not sort of feel -- I don't want you to 18 feel like you're getting ganged up on and having lots of 19 people sort of mass firing at you. 20 Okay? 21 A Thank you. 22 MR. ESTES: We trust you. 23 BY MR. TABACKMAN: 24 Q I'd like to go over some background matters. 25 Where were you born, Mr. Chen? 12 1 A I was born in China. 2 Q Where in China? 3 A Zhejing Province. 4 Q Could you spell that? 5 A Z-h-e-j-i-n-g. 6 Q And how old are you? 7 A 44. 8 Q And when did you come to the United States? 9 A 1995. 10 Q You were 29 when you came? 11 A That's correct. 12 Q And were you already -- had you established a 13 profession in China before you came to the United States? 14 A No. 15 Q How far did you go in your education before 16 coming to the United States? 17 A I have a doctorate's degree in power 18 engineering. 19 Q And where did you get that degree? 20 A From Tsinghua University. 21 Q I think you will have to spell that, too. 22 A T-s-i-n-g-h-u-a. 23 Q And how many years of study did it take you to 24 get the degree in power engineering, the doctorate's 25 degree? And I will call you Dr. Chen, and I apologize if I 13 1 referred to you before as Mr. Chen. 2 A No, please call me Alan. I actually spent five 3 years undergraduate, 2-1/2 years master's degree, and four 4 years for the Ph.D. 5 Q And this was all in China? 6 A Yes. 7 Q Before coming to the United States, were you 8 employed in China? 9 A No. 10 Q You never held a job after your education was 11 completed? 12 A That is correct. 13 Q What brought you to the United States? 14 A I apply for a student visa to Drexel University 15 in Philadelphia. 16 Q It's a happy day in Philadelphia today, if 17 you're a baseball fan. Mr. Hopkin is. 18 Did you get your student visa to Drexel? 19 A Yes, I did. 20 Q And did you attend Drexel? 21 A Yes. 22 Q For how long? 23 A For a little bit over 1-1/2 years. 24 Q And what did you study at Drexel? 25 A Power engineering. 14 1 Q And did you get a further degree from Drexel or 2 a certificate upon completion of that? 3 A No. 4 Q This was simply post-doctoral education? 5 A Mostly I spent time on research. 6 Q What were you researching? 7 A It's actually trying to develop a model called 8 voltage stability studies for power systems. 9 Q Can you describe those a little bit, please? 10 A You have a transmission line. You want to find 11 out different type of limit on the transfer capability and 12 voltage stability is one of that limit on the line. 13 Q After you completed your studies at Drexel, what 14 did you do? 15 A I saw a job ad on the Web site from Entergy, and 16 I applied and was accepted. 17 Q And I take it at that point the nature of your 18 visa changed? 19 A After one year. 20 Q And what is your current status? 21 A I have permanent residence, green card. 22 Q What was the job that you applied for at 23 Entergy? 24 A Entergy, as an analyst. 25 Q Could you expand on that, please? 15 1 A Basically, they want to hire someone to support 2 operation and dispatch operation planning group for the 3 generation fleet. 4 Q For generation -- 5 A Fleet. 6 Q Fleet? 7 A Yes. 8 Q And did you accept that job? 9 A Yes, I did. 10 Q And how long were you -- how long did you work 11 at Entergy? 12 A About 2-1/2 years. 13 Q Can you describe what your responsibilities were 14 there, what kind of activities on a day-to-day basis you 15 engaged in at Entergy. 16 A For the operations planning, you have -- various 17 type of generators consume different types of fuel, nuclear 18 fuel, natural gas, oil. And the most important thing we 19 were trying to do is you have a model, develop a fuel 20 consumption forecast, how much fuel you need to buy in the 21 next week, next month, and also trying to optimize the 22 generation, which generation is most cost effective. So 23 basically, you have two aspect of it. One is the fuel 24 burned. The other one is optimize generation fleet. 25 Q And I take it Entergy owned generators? Is that 16 1 correct? Could you describe a little bit about their 2 business. Were they a generating company? A transmission 3 company? 4 A At that time Entergy is a utility company. It 5 has generation. It also has transmission. 6 Q So it was your job, I take it, to analyze and 7 try to optimize those activities? 8 A Correct. 9 Q And were there other people at Entergy who were 10 also engaged in the same activity as you were? 11 A Yes. 12 Q When you left Entergy -- you said after 2-1/2 13 years; is that right? 14 A Correct. 15 Q What did you do then? 16 A I joined firm called Power Costs, Inc. 17 Q And where is that located? 18 A In Norman, Oklahoma. 19 Q By the way, where was Entergy? When you were 20 working there? Where did you live basically? 21 A Entergy is headquartered in New Orleans. So the 22 first month I stay there and get some general training. 23 After about one month, I move to a job site that's in The 24 Woodlands, Texas. 25 Q Why did you leave Entergy to go to Power Costs? 17 1 A At Entergy, we have a tool, we use a tool 2 developed by Power Costs, the tool called GenTrader. 3 That's optimization tool I use to forecast the fuel and 4 optimize the generation fleet. And the owner at Power 5 Costs ask me, you have a pretty good technical skill, why 6 won't you join us to develop some price forecast models, 7 and I agreed at the time, yes. 8 Q I'm sorry. Where was Power Costs, Inc., 9 located? 10 A Norman, Oklahoma. 11 Q And you said develop some price forecasts, some 12 models for price forecasting? 13 A Yes. 14 Q Could you describe what that entails when you 15 talk about that, that activity? 16 A In the power systems, to support the trading 17 activity, generally you want to understand what is the 18 trend of the price movement, and they want me to develop a 19 model called artificial neural network-based tool. To 20 forecast the price -- power price trend. 21 Q I'm sure if you described it for me I couldn't 22 understand it if we spent a week. But were you successful 23 on developing a model that became useful to your company? 24 A I spent less than six months over that company, 25 and I left. 18 1 Q And why did you leave? 2 A The major reason is my wife has a job at 3 Houston, and I invited her to take a tour at Norman, 4 Oklahoma. One, it's difficult to find a job over there. 5 Two, she doesn't like -- she likes Houston better. So 6 after six months, I return back to Houston. 7 Q Just briefly, when you talk about -- can you 8 describe what it is that you study when you try to develop 9 and understand the trends of energy use, which I believe 10 you said the model will -- that's the purpose of the model 11 you were trying to develop. 12 MR. ESTES: Did you understand the question? 13 BY MR. TABACKMAN: 14 Q When you start trying to establish and learn and 15 model trends, what are the things that you look at or that 16 you looked at in that activity? 17 A Are you referring to the price trend? 18 Q The price trend, yes. 19 A The tool trying to develop is based on market 20 fundamentals. Basically, you have the weather, all the 21 major city temperature, and you also have price history and 22 the price movement basically. And based on those 23 combinations or the inputs, seasonalities, weekday, 24 weekends, all those type of information, and you basically 25 forecast based on the estimate of the fuel price input, you 19 1 have associated with that fuel price. You have to set a 2 price forecast. 3 Q When you say "price forecast," what are you 4 referring to? Forecasting what it's going to cost? How to 5 charge for the energy? 6 MR. ESTES: Do you understand? 7 THE WITNESS: Yeah, I think that's correct. 8 BY MR. TABACKMAN: 9 Q You said that you looked at fundamentals, 10 weather, seasonality. You said price history. What other 11 factor would you look at in trying to develop and forecast 12 the pricing? 13 A We also look at generator outage information, 14 transmission outage information. We also look at all the 15 fuel difference. It depends on the geographic of the 16 location. Different place you have different fuel price. 17 So we all kind of assemble those data into the model. 18 Q Going back to Entergy for a moment, did you 19 engage in trading activity? 20 A No. 21 Q I take it -- at Power Costs, Inc., did you 22 engage in trading activity there? 23 A No, sir. 24 Q When you left Power Costs -- I take it to go to 25 Houston. Is that right? 20 1 A Correct. 2 Q Did you have a job when you left Power Costs 3 that you were going to? Had you lined up something? 4 A Yes, I did. 5 Q And where was that? 6 A I joined Enron. 7 Q And what was your job at Enron? 8 A As senior analyst. 9 Q And what did that -- and if you can, again, 10 describe to me in a functional way what kinds of activities 11 you engaged in. 12 A The job is very similar in nature what I did at 13 Entergy. Basically, I gather input, fuel price, price 14 history, weather, those kind of information and feed into 15 the model and do some scenario analyses, get some of the 16 price trend forecasts. That's one. 17 The other one I'm responsible for is to maintain 18 energy management system for Enron Genco. 19 Q What were the functions you had with respect to 20 managing the energy management system? 21 A Basically, Enron acquired some generation assets 22 or build power plants, actually. So my job is go to the 23 plant site, install some dispatching or monitoring software 24 so you can monitor the system, the power plant, you can 25 control the power plants from the control room at Enron. 21 1 Q And did you engage in any trading at -- while 2 you were at Enron? 3 A No. 4 Q The forecasts that you were making at Enron, how 5 were they used? 6 A They provide a feed, the input to the traders. 7 Q And would you get feedback from the traders as 8 to the nature of the kinds of information that might have 9 been lacking in the tool that you had developed? Let me 10 strike that. 11 Did you have a back-and-forth relationship with 12 the traders that helped you to further develop the model? 13 A Yes, we do have this type of interaction, yes. 14 Q And can you give me an example of, if you 15 recall, one of the interactions of something you learned 16 from the traders about your model would have caused you to 17 go and, perhaps, modify it in some way or collect a 18 different kind of data? 19 A I have worked on the model for the east 20 interconnect at Enron. And the model we develop to 21 forecast the price, price trend, say, for next six month, 22 and if the natural gas price at this level, what is your 23 best estimate for the power price going to be. And they 24 will come back and say what if the weather didn't turn out 25 that way, the temperature will be a few degrees lower than 22 1 normal or a few degrees higher than normal. Then I will 2 run more analysis and give them -- present the data to 3 them. 4 Q And the east interconnect covers what area? 5 A The east half, almost east half of the United 6 States. 7 Q Again, just so I'm also clear, when you were 8 using your model or developing your model at Enron, were 9 you looking at the same factors that you talked about 10 before when you were working at Power Costs? 11 A Yes. 12 Q That would be things like weather, 13 seasonability, forecast, generator outages, transmission 14 outages, the nature of the fuel; is that correct? 15 A Correct. 16 Q Any other factors that you regard as critical to 17 being able to forecast price trends in the eastern 18 interconnect? 19 A I don't recall. 20 Q When you were at Enron and developing the model, 21 how often would you have interaction with the people that 22 were doing the trading, if there is an average -- say in an 23 average week? 24 A On average, a few minutes a day, like maybe a 25 few minutes in a week. It's very sporadic. 23 1 Q And those encounters, those exchanges with the 2 traders, can you describe -- is there -- what kinds of 3 topics would you cover in a typical conversation? 4 A It is more the scenario analysis, like what-if 5 cases, what if the fuel price go up or down, what if the 6 temperature different turn out, what if this generator is 7 out, what if the transmission -- major transmission line is 8 out. So I just kind of run through the model and present 9 the data in reports. 10 Q And you would report back to them your analysis, 11 your assessment of how that would affect price? 12 A That is correct. 13 Q How long did you stay at Enron? 14 A About 2-1/2 years. 15 Q When did you leave Enron? 16 A I didn't leave Enron, per se. It's because UBS 17 Energy bought out a part of Enron, and I actually moved 18 down to UBS Energy. 19 Q And what year was that? 20 A Early 2002. 21 Q What was your job there? 22 A Same job, senior analyst. 23 Q Did you have people working for you, people who 24 reported to you, other analysts? 25 A No. 24 1 Q Were you still in Houston at the time? 2 A I stayed in Houston, as I recall, maybe like a 3 few month and then moved to Stamford, Connecticut. 4 Q Did the nature of the concerns or the interests 5 when UBS took over that portion of Enron change in any way 6 from, say, what the traders in Enron were interested in? 7 MR. ESTES: Do you understand? 8 THE WITNESS: As far as I know, no. 9 BY MR. TABACKMAN: 10 Q You were still producing the same kinds of 11 information and the same product to the traders? 12 A Yes. 13 Q And I've assumed something that may not be, in 14 fact, correct. Were the traders your principle, if I may 15 use the word, customers for the information that you were 16 developing? 17 A I think, yes. 18 Q Were there other people in either UBS Energy or 19 Enron who were the customers for the analyses that you were 20 developing, the people to whom you were giving your 21 information or seeking information from you? 22 A Except I think that my boss. 23 Q And was he an analyst also? 24 A Yes. 25 Q Who was your boss? What was his name? 25 1 A Lloyd Hill. 2 Q Lloyd? 3 A Yes. 4 Q The last name was? 5 A H-i-l-l, Hill. 6 Q Was he your boss at Enron or UBS? 7 A Both. 8 Q I take it some time in either late 2002 or early 9 2003 you moved to Stamford? 10 A That's correct. 11 Q Why did you move to Stamford, Connecticut? 12 A UBS required us to relocate. Otherwise, you 13 have to leave. 14 Q They required you -- I'm trying to understand. 15 Was that some sort of policy they had for the company, or 16 was that something they just wanted you to move to 17 Stamford? 18 A They just closed out office in Houston. 19 Q When you moved to Stamford, did you stay with 20 UBS? 21 A Yes. 22 Q For how long? 23 A For about 2-1/2 years. 24 Q So you were about three years altogether with 25 UBS; is that correct? 26 1 A Close to that. I think maybe 2-1/2 or three 2 years. 3 Q And over that period of time, did the nature of 4 your duties change in any way? 5 A When I started at UBS, I kind of expanded a 6 little bit, since right now you don't have all this 7 resources, you don't have five or six or maybe 10 analysts, 8 so just myself to support the power research. Later on, 9 they asked me to join the trading group, called east power 10 trading group. 11 Q And approximately how long into your tenure at 12 UBS did that occur? 13 A Last couple month. 14 Q And can you describe that experience -- when you 15 moved over to the trading group, your duties changed, I 16 take it, at that time? 17 A Yes, change a little bit. 18 Q Can you describe that, please? What were your 19 new responsibilities? 20 A I still responsible for the power research, 21 still doing the similar job, but they ask me to gradually 22 take on more responsibility, potentially doing some trades. 23 Q You're talking about applying the information 24 that had you developed on a daily basis to do trades? 25 A That is correct. 27 1 Q Did you do that while you were at UBS Energy? 2 A No. 3 Q Why not? 4 A I actually for a couple month, and then I left. 5 Q Is that when you went into business for 6 yourself? 7 A No. 8 Q What did you do when you left UBS Energy? 9 A I moved back to Houston and joined Merrill Lynch 10 Commodities. 11 Q So that was some time in about 2006? Have I got 12 that right? 13 A I think it's 2005. 14 Q And what was your job at Merrill Lynch 15 Commodities? 16 A It's similar type of senior analyst. 17 Q And what were you analyzing? 18 A Mostly similar kind of job. You gather all the 19 inputs and build the model, and you provide a forecast, 20 price, all those reports for the traders. 21 Q Did you do any trading? 22 A No, I don't have any account for myself. 23 Q Were you involved in trading on behalf of 24 Merrill Lynch with Merrill Lynch's investors' money? 25 A I did put on a few trades on behalf of the 28 1 trader. It's like I have this forecast, I have this 2 trading strategy, and I show the trader, and the trader say 3 okay, those trades okay, and why don't you put on. So I 4 put on those trades on behalf of the trader. 5 Q And you said that you would show him a trading 6 strategy. Was there -- did you have a strategy that you 7 had developed that you thought was applicable in a variety 8 of circumstances? 9 A That is correct, yes. 10 Q And could you describe that strategy, please? 11 A That is related to PJM one type of market called 12 up-to congestion trades. And I was basically looking at 13 what is the settlement formula, what kind of condition you 14 could make money, under what kind of circumstances you 15 could lose money. So I developed a model to forecast, say 16 what if under this weather condition and under this outage, 17 if I put on this type of trades, it's more likely to make 18 money than lose money. 19 Q You said this was a strategy that was applicable 20 to PJM? 21 A Yes; correct. 22 Q Did that strategy -- how did you come to focus 23 on PJM for the development of this strategy? 24 A This up-to congestion is a very small market, 25 and at Merrill Lynch, they haven't done anything like it 29 1 before. And I kind of have a pretty good technical 2 background, and they ask me why don't you take a crack at 3 that, develop some models. So I actually kind of work on 4 that. 5 Q Did you bring the up-to congestion transactions 6 to the attention of Merrill Lynch, or was that something 7 that they were looking at and assigned you to look into? 8 A They assign me to look into. 9 Q Okay. And when you were at Merrill Lynch, 10 before looking into the -- well, could you describe, were 11 there different markets other than PJM that you at any time 12 had analyzed? 13 MR. ESTES: Ambiguous as to time frame. 14 BY MR. TABACKMAN: 15 Q While you were at Merrill Lynch, when you came 16 to Merrill Lynch and during your period of time at Merrill 17 Lynch? 18 A Mostly concentrate on east interconnect and also 19 ERCOT market. 20 Q Texas? 21 A Yes. 22 Q The east interconnect, PJM is a part of the east 23 interconnect; is that correct? 24 A Correct. 25 Q What other markets are there that comprise RTOs 30 1 or ISOs that comprise the eastern interconnect? 2 A Include New England, include New York ISO, 3 include part of Midwest ISO, and now we have like SPP, or 4 Southwest, also Florida. So it's more than half of United 5 States. 6 Q And when you were looking at the east 7 interconnect -- and I guess you began doing that while you 8 were at Enron; correct? 9 A Yes. 10 Q Did you focus more on one or other of these 11 submarkets that you've just talked about, PJM or New 12 England? Could you describe that? 13 A We trying to come up with the whole footprint, 14 not just individual market. 15 Q Okay. How is it that you came to focus on the 16 up-to transaction, up-to congestion transactions in PJM? 17 A I don't really know why, but the trader 18 management, they kind of assign me, say why don't you take 19 a look at this, see if we can put some trades on, and 20 that's the assignment. 21 Q Had you ever engaged in any kind of careful 22 analysis of up-to congestion transactions prior to that? 23 A No. 24 Q Had you ever discussed up-to congestion 25 transactions with any of the traders or management prior to 31 1 getting that assignment? 2 A No. 3 Q What did you first begin to do when you got this 4 assignment to look at up-to congestion transactions? 5 A First I was trying to find out what is up-to 6 congestion, so what is the formula, what is involved, what 7 is the components of the charges, the costs, the profit 8 signals, what type of -- to make you making money or what 9 is potential to lose money. So that's kind of the -- 10 originally I thought about that. 11 Q And when you began to engage in that analysis or 12 that study to gather the information, what did you find? 13 A I have basic understanding, like after I talk, 14 dig deep into PJM Web site. The up-to congestion is like 15 one type of financial trades. You're just trying to 16 improve day-ahead and real-time price spreads. You're 17 actually trying to make them converge, and so that the goal 18 is to improve market efficiency. The up-to congestion 19 provide a mechanism to hedge in day-ahead market the price 20 spread between source node and sink node by specifying the 21 maximum price you are willing to pay for the congestion. 22 Q That was a mouthful, and I'm going to try to go 23 back through those. You described it as one type of 24 financial trade, and that's in contrast to an actual 25 physical movement of power? 32 1 A That is correct. 2 Q So that if I understand you, then, an up-to 3 congestion trade does not involve, at least as you were 4 studying it, the physical movement of energy from one place 5 to another? 6 A That is my understanding, yes. 7 Q And you said it was trying to make the market 8 more efficient. Have I repeated that correctly? 9 A That is correct, sir. 10 Q In that sense, how did up-to congestion make the 11 market more efficient? 12 A I gave the example, say, from input up-to 13 congestion, say, from MISO to Dayton, Dayton being a zone 14 within PJM, and the up-to congestion import is similar to 15 short in day-ahead and long in real time at Dayton node, 16 and which will reduce the spread between day-ahead price 17 and real-time price. So make the price converge. If you 18 have a converged day-ahead and real-time price will help 19 the system on the efficiency front. 20 Q How so? 21 A It's like you have a plan for day-ahead, since 22 the day-ahead is like planning purposes, you've done that. 23 And in real time, if you take a detour and the real time 24 price spread or go other way, it will cost extra money. If 25 the real-time, according to the plan, then it would be -- 33 1 market would be more efficient. 2 MR. TABACKMAN: Why don't we take a break for a 3 couple of minutes, because I want to make sure that as we 4 move into this -- 5 MR. ESTES: Sure. 6 MR. TABACKMAN: Let's take 10 minutes. 7 (Recess.) 8 BY MR. TABACKMAN: 9 Q We are back on the record. I remind you that 10 you're still under oath. I want to try to complete your 11 employment, the history, before getting back into the up-to 12 congestion trades and your understanding of them. 13 When you left UBS to go to Merrill, that 14 involved also a move from Stamford back to Houston? 15 A The family -- my wife stayed at Houston. 16 Q When you moved to Stamford? 17 A Correct. 18 Q So was that one of the motivations for your 19 leaving UBS to go to Merrill? 20 A That is correct. 21 Q Were there any others? 22 A No. 23 Q Just to make sure, your goal was to get back to 24 Houston, and Merrill provided that opportunity? 25 A That is correct. 34 1 Q If UBS had asked you to move back to Houston, 2 you would have stayed with UBS? 3 A Yes. 4 Q When you looked for positions in Houston, 5 though, were you looking for positions with a financial 6 entity, such as Merrill Lynch, or did you also look with 7 companies that generated power or transmission operators, 8 companies such as that? 9 A I would consider all the options, but what I'm 10 trying to do is more like in the financial trading side, 11 not in the physical trading side. So if you have a 12 company, most concentrate on trading financials, not flow, 13 not control generator, those type, and then it kind of more 14 fit into my profile. 15 Q When did you make -- maybe I'm assuming 16 something here -- the jump from the power engineer 17 background to being more interested in the trading side? 18 At what point did that become a greater interest to you? 19 A To me, it's not kind of a divide, per se. It's 20 if you concentrate on more in the generator side, you tend 21 to look for job at the utility companies. And the 22 potential at utility company is kind of the pace is slower 23 and the promotion or that kind of -- related to those. 24 It's not as good as in the financial trading companies. 25 Q You would see greater financial and economic 35 1 benefits to be gained from being in the trading side of 2 these operations? 3 A That is correct. 4 Q And I don't mean to denigrate that in any way. 5 If you took it that way, I apologize. That was a decision 6 you made to go, that that's where the greater opportunities 7 were for you and your family? 8 A That is correct, yes. 9 Q And you had moved into that while you were at 10 UBS, began to get more involved in trading or became more 11 aware of the opportunities on the trading side? 12 A That is correct. 13 Q Did that go back to Enron? When did you focus 14 on the desire to move over to the trading side after being 15 on the generation side, if we can call it that? 16 A I think more like a few months prior to I left 17 UBS. 18 Q I'm sorry. I'm not sure I understood you. Are 19 you saying that upon leaving UBS is when you really began 20 to focus on wanted to become more involved in trading? Is 21 that what you said? I'm just trying to paraphrase you. 22 A Yes, it's a few months before, yes. 23 Q So the motivation to leave UBS was an effort to 24 get more involved in trading and go back to Houston with 25 your wife? 36 1 A The first priority is move back. The next, I 2 would consider that, yes. Related to the trading, 3 financial power trading, yes, that's the second 4 consideration, yes. 5 Q And when you looked for positions in Houston 6 when you were trying to move back from Stamford, I take it 7 you looked at companies that would allow you to get 8 involved in trading on the financial side? 9 A I do see if there's a potential, that will be 10 another benefit to me, yes. 11 Q Were there other companies other than Merrill 12 that you received job offers from or that you solicited 13 jobs with? That's a compound question. 14 One, I guess, is did you solicit -- what other 15 company did you look for jobs and from what other companies 16 did you get offers? You can do those one at a time. 17 A Yes, I do understand the question. I actually 18 have some friends work in Houston, and one of my friend 19 refer the job to me, say do you want to come back to 20 Houston, we have opening at Merrill Lynch. And so I just 21 moved back. 22 Q How long did you stay at Merrill Lynch? 23 A A little bit over a year. 24 Q That takes us to roughly when? 25 A I think it's the later part of 2005 to 2007. 37 1 Q And what did you do when you left Merrill? 2 A I set up my own company, HEEP Fund, Inc. 3 Q Why did you decide to do that? 4 A At Merrill Lynch, they asked me to develop some 5 models, see if we could be making some money in the up-to 6 congestion market, and I did, and we -- I and other trader, 7 we put some trades on and made some money, but it's small. 8 And the trader at the time or maybe up in management looks, 9 that trade, it's not very profitable. To them, it's too 10 small. To me, it's kind of good enough I want to do more, 11 but to Merrill Lynch, like a big company like them, this is 12 too small. They're reluctant to put more trades on. 13 That's when I decided maybe I just better just go on my own 14 and set up a company, and doing this type of trades. 15 Q And I take it HEEP Fund is your current place of 16 employment now? 17 A Yes. 18 Q And how is HEEP Fund organized under the laws? 19 Could you describe that? 20 A It is incorporated in the Texas -- in The 21 Woodlands, Texas, as a corporation, and it's -- taxwise, 22 it's called pass-through S type of corporation. 23 Q Does it have any employees other than yourself? 24 A No. 25 MR. TABACKMAN: I take it you represent HEEP 38 1 Fund and CU Fund? 2 MR. ESTES: Yes. 3 MR. TABACKMAN: Those are wholly owned by 4 Dr. Chen, I understand? 5 MR. ESTES: That's correct. 6 BY MR. TABACKMAN: 7 Q Are there any other shareholders, just so we're 8 clear, in your Subchapter S corporation? 9 A No. 10 Q When did you form HEEP incorporated -- HEEP 11 Fund? 12 A I think it's August 15, 2007. 13 Q And how did you fund HEEP Fund? 14 A I put my own money into it. 15 Q And how much? 16 A $200,000. 17 Q And did you ever begin to accept money from 18 third parties, to invest on their behalf through HEEP Fund? 19 A No. 20 Q Did you ever provide trading advice to other -- 21 to third parties through HEEP Fund? 22 MR. ESTES: Do you understand? 23 THE WITNESS: Yes. The beginning, no. A few 24 months later, I did. 25 BY MR. TABACKMAN: 39 1 Q Could you describe that? 2 A I did provide -- or manage account for entity 3 called TFS Capital. 4 Q And when you say manage the account for TFS 5 Capital, can you describe what that means in a practical -- 6 as a practical matter? 7 A They have account set up within PJM. They have 8 the total control. I don't have the control over their 9 account. But I can put trades for that account. 10 Q And the trades, did you have complete discretion 11 with respect to those trades? 12 A We signed agreement called advisory agreement, 13 and it's based on a ratio. If I put on 1 megawatt for HEEP 14 Fund, I will put on 4 megawatt for TFS Capital. 15 Q And how did you come into contact with TFS 16 Capital? 17 A There's a gentleman, Mr. Larry Eiben, send me a 18 e-mail in February 2008. He said he got my contact 19 information from PJM members roster, and trying to find out 20 if I am interested in managing one of the account for them. 21 They are trying to set up a fund of energy funds. 22 Q And I take it you were interested? 23 A That is correct. 24 Q Can you describe what happened next with respect 25 to your relationship with TFS? 40 1 A We signed agreement, and I think we started 2 trading in April 2008. 3 Q And did they provide you with a certain amount 4 of funds to begin trading with, or is that simply as you 5 put on the trades they would fund them in some way? What 6 was the nature of the agreement, I guess, with respect to 7 the funding of the trades? That's a clearer question. 8 A I only responsible for put on trades. The cash 9 or credit requirement or loss or profit, they will bore out 10 the responsibilities. 11 Q Were there limits as to the size of the trades 12 that you could put on for them? 13 A As far as I know, no. 14 Q At any point did you ever enter into a similar 15 agreement or manage trades for any other third parties 16 other than TFS? 17 A I did. Once TFS I traded for a couple month, 18 the same -- I think the same group, they opened up another 19 company called Hunterized, and that agreement is 20 transferrable to the new entity. So after a couple of 21 months, I started trading for Hunterized. Later on this 22 year I stopped trading for Hunterized and started trading 23 another entity called Powhatan Energy Fund. 24 Q But this is for all the same group of investors, 25 as far as you know? 41 1 A That's correct, sir. 2 Q And those -- you mentioned Mr. Eiben. Was there 3 anyone else at TFS and Hunterized and Powhatan that you had 4 contact with during the time that -- during your 5 relationship with them? 6 A My main contact is Mr. Kevin Gates. I also have 7 personal interaction with another gentleman, Charles Chen. 8 Q And he works for TFS or Powhatan or Hunterized 9 or all of them at different points? 10 A I'm not sure, but he is working for TFS Capital 11 as a portfolio manager. 12 Q I'm going to go back into the TFS relationship, 13 but other than your relationship with TFS and the people 14 that were involved in that company through Hunterized and 15 Powhatan, did you get involved with any other third parties 16 in terms of managing trades for them in the power market? 17 A No. 18 Q Do you have any other entities through which you 19 conduct trades with your personal money? 20 A I have one other fund called CU Fund. 21 Q And when did you start that fund? 22 A I think June 28, 2010. 23 Q And why did you start CU Fund? 24 A There are a couple reasons, one being I 25 gradually make some money, and I want to take a little bit 42 1 more risk. Two being, the advisory agreement I signed with 2 TFS and Hunterized and Powhatan specifically prohibit 3 trading of FTR, and I do want to get involved with FTR 4 trading since there's a recommendation or report put out by 5 Dr. Bowering's group, annual report in 2009, came out in 6 March 2010. Some of the recommendations are very 7 detrimental to up-to congestion trades. So I want to find 8 other sources for my trading. 9 Q And the report, that was from -- you referred to 10 Dr. Bowering, the market monitor for PJM? 11 A Correct. 12 Q This is a report that was issued when? 13 A To the best my recollection, I think it was 14 March 2010. 15 Q And what was it about that report that caused 16 you want to move or to get into FTRs? 17 A The report, if I remember correctly, is called 18 state of the market report for 2009. On the report, there 19 are a couple of recommendations, one being add more 20 charges, operating reserve charges to up-to congestion 21 trades. And another recommendation is limit the buses 22 available for up-to congestion trades. 23 Q Okay. And why did that cause you to want to 24 move into FTRs? More expensive? More difficult to make 25 the trades? I'm just asking if you could explain that, 43 1 please. 2 A At this time this trading is kind of my 3 livelihood. So if this one is taking away or less 4 profitable, I try to find another way to see if I can make 5 some money on FTR front. 6 Q And was that the purpose of the CU Fund? 7 A Yes. 8 Q Did you get involved in any up-to congestion 9 trades with CU Fund? 10 A Yes, I did. 11 Q Can you explain that, then, in light of the 12 discussion we just had about wanting to get involved in 13 FTRs? 14 A May and June, especially June, the trades I put 15 on for the up-to congestions, the transmission loss credit 16 makes those trades more profitable. It's kind of less 17 risky. It did steer me toward, say, why just before you 18 really get into the FTR, why just add some up-to congestion 19 trades in that account. 20 Q Can you describe what the transmission loss 21 credit is, as you understood it and as it worked as you 22 experienced it? 23 A My understanding is because PJM model involve 24 three parts: energy, transmission loss, and congestion. 25 So you have a model call for the transmission loss. So you 44 1 will -- PJM will collect the money, and because the model 2 is like marginal, the transmission loss credit tends to be 3 higher than average number. So you have a surplus. That 4 surplus will distribute back to who is entitled to that 5 money. 6 Q Correct me if I'm wrong, but you said it was 7 money that arose from transmission loss. Does that mean 8 that it was initially tied to physical transmission of 9 energy? 10 MR. ESTES: Initially? Do you have a time 11 frame? 12 BY MR. TABACKMAN: 13 Q In May or June, was that when you first became 14 aware of the transmission loss credit, in May or June of 15 2010? 16 A No. 17 Q When did you first become aware of the 18 transmission loss credit in PJM? 19 A I recall in early October, I first -- 20 Q Of what year? 21 A 2009. 22 Q Okay. 23 A I saw on my weekly report this one line item 24 called 1220 transmission losses. 25 Q 1220? 45 1 A Yeah. That's line item number. 2 Q That's the line item number, not an amount of 3 money? 4 A Correct. 5 Q That was the first time you recall seeing that? 6 A Yeah, to my best -- at that time. So I 7 forwarded -- looking back and I find there's a filing, PJM 8 filing, I think it's around September, mid-September, maybe 9 September 22nd, 23rd, 2009, related to this transmission 10 loss credit. So on that day, I forward it to TCF's guy. 11 Since it's late in the day, I wait till next day to send 12 e-mail to PJM settlement group. I'm asking what is this 13 line item, I never seen that before, and is it related to 14 that filing. And I look at the filing, and there's some 15 kind of refunds go back 2007. So I asked those questions, 16 and I got a response back from PJM settlement group. 17 Q And what was that response? 18 A They said it is new, the transmission loss 19 credit never happen before to these types of trades, and 20 two, it is related to the filing. So you're getting money 21 and you're also getting refund, but refund will come in 22 batches. So it may be the next month you might get a few 23 months of refund and then the next month billing statement, 24 you will get extra refunds. 25 Q And these refunds you're talking about related 46 1 to historical transactions going back to the point in time 2 that this document you're referring to said the 3 transmission loss credits should have been given? 4 A That is correct. 5 Q So that you were then getting sort of makeup 6 money for historical transactions, plus now you knew that 7 that would apply going forward? 8 A That is correct, yes. 9 Q Let's go back, then, to the beginning of your 10 involvement with up-to congestion transactions. Before 11 jumping back, are you currently a member of any other 12 markets other than PJM? 13 A No. 14 Q Do you engage in -- engage in any kind of trades 15 in the PJM market other than up-to congestion transactions 16 as of today? 17 A I did put on a few trades in the inc and dec 18 market. 19 Q We will talk about that in a moment. Did you 20 ever get involved in the FTR market? 21 A No. 22 Q Why is that, since that is why you said you 23 initially set up CU Fund? 24 A Yes. It just started in -- I think it's July 25 2010, and I intended to put on small amount in the shoulder 47 1 month for FTR. 2 Q A small amount in -- 3 A FTR market like in the shoulder month. 4 Q Oh, in the shoulder month, I'm sorry. I didn't 5 understand the word you said. That's all. 6 A I'm sorry. 7 Q No, I realized what you were saying. But then 8 what happened? 9 A This investigation came in, and then I stopped 10 all trading activity. 11 Q You don't do any trading now at all? 12 A No. 13 Q And when did you stop doing trading? 14 A I stopped for CU Fund August 2nd, and I stopped 15 the trading totally for HEEP Fund on August 18th. 16 Q What about the investigation made you stop 17 trading altogether? 18 A My first response says this is a formal 19 investigation, and until you are clear it's correct or 20 incorrect, at least from my part, I can do it, just stop, 21 and wait to find out what's in that investigation. 22 Q What is your understanding -- I don't want to 23 get into the conversations with your lawyer of what the 24 problems were that were identified that made you want to 25 stop. Strike that question. 48 1 Did you make the decision to stop before or 2 after you talked to counsel? 3 A Before. 4 Q Why did you feel that the investigation -- 5 because there was an investigation made you have to stop 6 trades altogether? 7 A It's like someone is questioning -- someone with 8 authority is questioning your trades, and the best way is 9 just to stop. That's kind of the minimal at least I can 10 do. 11 Q Did you have an understanding that there were 12 certain kinds of trades, trades that had certain 13 characteristics that were being looked at, all your trades 14 in general? 15 A I think from what I have learned is a specific 16 type of trades. 17 Q And what specific type of trade is your 18 understanding? 19 A Called a large volume pair of trades, apply to 20 me. 21 Q Did you engage in large volume paired trades? 22 A I don't know what you qualify for large volume, 23 but I do put on some trades paired. 24 Q And what is a paired trade, as you understand 25 it? 49 1 A The paired trades, you have the same import 2 node, same, say, MISO to Dayton import, and you also export 3 back from Dayton to MISO. 4 Q In the same amounts of energy? Same time frame? 5 Give me all of the characteristics that make it a paired 6 trade. 7 A Sometimes exactly the same amount and sometimes 8 one leg is a little bit more, so I do intend to add a 9 little bit risk just for that leg alone. But I still look 10 at those as kind of a paired trades. 11 Q And did you come to an understanding as to why 12 paired trades were being investigated, your understanding? 13 MR. ESTES: He means as opposed to the 14 understanding you developed from talking to counsel. 15 MR. TABACKMAN: Right. 16 THE WITNESS: Yes, I do understand that. 17 BY MR. TABACKMAN: 18 Q And what is that? 19 A The allegations or the issues with this type of 20 trades, say it's a wash trade, it cancels each other out. 21 It has no value, no risk, no cost, and various type of the 22 gaming in the market, and it's market manipulation, all 23 those type of terms. 24 Q On your paired -- I understand how the trades 25 are characterized. On the trades that you just described 50 1 that are paired trades, was there any risk other than if 2 you did a minor difference, as you said, on one leg of it? 3 A They involved real risks, yes. 4 Q And could you describe how that is? 5 A The risk, when you look at -- maybe it's helpful 6 to go back to the conditions for up-to congestion trades. 7 To put trades from MISO to Dayton, for example, you have to 8 specify the maximum price you're willing to pay, which is 9 set by PJM at $50. 10 Q Okay. 11 A If the price exceeds $50, the trade is going to 12 be rejected. And if you have a pair importing and 13 exporting, one leg is rejected, the other leg could 14 potentially make you a lot of money. You could also lose a 15 lot of money with the returning leg. 16 Q When you placed these trades, these paired 17 trades -- strike that. 18 Prior to learning about the transmission loss 19 credit, did you engage in paired trading such as what 20 you've just described? 21 A No. 22 Q Was it the transmission loss credit that caused 23 you to begin to get involved in paired trading? 24 A I think that's fair assessment, yes. 25 Q And why did the transmission loss credit cause 51 1 you to become involved in paired trading when you didn't 2 prior to that? 3 A It all go back to my overall trading strategy. 4 I tend to put -- for my personal account, I tend to put on 5 low risk, low reward with high reward potential. So you're 6 not going to lose a lot of money, and that's the minimum. 7 I'm not taking a high-risk, high-reward trade. For this 8 low-risk, low-reward trade, if you have the transmission 9 loss credit, it cover part of the cost, at least. 10 Sometimes it cover all, and sometimes it cover part. So 11 make this type of trades more profitable. If you're losing 12 money, you could lose cents or tenths of cents. If you're 13 making money, you are also making cents or tenths of cents, 14 but you also have a big potential of high reward. When one 15 of the leg is rejected, the other leg could get you a 16 windfall of money. So that's kind of the potential, 17 high-reward potential. 18 Q Could there be a way, however, that if you, 19 having studied the market for as long as you did, if you 20 priced those two legs at a certain level, each one of them, 21 to maximize the likelihood that they would both be cleared? 22 Did you ever make that assessment? 23 MR. ESTES: Object to form. 24 Answer if you understand it. 25 BY MR. TABACKMAN: 52 1 Q Did you ever make an assessment that would 2 enable you to price both legs, that in your estimate they 3 would both get cleared, and therefore, you wouldn't have 4 this potential windfall one way or the other or potential 5 loss? 6 MR. ESTES: Same objection. Object to form; 7 ambiguous terms. 8 THE WITNESS: I think I'm okay on that question. 9 MR. ESTES: You can answer. 10 BY MR. TABACKMAN: 11 Q You can answer. 12 A You do have the potential. The probability is 13 lower, but you still have potential you could lose a lot of 14 money. The flip side, you could make a lot of money. 15 That's always a potential. But because I'm involved, the 16 overall strategy is low risk, high potential, it's not like 17 I'm trying to take on high risk, high reward. 18 If the strategy is that, like I'm working for 19 big company, I would intentionally pick those nodes spread 20 apart in the day-ahead market. Say if I choose a node from 21 MISO to Hackensack in New Jersey, very hot summer days, 22 it's going to over $50. 23 Q What's going to be over $50? 24 A In the day-ahead market. So day-ahead market 25 price of Hackensack minus the day-ahead price of MISO could 53 1 be $100 in the day-ahead market on the hot weather, cold 2 winter days. 3 Q Okay. 4 A And without the import leg, the export leg, you 5 don't have the guarantee. 6 Q The export leg would be going from Hackensack 7 back to MISO? 8 A To MISO. 9 Q How would that price under the weather 10 circumstances that you're talking about? 11 A If this one is rejected, the import leg, the 12 export leg, you receive that money, exactly the money 13 you're asking for, over $50. So in day-ahead market, you 14 get at least guaranteed $50 and over. So it's like -- if 15 in the real-time market it turns out to be much higher in 16 Hackensack, then you're losing a lot of money. If in the 17 real-time market, like day-ahead and real-time are closer, 18 you could make money. Those types of trades are what I 19 call high risk, high reward. 20 Q Did you try to structure trades with two legs 21 where they were high likelihood, in your mind, based on 22 your assessment, that both would be accepted and that your 23 profit would ultimately come from the transmission loss 24 credit? 25 A I agree, in part. When I put on those type of 54 1 trades, I do have the transmission loss credit component in 2 my mind. That's the price signal, one of those price 3 signals. And I do anticipate it's very likely both legs 4 going to be cleared, and the trade profit and loss would 5 depend on transmission loss credit and other charges. But 6 also, before I put on the trades, I also look at the 7 potential of making money versus the possibility of losing 8 money. So the potential of making money is much higher 9 than the potential of losing a big chunk of capital in 10 those type of choices I put on. 11 Q I don't have the documents of your particular 12 trades available, but at some point we will, and I want to 13 make sure I understand. You're saying you made trades in 14 this post-transmission loss credit phase in which if we 15 looked at it there was a potential for you to gain or lose 16 a lot of money? Actually, you said a probability of 17 gaining a lot of money, if I understand your testimony? 18 MR. ESTES: I think that mischaracterizes his 19 testimony. 20 BY MR. TABACKMAN: 21 Q If it mischaracterizes, correct me, if I 22 misunderstood what you said. I'm simply trying to make 23 sure I understood. 24 A My understanding is, before I put on trades, I 25 do see the potential to make a lot of money, yes. 55 1 Q And you're saying that -- similarly, was there a 2 potential to lose a lot of money, or had you minimized that 3 in formulating these paired trades? 4 A If you choose carefully, the potential of making 5 money is much higher than the potential of losing money. 6 Q And in all events, if the trades turned out to 7 be a wash or close to it, you would have the transmission 8 loss credit? 9 MR. ESTES: Object to form. 10 BY MR. TABACKMAN: 11 Q Is that a correct assessment of what you're 12 saying? 13 MR. ESTES: Object to form. 14 THE WITNESS: I mean, if it's paired trades and 15 both legs are cleared, the transmission loss credit plays a 16 big part in your settlement formula. 17 BY MR. TABACKMAN: 18 Q How big a part? 19 A I mean, sometimes the transmission loss credit 20 some days cover the total cost, and also over the total 21 cost. Some of the days, even in the summer, even though 22 not enough to cover the total cost, but it does offset part 23 of the charges. 24 Q You've been involved in studying the UTC market, 25 up-to congestion market, and I prefer UTC, for how many 56 1 years now? 2 A Since September 2007, so the past three years. 3 Q And I take it beginning with your time at 4 Merrill Lynch, you would study it very closely, examine 5 daily the back and forth of the trades that were clearing 6 and not clearing at various nodes and places; is that fair 7 to say? 8 A I think that's correct, yes. 9 Q And you had had experience, even before Merrill 10 Lynch, at making models, pricing models? That's been your 11 background for some period of time; is that right? 12 A That is correct. 13 Q Ever since you really entered -- in your 14 post-school career, that's been the thrust of what you've 15 done, figuring out pricing models for transmission of 16 power? 17 A That is correct. 18 Q And were -- strike that. 19 MR. ESTES: Counsel, if you get to the point 20 where you're moving to another subject area, I would like 21 to take a five-minute break. 22 MR. TABACKMAN: Now is fine. 23 (Recess.) 24 MR. TABACKMAN: We are back on the record. 25 BY MR. TABACKMAN: 57 1 Q I remind you you're still under oath, Mr. Chen. 2 Let me ask you this: How often when you were 3 making these trades, particularly the ones for the CU 4 Fund -- let's focus on those. Okay? If one of your legs 5 not clear in this hypothetical possibility of either making 6 or losing money, how often did that occur, if you recall, 7 during the time that you were trading for the CU Fund? 8 A I traded for the CU Fund for about three weeks, 9 and it didn't happen. 10 Q How many trades do you recall that you think you 11 placed approximately? I'm not going to hold you to an 12 exact number, but how many trades did you place for CU Fund 13 during that three-week period? 14 MR. HILL: Counsel, are you talking about any 15 forms of trades? 16 MR. TABACKMAN: Up-to congestion, paired trades 17 for the CU Fund, as he's described or used the term "paired 18 trade." 19 THE WITNESS: Every day I put on about six to 20 eight trades, those paired trades. So about 20 days, it's 21 about 120 to 160. 22 BY MR. TABACKMAN: 23 Q And if I understand you, those 120 to 160 are 24 all what you've described as paired trades? 25 A That is correct. 58 1 Q And what nodes did you use for those paired 2 trades? 3 A As I recall, I used node one being Dayton. 4 Another node is ComEd. 5 Q Where is ComEd? C-o-m-E-d? 6 A That is correct. ComEd is basically in Midwest 7 ISO in Chicago area. 8 Q And why did you pick those two nodes to do -- 9 I'm sorry. Strike that. 10 Are you saying that those were the majority of 11 the trades, these 120 to 160, were in those two nodes, or 12 all of them? I just want to be clear about that. 13 A Actually, I want to add, those are two nodes. I 14 also put Cook. So it's from MISO to Cook and Cook to MISO. 15 Q And then you had ComEd to Dayton and Dayton to 16 ComEd; is that correct? 17 A No. It's actually from MISO to Dayton and 18 Dayton to MISO. PJM up-to congestion trades requires at 19 least one of those source and sink nodes be interface. 20 Q By an interface -- what is an interface? 21 A My understanding is interface is a set of border 22 nodes close to another ISO. 23 Q So of these trades, the MISO to Dayton, Dayton 24 to MISO, which was the interface? 25 A The MISO being the interface. 59 1 Q Again, to understand, if you can, roughly the 2 percentage of these 120 to 160 trades you did on behalf of 3 the CU Fund, how many of them Dayton/MISO, MISO/Dayton? 4 A That's about a third or a quarter. 5 Q What other paired nodes did you use? 6 A ComEd and less volume for Cook. 7 Q And again, just so I understand it, the ComEd, 8 it would go from MISO to ComEd? No, that couldn't work. 9 What were the two nodes when ComEd was involved? 10 A It's actually -- you're correct, it's MISO to 11 ComEd and ComEd to MISO. 12 Q Because ComEd is in PJM? 13 A Yes. 14 Q What percentage of those 120 to 160 trades did 15 you use these two nodes? 16 A I think it's close to a third, similar to 17 Dayton. 18 Q What other paired nodes did you use? 19 A I used Cook. 20 Q Again, tell me what the pair is. 21 A MISO to Cook and Cook to MISO. 22 Q And where is Cook? 23 A I don't know the exact location, but Cook, I 24 know, is within AEP, and it's one of those 765-kV bus. 25 Q By the way -- and I don't mean to lean on you 60 1 for education, but the term "bus" as it's used in 2 transmission, what does that refer to? 3 A It generally refer to substation. 4 Q An electrical -- a transformer of some sort? Is 5 that what you're referring to? 6 A Yes. 7 Q And do buses have certain capacities? Is that a 8 part of the available transfer capability or capacity that 9 would be measured in a transaction? 10 A The capacity -- it's related to the line, but 11 the bus, it does provide the voltage support. So if you 12 have transmission, you have capacitors, you have some other 13 voltage supporting tools could potentially reduce or 14 increase the transfer capability on the line. 15 Q Okay. Thank you. 16 So we have three different pairs that you've 17 described that made up your trading for the CU Fund on 18 these paired trades. Is there any other pairs that you 19 used that you recall? 20 A To the best of my recollection, there's two 21 nodes, I generally not refer to as pairs since the nodes 22 within PJM I use two different nodes. So from MISO, I do 23 have import from Miami Fort 7. That's one of the bus, 24 generator bus within -- I think it's within Dayton. I also 25 have export from East Bend 2, another generator bus, export 61 1 to MISO. 2 Q So you had -- repeat that for me. The Miami 3 Fort 7, that was an import? 4 A Correct. 5 Q Leg. That came from MISO? 6 A Correct. 7 Q And then the export was from Miami Fort 7 to 8 East Bend? 9 A No. It's from East Bend to MISO. 10 Q And did that function -- even though you had 11 three different nodes involved, did that function like a 12 paired trade, these other ones that you've described in 13 your assessment based on your model? 14 MR. ESTES: Objection to form. 15 BY MR. TABACKMAN: 16 Q You can answer. 17 A I would look at them like spread trades since 18 they do take advantage of the spread between those two 19 nodes. 20 Q Between which two nodes? 21 A Between Miami Fort 7 and East Bend 2. 22 Q How did a spread trade differ from a paired 23 trade? 24 A The paired trades, from my understanding, I'm 25 reading the documents put forth by PJM and Dr. Bowering, is 62 1 you have exactly same import from MISO terminate at exactly 2 same node at PJM. And this is not exactly the case. 3 Q So we have these three different -- let's focus 4 on -- strike that. 5 The MISO to Miami to East Bend trades were 6 trades you made on behalf of the CU Fund; is that correct? 7 A That is correct. 8 Q And on those trades, if you could estimate -- on 9 the four different ones that you've described, the three 10 pairs and then the Miami Fort one, can you estimate for us 11 what percentage of your profits do you think came from the 12 transmission loss credit, the marginal surplus -- loss 13 surplus allocation, another term for the same thing as I 14 understand it, as opposed to the inherent qualities of the 15 prices of the energy you were trading -- not the inherent 16 qualities -- 17 MR. ESTES: Objection. 18 MR. TABACKMAN: I will rephrase it. 19 BY MR. TABACKMAN: 20 Q What part of your profit came from, derived from 21 the fact that you got a transmission loss credit? 22 MR. HILL: This is limited to the CU Fund and 23 when he traded for the CU Fund? 24 MR. TABACKMAN: Yes. 25 MR. ESTES: And you're asking for his 63 1 recollection as he sits here today without documents? 2 MR. TABACKMAN: Yes, absolutely. 3 THE WITNESS: I don't really know that number. 4 When I create the daily reports and the monthly reports, I 5 just put into Excel spreadsheet, and I'm not kind of very 6 good at data manipulation. You create all kinds of report 7 in the database. So actually, in the Excel, I only look at 8 one total number for that day as a group. I don't have 9 kind of a number separated into this is coming out of this, 10 this is coming out of this. So I don't have a ready number 11 on that. 12 BY MR. TABACKMAN: 13 Q If I understood you correctly, there was no 14 occasion on these trades -- again, all these questions 15 pertain to the ones you made on behalf of the CU Fund -- in 16 which one leg didn't get cleared, correct, and you had the 17 experience of the high profit or high loss possibility? 18 That didn't come out, that didn't come to fruition; 19 correct? 20 MR. ESTES: For CU Fund? 21 MR. TABACKMAN: For CU Fund. 22 THE WITNESS: That is correct. 23 BY MR. TABACKMAN: 24 Q And when you picked these two nodes, for example 25 MISO/Dayton, Dayton/MISO, what was the price spread between 64 1 those nodes? 2 A You mean day-ahead? 3 Q In day-ahead. Where was the possibility of your 4 making a large profit or suffering a large loss on those? 5 How would that have happened in the MISO/Dayton, 6 Dayton/MISO transactions? 7 A Let me give you kind of an example. Say in the 8 day-ahead market MISO day-ahead price, say, at $20, and 9 Dayton day-ahead price at $80. So the spread is $60. And 10 because the limit is 50, that import leg is rejected. The 11 export leg from Dayton to MISO in the day-ahead, you 12 receive that $60 up front. 13 Then you're going to in the real-time, because 14 the choice I made for Dayton, the price, say, in real-time 15 at $50, and if MISO come up at, say, $45, in the real-time, 16 you're losing $5. So you give $5 back. In day-ahead you 17 get $60. So you end up making $55 per megawatt. 18 Q And that scenario that you've just described 19 turns on the fact that one of your legs was rejected; 20 correct? 21 A Correct. 22 Q And I believe you testified before that on these 23 transactions for the CU Fund, it never occurred that one of 24 your legs was rejected; correct? 25 A Correct. 65 1 Q And that was -- that was because, I take it, you 2 had carefully selected your legs to minimize the likelihood 3 that they would get rejected; correct? 4 A That is correct. 5 Q Without a leg being rejected, was your profit on 6 these transactions dependent upon the transmission loss 7 credit? 8 A That's one of the price signals, yes. It 9 depends on that. 10 Q What do you mean by "it's one of the price 11 signals"? 12 A When I look at the up-to congestion trades, 13 there are different components associated with it. One is 14 you're just taking advantage of the spreads between 15 day-ahead and the real-time. Another component is various 16 charges. Like you pay for reactive supply and the voltage 17 control. You pay MMU funding, market monitoring unit 18 funding. You pay black start services extra, those 19 charges. The third component being refunds. 20 So I actually respond to those three components. 21 The costs and the charges you might not be able to control. 22 So the two remaining signal being spread and the 23 transmission loss credit. 24 Q And on the transactions that we've been talking 25 about, the CU Fund, the spreads were very small; isn't that 66 1 correct? 2 A For CU Fund, yes. 3 Q And you selected them purposely that way; isn't 4 that correct? 5 A That's correct. 6 Q You wanted to minimize the risk that you would 7 suffer if the unforeseen would happen; is that fair to say? 8 A I agree, yes. 9 Q So I guess my ultimate -- my question is, was 10 your profit that you actually made on these transactions, 11 given that you said the legs didn't -- you weren't ever in 12 a situation where one of the legs didn't go through, was 13 the majority of your profit made on the transmission loss 14 credit? 15 A I think that's a correct assessment, yes. 16 Q And is it also a correct assessment that you had 17 planned it that way? To the best you could anticipate what 18 the future would bring, that was your business; correct? 19 A Before I put on those trades, that's one price 20 signal, yes. I intend to make money. If it does turn out 21 that way, transmission does cover and I'm making money, I 22 also have another objective, is one of the leg rejected, 23 and then I'm making much more money. 24 Q But one of the legs was never rejected; correct? 25 MR. HILL: Wait a minute. What time frame? 67 1 You're getting too loose with your questions, Counsel. 2 MR. TABACKMAN: I'm sorry? 3 MR. HILL: You're getting too loose with your 4 questions. Can you please clarify it? 5 BY MR. TABACKMAN: 6 Q We've already defined this as the CU Fund 7 trades. On those trades, you never had a collapse of one 8 of the legs; correct? 9 A Correct. 10 Q Were you surprised by the fact that on the CU 11 Fund trades, the 120 to 160 that we're talking about, that 12 none of the legs collapsed? 13 A I agree, in part. A little bit surprised since 14 it does involve some of the hot days and it didn't 15 collapse, both legs actually approved. But on the other 16 hand, why I choose nodes, I tend to intentionally pick 17 those nodes. They fluctuate alongside with MISO. 18 So if that happen, you make a lot of money, but 19 if that doesn't happen, it depends on the price signal, the 20 transmission loss credit. If it covers, then you're making 21 money. If you lose, you lose money. So basically, the 22 risk potential is very low. The reward potential could be 23 very, very high. 24 Q We will have to explore that in the context of 25 this. 68 1 Did the transmission loss credit incent you, on 2 the CU Fund trades that we're talking about, to increase 3 the volume of your trades, the volume of energy that was 4 being traded? 5 A My understanding is because a transmission loss 6 credit covers part or most or maybe all of your charges, it 7 makes the trades more profitable. So yes, I want to 8 increase the volume. The possibility is there you could 9 increase volume, and you're taking similar risk. The risk 10 is lower. 11 Q And the amount, the dollar amount of the 12 transmission loss credit would increase in proportion to 13 the volume of energy you were trading; is that right? 14 MR. ESTES: Object to form. 15 BY MR. TABACKMAN: 16 Q You would get more of a -- was the transmission 17 loss credit based upon the number of megawatt-hours -- 18 number of megawatts that were being -- that you were 19 trading? 20 MR. ESTES: Same objection. 21 THE WITNESS: Part of that is correct. We need 22 to look at when you have more import leg, you receive 100 23 percent for that megawatt, that transmission loss credit. 24 But if you have 100 percent of your volume in export leg, 25 you receive nothing. There's no transmission loss credit. 69 1 BY MR. TABACKMAN: 2 Q Why is that? 3 A Because the FERC order is when you're importing, 4 you pay into the transmission reservation cost 67 cents per 5 megawatt. When you're exporting, you're not paying that, 6 and you're not receiving any transmission loss credit. 7 Q So to modify my question, increasing your 8 imports would increase the dollar amount of the 9 transmission loss credit, the total number? 10 A That is correct. 11 Q On a particular trade? The more megawatts that 12 you import, the higher it would be, your transmission loss 13 credit if the transmission cleared? 14 MR. ESTES: On an aggregate basis? 15 MR. TABACKMAN: Yes. 16 MR. HILL: Are you talking about total dollars 17 or per megawatt dollars? 18 MR. TABACKMAN: Total dollars. That's what I 19 said. 20 BY MR. TABACKMAN: 21 Q The credit is a certain amount per megawatt on 22 the imports; is that right? 23 A Let's say just concentrate on import. The more 24 volume, you are getting more transmission loss credit. 25 That's correct. 70 1 Q I was trying to make what I thought was a simple 2 point. I apologize if I was less than clear in my 3 questions. 4 I want to go back. You got involved in the CU 5 Fund, and the CU Fund is the most recent -- I guess the 6 last part of your employment and trading background. I 7 want to go back to when you first became involved or began 8 analyzing up-to congestion transactions at Merrill Lynch. 9 At that time were you -- did you also examine other kinds 10 of financial transactions involving transmission of power, 11 trading of power? 12 A I'm not involved, but there's another analyst 13 sitting right next to me and doing the FTR, not direct 14 involvement. 15 Q And if you can recall, back in those days at 16 Merrill Lynch, did you come to a conclusion as to which 17 type of financial transaction was -- potentially had 18 greater reward for less risk? 19 A I don't really know since I'm not into the FTR. 20 But up-to congestion at the time, I think it could make 21 some money, yes. 22 Q And if you could explain, when you first 23 started, could you describe the transactions that you saw 24 or the factors that you saw that made you conclude that you 25 could make money on an up-to congestion transaction? 71 1 A We put on some trades, or I, on behalf of the 2 trader, put on some trades, and we made some money, like 3 20,000 a day making, sometimes 50,000 or 10,000. But 4 overall, you're actually making some money. 5 Q Were you able to do those up-to congestion 6 trades any place other than in PJM? 7 A I don't really know if it exists in New York ISO 8 or not. I'm not sure. 9 Q You only did them in the PJM market; is that 10 correct? 11 A Correct. 12 Q I'm talking about back at Merrill Lynch. So 13 that's the time frame we're talking about. Okay? 14 A Correct. 15 Q And describe -- what I'd like to make sure I 16 understand from you is, putting aside transmission loss 17 credit, there is none, how does the trader make money, as 18 you put it, doing up-to congestion trades? 19 A Let me give a simple example, just one leg, say, 20 from MISO to Dayton. The settlement formula for this type 21 up-to congestion, other than the charges and other time no 22 refunds, you're only looking at spreads. The example is, 23 say, in day-ahead, MISO at, say, $20, Dayton in the 24 day-ahead price, let's say $50. If in real-time MISO is 25 $30 and the Dayton is $100, in day-ahead, you're losing 72 1 $20. 2 Q How are you losing $20? That's what I'm going 3 to ask you, to sort of walk me through your transaction. 4 A So basically, the formula says the real-time 5 price of the sink minus the real-time price of the source 6 minus the day-ahead price of the source plus the day-ahead 7 price of the sink. 8 Q Okay. So in this transaction that you've just 9 described, MISO is your source? 10 A Yes. 11 Q And you said that your day-ahead price is in 12 your hypothetical? 13 A If $20 in MISO is day-ahead and, let's say, $50 14 at Dayton, so in this import in day-ahead, the spread is 15 $30. 16 Q Right. 17 A And in real-time, let's say MISO, $30, Dayton, 18 $100, the spread being $70. 19 Q Okay. 20 A If you plug the number into the formula, you end 21 up $70 minus $30. 22 Q Okay. 23 A So average, you're making $40 per megawatt. 24 Q Okay. And how does your day-ahead factor into 25 that? 73 1 A In day-ahead, it's $20 versus 50. The spread is 2 $30, less than $50, the limit. So this one is approved. 3 And so that's why you can take advantage of the spread in 4 real-time. 5 Q And are you making money on both your 6 day-ahead -- is your profit derived from both your 7 day-ahead and real-time spreads or just from the real-time 8 spread? 9 A In this example, day-ahead, you're actually 10 losing money. In real-time, you're making more money, and 11 it covers the loss in day-ahead. 12 Q Okay. When -- did you develop, when you were at 13 Merrill Lynch, an assessment of which nodes -- strike that. 14 When you began trading on these, was it 15 important to you to -- as to the nodes that you would 16 select before you trade? Were there certain nodes that you 17 found more likely to result in a profit than others? 18 A That is correct. 19 Q And how did you go -- how did you go about 20 determining on these up-to congestion transactions which 21 nodes would be -- pairs of nodes would likely result in 22 profit rather than loss? 23 A I took a couple of different routes. One being 24 just look at this formula. You can do an exhaustive 25 search, say from 2005, 2006, 2007, all the combinations. 74 1 If I put the trades every day, every hour, find out the 2 spreads from real-time to day-ahead. If the real-time 3 higher than day-ahead and you import, you're making money. 4 On the other hand, if the day-ahead is over real-time and 5 you have export, making money. So I have one list is like 6 the best, top 40 or 100. Another list is export making 7 money. 8 So in PJM market, you have pocket of nodes the 9 best for importing. Another group of pockets or nodes are 10 actually better to do exporting. And the way doing this 11 balance, importing and exporting, is you basically take the 12 uncertainty of the interface, the MISO out. Since MISO is 13 basically outside PJM footprint, I don't have detailed 14 model as detailed as PJM. I don't have a good 15 understanding. I would like to less -- I mean less the 16 uncertainty or even cancel the uncertainty out. 17 Q The detailed study, then, that you said could be 18 done, is that a study that you did to develop these lists 19 that you just referred to? 20 A Yeah, that's one route I took. 21 Q What else did you do? 22 A Another one is I built a model to -- basically 23 called similar day model. If you're looking at similar day 24 in the past, say summer seasonality, weekdays and weekends, 25 different times and different temperature scenario in PJM, 75 1 say Chicago, Washington, D.C., Philadelphia, Pittsburgh, 2 those cities, I tend to anticipate, at least in my mind 3 going forward the price signal would be mimic the history. 4 So I want to make those as a possible choice you can put 5 trades on. 6 Q Okay. And was there any other analysis that you 7 did? 8 MR. ESTES: As he recalls, sitting here? 9 MR. TABACKMAN: As he recalls, sitting here, of 10 course. 11 THE WITNESS: To the best of my knowledge, I 12 think those are two major components, yes. 13 BY MR. TABACKMAN: 14 Q Did you ever cross those with each other, if you 15 understand my term, looking at your list of the most 16 favorable nodes with your seasonal or historical data? 17 A Yes. If they agree, it's more likely to make 18 money. If they disagree, then I might put on trades, I 19 might not. It depends, yes. 20 Q When -- strike that. 21 You stated, I believe, before that that the 22 trades that you were doing, the volume of them, was not 23 high enough, did not involve enough dollars for Merrill 24 Lynch to maintain an interest in those; is that right? 25 A That is correct. 76 1 Q And that was -- am I correct that that was the 2 major motivation for you setting up the HEEP Fund? 3 A Yes. 4 Q And did the size of your trades, I guess, the 5 volume of them -- well, strike that. 6 When you set up HEEP Fund, were you doing any 7 other kinds of trading other than up-to congestion trading? 8 MR. ESTES: Do you mean while he was at Merrill 9 Lynch? 10 MR. TABACKMAN: No, once he set up the HEEP 11 Fund. 12 THE WITNESS: I did put on a few trades, the inc 13 over and the dec trades, yes. 14 BY MR. TABACKMAN: 15 Q When you say "a few," percentagewise roughly, 16 again, based on your recollection? 17 MR. ESTES: Over the time frame of? 18 MR. TABACKMAN: Within the first year of HEEP or 19 during the period of time that he was doing the inc and dec 20 transactions, what percentage of his total transactions did 21 those amount to. 22 THE WITNESS: It's minimal. It's only 1 or 2 or 23 a few megawatts. So it's definitely less than 1 percent or 24 maybe 0.1 percent even. 25 BY MR. TABACKMAN: 77 1 Q Were the rest of them up-to congestion 2 transaction? 3 A That is correct. 4 Q And was there a typical size, megawatt size of 5 the trades that you would engage in on import and export 6 when you first started HEEP, say in your first year of 7 being in the HEEP Fund? 8 A When I started, one trade generally 10, 15, or 9 even 5 megawatt. 10 Q And how did you determine the size of the trade 11 that you wanted to enter into at any given time? 12 A I don't have a model, per se, to forecast the 13 risk involved. It just kind of in my mind based on my 14 experience or looking at the history, kind of I just think 15 oh, this is going to be -- 10 megawatt is good. Also, when 16 I started, I tended to put a very small amount in up-to 17 congestion trades. 18 Q And this was all your own money? 19 A Yes. 20 Q Personal money? 21 A Yes. 22 Q That you were trading in the HEEP Fund at that 23 point? 24 A Correct. 25 Q And in, say, the first year that you set up the 78 1 HEEP Fund -- and I'm sorry. Refresh my recollection. What 2 year did you set that up, HEEP? 3 A I set up in August 2007, and I started trading 4 in PJM September 2007. 5 Q Okay. Again, simply your recollection, how 6 many -- what percentage of the trades, the up-to congestion 7 trades that you did between September of 2007 and September 8 of 2008 for HEEP Fund were, quote, paired transactions, 9 using the word that we've used before, such as the CU Fund 10 trades were? 11 A Zero. 12 Q Between September 2008 and September 2009, what 13 percentage -- same question. What percentage of the HEEP 14 Fund trades were the kind of paired trades that we were 15 talking about with the CU Fund? 16 MR. ESTES: To the best of his recollection, 17 Counsel? 18 MR. TABACKMAN: To the best of his recollection. 19 THE WITNESS: For HEEP Fund, it's zero. 20 BY MR. TABACKMAN: 21 Q When you were doing work -- when you were doing 22 trades through your agreement with TFS prior to the 23 formation of the Powhatan fund, what percentage of the 24 trades that you did for TFS prior to Powhatan were these 25 paired trades such as we've talked about with the CU Fund? 79 1 A Zero. 2 Q What caused you to begin to do the paired 3 trades? 4 A It started in May 28, the first trading day I 5 did for Powhatan, and on the first day I was losing about 6 20,000 for Powhatan, and the next day, on June -- May 29th, 7 I put trades for May 30th. I lost about 370,000 for 8 Powhatan in a single day. And it's kind of first day and 9 second day I lost almost 400,000 for Powhatan. 10 And the reason I -- I stop trading for day and I 11 look at why this trade is suddenly causing a lot of loss. 12 What occurred to me is I paid a lot of money for the 13 day-ahead premium spread. It's like I have pair from MISO 14 according to Greenland Gap. I also exporting from Mount 15 Storm back to MISO. The day-ahead spread between Greenland 16 Gap and the Mount Storm some hours was close to $50. That 17 means in day-ahead, without the consideration of the risk 18 in real-time, you pay upfront close to $50 per megawatt, 19 and that's very, very significant. 20 So I just sit down, thought through trying to 21 find how do I reduce that day-ahead premium I have to pay, 22 and that occurred to me if you just shrink those two nodes, 23 take as one, you basically could reduce the day-ahead 24 spread to zero. So you're not taking in the day-ahead 25 spread if both legs are accepted. 80 1 Q And the day-ahead premium was derived from what? 2 MR. ESTES: Object to form. 3 BY MR. TABACKMAN: 4 Q What comprised -- I'm sorry. You referred to a 5 day-ahead premium. What are you talking about with that 6 term? 7 A It's the difference between the day-ahead price 8 of those two nodes. So example, say you're importing from 9 MISO to Dayton, MISO being 20 and Dayton being 50. The 10 spread is $30. So in day-ahead, you basically pay up front 11 $30 to hold this position. 12 Q Were there -- okay. And that's what you're 13 referring to as the day-ahead premium, that difference? 14 A That is correct, yes. 15 Q Was there any other factors, any other moneys 16 that went into comprising the day-ahead premium? 17 MR. ESTES: With respect to? 18 MR. TABACKMAN: I think this all started with I 19 was asking him why he went from -- what caused him to begin 20 doing the paired trades, and he said that it began -- as I 21 understand it -- and we can go off the record for a moment. 22 MR. ESTES: That might help. 23 (A discussion was held off the record.) 24 BY MR. TABACKMAN: 25 Q Is there a difference between the day-ahead 81 1 spread between the two nodes and the concept of the 2 day-ahead premium? 3 MR. ESTES: Object to form. Concerning which 4 two nodes? 5 BY MR. TABACKMAN: 6 Q You were talking a moment ago about the Dayton 7 and MISO transaction, and you gave me -- and I asked you 8 about the day-ahead premium, and you talked about the 9 difference in prices at the two different locations. So 10 I'm asking you, is there a difference between the spread in 11 the day-ahead market and what you referred to as the 12 day-ahead premium? Are those two different concepts? Are 13 they the same amount? 14 A They are different in the sense it could 15 possibly exceed $50. If not exceeding, these two numbers 16 are the same. The day-ahead spread $30, the premium $30. 17 But exceeding $50, the spread is still $60, but the premium 18 you pay is actually zero. So it's different conditions. 19 It could be different. 20 Q And why is the premium that you pay zero on that 21 second one where the spread is $60? 22 A Because the transaction is rejected. 23 Q So anyway, going back, then, your first two days 24 of trading on behalf of Powhatan you lost close to 25 $400,000. How does that connect to your decision to start 82 1 doing the paired trades? 2 A The example I give is from MISO to Greenland Gap 3 and from Mount Storm back to MISO. The spread between 4 Mount Storm and Greenland Gap is causing the loss, and 5 my -- at that time I'm trying to find a way to reduce that 6 spread in day-ahead, and the minimum in those cases is like 7 if you have those collapse into one node. 8 Q What do you mean by "collapse into one node"? 9 A So Mount Storm and Greenland Gap being a single 10 node, which is you come up with from MISO to Dayton and 11 Dayton to MISO back. 12 Q You don't have your import going from A to B and 13 then your export going from C to A? You put B and C into a 14 single location? Do I understand you correctly? 15 MR. ESTES: Do you understand? 16 THE WITNESS: That is correct. 17 BY MR. TABACKMAN: 18 Q Did the fact of the transmission loss credit 19 play any role in the decision to collapse the two -- the 20 two locations into one, on the import and export side? 21 A Yes, it did. 22 Q Describe that, please. 23 A Without a transmission loss credit, when you do 24 the importing, you pay 67 cents. You also pay about 20 to 25 25 cents for various charges. And on the returning leg -- 83 1 I mean, on the export leg, you also pay 20 to 25 cents per 2 megawatt on various charges. Without transmission loss 3 credit, this type of trades, it's less likely to make 4 money. With this transmission loss credit, you could 5 offset part of your charges and the cost, so make it more 6 appealing. 7 MR. TABACKMAN: Why don't we break for lunch at 8 this point and take 45 minutes. 9 (Whereupon, at 12:23 p.m., the deposition was 10 recessed, to be reconvened at 1:15 p.m. this same day.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 84 1 AFTERNOON SESSION (1:20 p.m.) 2 Whereupon, 3 HOULIAN CHEN 4 resumed the stand and, having been previously duly sworn, 5 was examined and testified further as follows: 6 MR. TABACKMAN: We are back on the record. 7 EXAMINATION (Continued) 8 BY MR. TABACKMAN: 9 Q Mr. Chen, you're still under oath. 10 Do you understand? 11 A Yes. 12 Q You said that as you began trading for Powhatan 13 in May of 2010, in the first two days you lost close to 14 $400,000; is that correct? 15 A That is correct. 16 Q Did you also lose money for HEEP Fund on those 17 dates? 18 A Yes. 19 Q Were the trades that you were placing for HEEP 20 Fund identical to the trades that you were pricing for 21 Powhatan except for the -- the ones for Powhatan, I 22 believe, may have been larger; is that correct? 23 A The intention is to be exactly the same, but 24 because sometimes the transmission you couldn't get for one 25 but you get for another, sometimes you have this $50 85 1 minute. It's not exact match, but I did try to be 1-to-20 2 ratio. 3 Q And where did that 1-to-20 ratio come from? 4 A Before Powhatan, I traded 1-to-4 ratio for 5 Hunterized, and they want to increase the risks, and so 6 they proposed to me to go 1-to-20. 7 Q And did you have any problem doing that? Any 8 concern about doing that is what I mean. 9 A I do have some concern. I actually 10 counterproposed to them, say, go 1-to-10, but they decided, 11 say we want to go 1-to-20. 12 Q By 1-to-20, what does that mean in terms -- was 13 that the difference in the volume of energy being traded or 14 dollars being traded? 15 A The volumewise, if I put down 1 megawatt for 16 HEEP Fund, I will put $20 for Powhatan. 17 Q 20 megawatts? 18 A 20 megawatts, yes. 19 Q The legs of the transaction would otherwise be 20 identical; is that correct? 21 A That is correct. 22 Q And again, on these days where you -- strike 23 that. 24 You traded on behalf of Hunterized for some 25 period of time before Powhatan was created; is that 86 1 correct? 2 A Yes. 3 Q Approximately how long? 4 A About two years. 5 Q And I take it that the relationship was regarded 6 as a beneficial one to both of you? 7 A Yes, sir. 8 Q Had you been losing money for TFS on a regular 9 basis during that two-year period? 10 A Dailywise, yes. Some of the days it continued 11 losing for a few days. And even you're looking at 12 accumulated for the month, single monthwise, I also lost in 13 some of the months, yes. 14 Q Did you ever experience a loss like you had 15 experienced in those first two days trading on behalf of 16 Powhatan? 17 A Dollarwise, no. 18 Q What was it that had changed, if anything, that 19 would account for a loss of that magnitude, or losses of 20 that magnitude on several days? 21 A I look at that in two things. One is being the 22 volume. Once you increase the volume, the loss will be 23 higher. 24 Another aspect of it is the spread happened on 25 that day is very wide in day-ahead. So I look at those to 87 1 contribute to big loss. 2 Q Why had you increased volume -- strike that. 3 Were these trades significantly larger than the 4 trades you had been making up to that point for the 5 Hunterized funds? 6 A It depends on the ratio. Yeah, from 1-to-4 and 7 now 1-to-20, from HEEP point of view, it's actually a 8 little bit less. 9 Q A little bit less what? 10 A Volumewise. 11 Q And why is that? 12 A If you have 1 megawatt originally and 4 megawatt 13 for Hunterized, in my understanding during those beginning 14 days or early days for Powhatan, I actually put 0.9 or 0.8 15 megawatt for HEEP Fund and 20 for -- 20 times 0.8 or 0.9 16 for Powhatan. So if you just look at the HEEP Fund alone, 17 you actually might see a little bit decrease in the volume. 18 Q Why did you do it that way? 19 A It's kind of related to up-to congestion trades. 20 Up-to congestion trades is going to improve the price 21 convergence. The goal is to take advantage of the price 22 spreads in day-ahead and real-time market. But the volume 23 you put on, it's actually act against you, shrinks the 24 price spread. 25 So the larger volume you put on, the less money 88 1 you're going to make for the trades. So for up-to 2 congestion trades, it's not very practical to put on very 3 large volume of trades. 4 Q Why does the phenomenon that you described of 5 increases in volumes of megawatts result in lessening the 6 spread? Why is that? 7 A Let me give example. From MISO to Dayton and 8 you're importing from MISO to Dayton and if you look at 9 up-to congestion formula, is positive real-time price for 10 Dayton minus in the settlement formula, and it's minus 11 day-ahead price of Dayton. 12 So if you look at formula, it is short on 13 day-ahead and long real-time. That means if the real-time 14 price is higher than day-ahead, you're going to make money. 15 But once your trade is put on, short day-ahead tends to 16 increase day-ahead price a little bit. Long real-time, it 17 tends to reduce the real-time price a little bit. So the 18 trade itself act against you. I mean basically you want to 19 exploit that spread, but once your trade is on, it's trying 20 to reduce that spread itself. 21 Q Did the TFS people ever ask you to come in-house 22 with them? 23 A Yes, they did. 24 Q Could you describe that, please, those 25 conversations, if there was more than one conversation, how 89 1 that came up and how that was resolved. 2 A We have three face-to-face discussion. The 3 first one, to the best of my recollection, I think in the 4 fall of 2008, they want to know more about up-to congestion 5 trades and how to make money and under what kind of 6 circumstances you could lose money, and second meeting 7 happened in maybe June. I don't recall the exact date, 8 June 2009. And they ask me to give them detailed 9 description of the model I developed. 10 So I gave some screen shots of the model, and I 11 presented that to the TFS guys. The last meeting happened 12 June -- I think June 24 or 25th of this year, 2010, and two 13 topics they asked me to get up to their office and they 14 want to discuss, one being the effect of transmission loss 15 credit on the trading strategy and on the trade itself. 16 The second topic, they're trying to ask me the influence of 17 limited capacity on the trades. 18 Q The influence, is that what you said? 19 A Yes. 20 Q And where did this discussion take place, this 21 last one? 22 A In West Chester, Pennsylvania. 23 Q Was this the first time that you discussed with 24 anybody from TFS the effect of loss -- of transmission loss 25 credits on trades? 90 1 MR. ESTES: Let's clarify. Do you mean discuss 2 in person? Over the phone? In any way? 3 MR. TABACKMAN: In any way whatsoever. 4 THE WITNESS: No, not first time. 5 BY MR. TABACKMAN: 6 Q Do you recall on what occasion you had 7 previously discussed it, again either on the phone or -- 8 how it first came up in your conversations with them? 9 A I remember first time I send an e-mail over to 10 Mr. Kevin Gates about up to transmission loss credit. I 11 think it's October 2009 when the first showed up in the 12 weekly report. 13 Q The weekly report you're referring to is what? 14 What is that? 15 A PJM change that monthly report, billing 16 statement it's called, into weekly billing. 17 Q So in October of 2009, if I understand you, is 18 the first time that you saw the transmission loss credit 19 showing up on your billing statement from PJM? 20 A That is correct. 21 Q And based on that, you contacted -- did you 22 initiate contact with TFS, Kevin Gates? 23 A I don't recall, but I did send an e-mail with 24 that link related to FERC filing. 25 Q And why did you do that? 91 1 A I didn't remember the exact circumstances. 2 Maybe they asked me or I want to -- so I send an e-mail 3 reply, or maybe I just kind of said this is a new item 4 showed up in the report, just kind of reminder to them. I 5 didn't remember the exact circumstances. 6 Q Was this a significant event for you, the fact 7 that this transmission loss credit showed up in your 8 billing statement? 9 A It is pretty big price signal, yes. 10 Q Why is that? 11 A Without the transmission loss credit, the 12 charges, all the components I'm looking at amount to about 13 67 cents on import plus 20 to 25 cent, the export being 14 around 20 to 25 cents per megawatt. And the transmission 15 loss credit, I don't recall the exact number, but that 16 transmission loss credit covers part of that charges. 17 Q On certain transactions could actually exceed 18 the charges that you just described? 19 A Yes, that is correct. 20 Q Do you recall what you told them in this e-mail, 21 what you told Mr. Gates, if that's who you sent it to, 22 about the transmission loss credit? 23 A If I recall correctly, I think I just sent them 24 a link with the e-mail from PJM, said this is for your 25 information, just FYI. I think that's about it. 92 1 Q Did they contact you afterwards? 2 A I don't recall. 3 Q Do you recall any further conversation, 4 communication, correspondence, written, computer, 5 telephone, about the subject of the transmission loss 6 credit at about that October 2009 time frame with Kevin 7 Gates or anybody from TFS? 8 A To the best of my recollection, yes, there are 9 various e-mail exchanges about this transmission loss 10 credit. 11 Q Did you suggest to them in any way that this 12 would change your trading strategy for them, or did they 13 ask you that question, whether it would? 14 MR. ESTES: During this October 2009 time frame? 15 MR. TABACKMAN: Right, October 2009. 16 THE WITNESS: I think it did, and I think in the 17 e-mail related I mentioned the transmission loss credit 18 makes the trades more profitable. So you can increase the 19 volume without taking significant risk. 20 BY MR. TABACKMAN: 21 Q Okay. And do you -- did you begin to increase 22 the volume at that time, to the best of your recollection? 23 I understand you don't have documents in front of you. 24 MR. ESTES: Still October 2009? 25 MR. TABACKMAN: Still October 2009. 93 1 THE WITNESS: I didn't. 2 BY MR. TABACKMAN: 3 Q There did come a point, though, at some point in 4 time on behalf of TFS where you did increase the volume; 5 correct? 6 A That is correct. 7 Q And do you recall when that happened? 8 A I think around the April -- not April. Let me 9 correct that. Around February 2010. 10 Q And what happened in February 2010 to cause that 11 or between October 2009 and February 2010 to cause that? 12 A I think the refunds of transmission loss credit 13 came out gradually. In November monthly bill, you have 14 some refund. In December bill, you have some refund, and 15 maybe even in January 2010 you have some refund. So now in 16 February you have a pretty good history. You have a couple 17 years of history you can look into. Before that, you only 18 have a couple months of history. 19 So I think it's about February 2010 we receive 20 all the refunds from December 2007 up to that point. And I 21 look at some of the months, it's pretty good number. Some 22 of the months, the number is pretty low in those shoulder 23 months. But I do have a pretty good handle based on the 24 two-year history. 25 Q And the shoulder months, how did that fit into 94 1 your model or cause you to think -- how did you look at 2 that, the fact that you didn't get the same amount of 3 transmission loss credit in those months? 4 A That -- I'm actually not quite sure. My 5 understanding is in those shoulder month, the transmission 6 loading or the demand tend to be lower. The transmission 7 loss is lower. So you collected less money, and the 8 surplus is lower. 9 So I think those are the month you could lose 10 money if you do paired trades. But for the colder winter, 11 hot summer, there's a potential. You gain the transmission 12 loss credit to cover all the charges. 13 MR. HOPKIN: Sorry. Did the witness say "game" 14 or "gain" in that last answer? 15 THE WITNESS: Gain. 16 BY MR. TABACKMAN: 17 Q I forget exactly where we were, but at what 18 point did you begin to increase the volume? I guess is 19 where we were going before. 20 A I started to increase, I think, in February 21 2010. 22 Q Okay. And did you tell -- did you have a 23 conversation with anyone from Hunterized about that? 24 A I don't recall the exact date, if it was in 25 February or March, but I do remember some e-mail exchange 95 1 about that effect, yes. 2 Q And I take it they were fine with that? 3 A Correct. 4 Q Between this approximate February to March time 5 frame and May 28th when you started trading for Powhatan, 6 did you suffer any losses anywhere near the magnitude of 7 the ones you described earlier today? 8 MR. ESTES: Dollarwise? 9 MR. TABACKMAN: Dollarwise. 10 THE WITNESS: No. 11 BY MR. TABACKMAN: 12 Q And what was the reaction of the Powhatan people 13 when they saw that level of loss? 14 A I cannot -- from my understanding, they are very 15 concerned. And so I got e-mails from Mr. Kevin Gates. I 16 also got phone calls from him. He actually was traveling 17 on that day, but he did get time to talk to me and e-mail 18 me asking questions why it happened and how do we kind of 19 prevent that kind of a big loss. 20 Q And what did you tell him? 21 A I think large volume did play a role. You have 22 to admit that volume is high, and then the risk will be 23 multiplied by the volume. 24 Another point is the spread between the trades I 25 put on in the day-ahead, it's very, very high. And so you 96 1 paid the premium, as I said, or paid the spread in the 2 day-ahead to take on the position in real-time, but in 3 real-time the prices converge, so close. You pay a 4 premium. You don't get anything back, and that's major 5 problem for us, too. 6 Q The volumes that were being traded in this May 7 28th to June, those last days of May when you started 8 trading for Powhatan, what are the volumes, if you can 9 recall, that you're talking about? 10 A To the best of my recollection, the maximum 11 megawatt I put on for one trade for HEEP Fund is -- I think 12 is 40, maybe 50 megawatt, the max put on. For Powhatan, 13 it's 1,000 megawatts. 14 Q Why was there this meeting on June 24th or 25th 15 with Powhatan? 16 A I think at that time they do have a basic 17 understanding about transmission loss credit and the effect 18 on the trades and want to have a face-to-face discussion 19 and want my confirmation the idea in their head are 20 correct. They want to assess the risk and the rewards of 21 the trades we put on. And also, it's written in agreement 22 I have to take at least one trip every year. 23 MR. TABACKMAN: If I could have this document 24 called "PJM operating agreement accounting, revision 45," 25 marked as Exhibit 2. 97 1 (Exhibit Chen 2 identified.) 2 BY MR. TABACKMAN: 3 Q Mr. Chen, I'd like to have you look at what I've 4 had marked as Exhibit 2. I will tell you, represent to 5 you, that this is a cover page and then a limited section 6 of a much longer document. But this is a portion of the 7 revision dealing with transmission congestion accounting 8 and transmission loss accounting, sections 7 and 8 of, as I 9 said, a larger document that bears -- the first page is the 10 cover page of it. 11 Have you ever seen this before, looked at this, 12 the operating agreement? 13 MR. ESTES: Take your time now. 14 BY MR. TABACKMAN: 15 Q Take as much time as you need. 16 MR. ESTES: To the best of your recollection. 17 MR. TABACKMAN: And I'm not going to ask 18 questions about the details of this. The dates of the 19 meeting in June and the date of this document, I'm 20 wondering if that's just coincidental or if there was 21 something in the document, if he recalls seeing these 22 revisions that may have caused him to go up and see -- 23 provoke the meeting. I'm not playing hide the ball here. 24 MR. ESTES: Okay. 25 THE WITNESS: I don't recall I read this 98 1 document. 2 BY MR. TABACKMAN: 3 Q Have you ever studied the issue of the 4 accounting for transmission losses and congestion, the 5 topics that are discussed in these? 6 MR. ESTES: One of the topics. 7 MR. TABACKMAN: One of the topics is 8 transmission congestion accounting. That is Section 7. 9 And Section 8 discusses aspects of transmission losses 10 accounting. 11 BY MR. TABACKMAN: 12 Q Have you ever made a study of either of those 13 subjects, how PJM handles them? 14 A The subject, yes. I look at -- they have called 15 settlement guide. It's similar to this but, I think, 16 shorter version. 17 Q When you met on June 24th or 25th with the 18 Powhatan people, what do you recall discussing? 19 A The topic we concentrate on is the effect of 20 transmission loss credit on the trades and on our trading 21 strategy. 22 Q And were you suggesting that there could be a 23 change in the trading strategy? 24 A No. 25 Q Was there a discussion on the change in this 99 1 trading strategy? 2 MR. ESTES: Including volumes? 3 MR. TABACKMAN: Any aspect of it. 4 THE WITNESS: No. My recollection is no. 5 BY MR. TABACKMAN: 6 Q Okay. What did you discuss about the trading 7 strategy? 8 A We discussed -- because of the transmission loss 9 credit, the trades we put on is to make more profit and we 10 could put on more volumes with same kind of risk we used to 11 take. 12 Q Were you concerned when you were talking with 13 them about increasing these volumes and making this 14 explanation of the situation that you hypothesized earlier 15 about one of the legs falling out, or did you feel -- I'm 16 using a shorthand, but one of the legs falling out and, 17 therefore, having potential for large reward or potentially 18 large loss? Was that a concern of yours at that time? 19 MR. ESTES: Object to foundation. I think 20 there's a timing mismatch here. 21 THE WITNESS: We did spend quite a bit of time 22 on that subject. And the question came up is if you have 23 100-megawatt import and then you have 100-megawatt back, 24 they ask me it seems to be they are net effect is zero and 25 why do you see differently. 100 1 And what I told them is from mathematical point 2 of view, the import, the condition is their price from the 3 sink minus their price from the source is less than or 4 equal to $50. If you look at export leg, the condition is 5 they have a price of the MISO of sink minus day-ahead price 6 of the source in PJM is less than or equal to $50. These 7 two conditions are independent almost. It's not exactly 8 opposite. So these two trades are actually not canceling 9 out. 10 BY MR. TABACKMAN: 11 Q That's what you explained to them? 12 A Yes. 13 Q Did you believe, though, that you could 14 structure these trades so that they would, in effect, 15 cancel each other out totally or almost totally every time? 16 MR. ESTES: Object to form. Object to 17 foundation. 18 THE WITNESS: No, not always. 19 BY MR. TABACKMAN: 20 Q Did you believe that you were going to be able 21 to do that -- that your data that you had looked at, the 22 models you had developed, would allow you to, I believe you 23 said, cancel each other out on a majority of the occasions? 24 MR. ESTES: Same objection. 25 THE WITNESS: On most cases, yes, the net effect 101 1 is zero. That, I kind of agree, and I think that's the 2 understanding of me and the discussion. On the other 3 circumstances is one leg could be rejected. I actually 4 tried to emphasize that potential you could be making a lot 5 of money, accumulating among 29 days you're making money. 6 If one day happened one of the legs rejected, you could 7 lose all the money you make. 8 BY MR. TABACKMAN: 9 Q Were you trying to make them aware of the risks 10 of this potential strategy? 11 A Yes. 12 Q And I take it that's because you wanted to -- 13 didn't want to be in a position of them coming back and 14 saying you didn't tell us the downside? Is that fair to 15 say? 16 A That is fair, yes. 17 Q I'm asking you now. As you thought about it, 18 putting aside what you wanted your client to understand, 19 what was your assessment of the likelihood of that downside 20 risk? 21 A It depends on how you choose that node. 22 Q Was it your intention to try to choose and 23 structure transactions so that they would be awash, net out 24 to zero? 25 MR. ESTES: Objection. The question is 102 1 ambiguous. 2 THE WITNESS: No. 3 BY MR. TABACKMAN: 4 Q We will use the example that you gave. I will 5 just rephrase it. You said you could look at these 6 transactions, as they said to you, and that they will net 7 out to zero. I believe that was the expression, that you 8 said something like that that they used. 9 Is that right? 10 A Mathematically, they are two conditions. They 11 are not canceling, and you cannot net to zero. Flowwise, 12 under certain circumstances, you do, but also, you have 13 various types of charges. So from -- if you look at 14 operational, flowwise, net effect is zero, but if you look 15 at financialwise, they are not. 16 Q I understand. But my question is, was it your 17 hope that you could and your goal to try to structure the 18 transactions that we've been talking about, that you were 19 explaining to Powhatan, in a way that they would, both 20 flowwise and financialwise, net out to zero? 21 MR. ESTES: If you understand, you may answer. 22 THE WITNESS: I disagree. 23 BY MR. TABACKMAN: 24 Q It was a question. That was not your goal? Let 25 me try to put this to you again. 103 1 Just to back up, I understand that when you 2 explained transactions to Powhatan on June 24th or 25th, 3 they were looking at these two transactions and saying -- 4 and I believe these were your words -- they will net out to 5 zero. 6 Is my understanding of your previous testimony 7 correct? 8 A Under certain circumstances, the flowwise, yes, 9 net zero, yes. 10 Q Let me try to understand. When they looked at 11 these transactions that you were explaining -- and you said 12 before their reaction was these would just net out to 13 zero -- what were they referring to, flowwise or 14 financialwise, or don't you know? 15 MR. ESTES: If you know. 16 MR. TABACKMAN: That's what I said. 17 THE WITNESS: I don't know what they meant, but 18 my understanding is that looking at the total package, 19 flowwise, also financialwise, the whole cancel out. 20 BY MR. TABACKMAN: 21 Q Okay. By "cancel out," what do you mean? 22 A If you have import, if you have export, the flow 23 offsetting each other. 24 Q Okay. And does that -- would that also, under 25 the circumstances that you were talking about these trades 104 1 with Powhatan, was that also going to cancel each other out 2 financially or potentially could cancel each other out 3 financially? 4 MR. ESTES: Do you understand? 5 THE WITNESS: Financially, they are not 6 canceling. 7 BY MR. TABACKMAN: 8 Q Did you ever try to structure them so that they 9 would cancel each other out financially except for the 10 transmission loss credits and the fixed costs? 11 MR. ESTES: Object to form. 12 BY MR. TABACKMAN: 13 Q Did you ever try to structure these trades so 14 that the spreads would cancel each other out financially 15 and all you would have as either profit or loss was the 16 fixed costs and the transmission loss credit? 17 A I can only say that one aspect of it. 18 Q What is one aspect of it? 19 A The two goals -- this is only one of the goal. 20 If they are canceling out, I will get transmission loss 21 credit. If the transmission loss credit covers all the 22 charges, you have been making money. If not cover all the 23 cost, you're losing money. That's one goal. 24 Another goal is in case one of the leg is 25 rejected, if you choose the node carefully, you could have 105 1 a high probability of making money and very less 2 probability of losing a lot of money. 3 Q When you say "choose the nodes carefully," how 4 did you go about doing that? 5 A It's kind of related to my overall trading 6 strategy, kind of we talked about in the early morning. I 7 tend to look at the low risk, lower profitability, but you 8 do have the potential there. And it's not looking at high 9 risk, high reward. 10 So I look at, I actually divide PJM into four 11 areas, area number 1 being ComEd in Chicago area 12 encompassed by Midwest ISO, area 2 being West of PJM and 13 Dayton, part of AEP, part of APS, and part of PENELEC 14 belong to that area. These two areas, the LMP price tend 15 to fracture it alongside with MISO. Area 3 being Dominion 16 and part of AEP and part of APS. Those price tend to 17 fluctuate along with south import and south export. Area 4 18 being east of PJM. Those price tend to fluctuate along 19 with New York ISO. So when I choose the nodes I put on, 20 say, low risk, I will pick nodes from area 1 and area 2. 21 Q Do they fluctuate with each other, those two 22 areas? 23 A With MISO. 24 Q Are you saying that these areas were highly 25 correlated, price movements in one would be in the same 106 1 direction as price movements in the other? 2 MR. ESTES: Ambiguous. 3 THE WITNESS: It depends what you mean by 4 "highly." But the idea is correlated. 5 BY MR. TABACKMAN: 6 Q Correlated, fair enough. 7 A Yes. 8 Q And when you were making -- the trades that 9 we're talking about that you were describing the 10 strategy -- strike that. 11 When you were describing the strategy to 12 Powhatan in your June 25th meeting or 24th meeting, you had 13 not established the CU Fund yet; is that correct? 14 MR. ESTES: If you recall. 15 BY MR. TABACKMAN: 16 Q Or started trading on the CU Fund. 17 A No, not yet. 18 Q And these trades that you were discussing with 19 Powhatan, did you ever go forward and make larger volume -- 20 increase the volume from the trades that you had been doing 21 on their behalf prior to that date? Strike that. 22 Did you increase -- after this conversation with 23 them, did you engage in trades, the kinds of trades that 24 we've just been describing, on behalf of Powhatan? 25 MR. ESTES: After meeting -- 107 1 MR. TABACKMAN: After the meeting on June 24th 2 or 25th. 3 THE WITNESS: I'm still putting on similar 4 trades. Volumewise, it varies by day. So if I look at 5 some hot days, I add a little bit more volume. If it's 6 mild days, I will reduce that a little bit, volume. 7 BY MR. TABACKMAN: 8 Q Did you ever make, for HEEP Fund, structured 9 trades for the HEEP Fund in the same way that you 10 structured the trades that we talked about for the CU Fund 11 earlier today? 12 MR. ESTES: Do you understand? 13 THE WITNESS: Yes. In HEEP Fund, I have more 14 trades. I keep my original trading strategy. Those are 15 not paired. I also have some paired trades in HEEP Fund. 16 Those trades are similar in nature with the trades I put on 17 in CU Fund. 18 BY MR. TABACKMAN: 19 Q But if I understand, not as many in the HEEP 20 Fund as in the CU Fund or not the same percentage as in the 21 CU Fund? 22 MR. ESTES: Which one? The second question? 23 MR. TABACKMAN: I'm asking him which is it. 24 BY MR. TABACKMAN: 25 Q Are you saying not as many or didn't make up as 108 1 large a percentage of the HEEP Fund trades? 2 MR. ESTES: Referring to the paired trades? 3 MR. TABACKMAN: Correct. 4 THE WITNESS: My recollection is in HEEP Fund 5 the percentagewise, less than half traded numberwise are 6 paired. 7 BY MR. TABACKMAN: 8 Q And how about for Powhatan? How many were 9 paired? 10 A The same percentage. 11 Q And how did you decide whether you were going to 12 use a paired trade for HEEP Fund? 13 MR. ESTES: As opposed to the original strategy? 14 MR. TABACKMAN: Correct. 15 THE WITNESS: Yeah, that go back to May 30th, 16 lost big chunk of money on that day. So I'm looking for to 17 reduce the day-ahead spread. So actually shrink those two 18 nodes into one, and on the first few days, like June 1st 19 and June 2nd, I only put on one pair, like from MISO to 20 Dayton, and a small volume and gradually add more volume 21 and also more pairs for those -- for HEEP Fund. 22 BY MR. TABACKMAN: 23 Q And what were the characteristics of the pairs 24 that you chose for HEEP Fund trades during that period of 25 time you've just described, June of 2010 and going forward 109 1 from there? 2 A I have picked five nodes in PJM, one being 3 Dayton, one being ComEd, one being Cook, one being 4 Rockport, and one being AEP. So what I did is I have one 5 importing from MISO to Dayton and exporting from Dayton to 6 MISO, and also did the same for the other pairs. 7 Q And what you've just described were trades that 8 you did on behalf of HEEP in the June period? 9 A That is correct. 10 Q And are -- and how about for -- did you do those 11 same trades for Powhatan? 12 A They are the same, yes. 13 Q And do those trades -- strike that. 14 In what way, if any, do the way that you 15 structured those trades differ, the ones we've just 16 described, differ from the trades that you were doing later 17 on for CU Fund in terms of the way you structured them? 18 MR. ESTES: Do you understand? 19 THE WITNESS: I think, to the best of my 20 knowledge, they are the same. 21 BY MR. TABACKMAN: 22 Q The agreement that you had with the Gates's, was 23 that strictly a performance-based agreement throughout the 24 time that you dealt with them? I'm sorry, with TFS and 25 Hunterized and then later Powhatan. 110 1 A Yes. 2 Q When you were discussing this matter with -- 3 this meeting with the Gates's in June of 2010 and then 4 later on when you founded the CU Fund, started trading for 5 CU, what impact, if any, did the report that Dr. Bowering 6 had issued in March play in your thinking as to the 7 strategy, if any? 8 A My understanding is for up-to congestion up to 9 that point, there's no effect. 10 Q What he had to say didn't have any effect on 11 your strategy? Is that what you're saying? I'm trying to 12 make sure I understood what you said and the record is 13 clear. 14 A That is correct. 15 Q Did you consider -- was that something that you 16 thought about as you were developing and explaining your 17 strategy to Powhatan in June of 2010? 18 MR. ESTES: The Bowering report? 19 BY MR. TABACKMAN: 20 Q The Bowering report, was that something that you 21 thought about as you formulated what you were going to say 22 and as you spoke with them? 23 MR. ESTES: At the June meeting? 24 MR. TABACKMAN: Correct. 25 THE WITNESS: I don't recall if that topic came 111 1 up in the meeting. 2 BY MR. TABACKMAN: 3 Q Apart from whether it came up in the meeting, 4 it's something that you thought about as you considered 5 this strategy? 6 MR. ESTES: Considered the paired trades? 7 MR. TABACKMAN: Correct. 8 THE WITNESS: You mean the effect of the 9 Dr. Bowering report? 10 BY MR. TABACKMAN: 11 Q Let's back up. What was your understanding, 12 just briefly, of what Dr. Bowering had to say in March 13 about up-to congestion transactions? 14 A If I remember correctly, there's two 15 recommendations, one being operating reserve charges, and I 16 don't recall the exact argument, but says if -- the idea is 17 if you have financial trades that's similar in nature to -- 18 Q Physical trades? 19 A Not similar. It's like similar -- in nature, 20 cause similar -- in the physical trades affect the flow of 21 the system. So the argument Dr. Bowering present is like 22 you also have to incur the operating reservation charge, 23 operating reserve charge. 24 Q Okay. 25 A And another point put forward is you have -- now 112 1 PJM allow up-to congestion trades, a limit set of buses 2 within PJM. As I understand it, Dr. Bowering has a 3 different opinion about that limitation. It's my 4 understanding that those bus has to be removed from up-to 5 congestion trades, only allow interface zones to put on 6 those type of trades. 7 Q Did any of that -- those recommendations, either 8 of those recommendations and discussions, as you remember, 9 impact the strategy that you were describing to Powhatan in 10 June of 2010 and that you adopted with respect to CU Fund? 11 MR. ESTES: Object to form. 12 THE WITNESS: I don't recall that topic came up. 13 MR. TABACKMAN: Why don't we take a break for a 14 couple of minutes. 15 (Recess.) 16 MR. TABACKMAN: Back on the record. 17 BY MR. TABACKMAN: 18 Q Were the volumes that were being traded in terms 19 of megawatts for the CU Fund higher than you were trading 20 for Powhatan or the HEEP Fund during the same periods of 21 time, if you recall? 22 A My reflection is HEEP Fund will be the lowest. 23 CU Fund is in between. And Powhatan is higher than CU 24 Fund. 25 Q Okay. Also, I recall -- if I understood you 113 1 correctly, you said that larger volumes traded would lead 2 to price convergence in the paired trades that we had 3 talked about? 4 MR. ESTES: Objection; mischaracterizes his 5 testimony. 6 THE WITNESS: The intent is -- and if your 7 intention is the same as PJM market call for, you make 8 money. If your intention is convergence, but market call 9 for divergence, then you're losing money. 10 BY MR. TABACKMAN: 11 Q When you were selecting the volumes to bid on 12 behalf of the CU Fund, why were you selecting volumes that 13 were larger than the ones you were selecting for the HEEP 14 Fund? 15 A The major reason is HEEP Fund is bounded by 16 agreement 1 to 20. Let's say -- if you put on 100 megawatt 17 for HEEP Fund, you have to put 100 megawatt times 20. So 18 it's pretty significant. 19 Q For Powhatan? 20 A Right. 21 Q Did you expect, by selecting larger volumes for 22 the CU Fund than for the HEEP Fund, that that would lead to 23 a convergence of the prices between the two nodes? 24 A Yes, that was the intention, yes. 25 Q It was your intention to lead to the convergence 114 1 of the prices between the two nodes by selecting the larger 2 volumes? I want to make sure I understand you. 3 A I have some question about the two nodes, what 4 you're referring to two nodes. 5 Q When you were selecting and structuring the 6 trades at the CU -- for the CU Fund, did you expect the 7 fact that you were using larger volumes in those trades 8 than you were for similar trades in the HEEP Fund to lead 9 to a price convergence on the trades you had set up for the 10 CU Fund? 11 MR. ESTES: Object to form. 12 THE WITNESS: If I understand your question 13 correctly, the intention is the same. HEEP Fund, a smaller 14 volume, but the intention is price convergence. In the CU 15 Fund, volume higher but intention is still the same, the 16 price convergence, yes. 17 BY MR. TABACKMAN: 18 Q And would the increased volume make price 19 convergence more or less likely or have no impact 20 whatsoever on the issue of price convergence? 21 A My understanding is for up-to congestion trades, 22 the trade you put on, the more volume you put into it, it 23 will make the price more convergence -- or move together, 24 move more closer together. 25 Q Okay. And on the trades again that were the CU 115 1 Fund or in any of these trades we have talked about, for 2 the HEEP Fund, CU Fund, or Powhatan, were you looking to 3 create price convergence in the spreads when you structured 4 these trades? Was that one of your goals? 5 A Yes, they are, because they are up-to congestion 6 trades, and the goal of up-to congestion trades, all the 7 trades belong to this type of financial trades, are to make 8 those price converge. 9 BY MR. HOPKIN: 10 Q Was it your goal to make the prices converge, or 11 are you saying that the purpose of having the up-to 12 congestion product is for the benefit of the market to have 13 the prices converge? 14 A It's the latter, yes, not just my goal. It's 15 actually this type of product called for, yeah. 16 Q What was your personal motivation or goal in 17 submitting high volumes of the up-to congestion 18 transactions? 19 A If we take the high volume aside, you're trying 20 to make money and provide value to the system. The high 21 volume is because you want to take on more risk, and 22 because you have higher capital and you want to take more 23 risk. You don't want to put on a large number of trades 24 with smaller volume. 25 If you want to put 1,000 megawatt on, you could 116 1 potentially 100 megawatts per trade or you could 100 trade 2 10 megawatt per trade. And because I put on trades 3 manually, I choose the higher volume, limited number of 4 trades. 5 Q So high megawatt volume, but a low volume in 6 terms of the actual number of trades? 7 A Correct. 8 Q Okay. In putting on trades that are high in 9 megawatts but are low in terms of the actual number of 10 trades you're putting on, does that tend to lead to price 11 convergence between the two nodes that are associated with 12 the up-to congestion transactions? 13 A I believe, yes. 14 Q Can you explain why that is? 15 A It actually not depend on the high or low 16 volume. Low volume have the same effect. High volume has 17 the same effect. 18 Q I'm sorry. I guess part of the problem we're 19 having in this line of questioning is differentiating when 20 we say "volume" what we're referring to, whether it's 21 megawatts per trade or the number of trades. If you could 22 just in your answer make that clear, when you say "volume," 23 what volume you're talking about, that would be helpful. 24 A Volume for one single trade. 25 Q Okay. 117 1 A If you look at example, say, from MISO to Dayton 2 importing, the up-to congestion, we talked before, is short 3 in day-ahead and long in real-time, and you want to exploit 4 that difference between real-time and day-ahead. But once 5 you put the trades on, no matter how high the volume, you 6 actually force that day-ahead and real-time price to 7 converge. 8 Q Again, when you said "volume" just then, did you 9 mean megawatt volume or transactional volume? 10 A Megawatt volume. 11 Q Okay. And when the prices converge, is that -- 12 does that tend to benefit your position vis-a-vis the up-to 13 congestion transaction, or is that moving -- is that 14 convergence moving against your up-to congestion 15 transaction? 16 A My understanding is it move against you, but you 17 provide value to the system. It's much more efficient if 18 you move together price. But you also make some money 19 because the price does move a little bit, not move all of 20 it. So say if you have a spread before your trade put on 21 is $2. After your trade is put on and now spread is $1, 22 you still have $1 left for your trades, but you did provide 23 $1 benefit for the system. 24 Q But your motivation is not to benefit the 25 system; correct? 118 1 A If I understand that correctly, the answer is 2 no. I do intend to benefit the system at the same time I 3 get reward back. It's two-way. If you provide the system 4 some value, you get a profit. If you don't provide any 5 value to the system, you actually are losing money. 6 Q Let me ask it a different way. You're in 7 business to make money; correct? 8 A That is correct. 9 Q Not to provide value to the system; correct? 10 A That is correct. Let me get back to that point. 11 It depends on how you put the trades on. I mean, up-to 12 congestion trades, the essence is to provide value to the 13 system. That's actually the first goal of these type of 14 trades. No matter if your intention is making money or 15 losing money. 16 So to me, you cannot differentiate these two. I 17 do want to make money, but any time you put on this type of 18 trades, you provide value to the system. So it's like 19 these two hand in hand. You cannot separate into two 20 topics. 21 Q Okay. I understand your answer. 22 BY MR. TABACKMAN: 23 Q When the spreads converge, when the prices 24 get -- the spread gets smaller because the prices converge, 25 does that lower the potential profit that you would make on 119 1 the transaction? 2 MR. ESTES: On a per-megawatt basis? 3 MR. TABACKMAN: On a per-megawatt basis. 4 THE WITNESS: That is correct. 5 BY MR. TABACKMAN: 6 Q You're familiar with the term "incs" and "decs" 7 as kinds of transactions in power trading? 8 A Yes. 9 Q Could you have used those financial transaction 10 vehicles to achieve the same -- in terms of your profit or 11 loss, the profit or loss of Powhatan, could you have used 12 those vehicles to achieve the same purpose as the up-to 13 congestion trades? 14 MR. ESTES: Do you understand? Same profit 15 objective? 16 THE WITNESS: My understanding is probably not. 17 BY MR. TABACKMAN: 18 Q And why is that? 19 A I don't have a very detailed knowledge of inc 20 and dec, but my understanding is for the inc and for the 21 dec, you pay various charges of operating reserve, between 22 day-ahead operating reserve and the balance operating 23 reserve. And those charges vary by day, and it's pretty 24 wide. Some days could go $10, a few dollars per megawatt. 25 But it could go to like 10 cents per megawatt. It's very, 120 1 very unpredictable. I've actually trying to get away with 2 that type of trades. 3 For up-to congestion, all the costs, all the 4 charges are very predictable. You know beforehand what 5 costs, what charges you agree to pay, and I actually kind 6 of like that aspect of it. 7 Q If you had been involved, if you know, in incs 8 and decs, would you also have been able to get the same 9 transmission loss credits with those kinds of transactions, 10 if you know, your understanding at the time that you were 11 doing these trades? 12 A I don't know exactly. But I have some trades 13 way before transmission loss credit for inc/dec, and I 14 don't see any number associated with those, and there's no 15 refund related to that. So I assume there's no. 16 Q In June or July or August of 2010, starting June 17 1 until whenever it is that you stopped your trading, and 18 talking on behalf of HEEP, Powhatan, or CU Fund, did you 19 ever submit a trade that was accepted that turned out to be 20 profitable solely because of the transmission loss credit, 21 if you recall? 22 A Before I put on those trades, I have no way to 23 know if they're profitable or not. If you're asking me 24 looking back, I do see some days you're making money it's 25 because of the transmission loss credit, yes. 121 1 BY MR. HOPKIN: 2 Q When did you first see that? 3 A The transmission loss credit, it's averaged a 4 few days later than the market settles. PJM, so today, if 5 you put trades on for tomorrow, 4:00 a.m. Eastern you get 6 day-ahead market. So you know what it is you're paying to 7 hold the position. The next day generally, if it's not 8 holiday, not weekend, the PJM publish real-time data. It 9 could be three days or five days or even seven days later 10 they publish the daily number of transmission loss credit. 11 Q Let me ask you that question a slightly 12 different way. When did you first notice that these paired 13 up-to congestion transactions, at least in some instances, 14 were profitable solely because of the marginal loss surplus 15 allocation? 16 A Some of the days, when I look at the whole 17 package for the whole day, before the transmission loss 18 credit, you have all of the other components. Day-ahead is 19 already there. Real-time is there. I have some estimates 20 for the other charges. The only piece missing is 21 transmission loss credit. And I see the number is 22 negative. That means without that I am actually losing 23 money on that day. And a few days later, they add it, 24 publish that transmission loss credit, and suddenly it 25 turns positive and I'm making money. It happens, and I do 122 1 know those kind of days. 2 Q That sequence you just described, can you tell 3 me a date as to when you first noticed that occurring, that 4 specifically that you noticed that the marginal loss 5 surplus allocation on the bill outweighed the costs that 6 you were paying in order to enter into the up-to congestion 7 transaction, such that the only reason the transaction was 8 profitable was because of the marginal loss surplus 9 allocation? 10 MR. ESTES: And the time frame is? Any time he 11 recalls? 12 MR. HOPKIN: Yeah. That's the question. 13 MR. ESTES: Do you understand the question? And 14 to the extent of your recollection. 15 THE WITNESS: I don't recall exact date, but I 16 noticed it's -- it should be before June 1st. 17 BY MR. HOPKIN: 18 Q Of which year? 19 A 2010. 20 MR. HOPKIN: Thank you. 21 BY MR. TABACKMAN: 22 Q Was it your hope -- strike that. 23 Was it your expectation in structuring the 24 paired transactions that we were just talking about that 25 they would -- if you had done your analysis right, that 123 1 they would be profitable primarily because of the 2 transmission loss credit? 3 MR. ESTES: Object to form. 4 BY MR. TABACKMAN: 5 Q Do you understand what I'm asking? 6 A If you mean primarily there are other 7 objectives, then I agree. This is one of the reason I put 8 on these type of trades. I don't want to argue against 9 that. But I do have other reasons as well. So if one of 10 the leg rejected, as talked before, you have a high 11 potential of making a lot more money. And so yes, the 12 answer to your question is yes. 13 BY MR. HOPKIN: 14 Q Is it fair to say, then, that these transactions 15 were almost a sure thing? At a minimum you would make at 16 least a little bit of money, but potentially you could have 17 a big pay-off? 18 MR. ESTES: Object to form. 19 THE WITNESS: It's not a sure thing. Looking 20 back, say in July, it covers cost or covers charges. But 21 before I put on those trades, I don't look at that way. I 22 look at you have the potential of making money and you have 23 a potential of losing money. It's like today if you want 24 trades put on for tomorrow, are you kind of certain it's 25 going to make money and the transmission loss credit come 124 1 out tomorrow will be higher than the total charges? I have 2 no way to know. 3 MR. TABACKMAN: I think we've exhausted this 4 subject. 5 MR. ESTES: I know you've exhausted me. 6 MR. HOPKIN: I didn't think that was possible. 7 MR. ESTES: Oh, yeah. 8 BY MR. TABACKMAN: 9 Q I think these are -- when you communicate with 10 either -- through your business, do you use e-mail? 11 A Yes. 12 Q And what e-mail program do you use? 13 A Outlook. 14 Q And do you retain your e-mails regarding your 15 business transactions? 16 A Yes, I do. 17 Q How about do you engage in -- do you use instant 18 messaging at all? 19 A No. 20 Q Have you -- other than talking with Mr. Estes, 21 Mr. Hill, or other attorneys with their -- connected with 22 them, have you spoken with any other individuals in an 23 effort to prepare yourself for this deposition? 24 A No. 25 Q When is the last time you spoke with Kevin 125 1 Gates, if you can recall, approximately? 2 A I think it's right before August 25th, 2010. 3 Q And August 25th is significant because? How do 4 you date that, August 25th? 5 A That's the due date for a data response to the 6 office. 7 Q Okay. Have you spoken to anyone else who has 8 indicated that they were deposed in connection with this 9 investigation? 10 A No. 11 Q Do you keep -- do you have contacts, other than 12 with Powhatan, with other traders on a regular basis? 13 A Not on a regular basis. 14 Q I should have defined "regular." More than 15 twice a week. Are there any professionals in your business 16 that you are in communication with on a 17 more-than-two-times-a-week basis? 18 A No. 19 Q Do you know anyone at a firm by the name of 20 Oceanside? 21 A I don't recall. 22 Q Do you know Robert Scavo? Have you met him? Do 23 you recall ever having a conversation with him? 24 A I didn't talk to anyone at Oceanside. 25 Q Have you talked with anyone at Twin Cities Power 126 1 regarding the matters that were the subject of the order 2 that I showed you at the beginning, these transactions? 3 A No, but I do know Twin City Power ring a bell, 4 more familiar with it. 5 Q How do they ring a bell with you? 6 A In up-to congestion trades, you have to reserve 7 transmission reservation on OASIS, and that company 8 regularly shows up on that. 9 Q How about SESCO Enterprises, S-E-S-C-O? 10 A Yeah, that one, too. 11 Q You've seen their name on OASIS? 12 A Yes. 13 Q But other than that, you have no recollection of 14 dealing with anybody from that company? 15 A No. 16 Q The way I phrased the question, yes, you agree 17 with me you have had no contact that you know of with those 18 folks? 19 A Correct. 20 MR. ESTES: Correct is better. 21 BY MR. TABACKMAN: 22 Q How about Michael Schubiger? Does that name 23 ring a bell with you? 24 A No. 25 Q How about Steven Tsingas, T-s-i-n-g-a-s, do you 127 1 know that name? 2 A No. 3 Q How about City Power Marketing? 4 A The name ring a bell. It shows up on the up-to 5 congestion, yes. 6 Q How do you keep track of the trades that you 7 engage in? Is it in a book? By computer? 8 A I have an Excel spreadsheet. Every month I have 9 one Excel file. So all the trades in Excel file. 10 Q And that goes back for how long? 11 A It goes back to day one. 12 Q When you first began trading? 13 A Correct. 14 Q Are you familiar with the term "point of 15 delivery? 16 A Yes. 17 Q And are you familiar with the term "point of 18 receipt"? 19 A Yes. 20 Q How do they match up, if at all, with the 21 term "source" and "sink" that you used before? 22 A My understanding is point of receipt is the 23 source. Point of delivery -- I don't know. Maybe I'm 24 confused a little bit here. I think point of -- 25 MR. ESTES: If you know. 128 1 THE WITNESS: I think I'm a little bit confused 2 here. 3 BY MR. TABACKMAN: 4 Q Okay. That's fine. 5 When you make a reservation on OASIS, do you 6 have to specify a source and a sink, or do you specify a 7 point of receipt and a point of delivery, if you recall? 8 A Specify point of receipt and point of delivery. 9 Q I should have probably asked you this at the 10 beginning. I take it you're not under any medication or 11 anything that keeps you from being able to testify -- that 12 the testimony you've given today is anything but your best 13 effort at being honest and truthful; is that correct? 14 A Yes, sir. 15 MR. TABACKMAN: Mr. Estes, do you have -- 16 BY MR. TABACKMAN: 17 Q Also, do you have any condition that has 18 impacted your ability to understand the questions and to 19 answer them to the best of your ability, illness of any 20 sort? 21 A No, sir. 22 MR. TABACKMAN: Do you want a few minutes? Do 23 you have any questions that you want to ask? 24 MR. ESTES: Let us take two minutes. 25 (Recess.) 129 1 MR. ESTES: We have no questions at this time. 2 MR. HOPKIN: I just want to say on the record, 3 we advise you under 1b.18 that if you feel at any point 4 during the investigation there is anything you would like 5 to bring to our attention, documents or any kind of 6 submission you would like to make, we would invite you to 7 do that. 8 MR. ESTES: Sure. 9 MR. TABACKMAN: And we will be issuing data 10 requests for further documents, and they should be arriving 11 shortly, on some of the things we've talked about today. 12 MR. ESTES: Are we off the record? 13 MR. TABACKMAN: Yes. 14 (Whereupon, at 3:04 p.m., the deposition was 15 concluded.) 16 17 18 19 20 21 22 23 24 25 130 1 I HEREBY CERTIFY that I have read this transcript of my 2 deposition and that this transcript accurately states the 3 testimony given by me, with the changes or corrections, if 4 any, as noted. 5 6 7 X 8 9 10 11 Subscribed and sworn to before me this day of 12 , 20 . 13 14 15 16 X 17 Notary Public 18 19 20 21 My commission expires: . 22 23 24 25 131 1 C O N T E N T S 2 3 WITNESS EXAMINATION 4 HOULIAN CHEN 5 by Mr. Tabackman, Mr. Hopkin 4 6 7 8 9 10 11 E X H I B I T S 12 EXHIBIT NUMBER IDENTIFIED 13 Exhibit Chen 1 4 14 Exhibit Chen 2 97 15 16 17 18 19 20 21 22 23 24 25