Last week, the Federal Energy Regulatory Commission (FERC)
released its annual report on enforcement. The report, prepared by
FERC's Office of Enforcement, provides FY2014 statistics on the
investigative and enforcement activities conducted by its four
divisions—Investigations, Audits and Accounting, Energy
Market Oversight, and Analytics and Surveillance. The full report
is available here.
In the report, FERC confirms that its investigation and enforcement
priorities for FY2015 and the foreseeable future will continue to
focus on matters involving (1) fraud and market manipulation, (2)
serious violations of reliability standards, (3) anticompetitive
conduct, and (4) conduct that threatens the transparency of
regulated markets.
Specific statistics in the report include the following:
- FERC opened 17 investigations in FY2014, over half of which involved market manipulation;
- more than half of these 17 new investigations arose from
referrals based on conduct observed by FERC surveillance staff or
RTO/ISO Market Monitoring Units;
- nine notices of alleged violations were issued by FERC in FY2014, five of which involved alleged market manipulation (two of which have settled); and
- every settlement of an investigation in FY2014 included provisions requiring the subject to enhance compliance programs and report back to FERC on the results of those enhancements.
The report also discussed recent improvements to FERC's surveillance capabilities, including FERC's gaining access to data from the Consumer Futures Trading Commission (CFTC) Large Trader Report and FERC's ongoing efforts to determine if market manipulation contributed to the historically high natural gas and electric prices that occurred during the 2014 "polar vortex" events.
Background
Since 2007, FERC has issued annual enforcement reports that
provide insight into FERC's largely non-public investigation
work. These annual reports provide summary statistics of FERC's
entire enforcement program, as well as descriptions of significant
recent cases.
Interest in FERC's investigation and enforcement program has
increased since the passage of the Energy Policy Act of 2005 (EPAct
2005), which amended both the Federal Power Act and Natural Gas Act
to enhance FERC's authority to prohibit market manipulation and
assess significant penalties where manipulation was determined to
have occurred. FERC Chairman Cheryl LaFleur recently expressed a
continuing commitment to investigation and enforcement activities,
which are expected to receive a boost when FERC Commissioner Norman
Bay, formerly the head of FERC's Office of Enforcement,
replaces LaFleur as chairman in April 2015.
The contours of FERC's authority over market
manipulation—as well as the types of activities that
constitute fraud or manipulation—are still being defined. In
2013, the DC Circuit ruled that FERC lacks jurisdiction over
manipulation of natural gas futures contracts, and that the CFTC
instead has exclusive jurisdiction over the trading of derivatives.
However, FERC recently signaled its intention to seek legislation
to address this jurisdictional dispute and confirm FERC's
jurisdiction over these products. In addition, other investigative
subjects currently are challenging FERC enforcement actions based
on both due process issues and jurisdictional issues. For example,
FERC's jurisdiction over allegedly manipulative activity
related to retail demand response programs appears to be
questionable, given a 2014 DC Circuit decision that such programs
are outside of FERC's jurisdiction.
As another check on FERC's authority, the inspector general for
the US Department of Energy recently announced that he will
investigate FERC's enforcement program. This investigation was
prompted by requests from Sens. John Barrasso (R-Wyoming), Robert
Casey (D-Pennsylvania), and Susan Collins (R-Maine), each of whom
raised concerns about the fairness and transparency of FERC's
program.
Implications
- While the boundaries of FERC's jurisdiction remain subject to further definition, FERC has made clear that it will continue to aggressively investigate and enforce against entities that violate applicable Reliability Standards, fail to comply with mandatory tariff requirements, or engage in fraudulent or other manipulative conduct in energy markets.
- As FERC continues to take action against market manipulation, a body of case law is developing that will provide more clarity on FERC's jurisdiction and what types of activities (such as uneconomic trading) constitute "manipulation" in the energy context. Regulated entities should continue to monitor ongoing cases and incorporate new precedent into their compliance programs.
- The report confirms the importance that strong internal compliance programs, coupled with self-reporting actions, continue to play in FERC decisions to enter into settlement agreements, as well as significantly reduce proposed penalties from the amount that otherwise could be assessed under its existing policies.
WilmerHale's Energy Group actively monitors developments at FERC, CFTC, and other entities with jurisdiction over energy markets, advises regulated entities on the development and implementation of compliance programs, and represents entities in investigation and enforcement actions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.