United States: Energy Market Manipulation Remains A Hot Issue At FERC

Last Updated: March 26 2019
Article by Jonathan G. Cedarbaum, H. David Gold and Nathaniel Custer

This is the eighth issue of WilmerHale's 10-in-10 Hot Topics in Energy Series. Over the course of 10 weeks, our attorneys will share insights on current and emerging issues affecting the US energy sector. Attorneys from across various practice groups at the firm will offer their take on issues ranging from congressional investigations, to the impact of key regulatory reforms, to emerging trends in domestic litigation and international arbitration.


Since the passage of the Energy Policy Act of 2005, fraud and market manipulation have been top enforcement priorities of the Federal Energy Regulatory Commission (FERC or the Commission). FERC's most recent annual report on enforcement shows that, in fiscal year 2018, FERC opened some 16 investigations into market manipulation (out of 24 total) and recovered almost $150 million in civil penalties and disgorgement of profits, much of which was from market manipulation cases.

Recent case law, meanwhile, indicates that courts interpret FERC's authority in this sphere permissively. The courts, for example, have sided with FERC in allowing considerable time to bring enforcement actions in market manipulation cases, notwithstanding statute of limitations defenses raised by the regulated entities subject to enforcement.

Energy companies and other businesses subject to FERC's enforcement authority should continue to monitor developments in this area and make sure that their compliance programs are up to date.

How FERC Investigates

FERC identifies potential instances of market manipulation through its own monitoring, self-reporting, tips from regulated entities, and referrals from market organizations or other federal or state agencies. If an investigation reveals a violation "of sufficient seriousness," FERC staff will seek authorization from the Commission to enter settlement negotiations with the alleged violator.1 If the parties cannot settle the violation, FERC staff must again seek authorization from the Commission to bring an enforcement action.

When FERC takes enforcement action for market manipulation, it issues an "Order to Show Cause" that proposes a penalty and calls for the alleged violator to show cause why the penalty should not be imposed. The alleged violator then has two options:

(1) It can elect to have an evidentiary hearing before a FERC administrative law judge (ALJ).2 If, at the end of the hearing, FERC issues an order assessing a penalty, the alleged violator can seek judicial review in a court of appeals. Based on a review of the record, the appeals court may affirm or modify the order, set it aside, or remand the case to FERC for further action.

(2) It can elect to have FERC "promptly" assess the penalty.3 If the penalty is not paid within 60 days, FERC may bring an action in federal district court for an order affirming the assessment of the penalty, in which case the court determines, based on de novo review, whether the penalty should be enforced, modified, or set aside. In other words, the alleged violator is effectively electing to litigate the merits of the penalty in district court. As with other district court litigation, a party may appeal an adverse decision to the appropriate court of appeals.

FERC's most recent five-year strategic plan, released in September 2018, highlights the Commission's continued efforts to detect and bring enforcement cases against energy market manipulation. One of the plan's many objectives is to "increase compliance with FERC rules; detect and deter market manipulation." That objective is supported by two "core functions," one of which is "identifying and conducting investigations of potential violations."

Annual Report on Enforcement

FERC's Office of Enforcement (OE) issued its 12th annual report on enforcement on November 15, 2018. Key statistics highlighted in the report include:

  • New Investigations. In FY 2018, OE opened 16 new investigations involving potential market manipulation. As the chart below demonstrates, that is the most for any year in the past decade, during which time more than half of OE's investigations have involved market manipulation.
  • Settlements. During FY 2018, OE recovered $83 million in civil penalties and disgorgement of over $66 million in unjust profits through negotiated settlements. As the chart below demonstrates, that is the third-highest recovery, in each category, in the past decade. As in many prior years, the lion's share of money recovered, in both penalties and disgorgement, was attributable to the settlement of market manipulation cases.

The report also highlights the importance of establishing and maintaining a strong compliance program, including self-reporting policies. The existence of an effective compliance program is an important consideration in FERC decisions to enter into settlement agreements, as well as to reduce significantly proposed penalties from the amount that otherwise could be assessed under the FERC Penalty Guidelines. Those guidelines also allow for mitigated penalties for self-reported violations.

Electing the District Court Path: Recent Cases Interpreting the Statute of Limitations

Two recent market manipulation cases have tested the bounds of the limitations period for FERC enforcement actions under the Federal Power Act. The decisions in those cases affirm that FERC has significant leeway as to when it brings an enforcement action.

In FERC v. Powhatan Energy Fund, LLC,4 the defendants elected to proceed in federal district court rather than before a FERC ALJ. FERC issued a penalty order on May 19, 2015, which the defendants did not pay. FERC filed a complaint on July 31, 2015. The defendants then argued that the limitations period had run on FERC's claims. While the parties agreed that the applicable limitations period is five years, they disagreed as to when that period began. The defendants argued that FERC's claims had accrued when the alleged violations occurred (from June 1, 2010, to August 3, 2010) and that, therefore, all but four days of alleged violations were time-barred. The court disagreed and sided with FERC, holding that the claims had accrued only when the defendants failed to pay the penalty within 60 days of FERC's penalty order. The court acknowledged, however, that the case presented "substantial ground for difference of opinion" and invited the defendants to bring an interlocutory appeal, which they did.5 Several trade groups have submitted an amicus brief, taking the defendants-appellants' side, and FERC filed its response brief just this week. A decision from the court of appeals can be expected by the end of the year.

As in Powhatan, the defendants in FERC v. Silkman6 chose to contest FERC's penalty assessment in district court. FERC issued a penalty order on August 29, 2013, and the defendants did not pay. FERC then filed a petition in district court on December 2, 2013, to enforce its penalty order. (The case was stayed for several years, pending resolution of several related matters.7) The defendants argued that the statute of limitations barred FERC's claims. As in Powhatan, the court held that FERC's claims had not accrued when the violations occurred. Instead, the court held that the claims had accrued when FERC assessed the penalty, meaning that FERC's enforcement action in the district court was not time-barred.

CONCLUSION

FERC is continuing to aggressively investigate and bring enforcement action against companies that engage in energy market manipulation, in investigations and proceedings that mirror Commodity Futures Trading Commission (CFTC) action on financial market manipulation in the energy area. (See WilmerHale's alert on related enforcement by the CFTC.)

As the recent Powhatan and Silkman decisions indicate, the body of case law defining FERC's enforcement authority continues to develop. Regulated companies should be aware that the statute of limitations in market manipulation cases will likely be read permissively. A strong internal compliance program, coupled with self-reporting in appropriate instances, can help reduce risk.

Footnotes

  1. Federal Energy Regulatory Commission, Strategic Plan, FY 2018-2022, at 7 (Sept. 2018).
  2. 16 U.S.C. § 823b(d)(2)(A)–(B).
  3. 16 U.S.C. § 823b(d)(3)(A)–(B).
  4. Civil Action No. 3:15-cv-452 (E.D. Va., Sept. 24, 2018).
  5. FERC v. Powhatan Energy Fund, LLC, No. 18-2326 (4th Circuit).
  6. 1:16-cv-00205-JAW (D. Me. Jan. 4, 2019).
  7. FERC v. Electric Power Supply Ass'n, 136 S. Ct. 760, 193 L. Ed. 2d 661 (2016) (holding that FERC has jurisdiction over demand response programs); In re Lincoln Paper & Tissue, LLC, No. 15:10715, 2016 Bankr. LEXIS 3501 (U.S. Bankr. D. Me. Apr. 5, 2016) (holding that an automatic bankruptcy stay did not apply to FERC's case against Lincoln Paper, which was implicated in FERC's case against the Silkman defendants).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jonathan G. Cedarbaum
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions