2016 FERC Enforcement Report: Trends Continue, with More Court Fights
The report shows a continued focus on manipulative conduct in energy markets as well as serious mandatory reliability standards violations, but also shows FERC’s increasing caseload in federal court.
On November 17, the Federal Energy Regulatory Commission (FERC) Office of Enforcement (OE) issued its 2016 Report on Enforcement. The report provides a review of OE’s activities during fiscal year 2016, revealing likely areas of focus for FERC enforcement in the coming year.
The report indicates OE’s continued focus on the same areas of market and operational risk that have traditionally captured its attention, although the targets of those investigations are contesting OE’s claims in the court system. The report also indicates that the vast majority of alleged violations that come to OE’s attention are addressed informally through corrective actions voluntarily implemented by the subject of the investigation, without the need for a formal settlement.
This LawFlash provides an overview of the 2016 Report on Enforcement and accompanying FERC staff white papers that provide insights into OE’s views on emerging trends.
Division of Investigations Overview
According to the report, OE’s priorities were the same as in previous years and largely focused on four primary areas:
Fraud and market manipulation
Conduct that threatens transparency in regulated markets
Serious violations of mandatory reliability standards
This indicates OE’s intent to “focus its efforts on keeping markets transparent and competitive and helping to ensure the reliability of the bulk power system.”
The report shows that the Division of Investigations opened 17 new investigations in 2016 and closed 11 pending investigations with either no action or through a Commission-approved settlement. The Division of Investigations also received nearly 200 hotline inquiries requesting FERC review of alleged violations. OE received 110 self-reports from regulated entities and took adverse action only in a minority of those cases, finding that most self-reporting entities had identified and implemented self-corrective actions and had caused little or no market harm.
Although FERC collected more than $17 million in civil penalties through settlements (with millions more potentially to be collected through pending investigations and court hearings), FERC’s continued willingness to permit entities to identify, report, and correct most violations provides a concrete demonstration of the benefits companies can derive from having strong compliance programs.
Several matters originating with the OE have been and remain subject to litigation. Historically, since the Energy Policy Act of 2005 provided FERC with enhanced penalty authority, OE investigations rarely resulted in litigation. Rather, the OE’s prolonged investigative process and FERC’s substantial penalty authority would often contribute to an entity’s decision to enter into a settlement that would resolve the issues. That changed in 2015, however, when several matters involving alleged violations of the Federal Power Act were brought before various federal district courts around the country. In 2016, FERC continued to litigate six matters in the federal courts involving Federal Power Act allegations, and is also litigating a challenge in the US Court of Appeals for the Fifth Circuit to civil penalties it issued involving natural gas market manipulation activity. Additionally, FERC litigated a challenge to the Commission’s jurisdiction at the district court level. The report provides additional detail concerning each of these litigated proceedings.
Division of Audits and Accounting Overview
From an audits perspective, the report notes that the Division of Audits and Accounting conducted 14 audits of oil pipeline, public utility, and natural gas companies during 2016. These efforts reflected a slight decrease from the division’s 2015 activities and led to more than 200 corrective action recommendations and to the issuance of more than $5 million in refunds. Under its audit authority, OE conducts both financial (rate) audits and performance (nonrate) audits, and these audits often extend for more than a year. As a result, the OE’s reported 2015 and 2016 numbers may not fully reveal the occasional intensity of the audit process, and the conclusion of 14 audits in a calendar year might mask the fact that a larger number of audits is actually in progress at any given moment.
The report also provides summaries of the following issues where the Division of Audits and Accounting has found that entities frequently have compliance challenges:
Failures to comply with FERC’s accounting and financial reporting regulations, resulting in incorrect formula rate calculations for electric transmission companies and natural gas pipelines
Noncompliance with open access transmission tariff regulations, including use of network service and network resources
Companies using the consolidation method of accounting for subsidiaries rather than the required equity method
Failures to file required reports with full information for nuclear decommissioning trust funds
Errors in the calculation of Allowance for Funds Used During Construction
Errors and failures to report required information to price indexes
Record retention failures, particularly when assets change hands
Division of Analytics and Surveillance
The report also states that the Division of Analytics and Surveillance, which was established in 2012, worked on more than 40 investigations in 2016. According to the report, this unit will “conduct surveillance and analyze transactional and market data to detect potential manipulation, anticompetitive behavior, and other anomalous activities in the energy markets.” The Division of Analytics and Surveillance continued to play an instrumental role in developing a Notice of Proposed Rulemaking that would impose substantial new reporting obligations on market participants within independent system operators and regional transmission organizations as well as their “connected entities.”
New White Papers on Enforcement
In a change from past practice, the Commission also released two white papers that provide insights regarding OE’s views on emerging trends related to the manipulation of FERC-jurisdictional markets, as well as the measures regulated entities can take to prevent such activities.
FERC’s “White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years after EPAct” summarizes recent Commission and federal court case law regarding FERC’s anti-manipulation doctrine and identifies factors FERC considers when deciding whether to pursue or close cases regarding allegations of manipulation. Some highlights from this white paper include a discussion of the specific types of conduct FERC has found to constitute market manipulation, as well as the mitigating and aggravating factors the Commission has considered in assessing an organization’s culpability.
FERC’s “White Paper on Effective Energy Trading Compliance Practices” provides guidance to entities regarding compliance practices that may be effective in preventing market manipulation. Some highlights from this white paper include a discussion of specific practices an organization might use to prevent and detect market manipulation and effective practices and tools for monitoring trading activities, enforcing compliance obligations, and ensuring that compliance programs remain up-to-date.