May 7, 2021

Volume XI, Number 127


May 07, 2021

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May 05, 2021

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FERC Staff’s White Paper on Manipulation Provides Insights on Commission’s Developing Manipulation Law


On November 17, 2016, the Office of Enforcement (“FERC Staff”) of the Federal Energy Regulatory Commission (the “Commission” or “FERC”) issued a White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005 (“Manipulation White Paper”) to “provide insight” on its ten years of experience investigating potentially manipulative conduct under the Anti-Manipulation Rule.1  During this period, FERC Staff has investigated over 100 matters, settled 24 proceedings resulting from those investigations, and pursued two matters in administrative proceedings.  In addition, FERC currently is litigating six penalty assessment orders in federal district courts.2  According to FERC Staff, through these investigations and proceedings, the Commission and the courts have “developed a body of law that, while still in its early stages and continuing to evolve, identifies and provides notice on specific types of conduct that can constitute market manipulation in the energy markets and factors that are indicative of such conduct.”3  

In its Manipulation White Paper, FERC Staff largely restates its litigation positions – many of which currently are being challenged – and seeks to provide notice of: (1) factors that typically indicate manipulative conduct; (2) specific types of conduct that often constitute manipulation; (3) mitigating and aggravating factors affecting penalty amounts for manipulation violations; and (4) the types of investigations that it has closed without further action.

FERC Staff first provides the following non-exhaustive list of key elements emerging from FERC’s developing manipulation law:

  • Fraud is a question of fact;

  • Fraud includes open-market transactions (g., transactions executed with manipulative intent on exchanges or public trading platforms);

  • Fraud is not limited to violations of a tariff or other express rule;

  • A manipulation violation does not require a showing that the manipulative conduct resulted in artificial prices;

  • The Anti-Manipulation Rule includes attempted fraud;

  • Manipulative intent, even where it is combined with a legitimate purpose, establishes the scienter element of the Anti-Manipulation Rule;

  • Pursuant to its “in connection with” jurisdiction, the Commission has jurisdiction over conduct that affects jurisdictional transactions, including the “rates, terms, and conditions of service in a market”; and

  • Individuals constitute “entities” and, as such, are subject to the Anti-Manipulation Rule.4

Indicia of Fraud

Identifying what it characterizes as typical indicia of fraud, FERC Staff explains that the distinction between fraudulent and lawful market behavior can hinge on the underlying purpose of the behavior.5  For example, in three orders relating to Up-To Congestion (“UTC”) trades, the Commission compared the purpose of UTC trading against the purpose behind respondents’ UTC trades and determined that their trades “were neither consistent with how the UTC product historically traded nor aligned with the arbitrage purpose of those trades.”6  The Manipulation White Paper does not identify where market participants should look to understand what Staff will view as “the purpose” of particular products like UTCs.  Staff emphasizes, however, that the purpose driving a market participant’s behavior in the market is a “critical factor” in a manipulation determination.  FERC Staff recommends, therefore, that companies require employees to document the purpose behind conduct likely to raise red flags.7  In the right circumstances, market participants should also consider documenting their understanding of the purpose of the relevant products and why their trading aligns with those purposes.

Uneconomic market conduct is another of Staff’s indicia of manipulation and occurs where “an entity knowingly engages in behavior that loses money . . . or is indifferent to whether it loses money – but engages in the behavior anyway to serve an ulterior purpose.”8  Profitability is a relevant factor in a manipulation determination, but, standing alone, it is “neither necessary nor dispositive.”9 To avoid fraudulent conduct, FERC Staff recommends that compliance units should monitor whether traders are incurring persistent losses in a price-setting product to benefit a related position.10  Staff, however, does not provide guidance about what it would consider to be “persistent losses.”

FERC Staff also reiterates the Commission’s repeated emphasis that trading should be guided by supply and demand fundamentals, rather than “ancillary considerations that bear no relation to underlying market fundamentals.”11  It further explains that arbitrage, for example “should be aimed at anticipated prices of underlying products based on trading acumen and market fundamentals, not at market rules that can be exploited to profit with little to no risk.”12

Types of Market Manipulation

FERC Staff provides guidance on three types of conduct that it says constitute manipulation, but notes that companies can “consult” with FERC Staff before engaging in conduct that could be construed as manipulative.  Staff acknowledges that it cannot provide formal, binding decisions, but it does state that it can informally express its views, including with regard to analysis of potentially relevant factors.13  It is unclear whether non-binding guidance from FERC Staff has much practical value.  First, Staff did not indicate how quickly it would provide guidance.  The timeline within which trading decisions must be made before they are moot typically is very brief.  Second, the informal opinion of one or two Staff members is not binding on the Office of Enforcement or the Commission.  Third, it may be difficult to ensure in tight time constraints that you have provided Staff with all of the material facts, many of which are not available to market participants (e.g., ISO dispatch algorithms) related to a proposed strategy.  Nevertheless, one potential benefit to seeking guidance from Staff is that disclosure makes it difficult for Staff to claim later that a market participant was acting with fraudulent intent.

The first example of a manipulative scheme provided by Staff involves “cross-market” manipulation—trading in one market intentionally to move prices in a direction that will benefit positions in a related market.  Staff explains that in past cross-market manipulation cases, companies’ conduct exhibited the following warning signs:  (1) holding large market shares in price-setting instruments; (2) physically trading in a direction that benefited positions in a related market; (3) holding benefiting positions with exposure to related physical trading; (4) entering into large volumes of physical trades without amassing a large net position; and (5) incurring consistent losses, or exhibiting indifference to price, in physical trading.14

Staff’s second example, gaming market rules, constitutes “effectively riskless transactions executed for the purpose of receiving a collateral benefit; conduct that is inconsistent or interferes with a market design function; and conduct that takes unfair advantage of market rules to the detriment of other market participants and market efficiency.”15  In the UTC enforcement actions previously discussed, the Commission concluded that UTC transactions were deceptive because they created the false appearance of being placed for arbitraging price spreads – the asserted purpose of PJM’s market design – but the “sole or primary purpose” of the respondents in those actions was instead to collect credit payments that PJM provided to transmission customers.16

Staff’s third and final example discusses misrepresentations or omissions of material fact that fall within the conduct prohibited by the Anti-Manipulation Rule.  In Maxim Power, for example, the Commission found that the company made misrepresentations through its energy offers and statements to the independent market monitor that its generator ran on high-priced fuel – entitling it to larger payments from the independent system operator– when it was actually burning cheaper natural gas.17  These violations also fell within the ambit of 18 C.F.R. 35.41(b), the Commission’s candor rule.

Mitigating and Aggravating Factors Relevant to Market Manipulation

FERC Staff explains that the Commission has articulated a variety of mitigating and aggravating factors that affect penalties for manipulation violations, and that “are relevant to the Commission’s statutory mandate to consider the seriousness of violations and efforts to remedy them.”18  These factors include a company’s:  (1) commitment to compliance; (2) self-reporting; (3) history of prior violations; (4) involvement of senior-level employees; (5) obstructionist conduct; and (6) acceptance of responsibility.

FERC Staff claims that “[a]chieving compliance, not assessing penalties, is the central goal of the Commission’s enforcement efforts.”19  As a result, it states, companies may receive up to a three-point credit for effective compliance programs, which reduces their culpability score for purposes of a penalty calculation.  FERC Staff emphasizes that, standing alone, this compliance credit can reduce a penalty by 60 percent and, combined with other factors, potentially eliminate civil penalties.  For example, the Commission found in Direct Energy that a company engaged in cross-market manipulation, but assessed a civil penalty of only $20,000 to reflect the company’s “robust” compliance program.20  Staff touts Direct Energy’s compliance program as a model for others to emulate.  FERC Staff explains that Direct Energy independently detected the violation through two means and took reasonable steps to self-report the trading, investigate, and discipline the traders involved. 

FERC Staff cautions that while adequate compliance can lead to a reduced penalty, failure to comply adequately can increase a penalty and even justify a departure above the applicable Penalty Guidelines range.  To ensure effective compliance programs, FERC Staff recommends:  (1) creating standards and procedures to avoid and detect violations; (2) responding appropriately after a violation has occurred; and (3) regularly evaluating a compliance program’s effectiveness.21  Staff describes how, in Direct Energy, the company’s compliance entailed “more than just a written document” – instead, it “was a program, supported and followed at all levels of the organization, that worked in practice to detect, cease, and respond to violations quickly and effectively.”22

FERC Staff stresses the importance of prompt self-reporting, but does not define what constitutes promptness.  It explains that the Commission “place[s] great importance on self-reporting” because of the “significant value [it adds] to overall industry compliance.”23  The Commission provides a two-point self-reporting credit for disclosures that are made before the immediate threat of disclosure or government investigation or within a reasonably prompt time frame after discovering the violation.  Again citing the Direct Energy case as a model, FERC Staff describes how the company verbally reported the conduct “very soon after” discovering it, proposed to FERC Staff that the company conduct an internal investigation, submitted a written self-report, regularly updated FERC Staff on its internal investigation, met with FERC Staff to describe the results of the internal investigation, and submitted another written self-report that reflected the results of its completed investigation.24

Cautioning against a delay in self-reporting, FERC Staff advises that prompt self-reports enable FERC Staff to guide reporting entities on potential factors to consider in internal investigations.  Conversely, delaying a self-report for too long risks forfeiting the full self-reporting credit.  In addition, Staff asserts that submitting a self-report does not mean that FERC Staff necessarily will initiate an investigation, nor does it constitute an admission of a violation.25 

On the topic of cooperation, which can result in a one-point credit, FERC Staff advises that cooperation must be “timely and thorough” – commencing once a company is notified about an investigation and disclosing information that enables the Commission to identify the nature and extent of the violation as well as the responsible individuals.  FERC Staff also describes how, in City Power, the Commission denied credit for cooperation and instead increased the company’s penalty because the company made “very serious” and “obstructionist” intentional misrepresentations to FERC Staff about whether relevant instant messages existed that “waste[d] valuable time and resources.”26

Staff Decisions to Close Investigations

Finally, FERC Staff explains that its Annual Reports on Enforcement, including its recently-released 2016 Report on Enforcement,27 provide “illustrative examples” of manipulation cases that were closed without further action, as well as the reasons for closing them.  Staff cites, for example, to one closed investigation of potential cross-market manipulation where the trader provided a “credible, legitimate explanation” for his decision to enter into virtual trades.  In support of his explanation, the company produced an email that the trader sent to his supervisor explaining that his virtual trades may have unexpectedly affected the company’s financial transmission right position and that he would stop trading at the relevant nodes.  FERC Staff explains that it closed the investigation based upon: (1) a lack of sufficient evidence of manipulative intent; (2) the short duration of the trading; (3) the fact that the independent system operator could possibly recover the gains realized through the trades; and (4) the company’s decision to implement additional protective measures to avoid further issues with virtual trading.28

1   Office of Enforcement White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005, Nov. 17, 2016), available here.  FERC Staff issued its Manipulation White Paper in conjunction with its Office of Enforcement White Paper on Effective Energy Trading Compliance Practices (Nov. 17, 2016) (“Compliance White Paper”).   In January 2006 and pursuant to EPAct 2005, the Commission promulgated the Anti-Manipulation Rule in Order No. 670, which prohibits an entity from “(1) using a fraudulent device, scheme, or artifice, making a material misrepresentation or omission, or engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity; (2) with the requisite scienter; (3) in connection with the purchase or sale of natural gas or electric energy (or the transportation or transmission of such) subject to the jurisdiction of the Commission.”  Prohibition of Energy Market Manipulation, Order No. 670, FERC Stats. & Regs. ¶ 31,202, reh’g denied, 114 FERC ¶ 61,300 at P 49 (2006); see also 18 C.F.R. Part 1c (2016).

2   Manipulation White Paper at 3-4.  Appendix A to the Manipulation White Paper provides a complete list of these proceedings.

3   Id. at 4.

4   Id. at 8-10.

5   FERC Staff cites to, among other FERC decisions and federal cases, a federal case involving the Securities and Exchange Commission and holding that conduct may be manipulative “solely because of the actor’s purpose.”  Markowski v. SEC, 274 F.3d 525, 529 (D.C. Cir. 2001).

6   Coaltrain Energy L.P., 155 FERC ¶ 61,204 at PP 166,191 (2016); City Power Mktg., LLC, 152 FERC ¶ 61,012 at P 103 (2015); Houlian Chen, 151 FERC ¶ 61,179 at P 80 (2015). 

7   This recommendation is discussed in more detail in our Clients & Friends memo analyzing the Compliance White Paper.    

8   Manipulation White Paper at 13.

9   Id. at 13 (quoting Barclays Bank PLC, 144 FERC ¶ 61,041 at P 43 (2013)).

10Id. at 14.

11Id. at 15.

12Id. at 15.

13Id. at 17-18, n. 60.

14Id. at 19.

15Id. at 25-26.

16Id. at 28.

17 Id. at 31 (citing Maxim Power Corp., 151 FERC ¶ 61,094 at PP 3-4 (2015)).

18Id. at 33.  See, e.g., Enforcement of Statutes, Orders, Rules, and Regulations, 113 FERC ¶ 61,068 at PP 21-27 (2005) (2005 Policy Statement on Enforcement); Enforcement of Statutes, Regulations, and Orders, 123 FERC ¶ 61,156 at PP 55-71 (2008) (Revised Policy Statement on Enforcement); Compliance with Statutes, Regulations, and Orders, 125 FERC ¶ 61,058 at PP13-21 (2008) (Policy Statement on Compliance); Enforcement of Statutes, Orders, Rules, and Regulations, 132 FERC ¶ 61,216 (2010) (Revised Policy Statement on Penalty Guidelines). 

19 Manipulation White Paper at 33 (quoting FERC Penalty Guidelines at § 1A1.1.2)).

20Id. at 34 (citing Direct Energy Serv., Inc., 148 FERC ¶ 61,114 (2014)).

21Id. at 34-35.

22Id. at 35.  FERC Staff provides several examples of ineffective compliance programs, including in Deutsche Bank, where the company’s compliance handbook described the type of trading at issue but management failed to review the trading.  Deutsche Bank Energy Trading, LLC, 142 FERC ¶ 61,056 at P 25 (2013).

23Id. at 35 (quoting Revised Policy Statement on Penalty Guidelines, 132 FERC ¶ 61,216 at P 141).

24Id. at 36.

25Id. at 36-37.

26Id. at 37-38, n. 174 (citing City Power, 152 FERC ¶ 61,012 at PP 241-47)).

27See FERC Office of Enforcement, 2016 Report on Enforcement, Docket No. AD07-13-010, at 31-32 (2016), available here.

28 Manipulation White Paper at 39-40.

© Copyright 2021 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume VI, Number 333



About this Author

George D. Billinson, Cadwalader, electric markets lawyer, natural gas utilities attorney

With more than 30 years of experience, George D. Billinson focuses his practice on complex energy and commodities litigation, as well as regulatory and antitrust matters. George represents and counsels electric and natural gas utilities, natural gas producers, and gas and power marketers in a range of U.S. Federal Energy Regulatory Commission (FERC) and Commodity Futures Trading Commission (CFTC) compliance and enforcement matters, including investigations, audits, and litigation. He also performs compliance assessments and helps clients develop and implement compliance...

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Mark Haskell, Cadwallader Law Firm, Energy and Commodities Attorney

Mark R. Haskell advises clients on matters related to the U.S. Federal Energy Regulatory Commission (FERC), including FERC investigations, litigation and related court appeals, and Commodity Futures Trading Commission (CFTC) investigations affecting the energy industry. Mark represents natural gas and power marketers, local distribution companies, end users, producers, industrial consumers, and liquefied natural gas (LNG) and shale gas developers in energy regulatory matters.

As a natural gas litigator, Mark handles...

Thomas Reid Millar, Cadwalader, regulatory proceedings Attorney, FERC electric matters lawyer

Tom Millar focuses his practice on representing energy and commodity companies and financial institutions in a variety of investigatory, transactional and regulatory matters. He regularly assists clients in regulatory proceedings before FERC on electric matters, including general rulemakings, ISO/RTO proceedings, and Federal Power Act Section 203 and 205 proceedings.

Tom’s energy and commodity clients value the insight his litigation background offers in regulatory and investigatory matters. Among his most significant and high-profile...

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Mary Treanor Lawyer Ballard Spahr

Mary Treanor focuses her practice on representing energy and commodity companies, financial institutions and trade associations in a variety of regulatory, compliance, litigation, and transactional matters. Her work includes representing clients in enforcement matters before the Commodity Futures Trading Commission, Federal Energy Regulatory Commission and Chicago Mercantile Exchange, as well as advising on regulatory matters and assisting with transactions.

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