Overview
On November 15, 2018, FERC Enforcement staff released the 2018 Report on Enforcement. The report shows that the agency continues to use its existing procedures to vigorously pursue its mission despite some public criticism and losses in court on certain legal positions that call into question the efficacy of aspects of the agency's pre-litigation process.[1]
The Enforcement Report underscores the need for rigorous compliance programs, along with prompt and thorough assessment of compliance issues when they arise. It also hints at potential new trends, including a stronger role of ISO/RTO market monitors in FERC's enforcement process and increased attention to activity outside the electricity and natural gas markets. Overall, the Office of Enforcement opened 24 new investigations, closed 23 pending investigations with no action, and completed 14 audits that led to 209 recommendations for corrective action.[2]
Settlements of Manipulation and Other Claims
In fiscal year 2018, which runs from the third quarter 2017 to the third quarter 2018, Enforcement staff settled two federal district court matters and a myriad of other matters prior to commencement of litigation. Violations of the Anti-Manipulation Rule concerned trading at a loss or without risk in one product to effect favorable market pricing in another. They included alleged loss-generating trading of physical power with the intent to benefit financial swap positions and a trading company's transactions in an RTO's virtual supply products, allegedly with little or no risk, for the purpose of affecting power prices that would benefit the company’s position in the RTO's congestion products. Other settlements focused on alleged violations of the Market Behavior Rule and RTO/ISO tariffs arising from the submission of inaccurate information to FERC or an RTO/ISO. Examples included (i) alleged submissions of incorrect cost-based offers to PJM; (ii) alleged failure to timely respond to ISO dispatch instructions due to insufficient fuel and alleged failure to timely update supply offers to notify the ISO of the potential inability to meet dispatch instructions; and (iii) alleged unwarranted collection of ISO capacity payments.
Market Monitors: An Integral Part of FERC's Surveillance Mechanism
The Enforcement Report highlights the reliance of the Division of Investigations (DOI) on referrals by ISO/RTO market monitors. The majority of new investigations opened by the Office of Enforcement in fiscal year 2018 arose from referrals by ISO/RTO market monitors.[3] This fact aligns with the observation that DOI's docket of investigations appears tilted towards electric work. The following are examples of referrals from market monitors that both they and FERC staff found appropriate for investigation. Although FERC staff closed these investigations without initiating an enforcement action, they show the type of activity that can spawn costly investigations.
- Reliability and Market Manipulation. An ISO/RTO market monitor referred conduct by a private natural gas-based electric power generating company to the Office of Enforcement that concerned bids placed for certain units during high-load periods in 2016. The referral stated that the company potentially violated the ISO/RTO's rules governing the obligations of installed capacity suppliers when it failed to comply with its capacity resource obligations on three separate dates and may have failed to provide complete and accurate information to the ISO/RTO with respect to its ability to meet its capacity supply obligations. Staff closed the investigation upon finding no evidence to indicate that the company was engaged in manipulative conduct or otherwise violated the capacity rules.[4]
- Failure to Respond to Dispatch. Following a referral from a market monitor, staff investigated whether a natural gas generator committed a tariff violation, or any related violations, when it failed to come online in response to a manual dispatch instruction from the ISO. The company contacted the ISO immediately upon receipt of the instruction. It indicated a willingness and ability to come online at that time. But it noted if it were dispatched then, possible fuel procurement problems related to a recent outage at the facility could impair the unit’s ability to dispatch over the next few days when demand would likely be higher. In response, the ISO cancelled the dispatch and brought a different generator online. Staff investigated the events surrounding the company's claims regarding potential fuel procurement problems, and found no evidence indicating the company intended to mislead or defraud the ISO. In light of the lack of market harm and the lack of evidence indicating ill intent, staff closed the investigation without further action.[5]
These types of referrals underscore the need for companies participating in organized markets to have internal procedures for interacting with and responding to inquiries by market monitors and the ISOs/RTOs. Clear and accurate responses at the outset could save market participants from time consuming and costly investigations, or even a significant penalty. Haphazard or off-the-cuff responses to market monitor inquiries can be detrimental and costly. As noted in previous Steptoe alerts, contemporaneous and careful documentation of the purposes and strategies for trading or other activity that might invite scrutiny can contribute to strong compliance and demonstrate care and good faith.
Self-reporting of Potential Violations Remains a Significant Feature of FERC Enforcement
In fiscal year 2018, staff received 137 new self-reports from a variety of market participants and closed 136 self-reports without further action. During the past five fiscal years, Enforcement has received approximately 498 self-reports. "The vast majority" of those self-reports were concluded without further enforcement action. Reasons for closing self-reports included that there was no material harm (or the reporting companies already had agreed to remedy any harms) and the companies had taken appropriate corrective measures (including appropriate curative filings), both to remedy the violation and to avoid future violations through enhancements to their compliance programs.[6]
This record indicates the prudence of early evaluation of whether to self-report when compliance problems arise. Counsel should be consulted in making that assessment. It requires careful consideration of the need, the pros and cons, and the necessary follow up if a self-report is made.
The following are examples of self-reports that were closed without enforcement action.
- ISO/RTO Reactive Power Payments Violation. An ISO/RTO self-reported three instances of making incorrect payments for reactive power to transmission operators. In two instances, it had paid less than the Commission-authorized revenue requirement, and in one instance, it had paid more. In all instances, it made adjustments to the extent possible under its period for billing adjustments. The ISO/RTO surveyed all transmission operators to ensure that it was paying the Commission-authorized revenue requirement going forward, and verified that no other incorrect payments existed.
- Standards of Conduct Violation. A public utility reported that it had violated 18 C.F.R. § 358.2(c), which prohibits certain personnel from disclosing non-public transmission function information to the transmission provider’s marketing function employees. Inadvertently, due to a software error, the utility had made certain transmission function information stored on intranet websites available to all of its employees. Upon learning of the situation, the company denied access to the intranet websites to all marketing function employees, and reviewed other document management systems at the company for similar problems. The company's investigation determined that the violations had occurred for more than six years and that the harm was unknown. Staff explained that it closed the self-report because the company reported the violations promptly after discovery, investigated the matter thoroughly, took substantial steps to remedy the violation, and acted to ensure it would not recur.
- Shipper Must Have Title Violations. An oil and gas exploration and production (E&P) company self-reported that it had violated the Commission's shipper-must-have-title policy by transporting natural gas owned by certain of its affiliates on interstate pipelines using capacity reserved by the E&P Company. After discovering the issue, the E&P company retained outside counsel to conduct an investigation of any other potential violations. The company subsequently reported a limited number of additional violations. The company took prompt corrective actions to end the violations and prevent any recurrence, including preparing a regulatory compliance manual and providing compliance training to employees. Staff explained that it closed the matter with no further action based on these prompt mitigation measures and because the violations were inadvertent, limited in extent and duration, and caused no harm.
Enforcement Reaches Beyond Electricity and Natural Gas Markets
The Enforcement Report leaves no doubt that investigating and prosecuting suspected energy market manipulation remains a primary focus of DOI,[7] but it also includes examples of investigations of other types of violative conduct.
- Hydropower Licensing. Acting on a referral from the Office of Energy Projects, Enforcement staff opened an investigation into the longstanding operation of a hydropower project without a license or an exemption, as required by the Federal Power Act (FPA). When staff contacted the project owner about the violation, he stated that he would no longer generate without a license. He then sold the unit to a third party that committed not to generate electricity unless and until it is licensed. In the meantime, the project has been disconnected from the grid and its power purchase agreement with the local utility has been terminated. Because the entity that engaged in the unlicensed generation no longer owns the project and the project is not currently generating, Enforcement staff closed the investigation.[8]
- Hydropower Compliance. Also following a referral from the Office of Energy Projects, Enforcement staff opened an investigation into Boyce Hydro Power LLC's significant violations of the FPA, Commission regulations, and license terms and conditions at the Edenville Hydroelectric Project. Of particular concern was Boyce's failure to comply with the Commission's dam safety requirements, making the dam potentially vulnerable to failure during a flood. After lengthy proceedings, including issuance of a compliance order and a cease generation order, the Commission issued an order revoking Boyce's license on September 10, 2018.[9]
Notably, the Division of Audits and Accounting evaluated the compliance of three oil pipeline companies this year, compared to only one in each of the last two years. Areas of concerns included improper accounting for various items and improper prorationing of nominations.[10]
With one of the premier energy practices in the country, Steptoe is able to design creative solutions to complex matters in many areas of the energy industry. Steptoe's FERC regulatory and enforcement practitioners frequently counsel market participants in developing compliance plans, documenting trading purposes, submitting self-reports, and responding to enforcement and surveillance inquiries. If you have any questions about the Enforcement Report, or any part of your compliance program, Steptoe's enforcement practice is available.
[1] Steptoe's Wesley Heath recently analyzed this criticism and the court decisions in a Utility Dive article, arguing that FERC may wish to consider changing its enforcement process.
[2] Enforcement Report at 7.
[3] Id. at 25.
[4] Id. at 32.
[5] Id. at 33.
[6] Id. at 17.
[7] Of the 24 investigations staff opened in fiscal year 2018, 16 involved potential market manipulation. Id. at 25.
[8] Id. at 32.
[9] Id. at 35.
[10] Id. at 47-48.