United States: 2014 FERC Enforcement Report Emphasizes Internal Compliance Procedures, Self-Reporting, And Importance of Cooperation

Last Updated: November 26 2014
Article by Greg Kusel, Gregory K. Lawrence and Christopher J. Polito

Most Read Contributor in United States, December 2018

The Federal Energy Regulatory Commission's (FERC) Office of Enforcement (Enforcement) 2014 Report on Enforcement (Report), issued on November 20, 2014, provides an overview of and statistics regarding FERC's enforcement activities during the fiscal year 2014 within Enforcement's four divisions: Investigations, Audits and Accounting, Energy Market Oversight, and Analytics and Surveillance.  The Report provides information regarding Enforcement's non-public activities and priorities during the fiscal year 2014.  The 2014 Report emphasizes the value FERC Enforcement places on self-reporting and internal compliance procedures.

The Report first identifies Enforcement's continued priorities:

  • Fraud and market manipulation;
  • Serious violations of the Commission's reliability standards;
  • Anticompetitive conduct; and
  • Conduct that threatens the transparency of regulated markets.

According to the Report, Enforcement does not plan to change these priorities in the coming year.  The Report highlights significant matters and statistics regarding each of Enforcement's four divisions.

Division of Investigations

The Division of Investigations conducts both public and non-public investigations of possible violations of the statutes, rules and regulations administered by FERC.  The Report summarizes a number of significant matters in 2014, including FERC's settlement of an investigation of a self-reported violation of FERC's Anti-Manipulation Rule, 18 C.F.R. § 1c.1 (2014) – the first self-report of this kind to result in a FERC-approved settlement.

Direct Energy Settlement:  The self-report was filed by Direct Energy Services, LLC (Direct Energy) after its outside counsel gave a compliance training presentation to Direct Energy's traders regarding FERC's Anti-Manipulation Rule.  One of Direct Energy's traders reported concerns after recognizing similarities between the trading activities discussed in the compliance training presentation and strategies that were being used by Direct Energy traders involving unusual natural gas trading at Transco Zone 6.  At nearly the same time, Direct Energy's back-room operations recognized a problem with certain trading.  Direct Energy immediately commenced an internal investigation, which eventually led to a self-report to FERC (as highlighted in the settlement) describing unusual natural gas trading at Transco Zone 6 where large volumes of next-day gas were bought at index and sold at a lower, fixed price resulting in losses and, in turn, a lower Gas Daily index price that benefited financial positions settling at that index held by Direct Energy.  The two traders involved were terminated.  As a result, Direct Energy settled with FERC for a civil penalty of $20,000, disgorgement of $31,935, and agreed to provide at least one monitoring report to Enforcement.  The settlement indicated that Direct Energy "fully and comprehensively" cooperated.  The Report stated that Direct Energy received a relatively small civil penalty and disgorgement payments due to its self-reporting, strong compliance program (the settlement emphasizes compliance training and daily data analysis), quick action, and full cooperation with Enforcement's investigation.

Additional Settlements: FERC also approved 8 settlements amounting to almost $25 million in civil penalties, approximately $4 million plus interest in disgorgement, and $1.7 million in public safety enhancements.  These settlements involved a variety of matters, including Open Access Transmission Tariff (OATT) violations, violations of reliability standards, violations of hydro power safety regulations, violations of FERC regulations regarding filings and facility merger/consolidation authorization, violations of prohibitions on submission of inaccurate information, and violations of FERC's regulations prohibiting manipulation in natural gas and electric markets.

Self-Reports Received and Closed:  The Report summarizes the 73 self-reports received by Enforcement.  Enforcement received 73 self-reports in the reporting period.  Enforcement closed 70 self-reports in fiscal year 2014, some of which were still pending from 2009 and 2011, and it had 40 self-reports still pending.  Enforcement received self-reports regarding a number of matters.  The largest category was for Tariff/OATT violations.  Enforcement also received a number a self-reports regarding Regional Transmission Organizations and Independent System Operators (RTO/ISO) violations.  Enforcement closed only one self-report related to market manipulation, as contrasted with 21 self-reports related to Tariff/OATT violations and 12 related to RTO/ISO violations. 

As part of Enforcement's effort to promote transparency and encourage compliance, the Report lists a number of illustrative self-reports closed with no action.  The Report provides some insights into why Enforcement chose not to pursue enforcement actions in particular instances, including:

  • The conduct resulted in no or minimal harm to the market or other market participants
  • The entity took remedial measures to correct market harm
  • The entity implemented compliance measures to prevent future violations
  • The violation was unintentional
  • The entity promptly submitted a self-report
  • The entity received little or no benefit from the violation

New Investigations:  The Division of Investigations opened 17 investigations in 2014, down from 24 investigations the year prior.  The opened investigations involve multiple different types of potential violations, including: market manipulation (9 investigations); false statements to FERC or an RTO/ISO (8 investigations); tariff violations (11 investigations); and FERC accounting standards and orders (1 investigation).  RTO/ISO market monitors and the Division of Analytics and Surveillance (DAS) referrals continue to be a key referral source, as over half of FERC's new investigations opened this year came through DAS or market monitors.  In 2014, Enforcement converted no Hotline calls to preliminary investigations, although multiple 2014 calls concerned conduct in investigations that were already pending.

Closed Investigations:  Enforcement closed 7 investigations because it found no violation or did not have sufficient evidence.  The Report provides several examples of investigations to provide guidance regarding why Enforcement chose to close these matters with no action:

  • The evidence did not support a violation
  • The entity took immediate remedial measures
  • The conduct was for a legitimate purpose (e.g., reliability or economic fundamentals)
  • The entity promptly submitted a self-report
  • The conduct occurred in an isolated trading period

Division of Audits and Accounting

The Division of Audits and Accounting operates FERC's audit program and administers FERC's accounting regulations.  According to the Report, the Division of Audits and Accounting completed 19 financial and operational audits.  The audits resulted in 162 recommendations for corrective action and directed refunds and recoveries totaling over $11.7 million.  These audits covered market-based rate authority and electric quarterly reports (EQRs), formula rates, transmission incentives, accounting and reporting, capacity markets and demand response, OATT provisions, allowance for funds used during construction (AFUDC), mergers and acquisitions, and nuclear decommissioning trust funds.  The Report also highlights areas where the Division of Audits and Accounting has found consistent patterns of noncompliance, including in formula rate matters, consolidations, nuclear decommissioning trust funds, AFUDC, OATT provisions, transmission and distribution, untimely filing of reports, record retention, and demand response/energy efficiency.

Division of Energy Market Oversight

The Division of Energy Market Oversight handles monitoring and oversight of wholesale natural gas and electric power markets.  It continued its roles of market monitoring, technical analysis and investigation support, outreach, forms administration and filing compliance, and rulemaking oversight.  Notably, the Division of Market Oversight reviewed nearly 9,000 EQR submittals from over 1,900 individual respondents.  The division also supported FERC's ongoing gas-electric coordination initiative which led to FERC's ongoing Notice of Proposed Rulemaking in Docket No. RM14-2-000, with comments due by November 28, 2014.

Division of Analytics and Surveillance

DAS conducts surveillance and analyzes market data to detect potential market manipulation, anticompetitive conduct, and other anomalous trading activities in the energy markets.  In 2014, FERC continued to enhance its ability to conduct surveillance of gas and electric markets and to analyze individual market participant behavior by gaining access to the Commodity Futures Trading Commission's Large Trader Report data.  This data allows the division to evaluate market participants' financial incentives – e.g., holding a financial position – as it looks for wrongdoing.  DAS uses electronic tags (e-Tags) from Order No. 771, Large Trader Reports, and data from RTOs/ISOs under Order No. 760 to improve its surveillance capabilities.  DAS also uses screens extensively to detect wrongdoing.  DAS worked on more than 30 investigations this year.

You can view the full Report on FERC's website at: http://ferc.gov/legal/staff-reports/2014/11-20-14-enforcement.pdf

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.

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