United States: FERC Enforcement Office Remains Focused On Market Manipulation And Compliance Programs

This month, the Office of Enforcement (OE) of the Federal Energy Regulatory Commission (FERC) released its tenth Annual Report on Enforcement. The report provides FY2016 statistics on the investigative and enforcement activities conducted by OE's four divisions—Investigations, Audits and Accounting, Energy Market Oversight, and Analytics and Surveillance. View the full report.

This year, in addition to OE's annual report, FERC staff issued a retrospective "lessons learned" white paper, available here, on the implementation of its anti-market manipulation enforcement program since the passage of the Energy Policy Act of 2005 (EPAct 2005), as well as a second white paper, available here, on effective energy trading compliance programs.1

Highlights

OE's annual report confirms that, in FY2017, OE intends to remain focused on (1) fraud and market manipulation, (2) serious violations of reliability standards, (3) anticompetitive conduct, and (4) conduct that threatens the transparency of regulated markets.

Specific statistics in the report include the following:

  • FERC opened 17 investigations in FY2016, 12 of which involved market manipulation. These 17 new investigations arose from referrals from FERC program offices, surveillance by FERC and organized market monitoring units, self-reports, and "hotline" tips.
  • FERC received 110 new self-reports from a variety of market participants in FY2016. FERC closed 126 self-reports that had been submitted in FY2016 and previous years. As in previous years, one of the many factors OE staff considered in closing self-reports was the absence of significant harm to the market.
  • FERC issued four notices of alleged violations in FY2016, three of which involved alleged energy market manipulation.
  • FERC approved settlement agreements in FY2016 that resolved allegations of market manipulation by 10 entities, including corporate entities and individual traders. These settlements assessed a total of $12.2 million in civil penalties and required the disgorgement of $5.7 million.
  • FERC issued three orders to show cause (OSCs) in FY2016, all of which involved alleged market manipulation. These OSCs proposed a total of $257.1 million in penalties and the disgorgement of nearly $13.6 million. FERC is seeking to enforce these OSCs, as well as others from previous years, in federal court. As a result, FERC is seeking to recover a total of $567.2 million in civil penalties and $45.7 million in unjust profits through seven litigation proceedings.

The "lessons learned" white paper provides FERC staff's views on what actions constitute market manipulation, including:

  • market behavior with an illicit purpose;
  • uneconomic conduct;
  • conduct inconsistent with market fundamentals of supply and demand;
  • cross-market manipulation schemes;
  • gaming of market rules; and
  • misrepresentations and omissions.

The "lessons learned" white paper also identifies three mitigating factors that have played a significant role in shaping FERC staff's penalty determinations: (1) a commitment to compliance, (2) self-reporting and (3) cooperation. Finally, the "lessons learned" white paper provides a few examples from recent OE annual reports in which staff decided to close investigations (which are largely nonpublic). In those examples, FERC staff found insufficient evidence of manipulative intent.

The second white paper, on effective compliance programs, discusses practices that companies may use to prevent and detect market manipulation. Those practices, which draw upon FERC guidance2 and the Federal Sentencing Guidelines,3 include:

  • appropriate organizational structure and composition;
  • diligent recruitment and hiring practices;
  • appropriate compensation incentives;
  • regular training;
  • effective information technology (IT) resources;
  • appropriate trading rules and restrictions;
  • effective monitoring of trading;
  • adequate enforcement of compliance rules and restrictions; and
  • regular performance audits and corrective actions.

FERC's Anti-Market Manipulation Enforcement Program

EPAct 2005 amended both the Federal Power Act and the Natural Gas Act to enhance FERC's authority to prohibit market manipulation and assess significant penalties where manipulation was determined to have occurred. Since then, FERC's investigative, analytical and surveillance capabilities have continued to expand, and the agency has assessed $641 million in civil penalties, ordered $402 million in disgorgement and imposed requirements for energy companies to implement measures to improve compliance.4

FERC's enforcement efforts received a boost in April 2015 when Norman Bay, a former federal prosecutor and former head of OE, became FERC chairman. During Chairman Bay's tenure, FERC's enforcement efforts remained aggressive.

The recent election of Donald Trump as president has the potential to change that posture. FERC consists of five commissioners who are appointed by the president, and no more than three commissioners may belong to the same political party.5 All three sitting commissioners are Democrats. We expect that President Trump will move quickly to fill the open commissioner seats with Republicans, and will also appoint a Republican as FERC chairman. This latter change may result in a shift in OE's priorities—especially if Chairman Bay decides not to continue serving as a commissioner.

Meanwhile, exactly what actions constitute manipulation, and where the boundaries of FERC's authority begin and end, continue to evolve as more of the subjects of FERC's enforcement actions forgo settlement and elect to enter into litigation with the agency. For example, in 2016, a federal court allowed FERC to bring an enforcement action based on allegations of manipulative intent (i.e., what would have happened), "not whether the alleged plan ultimately worked."6 Also in 2016, several courts addressed the scope of "de novo review" that governs the enforcement process under the Federal Power Act.7 While FERC has taken the position that de novo review should be based upon the "administrative record" and that full discovery is not required, federal courts have decided that de novo review means treating these cases as ordinary civil actions governed by the Federal Rules of Civil Procedure "subject to proper limitations on discovery that take proportionality into account" and culminating, "if necessary, in a jury trial."8

Implications

  1. OE's FY2016 annual report confirms that OE intends to continue to investigate and enforce against entities that engage in manipulative conduct in energy markets. The aggressiveness of enforcement efforts, however, may be mitigated as the makeup of the Commission changes.
  2. As FERC continues to take action against market manipulation, a body of case law is developing that will provide more clarity on FERC's jurisdiction and what types of activities constitute manipulation in the energy trading context. In its "lessons learned" white paper, FERC staff have set forth examples of the types of activities it may investigate and enforce against. Although those examples do not have the force of regulatory authority, regulated entities should be familiar with those examples, and should continue to monitor ongoing cases and incorporate new precedent into their compliance programs.
  3. OE's FY2016 annual report, along with the staff white paper on compliance programs, confirms the important role that effective compliance programs continue to play in FERC enforcement decisions. Companies with effective compliance programs may benefit by preventing energy trading from violating the Anti-Manipulation Rule9 in the first place, or, if a violation occurs, by being able to present a stronger case for reduced penalties.

Footnotes

1. Both white papers include a disclaimer that they are the product of FERC staff, and "do not necessarily reflect the views of the Commission, its Chairman, or any individual Commissioner."

2. See Enforcement of Statutes, Orders, Rules, and Regulations, 132 FERC ¶ 61,216 (2010) (Revised Policy Statement on Penalty Guidelines); Enforcement of Statutes, Orders, Rules, and Regulations, 130 FERC ¶ 61,220 (2010) (Policy Statement on Penalty Guidelines); Compliance with Statutes, Regulations, and Orders, 125 FERC ¶ 61,058 (2008) (Policy Statement on Compliance); Enforcement of Statutes, Regulations, and Orders, 123 FERC ¶ 61,156 (2008) (Revised Policy Statement on Enforcement); Enforcement of Statutes, Orders, Rules, and Regulations, 113 FERC ¶
61,068 (2005) (Policy Statement on Enforcement).

3. U.S. Sentencing Commission, Guidelines Manual § 8B2.1(b)(1)-(7).

4. FERC, All Civil Penalty Actions, www.ferc.gov/enforcement/civil-penalties/civil-penalty-action.asp.

5. 42 U.S.C. § 7171(b)(1).

6. FERC v. Maxim Power Corp., 2016 U.S. Dist. LEXIS 107770 (D. Mass. July 21, 2016).

7. See, e.g., id.; FERC v. City Power Mktg., LLC, 2016 U.S. Dist. LEXIS 105421 (D.D.C. Aug. 10, 2016).

8. FERC v. Maxim Power Corp., 2016 U.S. Dist. LEXIS 107770 (D. Mass. July 21, 2016).

9. 18 C.F.R. Part 1c.

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
Mark C. Kalpin
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.