United States: FERC's Forecast Is Clear: Energy Market Conduct Will Be Subject To Enhanced Scrutiny During Extreme Weather Events

Among the usual reminders about tariff compliance, duty of candor, and market manipulation, the Federal Energy Regulatory Commission (FERC) Office of Enforcement's (OE) 2023 Report on Enforcement (2023 Report) confirms that all eyes at FERC are on energy market performance during extreme weather events. The takeaway is clear: FERC-regulated entities must be prepared for potential scrutiny from OE following extreme weather events, especially when there are periods of unusually high prices in the wholesale natural gas and electricity markets. Entities should consider proactively to review unusual transactions, memorialize business and compliance justifications, confirm compliance with data quality and record keeping requirements, and evaluate procedures for responding to inquiries by FERC's Division of Analytics and Surveillance (DAS).

Chairman Phillips' Focus on Extreme Weather Events

OE's 2023 Report comes on the heels of a busy year for Chairman Phillips' efforts to protect reliability and affordability during extreme weather events and implement recommendations coming out of prior event inquiries. In February, the Commission approved a suite of extreme cold weather reliability standards aimed at preventing the recurrence of unprecedented power outages during Winter Storm Uri in 2021. In April, the first set of cold weather reliability standards became mandatory and enforceable. In June, FERC finalized two rules that require the North American Electric Reliability Corporation (NERC) to develop new reliability standards pertaining to transmission system planning for extreme weather events and interstate electric transmission providers to file one-time informational reports assessing the susceptibility of their systems to extreme weather events.

Earlier this month, FERC and NERC released their final report on Winter Storm Elliott, the December 2022 storm that contributed to power outages for millions of customers in the Eastern part of the country. At the November 2023 Open Meeting, Chairman Philips emphasized just how close Winter Storm Elliott came to paralyzing key natural gas systems during the heart of winter. The Chairman later emphasized OE's role in protecting consumers against energy price spikes during these severe weather events. Commissioner Clements also lauded DAS's enhanced surveillance enforcement efforts, initiated in response to Winter Storm Elliott and skyrocketing electricity and natural gas prices across the western United States this past winter.

DAS and "Enhanced Surveillance"

Through DAS's surveillance function, OE identifies irregular market activities and potential investigative subjects. To achieve these objectives, DAS develops, refines, and implements surveillance tools and algorithmic screens to perform continuous surveillance and analysis of market participant behavior, economic incentives, operations, and price formation, both in the natural gas and electricity markets. If a screen is tripped, DAS will perform follow-up analyses and if it cannot identify a fundamentals-based explanation, it may contact the market participant to seek additional information through an "inquiry." If, after conducting a surveillance inquiry, staff is still concerned that there is a potential violation, it will recommend that FERC's Department of Investigations (DOI) open an investigation into the matter.

In addition to its routine surveillance efforts, DAS may conduct "enhanced surveillance," such as during periods of unusually high prices following extreme weather events. DAS will, for example, seek additional data from the Intercontinental Exchange (ICE) and/or market participants to augment its normal data feeds; conduct outreach to market participants, other federal agencies, or state regulators; and/or develop new screening methods that utilize additional data or account for the changes in the markets caused by the ongoing event. The 2023 Report highlights DAS's enhanced surveillance efforts related to two extreme weather events: Winter Storm Elliott and the Winter 2022/2023 Western Energy Price Spike.

Winter Storm Elliott

Winter Storm Elliott was the largest controlled firm load shed recorded in the history of the Eastern Interconnection and the fifth event in the past 11 years in which unplanned cold weather-related generation outages jeopardized grid reliability. At the worst point, there were 90,500 MW of coincident unplanned generating unit outages, derates and failures to start (meaning they all occurred at the same time). Including generation that was already out of service, a total of over 127,000 MW of generation was unavailable, representing 18 percent of the U.S. portion of the anticipated resources in the Eastern Interconnection. Per the 2023 Report, DAS analyzed 57 screen trips related to the Winter Storm Elliott period and ultimately opened six inquiries stemming from its enhanced surveillance. These inquiries included outreach and data requests to plant personnel, marketers, and pipelines. As of the end of FY2023, DAS referred two matters to DOI for investigation as a result of these inquiries. Staff continues to analyze the data and information it has gathered as part of its inquiries and further referrals for investigations may follow.

Winter 2022/2023 Western Energy Price Spike

DAS also conducted enhanced surveillance in response to volatile prices in electricity and natural gas markets starting in December 2022 to determine if any market participants engaged in market manipulation or other violations. Specifically, DAS examined physical wholesale natural gas trade data and western non-RTO power market data from ICE, financial natural gas and electric positions from the Large Trader Report, and day-ahead electricity awards in CAISO using Order No. 760 data. In addition, DAS evaluated tips received through FERC's Enforcement Hotline and met with industry participants and public interest groups to discuss their concerns and coordinated with state and other federal agencies. For December 2022 alone, DAS staff examined 3,473 next-day natural gas market screen trips. As a result of DAS surveillance screening and examination of public and non-public information, DAS conducted ten inquiries into natural gas market participant behavior during the period and has referred one market participant to DOI for investigation thus far.

Conclusion

OE's 2023 Report and the Commission's initiatives this year make clear that energy market activities will be subject to additional scrutiny during extreme weather events. In particular, DAS's enhanced surveillance efforts highlight the potential need for FERC-regulated entities to proactively review unusual transactions, memorialize business and compliance justifications, confirm compliance with data quality and record keeping requirements, and evaluate procedures for responding to inquiries. Such robust practices may ultimately help to resolve unwarranted inquiries, and to mitigate risk.

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