FERC Annual Enforcement Report Underscores the Importance of Effective Compliance Programs

FERC Annual Enforcement Report Underscores the Importance of Effective Compliance Programs

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Last week, the Federal Energy Regulatory Commission (FERC) released its annual report on enforcement. The report, prepared by FERC's Office of Enforcement, provides FY2014 statistics on the investigative and enforcement activities conducted by its four divisions-Investigations, Audits and Accounting, Energy Market Oversight, and Analytics and Surveillance. The full report is available here

In the report, FERC confirms that its investigation and enforcement priorities for FY2015 and the foreseeable future will continue to focus on matters involving (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 FY2014, over half of which involved market manipulation;
  • more than half of these 17 new investigations arose from referrals based on conduct observed by FERC surveillance staff or RTO/ISO Market Monitoring Units;
  • nine notices of alleged violations were issued by FERC in FY2014, five of which involved alleged market manipulation (two of which have settled); and
  • every settlement of an investigation in FY2014 included provisions requiring the subject to enhance compliance programs and report back to FERC on the results of those enhancements.

The report also discussed recent improvements to FERC's surveillance capabilities, including FERC's gaining access to data from the Commodity Futures Trading Commission (CFTC) Large Trader Report and FERC's ongoing efforts to determine if market manipulation contributed to the historically high natural gas and electric prices that occurred during the 2014 “polar vortex” events.

Background

Since 2007, FERC has issued annual enforcement reports that provide insight into FERC's largely non-public investigation work. These annual reports provide summary statistics of FERC's entire enforcement program, as well as descriptions of significant recent cases.

Interest in FERC's investigation and enforcement program has increased since the passage of the Energy Policy Act of 2005 (EPAct 2005), which amended both the Federal Power Act and Natural Gas Act to enhance FERC's authority to prohibit market manipulation and assess significant penalties where manipulation was determined to have occurred. FERC Chairman Cheryl LaFleur recently expressed a continuing commitment to investigation and enforcement activities, which are expected to receive a boost when FERC Commissioner Norman Bay, formerly the head of FERC's Office of Enforcement, replaces LaFleur as chairman in April 2015. 

The contours of FERC's authority over market manipulation-as well as the types of activities that constitute fraud or manipulation-are still being defined. In 2013, the DC Circuit ruled that FERC lacks jurisdiction over manipulation of natural gas futures contracts, and that the CFTC instead has exclusive jurisdiction over the trading of derivatives. However, FERC recently signaled its intention to seek legislation to address this jurisdictional dispute and confirm FERC's jurisdiction over these products. In addition, other investigative subjects currently are challenging FERC enforcement actions based on both due process issues and jurisdictional issues. For example, FERC's jurisdiction over allegedly manipulative activity related to retail demand response programs appears to be questionable, given a 2014 DC Circuit decision that such programs are outside of FERC's jurisdiction. 

As another check on FERC's authority, the inspector general for the US Department of Energy recently announced that he will investigate FERC's enforcement program. This investigation was prompted by requests from Sens. John Barrasso (R-Wyoming), Robert Casey (D-Pennsylvania), and Susan Collins (R-Maine), each of whom raised concerns about the fairness and transparency of FERC's program.

Implications

  1. While the boundaries of FERC's jurisdiction remain subject to further definition, FERC has made clear that it will continue to aggressively investigate and enforce against entities that violate applicable Reliability Standards, fail to comply with mandatory tariff requirements, or engage in fraudulent or other manipulative conduct in energy markets. 
     
  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 (such as uneconomic trading) constitute “manipulation” in the energy context. Regulated entities should continue to monitor ongoing cases and incorporate new precedent into their compliance programs.
     
  3. The report confirms the importance that strong internal compliance programs, coupled with self-reporting actions, continue to play in FERC decisions to enter into settlement agreements, as well as significantly reduce proposed penalties from the amount that otherwise could be assessed under its existing policies.

WilmerHale's Energy Group actively monitors developments at FERC, CFTC, and other entities with jurisdiction over energy markets, advises regulated entities on the development and implementation of compliance programs, and represents entities in investigation and enforcement actions.

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