The Investigative and Enforcement Priorities of the FERC Office of Enforcement

            The past year has been marked by several record-breaking penalties imposed on companies and individuals by the Federal Energy Regulatory Commission (“FERC”) for alleged misconduct in the energy markets.  On November 21, 2013, the FERC Office of Enforcement (“OE”) released its 2013 Report on Enforcement (Docket No. AD07-13-006) (the “Report”), which discusses the OE’s priorities and significant investigations, market monitoring, and natural gas and electric surveillance conducted throughout the 2013 fiscal year (October 1, 2012 through September 30, 2013).  We previously discussed several of the investigations highlighted in the Report, including the investigations into market manipulation by J.P. Morgan Ventures Energy Corp. (“JPMVEC”), Barclays Bank PLC, and four individual Barclays Bank traders, which were resolved with increasingly sizable penalties that topped FERC’s previous record-breaking penalty imposed on Constellations Energy Commodities Group, LLC the year before.  See our posts: here and here.  Indicative of FERC’s fervor for pursuing energy market manipulation, the OE followed on the heels of ordering $430+ million in penalties in the Barclays matter by initiating an enforcement proceeding against BP America Inc., BP Corporation North America Inc., BP America Production Company, and BP Energy Company (collectively “BP”) for alleged market manipulation. Our expectation that the aggressive tenor of the OE’s regulatory enforcement efforts was likely to continue was confirmed by the Report.  The investigations mentioned above were just a few of the nearly 30 pending investigations that were resolved in FY2013.  The OE initiated 24 new investigations in FY2013, a 50% increase over the number of investigations initiated in FY 2012.  Half of the new investigations were referred by the OE’s Division of Analytics and Surveillance, which was just created in February 2012, or by RTO/ISO Market Monitoring Units.  The majority of new investigations involved allegations of market manipulation, although the OE’s investigative efforts also encompassed allegations of additional misconduct.  The OE’s FY2013 efforts provide a roadmap for what we can expect in the near term, as the Report indicates that the OE’s priorities for FY2014 will remain unchanged.

OE FY2013 & FY2014 Priorities

            The OE is comprised of four divisions: Division of Investigations (“DOI”), Division of Analytics and Surveillance (“DAS”), Division of Energy Market Oversight (“Market Oversight”), and Division of Audits and Accounting (“DAA”).  The DOI investigates potential violations of statutes, regulations, rules, orders, and tariffs within FERC’s purview.  The DAS was created in 2012 to identify potential investigative targets through the detection of potential market manipulation, anticompetitive behavior, and other irregular market activities.  To that end, DAS continuously analyzes market participant behavior, economic incentives, operations, and price formation on the natural gas and electric markets.  Market Oversight is tasked with monitoring and overseeing the wholesale natural gas and electric markets through constant scrutiny and monitoring of market structures and operations in order to detect “market anomalies, flawed or inadequate market rules, tariff and rule violations, and other market behavior.”  The DAA conducts public audit and accounting activities which focus on compliance with FERC requirements, transparency, accountability, operational efficiency and effectiveness.

            The Report identifies the OE’s FY2013 top priorities, which it anticipates will remain unchanged in FY2014: (1) Fraud and market manipulation; (2) Serious violations of the Reliability Standards; (3) Anticompetitive conduct; and (4) Conduct that threatens the transparency of regulated markets.  The OE stated that its priorities are focused on conduct “involving the greatest harm to the public,” and that which presents the opportunity for “significant gain to the violator or loss to the victims.”  It views fraud and market manipulation as a “significant threat” to energy markets in that the losses incurred from the misconduct are passed on to consumers, thereby preventing the provision of efficient and reasonably priced energy services.  The OE views anticompetitive conduct and conduct threatening market transparency in the same vein in that they weaken confidence in the energy markets, injuring competitors and consumers.

FY2013 Highlights

The Report reflects the following highlights from the year, as well as extensive details regarding each division’s activities:

• DOI resolved 29 investigations, resulting in either no further action, settlement, or formal enforcement proceedings.  DOI assessed the largest civil penalty that FERC has assessed to date, and obtained a total of more than $304 million in civil penalties and disgorgement of nearly $141 million in profits.  DOI opened 24 new investigations and received 75 new self-reports.
• DAS contributed to over 30 investigations, referring several matters to DOI for investigation. FERC issued a final rule and a Notice of Inquiry that augmented DAS’s capabilities for market surveillance and analysis of individual market participant behavior.
• Market Oversight issued the 2012 State of the Markets Report and the Summer 2013 Energy Market and Reliability Assessment in May 2013.
• DAA conducted 29 audits, resulting in nearly 400 recommendations for corrective action and refunds of nearly $16 million.

FY2013 Investigations 

            The conduct under scrutiny by the DOI reportedly included: market manipulation, submission of inaccurate and misleading information, violations of the Standards of Conduct for Transmission Providers, violations of the Reliability Standards, violations of Open Access Transmission Tariff provisions, violations of rules and regulations related to Market-Based Rate authority, violations of hydropower license provisions, and violations of the Commission’s natural gas open access policies.  Market manipulation was the subject of the greatest number of settlements and new investigations in FY2013.  The Report breaks down the issues as follows:

• Settlements: three (3) Open Access Transmission Tariff violations, three (3) violations of the Reliability Standards, four (4) violations of natural gas open access transportation rules, two (2) violations of regulations related to Market-Based Rate (MBR) authority, one (1) violation of hydropower license provisions, and six (6) violations of the Commission’s regulations prohibiting manipulation in natural gas and electric markets.
• New Investigations: eleven (11) involve market manipulation or false statements to the Commission or an RTO/ISO, four (4) involve tariff violations, eight (8) involve Reliability Standards violations, one (1) involves standards of conduct, and one (1) involves natural gas open access transportation rules.

            The Report highlighted eight significant matters, including post-settlement proceedings related to the Constellations Energy matter that was resolved in FY2012 via a record-setting settlement of $135 million civil penalties and $110 million disgorgement of profits.  Also among the significant matters highlighted are (1) the JPMVEC market manipulation matter, which set a new record in FY2013 with a $285 million penalty and $125 million disgorgement of profits, (2) the Barclays Bank market manipulation matter in which the bank was ordered to pay a $435 million penalty and $34.9 million in disgorged profits and the four individual Barclays traders were ordered to pay penalties totaling $18 million, (3) the BP market manipulation matter in which FERC is seeking a $28 million civil penalty and disgorgement of $800,000 plus interest, and (4) the Brian Hunter matter in which the imposition of a $30 million civil penalty against the trader was appealed to the United States Court of Appeals for the District of Columbia Circuit.  The Report noted that Barclays Bank and the individual traders have challenged the imposed penalty, and the OE filed a civil action to affirm the penalty in the federal District Court for the Eastern District of California on October 9, 2013. On October 4, 2013, BP filed its answer denying any wrongdoing and BP requested that FERC dismiss the proceeding or set a full evidentiary hearing on the matter before an Administrative Law Judge.  And in March 2013, the D.C. Circuit overturned the FERC penalty imposed on Brian Hunter on the grounds that the alleged misconduct was within the exclusive jurisdiction of the Commodity Futures Trading Commission (“CFTC”).  You can read our previous post Barriers to Cooperation between the CFTC and FERC Hinder Investigations into Energy Market Manipulation – A Legislative Fix May be on the Horizon, which addresses in further detail the jurisdictional conflicts related to energy market oversight that have arisen between FERC and the CFTC.

            The Report also describes the resolution of additional settlements, describes self-reported and investigative matters that were resolved with no further action, and provides a comparison of the number and types of investigative and self-reported matters resolved over the past few years.

FY2013 Surveillance, Market Oversight & Audits

            The Report provides details regarding the methods employed and efforts undertaken by DAS, Market Oversight, and DAA.  Highlights of significant activities include:

            DAS:  DAS’s reported focus is on natural gas surveillance, electric surveillance, and transactional analysis.  In FY2013, DAS contributed to more than 30 investigations, FERC issued Order No. 771 – Availability of E-Tag Information to Commission Staff – which gives FERC ongoing access to the complete electronic tags (e-Tags) used to schedule the transmission of electric power interchange transactions in wholesale markets, and FERC issued a Notice of Inquiry on Enhanced Natural Gas Market Transparency (“NOI”) in an effort to bolster its surveillance of natural gas and electric markets and to analyze individual market participant behavior.  DAS reportedly made “extensive use” of the e-Tag data it has received pursuant to Order No. 771. The NOI was issued to aid FERC in determining if any changes should be made to the regulations regarding natural gas market transparency, and resulted in 34 comments.

            Market Oversight:  Market Oversight issued the 2012 State of the Markets Report in May 2013, which reflected that natural gas production grew to a new record in calendar year 2012 and helped to generate the lowest nominal natural gas prices since 2002. The report acknowledged that more coordination between the natural gas and electric industries is needed due to the increased reliance on natural gas as a fuel source for electric generation, and it identified New England as a market with substantial risk of service disruption due to limited natural gas pipeline capacity.  Interestingly, the Summer 2013 Energy Market and Reliability Assessment, also issued in May 2013, noted that natural gas prices were rebounding; therefore, less of a switch from coal-to-natural gas as a fuel source would be experienced than during the previous summer.  Market Oversight also participated in Gas-Electric Coordination efforts throughout the year.

            DAA:  The Report provides extensive details regarding significant audit and accounting matters addressed during the year.  DAA conducted 29 financial, compliance, and performance audits of public utilities, natural gas pipelines, and gas storage companies, resulting in 360 recommendations for corrective action and the refund of more than $15.4 million.

            The OE issued the Report in an effort to “promote transparency and to encourage entities subject to Commission requirements to develop strong internal compliance programs.”  The OE stated its intention to continue its enforcement and surveillance efforts.  We will continue to keep you posted on significant enforcement developments.  You can access the full Report here.