The Federal Energy Regulatory Commission’s (FERC or Commission) Office of Enforcement (OE) 2022 Report on Enforcement highlights OE’s priorities for the fiscal year and provides valuable insight into how jurisdictional entities will be policed going forward. Unsurprisingly, considering Chairman Glick’s prior statements,2 fraud and market manipulation topped OE’s list of priorities.3 The Report, coupled with FERC’s proposed expansion of its duty of candor rule,4 also emphasizes the Commission’s current focus on ensuring transparency in the markets it oversees. But OE will likely face an uphill battle in 2023.
Fraud and Market Manipulation
During FY22, FERC litigated four cases in federal district court to enforce penalties for alleged market manipulation.5 Additionally, of the 21 investigations the Commission in the Southern District of Ohio, FERC recently approved a settlement resolving claims against Coaltrain Energy, L.P. (Coaltrain) and individual defendants for violations of section 222 of the Federal Power Act (FPA); FERC’s Anti-Manipulation Rule, 18 C.F.R § 1.c.2.; and 18 C.F.R § 35.41(b).6 Specifically, the Commission alleged that the defendants’ Up to Congestion (UTC) trading in PJM markets constituted market manipulation because such trades were designed solely or primarily to generate Marginal Loss Surplus Allocation (MLSA) payments, with zero or near-zero risk.7 Although the Commission initially sought civil penalties of approximately $38 million, joint and several liabilities, and disgorgement of $4 million in unjust profits, Coaltrain was able to settle for just $4 million in restitution to PJM.
This disappointing outcome for the Commission likely stems from the district court’s 2021 order holding that under section 313 of the FPA, the Commission’s orders are only reviewable by courts of appeal (with an exception for civil penalty assessments).8 As a result, the court concluded that it lacked jurisdiction to review the Commission’s proposed remedies of disgorgement and joint and several liability. The Court held that to impose such remedies, the Commission “must follow the procedures outlined in 16 U.S.C. § 825.”9 The order declined to specify how the Commission could pursue a review of civil penalties and other remedies in the same proceeding. Since the court declined jurisdiction over the remedies, it never broached whether the FPA even grants the Commission authority to impose disgorgement or joint and several liabilities in the first place. If adopted broadly, the Southern District of Ohio’s statutory interpretation would prohibit district courts from reviewing the Commission’s orders seeking remedies other than civil penalties. Accordingly, Coaltrain highlights the procedural complexities of enforcing FERC’s Anti-Manipulation Rule and raises questions regarding the mechanisms available to the Commission to do so.
In October 2022, the Fifth Circuit affirmed in part and reversed in part a FERC decision imposing a $20 million civil penalty upon various BP-related entities for manipulating the natural gas market in the wake of Hurricane Ike in 2008.10 According to the Commission, BP profited after the storm by artificially suppressing natural gas prices at the Houston Ship Channel (HSC), a gas hub in Houston. The greater the difference in gas prices between HSC and at Henry Hub, a major natural gas market in Louisiana frequently used as a national benchmark, the more money BP stood to make. BP sought judicial review of FERC’s 2016 order finding that BP engaged in market manipulation and imposing a $20 million civil penalty.
The Fifth Circuit held that the anti-manipulation provision in the Natural Gas Act (NGA), 15 U.S.C. § 717c-1, only affords the Commission jurisdiction over interstate transactions. In doing so, the court rejected the Commission’s argument that the provision provides the Commission jurisdiction over any natural gas transaction that is part of a manipulative scheme, so long as that scheme affects the price of an NGA-jurisdictional (i.e., interstate) transaction. Consequently, the Fifth Circuit remanded the case to the Commission to recalculate the penalty in light of "FERC's reliance on an erroneous understanding of its jurisdiction."11 While BP America was by no means a total loss for the Commission,12 the case still illustrates the jurisdictional limits the Commission may face in anti-manipulation cases and reluctance from the judiciary to expand upon such limits.
Duty of Candor NOPR
On July 28, 2022, FERC issued a Notice of Proposed Rulemaking (NOPR) proposing to broaden the existing candor requirements to extend to all of the Commission’s oversight responsibilities.13 While the majority of commenters support the general sentiment that candor in communication is important, several commenters contend that the Commission lacks the statutory authority to issue the rule as proposed.14 However, even if the Commission does have statutory authority to issue the proposed rule, commenters further assert that the broadness of the proposed rule, coupled with a lack of a scienter or a materiality requirement makes the rule unconstitutional and vulnerable to legal challenges under the Administrative Procedure Act (APA).15 Namely, commenters assert that the proposed rule is arbitrary and capricious, contrary to the First Amendment, unconstitutionally vague in violation of the Fifth Amendments Due Process Clause, and perverse to the APA’s notice and comment requirements. Commenters, including the American Bar Association (APA), also note that compliance with the proposed rule will likely infringe on attorney-client privilege.16
In addition to potentially exposing the Commission to significant legal hurdles, commenters, citing Commissioner Danly's dissent,17 contend that the broadness of the proposed rule may have a chilling effect on participation.18 Noting that as proposed, the rule could be applied to even trivial mistakes, commenters contend that valuable communication will be deterred in situations, including, but not limited to: settlement discussions; technical conferences; emergencies; routine communications with trade associations; routine communications with the Commission; and routine communications with Regional Trade Organizations (RTO) and Independent Service Operators (ISO). Even if the Commission can overcome the substantial legal hurdles that stand in its way and adopt the proposed rule, it is likely that the looming threat of enforcement actions will cause a decrease in the very participation that the Commission has sought to encourage.19
While there is no indication that OE will slow down its activities, 2023 might turn out to be a challenging year for enforcement. Coaltrain and BP America suggest that courts do not hesitate to rein in FERC's enforcement authority. Jarkesy calls into question the constitutionality of aspects of the Commission's enforcement process and use of administrative law judges.20 Industry push back and potential legal challenges to the proposed expansion of the duty of candor limits the prospects for a final rule. Finally, OE might lose its biggest champion by the end of the year—Chairman Glick’s retirement appears imminent. In response to OE's presentation of the Report, the Chairman called OE the "unsung heroes" of the Commission and praised that the office "is back" after a "little bit of a lull" during a prior Chairman’s term.21