On November 21, 2013, the Federal Energy Regulatory Commission (FERC) Office of Enforcement (Enforcement) issued its 2013 Report on Enforcement (Report). The annual Report provides an overview of and statistics regarding FERC’s enforcement activities during the fiscal year 2013 within Enforcement’s four divisions: the Division of Investigations, the Division of Audits and Accounting, the Division of Energy Market Oversight and the Division of Analytics and Surveillance. The Report provides information regarding Enforcement’s non-public activities and priorities during the fiscal year. In general, the Report shows that Enforcement appears to be increasing scrutiny regarding tariff violations.
The Report first identifies Enforcement’s priorities:
- Fraud and market manipulation;
- Serious violations of the Reliability Standards;
- Anticompetitive conduct; and
- Conduct that threatens the transparency of regulated markets.
According to the Report, Enforcement does not plan to change these priorities in the coming year. The Report then discusses significant matters and statistics regarding each of Enforcement’s four divisions.
Division of Investigations
The Division of Investigations conducts both public and non-public investigations of possible violations of the statutes, rules and regulations administered by FERC. The Report highlights a number of significant matters in 2013. For example, FERC approved its largest settlement to date, which resolved a manipulation investigation. The settlement included $410 million in combined civil penalties and disgorgement of unjust profits, among other remedies.
FERC also approved 19 settlements involving more than $304 million in civil penalties and almost $141 million plus interest in disgorgement. These settlements involved a variety of matters, including alleged market manipulation and false statements violations, natural gas transportation violations, Open Access Transmission Tariff (OATT) violations, Reliability Standards violations, market-based rate (MBR) authority violations and hydro licensing violations.
The Report describes the self-reports received by Enforcement. Enforcement received 75 self-reports in the reporting period. Enforcement closed even more – 94 – some of which were still pending from 2011 and 2012, and it had 42 self-reports still pending. Enforcement received self-reports regarding a number of matters. The largest category was for Regional Transmission Organizations and Independent System Operators (RTO/ISO) violations. Enforcement also received a number a self-reports regarding MBR and other tariff/OATT violations. Enforcement closed only one self-report related to market manipulation, as contrasted with 34 self-reports related to RTO/ISO violations and 11 related to tariff/OATT violations. As part of Enforcement’s effort to promote transparency and encourage compliance, the Report lists a number of illustrative self-reports closed with no action. The Report provides some insights into why Enforcement chose not to pursue enforcement actions in particular instances, including:
- The conduct resulted in no or minimal harm to the market or other market participants
- The entity took remedial measures to correct market harm
- The entity implemented compliance measures to prevent future violations
- The violation was unintentional
- The entity promptly submitted a self-report
- The entity received little or no benefit from the violation
The Division of Investigations opened 24 investigations in 2013, up from 16 investigations the year prior. The opened investigations involve multiple different types of potential violations, including: market manipulation or false statements to FERC or a RTO/ISO (11 investigations); Reliability Standards violations (8 investigations); tariff violations (4 investigations); natural gas open access transportation rules (one investigation); and Standards of Conduct (one investigation). RTO/ISO and Division of Analytics and Surveillance referrals continue to be a key referral source, as 12 investigations opened this year came through the division or market monitors. Additionally, Enforcement opened investigations from a number of other sources, including tips to the Enforcement Hotline (2 investigations) and self-reports that Enforcement converted into preliminary investigations (2 investigations).
Of the investigations closed in this year, Enforcement closed 8 because it found no violation or did not have sufficient evidence. In two investigations, Enforcement found a violation, but determined not to pursue an enforcement action. The Report provides examples of a few investigations to provide guidance regarding why Enforcement chose to close these matters with no action:
- The evidence did not support a violation
- The entity took immediate remedial measures
- The entity promptly submitted a self-report
- The conduct occurred in an isolated trading period
Division of Audits and Accounting
The Division of Audits and Accounting operates FERC’s audit program and administers FERC’s accounting regulations. According to the Report, the Division of Audits and Accounting completed 29 financial and operational audits. These audits covered formula rate matters, MBR authority and electric quarterly reports (EQRs), affiliate transactions and the Public Utility Holding Company Act, accounting and reporting, capacity markets and demand response, and reliability. The Report also highlights areas where the Division of Audits and Accounting has found consistent patterns of noncompliance, including in formula rate matters, demand response and energy efficiency in capacity markets, capacity transparency and allocation, OATTs, transmission incentives and regulatory assets.
Division of Energy Market Oversight
The Division of Energy Market Oversight handles monitoring and oversight of wholesale natural gas and electric power markets. It continued its roles of market monitoring, technical analysis and investigation support, outreach, forms administration and filing compliance, and rulemaking oversight. Notably, the Division of Market Oversight developed programs this year to revise the EQR filing process and support FERC’s ongoing gas-electric coordination initiative.
Division of Analytics and Surveillance
The Division of Analytics and Surveillance conducts surveillance and analyzes market data to detect potential market manipulation, anticompetitive conduct, and other anomalous trading activities in the energy markets. In 2013, FERC enhanced its ability to conduct surveillance of the natural gas and electric markets and to analyze individual market participant behavior by issuing Order No. 771, which provides FERC with access to the complete electronic tags (e-Tags) used to schedule the transmission of electricity interchange transactions in wholesale markets. FERC also issued a Notice of Inquiry on enhanced natural gas market transparency. The Report gives an overview of the surveillance activities conducted by the Division of Analytics and Surveillance. Of note, as part of its electric surveillance this year, Enforcement ran monthly screens that identify patterns at the hourly level to monitor the interactions between physical and virtual bidding strategies and potentially benefiting payouts. The Division of Analytics and Surveillance also worked on more than 30 investigations this year.
You can view the full Report on FERC’s website at: http://ferc.gov/legal/staff-reports/2013/11-21-13-enforcement.pdf