On 17 November 2011, the Office of Enforcement of the Federal Energy Regulatory Commission (FERC-OE) issued the 2011 Report on Enforcement. This annual report by staff provides an overview of FERC-OE's enforcement activities during fiscal year 2011 (FY2011) and provides statistics on the activities of the three divisions within the Office of Enforcement -- Investigations, Audits, and Energy Market Oversight. The report provides important information regarding FERC-OE's otherwise non-public activities. It also identifies the enforcement priorities for FY2012. A copy of the report is available here.
In FY2011 and continuing in FY2012, FERC-OE will focus on matters involving:
- Fraud and market manipulation
- Serious violations of the Reliability Standards
- Anticompetitive conduct
- Conduct that threatens the transparency of regulated markets
As usual, one of the most illuminating and anticipated aspects of the report is the discussion surrounding the activities of FERC-OE's Division of Investigations (Investigations). In addition to providing statistical and summary information concerning investigations, referrals, and self-reports, the report describes the application of several new FERC enforcement policies, namely, the new policy whereby staff publicly announces the identity and allegations against a specific wrongdoer prior to settlement or Commission action on the matter and the application of the new Penalty Guidelines.
The report discusses the new policy of issuing so-called "staff's notice of alleged violations," which are notices that Investigations issues after Investigations staff determines a violation has occurred and after the target of the investigation is given a chance to respond. The report states that the notices enable third parties to bring "relevant information, either inculpatory or exculpatory" to the attention of Investigations staff. However, these third-parties are not permitted to intervene. In FY2011, staff issued 11 public notices of alleged violations.
The report describes the self-reports and investigations that Investigations staff has participated in over the past year. Staff received 107 self-reports in FY2011, up from 93 in FY2010. Of these, staff closed 54 self-reports after an initial review without opening an investigation, while 53 self-reports are still pending.
The report also provides some information regarding the reasons why Investigations staff decided not to pursue enforcement action for certain self-reports, including:
- Company took prompt remedial action
- No harm to the market or to any parties
- The absence of wrongful intent
- Company established procedures to prevent reoccurrence
- Company provided additional training to employees
- Company created a compliance officer position
- Company submitted a prompt self-report
- Company did not profit from the violation
- Company voluntarily disgorged profit with interest
- Violation was inadvertent
In FY2011, Investigations staff began the implementation of the recently finalized Penalty Guidelines and has used them to determine the appropriate penalty amount in three of the most recent settlements. The Penalty Guidelines provide a framework for the consistent application of FERC's penalty authority which can reach US$1 million per violation, per day. Staff emphasized that the Penalty Guidelines provide credit for self-reporting that could "significantly mitigate a penalty if the violation came to staff's attention through a self-report."
Staff opened fewer non-self-reported investigations in FY2011 than in FY2010. Staff opened 12 investigations and 2 inquiries in FY2011 compared to 15 investigations in FY2010. Most of the investigations involved market manipulation or false statements (8). Five addressed RTO/ISO tariff violations, and the others relate to hydropower licenses, standards of conduct issues, and FERC's authority under the Interstate Commerce Act. Six of the 12 investigations resulted from referrals from market monitoring units of the RTOs/ISOs. Two resulted from tips from FERC's Enforcement Hotline. The others came from referrals from other offices of the Commission or through FERC-OE's own surveillance efforts.
The report also notes that FERC-OE staff (along with other reliability authorities) was involved in investigating the southwest power outages that occurred in early February 2011, and is currently examining reliability issues in the September 2011 power outage in California and Arizona.
The report provides information regarding investigations that Investigations staff closed in which it found a violation, but declined to take any enforcement action. Staff took the following into account when deciding not to pursue enforcement action:
- Company increased and improved training
- Company did not unjustly profit from the violation
- Company modified its compliance program
The report discusses the Investigations' involvement in enforcing the mandatory Reliability Standards. Staff reviewed 270 Notice of Penalties covering 1,392 potential or confirmed violations of the Reliability Standards.
Audits — focus on compliance programs
In FY2011, the Office of Enforcement, Division of Audits (Audits) continued to focus on promoting compliance programs at jurisdictional entities. The report states that Audits has shared compliance "best practices" with regulated companies and discussed some innovative programs such an "Ethics Week" and an employee-sponsored children's art contest focusing on ethics. Finally, Audits noted that certain companies have enhanced their compliance programs by bringing in outside consultants to "preemptively correct deficiencies" and highlighted some compliance programs that exceeded staff audit recommendations "in an attempt to craft a robust compliance program."
Of the 76 audits conducted in FY2011, 56 were traditional, staff-directed audits of jurisdictional entities and the remaining 16 were "reliability oversight audits" jointly conducted with the FERC's Office of Electric Reliability. Audits undertook these reliability oversight audits to provide feedback to the Regional Entities as they conducted audits of registered entities. The traditional audits resulted in 300 recommendations for corrective action. The 16 reliability oversight audits focused on the critical infrastructure protection, transmission planning and operation, vegetation management, and communications Reliability Standards.
According to the report, FERC-OE's Division of Energy Market Oversight (Oversight) continues to monitor and oversee the nation's wholesale natural gas and electric power markets by examining the structure and operation of the markets to identify market anomalies, flawed or inadequate market rules, tariff and rule violations, and other illicit behavior. During FY2011, Oversight Staff initiated projects to analyze natural gas prices during bidweek and to assess renewable portfolio standards. Staff presented its analyses at public Commission meetings.
Lawyers in Hogan Lovells' energy practice group have extensive experience successfully representing energy companies and financial institutions in FERC enforcement proceedings in matters involving everything from allegations of energy market manipulation to breaches of the mandatory reliability standards. Please contact the lawyers listed or your regular Hogan Lovells lawyer if you have any questions about FERC's enforcement program or this Energy Alert.