On November 17, 2022, the Staff of the Office of Enforcement (“OE”) of the Federal Energy Regulatory Commission (“FERC”) issued its sixteenth Annual Report on Enforcement (the “Report”). The Report discusses the activities performed by OE’s Division of Investigations (“DOI”), Division of Audits and Accounting (“DAA”), and Division of Analytics and Surveillance (“DAS”).
The Report provides ample reason for all participants in the energy markets regulated by FERC to continue to place an emphasis on compliance and annual reporting. The increase in investigations, the scope of DAS’s surveillance activities, and the resolution of self-reports without significant further investigation or penalties suggests that FERC continues to prioritize enforcement activities and values a strong culture of compliance by market participants.
FERC’s Strategic Plan and OE’s Priorities
OE’s priorities follow FERC’s March 28, 2022 Strategic Plan for Fiscal Years 2022-2026 (“Strategic Plan”). The Strategic Plan set forth several of FERC’s principal missions, including: accounting for significant supply-side changes in the organized electricity markets due to changes in the fuel mix of resources participating in those markets; addressing increasing threats to the nation’s energy infrastructure; and ensuring that consumers have access to economically efficient, safe, reliable, and secure energy at a reasonable cost. To achieve OE’s stated missions, the Strategic Plan indicated three goals: (1) ensure just and reasonable rates, terms, and conditions of service; (2) promote safe, reliable, and secure infrastructure consistent with the public interest; and (3) organizational excellence.
In light of the goals identified in the Strategic Plan and FERC’s obligation to oversee regulated markets, the Report notes OE’s recent enforcement priorities, including: (1) fraud and market manipulation; (2) serious violations of the Reliability Standards; (3) anticompetitive conduct; (4) threats to the nation’s energy infrastructure and associated impacts on the environment and surrounding communities; and (5) conduct that threatens transparency in regulated markets.
Enforcement Activities by the Numbers
DOI Investigations, Settlements and District Court Litigation
FERC and OE engaged in vigorous oversight and enforcement efforts in FY2022. For example, DOI opened 21 new investigations this year, a significant increase from the 12 investigations opened in FY2021, and six in FY2020. The 21 investigations involved a breadth of issues, ranging from NERC’s Rules of Procedure, to ISO/RTO must-offer requirements, to violations of Section 205 of the FPA.
OE resolved seven open investigations via eight settlements that FERC approved, and resolved an additional seven investigations by finding that no further action was warranted. The FY2022 settlements included approximately $23.59 million in civil penalties and $31.95 million in disgorgement. Five of the eight settlements also included additional compliance monitoring requirements. Also of note, during FY2022, there were three additional FERC-approved settlements that resolved two federal district court litigation matters totaling $1.975 million in disgorgement.
Settlements by Region
- Constellation NewEnergy, Inc. (“CNE”), Docket No. IN22-4-000 – On March 29, 2022, FERC approved the settlement of the OE’s investigation into whether CNE complied with CAISO’s resource adequacy tariff provisions. The OE found that by failing to purchase capacity in support of its RA-related imports and otherwise failing to reasonably plan for the circumstance of those imports being dispatched by CAISO, CNE violated 18 C.F.R.§35.41(a) and Sections 4.2.1, 184.108.40.206, and 37.3.1 of the CAISO tariff. CNE agreed to pay a civil penalty of $2.4 million and disgorgement of $2.3 million.
- Enerwise Global Technologies, LLC d/b/a CPower, Docket No. IN22-7-000 – OE investigated whether CPower complied with its offer obligations in the ISO-NE energy market during the period June 1, 2018-February 28, 2019. OE determined that CPower failed to offer the MWs required by ISO-NE tariff provisions governing its participation in the ISO-NE energy market, which constituted violations of Section III.220.127.116.11.1 of the ISO-NE tariff. On August 25, 2022, FERC issued an order approving a settlement resolving OE’s investigation, requiring CPower to pay a civil penalty of $2.54 million and disgorge $2.46 million to ISO-NE.
- Salem Harbor Power Development LP (“Footprint Power”) and ISO-New England, Inc., Docket No. IN18-8-000 – An OE investigation found that ISO-NE made over $100 million in capacity payments to Footprint Power for its New Salem Harbor Generating Station project even though the project had not yet been constructed in violation of the ISO-NE tariff and FERC’s market behavior rules. OE also determined that ISO-NE violated tariff provisions by denying ISO-NE’s Internal Market Monitor (“IMM”) access to a database of information regarding Footprint Power after the IMM investigated these violations. Subsequently, Footprint Power declared bankruptcy. In a settlement, Footprint Power agreed FERC would have unsecured bankruptcy claims of over $43 million – $17,100,000 as a civil penalty and $26,693,237.67 in disgorgement. In separate but related settlement, ISO-NE agreed to pay a civil penalty of $500,000.
Mid-Atlantic and Midwest
- Dynegy Marketing and Trade, LLC (”Dynegy”), Docket No. IN22-3-000 – On March 28, 2022, FERC approved a Stipulation and Consent Agreement with Dynegy resolving an investigation of whether Dynegy’s Real-Time energy market offers in the PJM market in Summer 2017, for ten GE 7FA dual-fuel combustion turbines, misrepresented that the units could ramp to their maximum oil-based output attained during their capacity tests while running on gas. Dynegy agreed to pay a civil penalty of $450,000 and disgorgement of $119,425.10. Dynegy also agreed to continue submitting annual compliance reports.
- sPower Development Company, LLC (“sPower”), Docket No. IN22-5-000 – On June 24, 2022, FERC issued an order that approved the settlement of OE’s investigation into whether sPower violated Section 36.2A of the PJM tariff by submitting to PJM two interconnection study agreements inaccurately stating that sPower had site control over property for a proposed interconnection. SPower agreed to pay a civil penalty of $24,000 and to submit annual compliance monitoring reports for two years.
- M3Ohio Gathering LLC (“M3) and Utica East Ohio Midstream LLC and UEOM NGL Pipelines LLC (“Utica East”), Docket No. IN22-6-000 – On June24, 2022, FERC issued an order approving the settlement of OE’s investigation of M3 and Utica East, common carrier oil products pipelines, into whether M3/Utica East violated Part I, Section 20(1) of the Interstate Commerce Act and 18 C.F.R. § 357.2(a) when they failed to submit annual and quarterly Form 6s during the period of 2013-2019. M3 agreed to pay a civil penalty of $30,000 and Utica East agreed to certify and submit all outstanding FERC Form 6 filings.
- Golden Spread Electric Cooperative, Inc. (“Golden Spread”), Docket No. IN21-9-000 – Golden Spread agreed to pay a civil penalty of $550,000 and disgorgement to SPP of $375,000 for violating FERC’s Anti-Manipulation Rule by offering its Mustang Station generating unit into the SPP market in a manner that improperly targeted and increased Day-Ahead Market make whole payments. FERC approved the settlement on November 16, 2021.
In FY2022, DOI staff received 124 self-reports from market participants and closed 126 self-reports. Of the self-reports received in FY2022, 39 remained pending at the end of the fiscal year. The plurality of self-reports closed in FY2022, as in each of the four previous fiscal years, are for violations of tariff provisions. In the FY2022 Report, FERC staff continued to encourage the submission of self-reports and emphasized that such behavior can significantly mitigate penalties.
DAA Audits, Findings of Noncompliance, and Refunds
In FY2022, DAA completed 12 audits of public utilities, natural gas and oil pipelines, and regional transmission organizations. The audits resulted in 51 findings of noncompliance, 258 recommendations for corrective action, and directed approximately $158 million in refunds and other recoveries. The FY2022 Report noted that of the $158 million, DAA directed $18.7 million to be refunded to customers and prevented $139.6 million from being inappropriately collected through customer rates.
The refunds and recoveries addressed DAA findings of improper application of merger-related costs, lobbying, charitable donation, membership dues, and employment discrimination settlement costs; improper labor overhead capitalization rates; accounting for production-related or distribution-related expenses as general or transmission-related expenses; pending income tax refunds being treated as prepayments; and compliance with the FERC’s allowance for funds used during construction (“AFUDC”)/construction work in progress (“CWIP”) regulations.
DAS Investigations, Transaction Analyses, and Data Management Initiatives
DAS focuses on: (1) natural gas market surveillance; (2) electric market surveillance; and (3) analytics for reviewing market participant behavior. DAS identifies market participants whose conduct may potentially call for investigation or further FERC action. With respect to surveillance, DAS seeks to detect anomalous behavior and identify potential investigative subjects. If DAS detects an anomaly through its surveillance screening, which DAS refers to as a “screen trip,” DAS will conduct a series of analyses to evaluate whether to further investigate a situation.
During FY2022, natural gas surveillance screens produced approximately 16,766 screen trips. After review, DAS dismissed the vast majority, opening only 26 natural gas inquiries, two of which remain open. In the context of electricity, there were approximately 535,865 screen trips. DAS identified 32 instances that required further inquiry. Of the 32 instances, 26 were closed with no referral, four remain pending and two resulted in referrals to DOI for investigation.
Along with surveillance activities, DAS worked on approximately 50 investigations and 15 other matters involving inquiries or litigations. The matters where DAS participated generally involved allegations of market manipulation and violations of tariff provisions.
The FY2022 Report noted that during FY2022, DAS conducted ex post analysis of over 2.5 million transactions filed through FERC’s electric quarterly reports, analyzing the combined results of 25 statistical indicators to detect potential instances of market power.
Finally, the Report notes that DAS is continuing its focus on two major data management initiatives.
The first initiative is the development of a data warehouse that will simplify data compiled under Order No. 760, an order intended to enhance FERC’s surveillance and analysis of the energy markets. During FY2022, the DAS data warehouse team completed development and validation on three additional data models. According to the FY2022 Report, the team has developed seven of the 11 data models in the Order No. 760 database, incorporating 540 of the roughly 1,500 Order No. 760 tables into the data warehouse. DAS plans to complete the initiative during FY2023.
The second initiative is FERC-wide and seeks to migrate FERC analytics into the cloud. During FY2022, DAS helped the FERC Office of the Chief Information Officer test and configure two enterprise-wide analytics products in the cloud. DAS expects the migration to be completed in FY2023.