When FERC Enforcement staff released its 2021 Report on Enforcement, Chairman Richard Glick warned the industry that "the cop is back on the street [and FERC] will aggressively pursue wrongdoing." Following a period of perceived torpor, Chairman Glick emphasized that "vigorous oversight and enforcement of Commission-regulated markets" is a top priority for the Commission, a fact buttressed by the report, which shows the agency is expanding its enforcement priorities to include environmental issues and threats to the nation’s energy infrastructure, and has also increased penalties compared to previous years.
The Enforcement Report, coupled with Chairman Glick's comments, underscores the need for regulated entities to have rigorous and up-to-date compliance programs. The report shows an increased willingness on FERC staff's part to investigate potential violations that resulted in negative environmental effects. It also shows a more active agency: from the fourth quarter of 2020 through the third quarter of 2021, the Office of Enforcement opened 12 new investigations, closed four pending investigations with no action, completed 12 audits that lead to 250 recommendations for corrective action, and began 65 surveillance inquiries that resulted in four referrals for investigation
New Focus on Environment and Infrastructure
The report included, for the first time, "threats to the nation's energy infrastructure and associated impacts on the environment and surrounding communities" as one of enforcement staff's now-five priorities in fiscal year 2021. To implement this priority, enforcement staff indicated that it will focus on violations of NERC Reliability Standards as well as enhanced monitoring to ensure compliance with Certificates of Public Convenience and Necessity
The following are examples of investigations related to this priority.
- Alleged Violation in Application for a Certificate of Public Convenience and Necessity. Enforcement staff issued an order to show cause directing a pipeline company to address an alleged violation that it misled the Commission in its Application for a Certificate of Public Convenience and Necessity when it stated in its application that it was "committed to a solution that results in no adverse effects" to a historic farmstead located near its largest proposed compressor station. FERC alleges that the company intended to and ultimately did demolish the farmstead without notifying the Commission.
- Violation of Requirements in Certificate for Public Convenience and Necessity. The Commission approved the settlement of an investigation into whether a natural gas company violated its Certificate of Public Convenience and Necessity by allegedly failing to comply with the requirement to "conduct sonar surveys of the [natural gas salt dome] caverns every five years."7
Settlements of Tariff Violations, Manipulation, and Other Claims
Enforcement staff settled nine matters in fiscal year 2021; one federal district court matter, and eight matters prior to commencement of litigation. Unlike recent years, in which settlements occurred across a limited and narrow set of cases, in fiscal year 2021, enforcement staff settled claims of several different types of violations, as highlighted below. This suggests that FERC may: (1) desire to reach resolution on pending investigations in a quicker timeframe than previously, and (2) investigate (and resolve) a wide variety of different cases, without particular emphasis on one type over another. Put differently, FERC seems to be focusing on all requirements it administers, not just a select subset.
- alleged violations of the Anti-Manipulation Rule, such as:
- allegedly taking advantage of CAISO software error to maximize possible bid cost recovery payments in alleged violation of the Anti-Manipulation Rule and FPA Section 222;
- allegedly trading intentionally designed to manipulate monthly index prices to benefit one trader’s derivative positions in alleged violation of the Anti-Manipulation Rule and Section 4A of the NGA; and
- allegedly engaging in a scheme to fraudulently inflate energy load baselines for a resource and then offer load reductions against that inflated baseline in alleged violation of the Anti-Manipulation Rule.
- alleged violations of ISO/RTO tariffs and associated regulations, such as:
- alleged failure to offer the MWs required by ISO-NE tariff for forward capacity and forward reserve markets in alleged violation of the ISO-NE tariff and Section 35.41(a);
- alleged submission of inaccurate cost-based de-list bids during ISO-NE Eleventh Forward Capacity Auction qualification period in alleged violation of the ISO-NE tariff and Section 35.41(a);
- alleged inaccurate submissions and intentional omissions to NYISO resulting in excess uplift revenues in alleged violation of the NYISO tariff and Sections 35.41(a)-(b); and
- allegedly submitting false or misleading information to CAISO about physical capabilities of a wind-powered electric generation facility and potential violations of the CAISO tariff in alleged violation of the CAISO tariff and Section 35.41(b).
- other alleged violations, such as:
- alleged failure to timely conduct sonar surveys as required by a Certificate Order in alleged violation of NGA Section 7(e) and a Commission-issued Certificate of Public Convenience and Necessity; and
- alleged failure to provide accurate reporting of unpermitted LNG terminal construction activities (having cleared and stabilized ~25 acres of land without prior Commission authorization) in alleged violation of the Commission’s Order authorizing LNG terminal construction.
Self-reporting of Potential Violations Remains a Significant Feature of FERC Enforcement
Like in previous years, this year's report highlights the importance of regulated entities self-reporting potential violations when possible. In fiscal year 2021, enforcement staff received 146 new self-reports, of which 113 were closed and 64 reports remained pending; each of these quantities is an increase compared to fiscal year 2020. Increased self-reporting may be the result of more robust compliance programs on the part of regulated entities, which can quickly identify potential issues and resolve them in a timely manner. FERC's quick processing of self-reports (with the majority closed without action) only further demonstrates the importance of such programs.
The following are examples of self-reports that were closed without enforcement action.
- Tariff/OATT and Reporting Violation (Electric). A utility and several of its subsidiaries self-reported failure to file timely notification with the Commission to disclose that the subsidiaries had become Category 2 Sellers when their corporate parent purchased other utilities. This was due to administrative oversight. They also failed to submit required MBR tariff amendments and timely triennial reports required of Category 2 Sellers. After it discovered the violations, the parent company made substantial improvements to its compliance program and conducted reviews of its subsidiaries' compliance obligations. Staff closed this self-report without further action because of (i) the inadvertent nature of the violations, (ii) the lack of market harm, and (iii) the companies' substantial compliance improvements.
- Tariff/OATT Violations (ISOs/RTOs). Multiple ISOs/RTOs self-reported minor tariff violations that resulted from software or human error, such as: failing to maintain confidentiality of market participant project information; small errors in calculating capacity and reserve values; data adjustment errors that resulted in inaccurate modeling inputs; transmission service processing delays due to a storage device failure; late-filing of agreements with the Commission and software errors that created the potential for incorrect market participation compensation. Staff closed these self-reports without further action because in all instances, (i) the violations were inadvertent, (ii) they resulted in minimal harm, and (iii) they were promptly and effectively remedied to mitigate harm and prevent future violations.
- Standards of Conduct Violation (Annual Training). A public utility self-reported its violation of Section 358 by failing to provide annual training to certain employees that had likely become privy to transmission function information. The utility orally informed enforcement of the violation and initiated an internal investigation then implemented new procedures in response to the failure. Staff closed this report without further action because of the utility's investigation and resulting new procedures.
While the wide variety of self-reported issues mentioned in the report emphasizes the importance of self-reporting, whether or not to self-report must be decided quickly after discovering the violation. It is important to consult counsel when making that assessment to properly consider the pros and cons and necessary follow-up if a self-report is made and to carefully consider the best course of action to take internally in response to the violation.
Response to the Texas Freeze
In response to the outages associated with the February 2021 cold weather event in Texas and other southern and central states, the Commission formed a joint inquiry with NERC and all six of the relevant regional entities (as previously reported by Steptoe, here). The joint inquiry aimed to determine the causes of the event and make recommendations to prevent such an event in the future. Enforcement staff were part of the FERC team for the joint inquiry, reviewing data and conducting interviews to determine the causes of generation losses and to develop recommendations. Enforcement’s involvement in this process signals the Commission’s willingness to not only seek to understand the root cause of significant events such as the 2021 cold weather event, but also potentially assess penalties in response to them when appropriate.