MARCH 2015
VOL. 15-3
PRATT’S Energy Law Report
P RA T T ’ s
Energy Law
R ep o rt
EDITOR’S NOTE: CHALLENGING FRACKING
BANS
Victoria Prussen Spears
AB 1103 MANDATORY ENERGY DISCLOSURES
FOR NON-RESIDENTIAL BUILDINGS
Jane M. Samson
MORA COUNTY AND DENTON:
CONSTITUTIONAL CHALLENGES TO
HYDRAULIC FRACTURING BANS
Samuel Boxerman, Joel Visser, and Ben Tannen
IN THE COURTS
Steven A. Meyerowitz
DRILLING DOWN: A DEEPER LOOK INTO THE
DISTRESSED OIL & GAS INDUSTRY – PART I
Charles M. Persons
MARCH 2015
TOP 10 PITFALLS IN EPC CONTRACTS
Seth Ginther, Roderick W. Simmons, and Angela
M. Carrico Stevens
vol.15-3
FERC ENFORCEMENT REPORT EMPHASIZES
INTERNAL COMPLIANCE PROCEDURES,
SELF-REPORTING, AND IMPORTANCE OF
COOPERATION
Doron F. Ezickson, Greg Kusel, Gregory K.
Lawrence, and Christopher J. Polito
LEGISLATIVE AND REGULATORY UPDATE
Steven A. Meyerowitz
INDUSTRY NEWS
Victoria Prussen Spears
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Editor-in-Chief, Editor & Board of
Editors
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STEVEN A. MEYEROWITZ
President, Meyerowitz Communications Inc.
EDITOR
VICTORIA PRUSSEN SPEARS
Senior Vice President, Meyerowitz Communications Inc.
BOARD OF EDITORS
SAMUEL B. BOXERMAN
Partner, Sidley Austin LLP
ANDREW CALDER
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M. SETH GINTHER
Partner, Hirschler Fleischer, P.C.
R. TODD JOHNSON
Partner, Jones Day
BARCLAY NICHOLSON
Partner, Norton Rose Fulbright
BRADLEY A. WALKER
Counsel, Buchanan Ingersoll & Rooney PC
ELAINE M. WALSH
Partner, Baker Botts L.L.P.
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Senior Counsel, Holland & Knight LLP
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Editor-in-Chief, Editor & Board of Editors
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FERC ENFORCEMENT REPORT EMPHASIZES INTERNAL COMPLIANCE PROCEDURES
FERC Enforcement Report Emphasizes Internal
Compliance Procedures, Self-Reporting, and
Importance of Cooperation
By Doron F. Ezickson, Greg Kusel, Gregory K. Lawrence, and Christopher J.
Polito*
The authors of this article summarize the Federal Energy Regulatory Commission’s Report on Enforcement.
The Federal Energy Regulatory Commission’s (“FERC”) Office of Enforcement
(“Enforcement”) 2014 Report on Enforcement (“Report”),1 issued on November 20,
2014, provides an overview of and statistics regarding FERC’s enforcement activities
during the fiscal year 2014 within Enforcement’s four divisions:
•
Investigations;
•
Audits and Accounting;
•
Energy Market Oversight; and
•
Analytics and Surveillance.
The Report provides information regarding Enforcement’s non-public activities and
priorities during the fiscal year 2014. The 2014 Report emphasizes the value FERC
Enforcement places on self-reporting and internal compliance procedures.
The Report first identifies Enforcement’s continued priorities:
•
Fraud and market manipulation;
•
Serious violations of the Commission’s 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 highlights 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
*
Doron F. Ezickson is a partner at Cadwalader, Wickersham & Taft LLP, where his energy and
commodities practice involves U.S. and EU regulatory and compliance issues. Greg Kusel is a law clerk
at the firm advising clients about energy-related matters with a focus on natural gas and pipelines.
Gregory K. Lawrence, a partner at the firm, concentrates his practice on the electricity and natural gas
industries. Christopher J. Polito, an associate at the firm, represents energy and commodity companies,
financial institutions, and trade associations. The authors may be contacted at
doron.ezickson@cwt.com,
greg.kusel@cwt.com,
greg.lawrence@cwt.com,
and
christopher.polito@cwt.com, respectively.
1
http://ferc.gov/legal/staff-reports/2014/11-20-14-enforcement.pdf.
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PRATT’S ENERGY LAW REPORT
of possible violations of the statutes, rules and regulations administered by FERC.
The Report summarizes a number of significant matters in 2014, including FERC’s
settlement of an investigation of a self-reported violation of FERC’s AntiManipulation Rule,2 the first self-report of this kind to result in a FERC-approved
settlement.
Direct Energy Settlement
The self-report was filed by Direct Energy Services, LLC (“Direct Energy”) after its
outside counsel gave a compliance training presentation to Direct Energy’s traders
regarding FERC’s Anti-Manipulation Rule. One of Direct Energy’s traders reported
concerns after recognizing similarities between the trading activities discussed in the
compliance training presentation and strategies that were being used by Direct
Energy traders involving unusual natural gas trading at Transco Zone 6. At nearly the
same time, Direct Energy’s back-room operations recognized a problem with certain
trading. Direct Energy immediately commenced an internal investigation, which
eventually led to a self-report to FERC (as highlighted in the settlement) describing
unusual natural gas trading at Transco Zone 6 where large volumes of next-day gas
were bought at index and sold at a lower, fixed price resulting in losses and, in turn,
a lower Gas Daily index price that benefited financial positions settling at that index
held by Direct Energy. The two traders involved were terminated. As a result, Direct
Energy settled with FERC for a civil penalty of $20,000, disgorgement of $31,935,
and agreed to provide at least one monitoring report to Enforcement. The settlement
indicated that Direct Energy “fully and comprehensively” cooperated. The Report
stated that Direct Energy received a relatively small civil penalty and disgorgement
payments due to its self-reporting, strong compliance program (the settlement
emphasizes compliance training and daily data analysis), quick action, and full
cooperation with Enforcement’s investigation.
Additional Settlements
FERC also approved 8 settlements amounting to almost $25 million in civil
penalties, approximately $4 million plus interest in disgorgement, and $1.7 million
in public safety enhancements. These settlements involved a variety of matters,
including Open Access Transmission Tariff (“OATT”) violations, violations of
reliability standards, violations of hydro power safety regulations, violations of FERC
regulations regarding filings and facility merger/consolidation authorization, violations of prohibitions on submission of inaccurate information, and violations of
FERC’s regulations prohibiting manipulation in natural gas and electric markets.
Self-Reports Received and Closed
The Report summarizes the 73 self-reports received by Enforcement. Enforcement
received 73 self-reports in the reporting period. Enforcement closed 70 self-reports in
fiscal year 2014, some of which were still pending from 2009 and 2011, and it had
40 self-reports still pending. Enforcement received self-reports regarding a number of
2
18 C.F.R. § 1c.1 (2014).
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FERC ENFORCEMENT REPORT EMPHASIZES INTERNAL COMPLIANCE PROCEDURES
matters. The largest category was for Tariff/OATT violations. Enforcement also
received a number of self-reports regarding Regional Transmission Organizations and
Independent System Operators (“RTO/ISO”) violations. Enforcement closed only
one self-report related to market manipulation, as contrasted with 21 self-reports
related to Tariff/OATT violations and 12 related to RTO/ISO 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; and
•
The entity received little or no benefit from the violation.
New Investigations
The Division of Investigations opened 17 investigations in 2014, down from 24
investigations the year prior. The opened investigations involve multiple different
types of potential violations, including:
•
market manipulation (nine investigations);
•
false statements to FERC or an RTO/ISO (eight investigations);
•
tariff violations (11 investigations); and
•
FERC accounting standards and orders (one investigation).
RTO/ISO market monitors and the Division of Analytics and Surveillance (“DAS”)
referrals continue to be a key referral source, as over half of FERC’s new investigations
opened this year came through DAS or market monitors. In 2014, Enforcement
converted no Hotline calls to preliminary investigations, although multiple 2014 calls
concerned conduct in investigations that were already pending.
Closed Investigations
Enforcement closed seven investigations because it found no violation or did not
have sufficient evidence. The Report provides several examples of 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 conduct was for a legitimate purpose (e.g., reliability or economic
fundamentals);
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PRATT’S ENERGY LAW REPORT
•
The entity promptly submitted a self-report; and
•
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 19 financial and operational audits. The audits
resulted in 162 recommendations for corrective action and directed refunds and
recoveries totaling over $11.7 million. These audits covered market-based rate
authority and electric quarterly reports (“EQRs”), formula rates, transmission
incentives, accounting and reporting, capacity markets and demand response, OATT
provisions, allowance for funds used during construction (“AFUDC”), mergers and
acquisitions, and nuclear decommissioning trust funds. The Report also highlights
areas where the Division of Audits and Accounting has found consistent patterns of
noncompliance, including in formula rate matters, consolidations, nuclear decommissioning trust funds, AFUDC, OATT provisions, transmission and distribution,
untimely filing of reports, record retention, and demand response/energy efficiency.
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 reviewed nearly 9,000 EQR submittals from over 1,900 individual
respondents. The division also supported FERC’s ongoing gas-electric coordination
initiative which led to FERC’s ongoing Notice of Proposed Rulemaking in Docket
No. RM14-2-000, comments were due by November 28, 2014.
DIVISION OF ANALYTICS AND SURVEILLANCE
DAS conducts surveillance and analyzes market data to detect potential market
manipulation, anticompetitive conduct, and other anomalous trading activities in the
energy markets. In 2014, FERC continued to enhance its ability to conduct
surveillance of gas and electric markets and to analyze individual market participant
behavior by gaining access to the Commodity Futures Trading Commission’s Large
Trader Report data. This data allows the division to evaluate market participants’
financial incentives—e.g., holding a financial position—as it looks for wrongdoing.
DAS uses electronic tags (e-Tags) from Order No. 771, Large Trader Reports, and
data from RTOs/ISOs under Order No. 760 to improve its surveillance capabilities.
DAS also uses screens extensively to detect wrongdoing. DAS worked on more than
30 investigations this year.
138