2015 FERC Enforcement Report Confirms Increase in Enforcement and
Audit Activity as FERC Faces Unprecedented Number of Litigated
Enforcement Matters
December 3, 2015
The Federal Energy Regulatory Commission’s (“FERC”) Office of Enforcement (“Enforcement”)
issued its 2015 Report on Enforcement (“Report”) on November 19, 2015. The Report
summarizes FERC’s enforcement efforts during the fiscal year 2015 in Enforcement’s four divisions:
Investigations, Audits and Accounting, Energy Market Oversight, and Analytics and Surveillance.
The Report offers insight into FERC’s public and non-public enforcement activities, which include
self-reported violations and investigations that were closed without further action, and audits of
jurisdictional companies. Consistent with the form of its past reports, FERC focused on four major
areas:
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Fraud and market manipulation;
Serious violations of the Reliability Standards;
Anticompetitive conduct; and
Conduct that threatens the transparency of regulated markets.
It intends to maintain these priorities in 2016. The Report’s hard numbers verify an increase in
FERC enforcement activity this year, and confirm FERC’s continued emphasis on investigations and
audits.
Division of Investigations
FERC highlighted several significant matters to which it directed its resources this year. FERC is
litigating six enforcement actions in federal district courts, more than ever before. FERC also
approved nine settlement agreements with eleven subjects to resolve six alleged violations of the
Anti-Manipulation Rule, four alleged violations of reliability standards related to the 2012 blackout in
Arizona and California, and an alleged violation of tariff provisions.
District Court Litigation: FERC issued orders to show cause why a penalty should not be assessed
in three investigations for violations of its Anti-Manipulation Rule. In all three cases, FERC imposed
civil penalties. The targets of these investigations were Powhatan Energy Fund, Maxim Power
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Corporation, and City Power Marketing as well as individual defendants associated with each of
these entities. Each defendant refused to pay the assessed penalties, and FERC sought to enforce
the penalties in United States District Courts across the country.
In Powhatan, FERC alleged that Powhatan, Alan Chen, HEEP Fund, Inc., and CU Fund, Inc.
violated the Anti-Manipulation Rule by engaging in a scheme of fraudulent up-to congestion trades
in the PJM Interconnection. Maxim Power, Maxim Power Holding Company, Inc., Pawtucket Power
Holding Co, LLC and Pittsfield Generating Company, LP allegedly violated the Anti-Manipulation
Rule through a scheme to collect inflated “make-whole” payments based upon alleged
misrepresentations and material omissions to the ISO-NE market monitor. Finally, FERC assessed
penalties against City Power and its owner K. Stephen Tsingas for engaging in fraudulent up-to
congestion trades.
FERC also continued to litigate cases it had filed in years prior against Barclays Bank PLC and
Lincoln Paper & Tissue, Inc. in federal district court and litigated against BP in an administrative
hearing. FERC sought to enforce civil penalties against Barclays and several of its traders for
violating the Anti-Manipulation Rule, alleging that Barclays and its traders made certain trades
between 2006 and 2008 that manipulated prices for electricity at four trading hubs in the western
United States.1 In Lincoln Paper, FERC assessed civil penalties after finding that Lincoln Paper
artificially inflated its energy load baseline and offered load reductions against that inflated baseline.
In the ongoing administrative litigation between BP and FERC, FERC contends that BP made
uneconomic sales at Houston Ship Channel and took steps to increase its market share at Houston
Ship Channel as part of a manipulative scheme to suppress the Houston Ship Channel Gas Daily
index, and that this scheme was motivated by a desire to benefit certain physical and financial
positions held by BP whose price was set by the same index.
Anti-Manipulation Rule Settlements: In addition to the blackout cases, FERC issued an Order
approving the settlement of a market manipulation investigation with Twin Cities Energy, two of its
affiliates, and three of its traders. This settlement resulted in $3,250,000 in civil penalties,
$978,186 in disgorgement, and temporary trading bans for each of the individuals involved.
Reliability Standards Settlements: The Office of Enforcement sought penalties against the
California Independent System Operator (“CAISO”) for failing to monitor the intertie separation
scheme at the San Onofre Switchyard moments before the outage began. Because of its failed
monitoring, CAISO could not take the necessary emergency measures to stop the scheme when
the intertie became overloaded. To settle, CAISO agreed to a civil penalty of $6 million—$2 million
to the U.S. Treasury, $2 million to NERC, and $4 million to be invested in measures to improve
1
While the Federal Power Act provides for de novo review if the parties elect to litigate in federal court, FERC has taken the
position that the de novo review is limited to the pleadings in the administrative file, without discovery or an evidentiary
hearing in the federal court proceeding.
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reliability. Southern California Edison Company (“SCE”) agreed to pay $650,000—$250,000 to
the U.S. Treasury, $250,000 to NERC, and $400,000 to be invested in reliability enhancement—for
failing to develop emergency plans to deal with a similar blackout. The Office of Enforcement
targeted Western Area Power Authority-Desert Southwest (“Western DSW”) for operating faulty
equipment that shut down during the blackout. Western-DSW agreed to mitigation and
compliance monitoring, but escaped a civil penalty. Finally, the Office of Enforcement alleged that
Western Electricity Coordinating Council (“WECC”) failed to respond properly to alarms and
relying on outdated reliability data. For these failures, WECC paid a civil penalty of $16 million—$3
million to the U.S. Treasury, $3 million to NERC, and $13 million to be invested in reliability
enhancements.
Tariff Provisions Settlements: FERC’s allegations against Columbia Gas Transmission for violating
the FERC gas tariff ended in settlement when Columbia Gas agreed to pay a civil penalty of
$350,000.
Self-reports: In FY 2015, FERC received 122 new self-reports, the highest number in any year
since 2011. The total number of self-reports since then now stands at 460. The majority of these
self-reports came from RTOs and ISOs.
The Division of Investigation closed 78 self-reports during 2015. FERC enumerated several
examples of conduct that, when self-reported, lead to no action: regulatory filing violations, errors in
electric quarterly reports, tariff/OATT violations, and RTO/ISO billing failures. FERC also noted that
the absence of significant harm to the market can be a factor in its decision to close a self-report.
Investigations: During FY 2015, the Division of Investigations opened 19 investigations, two more
than it opened in 2014. As in the year before, most of these new investigations began with a
referral from either the Division of Analytics and Surveillance or the RTO/ISO market monitoring
units. Of the 19 new investigations, 14 involve market manipulation, seven involve tariff violations,
four involve violations of the market behavior rules, one involves gas capacity releases, one involves
violations of natural gas posting requirements, and one involves false statements to FERC.
The Division of Investigation also closed 22 investigations, seven more than it closed in FY 2014.
Six of the 22 cases were closed as a result of a settlement, while the remaining 16 cases were
closed because the Division of Investigations found insignificant evidence of a violation.
Division of Audits and Accounting
The Division of Audits and Accounting administers FERC’s audit and accounting programs. The
Division of Audits and Accounting completed 22 audits of oil pipeline, public utility, and natural gas
companies. These audits covered market-based rate authority and electric quarterly reports
(“EQRs”), formula rates, transmission incentives, natural gas tariff and accounting, mergers and
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acquisitions, oil tariff and accounting, Form No. 552, nuclear decommissioning trust funds, and
capacity markets and demand response. The Division of Audits and Accounting issued 360
recommendations for corrective action and collected more than $26.3 million in refunds and
recoveries. The amount of refunds and recoveries gets higher every year – it more than doubled
this year over the last.2
Division of Energy Market Oversight
The Division of Energy Market Oversight oversees wholesale natural gas and electric power
markets. It continued to study the market for emerging trends, as reported to the Commission in
the 2014 State of the Markets Report and seasonal market assessments. The Division of Market
Oversight reviewed EQR submittals from more than 2,000 individual respondents – roughly 100
more than in FY 2014. And it led a technical conference devoted to the eForms Refresh Project
and transitioning to a new electronic filing format.
Division of Analytics and Surveillance
The Division of Analytics and Surveillance analyzes transactional and market data to detect potential
market manipulation, anticompetitive conduct, and other anomalous activities in the energy markets.
In FY 2015, this Division issued a Notice of Proposed Rulemaking for the Collection of Connected
Entity Data from RTOs and ISOs. It also continued to analyze manipulative and anti-competitive
behavior in the natural gas and electricity markets. The Division worked on more than 30
investigations this year.
The full Report is available on FERC’s website at: http://www.ferc.gov/legal/staff-reports/2015/1119-15-enforcement.pdf.
2
FY 2010: 52 audits completed, 210 corrective action recommendations and $4.1 million in monetary recoveries; FY 2011:
72 audits completed, 300 corrective action recommendations, $290,00 in refunds and a write-off of $95.8 million in
regulatory assets; FY 2012: 44 audits completed, 399 corrective action recommendations, $5.8 million in refunds, and
accounting adjustments of $3.5 million not recoverable in future rate proceedings; FY 2013: 29 audits completed, 360
corrective action recommendations, $15.4 million in refunds, and accounting adjustments of $200,000; FY 2014: 19 audits
completed, 62 corrective actions recommendations and $11.7 million in refunds and recoveries.
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Please contact any member of the Cadwalader team to discuss strategies to address potential risks
in these areas.
Doron F. Ezickson
+1 202 862 2430
[email protected]
Mark R. Haskell
+1 202 862 2407
[email protected]
George D. Billinson
+1 202 862 2411
[email protected]
Sohair A. Aguirre
+ 1 212 504 2278
[email protected]
Christopher Hood
+1 202 862 2272
[email protected]
Thomas R. Millar
+1 202 862 2334
[email protected]
Michael Selig
+1 202 862 2482
[email protected]
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