FERC releases 2016 Report on Enforcement and Two Enforcement White Papers

On November 17, FERC’s Office of Enforcement released its 2016 Report on Enforcement.  The Report shows continued focus on fraud and market manipulation, serious violations of mandatory Reliability Standards, anticompetitive conduct and conduct that threatens the transparency of regulated markets.

Concurrent with the release of the Report on Enforcement, FERC released two white papers providing insights regarding Enforcement Staff’s views and emerging trends related to manipulation of FERC-jurisdictional markets:

  • Staff White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005:  This white paper summarizes recent FERC and federal court case law regarding development of FERC’s anti-manipulation doctrine and identifies factors staff considers when deciding whether to pursue or close allegations of manipulation.  The white paper discusses some of the specific types of conduct that FERC has found to constitute market manipulation, as well as some of the mitigating and aggravating factors FERC has considered in assessing an organization’s culpability.  Of course, some of the conduct described as manipulative is currently the subject of ongoing federal court proceedings.
  • Staff White Paper on Effective Trading Compliance Practices:  This white paper provides guidance to entities regarding compliance practices that can be effective in detecting and preventing market manipulation if properly implemented within their organizations.  The white paper discusses practices that an organization might use to prevent and detect market manipulation, as well as practices and tools for monitoring trading activities, enforcing compliance obligations, and ensuring that the compliance program remains up-to-date and effective on an ongoing basis.  The document provides useful ideas and practices for an effective compliance program, however the utility/risk created by its various individual pieces should be considered carefully.

Some highlights of the 2016 Report on Enforcement include:

  • Division of Investigations:  During FY2016, staff opened 17 investigations, as compared to 19 investigations in FY2015.  Of the 17 investigations staff opened this fiscal year (some of which involve more than one type of potential violation or multiple subjects), 12 involve potential market manipulation, 11 involve potential tariff violations, one involves potential violations of a FERC certificate order, one involves potential violations of the Standards of Conduct, and one involves potential violation of a FERC filing requirement.  In addition, Staff closed 11 investigations in FY2016, compared with 22 in FY2015.  Staff-negotiated settlements assessed a total of approximately $12.25 million in civil penalties and disgorgement of nearly $5.7 million, and all of the settlements included reporting requirements and provisions requiring the subjects to enhance compliance programs.  Including actions filed in previous years, Staff is currently litigating six such actions in federal court, and it is seeking to enforce FERC’s combined assessment of more than $592 million in penalties and disgorgement in those proceedings.  The Report also discusses a number of illustrative investigations and self-reports closed with no action, which are intended to provide guidance to the public while preserving the non-public nature of the investigations.
  • Division of Analytics and Surveillance (DAS):  Staff worked on more than 40 investigations and reviewed numerous instances of potential misconduct, with some reviews resulting in referrals to Investigations during FY2016.  For natural gas surveillance, DAS uses automated screens that cover the majority of physical and financial trading hubs in the United States, as well as asset-based screens that monitor cash trading around infrastructure, including natural gas storage, pipeline capacity, and electric generation.  For electric surveillance, DAS runs monthly and weekly screens to identify patterns at the hourly level by monitoring the interactions between bid and cleared physical and financially-settled products, including screens that identify financial transmission rights and swap-futures that settle against nodes that are affected by transmission constraints where market participants also trade virtuals, generate electricity, or move power between RTOs/ISOs.  In addition, staff developed a Notice of Proposed Rulemaking regarding collection of data for analytics and surveillance and market-based rate purposes.
  • Division of Audits and Accounting:  During FY2016, Staff reviewed the conduct of regulated entities through 14 audits of oil pipeline, public utility and natural gas companies, resulting in 214 recommendations for corrective action and directing refunds and recoveries totaling $5.3 million.
  • Division of Market Oversight:  Staff continued to analyze market fundamentals, including significant trends and developments, market structure and operations to identify market anomalies, and flawed market rules.  As in prior years, staff presented its annual State of the Markets report and continued ensuring compliance with various Commission forms and reports, including filing requirements for Electric Quarterly Reports.
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