This week’s enforcement update covers FERC’s assessment of civil penalties against ETRACOM. We also report on comments regarding the CFTC’s proposed amendment to the RTO/ISO exemption order, the TOTAL and City Power proceedings in district court, and a FERC order revoking multiple entities’ market-based rate authority in certain balancing authority areas.
FERC issues Order Assessing Civil Penalties against ETRACOM and Michael Rosenberg. On June 17, FERC issued its Order Assessing Civil Penalties finding that ETRACOM and Michael Rosenberg violated section 222 of the Federal Power Act (FPA) and section 1c.2 of FERC’s regulations, which prohibit energy market manipulation, through a scheme to submit virtual supply transactions at the New Melones intertie at the CAISO border in order to affect power prices and economically benefit ETRACOM’s Congestion Revenue Rights sourced at that location. FERC assessed $2,400,000 against ETRACOM and $100,000 against Rosenberg in civil penalties, plus $315,072 in disgorgement. As part of the order, FERC also denied ETRACOM’s request for rehearing of FERC’s May 6 order denying the motion for disclosure of materials from CAISO.
Notably, FERC rejected the respondents’ arguments that the “well-functioning market” language in FERC Order No. 670 limits the reach of FERC’s anti-manipulation rule. According to FERC, Enforcement Staff is not required to prove that the market in which the manipulation occurred was “well-functioning,” nor does the alleged existence of market flaws serve as a defense to respondents’ manipulative trading behavior. FERC asserts that a flawed market can be manipulated, citing to the California energy markets during 2000-01.
ETRACOM and Rosenberg elected the de novo review procedures under FPA Section 31(d)(3)(A). Thus, if the penalty is unpaid within 60 days, FERC will institute a proceeding in the appropriate district court seeking an order affirming the assessment of a civil penalty and that court has the authority to review de novo the law and facts involved. According to FERC’s order, FERC’s position is that the “authority to review de novo” provided by statute under FPA Section 31(d)(3) provides substantial procedural discretion to the district court based upon the particular circumstances of the case. In some cases, the court might well decide that a review of the order itself and the administrative record provides a sufficient basis for determination; however, FERC has acknowledged that the courts have discretion to proceed as the court see fit, which could mean allowing supplemental evidence and discovery.
Parties file comments in response to CFTC’s proposed amendment to RTO/ISO exemption order for private rights of action. On June 15, a number of parties filed comments on the CFTC’s proposed amendment to the 2013 RTO/ISO Final Order that exempted specified RTO/ISO transactions from certain provisions of the Commodity Exchange Act (CEA) and CFTC regulations. As we previously reported, the CFTC’s proposed amendment seeks to change that 2013 order by expressly permitting private parties to bring claims under the CEA for fraud and manipulation involving financial energy products traded in the organized wholesale power markets. Of note, FERC filed comments opposing the CFTC’s proposed amendment. According the FERC’s comments, “introducing a private right of action to these markets via the CEA appears inconsistent with Congressional intent and would conflict with the design of the FPA.” A number of other parties, including the RTOs/ISOs, filed comments opposing the proposed amendment, noting that it would create significant regulatory uncertainty and increase costs for market participants. Equally notable, PUCT Commissioner Ken Anderson filed comments – you can get to the comments through here.
FERC files opposition to TOTAL motion for summary judgment, and TOTAL replies. On June 9, FERC filed its opposition to TOTAL’s motion for summary judgment in the district court proceeding in Texas. FERC argues that Section 24 of the Natural Gas Act (NGA) does not give federal courts jurisdiction over administrative actions to assess civil penalties. In addition, FERC claims that Congress authorized administrative adjudication of “public rights” cases—cases in which the government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress to enact. Finally, FERC argues that TOTAL’s arguments about the Appointments Clause and due process are unripe, as FERC has not yet conducted a hearing in this proceeding.
On June 16, TOTAL filed its reply in support of its motion for summary judgment. TOTAL argues that FERC distorts Sections 22 and 24 of the NGA to avoid Congress’s express division of those different powers. According to TOTAL, under Section 24, FERC cannot adjudicate whether the NGA has been violated, as the NGA expressly places that separate and distinct adjudicatory power exclusively in the hands of federal district judges. TOTAL also argues that FERC’s exercise of that authority would also violate both the Constitution and the Administrative Procedure Act (APA). In particular, TOTAL argues that: (a) FERC’s ALJ appointment process violates the Appointments Clause; (b) the Seventh Amendment and Article III of the Constitution entitle TOTAL to a jury trial in federal district court; and (c) administrative adjudication would deprive TOTAL of its Fifth Amendment right to an impartial tribunal and violate the APA.
The two whistleblowers who reported TOTAL for alleged market manipulation could split approximately $65 million, if FERC Staff’s proposed $216 million civil penalty against TOTAL is ultimately affirmed. Under the CFTC’s whistleblower program, whistleblowers are collectively eligible for between 10% and 30% of monetary sanctions collected by other authorities in actions related to a CFTC enforcement action and based on information provided by a CFTC whistleblower. If FERC decides to sanction TOTAL and two traders for allegedly engaging in a scheme to manipulate natural gas prices in the southwestern U.S. between June 2009 and June 2012, the two whistleblowers could receive 10-30% of the amount collected.
TOTAL files to dismiss class action complaint. On June 9, TOTAL filed a motion to dismiss the class action complaint in the Southern District of New York. TOTAL argues the financial instruments that plaintiffs alleged to have traded (NYMEX futures contracts settling at Henry Hub) are different from those at issue in the FERC and CFTC proceedings. According to the motion, neither the CFTC nor FERC allege a scheme by TOTAL to manipulate Henry Hub prices; rather, both agencies allege that trading in physical natural gas at four different regional hubs in the southwestern U.S. was designed to change prices at those regional hubs. Accordingly, plaintiffs lack standing. Additionally, TOTAL argues that the plaintiffs fail to state plausibly the related injury and causation elements of their various claims. Finally, TOTAL argues that controlling precedent bars plaintiffs from free-riding on an agency’s unadjudicated statements.
FERC files motion for leave to file supplemental brief in City Power district court proceeding. On June 9, FERC filed a motion for leave to file a supplemental memorandum on issues addressed at the June 1 hearing on City Power’s motion to dismiss. In the supplemental memorandum, FERC argues that: (a) the law of fraud generally is applied flexibly and recognizes that deception can occur without an express misrepresentation; (b) the regulatory context in which FERC is called on to prevent market manipulation differs in important ways from the context in which the SEC does so; (c) Congress’ grant of express anti-manipulation authority in 2005 must permit FERC to act against practices, like Enron’s “Death Star” trading scheme, that are deceptive through conduct or implied misrepresentations; (d) FERC’s interpretation of the applicability of securities precedents to the FPA anti-fraud provision is entitled to Chevron deference, (e) FERC provided ample notice to the marketplace, before the trading at issue here, that the only legitimate purpose of trades by virtual traders in PJM is arbitrage; and (f) FERC’s anti-manipulation rule incorporates the prohibitions in its earlier Market Behavior Rules.
Judge Bates granted FERC’s motion by minute order on June 1. City Power may file a 20-page response by June 30.
FERC revokes Berkshire Hathaway Energy subsidiaries’ market-based rates in certain areas. On June 9, FERC issued an order revoking the market-based rate authority of eighteen Berkshire Hathaway Energy subsidiaries in four balancing authority areas (BAAs) in the Northwest. FERC found that these sellers failed to rebut presumptions of horizontal market power, and thus revoked their authority to sell energy, capacity and ancillary services at market-based rates in the PacifiCorp-East (PACE), PacifiCorp-West (PACW), Idaho Power Company (Idaho Power), and NorthWestern Corporation (NorthWestern) balancing authority areas. As a result of the revocation, these entities now have to make sales at cost-based rates in the affected BAAs. In addition, FERC ordered refunds based on the cost-based rate for the period from January 9, 2015 through April 9, 2016. FERC’s order allows these sellers to propose tailored mitigation that would apply prospectively, and the sellers may make a new filing under FPA Section 205 to request market-based rate authority prospectively.