21 May 2018

Energy Enforcement Update

This week’s enforcement update covers:

  • FERC Enforcement Staff presents the 2018 Summer Energy Market and Reliability Assessment;
  • CFTC Staff issues report assessing market impacts of LNG;
  • CFTC Commissioner Behnam discusses CFTC enforcement program and trends;
  • FERC files opposition to TOTAL petition for writ of certiorari in the Supreme Court;
  • Second Circuit affirms dismissal of class action against TOTAL for alleged natural gas manipulation; and
  • FERC Enforcement settles investigation with PSEG.

FERC Enforcement Staff presents the 2018 Summer Energy Market and Reliability Assessment.  At FERC’s May 17 open meeting, FERC’s Office of Enforcement and Office of Electric Reliability presented the Summer 2018 Energy Market and Reliability Assessment.    The report provides a summary of the anticipated reliability challenges in the coming operating season and FERC Staff’s corresponding assessment of electric and natural gas markets headed into the summer months.  According to FERC Staff’s analysis, the energy reliability and market conditions and trends going into this summer indicate that most regions appear prepared for the expected summer demand.  FERC Staff identified hydro and natural gas availability in Southern California and total generating capacity in ERCOT as areas worthy of attention during the summer season.

CFTC Staff issues report assessing market impacts of LNG.  On May 16, Staff of the Market Intelligence Branch of the CFTC’s Division of Market Oversight issued a report assessing the market impacts from expanding liquefied natural gas (LNG) trade and exports.  In aggregate, U.S. LNG export plants in operation and under construction have a capacity of 10 Bcf/day, which is about 13% of current U.S. dry production.  The CFTC’s report examines the impact of LNG market changes and summarizes key factors in how the LNG market outlook has evolved.  The three main takeaways of the CFTC’s report are:

  1. global LNG trade growth is expected to continue with U.S. LNG exports having the most rapid growth rate and a competitive price advantage;
  2. U.S. LNG export growth may put upward pressure on U.S. natural gas prices and expose the relatively isolated North American market to global market dynamics; and
  3. burgeoning U.S. LNG exports are affecting global LNG market dynamics, including contracting and risk management practices in CFTC regulated markets.

CFTC expects the changes in LNG markets may drive increased participation in derivatives markets.  CFTC found that the LNG market is evolving to shorter contract durations and more spot transactions. These factors point to an increased need for derivatives markets for hedging, and recent experience supports this point. Additionally, as gas-indexed contracts become more prevalent, and U.S. exports increase, it is very likely that trading in U.S. derivatives markets will increase as a result, especially by overseas traders.  Bottom line: expect the CFTC to pay attention to LNG’s impact on the derivatives markets.

CFTC Commissioner Behnam discusses CFTC enforcement program and trends.  On May 15, CFTC Commissioner Rostin Behnam spoke at Energy Risk USA in Houston.  The remarks covered Commissioner Behnam’s thoughts on the CFTC’s enforcement program and some of the trends in the prosecution of spoofing cases and matters involving supervisory duties and third-party service providers.  Commissioner Behnam highlighted the aggressive and coordinated enforcement approach between the CFTC and the Department of Justice in prosecuting spoofing cases, as well as the new Spoofing Task Force to coordinate efforts internally across the Enforcement offices in Washington, New York, Chicago, and Kansas City.  In addition, Commissioner Behnam discussed the CFTC’s increased effective use of data, noting that CFTC Enforcement is utilizing CFTC data, analytics, and forensics and leveraging the tools utilized by self-regulatory organizations like CME Group to monitor for and detect conduct and patterns typical of spoofing and other manipulative behaviors.  Commissioner Behnam also pointed to failures by companies and individuals to use technologies to detect, deter, and otherwise generally supervise those for whom they are responsible.  According the Commissioner Behnam, “The Commission is working hard to identify and prosecute individual traders who engage in spoofing as well as individuals who teach others how to spoof, who build the tools designed to spoof, or who otherwise aid and abet the wrongdoing.”

FERC files opposition to TOTAL petition for writ of certiorari in the Supreme Court.  On May 11, the Solicitor General filed a brief on behalf of FERC in opposition to TOTAL Gas & Power North America’s (TOTAL) petition for a writ of certiorari in the Supreme Court.  FERC argues that the court of appeals correctly held that TOTAL’s claims are not ripe.  In addition, FERC claims that TOTAL errs when it contends that the court of appeals’ decision conflicts with decisions of other courts of appeals.  In any event, FERC argues that this case would be an unsuitable vehicle for resolving the question presented (i.e., whether the court of appeals correctly held that TOTAL’s challenge to a FERC order that has not yet issued, and may never issue, is not ripe for judicial review).  Finally, FERC asserts that there is no need to hold the petition until the Supreme Court resolves Lucia v. SEC, No. 17-130 (argued April 23, 2018), regarding the Appointments Clause.

Second Circuit affirms dismissal of class action against TOTAL for alleged natural gas manipulation.  On May 4, the U.S. Court of Appeals for the Second Circuit issued an order affirming the district court’s dismissal of the class action lawsuit against TOTAL Gas & Power North America, Inc. and certain affiliates for alleged natural gas market manipulation.  As we previously reported, drawing on CFTC and FERC findings, several investors who trade commodities derivatives on the New York Mercantile Exchange and Intercontinental Exchange sued for damages resulting from alleged manipulation of natural gas trading at four regional hubs in the western U.S.  In March 2017, the district court dismissed the plaintiffs’ suit on the grounds that they did not successfully plead injury, and thus failed to establish standing or to state a claim under the Commodity Exchange Act or antitrust laws.  The Second Circuit found, to the contrary, that the plaintiffs successfully pleaded standing.  However, the Second Circuit agreed with the district court that the plaintiffs failed to plausibly allege injury under any of their claims.  Accordingly, the Second Circuit affirmed the district court’s judgment, modified to remove the dismissal for lack of standing.

FERC Enforcement settles investigation with PSEG.  On April 25, FERC issued an order approving a settlement between FERC’s Office of Enforcement Staff and PSEG Energy Resources & Trade, LLC (PSEG).  The settlement resolves FERC Enforcement’s investigation into whether PSEG violated Sections 1.2 and 6.4.2(a)(ii) of Schedule 1 of the PJM Operating Agreement and Attachment K-Appendix of the PJM Open Access Transmission Tariff by submitting incorrect cost-based bids into the PJM energy market from 2005 through 2014, as well as FERC’s market behavior rule on communications (18 C.F.R. § 35.41(b)) by making false and misleading statements to PJM regarding the costs associated with certain units for which PSEG submitted cost-based bids into the PJM energy market.  According to the settlement, FERC Enforcement initiated a non-public preliminary investigation following PSEG’s self-reports of inaccuracies in its cost-based offers for some of its fossil units related to the inclusion of incorrect environmental adders going back to 2005.  Under the settlement, PSEG admits to the facts set forth in the settlement agreement, but neither admits nor denies the violations.  PSEG agreed to pay a civil penalty of $8,000,000, to pay PJM disgorgement of $26,905,736, plus $4,494,264 interest, and to submit annual compliance reports.