With the market evolving rapidly, we are pleased to provide you with the following enforcement updates:
- FERC extends deadlines for filing EQRs and Form No. 552 to June 1, 2020.
- Trading company challenges PJM FTR forfeiture rule.
- PJM submits tariff revisions to enhance rules for evaluating and managing credit risk.
- FERC establishes paper hearing to evaluate proposed rejection in bankruptcy.
- Parties file summary judgment motions and reply briefs in FERC v. Coaltrain Energy.
- Kraft conditionally withdraws its motion for sanctions in CFTC v. Kraft Food Group, Inc.
- Settlement discussions continue in FERC v. Richard Silkman et al.
- Comments filed on the request for technical conference and petition for rulemaking to update credit and risk management in the ISO/RTO markets.
- FERC issues Order 860-A on Connected Entity Information.
- Fourth Circuit finds FERC’s action timely in FERC v. Powhatan Energy Fund, LLC.
- CFTC approves proposed rule on position limits for derivatives.
- FERC issues notice of intent to revoke MBR authority to thirteen entities for failure to file EQRs.
- FERC approves a Stipulation and Consent Agreement between the Office of Enforcement and Emera Energy Incorporated.
FERC extends deadlines for filing EQRs and Form No. 552 to June 1, 2020. On April 2, 2020, FERC issued a notice (available here) extending the deadline for these items to June 1, 2020, due to the COVID-19 emergency. As we referenced in our April 2, 2020 blog update (available here), this is one of several steps FERC has taken to address COVID-19 issues. We have been in contact with FERC Staff, who have made themselves available should we become aware of industry concerns that FERC may help address. For natural gas buyers and sellers who are required to file Form No. 552, on January 29, 2020, FERC issued an updated filing guide that you may find helpful.
Trading company challenges PJM FTR forfeiture rule. On April 8, 2020, XO Energy LLC filed a complaint in FERC Docket No. EL20-41 against PJM alleging that the Financial Transmission Right forfeiture rule (the “FTR Forfeiture Rule”) is unjust and unreasonable, and that the rule has been implemented in a manner that is inconsistent with FERC’s orders. XO Energy states that PJM’s FTR Forfeiture Rule captures legitimate hedging activity and asks FERC to reject the rule. In place of this rule, XO Energy asks FERC to either (1) adopt a structured market monitoring approach similar to that used in MISO; or (2) amend the FTR Forfeiture Rule such that (i) it tests for financial leverage and (ii) includes a structured market monitoring function that is capable of assessing a participant’s behavior for credible evidence of intent.
PJM submits revised tariff to enhance rules for evaluating and managing credit risk. On March 31, 2020, PJM submitted a filing with FERC making changes to PJM’s tariff and operating agreement to update and enhance its procedures for monitoring and mitigating credit risk in the PJM Markets. In the filing, PJM proposes ongoing credit risk evaluations for FTR and other Market Participants. These risk evaluation practices will be based on “Know Your Customer” standards. In particular, under the new procedures, PJM will: (a) assess an entity’s financial strength, risk profile, and creditworthiness; (b) establish an unsecured credit allowance, if appropriate; (c) determine the level of collateral appropriate to the entity based on its anticipated market activity and credit risk profile; and (d) evaluate the credit support provided. PJM seeks an effective date of June 1, 2020 for the proposed revisions.
FERC establishes paper hearing to evaluate proposed rejection in bankruptcy. On March 30, 2020, FERC issued an order establishing a paper hearing to evaluate Energy Harbor LLC’s (formerly known as FirstEnergy Solutions Corp.) proposed rejection in bankruptcy court of certain FERC-jurisdictional contracts. FERC’s order follows a recent decision of the United States Court of Appeals for the Sixth Circuit, which ordered that the bankruptcy court to apply a public interest standard to the proposed rejection of the jurisdictional contracts and ruled that the bankruptcy court must take FERC’s views on the public interest of such rejection into account. In order to provide FERC’s views, FERC initiated a hearing and investigation under section 206 of the Federal Power Act to consider these public interest factors in FERC Docket No. EL20-35.
Parties file summary judgment motions and reply briefs in FERC v. Coaltrain Energy. On January 31, 2020, Coaltrain Energy, L.P. and the individual Defendants filed a motion for summary judgment in the case of Federal Energy Regulatory Commission v. Coaltrain Energy, L.P. et al. currently pending before the Southern District of Ohio. On the same day, FERC filed a motion for partial summary judgment. Thereafter on February 28, 2020, the parties cross filed Responses in Opposition to the Motions for Summary Judgment. On March 13, the parties also cross filed Replies to the Opposition to Motions for Summary Judgment.
Kraft conditionally withdraws its motion for sanctions in CFTC v. Kraft Food Group, Inc. On August 15, 2019, the CFTC issued a press release announcing that it had reached a settlement with Kraft for $16 million for improperly trading in wheat futures. Thereafter, Kraft filed a sealed motion for contempt, sanctions and other relief alleging that that CFTC’s press release violated the consent order. On February 14, 2020, Judge John Robert Blakey issued a minute order stating that “given the egregious misconduct by [the CFTC], this Court grants in part Defendants’ motions 315 [filed under seal] and 316 [motion for sanctions], and this Court shall issue findings of fact and conclusions of law by separate order.” On March 4, 2020, Kraft said it would withdraw its motion for contempt, sanctions, and other relief, if the Judge approves their proposed Consent Order. On March 11, the CFTC filed a motion to vacate. Judge Blakey said that he would take Kraft’s motion under advisement but set a status hearing for March 26.
Settlement discussions continue in FERC v. Richard Silkman et al. On January 29, 2020, the U.S. District Court for the District of Maine set the case for trial during the period beginning April 27, 2020, and ending May 5, 2020. Both FERC and the Defendants withdrew their jury demands in the case. Thereafter, a Settlement Conference took place on February 21, 2020. The settlement conference was expected to continue on March 24, 2020, but it has since been canceled. Settlement discussions will be rescheduled to a later date.
Comments filed on the request for technical conference and petition for rulemaking to update credit and risk management in the ISO-RTO markets. On December 16, 2019, the Energy Trading Institute filed a petition requesting that FERC hold a technical conference and conduct a rulemaking to update the requirements adopted in Order No. 741 and section 35.47 of FERC’s regulations addressing credit and risk management policies in the RTO/ISO markets. See FERC Docket No. AD20-6-000. On February 11, 2020, FERC issued a notice seeking comments on this request. On March 12, 2020, a number of market participants and trade groups filed comments supporting the request for a technical conference.
FERC issues Order 860-A on Connected Entity Information. On February 20, 2020, FERC issued an Order on Rehearing and Clarification regarding Order 860, which revised the requirements for entities with market-based rate authorization. In the order, FERC denied the requests for rehearing seeking to revisit FERC’s prior decision to not adopt a proposal on Connected Entity Information. FERC previously declined to require entities that trade virtual products or that hold financial transmission rights to report certain information about their legal and financial connections to other entities (Connected Entity Information). Commissioner Glick dissented in part, stating that the Order denying access to Connected Entity Information would impair the Office of Enforcement’s ability to police the markets for manipulation.
Fourth Circuit finds FERC’s action timely in FERC v. Powhatan Energy Fund, LLC. On February 11, 2020, the Fourth Circuit affirmed the district court’s judgment that FERC’s action was timely filed in FERC’s ongoing enforcement action against Powhatan Energy Fund and other defendants. FERC alleges that Powhatan and the other defendants violated FERC’s manipulation rule through a scheme to conduct fraudulent Up-To Congestion transactions in PJM energy markets to obtain excessive amounts of certain credit payments to transmission customers. Defendants had argued that the statute of limitations precludes any disgorgement remedy for almost all of the days at issue. On September 24, 2018, the district court found that FERC had met the statute of limitations, but authorized Respondents to seek interlocutory appeal. The Fourth Circuit affirmed that FERC’s action was timely filed and remanded to the district court for further proceedings. According to the order, “Because FERC had no complete and present cause of action until each statutory prerequisite to suit was met, the statute of limitations did not run until that date.”
CFTC approves proposed rule on position limits for derivatives. On January 30, 2020, the CFTC issued a proposed rulemaking on speculative position limits (the Proposal). This Proposal marks the CFTC’s fourth attempt since 2010 at establishing new federal speculative position limits in commodity derivatives markets pursuant to the Dodd-Frank Act. The CFTC has indicated that this Proposal is one of its top priorities. More information can be found at the Sidley Update drafted by our colleagues: https://www.sidley.com/en/insights/newsupdates/2020/02/cftc-proposes-federal-position-limits-on-physically-settled-derivatives
FERC issues notice of intent to revoke MBR authority to thirteen entities for failure to file EQRs. On January 23, FERC issued an order of intent to revoke the market-based rate authority of thirteen public utilities with market-based rate authorization that failed to file their Electric Quarterly Reports. FERC’s order notifies these public utilities that their market-based rate authorizations will be revoked unless they comply with FERC’s requirements within 15 days of the date of issuance of the order.
FERC approves a Stipulation and Consent Agreement between the Office of Enforcement and Emera Energy Incorporated. On January 10, 2020 FERC issued an order approving Stipulation and Consent agreement with Emera Energy Incorporated (Emera). The settlement resolves FERC Enforcement’s investigation into whether Emera supported Fuel Price Adjustment Requests using fuel costs that did not reflect an arm’s length fuel purchase transaction contrary to ISO-NE Tariff Market Rule 1, Appendix A § III.A.3.4(b). Under the ISO-NE Tariff, evidence supporting a Fuel Price Adjustment Request must reflect “an arm’s length transaction.” According to FERC’s order, FERC has consistently held that affiliated entities are not capable of engaging in “arm’s length transactions” because there is insufficient assurance that an agreed upon price will genuinely reflect market forces, so the indirect quote of a price by Emera’s gas desk to Emera’s power desk did not reflect an “arm’s length transaction.” Emera agreed to pay a civil penalty of $5,000 and to pay disgorgement of $14,120. Emera self-reported the violation and ceased the above-described practice contemporaneous with its internal review. FERC noted that “Emera Energy’s conduct could have been significantly higher absent the company’s timely reporting and cooperation with Enforcement’s investigation.”