Each year, pursuant to the Federal Energy Regulatory Commission’s (FERC or Commission) Revised Policy Statement on Enforcement, FERC’s Office of Enforcement (OE) publishes “annual statistical reports” summarizing its enforcement activities during the preceding fiscal year (FY).
Consistent with that directive, OE’s Annual Report on Enforcement (Annual Report) contains a range of statistical information about the activities of each of its components, the Division of Investigations (DOI), the Division of Audits and Accounting (DAA), and the Division of Analytics and Surveillance (DAS).
While these statistics convey important information about the year’s activity and broader enforcement trends, this information is only the tip of the iceberg. The Annual Report also contains a great deal of qualitative information about the nature, role, and activities of OE’s different divisions. Each section contains illustrative blurbs describing various matters handled, opened, or closed during the year, which are also very instructive. These carefully curated selections reveal OE’s priorities and thought processes. They identify activities of interest. DAA’s accounting blurbs are especially useful for their volume and specificity. The DAA section of the Annual Report should be mandatory reading each year for employees involved in FERC jurisdictional accounting and rate design.
Investigations: Insights from the 2022 Annual Report
Unlike DAA’s periodic risk-based public audits (which typically do not result in civil penalties), little information about DOI’s investigations becomes public. An entity seeking to enhance its compliance posture and minimize enforcement risk will therefore want to scrutinize the Annual Report for clues about OE’s methods and priorities.
DAS’s surveillance apparatus is primarily designed to detect potential instances of market manipulation and anti-competitive behavior. As matters proceed from screen trip to inquiry to DOI referral, a primary filter between each step is whether there is a plausible non-manipulative explanation for the observed behavior, sufficient to allay staff’s concerns. By the time DAS staff contacts the Market Participant, it has reviewed a significant amount of data and is familiar with the market conditions relating to the inquiry, but remains unsatisfied as to the reason for or legitimacy of the identified activity. As such, communications with DAS staff can be a critical juncture, and should be approached with care.
The FY 2022 illustrative surveillance inquiries closed with no referral are instructive regarding DAS’s surveillance priorities. In the seven examples provided, we see two broad categories of behavior targeted: (1) “related position” market manipulation; and (2) “gaming” market manipulation. Although five of the examples involved instances of potential related position market manipulation, this does not mean that potential gaming behavior is less of an enforcement risk or less of a DAS priority. The common thread in all of the examples: concern about trading one thing to profit from something else, whether that something else is a related physical or financial position or an out of market uplift payment. With this in mind, traders should be instructed on what the Commission views as market manipulation and, likewise, what kinds of strategies and behaviors are likely to draw scrutiny. Similarly, managers and compliance professionals should explore best practices and compliance enhancements ahead of time to improve the chances that DAS staff will be satisfied before a screen trip evolves into a referral to DOI for further investigation.
Investigations—Observations from FY 2022
DOI’s illustrative investigations and self-reports closed with no action both provide valuable information.
With continued emphasis on the Duty of Candor, several investigations closed in FY 2022 involved potentially inaccurate or misleading bids and offers. These were evaluated by enforcement staff as possible components of manipulative schemes or targeting of uplift payments. DOI works closely with ISO independent market monitors, who play an important role in identifying and referring anomalous bid and offer behavior for potential investigation. This underscores both the importance of ensuring accurate and justified bid and offer parameters and the significance of contacts from a market monitor. Additionally, two of the five examples cited contemporaneous communications with an ISO or market monitor as part of staff’s justification for closing the investigation without further action. These kinds of communications can be strong evidence that a subject was acting in good faith.
While 2022’s illustrative self-reports closed without action constitute a varied grab bag of generally minor regulatory violations, some could reasonably have been the subject of an investigation and/or given rise to civil penalties. Project developers in particular should note the several self-report examples relating to Market Based Rate applications, Exempt Wholesale Generator filings, Qualifying Facility certifications, and timing of initial power sales. But the most important insight from the example self-reports is the value of self-reporting. Self-reporting a violation shows a commitment to compliance, presents a well-tread path towards a resolution without sanctions, and—if staff later proposes penalties—can yield a significant penalty reduction under the Commission’s penalty guidelines. This section of the Annual Report also provides very useful information about considerations for remedial action and relevant information to collect when a potential violation is discovered.
OE’s Annual Report on Enforcement is packed with information. While each of the different sections will be more relevant for some than others, the Annual Report is worthwhile reading for counsel, trading managers, traders, compliance professionals, and accounting professionals, among others.
—Maxwell Multer, a partner with Bryan Cave Leighton Paisner, represents energy and financial clients in regulatory and enforcement matters before the Federal Energy Regulatory Commission and other agencies. He was formerly an attorney-adviser in FERC’s Office of Enforcement as well as in-house counsel at a large combination utility. He can be reached at [email protected].