Regulators release updated energy primer

The Federal Energy Regulatory Commission has released an updated version of its "resource manual",  Energy Primer: A Handbook of Energy Market Basics.

The FERC is an independent federal agency that regulates a variety of aspects of the U.S. energy industry, including the interstate transmission of electricity, natural gas, and oil, proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines, and hydropower projects, as well as engaging in strategic planning.

FERC's Office of Enforcement is charged with encouraging compliance with the Commission’s statutes, rules, and orders.  Within the enforcement office, the Division of Energy Market Oversight is responsible for monitoring and overseeing the nation’s wholesale natural gas and electric power markets.

In 2012, the Division of Energy Market Oversight (or DEMO) issued the first edition of its Energy Primer.  This week, DEMO issued an updated 2015 version of the Energy Primer.  As with the previous edition, the 2015 Energy Primer gives the public a broad overview of the physical wholesale markets for natural gas and electricity and energy-related financial markets.  As FERC has noted, the revised edition reflects some of the changes that have occurred in the industry since 2012, including the growth in natural gas supplies and the expansion of organized electric markets under Independent System Operators (ISO) and Regional Transmission Organizations (RTO).

The 2015 FERC Energy Primer offers a useful introduction to the U.S. energy industry as it is regulated by FERC.  As with the 2012 version, FERC staff states that the 2015 edition is intended to be used as either a text or a reference guide.  FERC's website also notes that the Energy Primer is a product of FERC staff and does not reflect the views of the Commission or any individual Commissioner.  Nevertheless it may offer careful readers insight into how Commission staff view the markets' continuing evolution.

FERC settles 3rd Southwest blackout case

A California public utility has settled claims by federal electricity regulators related to the September 8, 2011, blackout in the southwestern United States.  Following an investigation by the Federal Energy Regulatory Commission (FERC) and electric reliability organization North American Electric Reliability Corporation (NERC), Southern California Edison Company has agreed to pay a $650,000 civil penalty and undertake additional compliance actions.

According to previous investigative reports, the 2011 blackout started when a 500-kilovolt transmission line owned by Arizona Public Service Company tripped out of service, causing cascading power outages through automatic load shedding as other equipment quickly overloaded.  In the end, the outage affected over 5 million customers, shedding 7,835 megawatts of peak demand and over 30,000 megawatt-hours of energy.

Following the blackouts, both FERC and NERC launched investigations into what had happened.  As a federal agency, FERC has regulatory authority over the reliability of the electric bulk power system.  NERC is a not-for-profit international regulatory authority whose mission is to ensure the reliability of the bulk power system in North America, and has been designated by FERC as the nation's electric reliability organization.

In July, FERC announced a $3.25 million settlement with Arizona Public Service.  In August, FERC announced a $12 million settlement with California's Imperial Irrigation District.

Today, FERC announced that it has approved a stipulation and consent agreement between FERC’s Office of Enforcement, NERC, and Southern California Edison Company.  Through a joint investigation, FERC Office of Enforcement staff and NERC determined that the utility violated the Protection and Control group of NERC's Reliability Standards.  In particular, the investigation found that Southern California Edison failed to adequately coordinate its intertie separation scheme at the San Onofre nuclear generating station switchyard with certain other protection systems.  Enforcement staff and NERC found this violation to be a serious deficiency that undermined reliable operation of the Bulk Power System.

Through the settlement, Southern California Edison will pay a civil penalty of $650,000.  Of this penalty, $125,000 will be paid to the U.S. Treasury, $125,000 will be paid to NERC, and $400,000 will be invested in additional reliability enhancement measures.

With Southern California Edison's case resolved, all three of the vertically integrated utilities known to be implicated by FERC's investigation have now settled their alleged violations by agreeing to pay penalties.  Will further penalties be forthcoming?  Will the penalties and ordered reliability measures keep the lights on the next time the grid is stressed?

Polar vortex caused energy price spikes, says FERC staff

Why did energy prices rise during last winter's extremely cold "polar vortex" weather?  A recent report by federal regulators suggests that inadequate infrastructure is largely to blame, while finding no evidence of widespread or sustained market manipulation.

A recent winter in New England: cold ocean, cold snow.  Must high energy prices follow?

The 2013 - 2014 winter season brought prolonged and unusually cold weather events in much of the United States.  While the nation's major electric grids were generally able to maintain reliable operation, prices for natural gas and electricity spiked to unprecedented levels.  Bottlenecks on interstate natural gas pipelines limited the amount of gas flowing into regions like the Northeast, while demand for gas for heating and electric power generation increased beyond the constrained pipelines' capacity.  This imbalance of supply and demand for gas led to extremely high prices for gas as well as for electricity, because the price of natural gas often sets the price for power.  Compounding the problem, some generators could not buy enough gas to operate, while others experienced outages due to equipment failure and frozen coal piles.  In some regions, generators amounting to 30 percent of electric load faced forced outages.

As an immediate response, the Federal Energy Regulatory Commission took actions including changes to rules in the PJM, New York ISO and California ISO electricity markets, the Commission's first use of its emergency powers under the Interstate Commerce Act to direct Enterprise TE Products Pipeline to temporarily provide priority treatment to certain propane shipments, and approving a Winter Reliability Program in the ISO New England region.

According to a recently released report by the staff of the Federal Energy Regulatory Commission, the FERC Office of Enforcement also launched investigations into whether market participant behavior influenced regulated energy prices.  In addition to the Commission's enforcement arm's regular surveillance of natural gas and electric markets for market manipulation and other improper conduct, the past winter's extreme price spikes prompted a closer look by the Office of Enforcement to determine if market manipulation was behind the historically high natural gas and electric prices.

On October 16, FERC’s enforcement staff reported that it found "no evidence of widespread or sustained market manipulation."  Enforcement staff said it reached its conclusions after an extensive review and data analysis related to gas trading behavior, allegations received through the FERC hotline, generator offer behavior and outage behavior.

However, enforcement staff reported that three non-public investigations remain pending.  At stake is whether any market participant was involved with the formation of a single monthly natural gas index to benefit its financial derivative positions, as well as whether certain generators improperly took advantage of constrained conditions in the electric markets by bidding in a way that increased their uplift payments.

Expect these enforcement investigations to continue, either to an informal resolution or a public enforcement process.  With former Office of Enforcement head Norman Bay as the newest FERC Commissioner, FERC's enforcement arm appears to be growing in influence.  Meanwhile, the coming winter may yet again test the nation's electricity and natural gas infrastructure.  What will the 2014 - 2015 winter hold, in terms of energy reliability, pricing, and enforcement actions?

FERC approves second Southwest blackout penalty

A California irrigation district has agreed to pay a $12 million penalty to settle its role in a 2011 power outage affecting over 5 million people in California, Arizona, and Mexico.

The September 8, 2011 outage started when a 500-kilovolt transmission line owned by Arizona Public Service Company tripped out of service, causing cascading power outages through automatic load shedding as other equipment quickly overloaded.  In the end, the outage deprived customers of 7,835 megawatts of peak demand and over 30,000 megawatt-hours of energy.

Swiftly on the heels of the outage, the Federal Energy Regulatory Commission and electric reliability organization NERC launched an investigation into what had happened -- and whether any laws or regulations had been violated.  That investigation focused on APS and five other entities believed to have been involved: the California Independent System Operator, the Imperial Irrigation District, Southern California Edison, the Western Area Power Administration, and the Western Electricity Coordinating Council Reliability Coordinator.  Last month, the Commission approved a $3.25 million settlement with APS.

Today, the Commission issued an order approving a stipulation and consent agreement resolving  Imperial Irrigation District's role in the blackout.  Imperial Irrigation District is a not-for-profit, publicly owned, vertically integrated utility and political subdivision of the State of California.  The sixth largest utility in California, Imperial Irrigation District Electricity provides electric power to more than 145,000 customers in the Imperial Valley and parts of Riverside and San Diego counties.

Through their investigation, Commission enforcement staff and NERC found Imperial Irrigation District violated 10 requirements of four Reliability Standards on transmission operations and transmission planning, including a failure to coordinate its operations planning with neighboring systems.  The Commission noted that these violations were serious deficiencies that undermined reliable operation of the Bulk Power System.

Through that stipulation, Imperial Irrigation District agreed to pay a civil penalty of $12 million.  Of this amount, at least $1.5 million will go to the U.S. Treasury and another $1.5 million will go to NERC, and at least another $9 million will be invested in reliability enhancement measures that go beyond mitigation of the violations and the requirements of the mandatory Reliability Standards.  These reliability enhancements will include construction of one or more utility-scale battery energy storage facilities within IID’s transmission operations area, with the money spent by December 31, 2016.

Two of the six entities known to be targeted by the Commission's investigation have now settled their alleged violations by agreeing to pay penalties.  Perhaps more significantly, APS and Imperial Irrigation District represent two of the three vertically integrated utilities implicated.  Will the FERC/NERC investigation lead to further settlements soon?  What impact will the Imperial Irrigation District settlement and penalty agreement have?

Arizona utility fined $3.25 million over 2011 blackout

On a hot summer afternoon in 2011, cascading power outages spread across the North American Southwest.  Over 5 million people in Southern California -- including all of San Diego -- Arizona and Mexico were left without power for up to 12 hours.  This week a federal investigation into the outage was partially resolved by a $3.25 million settlement with Arizona Public Service Company.

According to a joint report by the staffs of the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation, the September 8, 2011 outage started when a 500-kilovolt transmission line owned by APS tripped.  The Hassayampa - N. Gila line serves as a major transmission corridor that transports power in an east-west direction, from generators in Arizona into the San Diego area.  The line's failure triggered significant voltage deviations and equipment overloads, causing transformers, transmission lines, and generating units to trip offline through automatic load shedding.  In all, 7,835 megawatts of customer load lost power -- over 30,000 megawatt-hours of energy -- primarily in the San Diego Gas and Electric service territory and in Baja California.

Following the outages, both the Commission's Office of Enforcement and NERC launched an investigation into the incident.  That investigation, which has been ongoing since 2011, focused on APS and five other entities believed to have been involved: the California Independent System Operator, the Imperial Irrigation District, Southern California Edison, the Western Area Power Administration, and the Western Electricity Coordinating Council Reliability Coordinator.


The investigation concluded that APS had violated NERC's mandatory Reliability Standards.  APS's role and liability was ultimately resolved this week when the Commission accepted a stipulation between APS, the Commission's Office of Enforcement and NERC.

Through that stipulation, APS agreed to pay a civil penalty of $3.25 million.  Of this amount, $1 million will go to the U.S. Treasury, $1 million will go to NERC, and $1.25 million will be invested in reliability enhancement measures that go beyond mitigation of the violations and the requirements of the mandatory Reliability Standards.  In finding the settlement to be in the public interest, the Commission cited APS's cooperation in the investigation as well as its voluntary mitigation efforts.

With APS's role in the outage settled, joint FERC/NERC investigations into other entities' roles continue.  While some targets of investigation choose to settle their cases, others insist to exercise their full legal rights.  Will the 2011 Southwest blackouts lead to further stipulations and penalties?

Norman Bay tapped as next FERC chairman

In a move that portends continued intense enforcement of federal energy laws, President Obama has nominated Norman Bay to serve as the next chairman of the Federal Energy Regulatory Commission. Currently the Director of the Commission's Office of Enforcement, since 2009 Mr. Bay has led that office through a series of high-profile investigations and enforcement actions, culminating in record fines for alleged violations of federal energy law -- over $440 million in 2013, plus hundreds of millions more in penalties levied but not yet collected due to legal challenges. His nomination for chairman illustrates the growing importance within the Commission of enforcement, and suggests enforcement would continue to remain aggressive if he is confirmed.

The Federal Energy Regulatory Commission, or FERC, is an independent federal agency charged with regulating the interstate transmission of electricity, natural gas, and oil. The Commission also licenses hydropower projects and reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines. The Commission is composed of up to five commissioners appointed by the President with the advice and consent of the Senate, each of whom serve five-year terms.

While the Commission has enforced federal energy laws since its inception, enforcement has become a higher priority for the Commission in recent years.  The Energy Policy Act of 2005 increased the Commission's enforcement powers, giving it the authority to levy fines of up to $1,000,000 per day for some violations. Following that law's enactment and a restructuring of the Commission's Office of Enforcement, the Commission has ramped up its enforcement activities. For example, in its 2012 fiscal year the Commission ordered penalties for over 904 possible or confirmed violations, including over $5.8 million in refunds, over $148 million in civil penalties and disgorgement of over $119 million in unjust profits.  Activity increased in 2013, with the Commission assessing over $304 million in civil penalties and ordering disgorgement of almost $141 million in unjust profits. 

Last year also brought record-high individual penalties.  Charged with market manipulation, a J.P. Morgan subsidiary agreed to pay a civil penalty of $285 million and to disgorge $125 million in unjust profits.  In another case, the Commission assessed its largest civil penalty ever: finding that Barclays Bank PLC and four traders violated the Commission’s rule against market manipulation, the Commission imposed civil penalties of $435 million against Barclays and $18 million against the traders, and disgorgement of $34.9 million plus interest in unjust profits. Barclays has challenged the order, and the case is now before the U.S. District Court for the Eastern District of California.

Mr. Bay led the Office of Enforcement through this escalation in enforcement activity.  An alumnus of Dartmouth College and Harvard Law School, prior to joining the Commission he served as a U.S. Attorney and as a law professor.  He now faces confirmation by the U.S. Senate. While some confirmation hearings move quickly, the confirmation process for President Obama's last nominee to replace former Commissioner Jon Wellinghoff -- Ron Binz -- became controversial, leading the President to withdraw his nomination last year.

Mr. Bay may be viewed as less controversial than the previous nominee, but the outcome of the confirmation process remains uncertain.  Whether Mr. Bay becomes a Commissioner -- and if so, how he leads the Commission -- will play out over the coming months and is likely to provoke further discussion on the role of enforcement in U.S. energy policy.

Federal energy enforcement: $304 million in penalties in 2013

The Federal Energy Regulatory Commission has released its report on its enforcement activities in fiscal year 2013.  The FERC's 2013 Report on Enforcement (69-page PDF) gives the public insight into how the Commission's Office of Enforcement operates.  The report also provides key statistics on the Commission's 2013 enforcement actions, which led to over $304 million in civil penalties and disgorgement of almost $141 million in unjust profits.

In recent years, the Commission has increased its market surveillance and enforcement of federal energy law.  The Commission has explained that conduct involving fraud and market manipulation poses a significant threat to energy markets, and that this in turn harms consumers who are exposed to losses from intentional misconduct.  These concerns, coupled with increased enforcement powers granted in the Energy Policy Act of 2005, have led the Commission to ramp up its enforcement efforts.  Today, the Commission's Office of Enforcement is now structured around four divisions: Investigations, Audits and Accounting, Energy Market Oversight, and Analytics and Surveillance.  These divisions are designed to identify and prosecute violations of federal energy laws and regulations.

The enforcement report describes the Commission's 2013 activity, which includes the largest civil penalty ever assessed by the Commission.  In that case, the Commission found that Barclays Bank PLC and four traders violated the Commission’s rule against market manipulation.  As a result, the Commission assessed civil penalties of $435 million against Barclays and $18 million against the traders, and directed the company to disgorge $34.9 million plus interest in unjust profits.  That case is now before the U.S. District Court for the Eastern District of California.

The report also describes 29 financial and operational audits of public utilities and natural gas pipelines conducted in fiscal 2013.  According to the report, these audits resulted in 360 recommendations for corrective action, and directed the targeted companies to pay $15.4 million in refunds. Other recommendations directed improvements to companies’ internal processes and procedures, enhancements to the accuracy and transparency of reports and web sites, and more efficient and cost-effective operations.

The Commission announced that it does not intend to change its enforcement priorities for 2014.  As described in the report, the Commission will continue to target fraud and manipulation, serious violations of mandatory reliability standards, anticompetitive conduct, and conduct that threatens the transparency of regulated markets.

Federal report details U.S. natural gas market

Last week the Federal Energy Regulatory Commission's Office of Enforcement released its assessment of domestic natural gas, electric and other energy markets.  The 2012 State of the Markets report (14-page PDF) describes how changes in both supply and demand led to record low pricing for natural gas at the same time as record high demand for that fuel.

2012 saw significant increases in the production of natural gas from shale and other unconventional resources. Domestic natural gas production grew 5 percent, reaching a new all-time record. Improved drilling rig efficiency boosted production from the Marcellus shale in Pennsylvania, Texas’s Eagle Ford shale, and the Fayetteville shale in Arkansas.  Shale gas production rose from 22 percent of total U.S. natural gas production in 2011 to 38 percent by the end of 2012.

At the same time, total average daily natural gas demand reached a new record, growing 4 percent to 70 Bcf/d in 2012. This growth in demand occurred despite a 10 percent drop in residential and commercial demand for natural gas due to the warm winter. Growth in demand for natural gas for electric power generation surged, driven by the low price of gas and tougher environmental regulations on coal-fired power plants. Generators’ demand for natural gas grew 21 percent over 2011, reaching a record 25 Bcf/d and surpassing residential and commercial demand for the first time in history.  Natural gas replaced coal in many places; coal-fired generation fell to the lowest level in 30 years. Since natural gas is often the marginal fuel in electric generation, lower natural gas prices generally resulted in lower electric prices across the country.

The combination of these changes in supply and demand led U.S. natural gas prices to a ten-year low last year. The spot price at the Henry Hub trading point averaged $2.74/MMBtu for the year, down 31 percent from 2011. Spot prices at Henry Hub ranged from a low of $1.82/MMBtu to $3.77/MMBtu at the onset of the winter heating season.  Most of the country enjoyed low natural gas prices, although pipeline constraints led to much higher pricing in New England, particularly in the winter.

FERC enforcement of energy laws

The Federal Energy Regulatory Commission is charged with enforcing statutes and rules covering much of the U.S. energy industry.  Its jurisdiction includes wholesale electricity market activity, electric and natural gas transmission and storage, and hydropower.  A report recently issued by the FERC's Office of Enforcement documents its enforcement activities in fiscal year 2012 (ending September 30, 2012).  The report illustrates the role of the Office of Enforcement and the importance of compliance by regulated entities.

According to the report, in FY2012, Enforcement focused on matters involving four kinds of conduct:

• Fraud and market manipulation;
• Serious violations of the Reliability Standards; 
• Anticompetitive conduct; and
• Conduct that threatens the transparency of regulated markets.

The report states that Enforcement does not intend to change its priorities in FY2013.

Organizationally, Enforcement currently houses four divisions: the Division of Investigations, the Division of Audits, the Division of Energy Market Oversight, and the Division of Analytics and Surveillance.  While these divisions are designed to coordinate on some enforcement operations, each has a specific mandate.

The Division of Investigations conducts public and non-public investigations of possible violations of the statutes, regulations, rules, orders, and tariffs administered by the Commission.  These investigations typically arise from self-reports, tips, calls to the Enforcement Hotline, referrals from organized markets or their monitoring units, other agencies, other offices within the Commission, or as a result of other investigations.  Where FERC Enforcement staff finds violations of sufficient seriousness, staff reports its findings to the Commission and attempts to settle the investigation for appropriate sanctions and future compliance before recommending that the Commission initiate a public show cause proceeding.

The Division of Audits administers the Commission’s audit and accounting programs. These programs help the Commission achieve effective and appropriate oversight of jurisdictional entities while maintaining accountability and transparency. To accomplish its mission, Audits conducts operational and financial performance and compliance audits of jurisdictional entities, and conducts other activities that aid the Commission. These audits and other activities assess how jurisdictional entities implement statutes, orders, rules, tariffs, and regulations the Commission administers.

The Division of Energy Market Oversight is responsible for monitoring and overseeing the nation’s wholesale natural gas and electric power markets. On a daily basis, Market Oversight examines and monitors the structure and operation of these markets to identify market anomalies, flawed or inadequate market rules, tariff and rule violations, and other unlawful behavior. Market Oversight administers, analyzes, and ensures compliance with the filing requirements for Electronic Quarterly Reports (EQRs) and various Commission financial forms.

The newest branch of FERC's Enforcement office is its Division of Analytics and Surveillance, created in February 2012 to develop surveillance tools, conduct surveillance, and analyze transactional and market data to detect potential manipulation, anticompetitive behavior, and other anomalous activities in the energy markets.  Analytics and Surveillance focuses on three areas: (1) natural gas surveillance; (2) electric surveillance; and (3) transactional analysis.  Within these areas, the Division of Analytics and Surveillance develops and refines surveillance tools to perform continuous surveillance and analysis of market participant behavior, economic incentives, operations, and price formation on both the natural gas and electric markets, to detect anomalous activities in the markets and identify potential investigative subjects.

Together, these divisions' FY2012 activities led to almost four hundred recommendations for corrective action and over $5.8 million in refunds, over $148 million in civil penalties and disgorgement of over $119 million in unjust profits in FY2012, and penalties for over 904 possible or confirmed violations.  In a future post, I will look at some of these specific enforcement cases in more detail.  It is clear that the FERC Office of Enforcement wields considerable power and is increasingly active.