FERC responds to COVID-19 pandemic

In response to the COVID-19 pandemic, U.S. energy regulators have adopted a variety of measures, including designating a single point point of contact for all industry inquiries related to impacts of the Novel Coronavirus on their activities jurisdictional to the Federal Energy Regulatory Commission, issuing a Policy Statement providing regulatory guidance on energy infrastructure, market, reliability and security matters, and providing other regulatory relief.

On March 19, 2020, the Federal Energy Regulatory Commission named Caroline Wozniak to lead a team of 14 technical staff from the Commission’s 12 program offices, as the Commission’s point of contact for all industry inquiries related to impacts of their COVID-19 preparations and responses on their FERC-jurisdictional activities.

On April 2, 2020, the Commission issued a Policy Statement providing regulatory guidance on energy infrastructure, market, reliability and security matters. Through the Policy Statement, the Commission noted that Commission-regulated entities have taken actions in response to the national emergency conditions that may disrupt, complicate, or otherwise change their normal course of business operations, which "may create questions about entities’ ability to meet regulatory requirements and/or recover the costs necessary to take steps to safeguard the business continuity of their systems." The Policy Statement emphasizes that the Commission will prioritize its processing of filings made for the purpose of assuring the reliable operation of energy infrastructure during this emergency, including requests for relief such as "cost recovery necessary to assure business continuity of the regulated entities’ energy infrastructure in response to the national emergency."

Separately, Commission Chair Neil Chatterjee issued a statement describing the Commission's efforts to help regulated entities manage their potential enforcement and compliance-related burdens during the COVID-19 pandemic. Announcing "that the Commission will exercise appropriate prosecutorial discretion in addressing events that arise during the emergency period", he noted that enforcement staff will take the current emergency into account when evaluating compliance programs, as part of an audit for operations taking place during the emergency, and in assessing the timeliness of self-reports.

FERC proposes revoking hydro license for noncompliance

U.S. hydropower regulators have proposed revoking a Michigan hydroelectric project's license under the Federal Power Act, following findings of violations of numerous license provisions, agency regulations and orders.

At issue is the Edenville Hydroelectric Project, No. 10808, located on the Tittabawassee and Tobacco Rivers by Wixom Lake in Michigan. The Federal Energy Regulatory Commission initially issued a license for the 4.8-megawatt Edenville project in 1998. That license was eventually transferred to a company named Boyce Hydro Power, LLC.

According to public records in the Commission docket for the license, "Boyce Hydro has a long history of non-compliance" with license terms and conditions and with related provisions in the Federal Power Act and Commission regulations and orders. Orders in the docket recite history including a 2017 Compliance Order finding noncompliance with respect to the adequacy of the project's spillway capacity and other matters. As noted in the docket, "The Commission’s primary concern has been the licensee’s longstanding failure to address the project’s inadequate spillway capacity, which currently is designed to pass only approximately 50 percent of the PMF. Failure of the Edenville dam could result in the loss of human life and the destruction of property and infrastructure."

The Commission has tools that it can use to compel compliance with its laws and regulations. For example, on November 20, 2017, Commission staff issued an order requiring the licensee to cease generating at the Edenville Project.

Beyond ordering the project to stop generating power, the Commission can revoke a license. Section 31(b) of the Federal Power Act allows the Commission to issue an order revoking a license, after providing notice and an opportunity for an evidentiary hearing, if it finds that a licensee knowingly violated a final compliance order and was given a reasonable time to comply with that order before the revocation proceeding was commenced. 

On February 15, 2018, the Commission issued an Order Proposing Revocation of License in the Edenville project's docket. In that order, the Commission noted that the licensee "has failed for many years to comply with significant license and safety requirements, notwithstanding having been given opportunities to come into compliance... The licensee failed to meet nearly all the obligations in the compliance order, even after Commission staff granted multiple extensions."

The Commission noted that public safety "would not be affected by revoking the license." It noted that if the Commission were to revoke the license, its jurisdiction would end, and authority over the site will pass to the State of Michigan’s dam regulatory authorities.

The Commission also noted that revocation of the project license "does not mandate removal or any modification of the dam," citing both its broad authority under the Federal Power Act and its general policy not to condition the effectiveness of a license revocation on a licensee that has shown its unwillingness to comply with other Commission orders.

The Commission set a 30-day deadline within which the licensee may request an evidentiary hearing before an Administrative Law Judge, after which the Commission will decide the matter.

2017 FERC Report on Enforcement

Federal regulators of U.S. energy markets and infrastructure described an increase in litigation activities in the most recent fiscal year. According to the eleventh annual Report on Enforcement issued by the Federal Energy Regulatory Commission’s Office of Enforcement, the office has five cases pending in various federal district courts.

The Commission is responsible for enforcing various laws and regulations affecting energy markets and infrastructure. On November 16, 2017, staff from its Office of Enforcement presented to the Commission on the office's activities in Fiscal Year 2017 (October 1, 2016 through September 30, 2017).

According to the 2017 Report on Enforcement, the office has maintained the previous year's enforcement priorities: (1) fraud and market manipulation; (2) serious violations of reliability standards; (3) anticompetitive conduct; and (4) conduct that threatens transparency in regulated markets.

As noted in the Commission press release announcing the 2017 enforcement report, "Conduct involving fraud and market manipulation poses a significant threat to the wholesale energy markets because it undermines FERC’s goal of ensuring efficient energy services at reasonable cost, and it erodes confidence in those markets to the detriment of consumers and competitors." The report notes that conduct which is anticompetitive or which threatens market transparency "undermine confidence in the energy markets and harm consumers and competitors." It also emphasizes the importance of compliance with reliability standards established by Electric Reliability Organization NERC.

The report describes activities by each division of the Office of Enforcement, including staff negotiation of five settlements that resulted in more than $51 million in civil penalties and disgorgement of more than $42 million in unjust profits. These settlements are in addition to the Commission’s November 7, 2017, settlement with Barclays Bank and three traders that requires Barclays to pay a $70 million penalty and disgorge $35 million in unjust profits.

While noting that at least one litigation matter has settled since the close of the fiscal year, the report states that Enforcement staff continues litigating five Federal Power Act matters in United States District Courts, along with two Order to Show Cause proceedings under the Natural Gas Act. According to the report, "In total, as of the end of FY2017, counting all pending federal court matters and the two NGA OSC proceedings before the Commission, staff sought to recover $806,865,000 in civil penalties and $53,987,678 in unjust profits through seven litigation proceedings."

Looking forward, the report emphasizes that in FY2018 the Office of Enforcement will continue to pursue these priorities.

EPA FAQ on dam removal projects

The U.S. Environmental Protection Agency has released a document answering "Frequently Asked Questions" about the removal of obsolete dams. 

As noted by EPA, dams "provide important societal functions for drinking water supply, flood control, hydropower generation, and recreation."  EPA estimates that the U.S. is home to between 2,000,000 and 2,500,000 dams -- but that between 75% and 90% of these dams "no longer serve a functional purpose."  Given the expense of maintaining dams and their safety, and some negative social and environmental impacts of dams, there is some pressure to remove obsolete dams.  According to EPA, over 1,300 dams have been removed in the U.S. since the early 1900s, with over 60 removals in 2015 alone.

EPA framed its dam removal FAQ in this context, noting that its answers to these questions would support dam removal efforts.  The FAQ addresses 20 distinct topics, ranging from dams' impacts on water quality, permitting issues related to dam removal, and EPA-related funding that could be used to support dam removal.

For example, the FAQ discusses permitting under Section 404 of the Clean Water Act, including the use of individual permits or general permits, including Nationwide Permits.  The FAQ encourages project proponents to work closely with the Army Corps of Engineers regarding Section 404 permitting.  It describes how EPA would evaluate specific requirements for monitoring or testing, such as in the case of contaminated sediments behind the dam.  The FAQ also discusses other permitting requirements, such as state-issued water quality certifications pursuant to Section 401 of the Clean Water Act, and evaluations of consistency with coastal zone management plans under the Coastal Zone Management Act.

The FAQ also notes that various grants may be available for dam removal projects.  For example, grants under Section 319 of the Clean Water Act can be issued to states, territories, and tribes for dam removals.  EPA's Five Star Wetland and Urban Water Restoration Grant Program could also provide funding for river, wetlands, riparian, forest and coastal restoration, and wildlife conservation.  Other funding, such as under the Wetland Program Development Grant program, is available to build technical and programmatic capacity of state and tribal water agencies.  Finally, the FAQ notes that dam removals could be part of a Supplemental Environmental Project proposed in settlement of an environmental enforcement action.

As noted by EPA, the FAQs released in December 2016 do not impose legally binding requirements on anyone, and EPA retains the discretion to adopt approaches on a case-by-case basis that differ from those described in these FAQs where appropriate.  Nevertheless the document provides dam owners, regulators, and communities guidance on how EPA views dam removal proposals.

FERC energy trading compliance white paper

Enforcement staff at the Federal Energy Regulatory Commission have released a white paper presenting their view of effective practices to ensure energy trading complies with prohibitions against market manipulation. The November 2016 document, “Staff White Paper On Effective Energy Trading Compliance Practices,” provides examples of compliance practices that Office of Enforcement staff have found effective in detecting and deterring market manipulation – as well as examples of ineffective compliance practices. Staff’s identification of these best practices and pitfalls can inform electric energy and natural gas market participants as they design, implement, and maintain strong compliance programs.

The Commission is charged with prohibiting market manipulation in jurisdictional electricity and gas markets. It has enunciated penalty guidelines, policy statements and regulations relating to preventing and penalizing market manipulation. These statements emphasize the importance of having an effective compliance program. As the Commission has described it, “For an organization’s compliance program to be deemed effective under the Penalty Guidelines, an organization must: (1) exercise due diligence to prevent and detect violations; and (2) otherwise promote an organizational culture that encourages a commitment to compliance with the law.”

The white paper provides additional insight into how the Office of Enforcement views compliance issues. It highlights the need for a “culture of compliance”:

For any compliance program to be effective, the organization must have a culture of compliance. Promoting a culture of compliance starts at the top, with a Chief Executive Officer and other executive officers who are committed to compliance and who demonstrate that commitment through action. The organization and the executive officers must be committed to promoting compliance at all levels by devoting the necessary resources to the organization’s compliance activities, implementing and enforcing rules and restrictions that are appropriate for the organization’s activities, ensuring that employees understand their compliance obligations, and continually assessing the effectiveness of the compliance practices.

The white paper then provides examples of effective compliance practices, organized into three categories. The first category focuses on designing an effective trading compliance program with a “strong foundation.” According to staff, this involves making “the appropriate decisions relating to: (1) the organizational structure and composition of the compliance function; (2) human resources issues, such as hiring standards, compensation, and discipline; (3) the types of training used to disseminate compliance information; and (4) the technological resources dedicated to the compliance function.”

The second category of practices identified by enforcement staff focuses on establishing, implementing, and enforcing effective practices to deter and detect market manipulation and other misconduct. In addition to implementing some or all of the practices described above in designing the organization’s compliance program, the white paper says organizations should also “(1) establish appropriate rules and restrictions for its traders that will further reduce the risk of misconduct; (2) consistently monitor trading activities for violations of those rules and for any other suspicious activity; and (3) strictly enforce all compliance rules and follow up on all potential issues.”

The third category focuses on assessing the performance of the compliance program on a regular basis. The Penalty Guidelines call for periodic evaluation of the effectiveness of the organization’s compliance program. The white paper provides additional color on staff’s views about assessment, calling for performance audits and taking action on all items identified in an audit.

The white paper finally identifies “ineffective trading compliance practices,” which staff said “generally reflect an organization’s failure to: (1) tailor its compliance program to the specific needs of its trading operation; (2) keep the compliance program up-to-date; (3) make compliance policies accessible to its employees both literally and from the prospective of employee comprehension; (4) place the appropriate emphasis on ensuring compliance; and (5) follow through on monitoring for violations and enforcing compliance-related rules.”

The white paper is designed to supplement the Commission’s Policy Statements, but it explicitly does not require organizations to establish or follow any specific practices to receive compliance credit under the Penalty Guidelines if a violation occurs. Instead, according to the white paper, the existence of these practices in an organization’s compliance program may factor positively into the Commission’s consideration of whether the organization’s compliance program was effective. At the same time, the white paper notes that “adopting the effective practices described herein will not shield an organization from, or provide a defense to, an enforcement action if the Commission concludes, after an evaluation of the facts and circumstances involved, that it committed a violation,” although having an effective compliance program in place at the time of a violation could lead to a reduced penalty.

FERC 2016 Report on Enforcement

The Federal Energy Regulatory Commission's enforcement program has shown consistency in recent years, according to a presentation by Office of Enforcement staff to the Commissioners.  On November 17, 2016, the Commission's Office of Enforcement released its 2016 Report on Enforcement.  This report, along with a presentation and two related white papers, provides insight into Commission staff’s views as well as emerging trends related to manipulation of FERC-jurisdictional markets.

Federal law charges the Commission with enforcing a variety of laws and regulations pertaining to utilities and energy matters.  These and related Commission policies include prohibitions on market manipulation.  Within the Commission, its Office of Enforcement houses various functions related to enforcing anti-market manipulation.

In its tenth annual Report on Enforcement, the Office of Enforcement provides information on the activities of all four OE Divisions: Analytics and Surveillance, Audits and Accounting, Energy Market Oversight, and Investigations.

As described in a related presentation by staff to the Commission:

A major theme reflected in this year’s Annual Report is the consistency in the Commission’s enforcement program. OE’s priorities have not changed over the past few years. We have focused, and will continue to focus, on four distinct areas: (1) fraud and market manipulation; (2) serious violations of the Reliability Standards; (3) anticompetitive conduct; and (4) conduct that threatens transparency in regulated markets.

Staff also published two white papers covering compliance practices and enforcement efforts:

• White Paper on Effective Energy Trading Compliance Practices
  
• White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct

FERC declares QF rights

Federal energy regulators have issued an advisory opinion regarding the rights of Qualifying Facility electric generators to sell power to their local utility under the Public Utility Regulatory Policies Act (PURPA).  The Federal Energy Regulatory Commission's declaratory ruling illustrates how the Commission interprets PURPA and QF rights, in the context of state renewable energy portfolio standards and

PURPA was enacted by Congress in 1978 to promote goals including energy conservation and greater production of domestic and renewable energy.  It established a new class of generating facilities called QFs, to receive special rate and regulatory treatment. A chief benefit of QF status is the
right to sell energy and capacity to a utility, usually at either at the utility's avoided cost or at a negotiated rate.  By regulation, QFs generally have the option to sell energy either "as-available," or as part of a long-term contract or other legally enforceable obligation for delivery of energy or capacity over a specified term.

The Federal Energy Regulatory Commission oversees this program, although state energy commissions play important roles.  Section 210 (H)(2)(A) and (B) of PURPA give the Commission discretionary power to enforce its PURPA rules, including the power to require state commissions and non-regulated utilities to comply.  But the Commission may also decline to initiate an enforcement action, on a case by case basis.

Earlier this year, a group of QFs filed a complaint to the Commission against the Connecticut Public Utilities Regulatory Authority.  Windham Solar LLC and Allco Finance Limited alleged that Connecticut law and PURA’s regulations violate the Commission's PURPA regulations regarding an electric utility’s mandatory purchase obligation and a QF’s ability to sell pursuant to a legally enforceable obligation. Complainants effectively alleged that they couldn’t get a long-term contract to sell energy and capacity at avoided cost rates on a forecasted basis, unless the energy and capacity were bundled with renewable energy certificates (RECs), or unless the energy and capacity were provided under a short-term contract not to exceed one year.

Some of those basic facts were contested by PURA and others, and the Commission noted a history of dispute and litigation among the complainants and Connecticut energy regulators. So the Commission declined to initiate an enforcement action on the complaint.

But the Commission did issue a declaratory ruling, reciting case law and interpretation on two points: the relationship between state RECs and PURPA, and QF opportunities to secure long-term contracts.  The Commission noted that RECs exist under state law and not PURPA, but that avoided cost contracts do not automatically include RECs.  It also noted that winning a competitive solicitation cannot be the only way a QF may be allowed to obtain long-term avoided cost rates.

The original comes with robust citations to precedent, omitted for convenience below:

4. The Commission has previously addressed issues regarding the relationship between state-created RECs and PURPA. The Commission has stated that the states have the authority to determine who owns RECs in the initial instance and how they are transferred, and has explained that the automatic transfer of RECs within a sale of power at wholesale must find its authority in state law, not PURPA. The Commission has also held, however, that a state regulatory authority may not assign ownership of RECs to utilities based on a logic that the avoided cost rates in PURPA contracts already compensate QFs for RECs in addition to compensating QFs for energy and capacity, because the avoided cost rates are, in fact, compensation just for energy and capacity. Moreover, while the Commission has made clear that states have the authority to regulate RECs, states cannot impede a QF’s ability to sell its output to an electric utility pursuant to PURPA. Thus, regardless of whether a QF has previously sold its RECs under a separate contract, that QF has the right to sell its output pursuant to a legally enforceable obligation.

5. The Commission has also held that “requiring a QF to win a competitive solicitation as a condition to obtaining a long-term contract imposes an unreasonable obstacle to obtaining a legally enforceable obligation.” The Commission likewise has determined a state regulation to be inconsistent with PURPA and the Commission’s PURPA regulations “to the extent that it offers the competitive solicitation process as the only means by which a QF . . . can obtain long-term avoided cost rates.” Accordingly, regardless of whether a QF has participated in a request for proposal, that QF has the right to obtain a legally enforceable obligation. 

As noted in the declaratory ruling, the Commission's "decision not to initiate an enforcement action means that Petitioners may themselves bring an enforcement action against the Connecticut Authority in the appropriate court."

FERC assesses Coaltrain penalties

U.S. energy regulators have issued an order assessing $38 million in civil penalties for alleged energy market manipulation, plus disgorgement of unjust profits.

The case involves Coaltrain Energy, L.P., two of its individual owners, and three traders.  In January 2016, the Commission issued an Order to Show Cause and Notice of Proposed Penalty, alleging that the respondents had engaged in fraudulent transactions in PJM Interconnection L.L.C.'s energy markets.  The show cause order, and a supporting Enforcement Staff Report, also include allegations that Coaltrain made false and misleading statements and material omissions during the Commission's investigation. 

FERC's case against Coaltrain has now moved forward.  In a May 27 order, the Federal Energy Regulatory Commission found that Coaltrain and five named individuals violated section 222 of the Federal Power Act and section 1c.2 of the Commission’s regulations, which prohibit energy market manipulation, through a scheme to engage in fraudulent Up-To Congestion (UTC) transactions to garner excessive amounts of certain credit payments to transmission customers. 

According to the Commission, the Coaltrain respondents engaged in UTC trading conduct "similar to the behavior the Commission found fraudulent in its Chen and City Power orders issued last year," in that the UTCs were traded "not to profit based on price spread arbitrage, as the product was designed, but instead, to profit solely or primarily from a transmission credit that had nothing to do with the underlying product."  FERC alleges that the Coaltrain respondents "designed and implemented a fraudulent UTC trading scheme to receive excessive amounts of MLSA payments," or Marginal Loss Supply Allocation transmission credits.  In the Commission's words, "Respondents’ OCL Trades were manipulative because they were executed for the sole or primary purpose of targeting and garnering MLSA payments. Additionally, they were manipulative because they falsely appeared to PJM as being placed for the market design purpose of arbitraging price spreads, thus concealing their fraudulent nature and purpose."

The Order Assessing Civil Penalties also found that Coaltrain violated section 35.41(b) of the Commission's regulations, which in relevant part, prohibits a seller, such as Coaltrain, from submitting false or misleading information to or omitting material information from Commission staff.  The Commission found that in the course of responding to an investigation by FERC Office of Enforcement staff, Coaltrain intentionally withheld relevant documents from Commission staff while repeatedly representing to that its productions were “true, complete, and accurate.”  In particular, FERC concluded that Coaltrain held back documents recorded on its Spector 360 keystroke logging software discussing and reflecting its trading strategy, and only produced the documents to the Commission after agency staff discovered the documents' existence on their own.

The May 27 order states that based on the "seriousness of these violations," it is appropriate to assess civil penalties pursuant to section 316A(b) of the Federal Power Act in the following amounts:

$26,000,000 against Coaltrain (jointly and severally with Messrs. Peter Jones and Sheehan); $5,000,000 against Mr. Peter Jones; $5,000,000 against Mr. Sheehan; $1,000,000 against Mr. Robert Jones; $500,000 against Mr. Miller; and $500,000 against Mr. Wells. The Commission further directs Coaltrain, Mr. Peter Jones, and Mr. Sheehan to disgorge, jointly and severally, unjust profits, plus applicable interest, pursuant to section 309 of the FPA, in the amount of $4,121,894.

The Commission directed the respondents to pay the civil penalties within 60 days, or else the Commission said it will commence an action in a United States district court for an order affirming the penalty.

FERC approves Berkshire Power settlement

Federal energy regulators have approved a stipulation and consent agreement under which two companies admit violations of the Federal Power Act and regulations prohibiting energy market manipulation.

The case involves Berkshire Power Company LLC (Berkshire), and Power Plant Management Services LLC. Berkshire owns an approximately 245 MW natural gas-fired, combined-cycle generating facility in Agawam, Massachusetts. Berkshire hired PPMS to provide project management and administrative services at the plant.

According to Federal Energy Regulatory Commission documents, at the direction of a general manager hired by PPMS, "Berkshire Power engaged in a fraudulent scheme to perform unreported maintenance work and to conceal that work and associated maintenance outages from ISO-NE."  The documents allege that individuals at the plant scheduled maintenance work for times when the plant was unlikely to be dispatched, and then failed to notify ISO-NE about the work or the associated Plant unavailability.  In at least six instances, this led to representations to ISO New England dispatchers that the plant was starting up or was able to start up when it was, in fact, unavailable due to ongoing maintenance or other technical problems.

The Commission's Office of Enforcement initiated its investigation in June 2014, following a referral from the United States Attorney’s Office for the District of Massachusetts.  Following fact-finding, Enforcement concluded that Berkshire and PPMS violated section 222 of the Federal Power Act and the Commission’s Anti-Manipulation Rule by concealing its maintenance work and associated outages from ISO-NE. That rule prohibits any entity from using a fraudulent device, scheme, or artifice, or engaging in any act, practice, or course of business that operates or would operate as a fraud; with the requisite scienter; in connection with a transaction subject to the jurisdiction of the Commission.

Enforcement also concluded that Berkshire violated Commission regulations by violating provisions of the ISO-NE tariff requiring it to schedule and disclose plant maintenance and to accurately report on plant availability, and by making false and misleading representations to ISO-NE. Finally, Enforcement concluded that Berkshire violated Commission-approved reliability standards by withholding information regarding its planned maintenance outages and plant capabilities and availability.

According to the order, the Office of Enforcement, Berkshire, and PPMS have resolved the matter by a stipulation and consent agreement.  Under that deal, Berkshire and PPMS stipulate to the facts, admit the violations set out in the Agreement, and agree to pay a civil penalty of $2,000,000 to the United States Treasury. Berkshire agrees to pay to ISO-NE disgorgement of $1,012,563, plus interest. Berkshire further agrees to pay a civil penalty of $30,000 to the United States Treasury for its violations of the Reliability Standards.

In its March 30, 2016 order accepting that settlement, the Commission noted Enforcement's consideration of the factors in the Revised Policy Statement on Penalty Guidelines.  Factors cited here as supporting "the appropriate remedy" include "that both companies cooperated fully and comprehensively throughout the investigation, both accepted responsibility for their violations, and neither has a prior history of violations."  The order notes that the remedy also reflects that neither company had an effective compliance program in place during the relevant period, and that a high-level employee at the plant directed the scheme.

The order directs Berkshire and PPMS to make the disgorgement and civil penalty payments as required by the Agreement within ten business days of its Effective Date. ISO-NE was directed to allocate the disgorgement funds pro rata to network load during the applicable period. The order also directs Berkshire and PPMS to comply with the provisions in the Agreement also requiring them to implement procedures to improve compliance going forward, subject to monitoring via submission of semi-annual reports for at least one year.

FERC enforcement report cites screenshots, keylogger

The Federal Energy Regulatory Commission has issued an Order to Show Cause and Notice of Proposed Penalty against Coaltrain Energy, L.P. and six individuals relating to alleged fraudulent transactions in PJM Interconnection L.L.C.'s energy markets.  The Order, and a supporting Enforcement Staff Report, also includes allegations that Coaltrain made false and misleading statements and material omissions during the investigation.  Notably, the report describes FERC Enforcement staff's discovery of troves of documents allegedly covered up by the respondents, including keystroke logs and computer screenshots recorded by the company's software.  This e-discovery aspect gives FERC's Coaltrain enforcement case a unique character.

Fundamentally, the Coaltrain case presents FERC Enforcement staff's allegations that the respondents violated of the Commission’s Prohibition of Energy Market Manipulation, and that Coaltrain violated a Commission market behavior rule about accurate communications.  At issue is an alleged scheme involving trades from June 15 until September 2, 2010.  Traders allegedly engaged in a large volume of marginally profitable Up To Congestion (UTC) trades -- not to make money on those UTC trades, but with the intent to earn outsize payments from PJM's Marginal Loss Surplus Allocation (MLSA) program. FERC Enforcement staff's report describes its view of these trades as similar to those at issue in other recent enforcement cases, and different from normal arbitrage or "spread" trades.

The FERC Enforcement staff report in the Coaltrain case sheds light on another aspect of enforcement activity: how did Enforcement staff conduct its investigation of Coaltrain and the other respondents?  In this case, the company’s computer security monitoring software, called Spector 360, played a key role.  According to the report, Spector 360 "recorded every keystroke on employees’ computers (other than co-owners Peter Jones and Sheehan) and took screen shots of every employee monitor every twenty seconds all day long".

As staff noted in a footnote:

A large portion of the evidence in this matter is derived from the documents and other materials recorded by Spector 360. While the keystroke text data is not much different from ordinary documents, the screen shots taken by Spector 360 are very different, and create a visual record of what Respondents were working on, what they were looking for, how they conducted their analyses, and what they actually saw—as if standing over their shoulders while they work. This evidence will be reproduced as images taken from the screen shots.

Indeed, the Enforcement staff report includes a series of screenshots allegedly captured by Coaltrain's software.  According to the report, the evidence captured by Spector 360 shows how the respondents developed, implemented, and communicated about their scheme.

Not only does the FERC Enforcement staff report allege that this evidence exists, but moreover it alleges respondents made false and misleading statements about Spector 360 and the data it logged, including claims that they "forgot" about it.  According to the report, the Spector 360 data included material responsive to data requests issued as part of the investigation - but Coaltrain allegedly only provided it to Enforcement after a former employee told Enforcement that the Spector 360 data existed:

Enforcement sent several data requests to Coaltrain beginning in August 2010. In June 2012, Enforcement discovered from a former Coaltrain employee that Respondents had failed to produce an enormous set of documents that were highly relevant to the matters under investigation and responsive to Enforcement’s prior data requests. As it turned out, for nearly two years Respondents had failed to tell Enforcement that before, during, and after the summer of 2010, Coaltrain had deployed computer monitoring software, called Spector 360, that had recorded every keystroke (saved as text files) and made screenshots every twenty seconds of every monitor (saved as image files) on the work and home computers of every employee other than the co-owners, Peter Jones and Sheehan. Enforcement then asked Respondents to produce the missing materials. Respondents admitted that they still retained the data, but they at first refused to produce it by falsely denying that they could access the Spector 360 materials. Respondents belatedly produced the materials only after Enforcement arranged with the software manufacturer to give Respondents a new license at no cost. Once produced, the Spector 360 documents proved to be an enormous trove of responsive and relevant materials—about 10 gigabytes per employee during the summer of 2010.

FERC has docketed the case as IN16-4-000.  In its show cause order, the Commission directs Coaltrain and its co-owners to show cause why they should not be jointly and severally required to disgorge unjust profits of $4,121,894, and directs all Respondents to show cause why they should not be assessed civil penalties in the following amounts:

• Coaltrain: $26,000,000
• Peter Jones: $5,000,000
• Shawn Sheehan: $5,000,000
• Robert Jones: $1,000,000
• Jeff Miller: $500,000
• Jack Wells: $500,000
• Adam Hughes: $250,000

FERC hydropower and successive preliminary permits

U.S. federal regulators can give a preliminary permit to the developer of a proposed hydropower projects -- but won't give out a successive permit unless the developer demonstrates it acted diligently under its prior permit.

Developers of proposed hydropower projects in the U.S. can apply for a preliminary permit from the Federal Energy Regulatory Commission.  During its term -- up to three years, according to the Federal Power Act -- a preliminary permit for a hydropower project does not authorize construction, but gives the permittee first priority to apply for a license for the project.  This exclusivity allows the permittee to study the site, communicate with stakeholders, and develop the information necessary to support a license application.  It also gives the permittee something of a "reservation" for the site during its term.  In exchange, the permittee must submit periodic reports on the status of its outreach efforts and studies.

Sections 4(f) and 5 of the Federal Power Act authorize the Commission to issue preliminary permits to potential license applicants for a period of up to three years.  While the statute does not specify how many preliminary permits an applicant may receive for the same site, the Commission's policy is to grant a successive preliminary permit only if it concludes that the applicant has pursued the requirements of its prior preliminary permit in good faith and with due diligence.   The Commission has noted that each application for a successive preliminary permit is considered on a case-by-case basis, but has described "a minimum bar that a permittee must achieve to be diligent."

A recent FERC delegated staff order in Coralville Energy, LLC, Project No. 14431-001, illustrates this policy.  On November 2, 2015, Coralville Energy applied to the FERC for a preliminary permit for the Burlington Street Dam Hydroelectric Project, to be located at the existing Burlington Street Dam on the Iowa River, near Iowa City in Johnson County, Iowa. 

But this was not Coralville Energy's first application relating to the Burlington Street; it had received a preliminary permit three years earlier, on October 18, 2012.  According to the 2015 order, the record under that prior permit "shows that Coralville Energy did not pursue the requirements of its prior permit with due diligence for purposes of receiving a successive permit because it fails to demonstrate progress toward preparing a development application."

In particular, the 2015 order notes that semi-annual reporting under the 2012 preliminary permit noted a series of items: late reports filed subsequent to Commission staff’s letters warning Coralville Energy of probable cancellation for failure to file progress reports; reports that were too brief, vague, and "nearly identical"; no change to the study plan from that proposed in 2012, suggesting no progress made toward the preparation of a development application; and no information about conducting, reviewing, or coordinating environmental studies or the status of the permittee’s efforts to obtain permission to access and use land not owned by the permittee.

By contrast, the order describes Commission staff's view that the requisite diligence requires completion of certain steps towards preparing a development application, including "developing study plans, conducting studies in a timely fashion, consulting with  resource agencies, and developing the application in accordance with the Commission’s regulations."  Additionally, Commission staff have said that it "must be able to discern a pattern of progress toward the preparation of a development application from the content of a permittee’s filings."

On this basis, the 2015 order denied Coralville Energy’s application for a successive preliminary permit.  The order illustrates FERC hydropower staff's perspective on the level of diligence expected of the holder of a preliminary permit.  It also highlights the importance of substantive action in pursuit of a license or development application as well as timely and adequate semi-annual reporting by preliminary permittees.

House subcommittee holds hearing on FERC oversight

Members of the Federal Energy Regulatory Commission testify today before the House Energy & Commerce Committee, Subcommittee on Energy and Power, as that committee considers its oversight of the FERC.

The FERC is an independent administrative agency within the Department of Energy.  Its mandate includes regulating the transmission, reliability, and wholesale sale of electricity in interstate commerce pursuant to the Federal Power Act; the transmission and sale of natural gas for resale in interstate commerce pursuant to the Natural Gas Act; the transportation of oil by pipeline in interstate commerce pursuant to the Interstate Commerce Act; and evaluating proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines, as well as the licensing of non - federal hydropower projects.

As described in a committee background memorandum for today's hearing, the Subcommittee on Energy and Power is exploring whether FERC’s statutory authorities require modernization to reflect current energy realities.  Chief among those statutory authorities are the Federal Power Act and the Natural Gas Act.  The committee memorandum also notes an interest in evaluating "whether FERC is overstepping its existing statutory boundaries to pursue policy goals not intended by Congress."

Specific issues expected to be examined at the hearing include:

• Potential impacts of the U.S. EPA's Clean Power Plan rule on electricity markets, fuel diversity, and electric reliability;
• Commission oversight of organized wholesale electricity markets and their operation
• Risks to the security of the electric grid, including physical and cyber security, geomagnetic disturbances, electromagnetic pulse, and severe weather;
• How to integrate renewable, intermittent resources and distributed generation;
• The role of demand response and other demand-side management technologies in wholesale markets, at issue in the EPSA v. FERC case pending before the U.S. Supreme Court; 
• Electric transmission operations and planning, including implementation of Order No. 1000;
• Natural gas pipeline permitting, LNG siting, and hydropower licensing;
• FERC market manipulation authorities and enforcement practices; and
• FERC’s implementation of the mandatory purchase obligation from qualifying facilities (QFs) under section 210 of the Public Utility Regulatory Policies Act of 1978.

Based on prefiled documents, today's hearing features:

• testimony by FERC Chairman Norman Bay
• testimony by Commissioner Cheryl LaFleur
• testimony by Commissioner Tony Clark
• testimony by Commissioner Colette Honorable

More information about today's hearing can be found on the committee's webpage.

FERC 2015 Report on Enforcement

The enforcement arm of the Federal Energy Regulatory Commission has released a report describing its enforcement activities in fiscal year 2015.

The 69-page 2015 FERC staff report on enforcement draws its organization from that of the Commission's Office of Enforcement.  The report presents public summaries of activity by each of the Office’s four divisions -- Investigations, Audits, Energy Market Oversight, and Analytics and Surveillance.  Of these, Investigations and Audits are the most likely to lead to penalties or other direct enforcement action, while Market Oversight and Analytics typically play more of a background role, supporting the Commission's investigations and audits.

According to the report, the Investigations division opened 19 new investigations in fiscal 2015, and closed 22 (through settlement or "no action").  Major settlements in fiscal 2015 focused on the major 2011 Southwest power outage, with the Commission concluding its multiyear investigation into that outage and its causes.  In all, staff obtained settlements resulting in almost $26.25 million in civil penalties and disgorgement of $1 million in unjust profits. All settlements included reporting requirements and provisions requiring the subjects to enhance compliance programs.

The FERC enforcement office's Audits division periodically checks the records of licensees and public utilities to evaluate their compliance with the statutes and regulations administered by the Commission.  It reportedly performed 22 financial and operational audits of public utilities and oil and natural gas pipelines.  The report states that these audits led to 360 recommendations for corrective action, and refunds and recoveries totaling more than $26.3 million.

Generally speaking, the annual staff enforcement report is a summary of what's already happened.  In other words, the enforcement activity described in the annual report has already occurred.  Much of that activity was public; any civil penalties or other remedies described in the report are generally imposed and documented in separate, preexisting proceedings.  The report does also provide summary level information on some non-public Enforcement activities, like self-reported violations or investigations closed without public enforcement action.

The enforcement report also provides an important look into how the Commission staff view their work -- the enforcement office's patterns, trends, and priorities, as expressed by the people doing the enforcing.  By following the Commission's enforcement activity throughout the year, and comparing that history to staff's view of the year, the enforcement office's points of emphasis come into focus.  As expected, in fiscal year 2015, these included fraud and market manipulation, serious violations of mandatory reliability standards, and conduct that the office found to threaten the transparency of regulated markets.

The Office of Enforcement's annual report can also be compared to previous reports dating back to at least 2007.  Compared to some recent years, fiscal 2015 saw a relatively lower total penalty amount resulting from enforcement action.  (Compare 2015's $26.3 million in penalties and $1 million in disgorgement, with 2013's over $304 million in civil penalties and disgorgement of almost $141 million in unjust profits.)

But experience has shown that there can be difficulty, or at least delay, affecting whether FERC will actually collect that money.  The report notes that in fiscal 2015, Enforcement filed three new petitions in federal district court to enforce earlier Commission orders assessing civil penalties.  Along with an anti-manipulation case tried in 2015 before a FERC Administrative Law Judge, the report notes that staff is waging district court and administrative litigation to recover over $500 million in civil penalties and disgorgement.

FERC considers 2015 enforcement report

The Federal Energy Regulatory Commission is scheduled to consider its 2015 Report on Enforcement when it meets later this week.

The FERC is an independent federal agency charged with regulating certain U.S. energy resources and activities, including the interstate transmission of electricity, natural gas, and oil, as well as hydropower and liquefied natural gas (LNG) terminals.

Since at least 2007, FERC releases an annual report describing its enforcement activity.  Recent FERC enforcement reports include:

• 2008 Report on Enforcement
• 2009 Report on Enforcement 
• 2010 Report on Enforcement
• 2011 Report on Enforcement 
• 2012 Report on Enforcement
• 2013 Report on Enforcement 
• 2014 Report on Enforcement

These reports illustrate that FERC's enforcement of the federal energy laws it manages has become a higher priority for the Commission in recent years.  Congress enhanced FERC's enforcement powers through the Energy Policy Act of 2005, which gives FERC the authority to levy fines of up to $1,000,000 per day for some violations.  Enforcement continued to escalate in priority through a subsequent restructuring of the Commission's Office of Enforcement, and President Obama's selection of chief enforcement officer Norman Bay as FERC's chairman.

Penalties assessed by FERC through enforcement actions have also increased in recent years, with over $5.8 million in refunds, over $148 million in civil penalties and disgorgement of over $119 million in unjust profits in fiscal year 2012, and over $304 million in civil penalties and disgorgement of almost $141 million in unjust profits in fiscal year 2013.

The Commission will next meet on November 19 at its Washington, DC headquarters.  On its agenda is an item captioned as A-3, AD07-13-009, "2015 Report on Enforcement."  While much of FERC's enforcement activity begins in a non-public mode, the annual staff report sheds some light on the Commission's overall approach to enforcement.  FERC's free live webcast is also available during the meeting and will be archived for 3 months.

Feds settle on final 2011 Southwest blackout penalty

Over four years after a major 2011 power outage in Southern California and parts of the Southwest, federal energy regulators have approved the sixth and final settlement of penalties for violations of law and reliability standards. 

After the September 8, 2011 blackout left more than 5 million people in Southern California, Arizona and Baja California, Mexico, without power for up to 12 hours, the Federal Energy Regulatory Commission began investigating what had happened.  After conducting that investigation jointly with electric reliability organization North American Electric Reliability Corporation (NERC), in an April 2012 report FERC found that the outage started when a 500-kilovolt transmission line owned by utility Arizona Public Service Company tripped.

The FERC continued its investigation into the 2011 Southwest blackout after its staff report was made public.  It identified six entities believed to have been involved: Arizona Public Service Company, 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.

FERC's enforcement process typically offers the accused an opportunity to agree to a stipulation of facts (for example, that the utility violated a particular reliability standard) and to pay a civil penalty and perform mitigation measures.  In its enforcement actions related to the 2011 Southwest blackout case, all six entities ultimately agreed to stipulations and penalties that were accepted by the Commission.

In July 2014, the FERC accepted Arizona Public Service's stipulation with NERC and FERC's Office of Enforcement, under which APS agreed to pay $3.25 million and improve its system reliability.  In August 2014, California's Imperial Irrigation District agreed to a $12 million fine.  Utility Southern California Edison agreed to a $650,000 fine in October.  In December, FERC settled with federal power marketing agency Western Area Power Administration with no penalty.  Grid operator California ISO agreed to pay $6 million.

This week the FERC announced a settlement with Western Electricity Coordinating Council.  WECC promotes grid reliability in the Western Interconnection, a broad area of the western United States.  According to the FERC order, FERC enforcement staff and NERC determined that WECC as the Reliability Coordinator violated nine requirements of the Interconnection Reliability Operations and Coordination (IRO) and the Facilities Design, Connection and Maintenance (FAC) groups of Reliability Standards.  Enforcement staff and NERC concluded that WECC failed to identify and prevent violations of system operating limits and Interconnection Reliability Operating Limits and was unaware of the impact of protection systems, and used an inadequate system operating limit methodology that exposed its area to cascading outages.

As a result, the settlement calls for WECC to pay a $16 million civil penalty.  $3 million of this will be split evenly between the U.S. Treasury and NERC, and $13 million will be invested in reliability enhancement measures that go above and beyond mitigation of the violations and the requirements of the Reliability Standards.  WECC and its successor as Reliability Coordinator, Peak Reliability, also agreed to mitigation and reliability activities and to submit to compliance monitoring.

FERC has described the WECC settlement as marking "final resolution" of the investigation by FERC Enforcement staff and NERC into the 2011 Southwest blackout.

4th California blackout FERC enforcement case settles

Federal regulators have approved a settlement with another federal agency over its role in a 2011 blackout in California, Arizona, and Mexico.

On September 8, 2011, the Southwest's electric grid was hit with a widespread power outage that left over 5 million people in California, Arizona and Baja California, Mexico, without power for up to 12 hours.  Previous investigations by the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC) found that the blackout occurred when Arizona Public Service Company's 500-kilovolt Hassayampa-N.Gila transmission line tripped out of service, overloading the remaining elements of the regional grid. 

Earlier this year, FERC approved stipulations and consent agreements among its Office of Enforcement, NERC, and three public utilities.  Arizona Public Service agreed to pay $3.25 million in civil penalties, California's Imperial Irrigation District agreed to a $12 million settlement, and  Southern California Edison Company agreed to pay a $650,000 civil penalty and undertake additional compliance actions.

FERC approved a fourth settlement on November 24, 2014, with the Western Area Power Administration – Desert Southwest Region (Western-DSW).  One of four power marketing administrations within the United States Department of Energy, the Western Area Power Administration (WAPA) markets and transmits electricity to a fifteen-state region from hydroelectric power facilities at the Hoover, Parker, and Davis dams. Western-DSW is one of four regions carrying out this mission for WAPA, serving customers in Arizona, Southern California, and Southern Nevada. It sells more than ten billion kilowatt hours of hydroelectric power to approximately seventy municipalities, cooperatives, federal and state agencies, and irrigation districts. Western-DSW also operates and maintains more than forty substations and 3,100 miles of transmission lines.

In the FERC Order Approving Stipulation and Consent Agreement, the Commission notes that Western-DSW violated four Requirements of three Reliability Standards in the Transmission Operations (TOP) and Voltage and Reactive Control (VAR) categories. These groups of standards cover the responsibilities and decision making authority for reliable operations and maintenance of Bulk Power system facilities within voltage and reactive power limits to protect equipment and ensure reliable operation of the interconnection.  In particular, FERC Enforcement staff and NERC found that Western-DSW failed to operate its portion of the transmission system within voltage system operating limits and to maintain sufficient situational awareness prior to and during the event, undermining reliable operation of the Bulk Power System.

Western-DSW stipulated to the facts in the agreement and agreed to implement compliance measures necessary to mitigate the violations and improve overall reliability, including improving its models, better coordination with neighboring entities, and improving its situational awareness by adding a real-time monitoring tool that analyzes and alerts operators to potential contingencies. Western-DSW also agreed to make semi-annual compliance reports to Enforcement staff and NERC for at least one year.  Notably, the stipulation does not require Western-DSW to pay a civil penalty.

FERC's general investigative report on the incident identified six potential targets for enforcement action.  With cases settled against Western-DSW, SoCal Edison, the Imperial Irrigation District, and Arizona Public Service, only the California Independent System Operator and the Western Electricity Coordinating Council Reliability Coordinator have not yet been parties to a stipulation and consent agreement.

Managing a FERC audit

What happens when the Federal Energy Regulatory Commission audits a public utility?

The Federal Energy Regulatory Commission has jurisdiction over interstate transmission of electricity, natural gas, and oil, as well as hydropower projects, liquefied natural gas (LNG) terminals and interstate natural gas pipelines. Under Section 301 of the Federal Power Act (codified at 16 U.S.C. § 825), public utilities and licensees must keep records of their business activities.  By law, the FERC has the right to inspect these records on a confidential basis.

The Commission's Office of Enforcement manages many of the agency's investigations.  Its Division of Audits and Accounting periodically audits public utilities and licensees to evaluate their compliance with the statutes and regulations administered by the Commission.

For example, on November 17, 2014, the Commission issued a letter to public utility Calpine Corporation noting the Division of Audits and Accounting's commencement of an audit.  That letter describes the objectives of the audit as "to evaluate Calpine's compliance with: ( 1) market rules regarding uplift payments from organized markets in which Calpine participates; (2) terms and conditions of its market-based rate authorization tariffs; and (3) Electric Quarterly Report filing requirements under 18 C.F.R. § 35.10b (2014)."  The audit will cover the period from January 1, 2012 through the present.

The letter to Calpine notes several provisions of the Federal Power Act that govern recordkeeping and audits.

• Section 301(b) of the Act requires Calpine to furnish, within reasonable time frames, any information the Commission may require; requires Calpine to grant agents of the Commission free access to its property, accounts, records, and memoranda; and allows Commission staff to keep copies of any accounts, records, or memoranda that pertain to the audit.
• Section 301(c) allows Commission staff to examine the books, accounts, memoranda, and records of any person who controls, directly or indirectly, Calpine, and of any other company controlled by such person, insofar as they relate to transactions with or the business of Calpine.

The audit letter also points to additional recordkeeping and retention requirements found in sections 301, 304, and 311 of the Federal Power Act, 16 U.S.C. §§ 825, 825c, and 825j (2012), and 18 C.F.R. part 125 (2014).  For example, it states that Calpine must preserve and retain, and shall not discard or destroy, any and all existing and future records or communications, including but not limited to electronic documents, emails, instant messages, text messages, and voice recordings, relating to this audit.

What this means for Calpine -- beyond the obvious audit -- is unclear.  The letter notes that Commission staff will contact Calpine soon to explain the audit process and answer any questions.  While many audits find no problems, some audits do lead to further enforcement action, penalties, or refunds.  In the Commission's 2013 Report on Enforcement, it noted that in 2013, staff from the Division of Audits and Accounting conducted 29 financial, compliance, and performance audits of public utilities, natural gas pipelines, and gas storage companies.  These audits resulted in 360 recommendations for corrective action and directed refunds totaling over $15.4 million.

Other public audits recently initiated by the Commission include audits of MidAmerican Energy Holding Company, Dynegy, Inc., and Bangor Hydro Electric Company.

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?

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?

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.