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?

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.

Gila River Power, FERC enforcement settle for $3.4 million in market manipulation case

Federal regulators have amped up their investigations of businesses involved in U.S. energy markets in recent years.  This week the Federal Energy Regulatory Commission (FERC) approved a settlement between its Office of Enforcement and Gila River Power LLC over market manipulation claims, requiring Gila River to pay a punitive fine of $2.5 million, and disgorge unjust profits of $911,553 plus interest.  Notably, this settlement represents the first time that a market participant accused of manipulating power markets has admitted to unlawful energy trades.

Gila River is a subsidiary of Entegra Power Group LLC.  Entegra owns and operates four combined cycle power plants capable of producing about 3,300 MW of power.  Two of these plants are located at the 2,200 MW Gila River Power Station in Arizona, while the other four are located at the Union Power Station in Arkansas.  Entegra markets energy from these facilities to customers in the southeastern and southwestern U.S.

In the settlement agreement, Gila River admitted to using energy transactions known as "wheeling-through transactions" between July 2009 and October 2010 to manipulate prices in markets operated by the California Independent System Operator.  Because congestion on the transmission grid limited both the amount of power Gila River could import into California as well as the price it could get for that power, the company designed its transactions to avoid creating congestion so that it would receive a higher price on a higher quantity of energy imports.  This strategy involved claiming that it was simply passing power between two points outside California over transmission facilities located inside California, even though its transactions lacked a resource and a load outside the California markets as required by the CAISO tariff.

Under the FERC's enforcement procedures and penalty guidelines, the FERC assessed a base penalty amount based on its powers under the Federal Power Act, which allows it to levy fines of $1,000,000 per day for each violation.  The FERC then considered mitigating factors, including Gila River's cooperation in the enforcement investigation and its acceptance of responsibility for its violations.  Based on these factors, and negotiations between Gila River's legal counsel and the FERC's Office of Enforcement, the parties settled on a fine of $2.5 million, and disgorge unjust profits of $911,553 plus interest. 

While the Gila River settlement represents the first time an accused company has admitted market manipulation, FERC has used its enforcement powers more extensively in recent years.  In fiscal 2012, FERC approved nine settlement agreements entered into by Enforcement for total civil penalty payments of more than $148 million and disgorgement of more than $119 million plus interest.