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 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.