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.

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.