December 24, 2022 capacity deficiency event in New England

New England's wholesale electricity grid experienced a capacity deficiency on December 24, 2022, according to grid operator ISO New England, Inc., but the system operator says its operating procedures successfully balanced supply and demand on the regional power system during evening peak hours, when unexpected generator outages and reductions and lower-than-expected imports led to a shortfall in operating reserves.

According to ISO-NE:

ISO New England did not call for controlled power outages on Christmas Eve, but did declare a capacity deficiency, meaning the region’s supply of electricity was insufficient to meet required operating reserves in addition to satisfying consumer demand, at 4:30 p.m. This action was taken after approximately 2,150 megawatts (MW) of resources scheduled to contribute power during the evening peak became unavailable. The outages and reductions coincided with net imports being approximately 100 MW less than had been expected based on that day’s Morning Report.

While the capacity deficiency was ongoing, at 4:40 PM, ISO-NE declared a "capacity scarcity condition" under its Forward Capacity Market’s Pay-for-Performance rules. This condition remained in effect until 6:05 p.m. Under the Pay-for-Performance rules, any resource that failed to meet its capacity supply obligation is penalized at a rate of $3,500 per megawatt-hour (MWh) for failing to meet its obligation, while resources that over-performed will receive $3,500/MWh of additional revenue. In total, ISO-NE has estimated penalties for the December 24 event to be approximately $39 million. In addition, any energy resources that cleared in the Day-Ahead Energy Market but failed to provide electricity in real-time are charged the real-time price for the missing energy; Real-Time Energy Market prices averaged approximately $484/MWh over the course of the day, peaking over $2,200/MWh during the 5 p.m. hour while the capacity scarcity condition was ongoing.

On January 12, 2023, ISO-NE provided an update on the December 24, 2022, capacity deficiency, "to help correct any confusion, misinformation, and misunderstanding resulting from various news stories and social media posts." According to that update, the incident was "mainly about timing". After noting that it entered the December 24 operating day with sufficient resource commitments to meet demand and required operating reserves, with a surplus of over 950 megawatts of fast-start resources, ISO-NE explains what happened next:

As the day went on, some generators in the region experienced unanticipated issues that caused them to go offline or reduce their output. These outages were caused by cold temperatures or mechanical problems, and not due to inadequate fuel supplies. Expected imported electricity from Canada was also reduced due to transmission system issues and unexpectedly high consumer demand in Québec. Despite these issues, New England was still expected to meet demand and operating reserves over the evening peak as of 3 p.m.

Around 4 p.m., additional unanticipated outages led to a capacity deficiency in the region. This meant that the 950 MW surplus was depleted and supply was insufficient to meet both demand and required operating reserves. In response, ISO New England system operators implemented procedures for dealing with capacity deficiencies. This included calling upon any resource that could respond quickly enough to be online for the evening peak, which usually falls between 5 and 6 p.m. during the winter months. The ISO dispatched all remaining offline resources that were available to provide electricity or operating reserves during this period.

In its update, ISO-NE described pricing and customer impacts from the incident:

Prices in the Real-Time Energy Market averaged more than $2,000 per megawatt-hour (MWh) during the 2.5-hour capacity deficiency. While high, these prices are unlikely to affect most consumers given how retail rates are set in the region. Though practices vary by state and utility coverage area, the rates paid by most retail customers are set for months-long periods and not subject to volatility within the wholesale marketplace. 

Almost all of New England’s wholesale electricity is bought and sold in the Day-Ahead Energy Market, where prices were unaffected by the capacity deficiency. Average day-ahead prices during that time were roughly $285/MWh.

As ISO-NE noted in its January 4 report, other regions of North America were challenged by extreme weather around the long holiday weekend, prompting varied responses outside New England including controlled power outages.

US warns of Russian Government Cyber Activity Targeting Energy and Other Critical Infrastructure

The U.S. Department of Homeland Security has warned that for at least two years, Russian government cyber actors have targeted government entities and multiple U.S. critical infrastructure sectors, including the energy, nuclear, commercial facilities, water, aviation, and critical manufacturing sectors.

In a joint Technical Alert issued March 15, 2018 by the Department of Homeland Security's U.S. Computer Emergency Readiness Team (US-CERT) and the Federal Bureau of Investigation, the agencies warned of a "multi-stage intrusion campaign by Russian government cyber actors." The report follows an October 2017 alert by computer security firm Symantec of a re-emergence of a sophisticated cyber espionage group known as "Dragonfly."

According to the government agencies' report, the Russian cyber threat actors seem to have deliberately targeted specific organizations, as opposed to pursuing targets of opportunity. In an initial "staging" phase, the campaign used tools like malware, watering holes, and spear phishing to gain access to small commercial facilities' networks -- typically peripheral organizations like trusted third-party suppliers whose networks may be less secure. For example, the threat actors sent emails with malicious attachments appearing to be personnel resumes or contract documents. Clicking on links in the attachments exposed the victims to malware or data harvesting. In a subsequent phase, the threat actors made further use of the staging targets' networks as "pivot points and malware repositories" for use in targeting their final intended victims.

The report says that these Russian government cyber actors used this hacked access for network reconnaissance and collection of information pertaining to Industrial Control Systems (ICS). It describes multiple instances of threat actors accessing workstations and servers on corporate networks that contained data output from control systems within energy generation facilities.

Cyber security is now a significant concern, both domestically and abroad. A February 2018 report by the U.S. intelligence community described the targeting of national security information and proprietary information from US companies and research institutions involved with defense, energy, finance, dual-use technology, and other areas as "a persistent threat to US interests." Last month, U.S. electric grid reliability regulators imposed a $2.7 million penalty on an unidentified utility for its violations of mandatory reliability standards in connection with a data security breach -- the largest fine to date associated with U.S. utility cybersecurity regulation. In that case, a third-party contractor hired by the utility allegedly copied protected data from the utility's network to the contractor's unsecured network -- where it was accessible online without the need to enter a user ID or password, and where it was in fact accessed by one or more unknown outside entities.

In 2014, reports emerged that Russian hackers had found flaws in solar panel monitoring software that, if left unfixed, could allow malicious actors to damage the electric grid. Foreign state-sponsored cyber attacks in 2016 and 2017 against Ukraine and Saudi Arabia targeted multiple sectors across critical infrastructure, government, and commercial networks, causing disruption to Ukrainian energy distribution networks.

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.

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 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.

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.

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?

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.