On November 17, 2022, the Office of Enforcement (OE) of the Federal Energy Regulatory Commission (FERC or the Commission) released its annual report on enforcement activities (Report). The Report details the FY 2022 efforts of OE’s three divisions: Division of Investigations (DOI), Division of Audits and Accounting (DAA), and Division of Analytics and Surveillance (DAS).
At the Commission’s November 17 open meeting, Chairman Richard Glick applauded OE’s efforts and accomplishments and described OE as the “unsung heroes” of both the Commission and the public interest. Noting a “lull” in OE activity several years ago, Chairman Glick commented that OE “is back” and added that “it’s like having the cop back on the street.” Commissioner Clements echoed Chairman Glick’s remarks and described the Report as an “exceptional version of government transparency.”
The Report indicates that OE has continued to focus on the following five key areas: (1) fraud and market manipulation; (2) serious violations of Reliability Standards; (3) anticompetitive conduct; (4) threats to the nation’s energy infrastructure and associated impacts on the environment and surrounding communities; and (5) conduct that threatens the transparency of regulated markets.
Department of Investigations
In FY 2022, DOI opened 21 new investigations; at least 12 involved potential market manipulation, nine involved potential tariff violations, and seven involved potential misrepresentations prohibited by the Commission’s Duty of Candor Rule. DOI closed seven pending investigations without further action and negotiated 11 settlements that were approved by the Commission and that resolved pending enforcement matters. Eight of these settlements resolved investigations for a total of approximately $55.54 million, which included approximately $23.59 million in civil penalties and $31.95 million in disgorgement, while the other three resolved two matters in federal district court and totaled $1.975 million in disgorgement. In FY 2022, OE staff continued litigating four matters in US district courts to enforce the Commission’s penalty assessments under the Federal Power Act and is engaged in administrative litigation on five enforcement matters.
The settlements achieved by OE in FY 2022 demonstrate OE’s continued focus on fraud and market manipulation, violations of reliability standards, and anticompetitive conduct. The Report reveals that the type of violations settled in FY 2022 include market manipulation, tariff violations, violations of the Market-Behavior Rule, violations of the Federal Power Act, and violations of the Interstate Commerce Act.
For example, in November 2021, the Commission approved a settlement resolving an OE investigation into whether a company violated the Commission’s Anti-Manipulation Rule by offering its generating unit into the SPP market in a way that improperly targeted and increased make whole payments in the Day-Ahead Market. The company agreed to pay a $550,000 civil penalty and disgorge $375,000 to SPP, and it further agreed to make enhancements to its compliance program. In March 2022, the Commission approved a settlement resolving an OE investigation into whether a company failed to purchase capacity in support of its Resource Adequacy-related imports and otherwise failed to reasonably plan for those imports to be dispatched by the California Independent System Operator (CAISO) in violation of the CAISO Tariff. The company agreed to pay a $2.4-million civil penalty and to disgorge $2.3 million. Finally, in August 2022, the Commission approved a settlement resolving an OE investigation into whether a company had failed to comply with its offer obligations under ISO tariff provisions governing participation in the ISO energy market. The company agreed to pay a $2.5 million civil penalty, disgorge $2.46 million to the ISO, and undertake compliance monitoring for at least one year.
In FY 2022, DOI received 124 new self-reports, 39 of which remained pending at the end of FY 2022. Fifty-six of the self-reports received in FY 2022 came from ISOs/RTOs and involved minor violations of tariff provisions. Other self-reports included a public utility’s failure to file with the Commission the depreciation rates used in the development of the utility’s wholesale transmission formula rates, an exempt wholesale generator’s failure to identify a passive, upstream owner in its application to charge Market-Based Rates, and a holding company’s failure to submit a timely application to the Commission for approval under Federal Power Act Section 203 of secondary stock market acquisitions through which the company indirectly held more than 10% of another entity’s common stock.
Also, in July 2022, DOI staff participated in a notice of proposed rulemaking proceeding that would establish a new, more expansive Duty of Candor rule under the Federal Power Act. Comments were due on November 10, 2022, and the Commission has not yet issued a final rule.
Division of Audits and Accounting
DAA completed 12 audits of public utility, natural gas, and oil companies that resulted in 51 noncompliance findings and 258 corrective action recommendations and $158 million in refunds and other recoveries.
The audits undertaken by DAA in FY 2022 show OE’s concern with noncompliance and conduct generally that threatens the transparency of regulated markets. These audits assessed the application of merger-related costs; the classification of lobbying, charitable donation, membership dues, and employment discrimination settlement costs; proper labor overhead capitalization rates; accounting for production-related or distribution-related expenses as general or transmission-related expenses; pending income tax refunds being treated as prepayments; and compliance with the Commission’s regulations concerning Allowance for Funds Used During Construction (AFUDC).
Division of Analytics and Surveillance
Finally, in FY 2022, DAS worked on approximately 50 investigations and 15 other matters involving inquiries or litigation. DAS natural gas surveillance screens produced approximately 16,766 screen trips, which resulted in 26 natural gas surveillance inquiries and no referrals to DOI. DAS electric surveillance screens produced approximately 525,865 screen trips, which resulted in 32 electric surveillance inquiries and two DOI referrals.
Takeaways
In summary, in FY 2022, FERC OE continued to aggressively initiate and conduct investigations and pursue resolution of enforcement actions through settlement or district court litigation. FERC OE is likely to continue the same in FY 2023.
