The US Federal Energy Regulatory Commission (FERC or Commission) has released its annual report on enforcement for fiscal year 2023. As in fiscal year 2022, FERC’s Office of Enforcement (OE) focused on matters involving fraud and market manipulation, serious violations of the Reliability Standards, anticompetitive conduct, threats to the nation’s energy infrastructure and associated impacts on the environment and surrounding communities, and conduct that threatens the transparency of regulated markets.
OE continues to open investigations into a range of violations including cross-market manipulation, violations of the market behavior regulations, tariff violations, and violations of the Federal Power Act and Natural Gas Act. The Division of Analytics and Surveillance (DAS) opened inquiries stemming from its enhanced surveillance related to two disruptive weather events, including Winter Storm Elliott, and has referred matters to the Division of Investigations (DOI) for investigation.
Division of Investigations
DOI conduct investigations into potential violations of the statutes, regulations, rules, orders, tariffs, certificates, and licenses administered by FERC. DOI opened 19 new investigations in FY 2023, of which at least 11 involved potential market manipulation, six involved potential tariff violations, and three involved potential violations of the Commission’s duty of candor rule. DOI closed nine pending investigations involving alleged market manipulation, alleged tariff violations, and alleged misrepresentations without further action.
In addition, DOI negotiated 12 settlements that were approved by the Commission, which resulted in nearly $27 million in civil penalties and nearly $26 million in disgorgement. Nine of the 12 settlements involved eight ongoing investigations; another resolved a pending order to show cause proceeding, while the other two settlements resolved ongoing judicial litigation, one of which is now being pursued in bankruptcy court. Since 2007, OE has negotiated settlements totaling approximately $857.98 million in civil penalties and approximately $583.54 million in disgorgement.
During FY 2023, OE received 23 referrals from Market Monitoring Units of organized markets, with market manipulation and tariff violations being the most common allegations. Of the 23 referrals, 11 resulted in OE investigations, nine remain pending, two were closed without investigation, and one was merged into an ongoing investigation.
DOI notes that over the last 10 years the OE has filed 10 enforcement actions in federal district courts across the country. This year, for the first time, a federal district court has issued a final judgment against an entity that FERC found to have committed market manipulation.
In addition, the Court of Appeals for the Ninth Circuit upheld on interlocutory appeal a district court’s opinion that allowed FERC to assess a penalty in excess of what the Commission had assessed in a show-cause order if FERC had new evidence suggesting a higher penalty was warranted. This proceeding remains ongoing before the district court.
Violators who self-report can significantly mitigate penalties, and OE views companies who self-report as showing a commitment to compliance. The DOI received 148 self-reports of violations last year, up from 124 in FY 2022. Almost half of these self-reports were from ISOs/RTOs and involved what FERC characterized as relatively minor violations of tariff provisions.
DOI closed 172 self-reports in FY 2023, 50 of which were carried over from previous fiscal years. Of the self-reports received in FY 2023, 23 remained pending. Violations self-reported by entities included a potential buy/sell violation, failure to file an accurate FERC Form No. 552, failure to file a change-in-control application, failure to file a change-in-status notice, and failure to provide Standards of Conduct training.
OE also participated in a joint inquiry with the North American Electric Reliability Corporation (NERC) and all six regional reliability entities to determine the cause of the outages, derates, and failures to start that occurred during Winter Storm Elliott of December 2022.
The resulting unplanned generation outages was the largest controlled firm load shed recorded in the history of the Eastern Interconnection and the fifth in the last 11 years caused by unplanned cold weather–related generation outages. The inquiry attributed 96% of all outages, derates, and failures to start to freezing issues (31%), fuel issues (24%), and mechanical/electrical issues (41%). Eleven recommendations were made to prevent future occurrences.
Division of Audits and Accounting
The Division of Audits and Accounting (DAA) completed nine audits of public utility, natural gas, and oil companies that yielded 68 findings of noncompliance and 332 recommendations for corrective action. These audits also directed approximately $33 million in refunds and other recoveries.
The audits undertaken in FY 2023 showcase OE’s concerns about noncompliance and conduct that threatens the transparency of regulated markets. The audits assessed the following factors:
- The methodology used to allocate company labor costs to construction projects;
- Compliance with the Commission’s regulations concerning Allowance for Funds Used During Construction;
- Errors in formula rates, including regarding revenue crediting or tax payments, which the Commission opined could often be prevented with better coordination between accounting and rate staff;
- Noncompliance with orders authorizing transmission rate incentives;
- Affiliate dealing; and
- Violations of the Standards of Conduct for transmission providers.
During FY 2023, DAA also participated in 62 electric or gas rate proceedings, 42 natural gas certificate proceedings, and 114 applications for mergers of public utilities under the Federal Power Act.
Division of Analytics and Surveillance
As part of its surveillance function, DAS detects anomalous activities in the markets and identifies potential investigative subjects. In FY 2023, natural gas surveillance screens produced approximately 23,769 screen trips, which resulted in 27 natural gas surveillance inquiries and three referrals to DOI for investigation. Electric surveillance screens produced approximately 566,933 screen trips, which resulted in 43 electric surveillance inquiries and six referrals to DOI for investigation.
DAS also conducted enhanced surveillance related to two disruptive weather events, Winter Storm Elliott and the Winter 2022/2023 Western Energy Price Spike. Surveillance into both events remain ongoing, but have already resulted in referrals to DOI for further investigation.
Expectations for the Future
In summary, FY 2023 continued the trend from the prior year of aggressive enforcement despite a change in the chair of the Commission. We expect aggressive enforcement actions by FERC in the coming year.
Consistent with prior annual reports, the FY 2023 Annual Enforcement Report emphasizes the importance of companies establishing and maintaining effective compliance programs that foster a culture of compliance that begins at the executive level and permeates throughout the organization.
Effective compliance programs should be tailored to a company’s specific size, region, organizational structure, operations, and business activities. In addition, they should ensure that their staff and management receive adequate and appropriate training and resources that enable them to detect potential issues in a timely manner and remain apprised of the latest compliance trends and issues.
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Morgan Lewis advises on all matters related to the energy sector, including counseling on FERC regulations, developing and implementing compliance programs, and responding to enforcement actions initiated by government regulators such as FERC.