On November 17, 2011, the Federal Energy Regulatory Commission (FERC) Office of Enforcement issued its 2011 Report on Enforcement (Report). The annual Report provides an overview of and statistics regarding FERC's enforcement activities during the fiscal year 2011 (FY2011) within the Office of Enforcement's three divisions: the Division of Investigations, the Division of Audits and the Division of Energy Market Oversight. The Report provides information regarding the Office of Enforcement's non-public activities and priorities during FY2011.
The Report first identifies the Office of Enforcement's FY2011 priorities:
- Fraud and market manipulation;
- Serious violations of the Reliability Standards;
- Anticompetitive conduct; and
- Conduct that threatens the transparency of regulated markets.
According to the Report, the Office of Enforcement does not anticipate changing these priorities in 2012. The Report then discusses significant matters and statistics regarding each of the Office of Enforcement's three divisions.
Division of Investigations
The Division of Investigations conducts both public and non-public investigations of possible violations of the statutes, rules and regulations administered by FERC. The Report highlights a number of significant matters in FY2011. For example, the Office of Enforcement led a task force regarding the widespread power outages and gas curtailments in the Southwest in February 2011, which led to a number of recommendations to prevent future outages and curtailments. The Report also notes that FERC denied rehearing and clarified certain aspects of its policy regarding issuance of public notices of violation after Enforcement staff has preliminarily determined that a violation has occurred. Since the rehearing order, FERC has issued 11 public notices under this new policy. Moreover, in April 2011, FERC affirmed a previous decision by a FERC Administrative Law Judge that former Amaranth Advisors LLC trader Brian Hunter violated FERC's anti-manipulation rule and ordered Hunter to pay a $30 million civil penalty.
In FY2011, FERC approved 9 settlements involving more than $2.9 million in civil penalties and over $2.75 million in disgorgement. These settlements involved a variety of matters, including natural gas transportation violations (3 settlements), Open Access Transmission Tariff (OATT) violations (2 settlements), reliability standards violations (2 settlements), market manipulation and false statements violations (1 settlement), and market based rate (MBR) authority violations (1 settlement).
The Report also describes the self-reports received by the Office of Enforcement. Enforcement staff received 107 self-reports in FY2011, up from 93 in FY2010. Of these 107 self-reports, Enforcement staff closed 54 self-reports after an initial review and without opening an investigation, while 53 self-reports are pending initial review. The Office of Enforcement received self-reports regarding a number of matters. As in FY2010, the largest category of self-reports was for tariff and OATT violations. Enforcement Staff also received a number a self-reports regarding natural gas transportation violations, failures to report certain information, and Standards of Conduct violations. As part of the Office of Enforcement's effort to promote transparency and encourage compliance, the Report lists a number of illustrative self-reports closed with no action. The Report provides some insights why Enforcement staff chose not to pursue enforcement actions in particular instances, including:
- The conduct resulted in no or minimal harm to the market or other market participants
- The entity took appropriate remedial measures to prevent future violations
- The entity implemented measures for future compliance
- The violation was inadvertent
- The entity quickly submitted a self-report
- The entity did not receive economic benefit or returned any economic benefit to its customers
The Division of Investigations opened approximately the same number of investigations in FY2011 (12 non-self-reported investigations and 2 inquiries) as in FY2010 (15 investigations). The opened investigations involve many different types of potential violations, including: market manipulation or false statements to FERC or a RTO/ISO (8 investigations); tariff violations (5 investigations); hydropower licenses (2 investigations); and Standards of Conduct (1 investigation). RTO/ISO referrals continue to be a key referral source, as 6 investigations opened in FY2011 came through RTO/ISO market monitoring units. Additionally, Enforcement Staff opened investigations from a number of other sources, including: market oversight (2 investigations); tips to the Enforcement Hotline (2 investigations), FERC directive (1 investigation), and referrals from other FERC program offices (1 investigation).
Enforcement staff also closed more investigations through settlement, FERC order to show cause, or without enforcement action in FY2011 (19 investigations) than FY2010 (16 investigations and 1 inquiry). In particular, Enforcement Staff closed investigations regarding the following conduct at issue in FY2011: potential tariff or OATT violations (5 investigations); potential market manipulation or false statements (3 investigations); and potential natural gas transportation violations (2 investigations). Notably, the Office of Enforcement closed a higher percentage of investigations by settlement in FY2011 than in FY2010.
The Division of Investigations also handles a number of reliability matters. In FY2011, FERC received 270 Notices of Penalty containing 1,392 potential or confirmed violations, which reflect violations of the reliability standards by the North American Electric Reliability Corporation (NERC) or one of the eight regional entities (REs.).
Division of Audits
The Division of Audits operates FERC's audit program and administers FERC's accounting regulations. According to the Report, the Division of Audits completed 72 audits and related activities in FY2011. These included 56 traditional audits directed by the Division of Audits of public utilities, natural gas pipelines, and storage companies. The 56 traditional audits consisted of both: (a) financial audits, addressing issues such as fuel cost recovery mechanisms, affiliated transaction compliance involving the Public Utility Holding Company Act of 2005, and reporting requirements of FERC Form Nos. 1 and 2; and (b) non-financial audits, addressing issues involving compliance with OATTs, MBR tariffs, mergers and acquisitions, electric quarterly reports, and pipeline postings. The 16 non-traditional audits involved reliability oversight audits conducted with the Office of Electric Reliability.
Division of Market Oversight
The Division of Energy Market Oversight within FERC handles monitoring and oversight of wholesale natural gas and electric power markets. In FY2011, the Division of Energy Market Oversight continued its roles of market monitoring, technical analysis and investigation support, outreach, forms administration and filing compliance, and rulemaking oversight. Notably, the Division of Market Oversight developed certain programs in FY2011 to evaluate index divergence in natural gas markets and applied screens to recognize uneconomic trading of electricity products traded on the IntercontinentalExchange.
You can view the full report on FERC's website at: http://www.ferc.gov/legal/staff-reports/11-17- 11-enforcement.pdf.
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