United States: FERC Proposes Rules On Electric Storage And Distributed Energy Resource Participation In Organized Wholesale Power Markets, Reports On FY 2016 Enforcement Activities, And Issues Staff White Papers On Market Manipulation And Energy Trading Compliance

Last Updated: November 24 2016
Article by Robert S. Fleishman, Zori G. Ferkin and Paul C. Varnado

FERC issued a proposed rule last week that has the potential to blaze a path forward for electric storage and distributed energy resources in organized wholesale electricity markets. It also released its annual enforcement report and two important white papers on key areas of concern with respect to FERC Enforcement.

Electric Storage and Distributed Energy Resources

The Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking (NOPR) last week that, if adopted, will require every regional transmission organization (RTO) and independent system operator (ISO) to develop tariff provisions and market rules to ensure that electric storage and distributed energy resources are eligible to provide all capacity, energy, and ancillary services that they are technically capable of providing in the organized wholesale electric markets and remove barriers that would prevent these resources from meaningfully participating in the RTO/ISO wholesale markets.

There is no requirement that FERC issue a final rule or act further within a certain time. It remains to be seen whether a FERC Chair and new Commissioners appointed by President Trump will reach the same conclusions expressed in the NOPR. If a final rule is promulgated, it would further catalyze electric storage and distributed energy resource activities spurred by rules, orders, and policies in various states.

At the Commission's public meeting, Commissioners Cheryl LaFleur and Colette Honorable referred to California Independent System Operator (CAISO) and the California Public Utility Commission (CPUC) as the "first one[s] to step into the new world" where technological and communication advances enable electric storage and distributed energy to provide an array of services.

The NOPR relies significantly on responses by the RTOs and ISOs and dozens of public comments to the April 2016 inquiry by FERC Staff concerning "whether barriers exist to the participation of electric storage resources in the capacity, energy, and ancillary service markets in the RTOs and ISOs potentially leading to unjust and unreasonable wholesale rates..." and "if potential barriers exist, whether any tariff changes are warranted." The NOPR finds that distributed energy resources, like electric storage, have the technological capabilities to enhance competition in the wholesale markets, and tariff changes are needed to remove barriers to their market participation.

FERC issued the NOPR under Section 206 of the Federal Power Act to ensure that RTO/ISO tariffs are just and reasonable and not unduly discriminatory or preferential. Barriers to the participation in the organized wholesale electric markets by electric storage resources, and by distributed energy resources through distributed energy resource aggregations, "may, in some cases, unnecessarily restrict competition, which could lead to unjust and unreasonable rates." Removing these barriers will enhance the competitiveness and efficiency of the organized wholesale electric markets "and thereby help to ensure just and reasonable and not unduly discriminatory or preferential rates for wholesale electric services." (PP 11, 14)

Establish Tariff Provisions to Ensure Electric Storage Resources Are Eligible to Participate in RTO/ISO Organized Wholesale Markets

The NOPR would require RTO/ISO tariffs to contain a participation model that ensures electric storage resources are eligible to provide all capacity, energy, and ancillary services that they are technically capable of providing in the organized wholesale electric markets. The proposal defines "electric storage" broadly as "a resource capable of receiving electric energy from the grid and storing it for later injection of electricity back to the grid regardless of where the resource is located on the electrical system, including but not limited to batteries, flywheels and pumped-hydro resources."

In addition, the participation model for electric storage resources must: incorporate bidding parameters that reflect and account for the physical and operational characteristics of electric storage resources; ensure that electric storage resources can be dispatched and can set the wholesale market clearing price as both a wholesale seller and wholesale buyer consistent with existing rules that govern when a resource can set the wholesale price; establish a minimum size requirement for participation in the organized wholesale electric markets that does not exceed 100 kW; and specify that the sale of energy from the organized wholesale electric markets to an electric storage resource that the resource then resells back to those markets must be at the wholesale locational marginal price.

Remove Barriers to Encourage Participation by Distributed Energy Resource Aggregations in Wholesale Markets 

The NOPR proposes that "Distributed Energy Resources," defined as "a source or sink of power that is located on the distribution system, any subsystem thereof, or behind a customer meter,"  including but not limited to distributed generation, electric vehicles and their supply equipment, electric storage and thermal storage, and be able under RTO/ISO tariffs to participate in distributed energy resource aggregations directly in the organized wholesale electric markets, similar to CAISO's recently approved market rules that establish distributed energy resource providers as a type of market participant. (PP 13, 124, citing California Independent System Operator, 155 FERC ¶ 61,229 (2016)).

FERC found that distributed energy resources are able under existing tariffs to compete in only one wholesale market: an RTO/ISO demand response program. FERC found that limiting these resources to wholesale demand response programs constrains their design and operations and restricts the services they are eligible to provide. (PP 15, 106). FERC found that advancements in metering, telemetry, and communications, together with decreasing costs of distributed energy technologies, create opportunities for distributed energy resources to participate in aggregations, and thus they should be eligible to compete in the organized wholesale electric markets. (P 15). 

The NOPR would not require that the RTOs/ISOs create a new participation model specifically for distributed energy resource aggregations. Rather, a distributed energy resource aggregation would be registered as a market participant under the participation model in an RTO/ISO tariff "that best accommodates the physical and operational characteristics of the distributed energy resource aggregation." 

The NOPR seeks comments on many issues, including:   

Minimum size: The NOPR would require that RTO/ISO tariffs establish a minimum size requirement for electric storage resources participating in the wholesale electric markets, not to exceed 100 kW. This would balance the benefits of increased competition with the ability of RTO/ISO market clearing software to effectively model and dispatch smaller resources often located on the distribution system. (P 94). The NOPR does not propose a blanket minimum size requirement for distributed energy resource aggregations; rather, distributed energy resource aggregations would be required to satisfy any minimum size requirement of the participation model under which they elect to participate in the organized wholesale markets. (P 136). The NOPR proposes that aggregations can be any number of distributed energy resources; a single qualifying distributed energy resource would be able to serve as its own aggregator. (P 137).

Coordination among RTO/ISO, distributed energy resource aggregator and distribution system owner/operators:  The NOPR proposes to ensure that participation by distributed energy resource aggregations in wholesale markets does not present safety or reliability concerns for the distribution or the transmission systems. The NOPR would require RTO/ISO tariff provisions for coordination and communication among and between the RTO/ISO, distributed energy resource aggregator, and the distribution utility with respect to registration of new distributed energy resource aggregations and operational matters.

Net Metering: The NOPR proposes that distributed energy resources participating in retail compensation programs (such as net metering), or in another wholesale market participation program, would not be eligible to participate in the organized wholesale electric markets as part of a distributed energy resource aggregation. The NOPR states that this is to "ensure that there is no duplication of compensation..." to the distributed energy resource. (P 134).

Injecting Power from Behind-the-Meter: FERC is proposing that electric storage resources be allowed to net inject power to the wholesale grid so that they are eligible to provide wholesale generation services in the markets. (P 24)   

Charging Energy for Storage: The NOPR seeks comment as to whether RTO/ISO tariffs need specific metering and accounting provisions to delineate between wholesale and retail activities to address a concern raised in the comments that electric storage providers could use charging energy, which they purchase at wholesale rates, to serve retail customers (P 102).  

Comments on the NOPR are due no later than 60 days from the date that the NOPR is published in the Federal Register. The NOPR proposes that RTO/ISOs would have six months from the date that the final rule is published in the Federal Register to submit compliance filings demonstrating that they satisfy the new requirements (P 159). RTOs/ISOs would have 12 months from the date of the compliance filing to implement the tariff and rule reforms, including changes in their technological systems and business processes (P 160).   


This NOPR is a significant event in blazing a further path forward for electric storage and distributed energy resources in organized wholesale electricity markets. Market participants in RTOs/ISOs will find the NOPR and the filed comments a useful compilation of the existing tariffs and market rules that govern or affect participation by electric storage resources and distribution-connected energy resources in wholesale electric markets.

FERC Enforcement

On November 17, 2016, FERC Staff issued its Tenth Annual Report on enforcement activities. The report is very informative for all entities whose activities may affect FERC jurisdictional markets as it provides a general overview of FERC's enforcement priorities and specific detailed guidance to assist compliance efforts. In addition, Staff released two white papers providing detailed insights into its views and emerging trends on alleged manipulation of FERC-jurisdictional markets and effective energy trading compliance.

Annual Report

The report is significant because it identifies FERC's Office of Enforcement's ("Enforcement") priorities and provides information regarding non-public enforcement activities, including investigations opened, self-reported violations, and investigations closed without public enforcement action during FY2016. The report also addresses additional Enforcement activities, such as auditing jurisdictional companies, compiling and monitoring data, and performing surveillance and analyzing conduct in wholesale natural gas and electric markets. 


In FY2017, Enforcement will maintain the same priorities as in previous years:

  • Fraud and market manipulation;
  • Serious violations of the Reliability Standards;
  • Anticompetitive conduct; and
  • Conduct that threatens the transparency of regulated markets.


The Division of Investigations opened 17 new investigations (compared to 19 in FY2015) while bringing 11 to closure with no action, a settlement, or a formal enforcement proceeding. With respect to the 17 investigations opened:

  • 12 involve potential market manipulation;
  • 11 involve potential tariff violations;
  • One involves potential violations of a FERC certificate order;
  • One involves potential violations of FERC's Standards of Conduct; and
  • One involves potential violations of a FERC filing requirement.

The vast majority of the new investigations arose from Commission referrals or conduct observed by Enforcement's Division of Analytics and Surveillance (DAS) or RTO/ISO market monitors.

DOI reports that it is actively litigating in United States District Courts six civil penalty assessments for electric market manipulation and one case in federal district court challenging FERC's legal authority to adjudicate violations of the Natural Gas Act. Rehearing remains pending of FERC's assessment of a civil penalty in a natural gas market manipulation case DOI litigated before a FERC administrative law judge. With the pending litigation, DOI is seeking to recover more than $567 million in civil penalties and disgorge more than $45 million in allegedly unjust profits.

During FY2016, five settlement agreements resulted in over $12 million in civil penalties and disgorgement of almost $6 million in allegedly unjust profits. Two of the settlement agreements resolved alleged market manipulation by entities who were already litigating civil penalty assessments in federal district court. Another settlement agreement resolved allegations referred by an Assistant United States Attorney's Office that a company and its affiliate violated the Anti‑Manipulation Rule, Market Behavior Rules, Reliability Standards, and an ISO tariff. The entities also pled guilty to felony criminal charges under the Federal Power Act (FPA) in connection with false statements and tampering with emissions equipment. This was the first criminal conviction for an FPA violation.

In FY2016, DOI received 110 new self-reports of violations. The Annual Report notes that staff views self-reports as evidence of a company's commitment to compliance, and that self‑reporting provides credit under FERC's Revised Policy Statement on Penalty Guidelines, and, thus it mitigates a penalty. Nearly half of the self-reports resolved by staff during FY2016 were from RTO/ISOs reporting minor violations of their tariffs due to software errors or human errors. In FY2016, the Enforcement Hotline received 198 reports or inquiries.

In an attempt to provide guidance regarding why staff chose not to pursue an investigation or enforcement action, the report provides summaries of selected self-reports and investigations that were closed with no action taken. While each case presents unique circumstances and reasons for closure, the reasons provided most often were: (1) that the company took immediate corrective action to prevent a recurrence, (2) that the violation was inadvertent, (3) that there was insufficient evidence to establish a violation, or (4) that the violation caused little or no harm to customers or other market participants.


The Division of Audits (DA) reviewed the conduct of regulated entities through 14 financial, compliance, and performance audits in FY2016. The audits resulted in 214 recommendations for corrective action, directed refunds totaling more than $3.7 million, and directed accounting adjustments that collectively removed more than $1.6 million from transmission plant and wholesale formula rates. The audits also resulted in recommendations regarding improvements to internal processes and procedures, enhancements to the accuracy and transparency of reports and websites, and more efficient and cost-effective operations of regulated entities.

The report highlights the following topics on which DA found consistent patterns of noncompliance: recurring errors in cost accounting for formula rate recovery; violations of open access transmission tariffs; accounting by natural gas pipelines diverging from their Commission-approved transportation tariffs; misclassified costs in oil pipeline accounting reports; improper nuclear decommissioning trust fund reporting; excessive accruals of allowances for funds used during construction (AFUDC); improperly consolidated accounting for subsidiaries; inaccurate price index and Form No. 552 reporting; untimely filing of Commission reports; and inadequate records retention.

Market Oversight, Analytics, and Surveillance

In FY2016, the Division of Energy Market Oversight (DEMO) continued to administer FERC's forms filing requirements, with more than 10,000 forms submitted, and is comprehensively revising the formatting for electronic submission of those forms. DEMO also generated publicly-available information on the energy industry, including annual and seasonal market assessments.

DAS continued to develop and implement surveillance tools, including algorithmic screens to continuously analyze electric and natural gas transaction data and spot anomalies. In FY2016, FERC sought to enhance the surveillance capabilities of DAS by issuing a Notice of Proposed Rulemaking on Data Collection for Analytics and Surveillance, which, if enacted, would require more detailed information reporting by electric market participants, including their legal and financial connections to other entities. MoFo published a Client Alert on the Data Collection NOPR.

DAS continued to assist DOI in identifying potential misconduct and analyzing market participant behavior and economic incentives, assisting DOI on approximately 40 active investigations during FY2016.

The 2016 Report on Enforcement is available here.

Enforcement Staff White Papers

The White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005, available here, summarizes recent FERC and federal court case law regarding development of the Commission's anti-manipulation doctrine. This is the first time Enforcement has pulled together such an analysis in one place.

The Paper identifies many of the factors staff has considered when deciding whether to pursue or close past investigations into alleged manipulation, including indicia of fraudulent conduct such as uneconomic trading in one product to benefit a related position or seeming to disregard price signals and market fundamentals. Staff summarizes its prior civil penalty assessments and settlements for alleged market manipulation due to cross-market manipulation schemes and attempts at gaming or exploiting market rules, and it reiterates the culpability and compliance factors that can mitigate a civil penalty.

The White Paper on Effective Energy Trading Compliance Practices, available here, explains internal best practices for jurisdictional entities to prevent and detect market manipulation and other violations. Although there is no "one size fits all" approach to compliance, staff encourages all entities to develop a meaningful culture of compliance beyond merely writing down rules and restrictions. Among other things, it recommends staffing the compliance function with skilled personnel who are integrated into the entity's key business units, empowered with the authority to remedy compliance failures or deficiencies, and have adequate resources and technology, including to monitor trading activities and communications. Staff also recommends conducting background investigations on prospective energy traders, tying compensation to compliance, and conducting regular training tailored to the specific business activities.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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