Energy Legal Blog

BP and MGTC Settlements Push FERC Penalties for Year Toward $40 Million, FERC Reiterates Self-Reporting Still Mitigating Factor in Penalty Amounts

On October 25 FERC approved two stipulation and consent agreements with BP Energy Co. and its affiliates BP Canada Energy Marketing Corp and IGI Resources, Inc. (collectively, BP) totaling $7 million in agreed-to fines for natural gas capacity release violations ―  violations of the posting and bidding requirements for released capacity (the so-called "flipping" violations), the shipper-must-have-title requirement, and the prohibition on buy-sell transactions, among others; and with Anadarko Petroleum Corporation subsidiary MGTC totaling $300,000 for shipper-must-have-title violations.  For the year, these push FERC's penalty total close to $40 million.

True to its emerging body of decisional precedent on mitigating factors under its expanded civil penalty, FERC concluded that: (1) Anadarko, MGTC's parent company, promptly self-reported the violations upon discovery and "exhibited exemplary cooperation with staff's investigation;" (2) the violations began long before Anadarko acquired MGTC; and (3) the violations occurred only in a small geographic area in Wyoming.  FERC also found that MGTC "did not profit unjustly from its violations, and it appears that no demonstrable financial harm to third parties was caused by [its] violations."  These findings echo those FERC made in levying substantial fines against Cleco earlier this summer.

BP's violations were found to span fourteen interstate pipeline systems, involving the transportation or storage of 49.3 Bcf, and arising under twenty-three separate asset management arrangements.  FERC found the flipping violations serious and "deliberate attempt[s] to circumvent [FERC] rules" and, as such, "intentional violation[s] . . . that warrant . . . substantial civil penalt[ies]."  FERC again reported that "significant credit" was given to BP for self-reporting and cooperation.

Chairman Joseph Kelliher has remarked, and this exercise of FERC's expanded civil penalty authority against BP and MGTC was no exception, that the companies involved would have seen substantially higher penalties but for the fact that they self-reported.  In the face of industry speculation, especially since Cleco, that self-reporting may not mitigate against high penalties after all, Chairman Kelliher assures that "FERC places a high value on a company's commitment to rectifying inappropriate conduct by self-reporting its violations and cooperating with staff's investigation."  Given the year's total penalty dollars from only twelve separate actions, however, it's obvious self-reporting can still lead to substantial penalties.

FERC Extends Financial Houses’ Leave to Acquire Utility Securities

The role of financial institutions in energy markets is steadily increasing.  In furtherance of this trend, FERC recently granted blanket authorizations to three financial and investment companies allowing them to acquire securities of electric utility companies in the course of their business, without needing advance FERC approval under the Federal Power Act (FPA) for each transaction.

As part of the Energy Policy Act of 2005, Congress amended the FPA to require prior FERC approval for holding companies to acquire securities with a value of over $10 million of utilities or holding companies owning utilities.  Financial institutions have since sought and received from FERC waivers to allow them or their affiliates to acquire these securities in amounts exceeding $10 million without advance FERC approval, provided the acquisition is in their ordinary course of their business, which includes taking security for a loan, in connection with their asset management business, or as part of their routine activities as a broker, dealer, and trader. 

In 2006, FERC granted these blanket approvals for only one-year terms.  But having grown more comfortable with these arrangements, FERC now granted blanket approvals for a three-year term.  The authorization granted two of the companies, The Goldman Sachs Group, Inc. and Morgan Stanley, were renewals for these longer terms, while the third, Legg Mason, Inc., received an initial three-year authorization.  The conditions FERC imposed on each company include not exercising control over public utilities whose securities they acquire and compliance with reporting requirements.

Demand Response Developments: Promotion and Quantification

Utilities and their regulators are increasingly taking steps to foster reductions in electricity demand — whether through improved efficiency in applications or demand management — based on a combination of economic, reliability, and, increasingly, environmental reasons.

FERC's recent creation of an Energy Innovations Sector (EIS) within the newly renamed Office of Energy Market Regulation (OMER) (formerly the Office of Energy Markets and Reliability) is intended to highlight and respond to the growing complexity and potential of demand response in U.S. electric power markets.   The EIS will focus on five areas—demand response, renewables, distributed generation, global warming and advanced technologies—and will be tasked with performing independent assessments of developments in each of these areas as well as serving as an in-house technical advisor on issues regarding the integration of these resources into FERC's traditional concerns of wholesale markets, reliability, transmission planning and resource adequacy. 

Regional collaborative efforts to encourage demand response are also gaining traction in the form of the Pacific Northwest Demand Response Project and the Midwest Demand Response Initiative in the last year.  In addition, the California Independent System Operator (CAISO) plans to open a demand response laboratory this month in an effort to educate consumers on the potential for and importance of demand response.  The lab will feature exhibits and information on the latest demand response technologies, ranging from thermostats that respond to FM radio signals to adjust air conditioning and other residential applications to an automated direct response programs for commercial and industrial clients.  The latter allows utilities and other demand response aggregators to bid in MW blocks of demand reduction at certain prices and allocate the revenue as they wish.  Increasing numbers of utilities are using programs such as these to meet supply.  Finally, the addition of third-party demand response providers to the mix further expands the range of demand response options. 

FERC's Assessments of Demand Response and Advance Metering, issued in August 2006 and again in September 2007, demonstrate, according to FERC Commissioner Wellinghoff, that implementation of demand response programs has shifted from a question of "whether" to a question of "how."  FERC plans to issue another report in 2008 and follow up every two years thereafter, with information updates in the intervening years. 

Other nationwide efforts are also underway to quantify and verify demand response resources.  Quantification can prove difficult since reliability-based demand response resources, such as direct curtailments or interruptible services, are easier to track than are economically induced resources that depend on variable levels of customer participation.  Both NERC and NAESB have undertaken efforts to calculate demand response potential in the U.S.  Also, the US Demand Response Coordinating Committee (DRCC), a group composed of utilities and other energy companies, is working to develop methods for verifying the contribution of demand response resources.

Initiatives Provide Transmission for Renewable Power

The California Energy Commission has initiated a Renewable Energy Transmission Initiative (RETI) to identify transmission projects needed to help the state meet its renewable energy development goals.  In a process similar to that already adopted in Texas, the RETI process entails identifying Competitive Renewable Energy Zones (CREZs) from which renewable energy could be brought to California consumers.  Not surprisingly for the power-importing state, CREZs could be outside as well as inside California, although designation of external CREZs to serve California may not be well received in neighboring states.

The RETI process should complement the California Independent System Operator’s (CAISO) development of transmission financing rules.  The CAISO’s FERC-approved trunkline proposal provides for sharing of costs between interconnecting renewable generators, together with subsidies from other transmission customers.  The CAISO is now working on a tariff proposal for the inelegantly named “Location Constrained Resource Interconnection” rules, and is expected to submit the proposal to FERC by the end of October. 

On the national stage, Senator Harry Reid, the Majority Leader from Nevada, has introduced a bill to promote renewable energy development.  The bill, S.2076, would require establishment of renewable energy zones and direct federal power administrations to identify the transmission needed to access renewable energy in the zones.  The prospects of the bill becoming law are uncertain.  At minimum, however, the bill signals increased awareness by senior policymakers of the need to foster transmission development to connect the nation’s vast renewable energy potential with the load centers in need of energy. 

Duquesne Complaint Dismissed in Time for October 1 PJM Capacity Auction

The Federal Energy Regulatory Commission (FERC) dismissed Duquesne Light Company's (Duquesne) complaint seeking to avoid participating in  the PJM Interconnection's (PJM)  scheduled October 1 Reliability Pricing Model (RPM) auction in which load servers are obligated to secure capacity reserves, and ultimately to withdraw from the regional transmission organization.

Among many deficiencies in Duquesne's complaint, FERC found that Duquesne failed to address "'the practical, operational, or other nonfinancial impacts . . . including, where applicable, the environmental, safety or reliability impacts of' PJM's exclusion of the Duquesne Zone load from the October 1 auction," as well as how reliability will be maintained if the load in its Zone is removed from the October 1 auction.

Importantly, FERC relied on both the PJM Transmission Owners' Agreement and the Reliability Assurance Agreement provisions that require that a load-serving entity seeking to withdraw from PJM must make a filing with the Commission under section 205 before that withdrawal becomes effective.  FERC ultimately found that it was the "necessary section 205 filing, rather than this complaint requesting relief on an emergency basis, [that] is the appropriate vehicle for resolving all of the issues related to Duquesne's withdrawal from PJM."  It remains to be seen whether Duquesne will make the withdrawal filing since avoiding participation in the October 1 RPM auction is no longer a motivating consideration.

Few Sitting the Fence in Gas Futures Turf War

Legislators and industry marketers seem clear on where they stand regarding the debate now pending in the Southern District of New York over the jurisdictional reach of the Federal Energy Regulatory Commission (FERC) to pursue enforcement actions against manipulators of the gas futures market, the jurisdiction over which has traditionally resided in the Commodity Futures Trading Commission (CFTC).

Chairman and ranking member of the House Energy and Commerce Committee, John Dingell (D-MI) has said that Congress intended for the two agencies "to work together, conduct joint investigations and find and prosecute market manipulation wherever it might take place."  Joe Barton (R-TX) echoed Chairman Dingell's view that "efforts by FERC to protect wholesale energy markets from manipulation are not inconsistent with the CFTC's exclusive day-to-day regulation of futures exchanges.  We do not view these regulatory jurisdictions as conflicting or duplicative but rather as complementary."

In addition, Senators Dianne Feinstein (D-CA), Maria Cantwell (D-WA), and Ron Wyden (D-OR) urged CFTC cooperation with FERC, stating that "[t]he American people need both FERC and CFTC to fight market manipulators, not each other" and that the jurisdictional battle will "weaken both commissions and could significantly constrain our government's ability to pursue future market manipulation cases."

On the other side of the fence, however, Bob Etheridge (D-NC), head of the House Subcommittee on General Farm Commodities and Risk Management charged with hearing testimony over the reauthorization of the Commodity Exchange Act (CEA), questioned FERC's action in seeking hundreds of millions of dollars in penalties under authority that the Energy Policy Act of 2005 purportedly conferred on the agency.   "For the CFTC to fail to assert its exclusive jurisdiction … would equal a failure to uphold the will of Congress," Etheridge said.  

Futures Industry Association President John Damgard agreed that there should be no controversy due to the comprehensive and time-tested nature of CFTC's authority in this area.  Chicago Mercantile Exchange Group Chairman Terrence Duffy said "FERC reads the CFTC's exclusive jurisdiction out of existence." New York Mercantile Exchange President James Newsome said that a dangerous precedent could be set if Congress allows FERC to assert authority in futures markets.

And where the ball stops, nobody knows.

Commodity Futures Trading Commission and Federal Energy Regulatory Commission No Longer Playing Nice In Jurisdictional Battle over Gas Futures Market Enforcement

In dueling briefs filed in the United States District Court for the Southern District of New York, the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) came out on opposite sides of the question whether FERC has authority to take enforcement actions against manipulators of the natural gas futures market.  CFTC and FERC until recently had been acting in tandem to investigate allegations that Amaranth Advisors, its trader Brian Hunter, and Energy Transfer Partners manipulated the natural gas futures market in 2006. 

The CFTC argued that federal statutes and legal precedent clearly established that the CFTC had "exclusive jurisdiction" over the natural gas futures trading activity and that it was clear the statutory language establishing the CFTC's jurisdiction "superseded or limited" the ability of other federal and state agencies to take action on futures trading activities.  FERC argued to the contrary that the Commodity Exchange Act (CEA) did not permit the CFTC's authority automatically to prevent other federal agencies from taking enforcement actions against market manipulation.  

Additionally, FERC pointed to its stand-by argument that Congress in the Energy Policy Act of 2005 "granted FERC broad authority to police market manipulation by 'any entity' who engages in conduct that is 'in connection with' any [FERC]-jurisdictional transaction," and did not limit that jurisdiction "to manipulative conduct solely concerning physical markets."  

In separate statements, FERC Chairman Joseph Kelliher warned of a regulatory gap that could be created by courts acting in favor of Amaranth and CFTC in this area.  "If the Amaranth position prevails," said Kelliher, "the CFTC won't be able to protect [customers] because the physical market is not jurisdictional to CFTC."  James Kerr, president of the National Association of Regulatory Utility Commissioners echoed this sentiment, stating that "[i]f FERC is unable to police market manipulation in financial markets that affects the price of natural gas, state regulators will be unable [to] prevent retail customers from being unfairly overcharged."

Supreme Court to Hear Long-Term Power Contract Cases

The U.S. Supreme Court granted certiorari to review two Ninth Circuit decisions involving long-term contracts that were entered into during the 2000-2001 California energy crisis.  In a pair of decisions issued last December, Public Utility District No. 1 of Snohomish County, WA v. FERC and California Public Utilities Commission v. FERC, the Ninth Circuit held that the long-standing Mobile-Sierra doctrine and its "public interest" standard did not protect contracts from unilateral modification when they were entered in a dysfunctional market that caused prices to exceed a "zone of reasonableness."  The Ninth Circuit held that FERC should have reviewed the circumstances under which the contracts were entered, and possibly set those contracts aside if it found the prices to be unreasonable. 

Several groups of sellers sought Supreme Court review of the Snohomish and CPUC decisions to determine whether the Ninth Circuit's formulation of the Mobile-Sierra doctrine was appropriate.  Many argued the Ninth Circuit's view would upend contract certainty in electric markets, thereby inhibiting investment, if contracts could later be revised because of changes in the market, buyer's remorse, or other circumstances outside of a seller's immediate control.  Interestingly, FERC itself had asked the Supreme Court not to hear the cases, arguing that because these cases arose out of the "highly unusual context" of the 2000-2001 energy crisis they provided a "poor vehicle" for the Court to evaluate the proper application of the Mobile-Sierra doctrine to a complaint that rates were too high.

A seven-justice panel of the Supreme Court disagreed and granted certiorari in response to petitions filed by Morgan Stanley Capital Group and Calpine Corp. of the Snohomish decision.  (Chief Justice Roberts and Justice Breyer have recused themselves from the case, without explanation.)  The Court has not yet indicated whether it will grant certiorari petitions for the CPUC decision as well or will simply apply its decision in the Morgan Stanley and Calpine petitions to the CPUC case.  Briefs are due in November and December, and oral argument will likely be scheduled for sometime in the first quarter of 2008.