FERC settlement penalties drop again, adding to perception of relaxed enforcement

Washington — The Federal Energy Regulatory Commission in fiscal 2020 approved three enforcement staff-negotiated settlements, resulting in civil penalties and disgorged profits of just over $550,000, a figure that prompted one commissioner to question whether FERC remains committed to enforcement work.

Staff with FERC's Office of Enforcement released their annual report on the commission's enforcement activity at the Nov. 19 open meeting, which remains virtual due to the coronavirus pandemic.

According to the report, enforcement staff within the Division of Investigations opened six new investigations in FY-20 and closed eight investigations without further action. That is down from 12 newly opened investigations and 14 closed investigations in FY-19, and 24 opened investigations and 23 closed investigations in FY-18.

The three settlements reached in FY-20 included $437,500 in civil penalties and $115,876 in disgorgement, totaling $553,376. The prior year saw two settlements reached between enforcement staff and energy market subjects, totaling more than $14 million, including $7.4 million in civil penalties and $7 million in disgorgements. Since 2007, enforcement staff has negotiated settlements totaling $784 million in civil penalties and $518 million in disgorgement.

The commission has routinely cautioned against reading too much into a single year's enforcement statistics, and restrictions on travel and in-person meetings due to the pandemic likely slowed down non-essential investigative activity this fiscal year.

Concerns continue

But concerns that FERC's Office of Enforcement has not been as vigilant of late and that there has been a curtailment of enforcement activity predated the pandemic.

Several senators in September 2019 sent a letter to FERC asserting an "apparent erosion of the vital role [FERC] plays in preventing fraud and manipulation in our nation's energy and financial markets." That letter noted a decline in civil penalty actions initiated by FERC and abrupt terminations of nonpublic investigations among its grievances.

FERC Commissioner Richard Glick, at the time, said in a letter of response that he shared the senators' worries that the agency's "commitment to preventing manipulation and penalizing bad behavior appears to be waning." He also suggested that FERC was acting too slowly on select enforcement matters.

"We all rely on competitive markets to establish just and reasonable rates for wholesale markets, but in order for the system to work, we need to guard against and prevent market manipulation," Glick said at the Nov. 19 meeting.

He commended the Office of Enforcement as unsung heroes, noting the role staff plays in ensuring that pipeline companies, utilities and other market participants comply with regulations designed to protect the public.

"But in order for the Office of Enforcement to do its job, this commission must also do its job, and I'm concerned that we have gone AWOL," he said, pointing to the settlements worth just $550,000 when "in prior years, settlements amounted to tens of millions and sometimes hundreds of millions of dollars."

"I recognize you can't always make a finite judgment based on a single year's statistics, but I think it's at least worth asking whether the commission remains committed to its enforcement responsibilities. And I've had my doubts," Glick said.

One former FERC staffer asserted in an interview Nov. 19 that for the Division of Investigations to open just six new investigations in a year was "pathetic." While acknowledging informal inquiries, self-reports and other actions taken by the division, the former staffer said six was still "an extraordinarily low number" and to expect a change with the new administration.

Chatterjee's defense

Commissioner Neil Chatterjee, who was chairman in late 2017 and again from Oct. 24, 2018 to Nov. 5, 2020, pushed back on speculation that FERC enforcement activity has been lagging or less robust.

"There are natural variations year to year in terms of penalty and settlement numbers," he said in an email Nov. 19. "During my chairmanship, [the Office of Enforcement] carried out its duties – including opening and conducting investigations – in the normal course, recognizing that the pandemic inherently affected some activities. In addition, FERC's enforcement staff has maintained excellence in market surveillance, compliance, and audit activities, which ensure our energy markets continue to deliver benefits to consumers."

The enforcement report revealed that the Division of Investigations closed 105 self-reports without further action, closed six referrals from market monitors without opening full investigations, and resolved 146 calls made to the commission's Enforcement Hotline in FY-20.

That division also filed a new complaint in federal district court to enforce a penalty assessment and continues to litigate three other matters concerning market manipulation before US district courts. Those court cases represent some $79 million in civil penalties and $10.2 million in disgorgement of unjust profits, if decided in FERC's favor.

Among other takeaways from the report, Enforcement's Division of Audits and Accounting completed 10 audits in FY-20 that resulted in 51 findings of noncompliance and 199 recommendations for corrective action, the majority of which were implemented within six months, and directed $98.4 million in refunds and other recoveries.

And the Division of Analytics and Surveillance, which monitors for potential market manipulation and other anomalous activities in the markets, opened 26 natural gas surveillance inquiries and 39 electric surveillance inquiries.

None of the 26 gas inquiries were escalated to investigations. Of the 39 electric inquiries, five were referred to the Division of Investigations, six remain under review with analytics staff and the rest were closed, the report said.