By Michael Brooks
In response to requests from several senators from both parties, the Department of Energy’s Inspector General has begun an investigation into the Federal Energy Regulatory Commission’s Office of Enforcement.
“After reviewing this situation, we have determined that we will be undertaking a review of aspects of FERC’s enforcement program,” Inspector General Gregory Friedman said in a letter to Republican Sen. John Barrasso of Wyoming.
The letter is dated Oct. 23 but was only recently made public.
Barrasso and Sen. Susan Collins (R-Maine) had written Friedman in September, asking him to investigate allegations in an Energy Law Journal article by former FERC counsel William Scherman that “the FERC enforcement has become lopsided and unfair.”
The senators requested that Friedman look into allegations that enforcement targets “are not being given actionable notice by FERC of conduct” that “constitutes market manipulation.” The senators were also concerned that companies “who do not otherwise appear frequently before FERC are held to different standards.”
Quid Pro Quo?
The senators also pointed to Commissioner Norman Bay’s written answers to questions posed by the Senate Energy and Natural Resources Committee after his confirmation hearing in May, shortly after Scherman’s article was published. Sen. Lisa Murkowski (R-Alaska) asked about the appearance of quid pro quo regarding FERC’s approval of Exelon’s 2012 merger with Constellation Energy Group, which occurred the day after Constellation agreed to a settlement with the Office of Enforcement. Murkowski noted that the settlement agreement made reference to the merger.
Bay answered, “To the best of my recollection, I did not indicate to the parties involved in the Exelon-Constellation merger that it would be prudent to settle the pending enforcement matter to get the merger approved. I do not know whether anyone else at FERC did so.”
“Given these circumstances, did the former FERC chairman [Jon Wellinghoff] or any member of FERC’s staff suggest or actively or effectively require that a regulatory approval would be contingent upon the ‘voluntary’ settlement of an enforcement dispute?” the senators asked Friedman.
Barrasso had pointed criticism for Bay at the future FERC chairman’s confirmation hearing. “I find this very troubling,” Barrasso told Bay regarding Scherman’s allegations. “I believe this raises serious questions about your fitness to be on the commission. I also believe that these tactics have contributed to driving investors out of the electric market and that means a less reliable grid and higher costs to consumers.” (See Analysis: LaFleur Cruises, Bay Bruises in Confirmation Hearing.)
Sen. Robert Casey (D-Pa.) also wrote to Friedman about FERC’s enforcement tactics in July. Casey did not bring up specific allegations, only asking whether or not the office was violating any due process or confidentiality laws.
“I appreciate that FERC investigates matters that may bring instability or fraud to the energy marketplace,” Casey wrote. “However, to do this fairly and effectively, it is important that FERC’s policies on investigations and enforcement actions be transparent.”
Bay and his successor as enforcement chief, Larry Gasteiger, have defended the office’s work. (See FERC, CFTC Reject Due Process Complaints.)
2014 Report on Enforcement
News of the IG’s investigation came as FERC last week released its annual Report on Enforcement.
The report highlights eight settlements in fiscal year 2014 that resulted in almost $25 million in civil penalties and disgorgement of $4 million in unjust profits. Some of these penalties were offset by reliability enhancements that FERC ordered. For example, FERC penalized the Imperial Irrigation District $12 million for its role in the 2011 Southwest blackout, but this was offset by the $9 million spent by the utility on reliability enhancements. (See related story, MISO to Look Closer at Low-Voltage Threats to System.)
Otherwise, the largest of these penalties was against Louis Dreyfus Energy Services ($4.3 million) “for virtual transactions made to increase the value of the company’s position in financial transmission rights” in MISO. The company also paid a $3.3 million disgorgement to MISO under the settlement.
FERC also collected $4 million from Erie Boulevard Hydropower for failing “to adequately maintain and operate dam safety mechanisms” and $2 million from Arizona Public Service Co. for, among other violations, failing “to perform necessary operational planning studies.”
Gas Index Manipulation
Among the settlements is one with Direct Energy Services, in which the company agreed to pay a $20,000 penalty and disgorge $31,935 for manipulating natural gas prices in May 2012. FERC said the company lowered prices at the Algonquin and Transco Zone 6 hubs by buying next-day physical index gas and selling comparable volumes of fixed-price gas. The company’s action lowered the Gas Daily Index, benefiting the company financially, according to the report.
The report notes that Direct Energy self-reported the violation, and its “quick action due to its strong compliance program and its cooperation with Enforcement’s investigation resulted in relatively small civil penalty and disgorgement payments.”
At FERC’s monthly meeting last week, Bay asked enforcement staff what led Direct Energy to self-report the violations. Staff member Michael Raibman said that after the company’s outside counsel gave a presentation regarding the Constellation settlement, a trader went to his supervisors, saying he suspected that some of his colleagues were engaged in the type of activity described in the presentation. Direct Energy’s compliance division then began an internal investigation the next day, Raibman said.
“So how helpful was the transparency provided in the commission’s order in the Constellation settlement?” Bay asked.
Raibman replied that Direct Energy said it had found it very helpful “because they knew exactly what it was that we had found troubling Constellation and were able to identify the same pattern in their trading very, very quickly.”
