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Federal Regulatory Enforcement for LDCs

Federal Regulatory Enforcement for LDCs. Bob Fleishman AGA Legal Forum July 17, 2012. FERC Enforcement. Since 2007, Enforcement has assessed approximately $302 million in civil penalties and required approximately $155 million in disgorgement

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Federal Regulatory Enforcement for LDCs

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  1. Federal Regulatory Enforcement for LDCs Bob Fleishman AGA Legal Forum July 17, 2012

  2. FERC Enforcement • Since 2007, Enforcement has assessed approximately $302 million in civil penalties and required approximately $155 million in disgorgement • Approximately $150 million of the $302 million in civil penalties has been assessed since June 2011 • Since 2005, Enforcement has received 458 self-reports, 107 of which were received during FY2011 • Enforcement opened 12 non-self reported investigations and 2 inquiries in FY2011 • 72 audits and related activities were completed in FY2011, 56 of which involved traditional public utilities, natural gas pipelines and storage companies

  3. FERC Enforcement • Major focus on market manipulation (e.g., Constellation) • Continued focus on flipping and capacity release violations (e.g., Atmos, ConocoPhillips) • Some clarity regarding affiliate bidding in gas pipeline open seasons (Order No. 894) • Increased focus on individual liability (Polidoro, Kourouma, Whalen) • New focus on limiting ability to participate in the energy business (Constellation, Polidoro, Vista) • New(ish) focus on demand response (e.g., EnerNoc)

  4. Notices of Alleged Violations • Enforcement Staff notices of alleged violations make investigations public before settlement or order to show cause • 16 notices since January 2011 • Manipulation/false or misleading information • Constellation, Vista, Holyoke, Barclays, Deutsche Bank, (Electric) • BP (Gas) • Polidoro, Rumford Paper Company, Competitive Energy Services, Silkman, Lincoln Paper & Tissue (Demand Response)

  5. Notices of Alleged Violations • 16 notices since January 2011 (cont’d) • Capacity release, SMHT, buy/sell violations • Atmos, Missouri Gas Energy • Tariff , MBR, Reliability and OATT violations • Duke, Black Hills, Grand River Dam Authority • Eight of 16 matters for which notices of violations were issued resulted in settlement

  6. Significant Enforcement Settlements • Constellation Energy Commodities Group, Inc. (“Constellation”), 138 FERC ¶ 61,168 (2012) • Single largest civil penalty in FERC’s history ($135 million for Constellation alone v. $173 million in all other cases under EPAct 2005 up to that point) • Became effective when the merger between Constellation and Exelon was consummated; merger simultaneously approved

  7. Significant Enforcement Settlements • Constellation (cont’d) • Enforcement determined that Constellation entered into virtual and day ahead (“DA”) physical schedules with the intent of impacting DA prices in the NYISO and ISO-NE to benefit Constellation’s financial positions in swaps and Transmission Congestion Contracts/Financial Transmission Rights • Enforcement’s finding of manipulative intent was based on the volume of Constellation’s virtual and physical trading and the fact that its trading was persistent and repetitive, despite the fact that it was unprofitable

  8. Significant Enforcement Settlements • Constellation (cont’d) • Enforcement noted that compliance training materials stated that behavior which was uneconomic on a stand-alone basis in order to benefit positions in other markets would likely be considered market manipulation • Enforcement also noted that information concerning the manner of trading was available to upper management in an electronic database but (i) no one in upper management reviewed the database, and (ii) upper management did not address Risk Management’s concerns about the size of the traders’ positions

  9. Significant Enforcement Settlements • Constellation (cont’d) • Enforcement also determined that Constellation denied that its virtual transactions were related to its financial positions and instead told the NYISO market monitor that the transactions were independent of the financial positions and were entered into based on market fundamentals, thereby violating 18 CFR § 35.41(b) • Individual traders remaining at Constellation may not hold a position which involves physical or financial energy trading at Constellation or a successor or affiliate company in the future

  10. Significant Enforcement Settlements • Constellation (cont’d) • Additional compliance measures included: (i) regular monitoring of profit and loss concentrations in virtual transactions and physical schedules of electric energy; (ii) reviewing and documenting the purpose of virtual transactions; (iii) monitoring and preserving trader communications, including but not limited to instant messages, emails, and telephone calls, for no less than five years; and (iv) two years of semiannual reports to Enforcement, with the option of a third year at Enforcement’s discretion

  11. Significant Enforcement Settlements • Constellation (cont’d) • Constellation admitted facts, but did not admit or deny wrongdoing in settlement • After settlement, Constellation’s CEO stated publicly that Constellation believed the “trading practices in question were lawful portfolio risk management transactions” • Chairman Wellinghoff responded, stating that Constellation “knowingly and willfully engaged in [the transactions] that form the basis of Enforcement Staff’s conclusion that Constellation engaged in market manipulation, fraud, and misrepresentation”

  12. Bidding in Gas Pipeline Open Seasons • Final Rule-Order No. 894 (Nov. 2011) • Issue first arose in enforcement context in Cheyenne Plains Open Season • Multiple affiliates of the same entity cannot bid in an open season for pipeline capacity in which the pipeline may allocate capacity on a pro rata basis, except in cases in which an affiliate has an independent business reason for submitting a bid • An affiliate is not acting independently if a business unit is being used by its parent in a way that differs from its usual business operations, is used to perform transactions than an affiliate or parent could not, or is acting as an alter ego of the parent or affiliate

  13. Significant Enforcement Settlements • In re Joseph Polidoro, 138 FERC ¶ 61,018 (2012) • $50,000 civil penalty for manipulation • Polidoro and any entity, company or affiliate in which he has a financial interest barred from participating in PJM’s demand response market for two years • Concerned demand response in PJM market and was follow up to North America Power Partners (“NAPP”) settlement in 2010, 133 FERC ¶ 61,089 • Polidoro was one of two founding partners of NAPP and Senior Vice President

  14. Significant Enforcement Settlements • Polidoro(cont’d) • Polidoro registered resources for PJM’s Synchronized Reserve Market and submitted offers for resources into the market at times when the resources reported they were unavailable. Polidoro also offered a resource that had ended its contractual relationship with NAPP • Polidoro failed to notify the resources that cleared the market and the resources failed to respond • Similarly, Polidoro incorrectly registered resources for ILR planning season

  15. Significant Enforcement Settlements • Vista Energy Marketing, L.P. (“Vista”), 139 FERC ¶ 61,154 (2012) • $350,000 civil penalty for Vista and Vista barred from applying to make wholesale sales for two years • Michael P. Whalen, one of three investor/owners of Vista, previously pled guilty to charges involving the delivery of false, misleading or inaccurate reports of market information to natural gas price indices • In its MBR application, Vista made multiple representations and commitments that Whalen would play a limited role in operations and management

  16. Significant Enforcement Settlements • Vista (cont’d) • Whalen was actually involved in business development and marketing, directed employees, and organized and participated in regular meetings, among other activities • Enforcement determined Vista and Whalen violated conditions of MBR order and that the representations and commitments regarding Whalen constituted misleading information that Vista failed to exercise due diligence to correct, thereby violating 18 CFR § 35.41(b)

  17. Significant Enforcement Settlements • Vista (cont’d) • Whalen cannot have a role other than a passive investor in any entity that makes wholesale sales for next two years, cannot make new investments in entities that make wholesale sales, and must abide by other restrictions on business contacts with individuals at entities in which he already invested

  18. Significant Orders to Show Cause • In re Moussa I. Kourouma, 135 FERC ¶ 61,245 (2011) • $50,000 civil penalty • Used one year old daughter's name and name and mailing address of acquaintance in communications with FERC and the PJM to hide his activities from his former employer and circumvent non-compete clause • FERC found Kourouma violated § 35.41(b) • Kourouma did not dispute the material facts alleged and FERC decided the case on summary judgment without a hearing. • Pending appeal in D.C. Circuit

  19. Significant Orders to Show Cause • In re Brian Hunter, 135 FERC ¶ 61,054 (2011) • $30 million civil penalty - gas market manipulation • Pending appeal in D.C. Circuit and key issues include: • FERC v. CFTC jurisdiction • Open market manipulation • “Banging the close”

  20. Focus on Demand Response • EnerNoc, Inc. (“EnerNoc”) Audit, Docket No. PA11-20-000 (Jan. 13, 2012) • Audit report released after a year long audit • Included 7 findings and 22 recommendations relating to management of assets within resources in ISO-NE; demand reduction forecasting; capacity supply obligation shedding procedures; registration of distributed generators within ISO-NE; processes and procedures for notifications of change of load and change of status within NYISO; air facility registration certificates for generation assets within NYISO; and corporate compliance program

  21. Focus on Demand Response • Audits have also commenced for • Comverge (Enerwise), Viridity, and others • Investigations pending involving • Rumford Paper Company, Competitive Energy Services, LLC, Richard H. Silkman, Ph.D, Lincoln Paper & Tissue, LLC

  22. Organizational and Related Changes in Office of Enforcement (“OE”) • Significant number of Staff members have been in OE less than 5 years • A number of key Enforcement Staff members have moved to the CFTC (Matt Hunter and others) • Recent creation of Division of Analytics and Surveillance (40 staff members and growing) • Substantial increase in data collected from organized electricity markets (Order No. 760) • Each RTO/ISO must electronically deliver to FERC on an ongoing basis (i.e., within seven days after creating datasets in a market run or other procedure) certain non-public data

  23. Organizational and Related Changes in Office of Enforcement (“OE”) • Data to be reported includes supply offers and demand bids for energy and ancillary services and virtual offers and bids; energy/ancillary service awards; capacity market offers, designations and prices; resource output data used in market settlements; marginal cost estimates; shift factors; financial transmission rights data; settlement data for internal bilateral energy contracts and interchange transactions between two or more balancing authorities; and uplift charges and credits

  24. Organizational and Related Changes in Office of Enforcement (“OE”) • Investigations now begin with aggressive fact gathering • Early depositions and use of subpoenas to compel testimony • Still room for reasonable compromises and efficient resolution of investigations • Staff has begun to assert 18 USC § 1001 violations

  25. Lessons Learned-FERC • Lessons Learned • Continued enforcement risk for market participants trading in physical and financial markets simultaneously, particularly if trades are routinely unprofitable • Contemporaneous documentation of intent of trading strategies is essential • Carefully consider content of compliance materials • Communications with, and responses to, data requests to RTO/ISO market monitors can lead to investigations and additional charges • Upper management must take steps to actively supervise trading or ensure that such supervision occurs

  26. Lessons Learned-FERC • Lessons Learned (cont’d) • Enforcement will aggressively pursue and penalize individuals and entities in which the individuals have financial interests and limit ability to participate in energy markets • FERC is monitoring statements made in connection with settlements and will react quickly and forcefully • Substantial agency resources devoted to audits • Audits expanding into new areas such as demand response and may lead to investigations • FERC and CFTC work together on a number of matters but are still at odds on others

  27. CFTC Enforcement • Enforcement filed 99 actions in FY 2011, the highest yearly tally in the agency’s history and a 74% increase over prior fiscal years • More than 450 investigations were opened in FY 2011 • Substantial new enforcement authority under Dodd Frank • Fraud based manipulation • Disruptive trade practices • Whistleblower provision

  28. CFTC Enforcement • Ponzi schemes and MF Global • CFTC remains active in energy markets

  29. Fraud Based Anti-Manipulation Authority • CFTC fraud based anti-manipulation authority under Dodd Frank is in place. See 76 Fed. Reg. 41,398 (July 14, 2011) • Rule 180.1 makes it unlawful to: • use or employ or attempt to use or employ any manipulative device, scheme or artifice to defraud; • make or attempt to make any untrue or misleading statement of a material fact or omit to state a material fact;

  30. Fraud Based Anti-Manipulation Authority • engage or attempt to engage in any act, practice or course of business, which operates or would operate as a fraud or deceit; or • knowingly or recklessly deliver a false or misleading or inaccurate report concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce

  31. Fraud Based Anti-Manipulation Authority • For fraud based manipulation, CFTC has eliminated requirement to show artificial price and lowered scienter standard to recklessness • Fraud based manipulation rule does not reach inadvertent mistakes, negligence or legitimate market activity undertaken in good faith • This fraud based manipulation authority is in addition to, not in lieu of, CFTC’s existing anti-manipulation authority

  32. Disruptive Practices • Dodd-Frank makes it unlawful for person to engage in trading, practice, or conduct on or subject to rules of CFTC-registered entity that: • Violates bids or offers; • Demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or • Is, is of the character of, or is commonly known to the trade as, “spoofing” (which Dodd-Frank defines as bidding or offering with the intent to cancel the bid or offer before execution)

  33. Disruptive Practices • CFTC released Proposed Interpretive Order (PIO) in March 2011 clarifying Dodd-Frank’s disruptive practices provision. • Disruptive trading practices authority applies only to trading subject to rules of a registered entity • Violating bids or offers defined as either (1) buying a contract at any price that is higher than the lowest available price or (2) selling a contract at a price that is lower than the highest available bid

  34. Disruptive Practices • Disregard for orderly execution of transactions contingent on intent (i.e., intentional or reckless conduct), closing period, and orderly market • “Spoofing” includes submitting or cancelling bids or offers to (1) overload the quotation system of the registered entity, (2) delay another’s execution of trades, or (3) create an appearance of false market depth. • Requires specific intent to cancel or offer; does not include reckless conduct or good faith • Focus on market context, trader’s pattern and all other relevant facts and circumstances

  35. CFTC Remains Active in Energy Markets • CFTC v. Optiver US, LLC, No. 08-Civ. 6560 (S.D.N.Y. April 19, 2012) • Complaint charged defendants with engaging in manipulation and attempted manipulation of NYMEX Light Sweet Crude Oil, New York Harbor Heating Oil and New York Harbor Gasoline futures contracts • Optiver and Van Kempen charged with concealing manipulation by making false statements in response to NYMEX inquiry • Consent order requires defendants to pay $13 million civil penalty and $1 million in disgorgement, trading limitations range from 2-8 years

  36. CFTC Remains Active in Energy Markets • CFTC v. Parnon Energy Inc., No. 1:11-cv-03543 (S.D.N.Y. May 24, 2011) • Manipulation and attempted manipulation case involving West Texas Intermediate (WTI) NYMEX futures contract and physical holdings • Alleged manipulative strategy consisted of • Building a dominant physical position • Contemporaneously establishing a long spread position on NYMEX and ICE with intent to artificially inflate value of the position

  37. CFTC Remains Active in Energy Markets • Parnon (cont’d) • Withholding physical crude from market to create tight supply environment and selling long spread positions at profit • Establishing short spread position at artificially high price • Surprising market by dumping physical position to drive down prices and profit from short spread position • Alleged physical position trading loss of $15 million and derivative gain of $50 million • Motions to dismiss were denied, with finding that CFTC plausibly alleged manipulation

  38. CFTC Remains Active in Energy Markets • In re Cantor Fitzgerald & Co., CFTC Docket No. 11-08 (Feb. 22, 2011) • Trade practices case concerning wash trades in Reformulated Gasoline Blendstock for Oxygen Blending (RBOB) gasoline futures • CFTC alleged an employee received and executed orders on behalf of the same customer to buy and sell hundreds of futures contracts for the same price, quantity and contract month • Cantor Fitzgerald liable because the employee undertook actions within the scope of employment. • $100,000 settlement

  39. CFTC Remains Active in Energy Markets • CFTC continues to focus on other violations that have relevance in energy markets. • In re Barclays PLC, CFTC Docket No. 12-25 (June 27, 2012) ($200 million civil penalty for attempted manipulation and false reports concerning LIBOR and Euribor) • CFTC v. Welsh, 12 CV 01873 (S.D.N.Y. Mar. 14, 2012) (alleged manipulation involving “banging the close”) • In re D.E. Shaw & Co. L.P., CFTC Docket No. 12-09 (Feb. 22, 2012) ($140,000 civil penalty for exceeding speculative position limits) • In re Newedge USA, LLC, CFTC Docket No. 12-06 (Jan. 9, 2012)($700,000 civil penalty for submitting inaccurate large trader reports and violating CFTC order regarding reporting)

  40. CFTC Remains Active in Energy Markets • In re J.P. Morgan Securities LLC, CFTC Docket No. 12-14 (Mar. 8, 2012) ($140,000 civil penalty confirming execution of prearranged trade which was a fictitious sale and noncompetitively executed) • In re BlackRock Institutional Trust Company NA, CFTC Docket No. 12-13 (Mar. 8, 2012) ($250,000 civil monetary penalty for engaging in prearranged trades that were noncompetitively executed and fictitious sales) • In re Merrill Lynch, CFTC Docket No. 12-05 (Dec. 7, 2011) ($350,000 civil penalty for exceeding speculative position limits)

  41. CFTC Enforcement Priorities • Market manipulation • Disruptive trading practices • End user exception • Other new swap authorities under Dodd Frank • Customer funds

  42. Lessons Learned-CFTC • Even with recent focus on Ponzi schemes and MF Global, CFTC has resources to devote to energy enforcement • CFTC’s fraud based manipulation and disruptive trade practices authority will be important enforcement tools in energy markets • CFTC will aggressively pursue behavior that has relevance in energy markets, including “banging the close,” exceeding position limits, and wash trades • CFTC is devoting substantial resources to investigations

  43. Questions

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