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Welcome to McDermott’s Energy Business Law Blog

Welcome to McDermott’s Energy Business Law Blog.  Our objective in this forum is to provide our readers with insights into the evolving regulatory, business, tax and legal issues affecting the U.S. and international energy and commodities markets.  Contributions to this blog will be a collective effort of lawyers and professional staff that are part of McDermott’s broad-based energy practice, with ten U.S. and seven European offices, and a strategic alliance in China.  We will bring to bear our experience across the global energy sector, which spans exploration and production, oil, gas and refined products pipelines, storage and processing facilities, liquefied natural gas, refining and petrochemicals, electric power generation and transmission, renewable and alternative energy (including wind, solar, biofuels and others), trading and regulatory, carbon and emissions, metals and agriculture. 

We hope you find our energy blog to be an informative resource.  Please feel free to provide us any feedback on how we might improve our offerings.

Blake H. Winburne
Global Head, Energy Advisory Practice

FERC Enforcement Priorities Unchanged for 2012

by Elizabeth Philpott

Fraud and market manipulation, serious violations of the reliability standards, anticompetitive conduct, and conduct that threatens the transparency of regulated markets will continue to be the focus of FERC investigations and enforcement actions in 2012 according to the 2011 Annual Report on Enforcement.

The 2011 Report, issued November 17, 2011, describes the agency’s efforts in fiscal year (FY) 2011 to make its investigations more transparent through public notices of alleged violations and consistent implementation of penalty guidelines in settlements and adjudications.

The Enforcement Office (the Office) received 107 self-reports in FY 2011, up from 93 in FY 2010.  In its 2010 Report the Office predicted that the leniency afforded to self reporters by the penalty guidelines would drive this increase.  Enforcement staff closed 54 self-reports in 2011 after an initial review; 53 self-reports remain open.  These self-reports came from a variety of market participants — regional transmission organizations (RTO) and independent system operators (ISO), natural gas companies, electric utilities and marketers.  Most self-reports involved violations of tariff provisions, particularly open-access requirements.  Other infractions involved filing requirements, behavioral rule and conduct violations, and natural gas pipeline shipper restrictions.

The 2011 Report provides insight into the kinds of findings that will persuade the Office not to pursue enforcement actions against self-reporters.  Those findings include: 

  • the violation caused no harm to markets or parties or was isolated, inadvertent or unlikely to reoccur;
  • the self-reporter took prompt remedial action or instituted measures to ensure future compliance;
  • the self-reporter already paid penalties, refunds, or voluntarily disgorged profits; and
  • the self-reporter had an adequate compliance program in place.

Enforcement staff opened slightly fewer non-self-reported investigations in FY 2011 (12 investigations and two inquiries) than it did in FY 2010 (15 investigations).  The 2011 investigations were instigated on referrals from RTO/ISO market monitoring units, market oversight committees and program offices, and calls to the Office of Enforcement Hotline.  While most investigations addressed alleged tariff violations, others targeted suspected market manipulation, false statements to FERC, hydropower license violations and standards of conduct violations.

Enforcement staff closed slightly more investigations in FY 2011 (19 investigations) than it did in FY 2010 (16 investigations and one inquiry).  Nine of the 2011 investigations ended in settlements and five ended with no enforcement action.  Factors persuading the Office not to pursue enforcement even when the investigation found a violation included finding the violator received no economic gain or caused no economic harm, and finding the violator committed to implement improved compliance and training programs.

EC to Regulate Market Abuse in Wholesale Power and Natural Gas Transactions

by Thomas Morgan

European Union (EU) Regulation 1227/2011 on wholesale energy market integrity and transparency (REMIT), which came into force on December 28, regulates at an EU-level, the wholesale energy markets.  REMIT seeks to detect and prevent market abuse (or more specifically, market manipulation and insider trading) in the wholesale energy sector.  This is in contrast to the existing European market abuse legislation which applied, almost exclusively, to financial instruments admitted to trade on regulated markets.

REMIT applies to wholesale energy products (WEPs):

  • contracts for the supply of electricity or natural gas delivered in the EU;
  • contracts relating to the transport of electricity or natural gas within the EU; and
  • derivatives of those contracts;

irrespective of where or how they are traded, but does not apply if the consumption capacity of the gas or electricity is less than 600 GWh per year.

REMIT prohibits the manipulation of WEP transactions, and requires energy market participants to publish inside information relating to WEPs and submit details of energy transactions to the European energy regulatory authority, the Agency for the Cooperation of Energy Regulators (ACER).  REMIT also requires ACER, working with National Regulatory Authorities (NRA), to monitor wholesale energy markets and requires energy market participants to register with the NRAs.  Member States, in turn, are charged with ensuring that NRAs have the necessary investigatory powers, which shall be exercised in a proportionate manner.

REMIT extends securities market concepts to the energy sector by prohibiting manipulative transactions and the dissemination of misleading information, and preventing insiders from benefiting from access to information relating to power, natural gas and commodity derivatives markets.  Compliance with REMIT will require market participants to introduce or review information barriers between operational and trading activities and ensure timely public disclosure of relevant information.

Rules are to be promulgated requiring energy traders to report transactions to ACER.  ACER, in turn, will be responsible for monitoring and analysing all trades to verify that the rules are followed, and will instruct NRAs to investigate any incidents of market abuse.

Each NRA must establish a register of market participants.  This,is central to the goal of increased market transparency.  Participants will be required to register with one authority only: in the Member State in which it was established or is resident (if neither applies to the participant, then it must register in a Member State where it is active).  The European Commission will adopt implementing acts defining the scope of trade reporting and registration obligations.  Member States must establish registries of electricity and natural gas traders three months after the adoption of the implementing acts, with transaction reporting requirements coming into force three months later.