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FERC General Counsel Argues Applying Dodd-Frank Regulations to RTO/ISO Products is Potentially Harmful

by | Oct 11, 2012 | , ,

by Elizabeth P. Philpott

The Federal Energy Regulatory Commission (FERC) General Counsel recently argued to the Commodity Futures Trading Commission (CFTC) that “[a]pplying Dodd-Frank swap regulations to [regional transmission organization] RTO and [independent system operator] ISO products and services is not only unnecessary but also potentially harmful.” Transactions entered under RTO and ISO tariffs, according to the FERC General Counsel, should be exempt from the definition of “swap.”

The FERC General Counsel made these arguments in August 21 comments, partially supporting the petition of the nation’s six RTO/ISOs asking the CFTC to exempt them from swaps regulation under the Commodity Exchange Act in connection with four types of electricity purchases and sales they offer pursuant to FERC- or Public Utility Commission of Texas-approved tariffs. The FERC General Counsel had to resort to comment in order to make the Commission’s views known because the FERC and CFTC have yet to enter into a memorandum of understanding for “resolv[ing] conflicts concerning overlapping jurisdiction between the [two] agencies,” as required by § 720 of Dodd-Frank Wall Street Reform and Consumer Protection Act.

All RTO/ISO activities, from planning and operating transmission grids to dispatching generation resources to complying with reliability standards are governed by explicit tariffs that FERC must approve before they take effect. FERC staff also monitors RTO/ISO market operations, and ensures that they comply with FERC reporting requirements and credit practices. Consequently, according to the FERC General Counsel “[i]t makes little sense to subject organized electricity markets and transactions that are conducted pursuant to FERC-approved tariffs, subject to extensive reporting, as well as to FERC’s enforcement authority, to an entirely different regulatory model” under Dodd-Frank.

The FERC General Counsel also took issue with the scope of the exemptions that the RTO/ISOs sought, which would exempt only four categories of RTO/ISO transactions: (1) financial transmission rights, (2) energy transactions, (3) forward capacity transactions and (4) reserve or regulation transactions. The FERC General Counsel argued that all purchases and sales of products that are a logical outgrowth of the ISO or RTO’s core functions should be exempt in order to allow the ISOs/RTOs flexibility to adapt their products over time.

The CFTC is expected to make a ruling on the RTO/ISO petition and the FERC General Counsel’s comments by the end of the year.



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Alleged Agreement to Suppress Prices for Mineral Rights Highlights the Antitrust Risk Facing Energy Companies

by | Jul 5, 2012 | ,

by Jon B. Dubrow and Shauna A. Barnes

Recently published reports of land acquisition activities between Chesapeake Energy and EnCana senior executives will likely expose those companies to a Department of Justice (DOJ) antitrust investigation and challenge, as well as, if accurate, civil antitrust claims.  This matter highlights the risks that energy companies face when discussing lease arrangements with their competitors. 

In February 2012, DOJ settled its first challenge to a bidding agreement for mineral rights, alleging that agreements between Gunneson Energy Corporation and SGI Interests to bid jointly for government mineral leases were anticompetitive.  In a previous post, we explained the potential issues and pitfalls related to joint bidding for oil and gas properties.  We suggested various factors that companies can use to assess, or manage, their antitrust exposure. 

On June 25, 2012, Reuters published a special report indicating that Chesapeake and EnCana agreed to suppress bids for mineral rights at public and private land auctions.  Citing dozens of highly inflammatory emails, the article purports to detail how Chesapeake’s CEO, Aubrey McClendon, and other senior executives at Chesapeake and EnCana discussed how to avoid creating a bidding price war in acquiring drilling rights for Northern Michigan properties. 

According to Reuters, throughout 2010, EnCana and Chesapeake were the leading buyers in Michigan and they aggressively competed to acquire properties for hydraulic fracturing (fracing) operations.  During a May 2010 land auction, they paid approximately $1,413 per acre.  Following the auction, private landowners sought competing bids, leading to a bidding war resulting in offers of more than $3,000 per acre.

Reuters indicates that Chesapeake and EnCana discussed via email entering into a formal venture, including some areas of mutual interest that would allow the parties to share in the risks and rewards of developing properties.  However, they did not enter into any venture.  Instead, they purportedly discussed in emails ways, as independent bidders, to refrain from bidding up land prices, and to allocate various properties between themselves.  These emails were followed by significant price reductions in the offers made by Chesapeake and EnCana. 

The Chesapeake-EnCana situation, following quickly on the heels of the DOJ’s joint bidding challenge earlier this year, serves as a reminder that companies in the oil and gas industry must exercise care in situations where they may want to work with potentially competing bidders.  In the oil and gas industry, firms frequently work together to acquire and develop properties, and that can often be lawfully accomplished through a legitimate collaboration.  Firms, and their executives, may often have opportunities to discuss property acquisition in the context of a legitimate, integrated venture, including with firms that might otherwise be competitors.  However, while some joint activities may be permissible, other conduct may create antitrust liability.  Companies, and their personnel interacting with potentially competing land purchasers, need to be aware of the conditions under which a joint bid is likely to pass antitrust review, as well as when the proposed activity would likely be viewed as a simple market [...]

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FERC Asserts Jurisdiction Over Bundled Renewable Energy Credits

by | May 9, 2012 | , ,

by Bradford K. Gathright

On April 20, 2012, the Federal Energy Regulatory Commission (FERC) issued an order confirming that it has no jurisdiction under the Federal Power Act (FPA) with respect to sales of state-issued renewable energy credits (RECs) that are not bundled with sales of wholesale energy, but asserted that it does have jurisdiction over sales of RECs that are bundled with wholesale energy.

The ruling was in response to a request by the Western Systems Power Pool (WSPP) for FERC to clarify the scope of its jurisdiction. WSPP administers a standardized contract, called the WSPP Agreement, for the sale of wholesale electric power and physical options between its members. The WSPP Agreement allows a seller to charge market prices in energy transactions if the seller has received market based rate authority from FERC or if the seller is not regulated by FERC. Otherwise, the price is subject to rate caps set forth in the applicable FERC-approved rate schedule to the WSPP Agreement.

On February 22, 2012, WSPP submitted for approval under Section 205 of the FPA a revised service schedule to the WSPP Agreement, Service Schedule R, to address several varieties of bundled and unbundled REC transactions. For bundled REC transactions, the rate caps set forth in the existing service schedules of the WSPP Agreement would apply only to the energy portion of the contract price if the total price was allocated separately between energy and RECs, or to the total contract price if there were no separate allocations. With regard to unbundled REC transactions, the WSPP requested that FERC confirm its lack of jurisdiction.

In its order, FERC approved the incorporation of Service Schedule R into the WSPP Agreement and confirmed that sales of RECs that are not bundled with sales of wholesale energy fall outside FERC’s jurisdiction under Sections 201, 205 and 206 of the FPA. FERC’s rationale was that a REC is simply an instrument of state law certifying that energy has been generated pursuant to certain standards, and that the sale of a REC does not constitute the transmission of electric energy or the sale of energy in interstate commerce. However, when RECs are bundled with sales of energy, the REC transaction falls within FERC’s jurisdiction because the REC sales “affect” and are “in connection with” the wholesale energy sales. Under these circumstances, FERC asserted that it has jurisdiction over both the wholesale energy portion and the REC portion of the bundled transaction, regardless of whether the contract price is allocated separately between the energy and the RECs or whether the energy portion and the REC portion of a bundled transaction are split into two separate contracts.

The practical implications of the order are not yet clear. By extending its jurisdiction to RECs at all, FERC has expanded its reach and now has the authority to create additional requirements relating to the REC portion of a bundled REC transaction, which could increase the administrative and financial burden of selling RECs. For power producers who are selling bundled RECs and already [...]

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FERC Proposes to Adopt NAESB Standards for Demand Response and Energy Efficiency

by | Apr 24, 2012 |

by Elizabeth P. Philpott

The Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) on April 19 to amend its regulations “to incorporate by reference the business practice standards adopted by the Wholesale Electric Quadrant of the North American Energy Standards Board (NAESB) that pertain to the measurement and verification of demand response and energy efficiency resources participating in organized wholesale electricity markets.”  The NOPR is timely, coming on the heels of several contentious disputes, including FERC enforcement actions, questioning how to measure the performance of vendors of demand response and efficiency resources.  To be considered, comments on the NOPR must be submitted to FERC 60 days after publication of the NOPR in the Federal Register.

Adoption of the NAESB standards, in FERC’s view, could improve demand response and energy efficiency resource performance, measuring methods and procedures.  FERC also expressed its hope that the NAESB standards could assist Independent System Operators (ISO) and Regional Transmission Organizations (RTO) with accounting for and crediting demand response and energy efficiency resources.

NAESB describes the proposed standards as a “framework” to develop methodologies.  The proposed demand response standards include the following changes:

  • Adding a meter data reporting deadline;
  • Specifying advance notification guidelines;
  • Establishing a telemetry interval; and
  • Tightening requirement for meter accuracy.

Through this NOPR, FERC seeks comment about whether these methodologies need to be more detailed to be useful.  FERC also seeks comment on whether ISOs and RTOs need further specific development of measurement and verification standards and if so, whether NAESB or FERC should lead this process.



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FERC Conditionally Accepts New Enforcement Mechanism for Electric Reliability Standards

by | Apr 13, 2012 | ,

by Elizabeth P. Philpott

The U.S. Federal Energy Regulatory Commission (FERC) recently approved with conditions the North American Electric Reliability Corporation’s (NERC) petition proposing the use of the “Find, Fix, Track and Report” (FFT) to report possible lesser-risk violations of Reliability Standards.  FERC determined that the FFT initiative would more efficiently process lesser-risk violations and promote reliability because it streamlines the manner NERC reports minor violations and allows NERC to focus its resources on issues that pose more serious risks to reliability.

NERC’s petition proposed three tracks to address possible violations: (1) a Notice of Penalty; (2) an FFT information filing; or (3) a Dismissal. Unlike a Notice of Penalty, which deals with moderate to substantial reliability risks and can result in fines, the FFT process uses informational filings to report possible lesser-risk violations, such administrative, documentation and certain maintenance or testing program implementation failures. 

FERC approved NERC’s FFT initiative subject to the following conditions:

  • Only minimal risk possible violations are eligible;
  • Officer of entity that receives FFT treatment must certify that its statement of remediation is true and correct; and
  • NERC’s monthly FFT informational filings must publicly identify entities receiving FFT treatment unless the disclosure relates to a cybersecurity incident or would jeopardize the security of the Bulk-Power System.

FERC will also continue to monitor the FFT initiative through surveys to determine if the initiative is working and whether it needs improvement.  Additionally, FERC Chairman Jon Wellinghoff reiterated that compliance, not penalties, is his main goal and he has a concern that the FFT initiative may have an adverse impact on self-reporting. Accordingly, NERC is required to include an analysis of the impact that the FFT initiative has on self-reporting in a report due to FERC. 



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Welcome to McDermott’s Energy Business Law Blog

by | Jan 11, 2012 | , , , , , , , , , , ,

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



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FERC Enforcement Priorities Unchanged for 2012

by | Jan 11, 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.



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