On July 21, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Proposed Rulemaking (“NOPR”) titled Data Collection for Analytics and Surveillance and Market-Based Rate Purposes. The NOPR is intended to collect certain market data from market-based rate (“MBR”) electricity sellers, incorporating data about their affiliates, including natural gas and electricity companies (“Connected Entities”). As FERC increases its emphasis on market surveillance, the NOPR appears to be tailored to bring to light any corporate or financial connections that may exist among various market participants involved in buying, selling, transporting, or producing natural gas, electricity, and coal. The NOPR provides, in relevant part, that “the Commission observed that there is a risk that a market participant may take actions to benefit another entity that bears a financial or legal relationship to it, and that entities under common control may collude to manipulate the market. Given the potential for such conduct, the Commission found it needed to understand the relationships and corresponding incentives between entities to help determine whether they might be engaging in acts of market manipulation.” This emphasis on cross-affiliate and cross-commodity activity is consistent with recent regulatory scrutiny by energy regulators. Consequently, the information required to be reported by the NOPR would allow FERC’s staff to monitor a large number of trades, physical and financial, and cross-reference any unauthorized or suspicious activity.
The NOPR includes two different and somewhat overlapping reporting requirements. The first reporting requirement is MBR-related information. In particular, FERC intends to use this type of information to determine whether market participants should be permitted to obtain or maintain a market-based rate. This information would include an evaluation of market participants’ and their affiliates’ horizontal and vertical market power. This type of information gathering is very similar to what FERC already requires from market participants seeking an MBR. The second group of reporting requirements is related to market surveillance and analytics, i.e., the potential for market manipulation (“Connected Entity information”). The NOPR emphasizes that “screening market activity for anomalies must include understanding the circumstances surrounding a given pattern of trading, including the possible motivations for that behavior, which can sometimes be found in the legal or contractual relationships entities bear to one another.” The NOPR’s Connected Entity information requirements apply not only to the MBR holders but, also, to any affiliated entity that trades virtual products or financial transmission rights (“FTR”). The NOPR’s reporting requirement would not apply to municipal and cooperative entities.
Some of the information required to be reported under the NOPR includes the following:
- The “Connected Entity Ownership” – the identity of an MBR holder’s affiliates that: (a) are ultimate owners; (b) participate in organized wholesale electric markets; or (c) purchase or sell financial natural gas or electric energy derivative products that settle off the price of electric or natural gas energy products, which would, arguably, include any entity in the MBR holder’s enterprise, including the foreign based entities that trade in any financial products on ICE, CME, or NGX.
- Information about an MBR holder – as an electricity seller, such as category status for each region in which the reporting entity has MBR authority, markets in which it is authorized to sell ancillary services, mitigation, if any, and whether it has any limitations in the regions in which it has MBR authority.
- MBR “Ownership” information – this information would include affiliate owners that are: (a) ultimate affiliate owners and (b) affiliate owners that have a franchised service area or MBR authority or directly own or control generation, transmission, intrastate natural gas transportation, storage or distribution facilities, physical coal supply sources, or ownership of or control over who may access transportation of coal supplies.
- “Connected Entity Trader” and “Contracts information” – connected entity trader information would include any employees within an MBR holder’s connected entity, i.e., affiliates, that participate in making day-to-day trading decisions. Contracts information would include any entities that have entered into an agreement with the MBR holder that “confers control over an electric generation asset that is used in, or offered into, wholesale electric markets.” Agreements that confer control are those that grant one of the parties the right to make trading decisions for an electric generation asset of another party or to offer an electric generation asset into the wholesale electric markets.
- Asset ownership information – identifying the location, capacity, and percentage of ownership of electric generation and transmission assets and any assets that are owned or controlled by any MBR holder’s affiliate that does not have MBR authority. This would include any MBR holder’s affiliated entity that owns, actively or passively, any generation assets, or parts of those assets, including any joint ventures or special purpose entities.
The NOPR does not provide any empirical rationale for such a sweeping data harvest. In other words, it is unclear how often any type of cross-affiliate misconduct does occur in the market place and how frequently this type of misconduct rises to a level of a prohibited or manipulative outcome such as inappropriately influencing a price formation or operational reliability of the market as a whole. The very possibility that some market participants may do something, without any specific data indicating the frequency or severity of actual misconduct, makes it unclear if the associated costs of compliance, imposed on all MBR holders and their affiliates, are adequate and reasonable. To that end, there is a risk that this NOPR may appear to be a solution in search of a problem, rather than a problem in search of a solution.
If adopted as a final rule, the NOPR would impact many energy companies, especially those that engage in a diversified type of energy activities such as producing, transporting, processing, and marketing of electricity, natural gas, and coal. Given the traditional silo approach to many energy companies’ operational and financial functionality, it would be imperative to ensure an enterprise-wide approach to ensure compliance with the NOPR. This would include a strong risk management policy to ensure that any trading strategy approved by the senior management includes a cross-affiliate and/or cross-commodity vetting process to ensure that all trades stand on their own economics and, also, to prevent any prohibited trading conduct. The costs of the NOPR’s implementation are difficult to anticipate because they may include a significant cross-affiliate effort to create, train, and implement a variety of compliance steps including reconciling risk systems, trade-capture procedures, scheduling or dispatch activities, trading policies and procedures, and cross-affiliate system integration. The NOPR provides a 45-day comment period after it is published in the Federal Register.