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Don't Fear the FERC

Four steps to minimizing energy trading enforcement risk.

The Federal Energy Regulatory Commission’s enforcement of its anti-manipulation regulations has resulted in numerous actions with significant civil penalties and disgorgements of profits. While cases such as those involving Constellation, Barclays, and JPMorgan grab the news headlines, many other entities have settled investigations with FERC for multi-million dollar amounts that, although smaller by comparison, can still cause a significant hit to a company’s bottom line.

All companies engaging in energy trading – whether large or small, and whether directly regulated by FERC or not – must be mindful of this growing area of enforcement and should undertake actions to minimize enforcement risk. Many companies will, rightfully, view the risk of FERC enforcement proceedings as minimal, particularly if the company believes it runs a fully compliant operation. FERC, however, investigates many matters that ultimately do not result in civil penalties. Companies must thus be prepared to support and defend their actions even if they have done nothing wrong. In addition, because this enforcement program is its relative infancy and has not been meaningfully tested in the courts, it cannot be understated that there are few bright lines that distinguish creative and aggressive trading from market manipulation.

In this regard, companies can undertake several straightforward yet effective steps to minimize the likelihood of an investigation and reduce the risk of an adverse outcome in the end. Any of these suggestions, however, should be discussed with counsel before implementation.

Rule 1 – An Ounce of Prevention Is Worth Many Pounds of Cure

FERC has stated that companies should maintain a “culture of compliance.” To most, this means that executives must lead by example and instill appropriate values in their employees. But more is required than published codes of conduct and statements of executives to instill fully a culture of compliance. In this regard, an ounce of prevention in instilling a true culture of compliance is worth many pounds of cure. But instilling a true culture of compliance requires more than just management say-so. It requires substantive training, management presence, and willingness of the company to undertake potentially unpopular actions (including appropriate disciplinary actions) when necessary to ensure compliance.

One effective means of instilling a culture of compliance is regular, substantive, and meaningful training of employees with regards to compliance matters. Each session need not be extensive. Indeed, employees often learn better in shorter increments rather than in day-long sessions. Most companies have regular department meetings and brief compliance training sessions. These gatherings can be used as a place to reinforce the “culture of compliance” message and convey important information in a timely manner. Certain lessons likely warrant repeating at these sessions ( e.g., “Routinely losing money on one type of transaction will likely raise FERC’s eyebrows, so keep a close eye on your P&L”), but the balance of the discussion should change subject regularly, and focus on new developments when they happen, in order to keep people’s attention. Training is critical because many energy traders come from backgrounds outside the regulated world of wholesale power and have little to no exposure to FERC.

Executive or