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 FY 2009 Performance Budget Request  Enforcement: Introduction
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CHAPTER 3: ENFORCEMENT
Prevent Market Manipulation
Total Resources for Enforcement Program
(Dollars in Thousands)
FY 2007 FY 2008 FY 2009Actual Estimate RequestFunding 11,177 31,568 34,645
Program 6,614 26,279 29,017Support 4,563 5,289 5,628
FTEs 153 174 189
Program 124 143 156Support 29 31 33
Introduction
 Competitive energy markets can succeed only when competition iscombined with effective regulation. The Commission has adjusted itsregulatory policies to meet the dramatic changes that have occurred in both the natural gas and electricity industries. While the core legal dutiesof the Commission have not changed, to guard against unjust andunreasonable rates and undue discrimination and preference, the means of discharging this duty have evolved over time. The Commission orderedthe unbundling of natural gas sales and transportation in a series of landmark orders, which proved to be an unqualified success. In the wakeof these orders, the Commission witnessed a surge of activity by interstatenatural gas pipelines, as they sought to restructure the way they did business and interconnected to new markets. As a result, market areas arenow served by more pipelines and there is more competition for shippers’ business, who themselves have seen their number of choices increase.Overall, the cost of gas transportation has fallen while throughput hasrisen.With respect to wholesale power sales, the Commission used to preventthe exercise of market power by setting rates for each individual seller under cost-based regulation. Today, the Commission permits market- based rates for most sellers and increasingly sets rules of generalapplicability that govern an entire market. As a result of this regulatory
 
 FY 2009 Performance Budget Request  Enforcement: Introduction
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approach change, it is even more important for the Commission to enforcecompliance with its regulations and orders, and to monitor market power to ensure that market-based rates remain just and reasonable.The Commission seeks to detect violations quickly, publicize misconductwhere appropriate, and take prompt action to prevent future misconduct.The Commission can identify violations by many methods, includingreview of market information required to be filed by market participants;investigation of significant price spikes or market anomalies; periodicaudits of compliance with Commission tariffs, rules and regulations;referrals from RTO and ISO market monitors; tips and complaints fromthe public and market participants; and self-reports of violations bycompanies. (The Commission’s Enforcement Policy Statement issued inOctober 2005 encourages companies to self-report violations to mitigateremedies). It is important that the Commission understands marketdynamics, detects problems or issues in energy markets early, preventsviolations of its rules, and enforces compliance with the laws under its jurisdiction. Perhaps most important, the Commission needs to ensure thatutilities subject to its jurisdiction have effective internal monitoring andcompliance programs in place to help assure that they are followingestablished Commission rules and regulations. Commission oversightmust then provide an independent and external check to ensure that thecompliance programs of jurisdictional utilities are adequate. Further, theCommission periodically audits utilities’ compliance with theCommission’s rules, regulations, and statutory requirements.The Commission’s two main objectives in meeting its goal of preventingmarket manipulation are:
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 provide vigilant oversight; and
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 provide firm but fair enforcement.Each year the Commission performs investigations and conducts audits for noncompliance with the laws and regulations under its jurisdiction. Whilethese actions help to deter violations from occurring in the first place, theCommission takes even greater steps on a variety of fronts to reduce the probability that violations will occur, and detect problems before they become severe or widespread. To prevent market participants andregulated entities from unknowingly violating the Commission’s rules, theCommission works with stakeholders to explain the intent andrequirements of its rules and the laws it administers.The Commission’s enforcement tools were greatly reinforced when EPAct2005 conferred expanded authority, which provided, for the first time, penalty authority for violations of the NGA and all of Part II of the FPA.It further provided or increased (for violations of the NGPA) the level of  penalties to $1 million each day for the duration of the violation. Penalties
“The Energy Policy Act of 2005 permanentlychanged theCommission. It outlawed market manipulation in power and gas markets, gave us responsibility toassure reliability of theelectric grid, and gave usmeaningful enforcement tools that we badlyneeded. Congressentrusted theCommission with substantial civil penaltyauthority, and we areusing that penaltyauthority firmly and  fairly to sanctionwrongdoing and toencourage compliance.We are now anenforcement agencycapable of very effectiveoversight, and arededicated to becoming a preeminent enforcement agency.” Joseph T. Kelliher  FERC Chairman
 
 FY 2009 Performance Budget Request  Enforcement: Introduction
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of this magnitude also are applicable, pursuant to EPAct 2005amendments to the FPA and NGA, to any entity (not just traditionally jurisdictional companies) who manipulates wholesale natural gas or electric markets by engaging in fraud or deceit in connection with jurisdictional transactions. Armed with this expanded authority, theCommission will create an even stronger and more effective complianceand enforcement program to protect the public interest.To perform its additional responsibilities resulting from EPAct 2005, theOffice of Enforcement will require additional resources in FY 2009 of 13FTEs. Among many other tasks, the Commission must periodically auditthe ERO for ongoing compliance with the statutory and regulatory criteriafor both certification and the ERO’s performance in enforcing reliabilitystandards. The ERO will audit each Regional Entity to ensure it isadequately carrying out its responsibilities. However, the Commissionretains the authority, and indeed has the responsibility to participate in anyERO compliance audit of a Regional Entity or conduct its own complianceaudit. The Commission will also have a role in auditing the ERO and theRegional Entities’ budgets, filed annually with the Commission. The EROwill likely audit one-third of the Regional Entities each year with limitedto medium involvement required by the Office of Enforcement.In addition to these duties, the Commission will investigate incidents andallegations of non-compliance with the reliability standards. If violationsare uncovered in any of these inquiries, the Commission will leadreliability-centered investigations and develop legally-sufficient cases for  possible litigation. The Commission’s new reliability staff will benecessary for these investigations because of their technical expertise,familiarity with reliability standards, and experience in the industry. Thereliability staff will play a substantial role in these investigations astechnical advisors, possible expert witnesses, and investigators.Approximately 12 reliability-related, Commission-initiated, and/or complaint-driven audits are expected per year. An appropriate number of reliability incident-driven investigations (such as the rolling blackouts inCalifornia, Colorado, and Texas in the last 24 month period) and other investigations into possible violations of reliability standards are alsoexpected.The Commission is currently developing the rules which ultimately willform the basis for these auditing and investigative activities. However, theCommission currently does not have auditors or investigators solely performing these new functions. The additional resources requested willallow staff to work specifically on these new responsibilities withoutcompromising other Commission efforts.
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