To Aid Enforcement Efforts, FERC Proposes Significant Expansion of Data Required from RTO and ISO Market Participants

FERC’s Justifications for the Proposed Reforms

FERC asserts that existing RTO/ISO affiliate disclosure requirements, which vary across markets, do not allow FERC to fully identify and monitor business relationships between market participants and other entities.  FERC claims that “[u]nderstanding the ownership, employment, debt, and contractual relationships of market participants,” beyond affiliation by ownership, would provide context for the market and trading data that FERC monitors and would help FERC determine whether “there appears to be a legitimate business rationale for seemingly anomalous trading patterns, or whether there may be market manipulation, fraud, or abuse.”  Having access to “Connected Entity” data, FERC asserts, also will “reduce the number of informal inquiries” that staff in FERC’s Office of Enforcement have to make in response to “false positive surveillance screen trips that may result from an incomplete picture of market participants’ incentive structures.”  FERC also claims that the proposed reforms would improve the ability of RTO/ISO market monitors to “assess cross-market transactions and compare their data with that produced by their neighboring market monitors, assured that the data was accurate and consistent.” 

FERC’s New Definition of “Connected Entity”

In the proposal, FERC coins the new term “Connected Entity” and proposes to use it uniformly across organized markets as shorthand for describing “relationship[s] of interest in probing for potential market manipulation.”  FERC proposes to define a “Connected Entity,” which includes natural persons, as “one which stands in one or more of the following relationships to a market participant”:

1. 1. an entity that directly or indirectly owns, controls or holds with power to vote 10 percent or more of the ownership instruments of the market participant, including, but not limited to, voting and nonvoting stock and general and limited partnership shares; or an entity 10 percent or more of whose ownership instruments are owned, controlled or held with power to vote, directly or indirectly, by a market participant; or an entity engaged in Commission-jurisdictional markets that is under common control with the market participant;
   2. the chief executive officer, chief financial officer, chief compliance officer and traders of a market participant (or employees who function in those roles, regardless of their titles)
   3. an entity that is the holder or issuer of a debt interest or structured transaction that gives it the right to share in the market participant’s profitability, above a de minimis amount, or that is convertible to an ownership interest that, in connection with other ownership interests, gives the entity, directly or indirectly, 10 percent or more of the ownership instruments of the market participant; or an entity 10 percent of more of whose ownership instruments could, with the conversion of debt or structured products and in combination with other ownership interests, be owned or controlled, directly or indirectly, by a market participant or
   4. entities that have entered into an agreement with the market participant that relates to the management of resources that participate in Commission-jurisdictional markets, or otherwise relates to operational or financial control of such resources, such as a tolling agreement, an energy management agreement, an asset management agreement, a fuel management agreement, an operating management agreement, an energy marketing agreement or the like.

Category (a) is similar to FERC’s definition of “affiliate” for purposes of its market-based rate regulations,¹ including that definition’s “common control” aspect, but is considerably broader in that it also covers nonvoting ownership instruments and limited partnership shares, types of interests that typically characterize passive investments in market participants that do not convey control.  Categories (b), (c) and (d) are new and could require market participants to disclose a significant amount of data that FERC previously has not required to be reported.

The LEI System

To eliminate “confusion as to the identification of entities subject to its jurisdiction,” FERC proposes to require each market participant to obtain and maintain an LEI—a unique, 20-digit alphanumeric code, currently required by certain financial regulators, such as the Commodity Futures Trading Commission and Securities and Exchange Commission—and to report in their Connected Entity data filings “their own LEI and the LEI of each of their Connected Entities, if the Connected Entity has obtained one.”  LEIs would be issued by a third-party provider, a Local Operating Unit of the Global LEI System.²

FERC’s Proposed Process for Collecting Connected Entity Data

Rather than requiring market participants to submit Connected Entity data directly to FERC, the agency proposes to require each RTO and ISO to revise its tariff to require market participants to submit a list of all of their Connected Entities—whether engaged in activities in the same market(s) as the market participant or not—to the RTO or ISO in a format approved by FERC.  RTOs and ISOs then would transmit the information they collect to FERC in its native format.  FERC provides illustrations of its proposed formats for collecting information on the several Connected Entity relationship types and a detailed appendix of examples.

Providing Connected Entity data would be a precondition of participating in any RTO or ISO market, and market participants would be required to update their Connected Entity data within 15 days of a “material” change.  FERC also would require market participants to certify, on a yearly basis, that their Connected Entity data on file with the RTO or ISO remains comprehensive and accurate.  FERC also proposes that RTOs and ISOs give themselves the authority (although not the obligation) to audit Connected Entity data, and it notes that FERC staff may perform similar audits.

Finally, FERC proposes to eliminate all existing RTO/ISO affiliate disclosure requirements, unless an RTO or ISO requests and demonstrates a “particularized need” to retain its existing rules.

Implications of the Proposed Reforms

FERC’s proposal would provide the agency with more data regarding market-participant conduct across RTOs and ISOs, which FERC suggests will enhance its ability to detect potentially manipulative transactions.  However, any potential benefits could be marginal compared to the additional burdens on market participants.  FERC recognizes that the reforms would place additional burdens on market participants, but states that it believes the potential benefits will outweigh the burdens.  With respect to costs, FERC states that compliance “costs may vary widely from participant to participant largely in proportion to the size of the entity,” but that, because Connected Entity data is “readily available” to market participants, the costs of gathering and reporting the data should be “largely administrative in nature with some minimal review by legal staff.”

FERC also suggests that the “definitional uniformity” resulting from using “Connected Entity” across all organized electricity markets could simplify compliance for some market participants active in multiple markets with different reporting obligations.  FERC does not address whether the proposal, if adopted, would reduce or obviate the need for certain other existing or proposed reporting requirements, such as the organizational charts that FERC has proposed to require in market-based rate applications and notices of changes in status of market-based rate sellers.³

Commissioner Cheryl LaFleur, in her concurrence to the proposal, focuses on the potential for increased burden, noting that, while it is “important that [FERC] . . . have the tools to protect customers from manipulative behavior,” FERC “should always consider carefully whether the benefits offered by new compliance obligations outweigh the burdens.”  Commissioner LaFleur notes that FERC’s proposal “would create a significant new reporting regime for all market participants, as well as the RTOs and ISOs,” and encourages market participants to submit comments on potential benefits and incremental costs or burdens that the reforms might create.

In addition, anticipating concerns regarding the confidentiality of Connected Entity data, FERC states that it expects “that submitting Connected Entity data would not place market participants under increased risk in relation to the disclosure of confidential or proprietary information,” because some of the required information is already public, and, in any event, FERC intends to treat Connected Entity information as nonpublic.

Requests for Comments

FERC invites comments on any substantive aspect of its proposal and on the following specific topics:

1. 1. FERC’s “need for [Connected Entity and LEI] information, whether the information will have practical utility, the accuracy of the provided burden estimates, ways to enhance the quality, utility, and clarity of the information to be collected, and any suggested methods for minimizing respondents’ burden, including the use of automated information techniques”
   2. the “desirability and feasibility of expanding [the new disclosure requirements] to . . . non-RTO/ISO market participants, and on any difficulties [that] might . . . exist in doing so”
   3. the “appropriate threshold for a de minimis share of a company’s profits” in the context of identifying a Category (c) Connected Entity
   4. the “feasibility of [using the LEI system], . . . whether any other system besides LEIs would be a preferable method of achieving uniform identification, and . . .  whether waivers might be appropriate in given situations”
   5. the formatting of Connected Entity data filings, including “whether any changes should be made to the data table formats to allow RTOs and ISOs to utilize Connected Entities information for other purposes”
   6. Whether “it would be feasible and more efficient for the RTOs and ISOs to utilize the Connected Entities information . . . for the same purposes that they currently use the information provided through their existing affiliate disclosure requirements,” and, in particular, whether the new disclosure obligations “will adversely affect implementation of other provisions of the RTO and ISO tariffs” and, if so, how.