Fines, Sanctions and Settlements
The Federal Energy Regulatory Commission (FERC), the Alberta Utilities Commission (AUC), the Ontario Independent Electric System Operator (Ontario IESO) and the Australian Energy Regulator (AER) employ similar sentencing (or sanctioning) principles for energy market misconduct. These regulators apply these same sanctioning principles to settlements related to market misconduct, including manipulation offences. A separate description of the sanctions available in the European Union under REMIT is found in Chapter 10: Energy Market Manipulation in the EU: Practice and Procedure.
The intent of this chapter is to provide a general overview of sentencing and settlement principles and to identify the source of each jurisdiction’s sanctioning and settlement authority. However, it is important to note that the AUC, the Ontario IESO and the AER have each issued relatively few sanctioning and settlement decisions for market misconduct and even fewer relating to market manipulation. For example, only one entity has been sanctioned for market misconduct through the AER’s civil proceeding process and the AUC has heard only two significant market manipulation cases, both of which were ultimately resolved through settlement.
Readers should also be aware that the sanctioning and settlement principles employed by these agencies are generally applicable to a range of market misconduct that includes manipulation offences rather than being principles developed specifically for market manipulation offences.
The purpose of sanctioning
The FERC’s Penalty Guidelines expressly state that achieving compliance, not assessing penalties, is the central goal of the Commission’s enforcement efforts. Similarly, the Ontario IESO describes compliance as a key goal of its enforcement programme.
The AUC has found that ‘the purpose of its sanctioning authority is to achieve general and specific deterrence, encourage compliance and protect the public’ and has stated that ‘its sanctions are intended to be protective and preventative and not punitive.’
The AER explains that the aims of its enforcement programme are to: end the misconduct, correct related damage, prevent the misconduct from recurring, deter other entities from misconduct, clarify the statutory scheme and penalise wrongdoers. In a recent energy market misconduct case, the Federal Court of Australia stated that ‘the principal object of imposing a pecuniary penalty is deterrence, both the need to deter repetition of the contravening conduct by the contravener (specific deterrence) and to deter others who might be tempted to engage in similar contraventions (general deterrence).’
Authority to sanction
Available sanctions in each jurisdiction may include monetary penalties, disgorgement, compliance directions and other related directions, including the suspension or revocation of a wrongdoer’s authorisation to participate in a market.
The FERC’s sanctioning authority derives from Section 316A(b) of the Federal Power Act; its sanctioning principles are primarily set out in the FERC Penalty Guidelines, its Revised Policy Statement on Penalty Guidelines and its Revised Policy Statement on Enforcement.
The AUC’s authority to issue sanctions is found in Section 63 of the Alberta Utilities Commission Act. The factors that the AUC may apply when sanctioning market misconduct are listed in AUC Rule 013: Criteria Relating to the Imposition of Administrative Penalties (Rule 13).
Section 32 of the Electricity Act authorises the Ontario IESO to make rules, including rules related to imposing financial penalties on market participants. The principles the Ontario IESO applies when sanctioning wrongdoers are set out in Section 6.6.7 of the IESO Market Rules, Chapter 3, Administration, Supervision, Enforcement and in its Sanctioning Guidelines for Extraordinary Penalties. The Ontario Energy Board (OEB) also has sanctioning authority for market misconduct under Section 112.5 of the Ontario Energy Board Act but has yet to exercise that authority.
In Australia, the national energy laws authorise the sanctions and sanctioning principles for energy market misconduct.
All four jurisdictions consider the following factors, or variations thereof, when determining a monetary penalty for market misconduct.
- The seriousness of the misconduct and the resultant harm.
- The duration of the misconduct.
- The nature of the misconduct, including if the misconduct was deliberate, systematic, covert or involved manipulation, deceit or fraud.
- The wrongdoer’s compliance history.
- Senior management’s role in the misconduct.
- The wrongdoer’s compliance programme, or lack thereof.
- Whether the misconduct was self-reported.
- The wrongdoer’s level of cooperation in the enforcement process.
In each jurisdiction aggravating factors (e.g., serious misconduct with significant consequences or poor compliance history) are weighed and balanced against mitigating factors (e.g., self-reporting, full cooperation, etc.) to calculate the penalty amount.
The FERC’s maximum monetary penalty is US$1 million per day, per violation. The FERC’s Penalty Guidelines include detailed formulas that incorporate the factors set out above for calculating monetary penalty ranges depending upon the nature of the misconduct. However, the FERC reserves the right to depart from its Penalty Guidelines when it deems appropriate. In circumstances where the FERC has not applied its Penalty Guidelines, the FERC may determine monetary penalties based on the facts and circumstances of the case, including the aggravating and mitigating factors set out in its Revised Policy Statement on Enforcement (2008) that are generally consistent with the factors listed above but less prescriptive than the formula set out in the guidelines. Even in cases where the FERC does not use its Penalty Guideline formulas, the FERC may have reference to those formulas when assessing the reasonableness of a proposed sanction. The FERC publishes its sanctioning decisions including those arrived at through settlement.
The Ontario IESO’s (and the OEB’s) maximum monetary penalty is C$1 million per occurrence. The Ontario IESO can only impose a monetary penalty if it is satisfied that the ‘…breach could have been avoided by the exercise of due diligence by the market participant or that the market participant acted intentionally’. The Ontario IESO’s Sanctioning Guidelines employ a ‘penalty matrix’ to calculate penalty ranges based on the impact level of the misconduct and the breach history of the wrongdoer, with such analysis involving the weighing of the factors set out above. The Ontario IESO does not publish its sanctioning and settlement decisions or orders but provides a summary of non-confidential sanctions and negotiated settlements on its website.
The AUC’s maximum monetary penalty is C$1 million for each day or part of a day on which the contravention occurs or continues. The AUC has said that monetary penalties should be of sufficient magnitude so as not to be considered by a wrongdoer or future transgressor as a ‘cost of doing business or a licensing fee for transgressions’. The AUC publishes its sanctioning decisions including those arrived at through settlement.
Rule 13 lists the criteria the AUC may consider when calculating a monetary penalty but provides no formula, tables or other mechanisms for calculating penalty ranges. Perhaps the best indicator of how the AUC has approached monetary penalties is a recent decision relating to market manipulation and trading on non-public records. There, the AUC concluded that the misconduct in question caused significant, widespread harm, was systematic and persistent and was approved by senior management. The AUC also noted that it was not the wrongdoer’s first offence and that the wrongdoer had breached its own compliance plan as part of the misconduct. While the AUC acknowledged some mitigating factors, its approval of a settlement, that it described as ‘approaching the maximum penalty available,’ suggests that it agreed that little, if any, discount was warranted for mitigating conduct.
The maximum monetary penalty that the AER can issue on its own (through its infringement notice process, discussed below) without commencing a civil proceeding, is A$20,000 for bodies corporate and A$4,000 for individuals). However, the AER can also commence civil proceedings in the Federal Court of Australia and seek monetary penalties from a body corporate of up to A$1 million plus A$50,000 for every day during which the breach continues for certain types of misconduct (A$20,000 plus A$2,000 for natural persons). The national energy laws specify a common set of factors, consistent with those set out above, to be considered when setting a monetary penalty, but provide no formula, tables or other mechanisms for calculating penalty ranges.
In Australian Energy Regulator v. Snowy River Hydro Limited (No. 2) (Snowy Hydro), the Federal Court of Australia relied on the statutory sanctioning principles in the national energy laws when it ruled on a proposed settlement for market misconduct. The court determined the amount of loss or damages suffered as a result of the market misconduct but did not elaborate on how those damages factored into the monetary penalty it approved. The AER publishes its infringement notices and the Federal Court of Australia publishes its decisions on AER matters.
The FERC, the AUC and the OEB may order the disgorgement of any pecuniary benefits arising from the misconduct in addition to any monetary penalty assessed for market misconduct. While the Ontario IESO does not have the express authority to order disgorgement, benefit obtained by the conduct is a specific factor in its mandated penalty considerations, and the repayment of pecuniary benefits associated with market misconduct appears in the agency’s sanctions and negotiated settlements.
The FERC issues disgorgement orders for the full amount of the pecuniary gain plus interest. The FERC has defined pecuniary gain as including ‘the additional before tax profit to the entity resulting from the relevant conduct of the violation’. The FERC has stated that the disgorgement amount ‘need only be a reasonable approximation of profits causally connected to the violation’.
The disgorgement component of an AUC monetary penalty is the amount determined or estimated by the AUC to nullify the gains acquired through misconduct. AUC-approved disgorgement amounts have included interest from the date of the contravention. In its recent approval of a settlement for market misconduct, the AUC acknowledged that, in other Canadian jurisdictions that have the authority to order disgorgement, the enforcing agency bears the initial burden of demonstrating the reasonableness of the disgorgement amount with the burden then shifting to the wrongdoer, and that the risk of uncertainty in calculating disgorgement is borne by the wrongdoer.
Compliance plans and other related directions or orders
In addition to the authority to issue monetary penalties, the FERC, the AUC, the Ontario IESO and the AER all have broad authority to direct market participants to do certain things, or refrain from doing certain things to ensure compliance with the relevant statutory schemes. Such orders often deal with compliance plans or directions but may also include prohibitions against trading, operational matters, training, etc.
Many FERC sanctions include compliance requirements or plans. The FERC has said that the purpose of such plans is to ‘monitor relevant activity by the company for a suitable period of time, to ensure that steps are taken within the company to improve compliance practices and thereby prevent reoccurrence of the violations’.
The FERC, the AUC, the Ontario IESO and the AER all engage in settlements with respect to market misconduct, including manipulation matters. For the FERC, the Ontario IESO and the AER, market participants can settle market misconduct matters without acknowledging or admitting to a breach of the relevant regulatory scheme. In Alberta, however, any settlement for market misconduct that involves a monetary penalty requires the AUC to find that a contravention has occurred.
The FERC has stated that settlement is its ‘preferred resolution to investigations that result in a recommendation of remedial action’. It notes that settlement is advantageous to the wrongdoer because it can result in lower penalty payments as compared to a contested result and to the FERC because compliance problems are resolved more quickly and disgorged profits are returned to customers faster.
FERC enforcement staff require settlement authority from the Commission before commencing settlement negotiations. When deciding whether to grant settlement authority, the Commission is provided with the views of FERC staff and the views of the subject of the investigation. If settlement authority is granted, the Commission will authorise a range of potential monetary penalties or disgorgement. If FERC staff and the subject reach consensus on sanctions, a stipulation and consent agreement is submitted to the Commission for its consideration. When deciding whether to approve a settlement, the Commission generally considers whether the settlement is consistent with Revised Policy Statement on Penalty Guidelines and if the settlement represents ‘a fair and equitable resolution and is in the public interest, as it reflects the nature and seriousness of the conduct’.
In Alberta, the Market Surveillance Administrator (MSA) may seek AUC approval of a settlement without commencing a proceeding into the misconduct of a market participant or after notice of a proceeding into the alleged misconduct has been issued. The MSA has brought forward two significant market manipulation cases to the AUC. In the first matter, the MSA sought AUC approval of a settlement agreement in which the wrongdoer admitted to the misconduct and agreed to a monetary penalty and disgorgement. In that proceeding the AUC allowed several market participants to make submissions on whether the proposed settlement adequately addressed the harm and loss caused by the misconduct in question. In the second matter, the market participant contested the MSA’s misconduct allegations but, following a finding of misconduct by the AUC, the sanctioning of that misconduct was addressed through settlement agreement approved by the AUC.
When considering whether to approve a proposed settlement, the AUC has stated that its role is to decide if a proposed settlement is ‘…reasonable in the sense that it falls within a range of acceptable outcomes appropriate to the facts and applicable sanctioning principles rather than whether it is the sanction that the Commission might have chosen to impose’. When making this assessment, the AUC has confirmed that it is guided by the sanctioning principles set out in Rule 013, as described generally in the factors set out earlier in this chapter. The AUC has also confirmed that it can approve or deny a settlement but cannot unilaterally vary or amend a settlement.
The AER’s infringement notice process and enforceable undertaking process also promote the settlement of enforcement actions. Infringement notices issued by the AER to a market participant describe the misconduct identified and prescribe a fine of up to A$20,000. The recipient of the infringement notice can either pay the penalty or have the matter heard in court. A market participant that complies with an infringement order is not required to admit to the misconduct alleged in the notice.
Enforceable undertakings are formal, voluntary, written commitments from market participants to the AER. A recent enforceable undertaking that was prepared in conjunction with related infringement notices addressed compliance and operational issues for a generator. The undertakings agreed to by the market participant included the requirement to hire an independent compliance expert to audit the internal compliance plan, continue to employ a compliance officer and to provide specified compliance reporting. If the AER determines that a party has contravened an enforceable undertaking the AER can apply to a court for an order directing compliance with the undertaking and other remedies, including disgorgement of benefits to the state and compensation to persons who suffered damage or loss and from the breach.
With respect to the settlement of civil proceedings for market misconduct in Australia, the Federal Court of Australia recognised that, in determining the reasonableness of the proposed settlement, it was required to have regard to the sentencing principles in the National Electricity Act, which are generally consistent with the factors set out earlier in this chapter. The court also recognised that its role was to determine if the penalty proposed by the settlement parties fell within an acceptable range of penalties given the admitted contraventions.
Settlement discussions between the Ontario IESO and the subject of an investigation may result in either a negotiated settlement or in an uncontested sanction, consisting primarily of a non-compliance letter, a monetary penalty, a voluntary payment, other behavioural change, or some combination of these elements. Because the subject of a sanction issued by the Ontario IESO has the option of contesting the sanction through further negotiation or arbitration or by way of an appeal to the OEB, the acceptance of a sanction without dispute shares some attributes of a settlement, including the fact that the subject of a sanction can accept the sanction without admitting to a breach of the Market Rules. As noted above, Section 6.6 of the Market Rules sets out the Ontario IESO’s framework for calculating monetary penalties. However, because the Ontario IESO does not publish its non-compliance letters or its negotiated settlements, it is difficult to understand how monetary penalties, in the case of sanctions, and voluntary payments, in the case of negotiated settlements, are calculated.
The majority of market misconduct sanctions appear to be implemented through settlements rather than contested proceedings. A white paper published by FERC staff in 2016 reports that, from 2005 to 2015, FERC staff investigated more than 100 manipulation-related matters, settled 24 related investigations, tried two in administrative proceedings and had six pending affirmation hearings in various district courts. In Alberta, all sanctions for market misconduct matters brought forward by the MSA, including those for market manipulation, have been implemented through settlements approved by the AUC. In Australia, the AER has issued infringement notices on 13 occasions and reported two enforceable undertakings since 2006, none of which appear to have been breached. Further, the sanctions in the Snowy Hydro case were addressed through a settlement proposal approved by the court.
Generally speaking, the FERC, the Ontario IESO, the AUC and the AER have a relatively consistent approach to sentencing and settlements for market misconduct including market manipulation. Each jurisdiction has mechanisms for calculating monetary penalties, requiring some form of repayment of benefits, either through a voluntary payment or a disgorgement direction, and ensuring ongoing compliance. Each jurisdiction appears to weigh substantially similar principles when sanctioning wrongdoers regardless of whether the sanction arises from a contested proceeding or a settlement. However, the exact manner in which these regulators balance those principles varies.
The most effective mitigations against sanctions for market misconduct appear to be the development, implementation and maintenance of a comprehensive and effective compliance plan, full and forthright cooperation with the regulator, including self-reporting and, where possible, settling rather than litigating sanctions. The FERC observed that, under its Penalty Guidelines, an effective compliance programme on its own may reduce a penalty factor by 60 per cent and, when combined with other factors, can result in a penalty reduction of 95 per cent. To that end, FERC staff recently published a White Paper on energy trading compliance practices. Adherence to the compliance principles expressed in that White Paper are likely to go some way to effectively mitigating potential future monetary penalties.
 JP Mousseau is counsel to the Alberta Utilities Commission.
 Australian Energy Regulator v. Snowy Hydro Limited (No. 2)  FCA 58.
 FERC Penalty Guidelines Section 1A1.1.2., Revised Policy Statement on Penalty Guidelines, 132 FERC Paragraph 61,216 (2010).
 IESO website, Compliance enforcement page, http://www.ieso.ca/en/sector-participants/market-oversight/rule-compliance/compliance-enforcement/sanctions.
 AUC Decision 3110-D03-2015, Market Surveillance Administrator allegations against TransAlta – request for consent order, 29 October 2015, (Decision 3110-D03-2015) Paragraph 22.
 Compliance and Enforcement, Statement of Approach, Australian Energy Regulator, April 2014, page 12.
 Australian Energy Regulator v. Snowy Hydro Limited (No. 2)  FCA 58, Paragraph 109.
 16 U.S.C. Section 825o-1.
 FERC Penalty Guidelines, Revised Policy Statement on Penalty Guidelines, 132 FERC Paragraph 61,216.
 Revised Policy Statement on Penalty Guidelines, 132 FERC Paragraph 61,216, 17 September 2010.
 Revised Policy Statement on Enforcement, 123 FERC Paragraph 61,156 (2008).
 Alberta Utilities Commission Act, S.A. 2007, c.A-37.2, Section 63.
 AUC Rule 013: Criteria Relating to the Imposition of Administrative Penalties, Alberta Utilities Commission, (1 February 2013).
 Market Rules for the Ontario Electricity Market, Ontario Independent Electric System Operator, 7 June 2017.
 Sanctioning Guidelines for Extraordinary Financial Penalties, Ontario Independent System Operator, 10 September 2008.
 For example, National Electricity (Victoria) Act (2005) Section 64; National Gas (South Australia) Act (2008) Section 234; National Energy Retail Law (South Australia) Act 2011; Section 294.
 16 U.S.C. Section 825o-1.
 The FERC does not apply its Penalty Guidelines in all cases. For example, it does not use the Penalty Guidelines to calculate penalties for individuals.
 FERC Penalty Guidelines, Section 1A1.1.(1).
 See, for example, City Power Marketing, LLC and K Stephen Tsingas, 152 FERC Paragraph 61,012 (2015), Paragraph 227; in that decision the FERC confirmed that it will not use the Penalty Guidelines for individual wrongdoers or in circumstances where there are multiple serious violations in the same category.
 Ibid, paragraph 252
 IESO Market Rules, Chapter 4, Administration, Supervision, Enforcement, June 7, 2017, Section 6.6.6A., Ontario Energy Board Act, Section 112.
 Market Rules for the Ontario Electricity Market, Ontario Independent Electric System Operator, June 7, 2017, Section 184.108.40.206.
 See, http://www.ieso.ca/en/sector-participants/market-oversight/rule-compliance/compliance-enforcement/sanctions.
 Alberta Utilities Commission Act, Section 63(2)(a).
 AUC Decision 3110-D03-2015, paragraph 44.
 National Electricity (Victoria) Act (2005), Sections 58, 59; National Gas (South Australia) Act (2008), Section 2(1) definition of ‘civil penalty’, Section 229; National Energy Retail Law (South Australia) Act 2011, Section 2(1) definition of ‘civil penalty’, Section 289.
 Australian Energy Regulator v. Snowy Hydro Limited (No. 2)  FCA 58.
 Ontario Energy Board Act, Section 112.5.
 Section 1B1.1 of the FERC Penalty Guidelines.
 City Power Marketing LLC and K. Stephen Tsingas, Docket No. IN15-5-000, Paragraph 271, 152 FERC Paragraph 61,012.
 Ibid, Paragraph 272.
 Rule 013, Section 7.
 AUC Decision 3110-D03-2015, Paragraphs 31 and 32.
 Revised Policy Statement on Enforcement, 123 FERC Paragraph 61,156 (2008), Paragraph 44.
 Revised Policy Statement on Enforcement, 123 FERC Paragraph 61,156 (2008), Paragraph 33.
 See, for example, GDF SUEZ Energy Marketing NA, Inc. (GSEMNA), Docket No. IN17-2-000, Order Approving Stipulation and Consent Agreement, 158 FERC Paragraph 61,102 (1 February 2017), Paragraph 18, or MISO Virtual and FTR Trading (Louis Dreyfus Energy Services), 146 FERC Paragraph 61,072 (2014), Paragraph 12.
 Alberta Utilities Commission Act, Section 44.
 Alberta Utilities Commission Act, Section 54.
 AUC Decision 2012-182: Application for Approval of a Settlement Agreement between the Market Surveillance Administrator and TransAlta Energy Marketing Corp. (AUC Decision 2012-182).
 Decision 3110-D01-2015, Market Surveillance Administrator allegations against TransAlta Corporation et al., Mr Nathan Kaiser and Mr Scott Connelly, 27 July 2015.
 AUC Decision 3110-D03-2015.
 AUC Decision 3110-D03-2015, Paragraph 19; see also, AUC Decision 2012-182, Paragraph 35.
 Decision 3110-D01-2015, Market Surveillance Administrator allegations against TransAlta Corporation et al., Mr Nathan Kaiser and Mr Scott Connelly, 27 July 2015, Paragraph 20.
 AUC Decision 3110-D03-2015, paragraph 21.
 Undertaking to the Australian Energy Regulator given for the purposes of Section 59A of the National Electricity (Queensland) Law by CS Energy Limited, June 29, 2016, https://www.aer.gov.au/wholesale-markets/enforcement-matters/infringement-notices-issued-to-cs-energy-and-enforceable-
 See, for example, National Electricity (Queensland) Law, (2013), Section 59A.
 Australian Energy Regulator v. Snowy Hydro Limited (No. 2)  FCA 58, Paragraphs 131 and 163.
 Staff White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005, November, 2016, pages 3 and 4.
 Revised Policy Statement on Penalty Guidelines, 132 FERC Paragraph 61,216, 17 September 2010, Paragraph 109.
 Staff White Paper on Effective Energy Trading Compliance Practices, November 2016.