FERC NOPR Seeks Connected Entity Data from Virtual Traders and Financial Transmission Rights Holders 

Energy, Environmental & Utilities Alert

August 25, 2016

The Federal Energy Regulatory Commission (FERC) recently proposed that virtual traders1 and financial transmission rights holders2 (collectively Virtual/FTR Participants), which are not FERC electric market based rate holders3 but whom FERC has determined are subject its jurisdiction,4 must provide information on the entities connected to them — so-called Connected Entity information. This is the same type of information FERC requires from market based rate holders.5

The FERC Notice of Proposed Rulemaking (NOPR)6 represents FERC’s second attempt to gather information on the entities connected to market participants — the FERC withdrew its first attempt after criticism from those that would have been required to provide information to FERC. The revised NOPR explicitly7 requires Virtual/FTR Participants to provide two types of information, (i) Connected Entity information and (ii) a Legal Entity Identifier (LEI).8

Connected Entity information includes four types of information. Under the NOPR, Virtual/FTR Participants would be required to provide information to FERC on:

  1. Affiliates,9 but only if those affiliates are either one of three entities:
    1. the ultimate owners of the entity;
    2. participants in Commission-jurisdictional organized wholesale electric markets; or
    3. entities that purchase or sell financial natural gas or electric energy derivative products that settle off of the price of physical electric or natural gas energy products.
  2. Traders, proposed to be defined (and identified) as persons who make, or participate in, decisions and/or devises strategies for buying or selling physical or financial Commission-jurisdictional electric products or physical natural gas;
  3. If applicable, contracts entered into by the Virtual/FTR Participant, in which one party to the contract has the right to make trading decisions for an electric generation asset or to offer an electric generation asset into the wholesale electric markets;
  4. If available, Purchaser Seller Entity (PSE) NAESB/OATI webRegistry Entity Code(s).10

As for the process for submitting the Connected Entity information, there would be both an initial baseline filing and on-going filing requirements as Connected Entity information changes. The NOPR requires current Virtual/FTR Participants to submit baseline Connected Entity and an LEI within 90 days of the publication of the final rule in the Federal Register. Any new Virtual/FTR Participant would need to submit an Initial Connected Entity Submission within 30 days of commencing trading of virtual or FTR products.

Any changes going forward, such as when: (i) an entity becomes a Connected Entity of a Seller or Virtual/FTR Participant, e.g., a trader comes on board or any other change in 1–4 above; or (ii) an entity ceases to be a Connected Entity of a Seller or Virtual/FTR Participant, e.g., a trader leaves, or any other change in 1–4 above, would be required within 30 days of the change. Data would be provided in an extensible markup language XML schema format.11 Because sanctions, including civil penalties, could be imposed for intentionally or recklessly submitting incorrect or misleading information, entities will need to exercise due diligence in submitting this information.

FERC wants the Connected Entity information to develop what it refers to as a “relational data base.”12 FERC’s concern continues to be 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.”13 FERC stated “[g]iven the potential for such conduct,” the FERC wants to develop a relational data base, and needs information for that development, so it can understand “the relationships and corresponding incentives between entities to help determine whether they might be engaging in acts of market manipulation.”14

Virtual/FTR Participants opposed to the new requirements will likely argue that FERC did not sufficiently support the need for the new information citing National Fuel Gas Supply Corp. v. FERC.15 For example, the trader information will be burdensome to initially compile and likely require constant updates without any apparent benefit to FERC’s enforcement regime — will it make a difference to the success of FERC’s market monitoring efforts for FERC to know that Virtual/FTR Participant Company X, which once had six traders, now has five traders?

Further, FERC’s information requirements concerns itself only with the connection between two entities. But there is nothing inherently wrong with two entities being connected to one another or with connected entities doing business with one another. It is only wrong for those entities to use their connected relationship to harm a third party, such as when an electric transmission provider uses its monopoly position over transmission service to benefit an affiliated shipper to the detriment of a third-party shipper. To be sure, two connected entities could collude or be involved in cross market manipulation — bidding in one market for the sole purpose of increasing the value of a position in another market. But very few, if any, of FERC’s cross market manipulation cases have involved connected entities, generally all have involved the same entity trying to move its different positions in different markets by engaging in uneconomic trades. And while it may be somewhat easier for two connected entities to collude, two non-connected entities could just as easily collude, and FERC provided scant evidence justifying the regulatory burden being imposed on Virtual/FTR Participants in order to prevent or detect connected entity collusion.

Comments on the proposed NOPR, Docket No. RM16-17, are due September 19, 2016.

1 Virtual trading involves sales or purchases in an RTO/ISO day-ahead market that do not go to physical delivery. FERC stated that organized wholesale electric markets offer various virtual products, including Up-To Congestion products, for which no generation is dispatched and no load is served, with obligations met through cash settlement.

The term FTR covers not only Financial Transmission Rights, but also Transmission Congestion Contracts in NYISO, Transmission Congestion Rights in SPP, and Congestion Revenue Rights in CAISO. The proposed rule would not apply to entities holding auction revenue rights.

3 While entities that sell only natural gas do not have to provide Connected Entity information, entities that purchase or sell financial natural gas that settles off of the price of physical natural gas energy products may need to be reported as a Connected Entity if affiliated with a Virtual/FTR Participant.

4 FERC said, Virtual/FTR Participants provide jurisdictional service by engaging in practices that directly affect the rates charged by public utilities [RTOs/ISOs] for the sale of electric energy for resale, and the transmission of electric energy in interstate commerce, citing FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760 (2016).

See Data Collection for Analytics and Surveillance and Market-Based Rate Purposes, Notice of Proposes Rulemaking, Docket No. RM-16-17-000, 156 FERC ¶61,045 (July 21, 2016).

6 While this Alert focuses on non-market based rate Virtual/FTR Participants, the FERC NOPR also proposes significant revisions to the information required for requests to obtain and retain market based rates including ownership and asset appendix information. Future Alerts will address these requirements.

7 The original NOPR required Connected Entity information from a market participant in an RTO/ISO market. This NOPR specifically targets Virtual/FTR Participants and requires specific filings from those entities to the extent that they are already providing or initiating such service.

8 An LEI is a unique 20-digit alpha-numeric code assigned to a single entity, issued by the Local Operating Units of the Global LEI System. The Virtual/FTR Participant would have to obtain the LEI, but the entities connected to it need not obtain an LEI.

9 See 18 C.F.R 35.36(9), generally any person that holds 10 percent or more of the virtual trader or FTR holder or any company 10 percent or more of whose outstanding voting securities is held by the virtual trader or FTR holder.

10 This code is an entity identifier appearing in the contract/market paths field of an e-Tag.

11 XML schemas facilitate the sharing of data across different information systems, particularly via the internet, by structuring the data using tags to identify particular data elements.

12 A relational database is a database model whereby multiple data tables relate to one another via unique identifiers.

13 NOPR at 5.

14 Id.

15 Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 839 (D.C. Cir. 2006)(rejecting FERC’s attempt to expand the standards of conduct governing the relationship between natural gas pipelines and their marketing affiliates to include their non-marketing affiliates by relying on “both an asserted theoretical threat of undue preferences and a claimed record of abuse” finding that the Commission “provided no evidence of a real problem” and failed to “include a single example of abuse” by the entities that would be subject to the proposed rule.


Related Practices

If you would like to learn more about the issues discussed in this Alert, please contact the Energy, Environmental and Utility Practice Group at Cozen O’Connor.