FERC’s September 17, 2015 notice of proposed rulemaking (NOPR) in Docket No. RM15-23-000 would impose significant information-gathering requirements on participants in markets operated by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). The rule would require each market participant to obtain a Legal Entity Identifier (LEI) and to report its LEI and extensive additional information about itself and its Connected Entities to its RTO/ISO who would submit it to FERC. FERC has designed the information requirement, which applies on a regular ongoing basis and must be updated as facts and circumstances change, to reveal direct as well as indirect, third party links between market participants that could afford the incentive and ability to engage in joint action to manipulate and defraud the markets.
Need for the Connected Entity Information
According to the NOPR, FERC needs the Connected Entity information to protect against market manipulation and abuse. The NOPR refers to the market abuse “characterizing” the 2000-2001 “Western Energy Crisis.” The NOPR also refers to the subsequent Energy Policy Act of 2005 granting FERC authority to impose civil fines and seek criminal penalties against parties who engage in illicit market activity. The NOPR cites FERC’s information sharing with the Commodity Futures Trading Commission regarding market surveillance and investigative procedures. However, according to the NOPR, FERC’s lack of clear knowledge of several factors handicaps its efforts to analyze and investigate market behavior. Those factors include the relationships between market participants, the mutual benefits related participants might each derive from a given transaction, and the existence of common courses of fraudulent conduct by such related participants.
Connected Entity Definition
FERC regards the broad scope of the “Connected Entity” terminology as more suitable for the NOPR’s market oversight purposes than “affiliated entity” which typically is restricted to relationships based on common ownership. A market participant’s Connected Entities for purposes of the proposed rule could be another market participant, an entity that owns or is owned by the market participant, a corporate officer of the market participant, a creditor of the market participant, or a provider of asset management or other services to the market participant. In very simplified terms, a Connected Entity can have any of the following relationships to a market participant:
- Any entity that (i) has a 10% or more direct or indirect and active or passive ownership interest in the market participant; (ii) that is owned (10% or more) or controlled by a market participant; or (iii) that is engaged in Commission jurisdictional markets and is under common control with the market participant.
- Persons having a governing relationship with the market participant including its chief executive officer, chief financial officer, chief compliance officer, traders and other persons performing those functions on behalf of the market participant.
- An entity (1) owning a financial interest in the market participant (i) that entitles the owning entity to share in the market participant’s profitability above a de minimis level, or (ii) that is convertible to an ownership interest that alone or in combination with other interests would give the owning entity a 10% or more ownership interest in the market participant.
- An entity whose ownership instruments, provided they represent a 10% or more share, 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.
- Entities that have entered into arrangements with the market participant relating to the management, or operational or financial control of resources subject to FERC’s jurisdiction under agreements such as tolling agreements, energy management agreements, asset management agreements, fuel management agreements, operating management agreements, and energy management agreements.
Definition of Market Participant
The rule defines market participant as any buyer or seller “in any of the various markets of the RTO and ISO in question” (emphasis added). Despite the “in question” qualification, the NOPR does not explicitly identify markets excluded from its reach. The intent of the rule is probably to exclude at least firm and non-firm transmission services since they are offered pursuant to RTO/ISO tariffs, are not market-based services, are closely regulated, and as a rule are not the subject of market manipulation claims. Parties commenting on the NOPR may wish to seek confirmation that the NOPR does not apply to transmission services. They may also wish to request exemption of other services from NOPR application. The need for the NOPR to apply to buyers may also be problematic, although FERC may have concerns about collusive action by buyers and sellers or among buyers.
The rule requires RTO/ISOs to identify each market participant by its LEI, its RTO/ISO-assigned number or numbers and its full name. The RTO/ISOs must also supply the full name of each market participant’s several Connected Entities, including its owners, affiliates, creditors, corporate officers and service providers, and an explanation of the relationship between each market participant and its Connected Entities including a description of any financial relationships, services provided or contracts between the market participant and the Connected Entity. The rule also establishes a detailed format for reporting this information. While the RTO/ISO compiles the information related to its market participants and provides it to FERC, the each market participant is obliged to provide the information in the FERC-required format to the RTO/ISO. A market participant that is a member of multiple RTO/ISOs must provide its Connected Entity information to each of its RTO/ISOs.
The rule probably does not create a “daisy chain” effects. For example, two (or more) market participants who are Connected Entities to each other probably do not automatically share all each other’s Connected Entities. In addition, the mere connection of two (or more) market participants through a common Connected Entity probably does not cause all the Connected Entities of one market participant to become Connected Entities of the other market participants. FERC does not need such extended information for market surveillance purposes since it can electronically “sort” the information it receives by Connected Entity, easily identify the market participants who share a Connected Entity, and determine, equally easily, whether the trading patterns of those market participants reveal collusive behavior intended to defraud the markets. Nevertheless, parties who submit comments on the proposed FERC rule would do well to confirm this interpretation and to otherwise caveat FERC against adopting a rule with too broad a sweep that imposes heavy burdens and requires a market participant to provide information it would not acquire in the ordinary course of conducting its business.
The bright side of the proposed rule for parties concerned about new reporting burdens is that FERC believes the Connected Entity information should obviate the need for the existing affiliate disclosure provisions in RTO/ISO tariffs. Accordingly, absent an RTO/ISO request for continuation of those provisions based on particularized need, FERC proposes elimination of those tariff provisions.
The NOPR preamble states FERC’s intent to accord “non-public” status to all Connected Entity information it receives that is not already available through public sources such as Electronic Quarterly Reports or SEC filings. The preamble also states FERC’s belief that commercially sensitive information provided through the proposed rule would be subject to the trade secret exemption of the Freedom of Information Act (FOIA) and, generally, that the non-public information it compiles would be subject to the FOIA exemption for information acquired for law enforcement purposes. However, the regulation, as proposed in the NOPR, does not mention the need to protect confidential information. Accordingly, concerned parties commenting on the proposed rule may find it in their interest to ask FERC to include explicit confidentiality provisions in its proposed regulation.
FERC asked for comments on whether its proposed rule should also include participants in non-RTO/ISO markets, whether the LEI is too new and untested for use in implementing the NOPR, whether the proposed requirements for formatting information are reasonable, whether the Connected Entity information justifies elimination of the existing affiliate disclosure requirements from RTO/ISO tariffs, and whether it needs to modify the required Connected Entity information in order to justify elimination of the existing affiliate disclosure requirements. FERC also included a catch-all solicitation for comments on the need for the Connected Entity information and its practical utility, the accuracy of FERC’s estimates of the NOPR’s benefits and costs, and ways to enhance the quality, utility and clarity of the information.
She issued a short statement concurring with the proposed rule, but expressing concern that its burdens would exceed its benefits. She encouraged submission of comments on the proposal’s incremental costs and benefits that she promised to carefully consider in deciding whether to support the final rule.
The deadline for filing comments on the NOPR is 60 days counting from the date of the NOPR’s publication in the Federal Register.