FERC Staff conducted a technical conference this week on the Connected Entities Reporting NOPR. Under the provisions of the proposed rule, RTOs/ISOs would report to FERC data from market participants to:
“i) Identify the market participants by means of a common alpha-numeric identifier;
ii) List their “Connected Entities,” which includes entities that have certain ownership, employment, debt, or contractual relationships to the market participants, as specified in this NOPR; and
iii) Describe in brief the nature of the relationship of each Connected Entity.”
Market participants would file, pursuant to a tariff of the RTO/ISO, their Connected Entity data, subject to the obligation to update the filing within 15 days of a change in status as well as a yearly certification that the data filed is comprehensive and accurate. RTOs/ISOs would require their market participants to obtain a Legal Entity Identifier (LEI) and file their own LEIs as well as the LEIs of Connected Entities.
Staff used the Technical Conference to explain the rationale for the NOPR and the need for the Connected Entity data. Staff said the NOPR was routed in the Commission's Strategic Plan goal of detecting and deterring market manipulation. The data will be used for FERC's market surveillance program for the electric markets. Staff said it would provide a more complete understanding of trading patterns and yield fewer false positives in the surveillance screens.
Staff clarified that the reporting requirements would only apply to market participants in RTO/ISO markets. For example, in PJM this is defined as an entity that has signed the PJM Operating Agreement. Connected Entities that are not RTO/ISO members as per the applicable tariff are not required to file under the proposal. Market Participants would be required to update their filing when there is a change in status in their Connected Entities - a new entity becomes a Connected Entity or ceases to be a Connected Entity.
Staff said that all Connected Entity information that is not already public will be treated as non-public information for confidentiality purposes. This information could, however, be released if: FERC authorizes or directs its disclosure; the information is made public during an adjudicatory proceeding; or disclosure is required under FOIA. The full text of Staff's Presentation is available on the NEM Website.
“Connected Entities” is a new term that the Commission proposes to define as follows:
A Connected Entity, which includes natural persons, is one which stands in one or more of the following relationships to a market participant:
a. 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 non-voting 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;
b. The chief executive officer, chief financial officer, chief compliance officer, and the traders of a market participant (or employees who function in those roles, regardless of their titles);
c. 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
d. 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.
In response to stakeholder questions, Staff addressed and clarified in some detail the four components of the Connected Entities definition. The full text of Staff's Q&A on Connected Entities Definition is available on the NEM Website.
Commissioner LaFleur and Commissioner Clark both attended the technical conference. Commissioner LaFleur noted her concurrence to the NOPR, her concerns that it represented a significant reporting regime, and her request for specific comments on the burden and benefits associated therewith. Commissioner LaFleur also questioned whether existing reporting vehicles could be utilized to achieve the goals of the NOPR (EQRs, contract filings under Section 205, credit reports). Similarly, Commissioner Clark said the threshold questions for comments are: 1) whether the case has been made as to the need for the data? and 2) if so, how can the reporting be made meaningful and not overly burdensome. It is important to strike the right balance otherwise you run the risk of creating a compliance regime that "traps" good actors, while bad actors are able to elude detection.
A panel of stakeholders, including market participants and RTO/ISOs, discussed potential issues associated with the reporting. This includes extensive costs and burdens for market participants associated with developing, designing and implementing systems for compliance purposes, the need to renegotiate contractual agreements with Connected Entities, and potential reduction in market participation by price takers and those for whom the sale of electricity is not their primary business.
Stakeholders recommended reforms to the reporting included:
* establishing a single repository for the data;
* the frequency of reporting should not occur on more than a quarterly basis;
* adoption of a scienter requirement;
* narrowing the definition of "trader";
* a phased-in approach to the reporting coupled with a safe harbor for good faith errors in reporting;
* refining existing EQR requirements rather than impose a new reporting requirement; and
* consistency across RTO/ISO markets in data to be collected.
The full texts of the Stakeholder Presentations and the Connected Entities NOPR are available on the NEM Website.