One FERC Meeting, Four Enforcement Rulings

Last Thursday’s Commission meeting was a banner day for enforcement.  FERC issued a suite of orders that clarify the Commission’s enforcement program, offer companies additional tools such as no-action letters and a help desk for seeking compliance guidance and extend due process protections to the subjects of investigations by giving them an opportunity to respond where staff plans to recommend an enforcement action.  For my quick analysis of the orders, see below the jump.

(1) Order No. 711 affords the subject of an investigation an opportunity to provide a written, non-public response to a recommendation by staff that the Commission initiate an enforcement action or civil action.   In this regard, Order No. 711 increases due process protection to subjects of Commission investigations.

(2)  NOPR on Ex Parte Contacts and Separation of Functions, 123 FERC 61,158 (2008). This proposed rulemaking addresses three main matters.  First, the NOPR provides that separation of functions between decisional and non-decisional Commission staff will start when a show cause order is issued.  Second,  the NOPR bars non-written communications concerning Part 1b investigations between persons outside the Commission and Commissioners or decisional employees.  In my view, this aspect of the NOPR makes sense because it avoids any potential appearance of impropriety.  Quite frankly, there’s something unseemly about a company or its lawyers having the ability to call up a Commissioner to discuss an investigation and possibly alter the outcome without any kind of documentation or written record.

Finally, the NOPR clarifies that as a general rule, FERC will not allow intervention by third parties in enforcement proceedings.   FERC may, however,  consider allowing intervention where third parties are directly affected by FERC’s resolution of a penalty,  such as where they are potential recipients of disgorged profits or adversely impacted by reliability violations.   FERC’s rule raises some interesting questions.  On the one hand, enforcement proceedings are exclusively between FERC and the subject of the enforcement action.  In that regard, third parties have no place in the process so barring interventions makes sense.   On the other hand, where third parties are arguably aggrieved by a violation of a reliability standard or market manipulation rule,  it seems that they should have an opportunity to have a say, though I’m just not sure that an enforcement proceeding is the appropriate forum.  After all, in conventional criminal proceedings, victims aren’t parties to the process, though they certainly can testify and some fora allow them opportunities to make statements.   I’ll be interested in seeing the comments on the NOPR on this subject.

Interpretative Order Modifying No Action Letter Process, 123 FERC 61,157 (2008).  In this order, FERC implemented measures to facilitate compliance.  These measures include (1) expanding the scope of the no action letter (NAL) process, (2) establishing a compliance help desk for regulated companies to get informal guidance and (3) proposing to hold periodic workshops to assist the regulated community in understanding and complying w/Commission policies.   As a result of the Policy Statements, companies may now file an NAL request  concerning any compliance issue except those under Part I of the FPA, Sect 216 and 216 of FPA and sec 3,7 and 15 of NGA and sec 3211 of NGPA where FERC already has a specific complaince program. In addition, FERC will not issue NALs for enforcement of reliability standards because Regional entities and NERC have initial responsibility for investigations.  Any requests for guidance must go to NERC first, and will then be submitted to FERC for review

FERC cautioned that a request for a NAL should not be used as substitute for a complaint or litigation because NALs are not binding.  Thus, they are appropriate only for advice on whether staff would recommend no action.  Still, companies can derive a benefit from seeking an NAL since it will be considered as evidence of good faith compliance if an enforcement action later ensues.
Revised Policy Statement on Enforcement , 123 FERC 61156 (May 15, 2008).  This Policy Statement supercedes FERC’s early policy statement on enforcement and is based on FERC’s experience in implementing its expanded enforcement powers granted by the Energy Policy Act of 2005.

The policy statement describes the steps involved in a staff audit and investigation as well as the factors that staff and Commission consider, respectively, in deciding whether to open an investigation and what size penalty to assess.  In determining whether to investigate, staff considers: (1) the nature and seriousness of violation; (2) the nature and extent of harm; (3) efforts to remedy; (4) were violations widespread or willful; (5) whether documenting and remedying violations will advance policy objectives; (6) staff’s likelihood of assembling a legally sufficient case; (7) compliance history of the violator and (8) staff resources.The factors for assessing a civil penalty – and choosing whether to require disgorgement or a compliance plan – are simlar. In addition to the EPAct 2005 factors,  FERC will also examine (1) harm to the market, (2) earnings and market share of company and (3) what penalty best discourages improper conduct while not discouraging market participation.  FERC also considers the commitment to compliance, self-reporting, reliance on staff guidance in good faith cooperation in the investigation and whether a company acted in an “obstructionist” manner.   My concern with the obstructionist factor is that there’s often an awfully thin line between “obstructionist” conduct  and mounting a vigorous defense.   Hopefully, companies will not be penalized more harshly for exercising their right to challenge the results of an investigation or defend themselves in an enforcement action.

Here’s a recent example,  just issued today of how seriously FERC intends to punish companies for obstructionism. Here, FERC approved a stipulation and consent agreement with Edison Mission in which the company will pay $9 million to resolve violations involving its conduct that misled staff of the Office of Enforcement during an investigation. According to the news release, Edison Mission’s actions, which took place over three and a half years:

not only misled and misdirected FERC staff, but caused staff to waste resources analyzing different explanations offered by Edison Mission for its bidding practices. Today’s order noted that the conduct that occurred in this matter was severe and did not involve the types of errors or omissions that sometimes occur in investigations involving large data production. Those types of matters usually are timely and easily cured. But here, Edison Mission’s acts that misled were protracted, related to core issues under investigation and caused extensive misallocation of resources.

Looking ahead, companies must devise strategies for vigorously defending against enforcement actions while not running afoul of FERC’s anti-obstructionism policy.