Are Penalties for Obstructionism Dangerously Close to Charging for Staff Resources?

In this earlier post on FERC’s recent compliance orders, I made passing reference to FERC’s recent $9 million settlement ($7 million in penalties and $2 million to create a compliance program) with Edison Missionto resolve violations involving the company’s obstructionist conduct during a three year investigation which misled staff and wasted resources. In that post, I expressed concern that FERC might confuse a company’s legitimate efforts to mount a vigorous defense with impermissible obstructionism. Now that I’ve had a chance to look at the order more closely, I question FERC’s apparent reliance on the expenditure of staff time and resources necessitated by Edison’s conduct as a factor in arriving at the agreed upon penalty – a practice that the D.C. Circuit has found impermissible under the Federal Power Act.

The Edison Mission Order and Stipulation and Consent order concers FERC’s investigation of a pricing practice used by Edison Mission known as a “high offer” strategy. Essentially, Edison priced its capacity generation units near the $1000/MWh PJM cap to ensure that they would be bypassed in the day ahead market. As a result, buyers with a need for power would later be forced to purchase the generation in the subsequent real time market where Edison could reap larger profits. Edison made misrepresentations to staff about the reasons for the high offer strategy, as well the strategy’s intended 2004 expiration date. Eventually, Edison discontinued use of the high offer strategy in April 2006, but its misrepresentations about the strategy continued throughout the duration of FERC’s three year investigation.
The Stipulation and Consent order assesses a $7 million penalty for Edison’s misleading conducting during the investigation. The order describes how Edison’s conduct wasted staff time and resources, repeatedly forcing staff to restart its investigation after Edison offered a new explanation for its strategy. However, as the DC Circuit has held in Bluestone Energy v. FERC, 74 F.3d 1288 (D.C. Cir. 1996)(disclosure: I briefed and argued Bluestone), expenditure of staff resources are not an appropriate factor for inclusion in a penalty. From the decision:

In reviewing the Commission’s interpretation of the Federal Power Act as permitting the Commission to consider staff time and resources in setting penalties, we follow the principles set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-45, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). We first consider whether the language of the Federal Power Act offers clear instruction regarding the propriety of considering staff time and resources in setting penalties. See id. at 842-43. In our view it does not. Use of staff time and resources is not listed as one of the three factors that Congress has authorized the Commission to consider. Furthermore, as to whether the use of staff time and resources is either relevant or irrelevant to the statutory factors, the Act is silent. In other statutes, Congress has authorized agencies to set fees so as to recover the agencies’ full costs, including costs of staff time and resources. See, e.g., 21 U.S.C. � 886a(3) (1994) (”Fees charged by the Drug Enforcement Administration under its diversion control program shall be set at a level that ensures the recovery of the full costs of operating the various aspects of that program.”). The Federal Power Act nowhere authorizes the Commission to recover expenses on behalf of the United States through penalties; rather, the Act specifically states that expenses for employing attorneys to enforce the Act “shall be paid out of the appropriation for the Commission.” 16 U.S.C. � 825m(c).

Because the Federal Power Act does not directly address the propriety of considering staff time and resources, we turn to the second step of Chevron, testing for reasonableness the Commission’s view that use of staff time and resources is relevant to the statutory factors. Chevron, 467 U.S. at 844-45. Neither the ALJ’s initial decision imposing the penalty nor the Commission’s order affirming that decision explains the link between staff time and resources and any of the three statutory factors, and we do not find persuasive the ALJ’s explanation that the Commission’s dependence on cooperation from dam operators renders the use of staff time and resources a legitimate consideration. Because the Commission has broad discretion to apportion its enforcement resources as it wishes, there is no guarantee that the amount of staff time and resources devoted to a case will correspond to the nature or seriousness of a violation or to the violator’s efforts to comply. Where the Commission investigates what turns out to be a relatively unserious violation, any attempt by the agency to compensate for the apparently disproportionate “diversion of staff resources” would essentially increase the size of a penalty on account of the violation’s lack of seriousness, contrary to Congress’s instructions. For a violation that actually turns out to be serious, our ruling will not hamper the Commission’s ability to consider the seriousness of the offense, for three of the eleven factors set forth in the Commission’s regulations already address the seriousness of a violation. See 18 C.F.R. 385.1505(b)(4), (6)-(7). Indeed, counsel for the Commission told us at oral argument that this is the first case in which the Commission has considered staff time and resources in setting a penalty. We find the Commission’s consideration of this factor impermissible under the Federal Power Act.

FERC has authority to penalize companies for violating the duty of lack of candor. But in measuring the seriousness of these violations, the impact on staff resources is not a permissible consideration, at least under the FPA in its current form. As the D.C. Circuit points out in Bluestone, focusing on use of staff resources may skew the amount of the penalty and divert the agency’s attention from the underlying conduct that lead to the investigation to begin with.

For another criticism of the Edison order, see Jay Hancock’s column from the Baltimore Sun, arguing that FERC’s order penalizing Edison for lack of candor doesn’t do anything to punish it for the high offer strategy and other improper pricing strategies that provoked the investigation to begin with. Most likely, because Edison implemented the high offer strategy before August 2005 when EPAct took effect, FERC lacked authority to penalize Edison for any market manipulation that took place during this period.