Energy Legal Blog

FERC Explains Its Policy on New Penalty Authority

The Domenici-Barton Energy Policy Act of 2005 (EPAct 2005) expanded and increased administrative, civil and criminal penalties for violations of the Natural Gas (NGA), Natural Gas Policy, Federal Power (FPA), and Interstate Commerce Acts, including new NGA 4A and FPA 222 on market manipulation.  See Congress Passes New Energy Bill.  In an October 20 Policy Statement on Enforcement (PSE), the FERC notifies the industry how the agency proposes to dole out these penalties to malefactors.  The central admonition of the PSE to the power industry is:  Get thee a comprehensive compliance program and your punishments for errant infractions will be small and few; without such a program, they will be severe and many.  FERC joins other federal law enforcement agencies in further admonishing energy business organizations that willing and timely cooperation in investigations of their agents will lessen the likelihood of sanctions against the company itself, but failure to cooperate could result in penalties against the company as well as its agents.  The seriousness of a violation will also influence the punishment.  To be considered, public comments on the proposed rule must by submitted to FERC by November 23, 2005.

FERC discloses in the PSE that for all violations of the statutes the agency administers or regulations implementing those statutes, FERC will require the violator to disgorge any resulting unjust and unreasonable profits, to the extent they can be determined or reasonably estimated.  Beyond disgorgement, the scope and severity of administrative sanctions and civil or criminal liability will turn on the existence of a comprehensive compliance program, cooperation in any investigations, and the severity of the offense.   Following the example of the Securities and Exchange Commission and Commodity Futures Trading Commission, FERC declines to adopt any specific schedule of penalty severity.  Using its new EPAct 2005 authorities, in addition to administrative sanctions ― disgorgement of unjust profits and conditioning or suspending market-pricing authority and (blanket) certificates ― FERC can pursue civil penalties of up to a maximum of $10,000 to $1 million for violations of any provision of the NGA, NGPA or Part II of the FPA, and refer criminal violations to the Justice Department for prosecutions up to $1 million and five years incarceration for statutory violations and $25,000 per day for regulatory violations.

Given the greatly expanded range of penalties, it becomes imperative that energy companies understand what FERC means by a comprehensive compliance program, investigatory cooperation, and the seriousness of an offense because these are the factors that will mitigate punishments under the PSE.   In order for a compliance program to be deemed comprehensive and worthy of penalty mitigation, FERC will require that it address all legal and regulatory obligations, be memorialized in a widely disseminated document, supported by senior management (for example in compensation decisions and disciplinary actions), updated periodically in training programs, and intermittently audited.

For purposes of assessing whether an energy company is cooperating in its investigations, FERC will look to a wide array of factors that largely track Justice's so-called Thompson memorandum on the Principles of Federal Prosecution of Business Organizations.  In addition to stopping quickly any violation that comes to light, the company will be expected to produce internal records, investigations or audits, encourage all employees to cooperate in FERC's investigation, provide FERC access to employees with knowledge of the investigation, identify culpable employees, and audit the consequences (i.e., revenues and profits that flowed from the violation).  The PSE does not expressly instruct that an energy company will be required to waive attorney-client privilege in order to be deemed cooperative, but it implies as much.

In gauging the seriousness of an offense, FERC explains that it will consider whether there was loss of life or endangerment, damage to property or the environment, harm to energy markets, the cost, the wrongdoer's gains, whether the wrongdoer acted willfully, whether senior management was involved, and whether repeat offenses are involved.  [Enforcement of Statutes, Orders, Rules and Regulations, 113 FERC ¶ 61,068 (2005)]