Energy Legal Blog

Rulemaking to Establish Procedures for Challenging FERC Operational Audits

As a part of an overhaul of its enforcement procedures and authority, on October 20 FERC issued a notice of proposed rulemaking (NOPR) that would extend its financial auditing rules to operational audits.  These audits seek to gauge compliance with FERC's standards of conduct, code of conduct, market behavior rules, rules on interlocking directorates, and other standards under the Federal Power Act, as well as audits pursuant to the Natural Gas Act and Interstate Commerce Act.  Public comments on this proposed rulemaking are due November 22, 2005; reply comments are due November 29.

Just one of a slew of rulemakings FERC has recently undertaken, the NOPR would allow companies subject to operational audits to challenge the auditor's findings before FERC issues an order on the merits of any disputed findings on non-compliance.  Under the proposal, FERC would still issue an order on the merits with respect to any non-disputed compliance issues, but would issue a public notice as to any disputed audit findings.  The audited entity or person could then choose between a shortened review procedure and a trial-type hearing to challenge the disputed audit matters.  Under the shortened procedures, the audited person and other interested parties, including FERC's technical staff, would be allowed to submit memoranda of the facts and law supporting their positions to the Commission.  Any person that elects the shortened procedures will be precluded from subsequently requesting a trial-type hearing.

Until now, the shortened procedures have been available only to subjects of financial audits.  Perhaps acknowledging a potential increase in the number of operational audits it will perform, FERC Chairman Joseph Kelliher noted that out of "simple fairness," procedures for challenging the findings made in operational audits should be available to all audited entities just as they are for the targets of financial audits.  While in principle, this sounds like a positive development for companies subject to operational audits, it may prove little more than a sham.  Under the existing financial auditing rules, the shortened procedures have often been perfunctory, with the auditor serving as judge and jury over the target's appeal.  In practice, this creates an incentive to demand a trial-type hearing (whenever contested facts can arguably support such a demand)  because then FERC or an administrative judge, rather than the auditor, will hear and decide factual disputes, cross examine the audit staff, and develop a further record for appeals.  [Prodceudres for Disposition fo Contested Audit Matters, 113 FERC ¶ 61,069 (2005)]