Energy Legal Blog

Standards of Conduct Proposal Retreats from Structural to Functional Separation

A recent FERC Standard of Conduct rulemaking proposal retreats from its Order 2004 expansion of the standards of conduct, expressly finding that expansion too complex and unworkable.  FERC proposes a return to its 1990s vintage functional separation model of Order 497 (natural gas) and Order 889 (electric power), eliminating both Order 2004's concept of "Energy Affiliates" and its emphasis on corporate separation.  FERC concludes that returning to mere functional separation will encourage compliance by making the rules clearer, which the agency indicates is necessary in light of the new penalty regime of the Energy Policy Act of 2005 (EPAct 2005).  Comments on the proposed rule must be filed with FERC by May 12. 

In retreating to functional (from structural) separation, the proposal rulemaking appears to validate vertically integrated utilities by conceding that Order 2004 was hindering the advantages that accrue from vertical integration.  Nevertheless, the agency seems to be adrift between acknowledgment of the planning and integration advantages of the historical utility model and distrust of the  non-competitive characteristics of that model.  

Specifically, the proposed Standard of Conduct reform would implement:  

(1)  An “independent functioning rule” that defines the two groups of employees — “transmission function" and "marketing function" — who must function independently.  This division is based on what the employees do, not where they are employed.  Employees not directly engaged in transmission or marketing -- for example attorneys, accountants, and certain supervisors -- will not have their functions constrained by the proposed rule.   

(2)  A “no-conduit rule” to ensure independent functioning by prohibiting transmission function employees from communicating non-public transmission-related information with marketing function employees.  The no-conduit rule bars both communicating and receiving non-public transmission information, and everyone, regardless of function, is prohibited from being a conduit.   

(3)  A “transparency rule” to help detect, correct, and sanction violations of the independent functioning and no-conduit rules.  Whenever information is communicated in violation of the independent functioning or no-conduit rules, then, as provided in the current rules, the transmission function employee must immediately post that information on OASIS.  In addition, any interaction of transmission and marketing function employees would have to be contemporaneously recorded (handwritten notes may suffice) and made available to FERC on request, so the agency can monitor compliance with the rules.     

Unclear from the transparency rule is whether the damage of an improper disclosure of non-public transmission information can be undone.  Penalties for violations would remain unchanged from those enacted under EPAct 2005.