First NERC Penalty Notices Suggest Focus on Enforcement

FERC Augments, Revamps Enforcement Guidance and Procedures

FERC has taken several steps to clarify its policies for conducting enforcement investigations, carrying out its authority to impose penalties on violators, and broadening the scope of issues to be covered by its ex parte rules and no-action letter procedures.  The additional guidance is welcome in light of the seemingly haphazard approach to enforcement that FERC has taken over the last couple of years. 

FERC’s new Revised Policy Statement on Enforcement supersedes its 2005 Policy Statement on Enforcement.  The Revised Policy Statement affirms FERC's existing enforcement policies and explains the usual steps involved in FERC's conduct of audits and enforcement investigations.  It describes the types of matters that FERC has recently determined do not merit investigation or that have not resulted in findings of a violation or sanction.  It lists several actions that entities can take to develop strong compliance programs, and offers suggestions for making effective self-reports.  Finally, it augments the current list of factors that FERC will consider when determining the seriousness of an offense:

• What, if any, harm was there to the efficient and transparent functioning of the market?
• What are the earnings, revenues and market share of the part of the company that is under investigation?
• What penalty amount best deters improper conduct, while not excessively discouraging beneficial market participation?
• What was the motivation of those accused of the improper conduct?
• Was the integrity of the regulatory process impaired:
• Was there a risk of serious harm, even if the actual harm was slight of non-existent? 

FERC also issued a Notice of Proposed Rulemaking (NOPR) to clarify its regulations governing ex parte contacts (Rule 2201) and separation of functions (Rule 2202) in the context of non-public investigations.  Rule 2202 prohibits FERC staff that act as litigators in an adjudicated proceeding from advising as to the outcome or decision in that proceeding.  The NOPR proposes that this separation begin at the point when FERC issues a show-cause order in a proceeding or initiates a civil action under Part 1b of FERC's regulations.  The NOPR also proposes to apply FERC's ex parte rules during investigations conducted under Part 1b, where they do not currently apply.   

Senate Joins House in Passing Measures to Expand CFTC Authority over Energy Markets

The U.S. Senate reauthorized the Commodity Exchange Act (CEA) in a farm bill, strengthening the Commodity Futures Trading Commission's (CFTC) authority over energy (and other commodity) trading platforms such as the Intercontinental Exchange (ICE) that are currently "exempt commercial markets."  This closes the so-called "Enron loophole" that allows these exchanges to avoid federal regulation of their trading activities.  

In language very similar to a CEA reauthorization that the House Agriculture Committee also passed last week, the Senate amendment to the CEA would require electronic exchanges to monitor trading for manipulative trading behavior and price distortions, limit position sizes to prevent excessive speculation, and reduce the holdings of traders who have violated position limits.  Exchanges would be required to collect data on trading activity, report large traders to the CFTC, and publish daily price and trading volume data.  These requirements would apply only to futures and financials contracts that offer a "price discovery function" for energy commodities.  The CFTC is directed to review all currently exempt contracts to determine which ones affect market prices and, for that reason, should be brought within the expanded purview of the CEA, with the main target being ICE's financial Henry Hub swap.

The main distinction between the House and Senate measures is that the Senate amendment permits an electronic trading platform to determine whether a previously unregulated product serves a price discovery function, while the House measure includes no such provision.  The House measure could be attached to that body’s farm bill. 

Expanded CFTC oversight of commercial futures and financials markets enjoys broad bipartisan support.  The CFTC itself now supports the measure after abandoning its resistance to calls for expanded oversight.  If the expanded authority is enacted — which now appears likely — that authority would validate the CFTC's evaluation the actions of energy markets and traders, including ICE as well as Amaranth Advisors.

Competing FERC and CFTC Jurisdictional Claims Are Court Bound

FERC in a November 30 order refused to reconsider its July 26 decision to impose $291 million in civil penalties against Amaranth Advisors (Amaranth) for gaming the natural gas futures market and manipulating the price of natural gas.  FERC upheld its own jurisdiction to impose penalties on Amaranth, rejecting the Commodities Futures Trading Commission's (CFTC) insistence that it alone has jurisdiction over manipulation of gas futures contracts.  FERC found instead that "the language and statutory purpose of Section 315 of the Energy Policy Act of 2005" (EPAct 2005) gave FERC "broad authority to sanction manipulative conduct by any entity 'in connection with' the purchase, sale or transport of natural gas within its jurisdiction." 

In the earlier July order, FERC had directed Amaranth to show cause why it had not violated the Natural Gas Act and FERC's anti-market manipulation rules, and proposed a $291 million civil penalty for allegedly manipulating the gas futures market by selling New York Mercantile Exchange (NYMEX) futures contracts just before they expired.  In an August request for rehearing, Amaranth argued that FERC did not have jurisdiction to impose the proposed civil penalties, and that the CFTC had exclusive enforcement authority for manipulation of gas futures markets.  The case has set up a turf war between FERC's expanded enforcement authority under EPAct 2005 and the CFTC's traditional regulation of commodities markets, and led the CFTC to argue that it has exclusive jurisdiction over this case.  Amaranth may now appeal FERC's orders to a US Court of Appeals, which may ultimately delineate the boundaries of FERC's expanded enforcement authority in relation to the CFTC's authority over commodity futures markets. 

Also in the November 30 order, FERC gave Amaranth 14 days to responds to the original show-cause order.

FERC, Industry Exchange Views on Enforcement

Two years after Congress granted FERC enhanced enforcement authority in the Energy Policy Act of 2005 and FERC issued its Policy Statement on Enforcement, and following the first year in which FERC has acted on this authority, FERC this month held a technical conference to discuss how it is implementing its new authority.  The conference revealed a gap between how FERC understands and is implementing its enforcement authority and an industry that is uncertain what is expected of it and fearful of the penalties it could unwittingly incur.  

In anticipation of the conference, a coalition of seven trade groups representing the electric and natural gas industries submitted a white paper highlighting concerns with FERC's implementation of its enforcement authority.  The coalition urged FERC to ensure that penalties fit the infraction.  It also warned FERC not to enforce against legitimate market behavior. 

In a statement issued prior to the conference, FERC Chairman Kelliher responded to the white paper and tried to clarify FERC's approach to implementation of its enforcement authority, disclosing that FERC intended to focus on punishing violations that cause the most serious harm or entail great risk of serious harm, violations of core regulatory requirements, and companies with weak compliance programs.  He cited FERC staff's report tallying the 64 enforcement investigations conducted in the last two years to argue that FERC has exercised this authority fairly, pointing out that of those, 47 concluded with no sanctions imposed and the remainder resulted in 13 settlements involving civil penalties and two show-cause orders.  Kelliher touted the value of self-reporting, and clarified that FERC will consider both actual and potential harm as the most important factor when determining a penalty. 

FERC, NERC Flesh Out ERO Operations, Penalties, Disclosures & Budgets

Five months after FERC authorized mandatory Reliability Standards to go into effect last June, it  is now sorting out to whom the Standards apply.  It is also slogging through issues of organization and management of NERC as the Electric Reliability Organization (ERO).   

Application of Reliability Standards 

Among the issues being debated are when a participant on the electric power grid sufficiently impacts grid operations to require registration with a Regional Entity and to what extent pure power marketers should be subject to Reliability Standards.

On October 18, 2007, FERC remanded to NERC its determinations that the Florida Reliability Coordinating Council properly included Mosaic Fertilizer, LLC and City of Tampa, Florida on its compliance registry.  Mosaic and Tampa appealed their registration to NERC and then to FERC.  FERC determined that NERC did not adequately show that the either was properly registered and, in any event, failed to respond adequately to arguments against registration. 

Penalties, Budget & Business Plan

The back-and-forth between FERC and NERC to define the ERO continues.  FERC issued an order October 18 directing NERC to clarify that the maximum penalty that it or a Regional Entity could impose for violation of a Reliability Standard is $1 million per violation, per day, consistent with the Federal Power Act, and to clarify how it would address specific situations that do not fit the one-violation, one-day fact pattern.  FERC generally accepted NERC's compliance filing on these issues, and directed small follow-up clarifications to the proposed sanctions language.  Alternative situations will be handled as follows:  repeated violations during a single day may result in a $1 million penalty  for each violation; NERC will amend Reliability Standards requirements measured as an average over time to specify the minimum period in which a violation could occur and how to determine when a violation arises; and for requirements of Reliability Standards that involve discrete events that are measured only periodically or are reported by exception, a violation arises when that event occurs and continues until it is cured.

In response to FERC's request that NERC describe how it will process requests for information, NERC clarified that the requestor must explain the need for the information and how it will be used.  NERC clarified that requests would be met so long as they were not frivolous, too-broad or unreasonable, and that the requestor's description of the anticipated use of the information would not limit the use of the information once disclosed.  FERC accepted these clarifications.  NERC also proposed to include a new section 1600 in its rules of procedure, to establish a process for NERC or Regional Entities to issue requests for data or information needed to fulfill their obligations.  

Also on October 18, 2007, FERC accepted NERC's proposed budget and business plan for 2008, including the budgets and business plans for each of the eight regional entities and the Western Interconnection Regional Advisory Body.  FERC noted that it plans to compare proposed budgets to actual expenditures, and will require NERC to provide a true-up for itself and each Regional Entity by April 1 of each year.  FERC also directed several compliance filings with regard to the Regional Entities' proposed budgets and business plans, focusing especially on inconsistencies between the Regional Entities' income statements and their business plans, and on its concern about the adequacy of separation and independence of the SPP Regional Entity from the SPP RTO.

BP and MGTC Settlements Push FERC Penalties for Year Toward $40 Million, FERC Reiterates Self-Reporting Still Mitigating Factor in Penalty Amounts

On October 25 FERC approved two stipulation and consent agreements with BP Energy Co. and its affiliates BP Canada Energy Marketing Corp and IGI Resources, Inc. (collectively, BP) totaling $7 million in agreed-to fines for natural gas capacity release violations ―  violations of the posting and bidding requirements for released capacity (the so-called "flipping" violations), the shipper-must-have-title requirement, and the prohibition on buy-sell transactions, among others; and with Anadarko Petroleum Corporation subsidiary MGTC totaling $300,000 for shipper-must-have-title violations.  For the year, these push FERC's penalty total close to $40 million.

True to its emerging body of decisional precedent on mitigating factors under its expanded civil penalty, FERC concluded that: (1) Anadarko, MGTC's parent company, promptly self-reported the violations upon discovery and "exhibited exemplary cooperation with staff's investigation;" (2) the violations began long before Anadarko acquired MGTC; and (3) the violations occurred only in a small geographic area in Wyoming.  FERC also found that MGTC "did not profit unjustly from its violations, and it appears that no demonstrable financial harm to third parties was caused by [its] violations."  These findings echo those FERC made in levying substantial fines against Cleco earlier this summer.

BP's violations were found to span fourteen interstate pipeline systems, involving the transportation or storage of 49.3 Bcf, and arising under twenty-three separate asset management arrangements.  FERC found the flipping violations serious and "deliberate attempt[s] to circumvent [FERC] rules" and, as such, "intentional violation[s] . . . that warrant . . . substantial civil penalt[ies]."  FERC again reported that "significant credit" was given to BP for self-reporting and cooperation.

Chairman Joseph Kelliher has remarked, and this exercise of FERC's expanded civil penalty authority against BP and MGTC was no exception, that the companies involved would have seen substantially higher penalties but for the fact that they self-reported.  In the face of industry speculation, especially since Cleco, that self-reporting may not mitigate against high penalties after all, Chairman Kelliher assures that "FERC places a high value on a company's commitment to rectifying inappropriate conduct by self-reporting its violations and cooperating with staff's investigation."  Given the year's total penalty dollars from only twelve separate actions, however, it's obvious self-reporting can still lead to substantial penalties.

Few Sitting the Fence in Gas Futures Turf War

Legislators and industry marketers seem clear on where they stand regarding the debate now pending in the Southern District of New York over the jurisdictional reach of the Federal Energy Regulatory Commission (FERC) to pursue enforcement actions against manipulators of the gas futures market, the jurisdiction over which has traditionally resided in the Commodity Futures Trading Commission (CFTC).

Chairman and ranking member of the House Energy and Commerce Committee, John Dingell (D-MI) has said that Congress intended for the two agencies "to work together, conduct joint investigations and find and prosecute market manipulation wherever it might take place."  Joe Barton (R-TX) echoed Chairman Dingell's view that "efforts by FERC to protect wholesale energy markets from manipulation are not inconsistent with the CFTC's exclusive day-to-day regulation of futures exchanges.  We do not view these regulatory jurisdictions as conflicting or duplicative but rather as complementary."

In addition, Senators Dianne Feinstein (D-CA), Maria Cantwell (D-WA), and Ron Wyden (D-OR) urged CFTC cooperation with FERC, stating that "[t]he American people need both FERC and CFTC to fight market manipulators, not each other" and that the jurisdictional battle will "weaken both commissions and could significantly constrain our government's ability to pursue future market manipulation cases."

On the other side of the fence, however, Bob Etheridge (D-NC), head of the House Subcommittee on General Farm Commodities and Risk Management charged with hearing testimony over the reauthorization of the Commodity Exchange Act (CEA), questioned FERC's action in seeking hundreds of millions of dollars in penalties under authority that the Energy Policy Act of 2005 purportedly conferred on the agency.   "For the CFTC to fail to assert its exclusive jurisdiction … would equal a failure to uphold the will of Congress," Etheridge said.  

Futures Industry Association President John Damgard agreed that there should be no controversy due to the comprehensive and time-tested nature of CFTC's authority in this area.  Chicago Mercantile Exchange Group Chairman Terrence Duffy said "FERC reads the CFTC's exclusive jurisdiction out of existence." New York Mercantile Exchange President James Newsome said that a dangerous precedent could be set if Congress allows FERC to assert authority in futures markets.

And where the ball stops, nobody knows.

Commodity Futures Trading Commission and Federal Energy Regulatory Commission No Longer Playing Nice In Jurisdictional Battle over Gas Futures Market Enforcement

In dueling briefs filed in the United States District Court for the Southern District of New York, the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) came out on opposite sides of the question whether FERC has authority to take enforcement actions against manipulators of the natural gas futures market.  CFTC and FERC until recently had been acting in tandem to investigate allegations that Amaranth Advisors, its trader Brian Hunter, and Energy Transfer Partners manipulated the natural gas futures market in 2006. 

The CFTC argued that federal statutes and legal precedent clearly established that the CFTC had "exclusive jurisdiction" over the natural gas futures trading activity and that it was clear the statutory language establishing the CFTC's jurisdiction "superseded or limited" the ability of other federal and state agencies to take action on futures trading activities.  FERC argued to the contrary that the Commodity Exchange Act (CEA) did not permit the CFTC's authority automatically to prevent other federal agencies from taking enforcement actions against market manipulation.  

Additionally, FERC pointed to its stand-by argument that Congress in the Energy Policy Act of 2005 "granted FERC broad authority to police market manipulation by 'any entity' who engages in conduct that is 'in connection with' any [FERC]-jurisdictional transaction," and did not limit that jurisdiction "to manipulative conduct solely concerning physical markets."  

In separate statements, FERC Chairman Joseph Kelliher warned of a regulatory gap that could be created by courts acting in favor of Amaranth and CFTC in this area.  "If the Amaranth position prevails," said Kelliher, "the CFTC won't be able to protect [customers] because the physical market is not jurisdictional to CFTC."  James Kerr, president of the National Association of Regulatory Utility Commissioners echoed this sentiment, stating that "[i]f FERC is unable to police market manipulation in financial markets that affects the price of natural gas, state regulators will be unable [to] prevent retail customers from being unfairly overcharged."

Commodity Futures Trading Commission Echoes Arguments of Alleged Manipulators of the Gas Futures Market

FERC Shows Zero Tolerance in $500,000+ Settlement for Reporting Violations

Stressing the harm to the regulatory process and to rules central to the mission of the agency, the Federal Energy Regulatory Commission (FERC) on August 20 approved a settlement of $500,000 civil penalties plus disgorgement of profits against Gexa Energy, LLC, (Gexa) despite:  (1) new owner FPL Energy's (FPL) prompt self-report, cooperation during the investigation, and demonstrated commitment to compliance; and (2) FERC's admission that Gexa's violations resulted in no harm to the market or market participants.  The order, issued notationally, explained that "absent the self-report and these remedial measures, the civil penalty would have been substantially higher" — FERC is authorized to impose civil penalties of up to $1 million per violation per day.

In May 2004, Gexa obtained market-pricing authority under the Federal Power Act (FPA).  On June 17, 2005, power marketer Gexa merged with FPL, but failed to disclose to FPL that Gexa had obtained authority for and was making sales at market-based rates.  As a consequence, the parties violated section 203 of the FPA by failing to seek permission from FERC for disposition of jurisdictional facilities.  In addition, Gexa violated FPA section 205 "by entering into a series of unauthorized wholesale balancing transactions to sell excess generation in interstate commerce into the ISO-NE's hourly or day[-]ahead market" three weeks before obtaining market-based rate authority to do so for which Gexa must disgorge $12,498.41 in profits.  In addition, Gexa failed to file change in status notifications with FERC consistent with Order No. 652 and failed to timely file Electric Quarterly Reports for market-based rate sales from March 2005 to February 2006.

FERC noted among FPL's cooperative actions and prompt steps to prevent future violations, FPL removed Gexa's senior management involved in the violations that Chairman Kelliher characterized as "knowing", "deliberate" and "blatant."

Amaranth Trader Must Wait for Decision on Injunction of FERC Enforcement Action

On August 7, Judge Richard Leon of the U.S. District Court for the District of Columbia delayed ruling on ex-Amaranth trader Brian Hunter's suit to enjoin the Federal Energy Regulatory Commission (FERC) from continuing its show-cause investigation into Hunter's and hedge fund Amaranth Advisors' 2006 gas futures trading activities.  Judge Leon promised a ruling as fast as possible, but not "in the next few days."

Hunter filed his suit on July 23 alleging that FERC lacked jurisdiction to bring an enforcement action against him because the alleged actions pertain to futures rather than physical natural gas.  Hunter argued that only the Commodity Futures Trading Commission (CFTC) possesses authority to take enforcement actions in connection with commodity futures.  Hunter claimed that the FERC action harms his new commodities trading fund, Solengo Capital Advisors, in that traders are deterred from taking employment with the fund and Solengo is being denied registration as an investment advisor due to Hunter's ownership of it.  How either allegation bears on FERC's jurisdiction is not explained.

The case against Hunter is the first in which FERC has claimed jurisdiction over commodity futures trading.  FERC brought its show cause order for $291 MM in fines against Amaranth and its former heads under the FERC's anti-manipulation rule from 2005's Energy Policy Act.  The CFTC and FERC are working in tandem to investigate the hedge fund's collapse late last year. FERC Chair Joe Kelliher explained that the outcome of the two investigations may be different as the CFTC operates under a tougher intent standard and under different statutory guidance.

Both the CFTC and FERC allege Hunter and Amaranth attempted to manipulate natural gas futures prices by, in one example, acquiring more than 3,000 New York Mercantile Exchange (NYMEX) contracts in advance of the closing price range timeframe and then selling those contracts during the closing session which consequently impacted the settlement prices of swaps traded on the IntercontinentalExchange (ICE).  These actions allegedly lowered prices on the NYMEX, which in turn benefited Amaranth's derivative positions on the ICE and other exchanges.

Amaranth and its former leaders are not the only ones to come under recent scrutiny regarding trading practices.  FERC issued a show-cause letter on July 26 to Energy Transfer Partners that asked for $167 MM in penalties, including $97.5 MM for what is being called the alleged Houston Ship Channel manipulation and Oasis bias/collusion and $69.2 MM in disgorgement of profits.  In addition, FERC is seeking a one-year revocation of Energy Transfer Partner's blanket certificate to sell natural gas.  

Concurrent with these regulatory enforcement actions, the US Congress has been demanding better oversight and transparency of energy exchanges, and the CFTC is under pressure for both rulemaking and enforcement actions since Amaranth's collapse.  It will convene a hearing on September 18 to investigate trading on regulated futures markets like NYMEX and on exempt commercial markets like ICE.  The hearing is intended to form the basis of recommendations from the agency to Congress.

Court Upholds Market Pricing and Market Behavioral Rules

In a short per curiam opinion issued June 22 in Colorado Office of Consumer Counsel v. FERC, the DC Circuit upheld FERC's provision of a targeted remedy for abuses of market-based rates and ruled that FERC was not required, as certain consumer advocates had argued, to throw out market-based pricing altogether.  In response to findings that sellers operating under market-based tariffs had engaged in "fraudulent or otherwise anticompetitive" behavior, in 2003 FERC adopted Market Behavioral Rules, but rejected arguments by several consumer groups that the only course open to FERC under the Federal Power Act was to jettison market pricing and revert to "fixed" rates for electric energy.  In its decision, the DC Circuit upheld FERC's targeted remedy and held that the agency was not required to "reopen and reevaluate all other aspects of the filed rate."

FERC Chairman Joseph Kelliher trumpeted the decision, along with the Supreme Court's earlier rejection of petitions for certiorari from the Ninth Circuit's decision in Lockyer v. FERC case, as firmly upholding FERC's market-based rate program.  According to Chairman Kelliher, the Colorado Office of Consumer Counsel decision cleared the way for FERC to "conduct effective enforcement" in wholesale power markets.

Failing Commitment to Report Code of Conduct Infractions Lands Cleco $2 Million Penalty

On June 12 FERC again flexed its EPAct 2005 civil penalty authority muscle.  FERC's Office of Enforcement had alleged that Cleco violated its Code of Conduct and a 2003 settlement in which Cleco agreed to a stricter, more consolidated code of conduct requiring the independent operation of its unregulated affiliated power marketers and generation assets.  The June 12 Stipulation and Consent Agreement (Settlement) recapped specific allegations of Code violations from the summer of 2003 to winter 2005.  In addition, the Settlement accuses Cleco of failing to report those violations to the Office of Enforcement, even though Cleco did submit a self-report of possible violations after investigations had been initiated.  As a part of the Settlement, Cleco neither admitted nor denied that its conduct violated the 2003 settlement or its Code of Conduct.

Non-public, preliminary investigations of Cleco began in November 2005 when the Office of Enforcement reviewed the utility's October 2005 Quarterly Compliance Report as a requirement of the 2003 settlement with FERC.  The Office of Enforcement concluded that Cleco violated the independent functioning requirement in the Code of Conduct, which requires that, except in emergencies, employees involved in transmission must function independently of the power supply employees.  The Office of Enforcement concluded that: (1) operational employees impermissibly engaged in restructuring activities for Cleco's exempt wholesale generators; (2) employees conducted activities that were beyond the scope of permissible shared accounting support duties; (3) six Technical Services Department Planning Group employees performed generation outage planning, coordinating, and scheduling activities for affiliates; (4) certain employees were given access to non-public market information; (5) a non-public monthly risk report was circulated to affiliated companies' Chief Operating Officer(s); and (6) daily status reports were distributed to affiliates that contained non-public information. 

In addition to the $2 million penalty, Cleco is now subject to another compliance plan that requires semi-annual reports to the Office of Enforcement and a 12-month independent audit.  Both semi-annual report and the audit reports must identify all shared employees, report whether any provisions of the Code of Conduct were violated, and identify each instance where non-public information was shared with affiliates.  

Although Cleco self-reported some of the violations at a later date and has taken steps to prevent recurrence of similar violations, it was Cleco's violation of the earlier 2003 settlement agreement that peeved the regulator.  FERC Chair Kelliher admonished that the $2 million penalty would serve as "a reminder that the Commission will not tolerate such actions."  He went on to say that the Commission will "use [its] civil penalty authority to establish a culture of compliance."  The Commission acknowledged that Cleco's actions did not create undue discrimination, result in preference, or cause harm to third party competitors or customers.

FERC to Investigate Claims of PJM Management Interference in Market Monitoring

FERC Exercises New Natural Gas Civil Penalty Authority

FERC has approved a settlement agreement between its Office of Enforcement and Bangor Gas Company, LLC (Bangor Gas) requiring Bangor Gas to pay a civil penalty of $1 million for self-reported violations of FERC's shipper-must-have-title policy.  That policy requires shippers who transport natural gas using their own capacity to hold title to that natural gas.  The settlement represents the first time FERC has exercised the natural gas civil penalty authority granted to it by the Energy Policy Act of 2005.  That authority permits FERC to impose a penalty of up to $1 million per day per violation of FERC's rules, regulations, and orders issued under the Natural Gas Act.  In addition to the monetary penalty, the settlement requires Bangor Gas to file semi-annual reports with FERC's Office of Enforcement to ensure future compliance with FERC's natural gas transportation requirements, including the shipper-must-have-title policy.   

FERC Flexes New Civil Penalty Muscle

FERC issued orders January 18 exercising for the first time its expanded Energy Policy Act of 2005 penalty authority.  In each of five separate investigations, FERC blessed settlements that required the targets to pay substantial civil penalties ranging from $500,000 for an isolated two-day incident to $10 million for a broad pattern of Open Access Transmission Tariff (OATT) and Standards of Conduct violations. These penalties were assessed even though the violations resulted in little actual, financial harm to customers or to the markets.  The January 18 orders underscore FERC’s preference for negotiated settlements over litigation, and illustrate the importance the agency places on self-reporting of violations and cooperation with Office of Enforcement staff during audits and/or investigations.

The most serious of the violations were uncovered in investigations of PacifiCorp and SCANA.  Both companies self-reported behavior that included numerous violations of OATT requirements and proscriptions, and in PacifiCorp's case, FERC's Standards of Conduct.  In particular, both companies admitted to misusing network transmission service to support the utility’s or its affiliates’ off-system sales.  The PacifiCorp settlement also dealt with numerous instances in which PacifiCorp's merchant and transmission functions had improperly shared information, violating the Standards of Conduct.  PacifiCorp agreed to pay a $10 million civil penalty, and to contract for independent audits of its business practices, implement a compliance program, and submit quarterly reports to Enforcement on its compliance efforts.  SCANA agreed to a $9 million penalty, disgorgement of $1.4 million in profits, and repayment of $400,000 in transmission fees.  SCANA too agreed to implement an OATT compliance program.  While the civil penalties in both cases were quite high, FERC cautioned that, absent self-reporting in both cases, "the civil penalty sought would have been considerably higher."

The other three cases involved less pervasive violations.  Entergy, as a result of employee carelessness and system malfunctioning, lost several months of hourly Available Flowgate Capacity data, which violated FPA and FERC record retention requirements, and failed to comply with several OASIS posting requirements.  Entergy's OASIS system also responded erroneously to transmission service requests on several occasions.  Entergy agreed to pay $3 million ($1 million of which would go to a New Orleans charity) and implement going-forward compliance and reporting programs.  As for NorthWestern Corp., FERC found that it had failed on numerous occasions to respond timely (within 30 days) to transmission service requests.  One of its customers had called in a complaint to FERC's Enforcement hotline.  For the violations uncovered during FERC's investigation, NorthWestern agreed to pay $1 million and implement a two-year compliance program to ensure timely responses to service requests.  Finally, NRG Energy, Inc., agreed to pay $500,000 and implement a compliance plan, after self-reporting to the ISO-New England Market Monitor that one of its plant managers had intentionally misrepresented the availability of a generation unit that was under a Reliability Must-Run contract for a two-day period.

Guidance on FERC Assessment of Civil Penalties

In an attempt to show it means business regarding its enhanced authority to assess civil penalties under the Energy Policy Act of 2005 (EPAct 2005), on December 21, FERC issued a statement of administrative policy detailing the procedures it will use in assessing civil penalties, but emphasized the continuing importance of negotiated settlements, which are not subject to the procedures.  In EPAct 2005, Congress authorized FERC to impose penalties of up to $1 million per day per violation, for violations of the statutes that FERC administers —  Parts I and II of the Federal Power Act (FPA), the Natural Gas Act (NGA), and the Natural Gas Policy Act (NGPA) —  and the rules, regulations, and orders issued pursuant to those statutes.  The December 21 policy statement complements a prior Policy Statement on Enforcement, issued in October 2005, which discussed the factors FERC would take into account in responding to violations and determining appropriate remedies, and emphasized the need for companies to create an internal "culture of compliance" and self-report violations.  [See FERC Explains Its Policy on New Penalty Enforcement.] 

FERC Chair Joseph Kelliher emphasized that FERC generally prefers settlement to litigation, and predicted that the majority of penalty decisions will likely be made through negotiated settlements.  Consequently, it is not entirely clear how often the civil penalty procedures will be put to use.  To the extent they are put to use, FERC explained that it will first provide notice describing a violation and the proposed penalty.  The targeted person or company will have a chance to respond and explain why the penalty should not be assessed.  Following the target's response or explanation:

• For violations of Part I of the FPA, if a final compliance order has been violated, then FERC will conduct an administrative hearing before an administrative law judge (ALJ); if no final compliance order has been violated, then an entity may choose between the ALJ hearing and an immediate assessment of the proposed penalty.
• For violations of Part II of the FPA, the entity may choose between a hearing before an ALJ or an immediate penalty assessment. 
• For violations of the NGA, FERC will require either a paper hearing or a hearing before an ALJ, depending on the circumstances involved, and will issue an order after considering an entity's response.  
• Finally, for violations of the NGPA, FERC explained that the NGPA does not provide for an on-the-record administrative hearing; rather, FERC will assess the penalties after considering the facts.

Once FERC issues a final order assessing the appeal, if the entity does not voluntarily pay the penalty within 60 days, FERC can institute a collection action in the appropriate United States district court.  At this point, proposed penalties are subject to de novo review by the district courts.  Entities assessed penalties may appeal final Commission decisions by following the usual appeal procedures, i.e., by filing a petition for review within the appropriate time to a U.S. Court of Appeal.