FERC's Enforcement Program

The Energy Policy Act of 20051 ("EPAct

2005") authorized the Federal Energy Regulatory Commission

("FERC") to assess civil penalties up to $1 million

per day per violation of the Natural Gas Act ("NGA"),

the Natural Gas Policy Act ("NGPA"), and Part II of

the Federal Power Act ("FPA").2 EPAct 2005

also gave FERC express authority over market manipulation in

the natural gas and electricity markets. In addition, FERC also

has the authority to order disgorgement of unjust profits and

the ability to condition, suspend, or revoke market-based rate

authority, certificate authority, or blanket certificate

authority.

Since EPAct 2005, FERC has issued several orders developing

an energy enforcement program and laying out how it planned to

operate under that program. FERC also has approved 17

enforcement settlements (assessing civil penalties and/or

disgorgement of $300,000 to more than $12 million each) and

issued two orders to show cause regarding alleged manipulation

of the natural gas markets (together recommending civil

penalties and disgorgement of nearly $500 million).

On May 15, 2008, FERC issued a package of orders intended to

strengthen its enforcement program. The package of orders

included: (a) a Revised Policy Statement on Enforcement; (b) an

Interpretative Order that revises FERC's no-action letter

process; (c) a Final Rule that sets out the rights of parties

once FERC's Office of Enforcement decides to seek a show

cause order; and (d) a Notice of Proposed Rulemaking proposing

updates to FERC's ex parte policy and separation

of functions and intervention rules in the context of

enforcement investigations. These orders enhance existing

policy, codify existing practice, and propose additional

procedural safeguards.

On May 19, 2008, FERC issued an order approving an

enforcement settlement among Edison Mission Energy, Edison

Mission Marketing & Trading, Inc., and Midwest Generation

LLC (collectively "Edison Mission") and FERC's

Office of Enforcement. To settle allegations that it had misled

FERC during an investigation, Edison Mission agreed to pay $7

million in civil penalties and to assess and strengthen its

current compliance programs at a cost estimated at an

additional $2 million.

This Commentary reviews the history of FERC's

existing energy enforcement program, summarizes the orders

described above, and describes how they might affect a company

or individual subject to a FERC investigation.

Revised Policy Statement

On October 20, 2005, shortly after EPAct 2005, FERC issued

its first Policy Statement on Enforcement (2005 Policy

Statement).3 That initial policy statement set out

the remedies available to FERC and explained how FERC would

determine the appropriate remedy for a violation.

On May 15, 2008, FERC issued a Revised Policy Statement that

reflects FERC's recent enforcement experiences, industry

comment, and the need for more transparency.4 The

Revised Policy Statement provides an overview describing how

FERC conducts audits and investigations, and how FERC

determines appropriate remedies for violations. It supersedes

FERC's 2005 Policy Statement.5 It affirms and

restates FERC's existing policies and adds to FERC's

enforcement policies where needed.6

The Revised Policy Statement describes FERC Staff's

investigation process.7 When faced with a possible

violation, FERC's Staff will perform an informal review.

After its informal review, Staff can either open an

investigation (formal or informal) or close the review without

further action.8 FERC's 2005 Policy Statement

did not identify the factors that FERC's Staff would

consider when deciding whether to open an investigation. The

Revised Policy Statement fills that gap and explains that in

deciding whether to open an investigation, FERC's Staff

will consider: (a) the nature and seriousness of the alleged

violation; (b) the nature and extent of the harm, if any; (c)

the efforts made to remedy the alleged violation; (d) whether

the alleged violations were widespread or isolated; (e) whether

the alleged violations were willful or inadvertent; (f) the

importance of documenting and remedying the potential

violations to advance FERC policy objectives; (g) the

likelihood of the conduct recurring; (h) the amount of detail

in the allegation or suspicion of wrongdoing; (i) the

likelihood that Staff could assemble a legally and factually

sufficient case; (j) the compliance history of the alleged

wrongdoer; and (k) the Staff resources.9 The Revised

Policy Statement also describes limitations on communications

with the commissioners during the investigation process, the

discovery process, the options at the end of an investigation,

and the procedures applicable to settlement negotiations and

show cause orders.10

The Revised Policy Statement describes in more detail the

remedies available to FERC (i.e., disgorgement,

compliance plans, non-monetary measures, and civil

penalties).11 When determining the appropriate

remedy, FERC will consider the seriousness of the violation,

the company's culture of compliance, and the level of

cooperation. The Revised Policy Statement identifies six

new factors for evaluating the seriousness of a

violation:

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 discourages improper conduct

while not excessively discouraging beneficial market

participation?

What was the motivation of those accused of improper

conduct?

Was the integrity of the regulatory process

impaired?

Was there a risk of serious harm, even if the actual harm

was slight or nonexistent?12

The Revised Policy Statement clarifies the factors that FERC

will consider in analyzing whether a company has a strong

culture of compliance and notes that FERC will hold periodic

workshops to discuss the elements of a vigorous compliance

program.13 In addition to readopting the compliance

program evaluation factors set out in the 2005 Policy

Statement, the Revised Policy Statement provides specific

guidance regarding the development of compliance programs. FERC

suggests that companies: (a) prepare an inventory of compliance

risks and practices; (b) create an independent compliance

officer reporting directly to the CEO and the board of

directors; (c) provide sufficient funding for the compliance

program; (d) identify measurable compliance targets; (e) tie

compliance to personnel assessment and compensation; (f)

provide for disciplinary consequences for infractions; (g)

provide frequent, mandatory training programs; (h) implement an

internal "hotline" for anonymously reporting

compliance issues; and (i) implement a comprehensive compliance

audit program.14

The 2005 Policy Statement identified "self-report"

and "cooperation" factors that FERC will consider

when determining the proper remedy for a violation. The Revised

Policy Statement specifically reaffirms and readopts those

factors.15 The Revised Policy Statement states that

FERC also will consider whether the company reasonably relied,

in good faith, on guidance received from Staff through the

No-Action Letter process or other FERC guidance.16

The level of credit will depend on the circumstances and could

be negative if the company...