Three attorneys who formerly worked for FERC and helped it conduct investigations into alleged wrongdoing say the Commission should cease issuing public notices of such probes, arguing that the policy has been ineffective and is often unfair to the individuals and companies being investigated.
In December 2009, the Federal Energy Regulatory Commission introduced a policy calling for public disclosure of its enforcement investigations. Specifically, the policy authorizes FERC's Director of the Office of Enforcement (OE) to issue a Notice of Alleged Violations (NAV). The policy was controversial because it departed from the Commission's long-established position of not disclosing investigations, or the names of those individuals and companies being investigated, to the public.
Despite conceding that issuing a NAV could adversely affect the reputation of people and companies under investigation, FERC said issuing NAVs is sound public policy because of the "benefits of public transparency." But attorneys David Applebaum, Todd Brecher and Jeffery Dennis with the firm Akin Gump Strauss Hauer & Feld LLP argue that the policy should be rescinded and are urging FERC to do so once it re-establishes a quorum.
"We recognize that the Commission instituted the NAV policy as a part of its efforts to bring transparency to the enforcement program -- efforts that we find laudable," the attorneys wrote in an article published this spring by the George Washington Journal of Energy & Environmental Law. "But now, with more than six years' experience with the NAV policy, it is possible to reach some conclusions about the NAV Policy's effectiveness. And we think, based on publicly available data, that the policy has not produced the benefits that the Commission intended."
Few benefits from existing policy
The attorneys argue that there is no evidence that the NAV policy caused market participants to supply relevant information to FERC staff, or that the NAVs themselves provide any meaningful transparency into the Commission's investigations. They also argue that the educational value to other market participants is limited because NAVs provide little information into alleged wrongdoing.
"Once one strips away the boilerplate language common to all NAVs, the substantive description of the underlying conduct is generally two or three sentences," the attorneys wrote. "Such brevity is understandable in the context of an issuance in the midst of an ongoing investigation in which OE staff has not yet finalized its views. However, that does not change the fact that the NAV remains unhelpful to market participants and...risks compromising transparency more than promoting it."
For example, the attorneys said the three largest civil penalties levied by FERC to date -- against Constellation Energy Commodities Group in March 2012 ($135 million in penalties, plus $110 million in assessed disgorgement); Barclays Bank ($435 million in penalties, $34.9 million in disgorgement) in July 2013; and JP Morgan Ventures Energy Corp. ($285 million in penalties, $125 million in disgorgement) in July 2013 -- had accompanying NAVs of only one or two sentences describing the alleged violations.
Enforcement tools evolving
Another issue, according to the attorneys, is that FERC's enforcement tools have evolved since the NAV policy was rolled out in 2009. In February 2012, the Commission created the Division of Analytics and Surveillance within the OE. An order issued two months later requires independent system operators (ISO) and regional transmission organizations (RTO) under FERC's regulatory purview to submit a wide range of data on an ongoing basis.
FERC also began receiving a daily feed of data from the Commodity Futures Trading Commission's Large Trader Report in 2014. The report includes open financial positions for natural gas and electric products that are traded on exchanges by large traders.
"In the years since the NAV policy was introduced, OE staff has also benefited from substantially increased collaboration with the ISO and RTO wholesale market operators and their market monitoring units [MMU] on enforcement issues," the attorneys said, adding that a separate order issued in October 2011 authorized FERC staff "to communicate freely with ISOs and RTOs, and their MMUs, regarding investigations..."
Potential damage to reputations
The potential damage to the reputation of subjects under investigation is another issue. The attorneys point to a NAV issued in November 2014 against Maxim Power Corp., alleging the company and two executives engaged in three schemes in ISO-New England. According to the attorneys, one of the executives "stood publicly accused of committing market manipulation" for more than two years "without the Commission ever finding that there was cause to bring a case against him.
"Unlike companies, individuals publicly accused of serious wrongdoing can be damaged in ways that go beyond monetary harm. This can include emotional harm and harm to family and personal relationships, among other things. The potential magnitude of such harm has become even more significant as the Commission's enforcement activities garner more public attention and are increasingly associated with criminal investigations and prosecutions."
It's not over
If FERC issues a NAV, it doesn’t mean mean an investigation is over, either. The attorneys said that when the policy first came out, FERC would issue a NAV only after OE had completed its investigation. Preliminary findings and settlement negotiations would also only begin after the conclusion of a probe.
"The Commission's enforcement process has developed and matured over the past several years such that neither the issuance of preliminary findings [or the] authorization of settlement negotiations...reflect the end of staff 's investigation or an appropriate time for public disclosure," the attorneys said.
"Rather, we now know...that OE staff may issue preliminary findings and obtain settlement authority while it continues to actively investigate conduct, and that its findings are often subject to robust debate and reconsideration as the investigation proceeds."
According to the article, Applebaum previously served FERC as an attorney, branch chief, deputy director and Director of the Division of Investigations, a unit within the OE. Brecher also served as an attorney within the division. Both men have experience conducting NAV investigations, with Applebaum also serving in a supervisory role. Meanwhile, Dennis was an advisor to then-Commissioner John Norris when the NAV policy was first unveiled, and has experience advising on NAV issuances.