In two separate orders implementing provisions of the energy policy act, FERC last Thursday proposed actions aimed at broadening its anti-manipulation reach in the natural gas and electricity markets and outlining its policy for assessing civil penalties. In a third order, the agency proposed a rule giving energy companies the right to challenge the findings of staff operational audits before a final order is issued.
The proposed anti-manipulation rule would make it illegal for any entity, directly or indirectly, in connection with the purchase or sale of electric energy or natural gas, or in providing transmission or transportation services subject to FERC regulation, to do the following: 1) defraud using any device, scheme or artifice; 2) make a false statement of material fact or omit a material fact; or 3) engage in any act, practice or course of business that operates or would operate as a fraud or deceit [RM06-3]. The proposed rule, as required by the energy bill passed by Congress this summer, is modeled after language in the Securities and Exchange Act.
At its regular monthly meeting last Thursday, the Federal Energy Regulatory Commission emphasized that the proposed regulation would apply to any entity, not just jurisdictional market-based rate sellers, natural gas pipelines or holders of blanket certificate authority. "Any entity" includes government-owned utilities and other market participants, it said.
Under the proposed rule, FERC "would have the authority to police any potential market manipulation" by energy companies, even those firms over which the agency does not have jurisdiction, said Commission spokesman Bryan Lee.
"We intend to move swiftly to issue a final rule implementing the anti-manipulation provisions Congress provided. In the interim, I would remind regulated entities that the market behavior rules remain in effect," said Chairman Joseph Kelliher. "However, the [proposed rule] recognizes that, with the new authority granted by Congress, the Commission should consider whether to revise or repeal" an existing market behavior rule that bars manipulation once the new regulation takes effect. "We intend to initiate such an inquiry in the very near future and to swiftly resolve that issue," he noted.
The energy bill that was signed into law by President Bush in early August gave FERC the authority to impose civil penalties under the Natural Gas Act for the first time, and it extended civil penalties to all of Part II of the Federal Power Act. It also increased the maximum penalty that the Commission can assess on violations to $1 million per day for each violation.
In order to provide the energy industry with more guidance, FERC issued a concurrent policy statement that identifies the factors that it will weigh when deciding the appropriate remedies for a violation, including the amount of civil penalties to be levied [PL06-1]. The policy statement cites factors to be considered when determining the seriousness of a violation, and identifies the factors that could come into play to mitigate a punishment, such as adopting strong internal compliance programs, voluntarily reporting of violations and cooperating with staff investigations.
Kelliher explained how this would work. "If two different entities commit the same violation, and one entity has an effective compliance program, self-reported the violation, took remedial action, cooperated with the Commission's investigation, and the violation was an isolated instance, [while] the second entity had no compliance program, its senior management learned of the violation but took no action, the entity had a history of violations and failed to cooperate with the investigation, the civil penalties levied would likely be dramatically different," he said.
Kelliher and the other commissioners stressed that FERC was more interested in compliance than enforcement this winter. "While we care about enforcement, enforcement is not a game of gotcha," said Commissioner Nora Brownell.
The expanded anti-manipulation rules are especially critical as the winter heating season approaches and in light of the high natural gas prices, the agency said. "We 're going to see high prices this winter. We're going to see volatility this winter. And we will be challenged to ensure both to Congress and to consumers that we're on top of it," Brownell noted.
In addition to the enhanced penalty authority, FERC noted that it currently has a variety of enforcement tools at its disposal, including the ability to order the disgorgement of illegal profits; or to condition, suspend or revoke market-based rate authority, pipeline certificate authority or blanket authority. Like other federal agencies, FERC also is considering issuing no-action letters to violators, said Commissioner Suedeen Kelly.
Lastly, the Commission issued a proposed rule that would allow companies to use existing procedures for challenging financial audit findings in all audits, including operational audits [RM06-2]. FERC has traditionally conducted financial audits to determine compliance with its accounting regulations. But in recent years, the agency has begun carrying out operational audits to assure compliance with its standards of conduct and codes of conduct.
"The proposed rule would advance the due process rights of all audited persons by providing an effective procedure for them to challenge staff audit findings," Kelliher said. "Companies seeking to challenge a staff audit finding may choose either a paper hearing or a trial-type proceeding if there are material issues of fact to resolve before we issue an order on the audit findings."
Comments on the two proposed orders addressing FERC's anti-manipulation authority and operational audits are due at the Commission within 21 days after being published in the Federal Register.
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