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FERC OE Testifies Against Proposed Legislation to Rein in Commission Investigations

Proposed amendments designed to afford defendants more rights in investigations and adjudications by the Federal Energy Regulatory Commission were strongly opposed by Office of Enforcement Director Larry R. Parkinson in a hearing last week before a House Energy and Commerce subcommittee.

Parkinson told the Energy and Power Subcommittee that FERC’s investigative practices “are one of the most transparent, if not the most transparent, in the federal government.” He disputed charges that subjects of investigation by the FERC do not get due process of law.

And he strongly objected to language in a draft amendment under discussion by the subcommittee that would revise some of those practices, including one that would put all communications regarding the case among the investigative staff, other Commission staff and the Commissioners on the record

The amendments being considered would require:

  • FERC to disclose to the subject of an investigation not only exculpatory material uncovered, but any material in federal or state agencies or  non-governmental entities such as regional transmission organization, or RTO, market monitors that would be “helpful or potentially helpful” to the defendant.
  • Material be turned over no later than seven days after the Commission issues a preliminary findings letter relating to the investigation.
  • Transcripts be provided by FERC of a deposition within a reasonable time to the subject of that deposition.
  • Ensure all communications regarding the merits of the investigation between the investigatory staff of the Commission and the advisory staff be in writing and included in the formal record of the investigation.
  • Allow the subject of an investigation to be able to communicate with FERC Commissioners regarding the substance of settlement considerations to the same extent that settlement discussions occur between the Commissioners and its investigatory staff.

Objecting to the proposed changes, Parkinson told the subcommittee hearing that FERC already provides any exculpatory material to defendants, but to search through files and require third parties to search their files and make determinations as to whether any other material would be “helpful or potentially helpful” to the defendants would be extremely burdensome. It would require individual decisions as to what would be “helpful.”

Attorney William S. Scherman, partner in the firm Gibson, Dunn & Crutcher LLP and a former FERC general counsel, appeared on a second panel at the hearing and suggested substituting the word “favorable” for “helpful” to make the process easier. Subcommittee Chairman Ed Whitfield (R-KY) appeared to take note of that suggestion.

Parkinson said the Commission staff making transcripts available to a party who has been deposed is part of the Commission’s current rules, which it only waives “in rare instances where there is a threat to the integrity of the fact-finding process.” Transcripts have been denied in only about a dozen cases out of 90 investigations in the past six years, he added.

The crux of the debate appeared to be the communications throughout the process between the investigative staff, the regular Commission staff and the Commissioners. “There’s an attorney-client privilege between the triers of fact and the investigators that bring the case that is abhorrent to the American legal system,” Rep. Morgan Griffith (R-VA) said.

Entities subject to the FERC enforcement process do not receive due process of law, Scherman said, and there needs to be reform both substantively and procedurally. The free internal communications on investigations did not occur when he was general counsel, he added. In the past the investigative staff reported to the general counsel and did not have access to the Commissioners who would make the ultimate decision. The emphasis and range of enforcement activities have increased since that time when enforcement had about 20 staff members. There are now more than 200, Scherman said.

Parkinson said once the adjudicative part of the procedure has begun, after a show cause order is issued, the Commissioners and their regular staff are walled off from the Commissioners who will make the final decision.

He acknowledged, however, that through the investigative stage, which may take several years, “the Commission itself is responsible for directing, supervising and setting priorities regarding the work of the enforcement staff. To perform that function properly in the enforcement context the Commissioners and their staff need to be able to communicate freely with investigative staff on a wide range of topics…”

Parkinson said to require those discussions to be on the record “would make candid communication impossible,” and would deny the investigative staff of the expertise of other FERC offices during the investigations.”

“Virtually every complex FERC investigation involves collaboration with a multi-disciplinary team…Forbidding oral communications and meetings between investigative staff and the Commission’s subject matter experts would seriously impede the ability of the Commission to make informed decisions about enforcement matters and enforcement policy.”

That very collaboration undermines due process, Scherman said. “The difference between investigative and adjudicative phase is an illusion.”  And in the investigative stage, witnesses do not receive due process, no rights of discovery, no ability to questions witnesses.

Those communications between the prosecutors and the ultimate judges sometimes over a period of years ensure the ultimate verdict, Scherman said, which means it cannot be a fair adjudication.

“If you’re told for five years that somebody has been guilty of fraud; if you’re told for five years that somebody has manipulated the market; if you’re told for five years that someone has unjustly enriched themselves to the detriment of consumers, and then all of a sudden as the very last part you have to sit  in judgment where only one party has had access to you and where only one party has had a free exchange, that is a problem.

“It’s simple fairness allow subjects of investigation access to comparable access to the adjudicators, the FERC commissioners who decide their case,” he added.

Unless the FERC enforcement process is reformed, both substantively and procedurally to ensure due process, “the very competitive markets this Commission is trying to promote will be harmed as market participants continue to flee from markets and liquidity is decreased and price discovery becomes nonexistent.”

Statistics collected by FERC on natural gas market trading show that even while production is increasing, trading is declining as middle market participants withdraw (see Daily GPI, May 28).

The defendant is even walled off from the Commissioners during the settlement phase.  Scherman said that in a recent case when he asked to talk to the Commissioners about a settlement, even though he offered to have the enforcement staff in the room at the time, he was told it was against Commission policy to allow him to talk to the Commissioners.

Parkinson had pointed out that defendants can ultimately seek court review of their case if they object to FERC’s decisions.

But, Rep. Griffith suggested that the court review was something of a red herring, since it is not a “de novo” review. “Even to a country lawyer, “de novo” means new,” Griffith said. That is not always the way it works with court reviews of FERC actions.

In a FERC adjudication “the federal rules of evidence do not apply, the federal rules of civil procedures do not apply and when the case gets to the court of appeals, the record that FERC has developed under flawed procedures is given deference, even when you can get the federal district court de novo review, the FERC today in two pending cases is doing everything it can to restrict the right of having a full trial with full rights of discovery” Scherman said.

Griffith said it might be better to allow FERC to continue to have jurisdiction over settlement discussions, but failing settlement, move any dispute to a district court “where [it] can have a legitimate due process trial.”

Scherman, along with a number of other witnesses, also endorsed parts of the draft amendment that would affect FERC’s governance of the RTO/ISO markets. “There is strong evidence that suggest existing ISO and RTO markets are no longer producing competitive results…no longer balancing supply and demand.”

He noted that FERC witnesses told the subcommittee they are working on refining the system. But “without the Congress spurring FERC to act through legislation or a letter from the Committee asking them to act by a date certain, many of us are concerned the Commission is hopelessly deadlocked and cannot achieve a consensus on these important initiatives.”

The subcommittee chairman said there would be further discussion of the issues at a later date. This is part of of the formation of the committee’s Architecture of Abundance initiative. 

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