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Momentum Slowly Building For NGA Enforcement Changes

Getting called out by FERC's Office of Enforcement (OE) for alleged market manipulation will give any energy company and its lawyers heartburn, but the blow to the gut is particularly acute when it's a natural gas rather than a power case.

Both the Federal Power Act (FPA) and Natural Gas Act (NGA) allow respondents to Federal Energy Regulatory Commission enforcement actions to seek hearings before an administrative law judge (ALJ). But the FPA also allows respondents to opt for de novo review of their case in federal court. There is no such provision for this under the NGA, and that non-parity of regulatory practice has had energy lawyers and others crying foul.

With early manipulation cases wending their way through the Commission and the courts now -- and more cases to come -- the time could be (almost) ripe for modification of the NGA by Congress. "...[T]hat is a real possibility..." Matt Connolly, an attorney in the litigation department of Nutter McClennen & Fish LLP, told NGI recently.

Late in September, FERC OE staff rejected a bid by Total Gas & Power North America Inc. to have penalty claims in an ongoing NGA manipulation case heard in federal district court (see Daily GPISept. 27). Instead, OE staff called for a hearing before an ALJ. OE staff said, "...the NGA does not vest district courts with exclusive jurisdiction to determine liability in the first instance of penalty matters." Staff added that the Constitution does not bar adjudication of NGA violations administratively.

However, earlier in May Total had taken the case to federal district court in Texas, challenging FERC's jurisdiction under the NGA (see Daily GPIMay 10). That case is now on appeal in the Fifth Circuit Court after the Texas court declined to rule on it. In another natural gas market manipulation case, BP plc is making an argument similar to that made by Total (see Daily GPI, Aug. 12). The Total and BP cases "are the two big ones" right now under the NGA, Connolly said. It's possible that either could ultimately precipitate an attempt to change the NGA, he said.

"My sense on the Total case is that the Fifth Circuit will follow the lead of the Southern District of Texas and say it's not going to weigh in until after the FERC has finished the penalty determination..." Connolly said. "The Commission will set the penalty and then under the Natural Gas Act, Total will then be able to go to the circuit court of appeals...My sense is that the Fifth Circuit will wait for that rather than making a decision now..."

Word from the Fifth Circuit "could take anywhere from six months to a year, sometimes longer, sometimes less," Connolly said.

One of the criticisms of FERC enforcement practices under the NGA is the Commission's strict interpretation of what must be shared by the agency during discovery. "One thing that has been frequently alleged against FERC is that they've taken a rather stringent view of their obligations to disclose potentially exculpatory information [under the NGA]..." Connolly said. "The Federal Rules of Civil Procedure [available under the FPA] are a fairly different process than certainly a paper hearing before the Commission, and even different from what an ALJ would usually permit."

Connolly said he expects that the industry will have more clarity on the NGA in the next year or two. "For now, we have to continue to take a wait-and-see approach until the federal courts continue to make decisions and then reach a consensus...It may require going back to Congress for some tweaks [to the NGA]."

There's no legislative fix on the horizon to better align the NGA with the FPA, Baker Botts LLP Special Counsel Greg Wagner told NGI. "I think it's going to be a few years," he said. "There was a bill proposed last summer that didn't go anywhere. It would basically catch up the Natural Gas Act with the Federal Power Act's ability to go to district court [see Daily GPIJune 8, 2015].

"My hunch on this is that it's going to take a few cases that develop, a few power cases through the district court route and some gas cases that are stuck going the FERC route as kind of a control to see how those develop and whether it plays out that the enforcement targets do better in district court, and then maybe there's something to the perception of bias or prejudgment at FERC.

"...I think at this point it's kind of an abstract argument, and if we have some cases that go forward in district court and maybe people do better in district court, or they get more discovery, or they find out that there's something that outweighs FERC's portrayal of the case or the facts that they've found, then you start to see some objective reasons why there should be a legislative fix."

The FPA side of that equation is unfolding with two cases: Federal Energy Regulatory Commission v. Maxim Power Corp. [15-30113] in U.S. District Court for the District of Massachusetts, and Federal Energy Regulatory Commission v. City Power Marketing LLC [15-1428] in U.S. District Court for the District of Columbia.

Recent decisions in these cases served to protect the procedural due process rights of respondents. Writing in a mid-October note on the Maxim case, attorneys at King & Spalding LLP (K&S) said, "FERC insisted that the FPA's de novo directive allowed the court discretion and flexibility to craft procedures necessary to take a fresh look at the evidence FERC collected without attendant procedures and trial. The court disagreed, noting that it would be unfair to penalty-facing parties if the FPA failed to provide due process rights during FERC's original penalty assessment and did not provide for due process rights at a later review."

The court said that FERC Commissioners performing investigatory and adjudicatory functions in the same cases risks inherent bias in the decision-making process, the K&S lawyers noted. "Maxim's reading of the FPA prevailed, and the court concluded that the case should be treated as an ordinary civil action governed entirely by the Federal Rules of Civil Procedure culminating, if necessary, in a jury trial," K&S said.

In City Power, "Relying heavily on the Maxim decision, the court decided that it would not simply rely on the record already compiled by FERC when determining whether the Commission properly fined City Power and its owner more than $16 million for allegedly manipulating the PJM Interconnection markets," K&S said.

Wagner noted that FERC "has not been doing well as far as availability of discovery" in Maxim and City Power. "If you see that these guys, City and Maxim do better in district court because they get more discovery, then there's something to be said; there's something concrete to say that the forum FERC provides under the Natural Gas Act is harmful...and you can more readily show the need for legislation [to modify the NGA]," he told NGI.

It's a different game on appeal, too, in district court than at FERC, and that's another thing that makes the options available under the NGA, as well as the FPA important, Wagner said.

"There is a different posture to appeals from a district court case versus appeals form a FERC opinion," he said. "When you go up to circuit court from a FERC opinion, whether it's an enforcement case or any ordinary gas or power case, the agency is going to get a lot of deference from the court by design.

"If you go up to district court and you litigate de novo against FERC and they have to prove their case and you have to defend your conduct and show that it didn't violate the statute, that's going to go up to court like an appeal of any other district court case. So if there are matters of law that you're alleging the court made an error on, the appellate court is going to look at those de novo. If there are errors of fact, that appellate court is going to review those for clear error as opposed to the way it would essentially accept almost on faith any fact asserted by FERC in its own opinions."

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