FERC Chairman Joseph Kelliher said Friday the agency is more interested in the energy industry complying with its rules and requirements than in collecting penalties, but this was not enough to allay the concerns of industry. Energy attorneys and industry representatives urged FERC to be more forbearing and patient as companies strive to comply with hundreds of rules, with some going as far as to suggest that FERC create an amnesty program for those who self-report their violations.

Kelliher said the majority of regulated energy companies try to comply with the Federal Energy Regulatory Commission’s regulations, while only a minority (about 5%) seeks to evade the rules. The focus of FERC’s enforcement efforts is on this latter group, he noted during a conference assessing the agency’s enforcement program in the two years since enactment of the Energy Policy Act of 2005 (EPAct).

FERC imposed $41.6 million in penalties this year, but Kelliher said the agency has been “reserved” in exercising its maximum penalty authority. Under EPAct, FERC can penalize violators up to $1 million per day per violation. He noted the Commission will assess maximum penalties for violations that cause serious harm or pose a risk of serious harm to the market, such as market manipulation. A violation of the reliability standards for the bulk power market would be another example of serious harm, Kelliher said.

The “biggest mitigating factor” as to whether FERC will impose penalties or other sanctions “is the strength of [a company’s] compliance program,” he said. Companies with weak compliance programs that self-report violations still can expect to pay penalties, but those with strong compliance programs that self-report may not face any penalties. Kelliher said that in some cases the Commission will require violating companies — rather than pay penalties — to use the money to improve their compliance programs.

“There is a widely held belief…that we’re a little too eager to fine entities,” said Commission Philip Moeller. He added that this was not the case at the agency.

William L. Massey, a former FERC Commission and attorney with the Washington, DC, firm of Covington and Burling LLP, called on FERC to consider the idea of an amnesty program “to get people to come in the door and admit [their] violations.”

Clifford M. Naeve, a Washington energy attorney, stopped short of supporting an amnesty program for companies that self-report violations, but he said FERC’s “level of forbearance may be a little higher [toward energy companies] in the earlier years” as the agency enters into unchartered waters with its enforcement program. He said the forbearance should be for “run-of-the-mill” violations, not serious abuses. Massey agreed that FERC should exercise forbearance, particularly in cases where the rules are unclear.

Massey said the energy industry believes penalties and sanctions should be issued only in cases of serious, flagrant violations. That’s “too high of a bar,” Kelliher countered.

If total compliance is not achievable in the energy industry, which Naeve believes is the case, then FERC shouldn’t focus its enforcement efforts on individual violations, but rather should look to whether a company’s compliance program is acceptable or unacceptable, he told FERC. This “turns our system on its head” if the agency would adopt this approach, said Commissioner Suedeen Kelly.

Industry and attorneys also questioned whether it was fair for FERC to act as both judge and prosecutor in carrying out its enforcement actions. Donald Santa, also a former FERC Commissioner and now president of the Interstate Natural Gas Association of America, urged the Commission to “look seriously” at this issue. Santa believes FERC enforcement actions should be subject to de novo review — a new trial in district court.

It was also suggested that FERC issue some type of grading scale for violations, which would identify how much a company would be penalized if it committed a particular violation. “I like it conceptually, but I think it’s impractical” due to the large number of regulations at the Commission, Kelliher said.

With the enhancement of FERC’s enforcement capability under EPAct, no other federal agency has greater penalty authority than FERC, according to Susan J. Court, director of the Commission’s Office of Enforcement. In the past year, FERC has brokered 12 settlements and issued two show-cause orders against Amaranth Advisors LLC and Energy Transfer Partners. This is the “public face” of the agency’s enforcement efforts, she said, adding a lot more has gone on behind the scenes.

FERC has received an estimated 74 reports from energy companies admitting violations in the past two years, and only half of these led to penalties being imposed, Court said.

“Market participants do want to comply…They understand the costs of noncompliance,” Massey said. But he urged FERC to strike an “appropriate balance” between “hard power,” which he defined as brute power (penalties), and “soft power,” such as education and guidance efforts.

Massey represented a group of seven natural gas and electric trade groups that released a white paper recently, calling on FERC to provide more clarity on its enforcement rules and requirements. The industry is “hungry” for this, he said.

The white paper recommended that the Commission increase its efforts to educate and provide guidance; create a help desk for industry to ask questions about unclear rules; hold more public workshops on enforcement; publish guide books on compliance with FERC’s enforcement program; and increase efforts to encourage more self-reporting of violations.

FERC is evolving from an economic regulator to an enforcement agency as a result of EPAct, Naeve said. Other federal agencies have had heightened penalty authority for 60 to 80 years, but this is new ground for the Commission, he noted. EPAct has given the Commission “tremendous discretion” with respect to who will be penalized and how much.

Naeve believes FERC should identify for industry the “core” requirements that, if violated, would result in substantial penalties. Core requirements would be the ones that “we [FERC] care the most about,” he said. In addition, Naeve proposed that FERC publish a list of the most frequent violations committed by the industry.

He further suggested that FERC dedicate personnel to act as consultants to help regulated companies develop their compliance programs. Naeve proposed recommended that the Commission organize its compliance staff along regional lines as well.

In advance of the conference, FERC’s Office of Enforcement (OE) released a report last Wednesday on its enforcement efforts. It reported that of the 64 investigations that FERC’s enforcement staff completed in the past two years, more than 70% (47 cases) were closed without any sanctions being imposed on energy companies.

“In 25 instances, there was insufficient evidence of a violation, and in the remaining 22 instances staff found a violation but closed the matter without a sanction. Of the remaining investigations, 15 have resulted in 13 settlements involving the payment of civil penalties or other monetary remedies, the filing of compliance plans and other remedial steps, and two investigations have resulted in show-cause orders” against Energy Transfer Partners LP and Amaranth Advisors LLC, along with Amaranth affiliates and ex-traders, said 33-page report said.

Companies that have been assessed penalties resulting from FERC’s enhanced authority under EPAct include BP Energy Co. ($7 million); MGTC Inc. ($300,000); GEXA Energy LLC ($500,000 and $12,481); Cleco Power LLC ($2 million); Columbia Gulf Transmission Co. ($2 million); Calpine Energy ($4.5 million); Bangor Gas Co. ($1 million); PacifiCorp ($10 million); SCANA Corp. ($9 million, $1.8 million); Entergy Services Inc. ($2 million); Northwestern Corp. ($1 million); and NRG Energy Inc. ($500,000). In none of these cases did penalties approach the maximum or near-maximum levels, Kelliher said.

However, the show-cause orders against Amaranth and Energy Transfer “stand in sharp contrast to the settled cases,” the OE report said. “Market manipulation, which is alleged to have occurred as a result of intentional actions of the respondents in those cases and with the involvement of senior management, may require more significant action, including the possibility that penalties could be assessed near or at the maximum.”

Under EPAct, FERC could assess as much as $1 million per day per violation if Amaranth and Energy Transfer are unable to refute charges that they manipulated the natural gas market. Prior to EPAct, FERC’s penalty authority was restricted to $5,500 per day per violation under the Natural Gas Policy Act, and $11,000 per day per violation under the Federal Power Act.

The report also stressed the benefits of self-reporting violations to the Commission. An estimated “37 of the 74 self-reports of violations received since October 2005 have been closed without conducting an investigation or imposing a sanction. Five self-reports are still in the initial stage of review. Of the 32 self-reports for which investigations were opened, eight were closed without further action, 12 were settled with payment of civil penalties and 12 are still pending an investigation,” the OE said.

Often FERC’s division of investigations “determines that the self-reported matter is a violation of a minor nature and does not warrant an investigation.

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.