Responding to industry claims last month that FERC is acting as both judge and prosecutor, the agency last Thursday announced that a number of changes are being made to its show-cause enforcement procedures to expand the protections of companies involved in civil penalty cases. FERC also denied Dallas-based Energy Transfer Partner's request for rehearing of a July show-cause order accusing it of manipulation of the natural gas markets at the Houston Ship Channel (HSC) and Waha, TX, trading hubs.

For all future civil penalty cases under the Federal Power Act, the Natural Gas Policy Act and the Natural Gas Act (NGA), the Federal Energy Regulatory Commission has ordered its Office of Enforcement (OE) investigative staff, once it completes an investigation, to turn over a report to the Commission with recommended findings and conclusions of fact and law.

Once the report is filed, FERC staff members who were involved in an investigation will no longer be able to participate in the remainder of an enforcement proceeding, including any hearing or other procedures used by the agency to resolve a proceeding. If warranted, the Commission said it may require the staff investigative report to be attached to a show-cause order to enable a defendant company to better respond to the charges.

With respect to the Energy Transfer enforcement proceeding, FERC said the OE staff will not be permitted to serve as advisors to the Commission, take part in the agency's review of any offer of settlement or communicate with advisory staff concerning any deliberations in the case. This, however, would not apply to the director of the OE office and directors of the Divisions of Investigations, Energy Market Oversight, Audits and Financial Regulation in the OE office, it noted [IN06-3].

The FERC order further said the agency would not make any findings with respect to guilt, preliminary or otherwise, at least until it has considered the defendant company's response.

"We believe these steps, although not required as a matter of law, will provide additional due process," said Chairman Joseph Kelliher.

The changes were made in response to industry complaints during a FERC enforcement conference in November (see NGI, Nov. 19). Industry and attorneys questioned whether it was fair for FERC to act as both judge and prosecutor in carrying out its enforcement actions. Donald Santa, a former FERC Commissioner and now president of the Interstate Natural Gas Association of America, urged the Commission to "look seriously" at the issue. He further recommended that FERC enforcement actions be subject to de novo review -- a new trial in district court.

In related action, FERC last Thursday rejected Energy Transfer's argument that it is entitled to de novo review in district court for any civil penalties assessed under the NGA, and held that the company instead may seek U.S. court of appeals review of any civil penalty after the Commission makes a final ruling in the show-cause proceeding.

Responding to Energy Transfer's claims that FERC prejudged the company's action in the show-cause order, the Commission said the order was a "presentation of evidence collected at that point and not a prejudgment of the ultimate resolution of whether a violation has occurred."

The FERC show-cause order, which was issued last July, seeks more than $167 million in total penalties and disgorgement of unjust profits from the Texas-based energy company (see NGI, July 30).

The case against Energy Transfer, which came to the Commission's attention through its enforcement hotline, involves the alleged manipulation of wholesale natural gas markets at the HSC and Waha trading hubs on various dates from December 2003 through December 2005.

The Commission's investigation found that Energy Transfer allegedly violated FERC's market behavior rule, the anti-manipulation rule then in effect, when it artificially lowered the price for prompt-month gas at the HSC to the benefit of its physical and financial positions. By lowering the price, the company depressed the Inside FERC's Gas Market Report Houston Ship Channel index, published by Platts, on which the pricing of many physical natural gas contracts and financial derivatives are based, FERC charged.

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