Energy companies need to be proactive in policing the marketplace behavior of their employees, and when they find legal or ethical problems they need to be forthright in self-reporting transgressions to FERC, according to a Washington, DC, energy attorney who has closely analyzed the expanded federal enforcement policies granted the Commission in the 2005 Energy Policy Act (EPAct).

Kevin McIntyre, who is with Jones Day in Washington, DC, outlined what EPAct means and how companies can best deal with what he called the "enormous consequences" of the new powers at the Federal Energy Regulatory Commission (FERC) during a presentation last Tuesday to a Law Seminars International conference in Seattle. A day earlier at the same conference, FERC Commissioner Philip Moeller stressed that the Commission is looking for a lot of "self-reporting" by the industry.

EPAct's provisions giving FERC authority to assess fines of up to $1 million/day (compared to previous limits of $1,000/day) has "obviously woken some people up," Moeller said at the "Buying and Selling Electric Power in the West" conference. "When we announced our first set of enforcement actions a year ago, it got peoples' attention, specifically including fines ranging from $500,000 to $10 million, and nothing like that had been imposed by FERC before. In the meantime, we have had plenty more high-profile cases."

Both Moeller and McIntyre cited two show-cause proceedings that will start later this year that involve proposed penalties of more than $400 million combined. They involve the now defunct Amaranth Advisors hedge fund and two of its Greenwich, CT, traders (see NGI, Dec. 17, 2007), and separately Energy Transfer Partners' (ETP) Texas natural gas pipeline alleged market manipulation at the Houston Ship Channel (see NGI, Dec. 24, 2007).

"We have potentially put down the hammer on these folks," said Moeller, noting that the huge fines are pending but not yet not assessed.

Calling the EPAct the biggest piece of energy legislation since 1992 and maybe even 20 years before that, McIntyre said the law requires "absolute transparency" in every market and expressly prohibits market manipulation for the first time, and it gives FERC the biggest mallet in the whole federal enforcement scheme." The new powers apply equally to the natural gas and electricity sectors, McIntyre said.

There is now the possibility of enormous financial penalties for companies found violating FERC rules, directives, orders or any other requirement, he said. Previously, there were federal civil penalties under the Federal Power Act, but FERC had very few teeth to impose them. Now the Commission does, McIntyre said.

McIntyre went into great detail about what EPAct includes on FERC enforcement powers and what is expected of companies that are the subject of investigations from the standpoints of the seriousness of the alleged offenses, internal compliance at the company, self-reporting and the level of cooperation through the various stages of the investigation.

Both Moeller and McIntyre said FERC is stressing the importance of self-reporting. (In contrast, both Amaranth and ETP were "turned in" by third-parties; the companies did not come forward voluntarily.)

"Those [Amaranth and ETP] are going to be fascinating proceedings to watch because on a procedural basis a dispute has arisen between FERC and the Commodities Futures Trading Commission," McIntyre said.

McIntyre urged industry people to be familiar with FERC's October 2005 policy statement on its new enforcement powers as it pretty clearly outlines the regulators' intentions. It lists the four main factors that FERC is going to take into consideration, and whether the company self-reported its alleged transgressions is one of the four.

McIntyre also advised companies to give a senior official responsibility for FERC compliance. He said this could be done by building on existing internal policies and on whatever the company is already doing to comply with the 2002 Sarbanes-Oxley Act on corporate accounting.

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