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FERC Moves to Bolster Enforcement Program

FERC last Thursday issued two final rules and a policy statement aimed at bolstering and clarifying the agency's enforcement of the regulated natural gas and electricity markets.

The Federal Energy Regulatory Commission took a step backward with its new rule governing the conduct of natural gas pipelines and electric transmission providers and their marketing affiliates. The order returns to the core principles outlined in Orders 497 and 889, which until 2003 addressed standards of conduct for, respectively, gas pipeline and electric transmission provider employees.

In a subsequent order, Order 2004, the Commission broadened the standards of conduct rule to restrict the relationship of gas pipelines and electric transmission providers with practically all energy affiliates, not just marketing affiliates (see NGI, Dec. 1, 2003). The U.S. Court of Appeals for the District of Columbia in 2006 vacated and remanded the part of Order 2004 dealing with gas pipelines, saying that FERC had failed to provide record evidence of abuses to justify its decision to broaden its standards of conduct (see NGI, Nov. 20, 2006).

FERC tried to fix the problem in its original notice of proposed rulemaking, issued in January 2007, by limiting the standards of conduct restrictions for gas pipelines to only marketing affiliates (see NGI, Jan. 15, 2007). It also sought public comment on whether it should narrow the scope of affiliate restrictions for electric transmission providers. But as FERC moved to issue a final order, the agency realized that its proposal had "some of the significant flaws that marred Order 2004," the agency said.

"The final rule refocuses the scope of the standards of conduct rule on the relationship between marketing affiliates and transmission providers, and eliminates the corporate separation approach in favor of the employee functional approach used previously," said FERC Chairman Joseph Kelliher [RM07-1].

"It has been difficult to get this rule right. Essentially what we have been trying to do is identify those relationships between a marketing affiliate and a transmission provider that run the greatest risk of undue discrimination and preference. We then subject those companies to prophylactic rules designed to reduce the risk. In my view, a prophylactic rule should be limited to areas where there is a high risk of affiliate abuse," he said.

Commissioner Suedeen Kelly noted that the agency's authority to rein in discriminatory practices extends beyond the standards of conduct. "While the standards of conduct provide specific rules that transmission providers must follow, the Commission continues to have the tools it needs under the Federal Power Act and Natural Gas Act to address instances of undue discriminations and preference, regardless of whether they are specifically enumerated in the standards."

A separate policy statement issued last Thursday gives additional guidance on the importance of effective corporate compliance with FERC governing statutes. It identifies four hallmarks of effective compliance practices: active engagement and leadership by senior management; preventive measures appropriate to the circumstances of the company that are effective in practice; prompt detection of problems; terminating misconduct; and reporting of a violation and remediation of the misconduct [PL09-1].

Under the policy statement, regulated companies will receive credit for good compliance practices. And in cases where violations are not serious -- they do not involve significant harm, risk of significant harm or damage to the integrity of FERC's regulatory program; and where the company has demonstrated all four elements of effective compliance practices -- the Commission said it may reduce penalties that would otherwise apply, or even eliminate the penalty.

"The full penalty credit for a model compliance program would not be available for serious offenses...Serious offenses would include, for example, market manipulation, attempted market manipulation and the most serious reliability violations," said Kelliher.

A second final rule reforms FERC regulations to clarify the rules governing off-the-record contacts (ex parte communications) and separation of functions in the context of nonpublic investigations. Applying from the time the Commission initiates a proceeding arising out of an investigation, the order ensures that rules limiting contact with commissioners and decisional staff apply in the same manner to outside parties as they do to litigation staff [RM08-8].

The rule regarding standards of conduct and ex parte communications take effect 30 days after publication in the Federal Register.

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