Enforcement Policy Will No Longer Include Notices of Alleged Violations

This article appears as published in Foster Report No. 3429

In a move sought by some market participants, FERC decided to halt its practice of issuing notices of alleged violations during an investigation by FERC staff into behavior or practices that may violate the law or FERC regulations.

The Commission determined that in the last 10 years or so since the policy was adopted, the public notice and transparency benefits of the practice are no longer substantial and are outweighed by the reputational harm to subjects of the notices of alleged violations (NAV).

Initial reactions include an agreement that the move was needed and disappointment, both with the outcome and that FERC did not provide notice that it was considering such a change.

The vote was unanimous among the four commissioners, with Chairman Neil Chatterjee and Commissioner Richard Glick addressing the change during the May 16 meeting, and Chatterjee elaborating a bit during a briefing with reporters. Chatterjee declined to comment on any future actions with the Office of Enforcement, where some in the industry have argued FERC’s zealous examination of potential market manipulation needs to be reined back.

“I commend the chairman and commissioners for starting to tackle the reforms that are long overdue to the enforcement process,” said William Scherman, partner at Gibson, Dunn & Crutcher LLP and a former general counsel at FERC. “While eliminating the NAV process helps, we still need systematic and structural changes to the [Office of Enforcement] process to ensure that it comports with due process,” Scherman said when asked about the change.

FERC in 2009 authorized the issuance of NAVs after the subject of an investigation by Commission staff had the opportunity to respond to preliminary findings by the Office of Enforcement. The first such notices were issued in 2011, after a rehearing order of that decision was issued.

A NAV was essentially the first public disclosure that a company or individual was under investigation, and it provided those named, along with other market participants, the chance to evaluate their activities against what they know about the matters involved and the conduct alleged in the NAV. It also provided market participants an opportunity to bring to FERC staff’s attention information related to an investigative subject’s conduct, whether indicative of violations or clearing them of any alleged wrongdoing, FERC noted.

The short order (PL10-2) rescinding the policy recounted that when it was adopted, FERC weighed the importance of protecting the confidentiality of entities being investigated against the benefits of transparency and found that the NAV policy struck an appropriate balance. FERC vowed to monitor and evaluate how the practice worked overtime, and based on that evaluation found that the anticipated benefits “generally have not materialized such that the balance has shifted.”

FERC’s Office of Enforcement issues an annual report on activities and provides public disclosure of investigations, some of which have not led to an order to show cause, settlement, or findings of violations. The Commission also has gained access to significantly more market data through various orders, agreements, and reports from independent system operators through Order 760. Those other data sets provide transparency on FERC staff activities and NAVs have not been a significant source of information on Office of Enforcement investigations, the Commission said.

Public disclosure of an alleged violation before a settlement is reached or decision to proceed with an enforcement action may expose subjects of an investigation to potential risk of reputational harm. “We therefore conclude that the anticipated transparency benefit from the NAV policy was limited in scope and, over time, sources other than the NAV have provided a transparency benefit.”

Glick said as he understands the order, it is essentially an affirmation of a practice that has been in place for a while, with NAVs providing limited incremental value on transparency.

However, he highlighted the critical role that the Office of Enforcement plays and noted that Congress requires FERC to be vigilant in protecting the integrity of energy markets and ensuring just and reasonable rates for consumers. “The Office of Enforcement must act aggressively when there is evidence of market manipulation or other malfeasance that could adversely impact our jurisdictional markets. I intend to review any future proposal affecting enforcement’s role with that in mind,“ Glick said during the meeting.

Chatterjee commented that when FERC began the policy of issuing NAVs, it would monitor the effectiveness of the policy and the benefits public disclosure of companies or individuals subject to staff investigations. “We’ve done just that” and concluded that the potential harm is no longer justified and the Commission has more tools for providing transparency. “That’s why we’re taking this action today” and discontinuing the practice of issuing NAVs, Chatterjee said.

“This is a pretty significant policy change that should have been open to public notice and comment,” said Tyson Slocum, energy program director for Public Citizen. Slocum deemed it “problematic” that FERC is scrapping the policy without giving parties a chance to provide their views.

A NAV is important for providing public disclosure and transparency on Office of Enforcement activities and possible violations or market manipulation, Slocum said. Law enforcement agencies provide public disclosure of charges all the time and to have FERC backtrack from the transparency provided through NAVs is an unfortunate decision, he said.

In a 2017 article for the George Washington University Journal of Energy and Environmental Law, three former FERC staffers asserted that the NAV policy should be rescinded because it has not produced the transparency benefits FERC had hoped when it was adopted. The adoption itself was controversial, changing FERC’s long-established policy that the identity of subjects under investigation were not disclosed until FERC either issued an order approving a settlement or began an enforcement action through an order to show cause, said the staffers.

The article was written by David Applebaum, Todd Brecher and Jeffrey Dennis, who at the time were with Akin Gump Strauss Hauer & Feld LLP. Applebaum and Brecher served in the Office of Enforcement while Dennis, who is now general counsel and managing director for Advanced Energy Economy, was an advisor to former Commissioner John Norris when the NAV policy was adopted.

They asserted that the policy has not produced the intended transparency benefits and FERC has used other means to provide guidance to market participants on Office of Enforcement activities and possible violations. When the countervailing reputational harm associated with disclosure of alleged violations has not changed, it is time to rescind the policy.

The authors also noted that a premise of the policy was that a NAV would be issued only after a FERC staff investigation concluded. That has not always been followed and it has become clear that FERC staff investigations may be refined after a NAV is issued. “This means that the NAV may not accurately reflect who will ultimately be named and what violations will ultimately be pursued – a reality that further detracts from the NAV’s intended transparency benefits.”

By Tom Tiernan TTiernan@fosterreport.com

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