CHAPTER 5 PITFALLS AND PERILS OF COMPLIANCE AND ENFORCEMENT FOR NATURAL GAS PRODUCERS, MARKETERS, AND OTHER MARKET PARTICIPANTS
| Jurisdiction | United States |
(Feb 2011)
PITFALLS AND PERILS OF COMPLIANCE AND ENFORCEMENT FOR NATURAL GAS PRODUCERS, MARKETERS, AND OTHER MARKET PARTICIPANTS
Duane Morris LLP
Washington, D.C.
SHEILA SLOCUM HOLLIS is chair of the Washington, D.C. office of Duane Morris LLP, serving on the firm's Executive Committee and Partners' Board of the firm. She served as managing partner of the Washington office from 1997-2004. Ms. Hollis specializes in domestic and international energy, water and environmental matters. She represents governmental bodies and the power and natural gas industries. Ms. Hollis often serves as legal consultant to energy producing nations and states, aiding them in formulating their energy laws and policies. Ms. Hollis was the first Director of the Office of Enforcement of the Federal Energy Regulatory Commission, establishing the office and its policies and procedures, serving from 1977 to 1980 and was a trial lawyer at the Federal Power Commission from 1974-1975. Over the course of her career, she has played a key role in the formation and implementation of energy law and policy. Ms. Hollis practices in the areas of energy transactional and regulatory law, and international and administrative law before government agencies, the Congress and other entities. Her experience encompasses representation of clients in large energy project development issues and in complex regulatory and litigation matters. Ms. Hollis served as the chair of the Board of Editors of the American Bar Association's Journal, and is the past chair (2001-2002) of the Section of Environment, Energy and Resources of the American Bar Association, and now serves as its representative in the ABA's House of Delegates, representing 11,000 ABA members. She is the Section's representative on the ABA Nominating Committee. She served on the Standing Committee on the Federal Judiciary. In addition, she served as chair of the Standing Committee on Environmental Law from 1997 to 2000 and served two terms as chair of the ABA's Coordinating Group on Energy Law. A Fellow of the ABA, Ms. Hollis is Chair of the ABA's Standing Committee on Gavel Awards. Ms. Hollis was the first woman to serve as president of the Federal Energy Bar Association (1991-1992) and in December 2010 received its (and the Charitable Foundation of the Energy Bar) Paul Nordstrom Award for her service to the profession and the community. She served as president of the Women's Council on Energy and the Environment from 1997-2002 and received its Woman of the Year award in 2003. She is the first person to serve as both President of the Energy Bar and Chair of the ABA Section of Environment, Energy, and Resources. She is a Treasurer of the United States Energy Association and a member of the advisory committee of the North American Energy Standards Board. Ms. Hollis served as a Professorial Lecturer in the Law on the subject of Energy Law at the George Washington University Law School 1979-1999. She serves on the Board of the American Friends of the Royal Society and was President of the Thomas More Society of America. She also served as a trustee of the Eastern Mineral Law Foundation, and the Women's Bar Association. Ms. Hollis has twice been nominated for Platt's Global Energy Awards Lifetime Achievement Awards in 2006 and 2009. Admitted to practice in the District of Columbia and Colorado, she is a member of the American Law Institute and serves on the board of trustees of the Center for American and International Law and was its vice chair of its Institute for Energy Law. With an extensive background in international energy and environmental law, Ms. Hollis is admitted as an honorary, international member of the Commercial Bar of England and Wales. She is a member of the Energy, International, Women's and Federal Bar Associations and the Bar Association of the District of Columbia. Ms. Hollis is widely published in energy law and policy matters, having co-authored two energy law texts and numerous articles on energy and environmental policy, energy enforcement, natural gas, independent power and cogeneration, and hydroelectric energy regulation. She is recognized by Chambers in electricity law and was ranked by the National Law Journal as one of the Nation's top 20 energy lawyers and is listed in Who's Who in America, Who's Who in the World and other biographical directories. She was named one of "50 Key Women in Energy" in 2003 and 2004 in a worldwide selection process. A Colorado native, she is a 1973 graduate of the University of Denver College of Law and a graduate of the University of Colorado at Boulder, cum laude in General Studies and with honors in Journalism.
TABLE OF CONTENTS
I. OVERVIEW
II. THE CREATION OF A MODERN FERC ENFORCEMENT REGIME
A. The Legal Background
B. The New Office of Enforcement
III. FERC'S ENFORCEMENT ACTIVITIES
A. Investigations
1. How Conducted
2. Civil Penalties and Other Remedies
a. Civil penalties
b. Disgorgement
c. Criminal penalties
d. Other non-monetary remedies
3. Recent Investigations and Settlements
a. Market manipulation investigations
b. Reliability violation investigations
c. Tariff violation investigations
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B. Audits
1. How Conducted
2. Recent Audit Decisions
a. Audits of regional entities
b. Other audits
C. Market Oversight
IV. HOW TO PROTECT YOURSELF
A. An Effective Compliance Program
B. Self-Reports
C. Obtaining FERC Staff Guidance
V. SOME EMERGING ISSUES
A. FERC v. CFTC
B. Antitrust Enforcement
VI. CONCLUSION
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I. OVERVIEW
To say that the Federal Energy Regulatory Commission's (FERC or Commission) focus on enforcement and compliance has been increasing is to understate the case by a mile. The Energy Policy Act of 2005 (EPAct) dramatically expanded the Commission's authority in this area, including its punitive reach. Instances of market manipulation, violations of the new mandatory reliability standards and non-compliance with long-standing open access tariffs and regulations have all resulted in recent years in extensive FERC investigations and, in many cases, costly penalties. The procedural backdrop surrounding FERC investigations, the Commission's handling of the ultimate outcomes of the investigations, and the level of penalties also have evolved as the FERC has gained further support and momentum in the compliance and enforcement arena.
To navigate these rough waters, it is critical for market participants and regulated companies to understand both the substantive requirements that apply to them and the procedural rules under which the Commission operates in conducting its investigations, audits and other enforcement activities. This paper begins with a brief discussion of the substantive underpinnings of the Commission's authority, particularly with regard to market manipulation. Next, is a review of the three principal enforcement activities of the Commission-investigations, audits and market monitoring-which includes recent developments in how the Commission conducts these activities. This is followed by a discussion of the proactive steps that companies should take to minimize their compliance and penalty risks. Lastly, the paper touches upon some emerging issues, such as the ongoing jurisdictional disagreements between the FERC and the Commodity Futures Exchange Commission (CFTC) and the U.S. Department of Justice's recent foray into energy markets enforcement.
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II. THE CREATION OF A MODERN FERC ENFORCEMENT REGIME
A. The Legal Background
The enforcement function has existed at the FERC practically since the creation of the Commission in 1977 as a key component of the Department of Energy Organization Act. It reflects the dual nature of the agency. On the one hand, the FERC is a policy-making and quasi-judicial body. On the other hand, it is a cop, watching over the industries it regulates and making sure public utilities, natural gas companies and market participants comply with the cornucopia of laws, regulations and rules the FERC enforces.
When the Commission's Office of Enforcement was created in December 1977, it was modeled on SEC-style enforcement and was a response to the energy market shortages and price run-ups of the 1970s. The focus of the early enforcement program was on making sure that natural gas companies and public utilities complied with the federal statutes that govern these industries-primarily, the Natural Gas Act (NGA), the Natural Gas Policy Act (NGPA) and the Federal Power Act (FPA), as well as the FERC regulations implementing these laws and the companies' filed tariffs. These laws generally provided for refund authority to disgorge unlawfully collected charges, some limited civil penalties and, in certain cases, for criminal referrals.
With deregulation picking up speed, first in the natural gas arena in the 1980s and then in the electricity industry in the 1990s, came concerns about market manipulation. Encouraged by the Commission, transmission utilities began creating independent system operators (ISOs) and regional transmission organizations (RTOs), which became the administrators of the newly formed wholesale spot electricity markets and congestion management mechanisms. The 2000-01 Western energy crisis and the Enron scandal tested the limits of FERC's ability to supervise
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these complex structures with the old enforcement tools; this delivered a powerful wake-up call that led to significant reforms of the Commission's enforcement function.
In 2002, the Office of Market Oversight and Investigations (OMOI) was established at FERC to learn more about energy markets operations and ensure effective regulation of the nation's energy markets. The Commission referred to the OMOI as its "cop on the beat," but soon came to realize that its penalty authority under the then-existing...
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