Under 2005 EPAct provisions, Congress increased the U.S. Federal Energy Regulatory Commission's jurisdiction and authority. During today's OnPoint, Susan Court, director of FERC's Office of Enforcement, and R. Michael Sweeney Jr., attorney and partner at Hunton & Williams, discuss the major revamping FERC has undergone. They also discuss FERC's role as a consumer-oriented agency and its ability to affect public power companies.
Arthur O'Donnell: Hello and welcome to OnPoint. I'm Arthur O'Donnell. Today we'll be talking about some new duties of the Federal Energy Regulatory Commission. Joining me is Susan Court, the new director of the Office of Enforcement, and R. Michael Sweeney, Jr., a partner with Hunton and Williams here in Washington, D.C. Welcome and thanks for being with us today.
Susan Court: Thank you.
Arthur O'Donnell: Susan, let's talk about some of the changes. The Energy Policy Act of 2005 gave FERC new duties and it caused some restructuring within the agency. What's the set up these days?
Susan Court: From the perspective of enforcement the commission has greatly expanded enforcement authority. For one thing the EPAct of 2005, which was put into place last August, increased the commission's authority over any violation of the Natural Gas Act, for example. So up to that time the commission did not have the authority to penalize anyone that violated the Natural Gas Act. The same is true for most of Part II of the Federal Power Act. The Natural Gas Act and the Federal Power Act Part II by the primary statutes which the commission uses to regulate the natural gas industry and also the investor owned electric utility industry. So in the first instance the EPAct of 2005 expanded the commission's authority to impose penalties. And then secondly, to the extent it had penalty authority in some areas, it increased that authority from $10,000 a day per violation to $1 million a day per violation. And finally, and again in the area of enforcement, EPAct of 2005 gave the commission new authority to prevent the manipulation of energy markets by any entity, not just traditionally jurisdictional entities, that would commit a fraud in the marketplace, electric and gas market.
Arthur O'Donnell: OK.
Susan Court: Those are the primary areas. Also the statute gave us more authority with respect to transparency, promulgating rules to improve the transparency of energy prices, electric and gas. So in a nutshell those are the major areas of increased authority, enforcement authority, that EPAct gave us.
Arthur O'Donnell: When you talk about financial penalties it makes it sound like FERC is becoming a consumer protection agency. It never was set up to be, but is that something that's more in your role now?
Susan Court: Well, I think that the FERC was always a consumer protection agency and its predecessor, the Federal Power Commission, going back to going back to the creation of the Federal Power Commission in 1935, because we were charged, FERC and its predecessor were charged with ensuring the rates were just and reasonable. That is definitely a consumer-oriented standard. Also we are charged with ensuring that the transmission of electric energy and the transportation of natural gas is done on a not unduly discriminatory basis. Those are the words out of the statute. So I think we were always consumer oriented, of course the FERC regulates wholesale sales and interstate transmission and transportation of energy. And frequently we associate consumer with the end-user, which is usually the bailiwick or within the bailiwick of state commissions which are in charge of retail rates. But we view ourselves as a consumer oriented and a consumer protection agency. We do that though by ensuring that wholesale rates are just and reasonable.
Arthur O'Donnell: OK. These are big changes. Michael, do you think that the changes are well understood in the industry?
R. Michael Sweeney Jr.: I think so.
Arthur O'Donnell: Yeah?
R. Michael Sweeney Jr.: I do think so. I think that the changes that were implemented through EPAct 2005 were not unforeseen. They're a natural outcome of the Enron crisis and the crisis in Western energy markets that occurred in 2000 through 2003. So I think on the whole, yes, the industry was on notice. And that the commission had been quite articulate about sending signals of where they wanted to move regulation, from their traditional structure to a more market behavior oriented focus.
Arthur O'Donnell: OK. One of the things about EPAct is that it broadened FERC's jurisdiction. Actually people who were nonjurisdictional in the past now have to pay attention. Tell us who has to care about this stuff?
Susan Court: Well, anyone who participates in the market, in the electric and gas markets that do anything that may affect FERC jurisdictional transactions. So normally FERC regulates natural gas pipelines, pipeline companies that transport gas in interstate commerce and investor owned electric utilities that make sales for resale in interstate commerce or transmit electricity in interstate commerce. That, in a nutshell, is the scope of our jurisdiction over these two industries. But the any manipulation provisions of EPAct also extends to companies that are not traditionally regulated by FERC that may do something that might affect a jurisdictional transaction. For example, a trader, a person who trades in natural gas as a commodity or electricity as a commodity or a producer of natural gas who sells natural gas in interstate commerce are not subject to our jurisdiction normally.
Arthur O'Donnell: OK.
Susan Court: And so now if they commit a fraud in those energy markets that might affect a jurisdictional transaction they would be subject to the million dollar a day penalty, up $2 million. I'm not saying it's an absolute. It's up to $1 million.
Arthur O'Donnell: Right. And Michael you've talked about how public power has to be aware of these changes at FERC too. How are munis and districts being brought in?
R. Michael Sweeney Jr.: Well, as Susan mentioned, through the market manipulation provision the statute applies to any entity that engages in a jurisdictional transaction. And it specifically applies to entities that are normally exempt from the commission's jurisdiction, for example on the electric side under the Federal Power Act section 201(F), which would be municipal utilities, state agencies, RUS funded co-ops. So it does have a broad swath. It's really intended to ensure that these provisions are intended to ensure the integrity of the energy markets and require responsible behavior by the participants in those markets.
Arthur O'Donnell: Susan, what kind of cases do we have pending, without going into a lot of detail?
Susan Court: Well, I can't even, detail or no detail, all investigations by the commission are nonpublic, per the, our regulations. And so I really can't discuss this.
Arthur O'Donnell: OK. Now there is a process for what people call a no action letter, where a client can come and ask FERC for guidance. You've taken a client through this. Can you give us a sense of the process for this?
R. Michael Sweeney Jr.: It's a fairly effective process. It is structured, at least in my experience, similar to what the FCC has done with the no action letter process. Which is when there's a gray matter area that is not something that FERC staff or a client is comfortable with an informal resolution and wants some sort, a greater degree of comfort from the agency. Now it's important to know that no action letters don't bind the commission itself. But nonetheless it's a process where you can come in and articulate a set of facts with a staff, work with a staff, educate the staff. They educate you in the process. And hopefully come to a resolution where you're able to take action that's in a gray area and have comfort that that action is compliant. And if it's not you also get a real view that it's not. So it's an iterative process. It goes back and forth. It's highly fact intensive. And I think given the new regulatory paradigm or the enforcement paradigm the commission is highly effective.
Arthur O'Donnell: OK. Susan what I'm hearing here is it sounds like there's a lot of parallels with the Securities and Exchange Commission, the Commodity Trading Futures Commission, even the IRS. Were some of those elements brought specifically into FERC's authority so that everything worked on the same pattern?
Susan Court: Yes, I don't know about the IRS, but as far as the Securities and Exchange Commission Congress actually directed the FERC in promulgating its rules on the prevention of manipulation in the energy market to model its rule after rule 10(b) of the Securities and Exchange Commission in the Securities Exchange Act. So that was per the direction of the Congress itself. But in developing other actions and taking other initiatives since the passage of EPAct the commission has looked to other agencies that have a strong enforcement role. And even the Department of Justice, for example, we looked to, when we crafted our policy statement on enforcement, which lays out the factors that we'll consider in crafting a remedy. And so we used the sentencing guidelines, for example, to come up with a list of factors that we would consider, for example, how strong is the compliance program? What was the role of senior management? Whether the company self reported a violation. So there's a whole litany of factors that we'll consider. And we did look to other enforcement agencies for inspiration and as a model.
Arthur O'Donnell: OK. A basic question, do you do this investigation on your own initiative? Do you have to wait for a complaint?
Susan Court: Oh, the sources of investigation are varied. We have a hotline, that actually has been in place since the late 1980s, where individuals or companies can call the FERC, the FERC enforcement office, and informally complain about discrimination that it may be experiencing in the marketplace or manipulation. So there's the hotline. We also have a market oversight. This is in the Office of Enforcement. We have a market oversight staff that daily looks at what's happening in the electric and natural gas markets, intensely. And if any anomaly picks up, they pick up any anomaly that can't easily be explained then we sort of tag it and look further into it. That's another source. We receive referrals from the market monitors who are active in our organized markets in the regional transmission organizations for example. So we get referrals from them. We have self reports that are now, that really is a derivative of our policy statement from last October, so companies can self report a violation. We have, we also receive, in our docketed proceedings, we receive complaints and protests that may lend themselves to an investigation as opposed to an adjudication before a judge. So we get referrals from other members of our own staff. And finally we also have a very active audit program, which is focused on compliance with the regulations. But in the course of doing an audit if it's apparent that a company is literally violating the law then we can take that piece of information and move it into the investigative arena area.
Arthur O'Donnell: OK. So there's a lot more to look forward to. The stakes are higher. The rules are more complex. I want to think Susan and Mike for joining us today. I'm Arthur O'Donnell. We'll see you next time.
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