Pursuant to the Revised Policy Statement on Enforcement released earlier this year, the Federal Energy Regulatory Commission (“FERC” or “Commission”) released its 2008 Report on Enforcement (the “Report”) on November 6, 2008. The Report details the Commission’s enforcement activities during FY2008, including an overview of and statistics on the activities of the Office of Enforcement (“OE”). It also provides general information regarding trends in enforcement, including the types of violations that parties have self-reported and the circumstances that have led the Commission to reduce potential penalties or forbear completely.
Although the Commission noted that there was no guarantee that similar situations would be handled in the same manner in the future, the summaries provide helpful guidance regarding the kinds of violations the Commission is particularly focused on, the kinds of violations that may result in greater penalties, and the actions that regulated entities can take to reduce or avoid penalties should violations occur. Common themes in those cases where no penalties were imposed include: (1) the violation is self-reported; (2) there is no harm to the market or customers; (3) the violation was inadvertent; (4) the violation was of limited duration and scope; and (5) corrective action was taken. Each case must be evaluated on its own merits, but the presence of these factors should help reduce or avoid penalties should a violation occur. All of these factors are, to varying degrees, within a company’s control, from adequate training and compliance due diligence, to prompt detection and remedial actions, to self-reporting. Companies that recognize and act on that observation are in the best position to avoid violations in the first instance and to merit lenient treatment by FERC should violations occur.
The Report reiterates the importance of self-reporting and notes that the agency has received a total of 136 self-reports over the last three years. The OE received 68 self-reports in FY2008, which is more than twice the number of reports received in FY2007. The Report offers two possible reasons for this dramatic increase: (1) companies are improving their compliance programs and auditing procedures, so they are better able to detect violations and report them to Commission Staff; and (2) the Commission offers penalty mitigation credit to those who self-report violations, thus creating a strong incentive to self-report.
The Report notes that when reviewing a self-report, OE Staff typically considers whether: (1) there is an explanation for the conduct; (2) the self-reported matter caused any harm; (3) corrective action has been taken; and (4) the company has adopted measures to prevent future violations. If the violation was “inadvertent or isolated, did not cause harm, was corrected, and preventative measures have been taken,” then often OE Staff will close the self-report without an investigation or sanctions.
Of the 68 reports received in FY2008, OE Staff closed 25 of them after an initial review and without opening an investigation. Three cases were closed without penalties after conducting an investigation. This represents 40% of the self-reports received by OE. By contrast, in FY2007, approximately 75% of self-reports were closed with no action. OE Staff’s initial review is pending for 7 of the 68 self-reports and 33 are pending as investigations. To date, none of the FY2008 self-reports has resulted in a civil penalty.
Natural Gas Capacity Release Violations
For the first time, the Commission has provided specific examples of capacity release violations that did not result in sanctions. In one instance, a natural gas company reported to the Commission that it failed to post a seven-month capacity release at a discounted rate and failed to include the release in a quarterly compliance report. Because the event was an isolated incident and the company had already remedied the matter, Commission Staff closed the case without further action.
Commission Staff also closed a matter involving a shipper-must-have-title violation without further action where a company self-reported that, while acting as a nominating agent, the company had transported natural gas using a customer’s capacity. No further action was taken because the violation occurred prior to the Commission’s new civil penalty authority became effective and there was a low likelihood of unjust profits to disgorge.
In another case, a shipper inadvertently transported its natural gas on another shipper’s interruptible transportation contract for a single day. Commission Staff closed the investigation because the company responded quickly and the violation was inadvertent, occurred using interruptible transportation, and was short in duration and small in quantity.
Finally, Commission Staff closed an investigation involving a holding company that violated the shipper-must-have-title requirement by transporting gas owned by its multiple local distribution companies (“LDCs”) using a “bridge” contract with a pipeline that specified that the shipper of record would be the LDC that was farthest upstream. The transactions occurred over 94 days and involved 1,221,184 Dth of gas. The case was closed without penalty based on the limited scope and duration, lack of harm to the market and immediate response and self-report by the company.
The OE also was active in the electricity sector. For example, there was an increase in the number of investigations involving alleged violations of Section 35.41 of the Commission’s Regulations, which imposes a duty upon electric power sellers authorized to engage in sales for resale of electric energy at market-based rates to provide accurate, factual and complete information to the Commission. The majority of these investigations involved allegations that entities provided inaccurate information to Commission-approved entities in connection with bidding, scheduling or unit availability. In addition, Commission Staff saw an increase in the number of referrals from the market monitoring units of the Regional Transmission Organizations and Independent System Operators. Finally, for the first time, OE Staff opened investigations related to potential violations of the Reliability Standards that went into effect in June 2007 in the continental United States.
Notably, there was a large increase in the number of market manipulation investigations conducted. In FY2008, OE Staff opened 20 investigations involving allegations of market manipulation, compared to 12 in FY2007. Other than discussing the show-cause orders currently pending before the agency (the Amaranth and ETP cases), the report does not provide details regarding these investigations, but notes that “these investigations, even when they do not result in enforcement action, are generally more time-consuming and labor-intensive than other investigations.”
In FY2008, the OE completed 60 audits of public utilities and natural gas pipeline and storage companies. Approximately two-thirds of the audits were classified as financial audits, and focused on compliance with the Public Utility Holding Company Act of 2005, rate issues, fuel clauses, merger conditions, affiliate relationships, and various Commission reporting requirements. The other third were non-financial audits and focused on open access transmission tariffs, interconnection rules, gas tariffs, OASIS and gas Web site posting, Standards of Conduct, blanket authorizations, filing requirements, and other regulations of the Commission.
These audits resulted in 156 recommendations for corrective action and included $1 million in recoveries from accounting and billing adjustments and $8.7 million in reductions to utility plant accounts. In addition, OE required certain entities to implement compliance plans to ensure compliance with the Commission’s policies and rules, including requirements to conduct training and periodic audits.