On January 24, 2011, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued an order denying rehearing and providing clarification to its December 17, 2009 order (the “December 17 Order”) regarding Commission enforcement of statutes, regulations and orders. Specifically, the December 17 Order authorized the Secretary to issue, upon direction from the Director of the Office of Enforcement, a staff Preliminary Notice of Violations (“Notice”) as a part of the staff’s process in conducting an investigation under Part 1b of the Commission’s regulations. According to the FERC, the Notice’s purpose is to provide: (1) the identity of the entity or entities that are the subject of an investigation; (2) the time and place of the alleged conduct; (3) the rules, regulations, statutes, or orders that staff alleges were violated; and (4) a concise description of the alleged wrongful conduct. The Notice would be issued only after the subject of an enforcement investigation had either responded, or had the opportunity to respond, to a preliminary findings letter detailing Enforcement staff’s conclusions regarding the subject’s conduct. Energy Associations (including the Edison Electric Institute and other energy trade organizations), among others, filed requests for rehearing and clarification.

FERC denied the requests for rehearing on both procedural and substantive grounds. Procedurally, the Commission stated that the December 17 Order was an exercise of agency discretion (i.e., a “policy statement”) and therefore not a substantive action subject to the notice and comment requirements of the Administrative Procedure Act.

On the merits, Petitioners argued that the disclosure of the subject of an investigation could harm the company by lowering its stock price. The Commission ­disagreed and concluded that the Notice strikes the appropriate balance between transparency and the risk of reputational harm to the subject of an investigation. The Commission clarified that the Secretary will not issue Notices until after all of the following have occurred: (1) staff has completed its fact-finding process; (2) staff has presented the subject of the investigation with its preliminary findings; (3) the subject has had the chance to respond in writing to the facts and arguments in staff’s preliminary findings; and (4) staff has had a full opportunity to review and analyze the subject’s response.

The Commission provided the following additional clarifications:

  • The Commission anticipates that a Notice will issue in every investigation in which staff, after consideration of the subject’s response to the preliminary findings letter, decides to forward the matter to the Commission for settlement authority. However, the Commission retains the discretion to stay or bar issuance of the Notice in any given matter.
  • The Notice will not issue unless and until Enforcement staff has satisfied itself that, in its view, a violation of a Commission requirement has occurred and it is prepared to seek settlement authority from the Commission.
  • Staff will give the subject of an investigation advance notification that a Notice will be issued.
  • Third-party evidence submitted to the Commission in response to a Notice will be treated as non-public in accordance with section 1b.9 of the Commission’s regulations. In the event staff determines that any third-party allegations may be meritorious, it may engage in further discovery.
  • With limited exceptions, the Notice procedure authorized in the December 17 Order applies only to those investigations where a subject’s response to staff’s preliminary findings letter was received fter December 17, 2009, or where the time period for such response had passed as of December 17, 2009.

Commissioner Marc Spitzer issued a dissent to the January 24 Order. In his dissent, Commissioner Spitzer stated that the Petitioners’ requests for rehearing were compelling and that the December 17 Order failed to comply with the Commission’s obligations under the Administrative Procedure Act. Commissioner Spitzer concluded that the majority failed to strike the proper balance between transparency and the due process rights of entities under investigation.