On Thursday, October 16, 2008, the Federal Energy Regulatory Commission (FERC) approved three measures to strengthen and clarify its enforcement policy: a Policy Statement on Compliance (Docket No. PL09-1-000) and two orders revising FERC's regulations: one addressing Standards of Conduct for natural gas and electric transmission providers (Docket No. RM07-1-000; Order No. 717) and the other addressing off-the-record (ex parte) contacts during non-public investigations (Docket No. RM08-8-000; Order No. 718).
Policy Statement on Compliance. The Policy Statement encourages regulated energy companies to develop rigorous compliance programs, which FERC hopes will minimize the number of regulatory violations. FERC Chairman Joseph T. Kelliher explained: "We recognize that companies and entities that develop effective compliance programs may still commit violations. In that case, companies that follow the guidance we offer today can expect significant penalty credits, perhaps a full credit."
FERC identified four hallmarks of a good compliance program. First, senior management must be active and involved. Ideally, management should communicate their commitment to the program, actively encourage participation, and designate one or more compliance officers, who, for example, might be able to bring compliance issues directly to the Board of Directors.
Second, a program must produce effective preventive measures, such as careful hiring, systematic training and supervision and periodic reviews. FERC recognizes that compliance programs can be costly and, as such, when reviewing the preventive measures will take into account the size of a company and the extent of its jurisdictional activities and resources.
Third, prompt detection, cessation and reporting of the offense is essential. A company will receive credit for promptly reporting to the Enforcement Staff a violation or the investigation of a possible violation. Conversely, a company that does not self-report violations can expect to be penalized far more severely.
Fourth, remediation must occur. Not only must the violations stop, but steps should be taken to prevent future occurrences, including appropriate disciplinary action for employees.
Finally, the Policy Statement identified several factors that FERC will examine when assessing civil penalties (which can be as high as $1 million per day per violation). As an initial matter, unjust profits must be disgorged. The amount of any civil penalty will be based on the extent to which the four elements of a vigorous compliance program are present and the nature of the violation (e.g., a serious violation that damages the integrity of regulatory program or, alternatively, a minor offense that does not involve significant harm or risk).
Standards of Conduct for Transmission Providers. FERC revised its regulations to clarify the Standards of Conduct for transmission providers and their marketing affiliates and refocus them on those areas where there is the greatest potential for abuse. The new Standards of Conduct incorporate the best from those previously in force under Order No. 2004?especially the integration of electric and natural gas standards?while conforming to the D.C. Circuit's decision?which did not approve of expanding the standards to "energy affiliates" and invalidated Order No. 2004 as it applied to the natural gas industry (National Fuel Gas Supply Corporation v. FERC, 468 F.3d 831 (D.C. Cir. 2006))?and eliminating those elements of the Standards of Conduct that were difficult to enforce and apply. As such, the two key elements of the revised regulations are the elimination of (1) the concept of "energy affiliates" and (2) the corporate separation approach to separating transmission function employees from marketing function employees, which will be replaced by the employee functional approach utilized under Order Nos. 889 and 497.
Ex Parte Contacts and Separation of Functions. The revised regulations will clarify that both FERC investigative staff and outside persons are subject to the same rules governing off-the-record communications with Commissioners and decisional staff in connection with non-public investigations. Both may engage in off-the-record communications with Commissioners and decisional staff while such an investigation is pending. Once an enforcement proceeding is initiated, however, neither may engage in such communications. The revised regulations also clarify that intervention is not permitted as a matter of right in proceedings arising out of non-public investigations.
Effective Dates. The Policy Statement is effective immediately. The other two orders are effective 30 days after publication in the Federal Register, which has not yet occurred but will in the near future.