1. law, govt and politics

Republicans on House Subcommittee Advance Bill Targeting FERC’s Enforcement Authority
By Edgar Boshart and Kimberly Underwood
This article appears as published in The Foster Report No. 3054, issued June 12, 2015
In the House of Representatives last week, the Energy and Commerce’s Subcommittee on Energy and Power
publicized two proposed “discussion drafts” that are part of a more comprehensive energy-related bill (Title IV) and
held hearings to receive testimony and review the drafts’ merits. Title IV includes two main sections: Subtitle A Energy Efficiency and Subtitle B - Accountability. The “accountability” section squarely targets FERC’s “enforcement
behavior,” characterizing the Commission’s past efforts in a negative light. The draft “seeks to reform the process by
which FERC implements its enforcement authority.”
The measure would add a new section to the Federal Power Act (FPA) and establish a new Office of Compliance
Assistance at the FERC – although is not proposing any new funding authorization. Headed by a director, the Office
would be responsible for: “promoting improved compliance with Commission rules and orders by, among other
things, providing entities regulated by the Commission the opportunity to obtain timely compliance guidance; making
recommendations with respect to market behavior and enforcement; issuing reports and guidance; and performing
outreach to regulated community.”
Moreover, the bill would require the Commission “to complete a rulemaking with respect to investigations to address:
(1) disclosure of exculpatory materials; (2) the documentation of communications regarding the merits of an
investigation between FERC investigatory staff and advisory staff; and (3) allowing direct communications between
entities subject to an investigation and FERC commissioners regarding settlement considerations.”
In addition, FERC would have to direct regional transmission organizations (RTOs) "to develop, in consultation with
stakeholders, and submit, a plan that describes how the market rules, practices, and structures of the RTOs meet certain
established criteria, such as just and reasonable rates; reliability; fuel diversity and resource adequacy; transmission
and natural gas infrastructure development; accurate price formation; and improved transparency in governance and
stakeholder processes.” RTOs would be required to identify “specific actions” taken to revise or amend its market
rules to meet the criteria.
Lastly, Subtitle B proposes language to “modernize” the Public Utilities Regulatory Policies Act (PURPA), specifically
the mandatory purchase obligation and the definition and size restrictions of qualifying facilities.
Rep. Ed Whitfield (R-Kentucky), the subcommittee’s Chairman, a vocal critic
of FERC, claims that the Office of Enforcement’s (OE’s) “aggressive behavior”
has “raised concerns.” The Congressman alleged that FERC’s actions have
“come at the expense” of fairness, transparency, and due process. “Some have
even questioned whether FERC enforcement actions are counterproductive
and actually impede the proper functioning of electricity markets,” he said.
Whitfield contends that the legislative measure is necessary to help “improve
transparency in FERC investigations.” In addition, the bill, with the energy
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efficiency-related provisions, intends “to improve” wholesale electricity
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June 12, 2015
markets. “FERC has yet to develop effective reforms to ensure fair, transparent, and well-functioning competitive
markets,” Whitfield asserted.
Testimony. Witnesses at the hearing included:

Kathleen Hogan, Deputy Assistant secretary for Energy Efficiency, U.S. Department of Energy;

Arnold Quinn, Director, Office of Energy Policy and Innovation, FERC;

Larry Parkinson, Director of OE, FERC;

Sue Kelly, President and CEO, American Public Power Association (APPA);

John Shelk, President and CEO, Electric Power Supply Association;

Peter Galbraith Kelly, Senior Vice president, external affairs, Competitive Power Ventures, Inc.;

Christopher Cook, President and General Counsel, Solar Grid Storage LLC;

Jonathan Weisgall, Vice President, legislative and regulatory affairs, Berkshire Hathaway Energy; and,

William Scherman, Partner, Gibson, Dunn & Crutcher LLP.
Below is a summary review of testimony offered by FERC’s Larry Parkinson, APPA’s Sue Kelly, and Attorney William
Scherman.
Parkinson. Parkinson,1 who was the Director of OE’s Division of Investigations, recently
took the reins as Director of the OE itself from Norman Bay (who became FERC’s Chairman
on April 15). The new OE director explained to the subcommittee that OE’s work includes
an investigative stage -- during which staff gathers facts to decide whether to recommend
further action by the Commission -- and an adjudicative stage -- during which the
Commission hears facts and arguments and decides whether to impose civil penalties and
other remedial measures.
The House’s discussion draft, as he sees it, is proposing changes to FERC’s regulations governing the investigative
stage. While OE certainly “welcomes constructive analysis” of its policies and procedures and “is always willing to
consider changes in the way it conducts investigations,” Parkinson flatly declared that the proposed legislation “would
be very harmful to the investigative process and, if enacted, could significantly undermine the Commission’s ability to
carry out Congress’s enforcement goals.” Specifically, the OE has special concerns about Subtitle B’s proposed
subsections 4212(1), 4212(2), 4212(3), and 4212(4).2
Subsection 4212(1). FERC opposes being subject to a mandate to disclose “helpful or potentially helpful” materials and
ensure that any third party that “assists” with investigations does the same. The measure would pose a tremendous
burden on FERC’s investigations, Parkinson warned. The Commission already discloses exculpatory material to
subjects under a voluntary policy adopted five years ago. FERC’s policy requires enforcement staff to review all
materials it receives during an investigation and to provide the subject with any materials that a criminal prosecutor
would have to provide pursuant to the U.S. Supreme Court’s decision in Brady v. Maryland -- that is, to provide the
subject with any exculpatory evidence known to the government but unknown to the subject that is “material to guilt
or punishment.”
1
Parkinson is a former federal prosecutor and has 30 years of experience in federal enforcement work in several federal agencies.
2
Parkinson’s FERC colleague, Arnold Quinn, director of the Office of Energy Policy and Innovation, testified as to the propose d
legislation’s other sections (mostly Subsection 4221), which addressed proposed improvements to wholesale electricity markets and
establishment of an Office of Compliance Assistance.
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Overall, Parkinson said, the subsection 4212(1) language could undermine existing policy and drastically burden and
delay investigations. The proposed language goes “far beyond” any traditional definition of Brady material by
including the term “materials helpful or potentially helpful to the defense.” That term is not defined, Parkinson said,
and it is unclear how staff would go about identifying such information, particularly given that the subject may not
have disclosed all of its defenses at that stage. A literal reading of the term could “seriously disrupt” the investigative
process, the OE Director reiterated.
“I am not aware of any federal agency that operates under such a requirement,” he stated. “Requiring staff to identify
and disclose material that could be ‘helpful or potentially helpful’ to a subject would impose difficult and timeconsuming judgments that extend well beyond what even criminal prosecutors are required to undertake.”
In addition, the obligation does not appear to be limited to factual material, and could include non-factual material
such as FERC staff’s internal analyses of the evidence and legal memoranda. The language could be read, “to override
well-established protections” for attorney work product, attorney-client communications, and the agency’s
deliberative process. Additionally, the requirement to ensure disclosure by other federal agencies, state agencies, and
non-governmental organizations that “assist” an investigation would be extraordinarily difficult to administer in many
of FERC’s cases, director Parkinson said.
Subsection 4212(2). This subsection would require the Commission to provide any entity or person subject to an
investigation access within a “reasonable time” to the transcripts of sworn testimony taken during that investigation.
Parkinson again explained that Commission regulations already allow a witness to have a copy of the transcript of his
testimony “unless there is good cause to deny the request.” Staff almost always makes such transcripts available
promptly upon request, and it delays access only in the rare instance where there is a threat to the integrity of the factfinding process.
The issue under the Commission’s existing regulations is not really whether a witness will receive access to the
transcript, but whether staff (with management review and approval) can delay such access for a short time in certain,
rare cases. Litigation in this matter concluded that such delayed access is appropriate in some circumstances. “Over the
past six years, we have conducted more than ninety investigations and have delayed access to transcripts in only about
a dozen of those matters,” Parkinson told the subcommittee.
As it is written, asserted Parkinson, the subsection could be read to undermine FERC’s investigative work and infringe
the rights of third parties. While the reference to “reasonable period of time” may simply codify in statute the
Commission’s existing regulations and practice that language could be meant to eliminate the good cause standard for
delaying access in the few instances when it is necessary to do so.
“I would also be very concerned about the language that provides that the subject would be provided access to ‘any
deposition involving such entity or person,’” he continued. In many cases, such a requirement would be problematic
if it requires the Commission to provide the investigative subject -- and not just the witness -- access to the transcripts
of all testimony taken during an investigation. During the investigative stage, there is often good reason to avoid
giving transcripts of testimony taken of one subject to a different and potentially-adverse subject – such as in
whistleblower cases. It would be harmful to investigations and the rights of individual witnesses to mandate that
every investigative subject automatically gets a copy of all testimony, particularly while an investigation is ongoing,
he said.
Again, no other agency is required to take this kind of approach, “and I do not believe FERC investigations should be
treated differently in this key respect,” Parkinson admonished the panel.
Subsection 4212(3). According to the draft measure, any communications between FERC’s investigatory staff and
advisory staff regarding the merits of an investigation must be “in writing and on the record.” Parkinson blasted this
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“dramatic change” to existing practice, claiming it would “seriously undermine” the Commission’s ability to
administer its enforcement function.
In the adjudicative stage, FERC’s existing regulations and practices allow Commissioners to sit as neutral arbiters as
they and advisory staff are walled-off from investigative staff who are litigating matters before them. During the
investigative stage, by contrast, the Commission itself is responsible for directing, supervising, and setting priorities
regarding the work of Enforcement staff. To perform these functions properly in the enforcement context, the
Commissioners and their staff need to be able to communicate freely with investigative staff on a wide range of topics,
including the types of conduct staff is investigating, the progress of those investigations, the merits of potentially
settling those investigations, and many other important judgment calls that arise in complex enforcement cases,
Parkinson explained.
Under the draft language, all of those types of communications may be considered to fall within the phrase “regarding
the merits of the investigation.”
“Requiring that they all be in writing—without the ability to have candid back-and-forth discussions and oral
briefings—would be extraordinarily inefficient and would significantly impede the Commission’s exercise of its
management responsibilities,” he said. “Further, requiring that such writing be ‘on the record’ would make candid
communication almost impossible -- particularly given the lack of any express protections for attorney work product,
attorney-client communications, or agency deliberative process in the proposed legislation.”
Furthermore, separating the investigative staff and advisory staff during the course of an investigation would deprive
investigative staff of the expertise of other FERC offices (and vice versa), and would largely isolate enforcement staff
from the rest of the agency. Similarly, no other federal enforcement agency – including the Securities and Exchange
Commission (SEC), the Federal Trade Commission (FTC), and the Commodities Futures Trading Commission (CFTC)
or others -- is subject to the types of limitations proposed by the House’s legislation.
Subsection 4212(4). This article of the proposed bill would require that investigative subjects be allowed to
communicate with Commissioners regarding the substance of settlement considerations to the same extent that the
Commissioners and the investigatory staff communicate. Parkinson questioned the intent of the provision, and
stressed that it fails to recognize that OE attorneys act as counsel to the Commission and, as such, have an obligation to
provide candid advice to the Commissioners regarding settlement considerations during the investigative stage, which
should not be party to investigative subjects.
“I believe it would be a significant mistake to interfere with Commissioners’ ability to obtain such candid advice from
its own attorneys at that stage by treating investigatory staff and subjects as being on the same footing (as they are
during the later adjudicative stage),” he shared. Parkinson reiterated that no other enforcement agency has such
substantial restrictions on the ability of staff and the heads of the agency to communicate freely. Subjects already have
the right to submit written materials to the Commissioners regarding settlement, or any other topic, at any point in the
investigation. Mandating that subjects be allowed to communicate regarding settlement to the same extent as
investigatory staff fails to recognize that attorneys who serve as investigative staff have an attorney-client relationship
with the Commission and, therefore, are on a different footing than investigative subjects.
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APPA's Kelly. Kelly testified that APPA certainly supports efforts to ensure stronger compliance
with FERC's regulations. The association, however, is not sure that the legislative proposal
mandating the creation of another Commission office, along with the additional bureaucracy and
employees, is the best way to accomplish that goal.
Kelly advised that the Commission already has several mechanisms for providing compliance
guidance to regulated entities, including: formal Commission orders, regulations, and policy
statements; no-action letters, legal opinions, and accounting letters by Commission staff;
information on its extensive website; an enforcement hotline and an online compliance help-desk
via which entities can seek compliance advice from Commission staff; and the availability of in-person meetings and
telephone discussions with Commission staff. In addition, staff has made itself available for many years with entities
intending to make filings through pre-filing conferences.
Proposed section 4212 would provide additional procedural rights to entities that are the subject of investigations, and
this is something APPA questions. “In the absence of a compelling reason for Congress to step in, APPA believes that
the Commission is generally best positioned to set out the procedures and processes applicable to its own internal
investigations,” Kelly asserted.
In general, enforcement proceedings at the Commission -- especially in wholesale market manipulation cases -- often
involve large corporations, investment banks or other financial entities with “substantial” resources. “They can and
do hire major corporate law firms with experienced enforcement practices to litigate each and every aspect of such an
enforcement proceeding.”
In civil penalty cases, the FPA allows entities to elect either an evidentiary hearing before a Commission administrative
law judge or a trial de novo in a federal district court. On the other hand, electric consumers who may have been
victimized by market manipulation or other deceptive practices have no representation other than through the
Commission’s enforcement staff. Consumers and the public generally do not even know that an investigation is
ongoing until it is settled or a notice to show cause is issued, unless the regulated entity itself decides to disclose the
fact publicly or the Commission decides to issue what is known as a Staff’s Notice of Alleged Violations.
Since consumers must rely on the OE’s staff to protect their interests as electricity consumers, any additional due
process protections Congress might decide to give subjects of enforcement investigations must not adversely affect the
ability of FERC to protect the public from market manipulation.
In sum, from APPA's standpoint, the “very complex” electric market rules and tariff provisions give market
participants “more opportunities to engage in at best, questionable, and at worst, unscrupulous, behavior.” Clearer
and simpler electric market regimes that rely less on centralized administrative constructs and complicated rules and
more on bilateral market transactions and activities of individual market participants could reduce opportunities for
market manipulation in the first instance, Kelly concluded.
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Sherman. William Sherman 3 shared his relatively well-known misgivings about the FERC’s
handling of market manipulation investigations. While FERC’s actions over the last few
years have injected greater competition into the nation’s natural gas and electricity markets,
he -- along with “many other members of the regulated community, energy bar and leading
economists” – is “becoming increasingly concerned that we have recently hit some
stumbling blocks,” especially as it relates to the regulation of electrici ty markets.
In Sherman’s opinion, an important part of healthy competitive markets is to give regulated
entities a “meaningful ability” to seek advice and guidance from regulators as they attempt
to comply with complex Commission regulations.
Equally important, he said, regulated entities subject to FERC investigations “must be treated in a manner that fully
respects their due process rights – both in practice and perception.” FERC investigations and enforcement actions must
be conducted in a fair and transparent manner, Sherman stressed. In his view, however, the enforcement process at
the Commission “is no longer an unbiased exercise” of the prosecutorial authority Congress gave FERC in 2005.
“This has profound implications not only to subjects of investigations, but also for the long term competitive health
and liquidity of our markets,” he warned.
Sherman “strongly supports” the proposed reforms to FERC’s enforcement as outlined in subsection 4212.
“The discussion draft is a very good start in restoring fairness and impartiality to the FERC Enforcement Process,” he
argued. These specific proposed reforms, along with several others, are "vital to the long term competitiveness of our
nation’s gas and electric markets,” Sherman testified.
Copyright © 2015 by Concentric Energy Publications, Inc. All rights reserved. Concentric Energy Publications
Trademark used under license from Concentric Energy Advisors, Inc. The Foster Report is published by
Concentric Energy Publications, Inc., a Concentric Energy Advisors, Inc., Company.
3
Sherman is a former FERC general counsel, chief of staff and senior legal and policy advisor to the Commission.
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