I would like to take this opportunity to introduce you to the Energy Regulatory and Enforcement practice at Patton Boggs, LLP. I joined the Firm last April, and I have enjoyed both getting to work with lawyers here on energy matters as well as growing the practice. Since April, we have added Cyndy Marlette, Chip Cannon, Scott Binnings, Matt Dunn and Colleen O'Boyle to the team. The other 11 members include Debbie Swanstrom, David Robinson, Scott Stewart, Ted Sonde, Cass Weiland, Phil Smith, Ted Planzos and Mario Mirabelli (partners) and Lodie White, Meredith Jolivert and Dana Weekes (associates). Their biographies are attached to this newsletter, and you will see that nine of the lawyers have worked at FERC, CFTC, SEC, FTC and DOJ, in positions that include general counsel, director of enforcement, assistant director of enforcement and commissioner.
We have jointly put together this newsletter on enforcement-related developments in the energy industry. We plan to issue Enforcement Insights on a regular basis. Please let us know what you think of it and how we can continue to improve our coverage of issues of interest to you.
Suedeen Kelly, Editor
For further information, please contact Suedeen at firstname.lastname@example.org.
PRESIDENT OBAMA'S DIRECTIVES TO FEDERAL AGENCIES ARE EXPECTED TO ALTER COMPLIANCE OBLIGATIONS AND ENFORCEMENT RISKS
by Debbie Swanstrom
President Obama issued an executive order and memoranda to executive department heads and agencies directing them to take steps to reduce regulatory burdens on U.S. businesses. These directives are expected to affect the scope and type of compliance obligations faced by U.S. businesses as well as the risks of enforcement actions.
If implemented as intended, the executive order will reduce the number of regulations which U.S. businesses must comply with and remedy conflicts in regulations adopted by multiple executive departments and agencies. The executive order directs each executive department and agency to analyze whether its existing regulations are outmoded, ineffective, insufficient or excessively burdensome, and to modify, streamline, expand or repeal regulations as needed.
Executive departments and agencies also were directed to take steps to provide greater disclosure and transparency with respect to their regulatory compliance and enforcement activities. To the extent feasible and permitted by law, each executive department and agency must develop plans to make public information concerning their regulatory compliance and enforcement activities accessible, downloadable and searchable online, including on centralized platforms such as www.data.gov. They also must work together to explore how best to generate and share enforcement and compliance information across the federal government.
The president stated that these transparency requirements are intended to promote fair and consistent enforcement and cross-agency comparisons, as well as to provide the public with data they need to make informed decisions. Significantly, the president also stated that the sharing of compliance and enforcement data among federal agencies "can assist with agencies' risk-based approaches to enforcement" because a "lack of compliance in one area by a regulated entity may indicate a need for examination and closer attention by another agency." This statement implies that if a company is found to have violated a regulatory requirement of one federal agency, it might be placed on a watchlist and be subject to heightened scrutiny by another federal agency. As a result, the risks of enforcement actions by multiple federal agencies could increase.
Although the executive order and memoranda do not apply to independent agencies, such as the Federal Energy Regulatory Commission (FERC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC), the president requested that independent agencies voluntarily follow the same principles.
Already, FERC has taken steps promoting the president's policy of transparency in enforcement actions. As described below, shortly after the executive order and memoranda were published, FERC issued a long-awaited order on rehearing regarding the release of information to the public in a preliminary notice of violation.
For further information, please contact Debbie at email@example.com.
FERC AFFIRMS PUBLIC DISCLOSURE OF NAMES OF COMPANIES SUBJECT TO ENFORCEMENT INVESTIGATIONS
by Scott Binnings
On January 24, 2011, the Federal Energy Regulatory Commission (FERC) issued an order addressing multiple requests for rehearing of its December 17, 2009 order authorizing the Secretary of the Commission to issue, upon direction from the director of the Office of Enforcement, a preliminary notice of violations to companies that are the subject of enforcement investigations disclosing the company name and nature of the conduct enforcement staff believes constitutes a violation. Prior to the December 17 order, information about enforcement investigations was not typically disclosed publicly unless and until the Commission approved a settlement or issued an order to show cause.
Multiple parties filed requests for rehearing, reconsideration and clarification urging the Commission to rethink the new disclosure procedures, stating that disclosure of company names subject to enforcement investigations will pose considerable reputational and financial risks (e.g., lower stock prices, ability to attract capital), will be unfair to companies the Commission ultimately decides not to proceed against and will put pressure on the Commission not to disagree with staff's conclusions. Several other parties argued that the order was invalid under the Administrative Procedure Act (APA) because it was not issued after notice and comment.
In the January 24 order, the Commission denied rehearing, concluding that it had struck the proper balance between transparency and confidentiality. The Commission stated that disclosure of the company name will enhance the Commission's ability to resolve investigations because market participants will share relevant information. The Commission also stated that disclosure of the nature of conduct enforcement staff believes to constitute a violation will facilitate compliance and encourage self-reporting. Responding to industry criticisms about the potential for reputational and financial harm, the Commission emphasized that a notice will be issued only after staff has completed its fact-finding process, presented the company with its findings and given the company a chance to respond, and staff has a full opportunity to review and analyze the company's response. At this stage, the Commission stated that the fact of an investigation likely will already have been disclosed through Securities and Exchange (SEC) filings or other means.
The Commission also rejected the procedural claims, stating that the December 17 order was exempt from notice and comment requirements either as an interpretative rule, general statement of policy or rule of agency organization, procedure or practice.
Commissioner Spitzer dissented, stating that the requests for rehearing were "compelling." In particular, Commissioner Spitzer found that the December 17 order did not comply with the APA and, even assuming it did, that the Commission's goal of achieving greater transparency in its enforcement program would be achieved by issuing a notice with the company name masked. Withholding the company name would provide market participants with information about the Commission's enforcement activities, while still protecting the company until after the Commission has had a chance to consider staff's views.
For further information, please contact Scott at firstname.lastname@example.org.
FERC INITIATES INQUIRY INTO DISRUPTIONS OF ELECTRIC AND NATURAL GAS SERVICE
by Debbie Swanstrom
The Federal Energy Regulatory Commission's (FERC) enforcement staff is conducting an inquiry into outages of electric generating facilities and disruptions in natural gas deliveries occurring in the Southwest during the first week of February 2011. Several outages of generating facilities in Texas and Arizona occurred when unusually cold weather spread throughout the region resulting in high customer demands for electricity. Also, deliveries of natural gas were disrupted in Texas, New Mexico and elsewhere in the Southwest.
The Commission directed its enforcement staff to conduct an inquiry with the objectives of identifying: (1) the causes of the disruptions; and (2) any appropriate actions for preventing a recurrence of these disruptions. The Commission stated that its current priority is to gather relevant facts, identify the problems and fix them. Any decisions by FERC on whether to initiate formal enforcement investigations will be made once the relevant facts are gathered.
While it is common for FERC to probe the causes of electric outages, this inquiry is noteworthy for at least three reasons. First, the inquiry involves not only outages of electric generating facilities but also disruptions of natural gas deliveries. There are reliability standards in effect, pursuant to Section 215 of the Federal Power Act, to maintain the reliability of the bulk-power system. But, comparable statutory authority and reliability standards do not exist under the Natural Gas Act. Depending on the outcome of the inquiry, and any subsequent investigations, Congress may be called upon to amend the Natural Gas Act to add new reliability provisions. Additionally, FERC may look for ways to improve reliability using its existing statutory authority over rates, terms and conditions of some jurisdictional services provided in the natural gas industry.
Second, the inquiry includes service disruptions occurring within the Electric Reliability Council of Texas (ERCOT). The inquiry is historic because, in the past, FERC has steered clear of ERCOT, leaving it up to the Public Utility Commission of Texas to regulate electric utilities operating within ERCOT. Now, FERC may invoke its authority to regulate some gas pipelines or wholesale natural gas suppliers in Texas or possibly test its new statutory authority to oversee and enforce electric reliability standards within ERCOT granted in the Energy Policy Act of 2005.
Third, the North Electric Reliability Corporation (NERC) and regional entities (to whom NERC delegated authority) also are conducting investigations. If, based on the results of FERC's inquiry, FERC ultimately commences its own formal Part 1b investigation, it is possible that FERC may apply its Revised Policy Statement on Penalty Guidelines for the first time to violations of electric reliability standards also investigated by NERC. In its Revised Policy Statement, FERC stated that the Penalty Guidelines will apply to violations of reliability standards only in the Commission's own Part 1b investigations and enforcement actions, and that FERC did not intend to apply the Penalty Guidelines simply to its review of notices of penalties filed by NERC.
For further information, please contact Debbie at email@example.com.
NERC MAKES FIRST FILING TO IMPLEMENT "PARKING TICKET" PROCEDURE FOR MINOR RELIABILITY VIOLATIONS
by Colleen O'Boyle
On January 31, the North American Electric Reliability Corporation (NERC) filed an administrative citation notice of penalty (NOP) for 41 violations of 11 reliability standards by 19 registered entities. This filing is significant because it is the first time NERC has implemented its new approach of bundling minor reliability standards violations together and filing the notice with the Federal Energy Regulatory Commission (FERC) without lengthy supporting documentation of the mitigation efforts and penalties. NERC is hopeful this new approach for minor violations, which has been compared to the issuance of a "parking ticket," will help alleviate the backlog in enforcement actions.
According to NERC, all of the violations included in this NOP had a minimal impact on the bulk power system and have been mitigated. The violations included, among others, a lack of procedures for the use of capacity benefit margin, which is required to calculate the transmission provider's available transmission capability; a deficiency in a utility's facility ratings methodology document to address series and shunt compensation devices; and a lack of procedures for the recognition of sabotage events on a power association's facilities and the communication of such sabotage to the Interconnection and/or the Federal Bureau of Investigation. The violations, with penalties ranging from $0 to $5,000, were largely identified through audits, while several were self-reported.
NERC requested that FERC accept the NOP as compliant with FERC's rules and orders because "handling these violations in a streamlined process will help NERC and the regional entities focus on the more serious violations of the mandatory and enforceable NERC reliability standards."
For further information, please contact Colleen at firstname.lastname@example.org.
FERC STAFF ISSUES NO-ACTION LETTER ON ASSET MANAGEMENT ACTIVITIES
by Debbie Swanstrom
One technique that can be used by energy companies to guard against the risk of an enforcement action is to request that the Federal Energy Regulatory Commission's (FERC) staff issue what is commonly known as a "no-action letter." Recently, the general counsel and director of enforcement at FERC jointly issued a no-action letter to CenterPoint Energy Gas Transmission Company (CEGT) confirming that FERC staff will not recommend an enforcement action in connection with CEGT's asset management activities. Specifically, the letter concluded that no enforcement action will be recommended based upon CEGT: (1) not treating affiliated local distribution company (LDC) employees involved in buy/sell transactions related to the use of asset management arrangements as marketing function employees; (2) applying standards of conduct to certain employees of the asset managers who are involved in buy/sell transactions with the LDCs; (3) relying on certifications from the asset managers that their employees engaged in marketing functions related to the LDC buy/sell transactions comply with standards of conduct training requirements; and (4) not treating the asset managers as marketing affiliates. FERC staff warned, however, that the no-action recommendation could change if the asset managers resell gas acquired from the LDCs to anyone other than the LDCs. In that situation, the affiliated LDCs' employees would no longer be engaged solely in buy/sell transactions authorized by Order No. 712 to serve the LDCs' on-system requirements and could be acting as marketing function employees. Also, the asset managers' employees could be acting as agents for the LDCs, which could require treating the asset managers as marketing affiliates of the LDCs.
For further information, please contact Debbie at email@example.com.
CFTC COMMENT PERIOD ON NEW WHISTLEBLOWER PROVISION CLOSES
by Matt Dunn
On February 4, 2011, the comment period closed for the proposed Whistleblower Rules released by the Commodity Futures Trading Commission (Commission). The proposal was originally published on December 6, 2010, and addresses the Whistleblower Provision of the Dodd-Frank Act, including eligibility, award amounts and funding. The proposal, promulgated under Section 748 of the Dodd-Frank Act, has important implications for utilities conducting transactions that fall under the Commission's jurisdiction.
The Whistleblower Provision directs the Commission to award whistleblowers who provide the Commission with original information that leads to successful enforcement actions resulting in monetary sanctions exceeding $1,000,000. The amount of the award, as determined by the Commission, will be between 10 and 30 percent of sanctions collected. The exact amount of the award is dependent upon the following criteria: significance of the information; degree of assistance provided in support of a covered action; programmatic interest; and any other criteria other than the balance of the fund. It should be noted that certain government employees and others are statutorily ineligible for the award.
Among the 102 comment letters the Commission received, one that warrants particular attention was a letter filed jointly by the Edison Electric Institute (EEI) and the National Rural Electric Cooperative Association (NRECA). The primary concern raised by EEI and NRECA is that the proposed rule will have "the unintended consequence of rendering the internal compliance and ethics reporting programs ineffectual." To alleviate this concern, the associations propose that employees be required to comply with employer-sponsored complaint and reporting procedures as a prerequisite to their entitlement to an award.
Clearly, the Whistleblower Provision will have important ramifications for utilities operating in the swap and derivatives markets, particularly for their compliance departments. As the final rule is published in the coming months, it is important for utilities to keep these changes in mind when they implement new procedures to comply with the Dodd-Frank Act.
For additional information, please contact Matt at firstname.lastname@example.org.
FTC TAKES ACTION AGAINST DECEPTIVE "GREEN SEAL" CERTIFICATIONS
by Deborah Lodge and Susan Billheimer
On January 11, the Federal Trade Commission (FTC) announced a settlement agreement with an issuer of a "green" seal of approval, called "Tested Green." According to the FTC, Tested Green sold deceptive "green seals" to anyone willing to pay the $189 or $550 fee. Tested Green's advertising claimed that its certifications were tested by two independent groups; the National Green Business Association and the National Association of Government Contractors. The FTC felt that too was deceptive because those supposedly independent associations were actually shell companies owned by Tested Green's principal.
The allegedly fake certifications in the Tested Green case would run afoul of the FTC's newly revised "Green Guides" as well. The revised Green Guides were issued for public comment in October 2010. While they are not yet final, the revisions include express guidance on certifications and seals of approval for environmental and green claims. The proposed revisions to the Green Guides cover many kinds of eco-friendly and other green claims and include detailed comments about "renewable energy" and "carbon offset" claims. For example, the FTC Green Guides state that it is deceptive (and therefore actionable under Section 5 of the FTC Act) to represent that a service uses "renewable" energy if fossil fuels are used to power any part of the process. The FTC also recommends that marketers should specify the source of their energy (e.g., wind power) and qualify all of their claims.
The FTC Green Guides are advisory administrative interpretations of the law. While they are not enforceable by themselves (as laws or regulations would be), they contain helpful interpretations of the FTC's views of deceptive and unfair claims and practices. In any proceeding to enforce the law, the FTC would have to prove that a particular "green claim" was deceptive or unfair. As the Tested Green case shows, the FTC is making it a priority to stop the dissemination of false environmental or green claims, as the FTC's research showed that consumers rely heavily on those kinds of claims. We expect additional FTC enforcement and the issuance of the final revised Green Guides in 2011.