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Presentation by

Ted P. GerardenBranch Chief, Division of Investigations

Office of Enforcement

Federal Energy Regulatory Commission

March 2, 2009

Utilities & Energy Compliance &

Ethics Conference

FERC ENFORCEMENT

Disclaimer

The views expressed in this presentation are those of the

presenter and do not necessarily reflect the views of the Federal

Energy Regulatory Commission, its Chairman, or any individual

Commissioner.

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Energy Market Regulation• Significant Statutory Provisions:

– Federal Power Act Section 222, 16 U.S.C. §824v (prohibition of energy market manipulation).

– Federal Power Act Section 220, 16 U.S.C. §824t (market transparency).

– Natural Gas Act Section 4A, 15 U.S.C. §717c-1 (prohibition of energy market manipulation).

– Natural Gas Act Section 23 15 U.S.C. § 717t-2 (market transparency).

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Energy Market Regulation

• Significant FERC Rules:– Wholesale Competition in Regions in Organized

Electric Markets, Order No. 719, FERC Stats. & Regs. ¶ 31,281 (2008), codified at 18 C.F.R. Part 35 (P 310-476 deal with market monitoring policies).

– Standards of Conduct for Transmission Providers, Order No. 717, FERC Stats. & Regs. ¶ 31,280 (2008), codified at 18 C.F.R. Part 358.

– Prohibition of Energy Market Manipulation, Order No. 670, FERC Stats. & Regs. ¶ 31,202, order on reh’g, 114 FERC ¶ 61,300 (2006), codified at 18 C.F.R. Part 1c (2008).

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Energy Market Regulation

• Significant FERC Orders:– DC Energy, LLC v. H.Q. Energy Services (U.S.), Inc., 124 FERC ¶ 61,295

(2008). – New York Independent System Operator, Inc., 122 FERC ¶ 61,211 (2008). – Energy Trading Partners, L.P., 121 FERC ¶ 61,282 (2007).– Amaranth Advisors L.L.C., 120 FERC ¶ 61,085 (2007).

• Important Cases to Watch: – New York Independent System Operator, Inc., 124 FERC ¶ 61,174 (2008)

(acknowledging enforcement investigation into manipulation involving scheduling flows over eight different transmission paths around Lake Erie)

– Independent System Operator of New England, 123 FERC ¶ 61,021 (2008) and 123 FERC ¶ 61,266 (2008) (acknowledging enforcement investigations into manipulation of demand response rules).

– PJM Interconnection, L.L.C., 122 FERC ¶ 61,279 (2008) and 123 FERC ¶ 61,103 (2008) (acknowledging enforcement investigation into manipulation of FTR markets).

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Enforcement• Significant Statutory Provisions:

– Federal Power Act Section 31, 16 U.S.C. § 823b (enforcement).– Federal Power Act Section 316, 16 U.S.C. § 825o (general penalties). – Natural Gas Act Section 20, 15 U.S.C. 717s (enforcement).– Natural Gas Act Section 21, 15 U.S.C. 717t (general penalties). – Natural Gas Policy Act Section 504, 15 U.S.C. § 3414 (enforcement).

• Significant FERC Regulations:– 18 C.F.R. Part 1b (2008). – 18 C.F.R. Part 1c (2008).

• Significant FERC Procedural Rules and Orders:– Submissions to the Commission upon Staff Intention To Seek an Order

To Show Cause, Order No. 711, FERC Stats. & Regs. ¶ 31,270 (2008).– Ex Parte Contacts and Separation of Functions, Order No. 718, FERC

Stats. & Regs. ¶ 31,279 (2008).– Statement of Administrative Policy on Process for Assessing Civil

Penalties, 117 FERC ¶ 61,317 (2006).

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Enforcement Policy

• Touchstone is “firm but fair”

• Most important considerations are seriousness of offense and commitment to compliance

• Credit given for presence of effective compliance program, self-reporting of violation, and exemplary cooperation

• Sanctions may include civil penalty, disgorgement, compliance monitoring, or specific obligations

• Settlements strongly encouraged

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Enforcement Since EPAct 2005

• 27 Commission orders approving settlements with civil penalties

• Total civil penalties of $64,670,000

• Disgorgement of more than $17,000,000

• Compliance monitoring in most cases

• Compliance investment in some cases

• Four orders to show cause

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Commission Actions

• Significant Recent FERC Settlement Orders:– In Re Tenaska Marketing Ventures, 126

FERC ¶ 61,040 (2009).

– In Re Duquesne Light Company, 123 FERC ¶61,221 (2008).

– In Re Edison Mission, 123 FERC ¶ 61,170 (2008).

– In Re Constellation NewEnergy – Gas Division, L.L.C., 122 FERC ¶ 61,220 (2008).

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Reliability Enforcement

• Federal Power Act Section 215, 16 U.S.C. §824o (mandatory reliability standards).

– ERO to oversee bulk-power system (NERC)

– REs delegated responsibility

– Order No. 693 approved initial standards

– Requirements cover “users, owners and operators”(except AL and HI)

• REs and ERO have hearing and appeal process, may use remedial action directives, mitigation plans, and/or penalties (matrix)

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Commission Reliability Authority

• FERC can act against any user, owner, and operator, including ERO and REs

• Sanctions include penalties, suspension, or decertification

• FERC offices of Electric Reliability, General Counsel, and Enforcement work together

• FERC jurisdiction concurrent, appellate, and original– FERC may act jointly with RE or ERO

– FERC reviews RE and ERO decisions

– FERC can take independent enforcement actions

• FERC not bound by penalty matrix—general policies on enforcement and compliance apply.

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Compliance

• Significant FERC Policy Orders

– Compliance with Statutes, Regulations, and Orders, Policy Statement on Compliance, 124 FERC ¶ 61,058 (2008).

– Revised Policy Statement on Enforcement, 123 FERC ¶ 61,156 (2008), superseding Policy Statement on Enforcement, 113 FERC ¶ 61,068 (2005).

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Compliance Guidance

• Significant FERC Policy Orders– Obtaining Guidance on Regulatory

Requirements, 123 FERC ¶ 61,157 (2008) (Interpretative Order Modifying No-Action Letter Process and Reviewing Other Mechanisms for Obtaining Guidance); see also Informal Staff Advice on Regulatory Requirements, 113 FERC ¶ 61,174 (2005),modified 117 FERC ¶ 61,069 (2006) (Interpretive Order Modifying No-Action Letter Process).

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Guidance Toolbox

• Commission Declaratory Order

• Staff No-Action Letter

• General Counsel Opinion Letter

• Accounting Interpretation

• Compliance Help Desk

• Enforcement Hotline

• Meetings and informal staff contacts

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Compliance Programs

• Goal of enforcement is compliance

• Companies must assess risks

• No one-size-fits-all

• Methods chosen must fit needs of company

• Outside resources, in-house capabilities

• FERC cannot endorse particular plans

• Compliance must be a culture, not a paper tiger

• End result is key—did program work as it should?

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Hallmarks of Good Compliance Programs

• Clearly articulated policies and objectives• Committed and dedicated organization and adequate

staffing• Designated compliance officer, independence and

access to senior management• Engagement of front-line supervisors• Balanced incentives• Effective training• Hotline or reporting channel• Trading controls• Record keeping and retention• Auditing, monitoring, and reporting

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Self-Reporting

• Strongly encouraged, credit given

• Call early, follow up timely

• Must be to OE, Division of Investigations

• Be clear, concise, and complete--“just the facts, ma’am.”

• Most self-reports result in no action– 75% of FY06 and FY07 self-reports closed with no

action

– 28 self-reports in FY08 closed with no action

• Settlements of self-reports reflect credit

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To Cooperate or Not: It’s the Client’s Call

•The client must decide whether and to what extent it wants to cooperate with government investigations.

•A lawyer should provide the client with the information it needs to make informed decisions.

•Benefits of cooperation outweigh risks.

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Factors from the Revised Policy Statement on Compliance:

• Did the company discover the misconduct internally?

• Did the company immediately stop the misconduct?

• Did the company act immediately and appropriately?

• Did senior management encourage identifying the misconduct?

• Did the company notify the Commission promptly?

• Did the company arrange for knowledgeable employees to meet with Commission Enforcement Staff and provide all evidence regarding the misconduct?

Revised Policy Statement on Compliance: The Commission “continue[s] to place importance on good-faith self-reporting, and will maintain our practice of awarding penalty credit for parties that promptly self-report violations.” Paragraph 62.

Inducements to CooperationInducements to CooperationInducements to CooperationInducements to Cooperation

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Factors from the Revised Policy Statement on Compliance:

• Did the company volunteer to provide internal investigation or audit reports?

• Did senior management encourage employees to cooperate?

• Did the company facilitate Commission access to employees with knowledge?

• Did the company identify culpable employees and assist the Commission in understanding their conduct?

• Did the company make records readily available with assistance on searching and interpreting information in the records?

• Did the company determine the effects of the misconduct?

Inducements to CooperationInducements to CooperationInducements to CooperationInducements to CooperationRevised Policy Statement on Enforcement: “Since cooperation is expected of all entities, we do not give penalty mitigation credit for ordinary cooperation…. However, we do give credit for exemplary cooperation.” Paragraph 65.

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Factors to Consider in Cooperation Decisions

• Regulators expect cooperating companies to be forthcoming about the results of their internal investigations

• Companies thus confront the question of whether to waive attorney-client privilege and work product protection.

• Waiver is not required to be given credit for cooperation

• Staff can work creatively with company to obtain critical information without waiver.

• In some circumstances, waiver may be in best interest of company.

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How FERC treats information

• FERC provides confidential treatment of all information gathered in investigations. 18 C.F.R. § 1b.9 (2008).

• Documents and information provided by a company are non-public, but FERC cannot prevent a waiver of privilege or protection.

• Parties submitting information may request confidential treatment. 18 C.F.R. § 1b.20 (2008); see also 18 C.F.R. § 388.112 (2008).

• Only the Commission may direct or authorize public disclosure of an investigation.

• Companies, however, may choose to reveal matters related to an investigation.

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Final Thoughts

• Come to Enforcement staff before we come to you.

• Strategize about cooperation and disclosure, not about minimizing information given.

• Be up front and forthright on fact disclosure, even where company invokes privilege or protection claims.

• Be sure company understands the value of disclosure. Companies will do better by addressing problems up front than by having regulators dig them out—be sure there is no delay or obfuscation.

• Note EME settlement—do not mislead investigators. Remember that FERC can also suspend or revoke certificate authority.

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Appendix

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Office of the Director

Anna Cochrane, Acting Director

Jerome Pederson, Acting Deputy Director

Roger Morie, Reliability Enforcement Counsel

Administration Staff

Denice Smith, Chief

Fuels Market Analysis Branch

Christopher Peterson, Chief

Market Monitor Relations Branch

Steve Michals, Chief

Information Management and Reporting Branch

William Booth, Chief

Investigations Branch 1

Deme Anas, Chief

Regulatory Accounting BranchScott Molony, Branch Chief

and Chief Accountant

Forms Administration and Data Branch

David Lengenfelder, Chief

Audits Branch 2

Stephen Flanagan, Chief

Investigations Branch 2

Ted Gerarden, Chief

Investigations Branch 3

John Kroeger, Chief

Audits Branch 1

Gerald Williams, Chief

Audits Branch 3

Beth Taylor, Chief

Division of Investigations

Robert Pease, DirectorLee Ann Watson, Dep Dir

Division of Audits

Bryan Craig, DirectorTimothy Smith, Dep Dir

Division of FinancialRegulation

Jerome Pederson, DirectorMichelle Veloso, Dep Dir

Division of Energy

Market OversightArnie Quinn, DirectorSteve Reich, Dep Dir

Investigations Branch 4

Vacant, Chief

OFFICE OF ENFORCEMENT

Audits Branch 4

Brian Harrington, Chief

Reliability

Committee

Roger Morie – Chair

Electric Market Analysis Branch

Keith Collins, Chief

Investigations Branch 5

Todd Mullins, Chief

Transactions Analysis Branch

Vacant, Chief