I. INTRODUCTION: THE GROWING PAINS OF A NEW FERC ENFORCEMENT ERA
Recent articles in this publication have reviewed the current FERC enforcement process and its roots in the Energy Policy Act 2005 (EPAct 2005).1 By way of brief background, as prior commentators have established, since almost its inception the Federal Power Commission and then its successor the FERC, have held "enforcement powers."2 However, in the wake of what came to be known as the "California Energy Crises" and the "August 2003 Blackout" in the Northeastern United States, Congress passed the EPAct 2005 that handed the FERC sweeping new powers—both substantive and remedial.3 EPAct 2005 amended Part II of the Federal Power Act (FPA), the Natural Gas Act (NGA), and the Natural Gas Policy Act (NGPA), and gave the Commission the authority to assess civil penalties of up to $1 million per day per violation, for violations of rules, regulations, and orders issued under these statutes.4
The Commission and its Staff began to flex these new enforcement muscles almost immediately, most notably with the initiation of the Energy Transfer Partners, L.P., and Amaranth Advisors L.L.C. proceedings.5 In these and other early cases, the FERC attempted (and in some cases succeeded) to use its newly granted penalty authority as leverage to obtain sizeable settlements for allegations of market manipulation as well as a large suite of settlements over the natural gas "shipper-must-have-title" rules.6 But, some of these cases were adjudicated. What followed was almost a decade of developments in cases and policy pronouncements that sometimes addressed perceived inadequacies or flaws in the enforcement process.7 The Commission instituted rules and policies that responded to some criticisms about the transparency and fairness of the process.8 But strong criticisms remain, particularly in the areas of discovery and disclosure of material, staff access to the Commission during an investigation, and the length and cost of the investigatory and adjudicative processes. Many of these criticisms were featured in the Scherman et al article, which asserts that there was a "wide spread perception" that the process has become "lop-sided and unfair."9 Some of the criticism and answers played themselves out recently on the very public stage of the hearing over the confirmation of now Chairman of the FERC, Norman C. Bay. Senators peppered the nominee with questions about the enforcement process. Bay staunchly defended the current process as being within the bounds of agency authority and established government processes, in some cases asserting that the Commission affords subjects of investigations more process than many other agencies do.10 Notably, he was confirmed by the Senate despite these questions being raised. Then, in a direct response to the Scherman et al article, FERC staff penned an article in this journal rebutting some of the criticisms and claiming that "proposed reforms are unnecessary."11 More recently, draft legislation addressing some FERC investigatory process matters floated in Congressional committees, but as of this writing do not seem poised for passage.12
We submit that each side in this debate is making some valid points and yet each side is exaggerating or minimizing the problems, respectively. More importantly, the specifics upon which these commentators focus are just symptoms of a larger condition; while the REAL problem is not really being addressed. We submit that the REAL problem is having the Commission, rather than a federal court, adjudicate these cases that do not settle before the "Order to Show Cause" (OSC) stage (described further infra, section II, A).
II. THE CURRENT ADJUDICATIVE PATHS
As we discuss below, what happens in the investigative process largely matters because of what follows: the settlement or adjudication of a case. Prior commentators have well-summarized, and largely focused on, the details of the FERC enforcement investigative process.13 What have garnered less attention are the varying adjudicative processes. To really understand what may or may not be broken in the current investigative system, we must begin at the end: adjudication.
As currently practiced by the Commission, FERC civil penalty enforcement "adjudication" or "litigation" paths—what happens when cases do not settle—are different under the FPA, the NGPA, and NGA.14 The FPA outlines two different possible processes by which the Commission can "assess" penalties for Part II violations. The NGPA provides for a de novo review process in federal court. The NGA contains no provisions specifying the process for meting out penalties under that statute. In short, the various statutory schemes are a hodgepodge. In 2006, the FERC issued a policy statement addressing the processes the Commission will use when assessing civil penalties under all its governing statutes.15 That policy statement added some gloss to the statutes. And since then, the Commission has, by pronouncement or practice, shaped these courses a bit more (and courts in litigated or reviewed cases may do so as well, though these cases are just starting to wend their way through the courts, even ten years out from EPAct 2005). In light of those sources, we attempt to summarize below the processes as currently practiced.
A. The Order to Show Cause
As currently practiced, the common jumping off point for any civil penalty adjudication under any of the Commission's statutes is what is generally referred to as the "Order to Show Cause and Notice of Proposed Penalty" (OSC).16 In all cases, if an enforcement matter does not settle and staff succeeds in convincing the Commission to pursue enforcement (as it invariably does, more about which anon), before issuing an order assessing a civil penalty the Commission will issue an OSC.17 In the first post-EPAct 2005 OSCs, the order contained a full recitation of the preliminary determinations of the Commission.18 More recently, the OSC attaches a "Staff Report" which is supposed to contain a statement of the material facts constituting, as well as the legal basis for, the violation.19 Interestingly, though no response is expressly contemplated by statute, the Commission routinely directs respondents to present "any legal or factual arguments that could justify not issuing the assessment or a reduction or modification of the proposed penalty."20 In practice, the Commission also provides for the staff to file a reply to the respondents' arguments.21 There is some debate about whether this phase of the process constitutes "adjudication" or merely a continuation of the investigative process (because, for example and most notably, the FERC claims that it can continue investigating while the OSC process is ongoing—and it has done so in several cases).22 Regardless, the process from the OSC forward is where the paths for (or to) adjudication start to diverge depending on which statute is involved.
B. The FPA Adjudicative Process
In an FPA case, the OSC will direct the respondent to respond on the merits and will also observe that the respondent has the option to choose between either (a) an administrative hearing before an Administrative Law Judge (ALJ) at the Commission prior to the finalization of the penalty under section 31(d)(2), or (b) an immediate penalty assessment under section 31(d)(3) followed by a district court "de novo review" adjudication.23 The process is supposed to work like this:
1. The "ALJ Route"
If the person elects an administrative hearing before an ALJ at the Commission, the Commission will issue a hearing order (unless it determines, and it has done so in one case, that there are not material issues of fact that require a trial).24 The ALJ will conduct a hearing under Part 385 of the Commission's regulations.25 Staff from the Office of Enforcement serves as trial Staff at the hearing. The Section 385 rules provide for rights of discovery—and in actual practice, Respondents sometimes do obtain discovery from the FERC Staff as well as third parties.26 Discovery is available to both sides, but not as of right, except among the parties. Participants must apply to the ALJ for the issuance of discovery and trial subpoenas to third parties.27 The hearing itself is a hybrid of paper, electronic, and live procedures.28 Pre-filed testimony of party-sponsored witnesses is typical with cross-examination live on the stand. The Federal Rules of Evidence do not apply to the hearing, though (in our experience) as a practical matter the ALJ's seem to apply evidentiary standards that are about what one might expect in a bench trial in a federal district court.29 Sometimes, ALJ's will permit opening statements, while closing arguments are almost unheard of. Parties file post-hearing briefs with proposed findings of fact and conclusions of law.
The ALJ will issue an "Initial Decision" and determine whether a violation or violations occurred.30 If a violation is found, the Initial Decision will recommend any appropriate penalty, taking into account factors described in various Commission Policy Statements on Enforcement. The hearing record is supposed to have developed the facts necessary to any such determination. The ALJ decision is not itself effective upon issuance. There is an automatic appeal process, and the decision-maker here is not a court, but the Commission.31 The Commission will consider the Initial Decision of the ALJ and any "exceptions" filed with the Commission by trial Staff or the respondent. The Commission treats the ALJ's decision "as part of the record" and does not treat the ALJ's Initial Decision with "any special deference" as to questions of law.32 However, if the ALJ—as the trier of fact—has made a determination on the credibility of a witness, such determination would be entitled to "some deference."33 If the Commission determines that there is a violation, the Commission will issue an order and may assess any appropriate penalty, taking into account all relevant factors.34
If a violation is found, a respondent may request a rehearing no later than thirty days after the issuance of the order assessing the penalty.35 If that rehearing request is denied, the respondent can seek a review of the case in a Court of Appeals.36 Alternatively, a respondent may appeal an order assessing penalty directly to the Court of Appeals without first seeking rehearing.37 The Court of Appeals reviews the Commission's findings of fact under the "substantial evidence standard."38 This deferential standard "requires more than a scintilla, but can be satisfied by something less than a preponderance of the evidence."39 Findings of law are reviewed under the arbitrary and capricious standard.40 This process can take several years.
2. The "De Novo Review Route"
If a respondent to an OSC in an FPA case elects an immediate penalty assessment by the Commission, the Commission is supposed to do just that—"promptly assess such penalty."41 Even though the statute does not require or even authorize the Commission to make a "determination of a violation" as with the ALJ path, in practice, the Commission has used the OSC process in such cases to analyze the facts and law, including the competing positions of staff and the Respondent.42 The Commission issues (usually a rather lengthy) order setting forth the material facts that constitute the violation, its view of the law supporting such violations, and assessing what it views as the appropriate penalty. This process typically takes at least six months from the issuance of the OSC. Revealing a rare crack in the foundation, one Commissioner recently dissented to some aspects of this process, noting in the face of these sometimes lengthy proceedings, that "there can be no disagreement that a prompt assessment is an assessment of an immediate nature."43
If the assessed penalty is not paid within sixty days, the Commission may commence an action in a United States district court seeking enforcement of the order.44 In such a case, FPA section 31(d)(3)(B) authorizes the court to review "de novo the law and facts involved."45 The district court can "enter a judgment enforcing, modifying, and enforcing as so modified, or setting aside in whole or in [p]art . . ." the Commission's penalty assessment.46
There has never been an FPA de novo review case that has proceeded past an initial pleading stage. So the precise meaning of de novo review under the FPA has yet to be defined by a Court. The best available test case thus far is FERC v. MacDonald, wherein the court held that:
Section 31 of the Federal Power Act, 16 U.S.C. § 823b(d)(3)(B) specifies that when FERC brings an action in district court to enforce a civil penalty assessment, the court must make a de novo review of the assessment. Accordingly, I will give no deference to FERC's decision. Instead, I will make "a fresh, independent determination of 'the matter' at stake."47
However, the case settled shortly after this preliminary pronouncement. So we do not really know how the courts will conduct the de novo review.
The FERC recently filed several enforcement actions in federal district court under the FPA for alleged market manipulation in electricity markets.48 The cases are FERC's first post-EPAct 2005 enforcement cases filed in district court under the FPA. The defendants in these cases claim that the full array of federal trial court procedures should apply, including the right to discovery, pretrial motions, the application of the Federal Rules of Evidence, and a hearing, including the right to a jury trial.49 The FERC, on the other hand has been a bit more open-ended in its position. It has demanded a jury trial in these cases while at the same time claiming that the courts can and should affirm the penalty assessment summarily based on the record developed solely at the agency.
By whatever means the district court gets there, the Commission and the respondent can appeal the court's final order to a United States Court of Appeals. The Court of Appeals will then make certain that the District Court applied the correct legal standards, before reviewing the District Court's findings of fact and application of the law.50 The Court of Appeals will review factual findings for clear error and will review questions of law de novo.51 We do not really know how long these de novo review processes will take. But it is instructive that both the Barclays and Lincoln cases have been in federal court for nearly two years and counting, though most commentators agree that the length of the proceedings to date likely has to do somewhat with this very debate over de novo review.
To summarize this discussion, we offer the following charts to illustrate the FPA adjudicative processes and which appear as appendices to the 2006 Statement of Administrative Policy Regarding the Process of Assessing Civil Penalties, Docket No. AD07-4-000 (Dec. 21, 2006).
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Footnotes
1. William S. Scherman, Brandon C. Johnson, & Jason J. Fleischer, The FERC Enforcement Process: Time for Structural Due Process and Substantive Reforms, 35 ENERGY L.J. 101 (2014); Allison Murphy, Todd Hettenbach, & Thomas Olson, The FERC Enforcement Process, 35 ENERGY L.J. 283 (2014).
2. Murphy et al., supra note 1, at 285-86.
3. Id. at 288-89.
4. Id.
5. Order to Show Cause, Energy Transfer Partners, L.P., 120 F.E.R.C. ¶ 61,086 (2007); Order to Show Cause, Amaranth Advisors L.L.C., 120 F.E.R.C. ¶ 61,085 (2007).
6. See, e.g., Order Approving Stipulation and Consent Agreement, In re Bangor Gas Co., LLC, 118 F.E.R.C. ¶ 61,186 (2007).
7. Murphy et al., supra note 1, at 290-91.
8. Revised Policy Statement on Enforcement, Enforcement of Statutes, Regulations, and Order, 123 F.E.R.C. ¶ 61,156 (2008); Policy Statement on Compliance, Compliance with Statutes, Regulations, and Orders, 125 F.E.R.C. ¶ 61,058 (2008); Revised Policy Statement on Penalty Guidelines, Enforcement of Statutes, Orders, Rules, and Regulations, 132 F.E.R.C. ¶ 61,216 (2010); Interpretive Order Regarding No-Action Letter Process, Informal Staff Advice on Regulatory Requirements, 113 F.E.R.C. ¶ 61,174 (2005); Interpretive Order Modifying No-Action Letter Process, Informal Staff Advice on Regulatory Requirements, 117 F.E.R.C. ¶ 61,069 (2006).
9. Scherman et al., supra note 1, at 102.
10. Lafleur and Bay Nominations: Hearing Before the Committee on Energy and Natural Resources, 113th Cong. 15 (2014) (testimony of Norman C. Bay, Nominee, Fed. Energy Reg. Comm'n), https://www.congress.gov/113/chrg/shrg88084/CHRG-113shrg88084.pdf [hereinafter Lafleur and Bay Hearing].
11. Id. at 28; Murphy et al., supra note 1, at 283.
12. Title IV—Energy Efficiency and Accountability, Subtitle B, Chapter 1—Market Manipulation, Enforcement and Compliance, Sec. 4212 (Discussion Draft May 20, 2015), available at http://docs.house.gov/meetings/IF/IF03/20150603/103551/BILLS-114pih-SubtitleB-Accountability.pdf.
13. Murphy et al., supra note 1, at 291-97; Scherman et al., supra note 1, at 108-11.
14. We put some of these terms in quotes because they may be terms of art in certain contexts, such as under the Administrative Procedure Act (APA). Moreover, in some current cases, parties, including the authors, are litigating the meaning of such terms. We do not intend here to ascribe any particular statutory meaning to the term "adjudication" but use it here as a general rubric. Moreover, nothing in this article is meant to present, modify, or characterize any legal position taken by any litigant. This is an academic and (we hope) scholarly presentation.
15. Statement of Administrative Policy, Process for Assessing Civil Penalties, 117 F.E.R.C. ¶ 61,317 (2006).
16. Revised Policy Statement on Enforcement, Enforcement of Statutes, Regulations, and Orders, 123 F.E.R.C. ¶ 61,156 at P 35 (2008).
17. Id.
18. Order to Show Cause, Energy Transfer Partners, L.P., 120 F.E.R.C. ¶ 61,086 at PP 4-22 (2007); Amaranth Advisors L.L.C., 120 F.E.R.C. ¶ 61,085 at P 5 (2007).
19. See, e.g., Order to Show Cause, Houlian Chen, Powhatan Energy Fund, LLC, HEEP Fund, LLC, CU Fund, Inc., 149 F.E.R.C. ¶ 61,261 at P 2 (2014).
20. Process for NGPA Penalty Assessment, FERC, http://www.ferc.gov/resources/processes/enforcement/ngpa-text.asp.
21. 120 F.E.R.C. ¶ 61,085 at P 1.
22. See, e.g., Order Assessing Civil Penalties, Barclays Bank PLC, Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith, 144 F.E.R.C. ¶ 61,041 at P 22 (2013).
23. This section of the article describes the process used to assess penalties under "Part II" of the FPA to which the enhanced penalty authority of the Commission applies. Lesser penalties are available under "Part I" of the FPA. FPA section 31(a) grants the Commission the authority to monitor and investigate compliance with licenses, permits, and exemptions for hydropower projects issued under Part I. It allows the assessment of penalties but this authority is rarely used. In any event, the process for adjudicating penalty cases under Part I is virtually identical to that under Part II.
24. See, e.g., Order on Show Cause Response, Moussa I, Kourouma d/b/a Quntum Energy LLC, 135 F.E.R.C. ¶ 61,245 at PP 9-10 (2011).
25. 18 C.F.R. §§ 385.101-.2202 (2013).
26. §§ 385.401-.411.
27. § 385.409(a).
28. §§ 385.501-.510.
29. Opinion No. 523, Entergy Servs., Inc., 142 F.E.R.C. ¶ 61,022 at P 55 (2013) (citing Midwest Indep. Transmission Sys. Operator, Inc., 131 F.E.R.C. ¶ 61,173 PP 97-98 (2010), reh'g denied, 136 F.E.R.C. ¶ 61,244 (2011)). Although, we note that most practitioners suspect that even federal judges apply the rules of evidence less rigorously in bench trials because they are not performing a "gate keeping function" to prevent jurors from being exposed to objectionable evidence.
30. 18 C.F.R. § 385.708(b) (2013).
31. §§ 385.711-.712.
32. La. Pub. Serv. Comm'n v. FERC, 522 F.3d 378, 395 (D.C. Cir. 2008) (citing Greater Boston Television Corp. v. FCC, 444 F.2d 841, 853 (D.C. Cir. 1970)). Administrative law judges' findings "are not entitled to any special deference," but instead "are treated as 'part of the record,'" such that "'in the last analysis, it is the agency's function, not the [administrative law judge's], to make the findings of fact and select the ultimate decision, and where there is substantial evidence supporting each result it is the agency's choice that governs.'"). Id.
33. Pennzoil Co. v. FERC, 789 F.2d 1128, 1135 (5th Cir. 1986) (citing Ward v. NLRB, 462 F.2d 8, 12 (5th Cir. 1972)).
34. 18 C.F.R. § 385.703 (2013).
35. § 385.713.
36. 16 U.S.C. § 825l(b) (2011); See, e.g., Hunter v. FERC, 711 F.3d 155, (D.C. Cir. 2013). See also Walker Operating Corp. v. FERC, 874 F.2d 1320 (10th Cir. 1989).
37. 16 U.S.C. § 823b(d)(2)(B) (2011); See, e.g., Bluestone Energy Design, Inc. v. FERC, 74 F.3d 1288, 1293 (D.C. Cir. 1996) (observing that § 823b(d)(2)(B) "does not require a party challenging a penalty to seek rehearing; a party against whom the Commission assesses a penalty may appeal directly to an appropriate court within sixty days").
38. 16 U.S.C. § 825l(b); See also La. Pub. Serv. Comm'n, 522 F.3d at 391.
39. FPL Energy Main Hydro LLC v. FERC, F.3d 1151, 1160 (D.C. Cir. 2002).
40. 5 U.S.C. § 706(2)(A) (2011).
41. 16 U.S.C. § 823b(d)(3)(A) (2011).
42. See generally Order Assessing Civil Penalties, Houlian Chen, Powhatan Energy Fund, LLC, HEEP Fund, LLC, CU Fund, Inc., 151 F.E.R.C. ¶ 61,179 at PP 33, 37 (2015) (finding violations in Order Assessing Penalties where respondents had elected immediate penalty assessment).
43. Barclays Bank PLC, 143 F.E.R.C. ¶ 61,024 (2013) (LaFleur, Comm'r, dissenting).
44. 16 U.S.C. § 823b(d)(3)(B) (2011).
45. Id.
46. Id.
47. FERC v. MacDonald, 862 F. Supp. 667, 672 (D.N.H. 1994) (citing Doe v. United States, 821 F.2d 694, 697-98 (D.C. Cir. 1987) (emphasis added); § 823b(d)(3)(B)).
48. See, e.g., FERC v. City Power Marketing, LLC, Case No. 1:15-cv-01428-JDB (D.D.C. Sep. 1, 2015); FERC v. Powhatan Energy Fund, LLC, Case No. 3:15-cv-0452 (E.D.Va. Jul. 31, 2015); FERC v. Maxim Power Corp., Case No. 3:15-cv-30113 (D. Mass Jul. 1, 2015); FERC v. Barclays Bank PLC, No. 2:13-cv-02093, (E.D. Ca. Oct. 9, 2013), FERC v. Lincoln Paper & Tissue, LLC, No. 1:13-cv-13056 (D. Mass. Dec. 2, 2013).
49. Joint Report in Compliance with Fed. R. Civ. P. 26(f) and Court's Order Requiring Joint Status Report, FERC v. Barclays Bank, No. 2:13-cv-02093-TLN-DAD, 2013 WL 7045794 (E.D. Ca. Dec. 16, 2013); Lincoln Paper & Tissue, LLC's Memorandum of Law Concerning the Contours of the Trial, FERC v. Lincoln Paper & Tissue, LLC, No. 1:13-cv-13056-DPW, 2014 WL 7148814 (D. Mass. May 9, 2014).
50. Cuddy v. Carmen, 762 F.2d 119, 123 (D.C. Cir. 1985) (citing Fed. R. Civ. P. 52(a)).
51. Id.
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