United States: FERC Enforcement Settlement Highlights M&A Compliance Risks; May Suggest Enforcement Policy Changes

On June 8, 2018, the Federal Energy Regulatory Commission (FERC or the "Commission") approved a settlement between its Office of Enforcement and Duke Energy Corporation resolving allegations that Duke and certain of its public-utility subsidiaries violated FERC's Rule 35.41(b) duty-of-candor requirement in a compliance filing to FERC in support of their application for approval of Duke's merger with Progress Energy, Inc.  Duke agreed to pay a civil penalty of $3.5 million to resolve the matter.

The settlement is significant for two key reasons.  First, it highlights FERC's continued aggressive enforcement of the duty-of-candor requirement—here, for the first time, in the context of a utility filing technical information in a merger proceeding.  Second, the settlement may suggest the Commission's receptiveness to making changes to its Enforcement program—including with respect to the Notice of Alleged Violations policy and the Commission's Penalty Guidelines

Summary of the Facts

In April 2011, Duke, Progress and their public-utilities subsidiaries (collectively, "Applicants") filed an application seeking FERC approval of their merger.  The application addressed possible concerns about the competitive effects of the merger in the Carolinas in light of the proximity of Duke and Progress's utility operations.  In September 2011, FERC found that the merger could have adverse competitive effects without adequate mitigation.  In December 2011, FERC rejected Applicants' proposed mitigation through virtual divestiture of generation and directed them to propose alternative mitigation.  In March 2012, Applicants submitted a Revised Compliance Filing proposing permanent mitigation through seven transmission expansion projects.  In support, Applicants presented a Delivered Price Test (DPT) that studied the effects of the revised mitigation proposal.  At FERC staff's request, Applicants provided additional supporting data in April 2012.  In June 2012, FERC issued an order accepting Applicants' mitigation proposal and authorizing the merger.

Shortly after FERC approved the merger, Duke's management learned of an anonymous letter submitted to the Commission following its authorization of the merger.  The letter claimed that Applicants' Revised Compliance Filing contained erroneous and intentionally misleading data.  Duke retained outside counsel to conduct an internal review, which identified two assumptions used in performing the DPT study that were open to question and could have affected the results of Applicants' proposed permanent transmission mitigation.  The assumptions involved the modeling of two phase shifters as operational in the Simultaneous Transmission Import Limit calculation but nonoperational in the Available Transfer Capability (ATC) calculation, which made Applicants' market share in one region lower than it would have been if the phase shifters were modeled as operational in the ATC.  The second assumption also related to ATC and involved Applicants' use of a transmission line in Duke's balancing authority area as the limiting line for certain ATC calculations rather than an internal Progress transmission line.

Duke presented its findings to Commission staff and in a December 2013 supplemental compliance filing, explained the two questionable assumptions and offered additional mitigation.  In October 2014, the Commission accepted Duke's proposal for additional mitigation and referred issues concerning the assumptions used in the DPT analysis to Enforcement for investigation.  During the investigation, Duke determined and advised Enforcement that a Progress staff engineer made a programming error affecting an ATC calculation submitted with Applicants' Revised Compliance Filing.  The error affected the ATC calculation for the Duke to Progress Energy Carolinas – East ("PEC-East") interface. 

Enforcement's Findings of § 35.41(b) Violations

Rule 35.41(b), FERC's duty-of-candor requirement, requires that a "seller" (i.e., a company with market-based rate authority) provide accurate and factual information, and not submit false or misleading information, in any communication with the Commission, Independent System Operators and Regional Transmission Organizations, market monitors or transmission providers.  Unlike FERC's Anti-Manipulation Rule, a violation of Rule 35.41(b) does not require proof of intent.  However, the rule has a safe harbor for sellers that exercise due diligence to prevent the submission of false or misleading information.

Enforcement found that Applicants violated Rule 35.41(b) "by failing to fully and accurately describe to the Commission the condition of the phase shifters and their modeling" in Progress's transmission studies.  Enforcement further found that Applicants violated Rule 35.41(b) by "failing to fully and accurately describe the methodology for calculating ATC at the Duke to PEC-East interface."  The settlement does not state that Enforcement found that Applicants intentionally submitted any false or misleading information.

Key Takeaways from the Settlement

  • Continued aggressive enforcement of Rule 35.41(b)—here, in a new context.

The settlement shows that FERC continues to aggressively enforce its duty-of-candor requirement.  In recent years, FERC has brought and settled Rule 35.41(b) violations in a variety of contexts—including, among other things, false or misleading statements to a market monitor about trading activities, false or misleading statements to Enforcement staff during an investigation, and incorrect cost-based offers in energy markets.  This is the first case where Rule 35.41(b) violations have been based on the submission of data to the Commission in a merger proceeding.  This highlights the importance of exercising due diligence in regulatory and transactional matters before the Commission, particularly in large and complex matters such as utility mergers where a wide range of technical data may need to be provided.  As noted above, because Rule 35.41(b) has a safe harbor for false or misleading submissions that occur despite the seller exercising due diligence, sound compliance practices could immunize a seller from Rule 35.41(b) liability even if inadvertent errors occur.

  • Harbinger of changes to Enforcement policies?

There is a widespread view among many in the industry that the newly constituted Commission will look to examine various Enforcement policies and make certain changes.  There are two subtleties in this settlement that may suggest the Commission's openness to reconsidering two important Enforcement policies.  First, this is the first settlement in many years where the Commission did not issue a Notice of Alleged Violations (NAV) publicly identifying the investigation subject and the alleged wrongdoing prior to a settlement or Order to Show Cause.  The NAV policy has long been controversial and demonstrably ineffective.  It is possible that the Commission chose not to issue a NAV in this case because the investigation had already been disclosed through a public referral to Enforcement in December 2013.  However, there have been several Enforcement settlements in recent years that occurred in similar contexts (i.e., where the investigation followed a public referral to Enforcement or was otherwise publicly disclosed prior to the NAV).  Yet this is the first such case in recent years where the Commission did not issue a NAV.  While one should not read too much into one case, it could suggest that the Commission and Enforcement may take a more flexible and pragmatic approach to the NAV going forward, at least until the Commission more formally considers whether the policy should continue.

The settlement also raises the question of whether the Commission will continue its policy of strictly adhering to the Penalty Guidelines when assessing civil penalties.  The Guidelines were instituted in 2010 and govern civil penalties assessed against companies (but not individuals).  While they have arguably succeeded in increasing transparency behind civil penalty determinations, they have been viewed by many as flawed in certain respects—from producing penalties that are too high in some cases relative to the magnitude of harm, to not sufficiently incentivizing and rewarding self-reporting and cooperation, to producing anomalous results in certain types of cases.  Although the Guidelines allow the Commission to depart upward or downward from the civil penalty range produced by them, the Commission, as a policy matter, has rarely done so.  However, in the last two enforcement settlements, the Commission has declined to affirmatively state that the penalty amount falls within the range produced by the Guidelines.1  Historically, in Enforcement settlements, the Commission often included a statement that the penalty is "consistent with the Revised Policy Statement on Penalty Guidelines."2  The last two enforcement settlements have not included such a statement.  It is again too soon to draw any conclusions about any change in policy, particularly since these settlements have not provided enough information to assess whether the penalties were above, below or within the Guidelines range.  However, it is possible these settlements suggest that the Commission, as with the NAV, may take a less rigid, more pragmatic, case-specific approach to applying the Guidelines pending a more formal policy review.


1 See PSEG Energy Resources & Trade, LLC, 163 FERC ¶ 61,056 (2018) (approving settlement resolving allegations that PSEG violated PJM Interconnection, L.L.C.'s Open Access Transmission Tariff and the Commission's Market Behavior Rule).

2 See, e.g., Am. Transmission Co., LLC, 160 FERC ¶ 61,030, at P 15 (2017); Westar Energy, Inc., 160 FERC ¶ 61,025, at P 16 (2017); GDF Suez Energy Mktg. NA, Inc., 158 FERC ¶ 61,102, at P 20 (2017).

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