Big changes may be in the offing for FERC enforcement

Source: Sam Mintz, E&E News reporter • Posted: Monday, December 4, 2017

Five years ago, the Federal Energy Regulatory Commission announced with fanfare that it had slapped an alleged market manipulator with a record fine, $469.9 million.

There was less hoopla last month when FERC said it had settled the case against Barclays PLC and had slashed that ballyhooed fine by nearly 80 percent, to $105 million (E&E News PM, Nov. 8).

That fine is less than the $139.3 million in damages that FERC alleged Barclays had cost power buyers and sellers.

While settlements are FERC’s preferred method of concluding investigations, FERC watchers have different theories about why FERC might have agreed to dramatically shrink the fine, notably to avoid years of litigation.

But some see the turnaround on Barclays, combined with declining enforcement data, as a sign that FERC enforcement could be slipping under Chairman Neil Chatterjee, a former aide to Senate Majority Leader Mitch McConnell (R-Ky.).

“I definitely saw that as a bellwether, how FERC was going to handle that case with acting Chair Chatterjee,” said Tyson Slocum, who leads Public Citizen’s energy program. “The fact that they settled for an amount far, far less than what FERC originally asked for … and less than what enforcement staff determined that Barclays’ actions cost market participants was very concerning for us.”

In fiscal 2017, FERC finalized five settlements and closed 11 other investigations with a finding of no violation — the lowest ratio of settlements to cases closed since the agency started publishing annual enforcement reports in 2007.

The five settlements is also the smallest annual total in a decade, down from an average of 10.3 settlements a year, although that could be partially explained by inactivity by the five-seat commission, which lacked a quorum for six months this year.

Sources say change may be afoot for the enforcement office. Three sources with knowledge of deliberations on the enforcement post told E&E News that John Estes, a lawyer with the firm Skadden, Arps, Slate, Meagher & Flom LLP who represents companies targeted by FERC investigations, is being considered to lead the Office of Enforcement and is the White House’s preferred choice.

The decision on the enforcement chief would ultimately be made by the incoming FERC chairman, Jones Day energy lawyer Kevin McIntyre, who was confirmed by the Senate on Nov. 3 but has not been sworn in.

Estes did not return phone and email messages.

For Slocum, the Barclays settlement and the Estes rumor are a “chilling sign that FERC’s tough enforcement days are in the rearview mirror.”

FERC declined to make Office of Enforcement officials available for interviews, but former staffers said they don’t think an enforcement slide is imminent.

For one, Office of Enforcement staff is stable, said David Applebaum, who worked in the office for six years, including as director of investigations. He’s now a partner at Akin Gump Strauss Hauer & Feld LLP.

“The enforcement staff, both in the analytics group and the investigations group, is largely the same as it was several years ago and will be expected to be pretty similar over the next few years. There’s typically not that much turnover,” Applebaum said. “The staff can be expected to approach investigations analytically … in similar ways going forward as they have in the past.”

The Office of Enforcement’s stated mission is to protect consumers through oversight and surveillance of energy markets. It has four divisions — the Investigations, Audits and Accounting, Energy Market Oversight, and Analytics and Surveillance divisions — and has about 200 employees, including lawyers, market analysts, economists, former traders and auditors, a FERC spokesman said.

Norman Bay’s years

As Slocum sees it, FERC’s enforcement efforts were boosted by Norman Bay, a former U.S. attorney from New Mexico who became enforcement chief in 2009, was appointed commissioner in 2014 and took the commission gavel as chairman in 2015. He resigned from FERC last February.

“He was a strong head of enforcement. That was why we publicly endorsed his confirmation as chair,” Slocum said. “He brought a whole new cultural change to the office; he completely beefed up their operation.”

Slocum said Bay “brought a prosecutor’s mentality” to FERC and pushed the commission to go after market manipulation.

Under Bay, the commission brought in $148 million in fines in fiscal 2012 and $304 million in fiscal 2013, with hundreds of millions more in unjust profits returned.

A major part of the 2013 total was a $285 million fine agreed to by JPMorgan Chase & Co, over charges that the firm gamed energy markets in California and the Midwest. That’s still FERC’s largest settlement ever.

FERC’s burgeoning enforcement efforts in the early part of the 21st century were primarily due to statutory changes, said Max Minzner, who was FERC’s general counsel and has also served as a special counsel in the enforcement office.

The most important thing to happen to FERC enforcement in the last 15 years, he said, was passage of the Energy Policy Act of 2005, which gave the commission power to issue penalties for market manipulation.

“It led to a reshaping of the office and the office’s priorities in light of the new statutory authority,” Minzner said.

Firms press for change

Since FERC regained its quorum in August, the Republican-led commission has been preoccupied with reducing a backlog of work that grew during the non-quorum period and, more recently, a Department of Energy proposal for boosting struggling coal-fired and nuclear power plants.

That could change under McIntyre.

In January, Estes, the rumored enforcement pick, and another lawyer from Skadden — which is also the firm where FERC General Counsel James Danly worked before joining the agency — laid out some changes they would like to see at FERC.

“There is no good reason to require the subject of an investigation to engage in three rounds of written submissions with the enforcement staff,” wrote Estes and Tim Mastrogiacomo. “Nor is there a need for FERC to publicly name subjects of ongoing investigations (by issuing what FERC calls a ‘Notice of Alleged Violation’).”

The two also wrote that FERC might eliminate or revise its penalty assessment guidelines and shift to focus more on ensuring compliance rather than issuing penalties to companies. Large penalties, they said, may be “misguided” because they punish shareholders.

They also suggested FERC could “pare back on its expansive practice of claiming that companies violated the previously unexpressed ‘spirit’ or ‘intent’ of market rules.”

Lawyers from Bracewell LLP wrote after the Barclays announcement that “we may be closer than ever to seeing FERC reform its investigative and enforcement processes.”

One factor that could force FERC’s hand is that the agency is seeing more entities that are the focus of investigations it elects to fight in court.

“[The Office of Enforcement] did see an increase in litigation activities with five pending cases in federal district courts” in the past year, said Max Multer, a member of enforcement staff, at FERC’s public meeting last month.

Applebaum and Todd Brecher, another Akin Gump lawyer, wrote in February that “subjects of enforcement actions are increasingly deciding to litigate cases rather than settle with FERC — particularly when major civil penalty and disgorgement amounts are at stake.”

And Chatterjee himself said he thinks FERC needs to re-evaluate at least one aspect of its enforcement tactics.

“I believe that FERC’s enforcement responsibilities are a critical part of our mission and that the electricity markets work best when investors, operators and the public have confidence that everyone is playing by the rules,” he said. “However, this new enforcement authority has not come without some controversy. One of the main points of contention has been over the scope of de novo review under the Federal Power Act.”

With companies pushing for court action instead of settlements, FERC lawyers have argued that, unlike in traditional civil proceedings, a discovery phase is unnecessary and that the administrative record that the agency submits for cases should be sufficient.

But that argument has been struck down five times by the courts.

“The courts have spoken, and I, for one, am listening,” Chatterjee said. “I believe that the proper scope of de novo review is a matter my colleagues and I need to examine so we can chart a new course that is fair and legally defensible.”

Whatever happens will likely not occur quickly.

“Things tend to change slowly in the FERC space, and enforcement is no different,” former General Counsel Minzner said. “While you may see a change in emphasis, it will not happen in a course of weeks. It will happen over a course of months or years.”

Reporter Hannah Northey contributed.