FERC Investigations: What is an Order to Show Cause?
The Federal Energy Regulatory Commission (FERC) has broad law enforcement authority under the Energy Policy Act of 2005 (EPAct 2005). If your company is being targeted by FERC, your immediate priority should be to avoid an Order to Show Cause.
The Federal Energy Regulatory Commission (FERC) is the federal agency responsible for the oversight of our nation’s interstate electricity, natural gas, oil, and renewable energy transmission facilities. With the enactment of the Energy Policy Act of 2005 (EPAct 2005), FERC’s regulatory and law enforcement authority expanded significantly; and, since then, FERC has been aggressively targeting companies in all sectors of the energy industry for a broad range of statutory and regulatory offenses.
Except in extreme cases, FERC investigations are civil in nature. However, FERC matters are unique in that prior to instituting litigation, FERC must issue an Order to Show Cause. An Order to Show Cause is not a finding of liability, but it places the onus on the target of the investigation to affirmatively demonstrate that the wielding of FERC’s substantial enforcement authority is unwarranted.
The Broad Scope of FERC’s Law Enforcement Authority
FERC enforces several federal laws that govern the energy markets; energy transactions; and the development, construction, and management of new energy transmission and storage facilities. ubstantial bodies of regulations exist under these laws as well, and this makes compliance a challenge even for the most well-established and well-heeled companies. The statutes that fall within FERC’s law enforcement jurisdiction include:
- EPAct 2005
- Prohibition of Energy Market Manipulation (16 U.S.C. Section 824v)
- Federal Powers Act (FPA) Subchapter I (16 U.S.C. Section 823b)
- FPA Subchapter II (16 U.S.C. Section 825o-1)
- FPA Subchapter III (16 U.S.C. Section 825o)
- Natural Gas Act (NGA) (15 U.S.C. Sections 717c, 717t, and 717t-1)
- Natural Gas Policy Act (15 U.S.C. Section 3414)
Under these laws (and their enabling regulations), FERC has the jurisdiction to oversee a broad range of activities in the electricity, natural gas (including liquified natural gas (LNG), oil, and renewable energy sectors. For example, FERC has the authority to issue Orders to Show Cause with respect to violations involving all of the following:
- The transmission and wholesale trade of electricity, natural gas, oil, and renewable energies;
- Mergers, acquisitions, and certain other corporate transactions involving electricity companies;
- Transportation of oil by pipeline
- Siting and abandonment of oil and natural gas pipelines and storage facilities
- Siting of certain electric transmission projects
- Operation and reliability of LNG terminals and high-voltage electricity transmission systems
- Licensing and inspections for hydroelectric projects
- Environmental matters related to natural gas and hydroelectricity projects
- Energy market manipulation
- Accounting and financial reporting by regulated companies
FERC’s Investigative and Law Enforcement Procedures
Similar to other federal agencies, FERC executes its law enforcement duties by conducting investigations that target suspected violators. Typically, a FERC investigation will be triggered by one of five possible factors:
- A company’s self-report of a statutory or regulatory violation;
- A call to FERC’s Enforcement Hotline;
- A whistleblower complaint filed with FERC;
- A referral from a Market Monitoring Unit for an Independent System Operator or Regional Transmission Organization; or,
- A referral from another state or federal regulatory or law enforcement agency.
1. Determining Whether to Investigate
Prior to conducting an investigation, FERC will examine the self-report or the basis for the complaint or referral in order to determine whether there is a sufficient basis to support devoting agency resources. Factors FERC considers when determining whether to investigate a company include (but are not limited to):
- The nature and seriousness of the allegation;
- The nature and extent of any harm caused;
- Any efforts already undertaken to remedy the violation;
- Whether the violation was willful or inadvertent; and,
- The likelihood of recurrence.
With this in mind, while an investigation is still very much an inquiry to determine whether a violation has been committed, the fact that FERC has decided to investigate indicates that agency staff already made a preliminary determination that there is an issue worth pursuing.
2. Conducting the Investigation
If FERC staff decide that an investigation is warranted, they will begin gathering information, “through customary discovery methods such as data and document requests, interrogatories, interviews, and depositions.” With regard to timing and targeted companies’ involvement in the investigative process, FERC states:
“The time needed to complete an investigation depends on many factors, including the complexity of the conduct involved and the nature of the alleged violations. Staff will discuss with company representatives relevant facts and data as the fact gathering progresses, and subjects of an investigation may at any time contact [FERC Office of] Enforcement staff to provide additional information or explanations of their conduct.”
If the FERC agents handling the investigation determine that no violation has occurred, then they will close the investigation without further action. If they determine that a violation has occurred, then they will, “share [their] views of the facts and the law with the subject . . . [and the] subject may respond with any additional information it deems to be helpful.”
3. Following a Finding that a Violation has Occurred
Once this preliminary process is complete, the agency staff handling the investigation will submit recommendations to the Director of the Office of Enforcement. The Director will review the recommendations, and, if he or she agrees, authorize FERC’s Secretary to issue a public Preliminary Notice of Violations. At this point, FERC staff will then typically reengage with the targeted company in order to pursue settlement negotiations.
If FERC and the targeted company reach a settlement, then they will enter into a Stipulation and Consent Agreement, subject to FERC approval. However, if the targeted company is unwilling to accept liability, it can refuse to settle, at which point FERC will issue an Order to Show Cause.
4. The Issuance of a FERC Order to Show Cause
Following the issuance of an Order to Show Cause, it becomes incumbent upon the targeted company to convince FERC (or a federal district court judge) that civil sanctions are unwarranted. However, it is also possible to settle following the issuance of an Order to Show Cause, and this happens in many cases. If additional negotiations and/or attempts to rebut the basis (or bases) for the Order to Show Cause are unsuccessful, then FERC or a federal district court can issue a final order assessing penalties which is subject to review in the U.S. Courts of Appeal.
Examples of FERC Orders to Show Cause
Even for companies that are facing FERC investigations or potential self-reporting obligations, this can all seem a bit amorphous in concept. To better illustrate the types of issues that can trigger Orders to Show Cause (and civil penalties), here are some examples of FERC Orders to Show Cause:
- Barclays Agrees to $105 Million in Civil Penalties and Disgorgement – In 2017, Barclays Bank PLC agreed to pay $70 million in penalties and $35 million in disgorgement after a five-year legal battle with FERC. According to the original Order to Show Cause from 2012, FERC alleged that Barclays and certain individual traders at Barclays violated Section 222 of the FPA by “manipulating the electricity markets in and around California from November 2006 to December 2008.” Originally, FERC sought to impose a civil penalty in the amount of $425 million along with $35 million in disgorgement.
- ETRACOM Agrees to Almost $2 Million in Penalties, Disgorgement, and Interest – In 2018, ETRACOM LLC agreed to settle with FERC following the issuance of an Order to Show Cause in 2015. Similar to the Barclays case discussed above, FERC sought penalties and disgorgement under Section 222 of the FPA based on allegations that ETRACOM engaged in virtual transactions intended to manipulate the wholesale electric market and, “economically benefit ETRACOM’s Congestion Revenue Rights (CRRs) sourced at that location.”
- Company Agrees to$290,000 Civil Penalty and Compliance Monitoring Following Allegations of Regulatory Violations – In 2011, National Fuel Marketing Company, LLC agreed to a $290,000 civil penalty and compliance monitoring following the issuance of an Order to Show Cause in 2009 which alleged that the company violated FERC prohibitions on natural gas market manipulation and FERC’s “shipper-must-have-title” requirement. FERC had originally sought to impose a penalty in the amount of $4.5 million.
- U.S. Court of Appeals Overturns $30 Million Civil Penalty Assessed Against Natural Gas Futures Trader – Following the issuance of an Order to Show Cause in 2007 and an administrative hearing, FERC assessed a $30 million civil penalty against a trader accused of attempting to improperly affect the index price of natural gas futures contracts. The trader appealed the decision to the U.S. Court of Appeals for the District of Columbia Circuit, and the appellate court overturned the civil penalty on jurisdictional grounds.
Is Your Company Facing a FERC Investigation?
If FERC is targeting your company, it is critical that you engage experienced legal counsel promptly. Oberheiden P.C. is a federal compliance and defense law firm that represents companies nationwide in civil enforcement matters. To speak with one of our senior attorneys in confidence, call us at 888-680-1745 or request a free case assessment online now.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.