The following is a contributed article by Zach Terwilliger, partner, John Decker, partner, and Ryan Hoeffner, associate, with the law firm Vinson & Elkins.
For nearly 20 years, the Federal Energy Regulatory Commission has administered a robust duty of candor framework for market-based rate sellers of wholesale electric power — one that requires them to provide accurate and factual information, and not to submit false or misleading information or to omit material information, in any communication with the commission and various electric market participants.
Now, FERC is seeking to expand the framework well beyond electric market-based rate sellers. Under a July proposal, any communication with FERC, its staff, or a wide range of FERC-regulated energy industry participants — from any person or entity on any matter under the commission’s jurisdiction — would be captured under its duty of candor rules.
FERC’s proposal is missing critical elements. In addition, it is overly broad and ill-defined, resulting in a rule that would hamper the very communications it is meant to protect.
FERC states that to be an effective regulator, it must ensure that communications involving matters before it are complete and truthful. And on a cursory review, the commission’s proposal might seem to advance progress toward that end. But on closer examination, the proposal is beset with many troubling flaws — three major ones are addressed here.
Materiality and intent: Key concepts gone missing
One troubling flaw — highlighted in Commissioner James Danly’s dissent — is that the proposal fails to incorporate the concepts of materiality and intent. This is a massive oversight: A materiality requirement is necessary to limit liability for minor inadvertent misstatements or omissions, and proving intent is an essential, long-established threshold for successfully prosecuting these types of violations.
Similar rules governing communications with regulatory bodies, including Securities and Exchange Commission Rule 10b-5 and FERC’s own Anti-Market Manipulation Rule, incorporate both of these critical concepts. Yet under the proposal, any accidental violation — such as an honest mistake in response to a request for data or an inadvertent submission of misleading information as part of a Natural Gas Act Section 7 certificate application for the construction of facilities — could be enough to trigger an enforcement action.
The threat of liability for innocuous errors like these isn’t likely to make energy industry communications more transparent, nor strengthen cooperation in business discussions. Quite the opposite, in fact. Such a threat will likely make energy industry participants far more hesitant to engage in these discussions while discouraging meaningful exchanges of information in those that do happen.
FERC attempts to avert this chilling effect by providing a safe harbor for exercising due diligence to prevent the submission of false or inaccurate statements, much the same as in the duty of candor rules now in place. But in many situations, exercising due diligence is impractical. In determining whether a communication constitutes a duty of candor violation, analyzing the communicator’s intent or the materiality of the information in question would be a far more thoughtful approach.
Blurred lines and imbalances
Another troubling flaw in the proposal is that it fails to distinguish business-related communications from communications involving FERC’s market-oversight obligations. All communications from a customer to a regulated entity are covered, but not communications from the regulated entity to the customer. Also, what about communications in support of a client’s position to FERC non-decision making trial staff?
Under the proposal’s plain language, all of these communications could risk a violation, and this would at a minimum create an imbalance from an advocacy standpoint and hinder efforts to settle a litigated proceeding.
A third troubling flaw in the proposal is that it fails to set out the penalties that FERC could levy for a violation, leaving energy industry participants to wonder whether — and to what extent — the commission will adhere to its 2010 guidelines for assessing civil penalties. Indeed, the guidelines govern civil penalties assessed against companies and are rarely used against people, yet the proposal captures communications from both.
Complicating matters further, the guidelines have their own flaws — from sanctioning penalties that don’t fit the level of harm they aim to punish, to producing dissimilar outcomes under similar circumstances. The guidelines authorize FERC to assess civil penalties exceeding $1.3 million per violation — per day — and under the expanding duty of candor rules, penalties reaching that figure can’t be ruled out.
These troubling flaws make clear that FERC’s duty of candor expansion is not ready for prime time. And if the final rule turns out substantially similar to the proposal, conversations in the energy industry are likely to become more guarded and thus more challenging to navigate.
As FERC works toward final rules, energy industry participants are watching closely to see whether these flaws will be addressed. Wherever the commission lands — and especially if it fails to address these flaws — energy industry participants will have much to think about as they prepare to face this novel regulatory landscape. Comments on the proposal are currently due to the commission by Oct. 11. Multiple industry associations have filed a joint motion requesting an extension until Nov. 10.