On December 17, 2009, the Federal Energy Regulatory Commission (FERC) issued two new orders related to enforcement proceedings. In the Policy Statement on Disclosure of Exculpatory Materials (Policy Statement),¹ FERC formalizes its policy regarding disclosure of potentially exculpatory materials to parties under investigation. The second order authorizes the FERC Secretary, upon direction from the Director of Enforcement, to issue notices regarding ongoing investigations that will disclose some basic facts about those investigations much earlier than was previously the case (Preliminary Notice Order).²

FERC also issued its 2009 Report on Enforcement on the same day, which lists FERC’s enforcement priorities for the year. Those priorities are (i) fraud and market manipulation, (ii) serious violations of the reliability standards, (iii) anticompetitive conduct, and (iv) conduct that threatens the transparency of regulated markets.

Policy Statement on Disclosure of Exculpatory Materials 

With the Policy Statement, FERC is formalizing an existing Enforcement policy to release potentially exculpatory material to parties subject to investigation under Section 1b of the Commission’s regulations or administrative enforcement actions. The Commission’s policy is modeled after the process required under the Constitution that requires prosecutors to turn over to the defendant potentially exculpatory evidence not already in the defendant’s possession or obtainable through reasonable diligence. FERC emphasizes that this policy is voluntary and has not been required of regulatory agencies by the federal courts. Exculpatory evidence is evidence that is material to guilt or punishment, including information that could potentially impeach a witness. During investigations, FERC staff will assess the materials they receive to determine if those materials should be provided to the subject of the investigation. The subject of an enforcement hearing can also request that the presiding administrative law judge order the disclosure of materials the subject has a reasonable basis to believe are exculpatory. If necessary, the presiding judge can review the allegedly exculpatory materials in camera before ordering disclosure.

FERC staff’s obligations do have limits, however. FERC staff is not required to seek out materials for disclosure, such as those held by other federal agencies; its obligation is only to turn over materials it obtains through discovery and its own investigation. Also, FERC staff need not turn over its strategies, legal theories, or evaluations of the evidence. The Commission is willing to turn over materials that are subject to Commission privilege or immunity. FERC reserves to itself, not its staff, the decision of whether to approve the disclosure of such protected materials. 

Order Authorizing Secretary to Issue Staff’s Preliminary Notice of Violations 

In the Preliminary Notice Order, the Commission directed the Secretary to issue a notice of a non-public investigation disclosing (i) the identity of the entity or entities that are the subject of the investigation; (ii) the time and the place of the alleged conduct; (iii) the rules, regulations, statutes, or orders that staff alleges were violated; and (iv) a concise description of the alleged wrongful conduct. However, the Secretary will issue the notice only at the direction of the Director of Enforcement. The notice, if issued, will occur after staff has prepared a preliminary findings letter and the subject of the investigation has had a chance to respond to FERC staff’s letter. The practical effect will be to advance significantly the time when the general public will gain insight into the factual and legal issues that Enforcement is pursuing. There is often a period of months between the exchange over the preliminary findings letter and the time when the existence of an Enforcement investigation becomes known to non-participants. Thus, the use of this procedure should enable regulated entities to obtain more current information regarding the facts and issues of concern to the Office of Enforcement. For the subject of the investigation, however, the notice procedure will publicize the pendency of the investigation much sooner in the process, and perhaps, in rare cases, when the matter might never have become public at all, if the investigation is later closed without Commission action.

Most FERC non-public investigations do not become known to the public until either a settlement is announced or the Commission issues a show cause order. The purpose of the new notice requirement is to provide the public with some limited information about the investigation earlier in the process. The typical pattern of an investigation is for FERC staff to obtain some information regarding a potential violation, after which Enforcement staff opens an investigation to examine whether there is a potential violation, often but not always including a contact to the subject for information prior to the issuance of a preliminary findings letters.  Many investigations are responsive to notices of potential violations by regulated entities themselves. Others are responsive to reports by market monitors, referrals from other offices within FERC, or complaints to the FERC hotline. If, at the conclusion of this initial review, Enforcement staff believes that there is a potential violation, FERC Enforcement staff will send a preliminary letter to the subject of the investigation outlining the allegations and supporting evidence. The subject has a specific opportunity to respond to the preliminary letter by a written submission. Following this response, the Director of Enforcement can direct the Secretary to issue the notice. The Preliminary Notice Order is explicit, however, that the new notice authorization does not create any right for third parties to intervene into an investigation. The issuance of the notice provides notice to the public of the basic facts and issues being investigated. The issuance of the letter is not intended to alter the ensuing process by which the subject of the investigation and Enforcement staff reach an ultimate resolution of the matter being investigated.

For more information, please contact Vinson & Elkins lawyer Steve Angle. Visit our website to learn more about Vinson & Elkins’ Energy and Energy Regulation practices.  

1 129 FERC ¶ 61,248 (2009).
2 Order Authorizing Secretary to Issue Staff’s Preliminary Notice of Violations, 129 FERC ¶ 61,247 (2009).