FERC as Prosecutor, Judge and Jury?

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May the Federal Energy Regulatory Commission (FERC) initiate an enforcement investigation against a company for manipulating natural gas markets, order the company to show cause why it shouldn’t be fined and then decide the case itself? Or do the Natural Gas Act (NGA) and the U.S. Constitution require that the company be given the right to defend its conduct exclusively in federal district court? That was the issue Total Gas & Power North America, Inc. (Total Gas), the subject of such an investigation, raised and that a federal district court in Texas recently refused to decide in Total Gas & Power North America, Inc. et al. v. FERC (DC SDTX July 15, 2016).

As previously reported in a Stinson Leonard Street Alert in late April, FERC issued an order directing Total Gas, two of its traders, its ultimate corporate parent, Total S.A. (Total) and an affiliate Total Gas & Power, LTD (TGPL) to show cause why they should not be found to have violated section 4A of the Natural Gas Act and section 1c.1 of FERC’s regulations through a scheme to manipulate the price of natural gas at locations in the southwest United States between June 2009 and June 2012. The April show cause order further directed the respondents to show cause why they should not be required to disgorge $9.2 million (plus interest) and why Total Gas should not be assessed a civil penalty of $213.6 million, why one trading manager should not be fined $1 million and another trading manager $2 million. The respondents were given 30 days to respond; this response period was later extended by 45 days, and on July 12, 2016, Total Gas submitted its formal opposition to the show cause order.

Contemporaneously, Total Gas took the fight to the federal courts. The central issue raised by Total mirrors the concerns that other companies targeted by FERC’s enforcement staff have recently voiced in the press and elsewhere about FERC’s investigative process. How, these companies argue, can they get a fair shake in an administrative hearing before the agency when the case against them has been launched at the urging of the agency’s own investigative staff? The District court, as discussed below, did not directly address that question. But its explanation for withholding a ruling is not likely to give these companies much hope that they will be able to shift adjudication of cases against them to the federal district courts.

The heart of Total Gas’s case was the argument that section 24 of the NGA – an unchanged part of the original 1938 Act – gives the federal districts the exclusive jurisdiction to adjudicate violations of the Act. Thus, Total Gas argued, the provisions in section 22 of the NGA (added as part of the 2005 Energy Policy Act) barring market manipulation and allowing FERC to assess penalties “after notice and opportunity for public hearing,” allow FERC to investigate and to “assess” a penalty, but not to issue a final order. Adjudication of the merits, Total Gas said, would have to take place exclusively before the federal courts.

FERC, the court said, has not only made no determination about Total’s liability, but “may abandon the civil penalty process at any of several remaining steps” in its process. Plaintiffs (Total Gas), the court added, “request an advisory opinion, not on their dispute, but on the validity of an entire administrative structure based on non-specific allegations.” In any event, federal district court judge Atlas concluded, if Total believes the administrative process before FERC is unlawful or unfair, its exclusive remedy is to appeal any final order, if there ever is one, to the federal circuit courts of appeal.

The court also noted that various courts of appeal, interpreting identical language in the Securities and Exchange Act, had concluded that the reference to “exclusive jurisdiction” meant “merely that all criminal or civil proceedings initiated in the courts for violations of the act must be brought in the [federal district courts] and that “the exclusive jurisdiction of violations language was not intended to repeal the statutes authorizing agency proceedings following judicial review.” For example, the court explained, FERC may “initiate” a proceeding in court to enforce a subpoena. If it does so, it must seek enforcement in the district courts, not the courts of appeal. “It would be extraordinary,” the court concluded, “to repurpose NGA § 24 eight decades later to govern the relationship between federal courts and the agency.” By establishing penalties for market manipulation under EPAct, “Congress likely intended the EPAct to strengthen the Commission’s civil enforcement powers within the administrative process.”

A fair reading of the district court’s opinion suggests it rejected the statutory argument advanced by Total Gas that the NGA precludes FERC from adjudicating market manipulation cases involving the natural gas industry and imposing fines for any violations it might find. But in recognizing the statutory legitimacy of an investigative and administrative adjudicative process, the court strongly hints at its skepticism that upon review of final agency orders, a court of appeals would find it fundamentally unfair and unconstitutional – after decades of use – for an administrative agency to adjudicate cases that its staff had recommended that it hear.

While the court did not reach the core issue, a conclusion of that type would call into question not only the validity of agency orders fining companies for market manipulation, but a much broader range of typical FERC actions. In virtually every rate case brought under section 205 of the Federal Power Act or section 4 of the NGA, the agency, having made a tentative and preliminary conclusion that the regulated company acted unreasonably, then sets the matter for an administrative hearing. FERC similarly bases its decision to suspend the effective date of utility and pipeline rate changes on a tentative conclusion that the rates “may” be excessive.

All this is not to say that parties are without recourse where there is evidence that individual agency decision makers have actually prejudged the outcome of cases before them. In such cases they may seek recusal of any decision makers who have done so. Nor are parties without recourse if they believe the investigative process itself has been unfair. FERC, like other administrative agencies, has on more than one occasion responded to complaints of this type by amending its rules or issuing policy statements governing the transparency of investigations. But it is unlikely that, a century or more into the establishment of administrative agencies, courts would find it unconstitutional that agencies perform both investigative and adjudicative functions involving the same conduct.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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