Our annual survey of rates of return on common equity authorized by state public utility commissions in recent rate cases for electric and gas retail distribution utilities.
FERC's Tough New Rules: Survival Skills for A New Era
rise, sometimes rapidly.
This supply tightness likely will continue to generate high prices and price volatility. This one-two punch already has drawn politicians’ attention. For example, announcing his opposition to the recently submitted LICAP proposed settlement, Connecticut Attorney General Richard Blumenthal noted:
Connecticut ratepayers have already suffered a 70 percent increase in three years and simply cannot afford to pay more. Another upsurge in power prices would do dire damage to our economy. It is unacceptable. 11
This attention will be exacerbated by the court cases now underway against former Enron executives. Thus, the trend appears headed toward increased scrutiny of market participants. In fact, the new director of FERC’s Office of Market Oversight and Investigations (OMOI) publicly announced on the commission’s Web site that she was making standards-of-conduct compliance a priority for her office. It is also no secret that the OMOI has been “staffing up” to meet the anticipated increase in enforcement activities.
The bottom line is simple. The risk is real and the consequences are enormous. In addition to huge civil penalty liability, violators run the risk of being punished by the rating agencies and Wall Street as well. So what can be done to help manage this risk? FERC has provided substantial guidance.
Although FERC has stated that no single list can identify all of the factors that will play into the determination of the penalty that will be assessed for a particular infraction, its Policy Statement on Enforcement 12 does identify representative examples of the factors that the commission will use in assessing the appropriate sanction. These factors can be broken down into “negative” and “mitigating” factors.
On the negative side, FERC will look at certain questions. What harm was caused by the violation? Was it widespread across markets or customers? Did it involve significant sums of money? Were others indirectly affected? What benefit did the wrongdoer receive? Was there fraudulent conduct involved? Was the violation willful, part of a broader scheme, or done in concert with others? Does the company have a history of violations? Is this an isolated instance or a recurring problem? What was management’s role in the violation and what actions did management take once the violation came to light? How did the violation come to light? Did the company self-report?
On the other hand, FERC has repeatedly stressed its preference for compliance over punishment:
We encourage regulated entities to have comprehensive compliance programs, to develop a culture of compliance within their organizations, and to self-report and cooperate with the commission in the event violations occur. 13
The fundamental need for an effective internal compliance program and proactive management is perhaps best illustrated by the following statement from Chairman Kelliher:
Under the Enforcement Policy Statement, if two different entities commit the same violation, and one entity has an effective compliance program, self-reported the violation, took remedial action, cooperated with the commission’s investigation, and the violation was an isolated instance, and the second entity had no compliance program, its senior management learned of the violation but took no action, the entity had