I’ve been blogging recently about my scholarly work in administrative enforcement. I thought it might be useful to touch on my practical experience as well. I took a break from my academic career to work in the Office of Enforcement at the Federal Energy Regulatory Commission. I had the good fortune to serve under Norman Bay, the Director of that Office at FERC. (Full disclosure – Bay has been nominated by President Obama to serve as Commissioner and, eventually, Chair of the Commission. The Senate Energy Committee voted in favor of his confirmation and I hope that the full Senate will do the same shortly).
FERC is an agency with mixed regulatory portfolio. As a general matter, it oversees the interstate energy markets. In practice, two of its largest areas of regulatory focus are electricity and natural gas. The agency’s traditional mission involved the rates, terms, and conditions of service offered by public utilities. In important ways, the Commission’s work mirrored the function of state public regulatory commissions. For example, just as state regulators are charged with the obligation to prevent public utilities from using their monopoly position to exercise market power in retail electric markets, FERC plays the same role in interstate electric markets.
This mission changed in the first part of the last decade as a result of two significant problems in the energy sector. The first was the western energy crisis of 2000 and 2001. Severe shortfalls in the supply of electric power produced blackouts and dramatic price fluctuations. Market manipulation, primarily by Enron and related entities, is widely seen as a key cause of that crisis. Second, the 2003 northeast blackout involved widespread power losses in both the United States and Canada. The blackout was the result of multiple failures of several public utilities to ensure the reliability of their systems.
Despite the severity of these events, no federal agency was in a position to respond effectively. Neither federal nor state regulators could impose significant penalties for energy market manipulation. Similarly, electric utilities had no binding legal obligation to prevent blackouts. Electric grid reliability depended on a set of voluntary standards that were not backed by any enforcement authority.
Congress responded with the Energy Policy Act of 2005 and dramatically expanded FERC’s enforcement powers. It received statutory authority to punish the manipulation of the energy markets. The statute and implementing regulations closely followed the models used by the SEC in the securities markets. With respect to electric grid reliability, Congress authorized the creation of mandatory standards to prevent blackouts. Notably, FERC received the power to impose penalties of $1,000,000 per day for violations of the Commission’s rules and regulations.
As a result, FERC obtained not just a new regulatory mission, but both the power and obligation to impose significant penalties for serious violations. It needed to decide how to use the authority effectively and judiciously. As I’ll discuss more tomorrow, my view is that it has done so – FERC recently has been a true enforcement success story.
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