Daily Rules, Proposed Rules, and Notices of the Federal Government
1. The Final Rule expands the procedural rights of persons subject to audits conducted by Commission staff under the Federal Power Act (FPA),
2. Under the Final Rule, following completion of the audit process, the Commission will issue an order on the merits with respect to non-disputed audit matters contained in a notice of deficiency, audit report, or similar document, and will notice, without making any findings on the merits, any disputed audit matters. The audited person may then elect a shortened procedure
3. As set forth in further detail below, twelve companies filed initial comments
4. In response to the filed comments, the Commission finds that a change to the proposed regulatory text is warranted to permit an audited person who has elected the shortened procedure to file a motion with the Commission for a trial-type proceeding in circumstances where a party has raised one or more new issues in the shortened procedure. In addition, three minor changes to the wording of the proposed regulatory text are warranted: (1) Clarifying that an audited person
5. On October 20, 2005, the Commission issued an NOPR to apply existing procedures for challenging the Commission staff's financial audit findings and proposed remedies to all Commission staff audits, including operational audit findings and proposed remedies. Pursuant to section 309 of the FPA,
6. As explained in the NOPR, relevant portions of the existing language of parts 41 and 158 of the Commission's regulations that relate to procedures for challenging audit matters date at least to 1937.
7. The 12 initial comments and four reply comments were overwhelmingly supportive of the Commission's efforts to provide a more complete and expansive procedure for persons subject to non-financial audits. We first address comments that identified issues pertaining to the primary scope of the proposed rule: (1) The role of interested persons; (2) appropriate informal procedures; and (3) the application of the proposed regulations to reliability audits. Next, we address comments suggesting changes to the proposed regulatory text. Finally, we address comments regarding the conduct of audits and related matters. Although these comments are beyond the scope of the issues set forth in the NOPR, the Commission believes that a discussion of these comments will add clarity to the agency's enforcement program.
8. The proposed rule states that “any other interested entities” may submit memoranda in the shortened procedure. Similarly, the existing rule makes provision for filing by “any other parties interested.”
9. Several commenters address whether anyone other than the audited person and the Commission staff should be able to file memoranda in the shortened procedure. For example, EEI comments that neither the proposed rule nor the Commission's regulations define the term “any other interested entities.” EEI asserts that historically only utility customers have intervened in contested proceedings concerning financial audits. EEI states that operational audits, in most cases, do not present rate implications, and that therefore there is no reason to permit other interested entities to file memoranda in the shortened procedure in matters involving operational audits. EEI also expresses the concern that an entity other than the audited person or Commission staff that files a memorandum in the shortened procedure could arguably be entitled to obtain in discovery non-public information pertaining to the underlying audit. EEI further seeks clarification regarding whether an interested entity may appeal the findings of an operational audit.
10. The Indicated New York Transmission Owners likewise comment that the Commission should clarify the role of “other interested persons” in the contested audit proceeding.
11. In this Final Rule, as is now the case in financial audits, the Commission will permit other interested entities to file memoranda in the shortened procedure. An entity other than the audited person may have an interest in the outcome of the contested audit proceeding and may have information about the audited person's operations or proposed remedy that would inform the Commission's determination regarding the contested issue. The Commission will use the same standard for permitting interested entities to file memoranda in the shortened procedure as it uses to permit interventions in other proceedings.
12. The Final Rule defines the shortened procedure as consisting of the filing of two rounds of memoranda, and thus there will be no opportunity in this procedure for any interested entity to use the discovery process to obtain information from the audited person.
13. The Commission adopts in part INGAA's suggestion that an audited person be permitted to change its election of the shortened procedure in favor of a trial-type procedure for good cause shown after an interested entity files a memorandum in the shortened procedure that raises a new matter. Within 20 days after the last date that reply memoranda under the shortened procedure may be timely filed, the audited person who elected the shortened procedure may file a motion with the Commission requesting a trial-type hearing if new issues are raised by a party. To prevail in such a motion, the audited person must show that a party to the shortened procedure raised one or more new issues of material fact relevant to resolution of a matter in the shortened procedure such that fundamental fairness requires a trial-type hearing to resolve the new issue or issues so raised. Parties to the shortened procedure and the Commission staff may file responses to the motion. In ruling upon the motion, the Commission may determine that some or all of the issues be litigated in a trial-type hearing. Further, the Commission can also set a matter for hearing
14. The Commission declines to adopt APGA's suggestion that the Commission permit an interested entity to participate in the initial election of the shortened procedure or the trial-type hearing. The election belongs to the audited person. The election provides the audited person a voice in how it may contest audit findings with which it disagrees. We conclude that the best approach is to permit the audited person to make the election for the shortened procedure or the trial-type election alone, subject to the requirement, as stated in the proposed rule, that the Commission will honor that election except when there are no material facts in dispute requiring a trial-type hearing.
15. In the NOPR, the Commission invited public comments on whether the Commission should also provide informal procedures before proceeding with the formal procedures contained in the NOPR.
16. A number of commenters express support for the continuation of informal contacts between the audit staff and the audited person during the course of the audit and up to the point where the audited person informs audit staff in writing that the audited person contests one or more audit findings or proposed remedies.
17. The Commission agrees with the commenters that asserted that informal discussions between the audited person and audit staff are useful and should continue where they are appropriate. Nothing in the Final Rule is intended to discourage these informal contacts. While it is not clear precisely what APGA means by “formal contacts,” requiring such contacts, as APGA suggests, would unduly impede the flow of communication between audit staff and an audited person that is essential to understand company records and the Commission therefore rejects this suggestion.
18. The Commission also does not see a compelling need to establish a specific informal procedure. An audited person may request to speak with management of the audit staff at any time during an audit up to the time that it indicates in writing that it contests specified findings or proposed remedies.
19. Two commenters ask whether the proposed rule would apply to reliability audits.
20. The Final Rule will apply to all audits conducted by Commission staff except for ERO Audits. A little background regarding ERO Audits will provide useful context. Order No. 672 was promulgated under the authority of the Energy Policy Act of 2005 (EPAct 2005).
21. Any audit or review of compliance with reliability standards conducted by an ERO will, by definition, not be an audit conducted by the Commission. Accordingly, the procedures set forth in the Final Rule will not apply to audits or compliance reviews conducted by an ERO. In addition, audits that are expressly conducted by the Commission staff pursuant to the provisions of Order No. 672 will not be subject to the procedures contained in the Final Rule. The Commission is excluding ERO Audits from the scope of the Final Rule because aspects of the Commission's program with respect to such audits remain to be determined. The Commission may reconsider this decision after an ERO is certified.
22. Ameren and EEI point out that in the NOPR the Commission referred to audit findings and proposed remedies collectively as audit matters and seeks assurance that an audited person may use the procedures set forth in the proposed regulations to challenge either an audit finding, or a proposed remedy, or both.
23. A situation may occur in which an audited person does not challenge a finding that it violated a Commission requirement, but the audited person does not agree with the remedial measure associated with the finding. In this situation, the audited person may wish to challenge the audit report, deficiency report, or other document with respect to the proposed remedy alone. The NOPR did not clearly specify that an audited person may challenge just the proposed remedy. The Commission clarifies that an audited person may do so, and the regulatory text is modified accordingly to clearly state that an audited person may challenge one or more audit findings, or one or more proposed remedies, or both, in any combination.
24. EEI notes that under the proposed section 41.1, the Commission shall provide the audited person a specified number of days to respond with respect to disputed audit matters. EEI also notes that the Commission did not specify the number of days in section 41.3 that an audited person will have to file memoranda pursuant to the shortened procedure. EEI urges that the Commission specify in sections 41.1 and 41.2 that an audited person shall have 30 days to respond to a Commission order that notes, but does not address on the merits, one or more disputed findings or proposed remedies. EEI also urges that the Commission specify in section 41.3 that initial memoranda be filed within 45 days and that reply memoranda be filed 20 days later.
25. The Commission accepts EEI's recommended changes with respect to the noted time limits for filings. The existing section 41.1 does not specify a time period for an audited person to respond to the Commission with respect to a noticed finding or proposed remedy with which he or she may disagree. Specifying the number of days for the noted filings will promote certainty. Therefore, the Commission will change the regulatory text to indicate the number of days for making the noted filings.
26. AOPL notes that the proposed section 349.1, which would apply to oil pipelines, provides that an audit may result in findings that an audited person has not complied with the Commission's requirements under the Standards of Conduct or the Code of Conduct, and that these requirements do not apply to oil pipelines.
27. The referenced requirements do not apply to oil pipelines. Accordingly, to avoid confusion, the Commission shall excise the phrase “matters under the Standards of Conduct or the Code of Conduct” from the regulatory text of section 349.1 in the Final Rule.
28. Williston Basin requests that the Commission remove the phrase “or taking other action” from proposed sections 41.2, 158.2, 286.104 and 349.2 because it appears to give the Commission the opportunity to change the findings or proposed remedies or possibly to take other action inconsistent with the original findings and proposed remedies. The relevant language reads as follows: “Upon issuance of a Commission order that notes a finding or findings, with or without proposed remedies, with which the audited person has disagreed, the audited person may: Acquiesce in the findings and proposed remedies by not timely responding to the Commission order, in which case the Commission may issue an order approving them or taking other action * * *.”
29. The Commission declines to remove the words “or taking other action” as Williston Basin requests. These words are needed to permit the Commission flexibility to decline to adopt the finding or findings or proposed remedy or remedies to which the audited person acquiesced by not timely filing the required document. The Commission may revise an audit report even where there is no party challenging the contents of that report because the Commission must always discharge its obligation to act consistent with the public interest according to its statutory authority.
30. A number of commenters assert that a lack of clear rules causes them to be surprised by new and changing regulatory requirements. Despite good faith attempts at compliance, these commenters state, they are subject to a “gotcha” approach to auditing that forces them to meet “moving target” requirements. As noted above, while these and similar comments regarding the audit process are outside the scope of the proposed rule, the Commission believes that addressing them will provide greater clarity to the agency's enforcement program.
31. Several commenters ask the Commission to clarify whether audit reports, settlements and orders on contested audit matters constitute binding precedent for non-parties. EEI states that the Commission must provide an opportunity for comment with respect to any requirement set forth in an audit report, settlement or order on a contested audit matter that the Commission proposes to make generally applicable.
32. Unless the Commission expressly states it is making findings that apply to other parties, an audit report and a Commission order approving an uncontested audit report are not binding on entities other than the audited person or persons who agreed not to contest the audit report that the Commission approved. To this extent, such an order, like an order approving an uncontested settlement, does not have precedential value.
33. Some commenters ask the Commission to clarify a number of issues regarding cooperation of audited persons. EEI asserted that it should not be considered a lack of cooperation for a company being audited to seek to narrow the scope of information requests. EEI requests that the Commission clarify whether the discussions with staff of this nature
34. On October 20, 2005, the Commission issued a policy statement to provide guidance and regulatory certainty regarding the agency's enforcement of the statutes, orders, rules and regulations it administers.
35. In sum, the Policy Statement set forth that the Commission expects cooperation, that the Commission will give consideration to exemplary cooperation,
36. Two commenters ask the Commission to keep information regarding contested audit matters confidential. Ameren asserts that the Commission should ensure that all contested audit proceedings remain completely confidential until a final Commission determination has been made. Ameren also asks the Commission to clarify that, if an audited company challenges any of the audit staff's proposed findings under the contested audit procedures, the Commission not issue a notice or other statement releasing any proposed staff findings or remedies to the public. Instead, Ameren urges that any additional paper or formal hearing procedures on the contested audit findings should be kept confidential until a final determination is made by the Commission. Ameren notes that the public release of proposed remedies could have an immediate and harmful impact on the audited person's stock price or credit rating.
37. All Commission issuances regarding the resolution of contested audit matters under the Final Rule will be public. A brief statement of the relevant processes under the Final Rule at this juncture will help inform this discussion. In instances in which the audited person and the audit staff are unable to agree upon the findings and proposed remedies contained in a draft audit report, the following steps occur:
• The audited person may provide in writing to the audit staff a response to the draft audit report indicating any and all findings or proposed remedies, or both, in any combination, with which the audited person disagrees.
• The audit staff communicates this response to the Commission along with the proposed final audit report. At this point, the Commission may direct the audit staff to undertake further analysis, obtain further information from the audited person, or take other action. The audited person's response indicating disputed findings or proposed remedies becomes public when the audit report becomes public,
• The Commission may make determinations on the merits in a public order with respect to the findings and proposed remedies contained in the audit report that are not in dispute and will publicly notice the disputed items. The order will not constitute final agency action with respect to the disputed items and will provide the audited person the opportunity to elect in writing the shortened procedure (submission of briefs) or the trial-type hearing by a date certain.
• If the audited person does not respond within 30 days to the notice, the Commission may issue an order on the merits regarding the noticed items. Alternatively, the audited person may timely respond to the notice in a public filing by electing in writing the shortened procedure or the trial-type hearing.
• If the audited person makes a timely election, the Commission will honor the election (unless a trial-type proceeding is chosen and there are in the Commission's judgment no disputed issues of material fact requiring a trial-type hearing) and issue a public notice setting the schedule for submission of memoranda, in the case of the shortened procedure, or referring the matter to the Chief Administrative Law Judge, in the case of the trial-type hearing.
38. The Commission is aware that noticed findings or proposed remedies may have financial consequences for an audited person. The public has an appropriate interest, however, in seeing the Commission's resolution of disputed, jurisdictional matters before it. Regulated companies may need to be aware of Commission determinations regarding disputed audit matters to comply with Commission requirements. Further, the Commission must publicly notice the disputed audit findings or proposed remedies to provide potential interested parties an opportunity to determine whether to participate in the contested audit procedures. The audited person's response and the Commission's notice establishing a briefing schedule or beginning a trial-type hearing must also be public to enable potential interested parties to participate in the proceeding. Nevertheless, audited persons may seek to file proprietary materials with a request for confidential treatment under section 388.112 of the
39. Three commenters request clarification regarding the role that part 1b of the Commission's regulations plays in audits.
40. In addition, EEI states that audited persons are uncertain as to whether the operational audits constitute part 1b investigations or whether part 1b investigations are separate and apart from the operational audits and the proposed procedures. EEI asserts that if audits are not conducted pursuant to part 1b, the Commission must establish procedures that define the rights of an audited person. In particular, EEI claims that new procedures are needed to both ensure the confidentiality of the audited person's proprietary or otherwise sensitive information during an audit and when the audited person contests the findings or remedies proposed by the audit staff. EEI calls on the Commission to issue a policy statement, with an opportunity for public comment, to establish the appropriate relationship between the audit staff and the enforcement staff during an audit, consistent with separations of functions requirements.
41. INGAA also asks the Commission to clarify whether audits are conducted under part 1b of its regulations.
42. Although not directly related to this rulemaking proceeding, we address the concerns about the role of investigations with respect to audits as part of the Commission's recent efforts to clarify its enforcement program. Investigations and audits are distinct methods the Commission uses to determine and address compliance with its requirements. Part 1b applies to investigations and not to audits.
43. It is not necessary, as EEI asserts, for the Commission to establish new procedures that define the rights of audited persons to ensure the confidentiality of the audited person's sensitive information. Audited persons provide information to the audit staff on a non-public basis. In that regard, the FPA specifies that “[n]o member, officer, or employee of the Commission shall divulge any fact or information which may come to his knowledge during the course of examination of books or other accounts, as hereinbefore provided, except insofar as he may be directed by the Commission or by a court.”
44. No new procedures are required to establish the relationship between audit staff and enforcement staff. Information obtained in an audit may be shared with Commission staff conducting a related investigation.
45. The Commission has explained that the same person on its staff may perform more than one function “provided (1) such combination enhances the Commission's understanding of energy markets and related issues; and (2) parties in individual proceedings appear to and actually receive a fair and impartial adjudication of their claims.”
46. Finally, with respect to EEI's request for clarification regarding when an attorney may be present during employee interviews, the Commission
47. Several commenters express concern about the role of “best practices” in the audit process. EEI states that the audit staff has developed and utilized a non-public list of best practices in its audits for Standards of Conduct and Code of Conduct compliance. EEI further states that best practices are not necessarily regulatory requirements and that on a cost-benefits basis, best practices may not be warranted.
48. The Commission acknowledges that because a practice was successfully implemented by one audited person does not necessarily mean that practice will be a good fit elsewhere. Practices that companies implement to improve compliance may serve as useful references, but they are not binding on others. For example, experience has shown that the taking of minutes at meetings in which transmission function and energy affiliate employees are present may be useful to address and prevent Standards of Conduct violations. However, taking minutes at such meetings is not a requirement. For some audited persons, the presence of a compliance officer may be sufficient, or other measures may be adopted that are equally effective. There is often not a one-size-fits-all response to help ensure compliance. The Commission does not intend to bind all companies to adhere to a remedy that one company may have adopted. A person need only comply with Commission requirements.
49. The staff does not have a non-public list of best practices as EEI suggests. The audit staff, however, has observed a broad array of company practices that address and prevent violations of Commission requirements with varying degrees of effectiveness. Some of these company practices are reflected in Frequently Answered Questions (FAQs) on the Commission's Web site.
50. LGE encourages the Commission to consider promulgating audit cycles for most of what LGE refers to as the Commission's “standard” audits. For example, LGE suggests that compliance with wholesale fuel adjustment clauses might occur on a three-year cycle.
51. The Commission declines to adopt LGE's suggestion. The audit staff does not necessarily commence audits based on a schedule. The audit staff selects companies and subjects to audit based on a variety of factors.
52. LGE encourages the Commission to develop or adopt auditing standards for all audits.
53. The audit staff adheres to auditing standards.
54. Office of Management and Budget (OMB) regulations require OMB to approve certain information collection requirements imposed by agency rule.
55. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment.
56. The Regulatory Flexibility Act of 1980