Through its more recent enforcement actions, the Federal Energy Regulatory Commission (FERC or the Commission) has sent a clear message to the energy industry, with its Office of Enforcement (OE) shifting enforcement efforts to policing infrastructure development and ensuring compliance with authorizations granted in certificate orders.
Investigations and enforcement actions have traditionally focused on market participants’ trading behavior and participation in organized markets, with FERC OE pursuing allegations of fraud and manipulation that generate headlines. In these more “traditional” enforcement actions, FERC OE has sought to impose civil penalties upwards of tens of millions of dollars, and sometimes even hundreds of millions of dollars.
Although we expect those enforcement actions to continue to make up a significant part of the FERC OE portfolio, it is clear that FERC OE has turned some of its attention to investigating and pursuing enforcement actions for noncompliance with the Commission’s rules and regulations applicable to the development of new infrastructure and the terms and conditions of the authorizations granted to developers that construct and operate projects.
Until 2021, FERC OE’s priorities have focused on matters involving fraud and market manipulation; serious violations of the Reliability Standards; anticompetitive conduct; and conduct that threatens the transparency of regulated markets. In its most recent Annual Report of Enforcement, which covered FERC OE’s activities during fiscal year 2021, FERC OE announced a new enforcement priority: investigating matters involving threats to the nation’s energy infrastructure and associated impacts on the environment and surrounding communities. FERC OE explained that it focuses on Commission orders and regulations related to energy infrastructure, including ensuring compliance with certificates of public convenience and necessity to minimize the impact of projects on the environment, landowners, and communities.
This new priority goes hand in hand with Chairman Glick’s initiative to expand FERC’s consideration of environmental justice concerns in all Commission decisions and to make participation by environmental justice communities on par with participation by other stakeholders. To achieve these goals, last year Chairman Glick appointed a Senior Counsel for Environmental Justice and Equity and established the Office of Public Participation (OPP), which facilitates public participation in Commission proceedings, with a focus on ensuring representation of environmental justice communities and other historically marginalized communities.
The Commission also recently issued an Updated Certificate Policy Statement to provide a more comprehensive analytical framework for its evaluation of the effects and need for a new interstate natural gas project and to clarify how the Commission will evaluate all factors in its public interest determination. The Updated Certificate Policy Statement identifies (1) the environment and (2) landowners and neighboring communities, and in particular, environmental justice communities, as two of the four major interests that FERC will consider when reviewing a natural gas project proposal. This new evaluation framework may result in additional conditions being set forth in an order authorizing a proposed project, and therefore additional compliance obligations for the developer.
In several statements issued over the last year, Chairman Glick clearly set forth his expectations that the holder of a certificate of public convenience and necessity must satisfy and fully comply with each and every condition in the certificate. Failure to adequately fulfill those responsibilities may result in (1) a referral to FERC OE for civil penalties, and/or (2) the revocation of the certificate of public convenience and necessity.
For example, in December 2021, the Commission ordered a pipeline company to show cause why it had not violated the environmental conditions of its certificate requiring environmental remediation of the right-of-way along the project. The Commission also referred the matter to OE for further investigation and, as appropriate, further Commission action that could include the assessment of civil penalties and other remedies. Chairman Glick acknowledged that progress had been made on the required restoration but stated that the Commission’s show cause order and referral to FERC OE “demonstrate that the Commission takes violations of environmental conditions set forth in its certificates seriously and dutifully considers and responds to the concerns and complaints of landowners.”
The Commission recently directed another pipeline to demonstrate why it should not be assessed a civil penalty for allegedly including diesel fuel and other toxic substances and unapproved additives in the drilling mud during its horizontal directional drilling (HDD) operation, failing to adequately monitor the right-of-way at the site of the HDD operation, and improperly disposing of inadvertently released drilling mud that was contaminated with diesel fuel and hydraulic oil.
We expect FERC OE to continue its efforts toward investigating and pursuing enforcement actions involving threats to the nation’s energy infrastructure, environment, and surrounding communities as well as noncompliance with the conditions set forth in a certificate of public convenience and necessity. As outlined in FERC’s Revised Policy Statement on Enforcement, among the factors that FERC OE examines in determining the seriousness of a violation are whether there was harm caused by the violation, loss of life, injury, or endangerment to persons, or damage to property or the environment.
With the Commission’s heightened focus on environmental impacts and environmental justice and the Updated Certificate Policy Statement, it is possible that the Commission will impose more extensive conditions in its certificates of public convenience and necessity. Additional conditions will require developers to exhibit further diligence in their compliance efforts to avoid any action initiated by FERC OE.