Overview
On July 28, 2022, the Federal Energy Regulatory Commission (Commission or FERC) issued a Notice of Proposed Rulemaking (NOPR) proposing broad candor requirements applicable to all of the Commission's oversight responsibilities.1 The Commission explains that while it already has adopted various regulations imposing a duty of candor, there are no broadly applicable requirements. It now wants to fill that gap by imposing a broad duty of candor on all communications with not only the Commission, but also with other entities, including Regional Trade Organizations (RTOs), Independent Service Operators (ISOs), and transportation providers. On its face, the rule appears to extend also to communications between regulated entities. If adopted, the proposed rule would raise the stakes for utility legal and compliance departments to monitor and track even informal interactions between their employees and these entities and could chill communications between those departments and outside counsel.
Specifically, the NOPR proposes to require that anyone communicating with the Commission or other specified entities about jurisdictional matters submit accurate and factual information and not submit false or misleading information, or omit material information. While the rule proposes a safe harbor if an entity can show that it has exercised due diligence, it places a heavy burden on the entity to trace and substantiate information communicated outside its walls. The proposed candor requirements are intended to build on, not replace, the duties of candor from the Commission’s existing regulations.2
We discuss here the applicability of the NOPR and its potential implications.3
The Duty of Candor
As proposed, the duty of candor is limited to communications related to a matter subject to the Commissions jurisdiction. Communications that are unrelated to matters subject to the jurisdiction of the Commission are not covered by the proposed regulation.
The duty of candor would apply to all entities, including both organizations and individuals, that make and/or are responsible for such a communication to:
- The Commission,
- Commission staff,
- Commission-approved market monitors,
- Commission approved RTOs,
- Commission-approved ISOs,
- Jurisdictional transmission or transportation providers, and
- Electric Reliability Organizations and their associated Regional Entities.
The Commission intends for the rule to reach communications to individuals employed or acting on behalf of these listed entities, including agents and contractors.
Due Diligence Safe Harbor
Recognizing that even the best-intentioned entities may inadvertently provide inaccurate information, the Commission proposes to permit a due diligence defense. The Commission’s review will consider, on a case-by-case basis, all relevant facts related to whether reasonable steps were taken by the communicator(s) to ensure the accuracy and completeness of a communication. Facts that will bear upon consideration of a due diligence defense include, but are not limited to:
- whether a communication had to be made without sufficient time for additional diligence to be undertaken,
- the importance and materiality of the communication to the recipient,
- the duration and consistency of the communication at issue,
- whether the communication was voluntary or required,
- whether the communication was in response to a specific request for information or was unsolicited,
- the size and sophistication of the communicator(s), and
- the communication’s effect on the marketplace or the Commission’s regulatory responsibilities.
Implications
As observed by Commissioner Danly in his dissent,4 the NOPR's proposal is broadly applicable and does not require a showing of materiality or intent. While the NOPR does not propose to impose a general affirmative duty of disclosure, it does notably impose the duty of candor requirement on all communications, regardless of whether they are voluntary or required. This includes formal or informal communications that are verbal or written, via any method that may be used for transmission.
As such, under the NOPR's proposal, daily interactions, such as those between utility employees and RTOs/ISOs would be subject to the duty of candor requirements. The threat of a potential enforcement action based on such communications could significantly chill the collaboration between RTOs/ISOs and their members and raise the stakes for legal and compliance departments to monitor those interactions. Communications between regulated entities may also be subject to the proposed rule. If, as the NOPR suggests, the rule reaches even communications between competitors it creates the risk of entities weaponizing such communications.
Moreover, the duty of candor stands even where an entity relies upon a non-employee agent for the submission of a communication. As an example, the Commission points to the common occurrence of outside counsel submitting documents to the Commission on behalf of a company. In such a circumstance, both the company and counsel are expected to exercise "due diligence," but the NOPR suggests that the responsible company will bear a greater burden. Placing a duty of candor on such communications will, at minimum, hamper the free flow of communications between counsel and their clients and potentially drag privileged communications into enforcement proceedings.
The Commission does convey flexibility by permitting a due diligence exemption, but it places a substantial burden on the responsible entity to trace all information. The NOPRs proposal also potentially exposes entities to the significant costs associated with an enforcement proceeding and penalties.5 The increased burden and risk to entities may have the effect of deterring communication and cooperation generally encouraged by the Commission.
Comments on the NOPR are due 60 days after the date of publication in the Federal Register. The Commission seeks comments on all aspects of the proposed rule, including whether a broad duty of candor rule is needed in the first place and whether the Commission has the authority to enact such a rule. While the Commission’s proposal is certain to draw the attention of FERC regulated entities, Commissioner Danly predicts that the Commission is unlikely to get many comments from the regulated community in opposition to a proposed rule of candor.6
Endnotes
1 Duty of Candor, 180 FERC ¶ 61,052 (2022).
2 See, e.g., 18 CFR 35.41(b) (prohibiting false statements made by entities who have sought or obtained electric market-based rate authority); ICA20(7)(b) (prohibiting the knowing and willful filing of any “false entry” in any annual filing or other report required to be filed); 15 U.S.C. 717f(d) (requiring that applications for pipeline certificates be verified under oath).
3 In his dissent, Commissioner Danly suggests that the proposed duty of candor may create constitutional due process concerns because it is impermissibly vague. Whether or not the Commission has the authority to impose a duty of candor rule in the first place is beyond the scope of the alert.
4 180 FERC ¶ 61,052 (Danly, dissent at P 1).
5 As Commissioner Danly points out, the NOPR is silent on what sanctions the Commission plans to impose on violations of the proposed duty of candor rule. 180 FERC ¶ 61,052 (Danly, dissent at P 12). Presumably, the Commission could impose penalties up to the maximum amount (currently $1,388,496 per violation, per day) authorized by the Federal Power Act (16 U.S.C. 825o-1(b)) and Natural Gas Act (15 U.S.C. 717t-1).
6 180 FERC ¶ 61,052 (Danly, dissent at P 18).
