UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Parts 41, 158, 286 and 349 

(Docket No. RM06-2-001; Order No. 675-A) 

(Issued May 18, 2006) 

AGENCY: Federal Energy Regulatory Commission. 

ACTION: Final rule, order on rehearing and clarification 

SUMMARY: In this Final Rule, the Federal Energy Regulatory Commission 

(Commission) is amending its regulations to expand due process for certain audited 

persons who dispute findings or proposed remedies contained in draft audit reports. 

EFFECTIVE DATE: This Final Rule will become effective [insert date 30 days within 

date of publication in the FEDERAL REGISTER].

FOR FURTHER INFORMATION CONTACT: 

John R. Kroeger 

Office of Enforcement 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-8177 

John.Kroeger@ferc.gov

SUPPLEMENTARY INFORMATION: 
UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Before Commissioners: Joseph T. Kelliher, Chairman; 

 Nora Mead Brownell, and Suedeen G. Kelly. 

Procedures for Disposition of Contested Docket No. RM06-2-001 

 Audit Matters 

ORDER NO. 675-A 

ORDER ON REHEARING AND CLARIFICATION 

(Issued May 18, 2006) 

 I. Introduction

1. On February 17, 2006, the Commission issued a Final Rule, Order No. 675,1

 that 

expands the procedural rights of persons subject to all audits conducted by the 

Commission staff under the Federal Power Act (FPA),2

 the Natural Gas Act (NGA),3

the Natural Gas Policy Act (NGPA),4

 and the Interstate Commerce Act (ICA),5 except 

 1 Procedures for Disposition of Contested Audit Matters, Order No. 675, 71 FR 

9698 (Feb. 27, 2006), III FERC Stats. & Regs. ¶ 31,209 (Feb. 17, 2006). 

2

 16 U.S.C. 791a, et seq. (2000). 

3

 15 U.S.C. 717, et seq. (2000). 

4

 15 U.S.C. 3301, et seq. (2000). 

5

 49 U.S.C. App. 1, et seq. (2000). 
Docket No. RM06-2-001 2

for audits pertaining to reliability that the Commission authorized in Order No. 672.6

 

Prior to the effective date of Order No. 675, audited persons who disagreed with nonfinancial audit matters approved by the Commission were required to seek rehearing of 

that order to obtain further Commission review. 

2. Pursuant to Order No. 675, audited persons may seek Commission review of 

disputed matters contained in an audit report or similar document in a procedure that 

provides additional due process to audited persons subject to non-financial audits. Under 

this procedure, audited persons may provide in writing to the audit staff a response to a 

draft notice of deficiency, draft audit report or similar document (collectively, 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 draft audit report. The Commission may make 

determinations on the merits in a public order with respect to the findings and proposed 

remedies contained in the draft audit report that are not in dispute. The Commission will 

publicly notice the disputed items and provide the audited person the opportunity to elect 

in writing a shortened procedure, which consists of a submission of memoranda, or a 

trial-type hearing, by a date certain. 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. 

 6 Rules Concerning Certification of the Electric Reliability Organization; and 

Procedures for the Establishment, Approval, and Enforcement of Electric Reliability 

Standards, 71 FR 8662 (Feb. 17, 2006), III FERC Stats. & Regs. ¶ 31,204 (Feb. 2, 2006); 

reh’g granted in part and denied in part, Order No. 672-A, 71 FR 19814 (Apr. 18, 2006), 

114 FERC ¶ 61,328 (Mar. 30, 2006). 
Docket No. RM06-2-001 3

3. The Commission will honor the audited person’s timely election (unless a trialtype hearing 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. 

4. On March 20, 2006, Edison Electric Institute (EEI) timely filed the only request 

for rehearing and clarification of Order No. 675.7

 The Commission grants the request for 

rehearing and clarification filed by EEI in four respects. First, the Commission grants 

EEI’s request for clarification regarding the scope of contested audit matters. Second, the 

Commission grants EEI’s request for clarification that contested audit procedures will not 

be used to amend Final Rules. Third, the Commission grants EEI’s request for 

clarification by specifying that an audited person shall have at least 15 days to provide in 

writing to the audit staff a response to the draft audit report indicating findings or 

proposed remedies with which it disagrees. Fourth, the Commission grants the substance 

of EEI’s proposal to change the regulatory text regarding the time within which an 

audited person must elect either the shortened procedure or a trial-type hearing. In all 

other respects, as explained below, the Commission denies EEI’s request for rehearing 

and clarification. 

 7 See 16 U.S.C. 825l(a) (2000). 
Docket No. RM06-2-001 4

II. Discussion

A. Scope of Contested Audit Matters

5. In Order No. 675, the Commission stated that entities other than the audited 

person and the audit staff may participate in the shortened procedure or the trial-type 

hearing.8

 The Commission explained that 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.9

 

1. Request for Rehearing or Clarification

6. EEI requests clarification, or in the alternative, rehearing, that the Final Rule is 

not intended to allow intervenors to raise new issues in response to a public notice of a 

contested audit report.10 EEI expresses concern that intervenors may seek to intervene in 

a contested audit proceeding and raise issues that are beyond the scope of contested 

issues raised by the audited person. EEI asserts that allowing intervenors to expand the 

scope of audit proceedings in such a manner would tend to dilute the due process rights 

afforded by Order No. 675.11 To address this concern, EEI urges that the Final Rule 

should be clarified to permit intervenors only to raise arguments or facts that directly 

 8

 Order No. 675 at P 11, 38. 

9

 Order No. 675 at P 11. 

10 EEI Request for Rehearing and Clarification at p. 6. 

11 EEI Request for Rehearing and Clarification at pp. 5-7. 
Docket No. RM06-2-001 5

relate to a finding or remedy already at issue in the contested audit proceeding. EEI 

contends that, under the FPA and consistent with due process norms, new issues must be 

raised in a section 206 complaint12 filed by the interested entity.13 

2. Commission Determination 

7. The Commission grants EEI’s request for clarification. An interested entity that 

has successfully intervened in a proceeding will be limited to arguments or facts that 

directly relate to a finding or proposed remedy already at issue in the contested audit 

proceeding that the audited person has appropriately designated and that is noted in the 

Commission’s initial order concerning the audit report or similar document.14 

Permitting an intervenor to raise extraneous issues could deflect the focus of the 

contested proceeding from the designated issue or issues, could cause unnecessary 

 12 See 16 U.S.C. 824e (2000). 

13 In support of its argument, EEI cites Public Service Commission of N.Y. v. 

FERC, 642 F.2d 1335, 1345 (D.C. Cir. 1980), for the proposition that section 4(e) of the 

NGA “cannot be used by the Commission to institute any change in a ratemaking 

component . . . that does not represent at least partial approval of the change for which 

the enterprise had petitioned in its filing. If the Commission seeks to make such changes, 

it has no alternative save compliance with the strictures of section 5(a).” EEI also cites 

Public Service Commission of Kentucky v. FERC, 397 F.3d 1004, 1012 (D.C. Cir. 2005), 

for the proposition that “[t]he Due Process Clause and the [Administrative Procedure 

Act] require that an agency setting a matter for hearing provide parties ‘with adequate 

notice of the issues that would be considered, and ultimately resolved, at that hearing.’” 

14 This limitation is consistent with Commission practice. For example, the 

Commission has rejected the timely-filed or otherwise accepted pleadings of intervenors 

where they addressed issues that were not relevant to the Commission’s disposition of a 

seller’s market-based rates application and where they related to issues that were 

otherwise outside the scope of the proceeding. See H.Q. Energy Services (U.S.) Inc., 81 

FERC ¶ 61,184 at 61,809 n.5 (1997). 
Docket No. RM06-2-001 6

expense, litigation and delay, and could require an audited person to litigate issues of 

which it had no notice at the time it made its election to challenge a finding or proposed 

remedy in the audit report. 

B. Orders in Contested Audit Proceedings 

 1. Request for Rehearing or Clarification 

8. EEI requests that the Commission clarify that it does not intend the Final Rule’s 

language regarding the precedential effect of contested audit orders to create or support 

the ability to amend, by individual adjudication, rules adopted through rulemaking 

proceedings.15 EEI contends that such a result would be contrary to law. EEI asserts that 

courts have struck down agencies’ attempts to use clarification and interpretations as a 

way of imposing more stringent requirements and setting higher standards on the 

regulated community.16 EEI also asserts that courts have rejected agencies’ efforts to 

enforce new policies by gradually imposing more restrictive standards and higher 

burdens without allowing the regulated community to participate or object.17 

 15 EEI Request for Rehearing and Clarification at p. 9. 

16 To support this position, EEI cites Alaska Professional Hunters Ass’n v. FAA, 

177 F.3d 1030, 1034 (D.C. Cir. 1999) (Alaska Professional Hunters Ass’n). 

17 To support this position, EEI cites Appalachian Power Co. v. EPA, 208 F.3d 

1015, 1024 (D.C. Cir. 2000) (Appalachian Power). 
Docket No. RM06-2-001 7

2. Commission Determination

9. The Commission grants EEI’s request for clarification. Orders that the 

Commission issues in contested audit proceedings will not amend rules adopted through 

rulemaking proceedings. 

C. Clarification of Time Frames for Audited Person to Respond 

1. Request for Rehearing and Clarification 

10. EEI states that if the Commission intended to require a 30-day time frame in 

which the audited person must provide in writing to the audit staff a response to the draft 

audit report noting the items with which it disagrees, then EEI seeks rehearing of that 

determination. EEI states that the time frame in which the audited person must provide in 

writing to the audit staff a response to the draft audit report indicating items with which it 

disagrees should be flexible and that it should be determined by the Commission audit 

staff and the audited person based on the facts of the audit. EEI also asks the 

Commission to clarify the regulatory text to make it clear that after the public issuance of 

the Commission’s initial order concerning an audit report, the audited person will have 30 

days to respond to the Commission with the selection of a shortened procedure or a trialtype proceeding.18 

2. Commission Determination 

11. The Commission grants EEI’s request for clarification in part. In Order No. 675, 

the Commission did not specify a time frame in which the audited person must provide in 

 18 EEI Request for Rehearing and Clarification at pp. 10-11. 

 
Docket No. RM06-2-001 8

writing to the audit staff a response to the draft audit report noting the items with which it 

disagrees. Instead, the pertinent regulation stated that the audited person’s written 

response must be “timely.” The Commission intended that the audit staff would 

determine the length of time an audited person would have to file a written response 

indicating the findings or proposed remedies with which it disagrees. The relevant 

regulatory text at §§ 41.1, 158.1, 286.103 and 349.1 reads as follows: 

Where such findings, with or without proposed remedies, 

appear in a notice of deficiency, audit report or similar 

document, such document shall be provided to the audited 

person, and the finding or findings, and any proposed 

remedies, shall be noted and explained. The audited person 

shall timely indicate in a written response any and all findings 

or proposed remedies, or both, in any combination, with 

which the audited person disagrees. Any initial order that the 

Commission subsequently may issue with respect to the 

notice of deficiency, audit report or similar document shall 

note, but not address on the merits, the finding or findings, or 

the proposed remedy or remedies, or both, in any 

combination, with which the audited person disagreed. The 

Commission shall provide the audited person 30 days to 

respond with respect to the finding or findings or any 

proposed remedies, or both, in any combination, with which it 

disagreed. 

12. The Commission declines to adopt EEI’s suggestion that both the audited person 

and the audit staff determine the time period in which the audited person shall provide a 

written response to the audit staff indicating findings or proposed remedies with which 

the audited person disagrees. If the time period for the audited person’s submission of 

this response were subject to agreement between the audited person and the audit staff, 

there might be instances in which the audited person and the audit staff would fail to 

agree, resulting in inappropriate delay. The Commission recognizes, however, that a 
Docket No. RM06-2-001 9

certain time period for the audited person to provide a written response indicating 

findings and proposed remedies with which it disagrees, with the possibility for 

additional time if deemed necessary by the Commission, would provide a measure of 

assurance to the audited person that it will have sufficient time to make this written 

response to audit staff. The Commission determines that 15 days to make this written 

response will be sufficient time in the large majority of cases in which the audited person 

and audit staff do not disagree regarding the contents of the draft audit report. Even in 

the remaining instances in which the audited person and the audit staff disagree regarding 

the contents of the draft audit report, the discussion between them regarding the contents 

of the draft audit report preceding the commencement of the 15-day period should render 

the allotted time sufficient for the audited person to indicate the areas of disagreement. In 

instances in which the audited person may require more than 15 days to provide a written 

statement of findings or proposed remedies with which it disagrees to audit staff, the 

audit staff may provide in writing to the audited person additional time at the time the 

draft audit report is sent. The audited person may also move the Commission for 

additional time. Consequently, the Commission will add two sentences to follow the 

second sentence of §§ 41.1, 158.1, 286.103, and 349.1 quoted above to read as follows: 

“The audited person shall have 15 days from the date it is sent the notice of deficiency, 

audit report or similar document to provide a written response to the audit staff indicating 

any and all findings or proposed remedies, or both, in any combination, with which the 

audited person disagrees, and such further time as the audit staff may provide in writing 

to the audited person at the time the document is sent to the audited person. The audited 
Docket No. RM06-2-001 10

person may move the Commission for additional time to provide a written response to the 

audit staff and such motion shall be granted for good cause shown.” 

13. In Order No. 675, the Commission intended to indicate that an audited person 

shall have 30 days to respond to a Commission order with a selection of a shortened 

procedure or a trial-type proceeding.19 The 30-day provision in the last sentence quoted 

in paragraph 11 above is meant to convey this intention. To remove any possible 

ambiguity, the Commission will amend the last sentence of §§ 41.1, 158.1, 286.103, and 

349.1 quoted above, to read as follows: “The Commission shall provide the audited 

person 30 days to respond to the initial Commission order concerning a notice of 

deficiency, audit report or similar document with respect to the finding or findings or any 

proposed remedy or remedies, or both, in any combination, with which it disagreed.” 

 D. Precedential Effect of Decisions in Contested Audit Matters

14. In Order No. 675, the Commission stated that a Commission order that resolves a 

contested audit matter would be precedent for non-parties. The Commission explained 

that an audited person who challenges a finding or proposed remedy in an audit report 

using the procedure in the Final Rule is participating in a contested, on-the-record 

proceeding, and, like any other such proceeding before the Commission, the legal 

reasoning and conclusions of the resulting order would apply to non-parties.20 

 19 Order No. 675 at P 24-25. 

20 Order No. 675 at P 32. 
Docket No. RM06-2-001 11

1. Request for Clarification 

15. EEI requests clarification that the Commission will not apply any ruling on a 

contested audit matter to an entity that was not a party to the adjudication unless and until 

the non-party entity has been afforded an opportunity to challenge the basis of the ruling 

as it applies to that entity. EEI states that the language in the Final Rule regarding the 

precedential value of the Commission’s rulings on a contested audit may not be clear. 

According to EEI, judicial precedent clearly supports its position. EEI relies principally 

upon Florida Gas Transmission Co. v. FERC, 876 F.2d 42, 44 (5th Cir. 1989) (FGT). In 

that case, the United States Court of Appeals for the Fifth Circuit held that the 

Commission did not sufficiently substantiate its decision to grant individual NGA section 

7(c) certificates for interruptible service for a one-year term instead of the multi-year 

terms requested by FGT. The Commission had relied on a policy of granting one-year 

terms for such certificates. The court stated that due process 

guarantees that parties who will be affected by the general 

rule be given an opportunity to challenge the agency’s action. 

When the rule is established through formal rulemaking, 

public notice and hearing provide the necessary protection. 

But where, as here, the rule is established in individual 

adjudications, due process requires that affected parties be 

allowed to challenge the basis of the rule. FERC must be able 

to substantiate the general rule.[21] 

 21 FGT, 876 F.2d at 44 (citations omitted). EEI also cites PPL Wallingford Energy 

LLC v. FERC, 419 F.3d 1194 (D.C. Cir. 2005). In that case, the court vacated orders of 

the Commission on the grounds that the Commission did not directly respond to or 

address arguments the petitioner in that proceeding had made before the Commission. 
Docket No. RM06-2-001 12

2. Commission Determination 

16. The Commission denies EEI’s request for clarification. The Commission plainly 

stated in the Final Rule that a Commission order that resolves a contested matter has 

precedential effect.22 As the Commission noted in Order No. 675, “the choice made 

between proceeding by general rule or by individual, ad hoc litigation is one that lies 

primarily in the informed discretion of the administrative agency.”23 The long-settled 

principle of federal administrative law is that “[a]bsent express congressional direction to 

the contrary, agencies are free to choose their procedural mode of administration.”24 

17. FGT does not require a different conclusion. The issue in that case was whether 

the Commission could rely upon its one-year policy for denying requests for longer term 

individual certificates or whether the Commission needed to provide an explanation 

specific to FGT’s circumstances and failed to do so. On remand, the Commission gave 

an explanation25 that the court subsequently concluded was sufficient.26 To the extent 

that the Commission makes a determination in a contested audit matter and subsequently 

applies that determination to an audited person who had not been a party in the prior 

 22 Order No. 675 at P 32. 

23 SEC v. Chenery Corp., 332 U.S. 194, 203 (1947). 

24 Davis v. EPA, 336 F.3d 965 (9th Cir. 2003). 

25 Florida Gas Transmission Co., 49 FERC ¶ 61,375 (1989). 

26 Monsanto Co. v. FERC, 963 F.2d 827 (5th Cir. 1992). 
Docket No. RM06-2-001 13

proceeding, the Commission will provide a reasoned explanation to comply with 

applicable legal standards. 

18. In sum, just like other Commission contested, on-the-record proceedings that 

provide third parties an opportunity to intervene and participate, we find that Commission 

determinations in contested audit proceedings are precedent for non-parties in subsequent 

proceedings. And, as in such proceedings, the Commission will explain the application 

of that precedent on the basis of the record developed in subsequent proceedings. 

E. Codifying the Determination in the Preamble of the Final Rule 

1. EEI’s Request for Rehearing and Clarification

19. EEI asks that the Commission include a number of its determinations contained 

in the Final Rule in the regulatory text. EEI states that the types of matters addressed in 

the Final Rule that were not included in the regulatory text have been included in the 

Commission’s regulations on other occasions. As an example, EEI cites § 1b.16 of the 

Commission’s regulations,27which pertains, in part, to the right of a person who is 

compelled to appear, or who appears in person at the request or permission of the 

Investigating Officer, to be accompanied, represented and advised by counsel, subject to 

certain additional provisions. EEI notes in this regard that in the Final Rule, the 

Commission stated that an attorney may be present during interviews of an audited 

person’s employees. EEI contends that a person should not have to refer to the language 

 27 18 CFR 1b.16 (2005). 
Docket No. RM06-2-001 14

of the Final Rule, but instead should be able to consult the Commission’s regulations, to 

learn this information.28 

20. EEI identifies seven matters that it states are discussed in the Final Rule but not 

reflected in the regulatory text. These matters are (1) the right to have counsel present 

during an audit; (2) use by the Commission of the standard set forth in § 385.214(b) of 

its regulations29 to govern interventions in contested audit proceedings and the 

disallowances of interested persons to intervene until after the Commission issues the 

notice described in Part 41 of the Commission’s regulations; (3) confidential treatment 

of information provided in an audit; (4) the absence of discovery in the shortened 

procedure and the applicability of Part 385 of the Commission’s regulations30 with 

respect to discovery in a trial-type proceeding; (5) the precedential value of an audit 

report and an order approving an uncontested audit report; (6) the 30-day time frame for 

an audited person’s response;31 and (7) protection of confidential treatment in trial-type 

proceedings. 

2. Commission Determination 

21. EEI has not provided a compelling reason for the Commission to include the 

noted portions of the Final Rule in the regulatory text. In particular, four of the issues 

 28 EEI Request for Rehearing and Clarification at pp. 11-14. 

29 18 CFR 85.214(b) (2005). 

30 18 CFR part 385 (2005). 

31 EEI’s request with respect to the 30-day time frame for an audit person’s 

response is addressed supra P 11-13. 
Docket No. RM06-2-001 15

EEI raises are not germane to the procedural matters addressed in the regulatory text. 

The right to counsel, confidential treatment, precedential value of an audit report and a 

Commission order approving an uncontested audit report, and protection of confidential 

treatment issues do not pertain to the procedure an audited person may use to challenge 

findings or proposed remedies in an audit report. Accordingly, it would not be 

appropriate to include them in the regulatory text of the parts of Title 18 involved in this 

rulemaking. The Commission has exercised its discretion in past proceedings to clarify 

matters in final rules and in orders on rehearing of final rules without inserting those 

clarifications in the underlying regulations.32 

22. The Commission’s statements in the Final Rule regarding interventions likewise 

do not warrant inclusion in the regulatory text. The Commission stated that it will use the 

standard stated in § 385.214(b),33 which is in subpart B of Part 385 of the Commission’s 

regulations, for permitting interested entities to file memoranda in the shortened 

 32 See, e.g., Regulations Implementing Energy Policy Act of 2005; Pre-filing 

Procedures for Review of LNG Terminals and Other Natural Gas Facilities, Order No. 

665, 70 FR 60426 (Oct. 18, 2005), FERC Stats. & Regs., Regulations Preambles 2001-

2005 ¶ 31,195 (Oct. 7, 2005) (“In view of the clarification and regulatory text revisions 

discussed above, the Commission does not believe that it is necessary to include in the 

final regulations additional criteria or definitions for the Director’s use in reaching a 

determination whether prospective modifications to an existing or approved LNG 

terminal should be subject to a mandatory pre-filing process.”); Standards of Conduct for 

Transmission Providers, Order No. 2004-A, 69 FR 23562 (Apr. 29, 2004), FERC Stats. & 

Regs., Regulations Preambles 2001-2005 ¶ 31,161 (Apr. 16, 2004) (“The Commission 

denies National Fuel-Supply’s request to revise the regulatory text, but clarifies that by 

using the term ‘relate’ in the phrase ‘if it relates solely to a Marketing or Energy 

Affiliate’s specific request for transmission service,’ the Commission intended to include 

the corresponding transportation service agreements that result from a ‘request.’”). 

33 18 CFR 385.214(b) (2005). 
Docket No. RM06-2-001 16

procedure as it uses to permit interventions in other proceedings. Subpart B of Part 385 

“applies to any pleading”34 and thus no addition to the regulatory text is needed to 

provide certainty. 

23. The Commission’s statements in the Final Rule regarding discovery also do not 

warrant inclusion in the regulatory text. The regulatory text accompanying the Final Rule 

does not authorize discovery in the shortened procedure. The Final Rule clarified that 

discovery is not available in the shortened procedure at EEI’s request.35 Again, adding 

language in the regulatory text will not provide certainty. As is true for adding regulatory 

text regarding interventions, adding regulatory text regarding discovery in trial-type 

proceedings would also be redundant, in this case to the rules in Part 385 of the 

Commission’s regulations. 

24. The Commission does not agree with EEI’s contention that a provision in Part 1b 

of the Commission’s regulations, which pertains to a person’s right to have counsel 

present under certain circumstances in an investigation, suggests that the revised Part 41 

should also address issues relating to counsel, in addition to other issues. Part 1b 

contains provisions describing the Commission’s policy and procedures for investigations 

conducted under the statutes it administers.36 Part 41 does not describe the audit process. 

 34 18 CFR 385.201 (2005). 

35 Order No. 675 at P 9, 12. The Final Rule also clarified that the applicable 

standards under Part 385 of the Commission’s regulations will govern if the trial-type 

procedure is used. Order No. 675 n.25. 

36 Rules Relating to Investigations, Order No. 8, 43 FR 27174 (Jun. 23, 1978), 

FERC Stats. & Regs., Regulations Preambles 1977-1981 ¶ 30,012 (1978). 
Docket No. RM06-2-001 17

Instead, Part 41 sets forth the procedure an audited person can use to challenge audit 

findings or proposed remedies with which it disagrees. In sum, by declining to include in 

the regulatory text the topics EEI references the Commission is not acting in a manner 

inconsistent with its promulgation of Part 1b. 

F. Separation of Functions Issues

 1. Request for Rehearing and Clarification

25. In its request for rehearing and clarification, EEI asks the Commission to issue a 

policy statement, with an opportunity for public comment, to consider and determine the 

appropriate relationship between the Commission’s audit and enforcement staffs during 

audits, shortened or trial-type procedures for contested audit matters, and formal and 

informal investigations under Part 1b of the Commission’s regulations. EEI asserts that 

the time is ripe for such a policy statement because of developments and changes in the 

roles and functions of the audit and enforcement staffs since the Commission’s issuance 

of its Policy Statement on Separation of Functions37 in 2002 and the Commission’s new 

and substantial enforcement and remedial authority under the Energy Policy Act of 2005 

(EPAct 2005).38 EEI states that the purpose of the policy statement it proposes would be 

for the Commission to examine the relationship of the audit and enforcement staffs to 

ensure that their work is fair and consistent with due process rights and separations of 

functions during every possible stage of the audit process and any subsequent 

 37 101 FERC ¶ 61,340 (2002). 

38 P.L. No. 109-58, 119 Stat. 594 (2005). 
Docket No. RM06-2-001 18

investigatory or enforcement action. EEI states that a policy statement, with opportunity 

for public comment, would help build an appropriate Commission record and basis for 

balancing separation of functions and due process requirements.39 Finally, EEI asserts 

that a case the Commission cited in the Final Rule, Trans Alaska Pipeline System, 9 

FERC ¶ 61,205 (1979), which states that the Commission’s audit and investigatory staffs 

may freely share information, is no longer fully relevant.40 

2. Commission Determination 

26. The Commission declines EEI’s proposal that the Commission issue a policy 

statement concerning the relationship of its audit and investigations staffs. As an initial 

matter, EEI’s proposal is not related to the Commission’s promulgation of a new 

procedure for audited persons seeking to challenge audit findings or proposed remedies, 

which is the subject of Order No. 675. Moreover, the Commission already has a policy 

statement on Separations of Functions,41 which is as applicable today as it was when it 

was issued in 2002. Nothing in EPAct 2005 affects the operation of Rule 2202,42 which 

was the focus of that policy statement. 

 39 EEI Request for Rehearing and Clarification at pp. 14-15. According to EEI, 

the Commission has not established a sufficient basis and record with respect to this issue 

to satisfy the reasoned decision making standard under the Administrative Procedure Act, 

5 U.S.C. 706 (2000). 

40 EEI Request for Rehearing and Clarification at pp. 15-16. 

41 101 FERC ¶ 61,340 (2002). 

42 18 CFR 385.2202 (2005). 
Docket No. RM06-2-001 19

27. For its part, EEI’s request is not supported by facts. EEI does not identify any 

specific practice or activity that warrants examination. EEI refers to developments and 

changes since 2002, but does not state what material developments and changes have 

occurred that compel the public examination of separation of functions issues that EEI 

requests. EPAct 2005 provided the Commission with enhanced authority to assess civil 

penalties for violations of the FPA, NGA and NGPA, but EEI does not suggest why this 

authority should trigger the policy statement it seeks.43

28. Trans Alaska Pipeline System remains relevant to the issue of whether the audit 

staff and investigative staff may share information. In that proceeding, the Trans Alaska 

Pipeline System owners asked that the Commission forbid communications between the 

valuation and audit staff on the one hand and the rate staff on the other. The Commission 

determined, among other things, that communications between these two staffs would not 

constitute impermissible, ex parte communications and that the staffs need not be 

separated to ensure the integrity of the valuation.44 The Commission approvingly quoted 

 43 Since the enactment of EPAct 2005, the Commission has issued a number of 

statements and orders to provide guidance to the regulated community. For example, in 

October 2005, the Commission issued a Policy Statement on Enforcement to provide 

guidance and regulatory certainty regarding the Commission’s enforcement of the 

statutes, orders, rules and regulations it administers. Enforcement of Statutes, Orders, 

Rules, and Regulations, 113 FERC ¶ 61,068 (2005). In November 2005, the Commission 

issued an Interpretive Order Regarding No-Action Letter Process to clarify that members 

of the public may request and obtain no-action letters with respect to whether staff will 

recommend that the Commission take no enforcement action with respect to specific 

proposed transactions, practices or situations that may raise issues under certain 

Commission regulations. Informal Staff Advice on Regulatory Requirements, 113 FERC 

¶ 61,174 (2005). 

44 Trans Alaska Pipeline System, 9 FERC at 61,371-372. 
Docket No. RM06-2-001 20

from a prior proceeding in which it endorsed the sharing of information among different 

staffs: 

Administrative agencies were brought into being to supply 

expertise and to minimize formalism. Walls of separation 

between those who litigate and those who investigate do not 

serve those ends. Nor does due process require them. All 

that due process mandates in situations of this kind is that 

adjudicative proceedings be decided solely on the basis of the 

records developed in them.[45] 

29. Efficiency and sound administrative practice favors the sharing of information 

between the audit staff and investigative staff, and no entity suffers a cognizable due 

process harm as a result. We see no need at this time to reevaluate the interaction 

between these staffs. 

The Commission orders: 

 EEI’s petition for rehearing and clarification is granted in part and denied in part 

as discussed in the body of this order. 

By the Commission. 

( S E A L ) 

 Magalie R. Salas, 

 Secretary. 

 

 

45 Id. at 61,372, quoting Tenneco, Inc., 7 FERC ¶ 61,258 at 61,541-542 (1979) 

(footnotes omitted). 
Docket No. RM06-2-001 21

In consideration of the foregoing, the Commission revises parts 41, 158, 286 and 

349, Chapter I, Title 18 of the Code of Federal Regulations, to read as follows: 

PART 41 – ACCOUNTS, RECORDS, MEMORANDA AND DISPOSITION OF 

CONTESTED AUDIT FINDINGS AND PROPOSED REMEDIES

1. The authority citation for part 41 continues to read as follows: 

 Authority: 16 U.S.C. 791a-825r, 2601-2645; 42 U.S.C. 7101-7352. 

2. Section 41.1 is revised to read as follows: 

§ 41.1 Notice to audited person. 

 (a) Applicability. This part applies to all audits conducted by the Commission 

or its staff under authority of the Federal Power Act except for Electric Reliability 

Organization audits conducted pursuant to the authority of part 39 of the Commission’s 

regulations. 

 (b) Notice. An audit conducted by the Commission’s staff under authority of 

the Federal Power Act may result in a notice of deficiency or audit report or similar 

document containing a finding or findings that the audited person has not complied with a 

requirement of the Commission with respect to, but not limited to, the following: A filed 

tariff or tariffs, contracts, data, records, accounts, books, communications or papers 

relevant to the audit of the audited person; matters under the Standards of Conduct or the 

Code of Conduct; and the activities or operations of the audited person. The notice of 

deficiency, audit report or similar document may also contain one or more proposed 

remedies that address findings of noncompliance. Where such findings, with or without 

proposed remedies, appear in a notice of deficiency, audit report or similar document, 
Docket No. RM06-2-001 22

such document shall be provided to the audited person, and the finding or findings, and 

any proposed remedies, shall be noted and explained. The audited person shall timely 

indicate in a written response any and all findings or proposed remedies, or both, in any 

combination, with which the audited person disagrees. The audited person shall have 

15 days from the date it is sent the notice of deficiency, audit report or similar document 

to provide a written response to the audit staff indicating any and all findings or proposed 

remedies, or both, in any combination, with which the audited person disagrees, and such 

further time as the audit staff may provide in writing to the audited person at the time the 

document is sent to the audited person. The audited person may move the Commission 

for additional time to provide a written response to the audit staff and such motion shall 

be granted for good cause shown. Any initial order that the Commission subsequently 

may issue with respect to the notice of deficiency, audit report or similar document shall 

note, but not address on the merits, the finding or findings, or the proposed remedy or 

remedies, or both, in any combination, with which the audited person disagreed. The 

Commission shall provide the audited person 30 days to respond to the initial 

Commission order concerning a notice of deficiency, audit report or similar document 

with respect to the finding or findings or any proposed remedy or remedies, or both, in 

any combination, with which it disagreed. 

* * * * * 
Docket No. RM06-2-001 23

PART 158 – ACCOUNTS, RECORDS, MEMORANDA AND DISPOSITION OF 

CONTESTED AUDIT FINDINGS AND PROPOSED REMEDIES

3. The authority citation for part 158 continues to read as follows: 

 Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7102-7352. 

4. Section 158.1 is revised to read as follows: 

§ 158.1 Notice to audited person. 

 An audit conducted by the Commission’s staff under authority of the Natural Gas 

Act may result in a notice of deficiency or audit report or similar document containing a 

finding or findings that the audited person has not complied with a requirement of the 

Commission with respect to, but not limited to, the following: A filed tariff or tariffs, 

contracts, data, records, accounts, books, communications or papers relevant to the audit 

of the audited person; matters under the Standards of Conduct or the Code of Conduct; 

and the activities or operations of the audited person. The notice of deficiency, audit 

report or similar document may also contain one or more proposed remedies that address 

findings of noncompliance. Where such findings, with or without proposed remedies, 

appear in a notice of deficiency, audit report or similar document, such document shall be 

provided to the audited person, and the finding or findings, and any proposed remedies, 

shall be noted and explained. The audited person shall timely indicate in a written 

response any and all findings or proposed remedies, or both, in any combination, with 

which the audited person disagrees. The audited person shall have 15 days from the date 

it is sent the notice of deficiency, audit report or similar document to provide a written 

response to the audit staff indicating any and all findings or proposed remedies, or both, 
Docket No. RM06-2-001 24

in any combination, with which the audited person disagrees, and such further time as the 

audit staff may provide in writing to the audited person at the time the document is sent 

to the audited person. The audited person may move the Commission for additional time 

to provide a written response to the audit staff and such motion shall be granted for good 

cause shown. Any initial order that the Commission subsequently may issue with respect 

to the notice of deficiency, audit report or similar document shall note, but not address on 

the merits, the finding or findings, or the proposed remedy or remedies, or both, in any 

combination, with which the audited person disagreed. The Commission shall provide 

the audited person 30 days to respond to the initial Commission order concerning a notice 

of deficiency, audit report or similar document with respect to the finding or findings or 

any proposed remedy or remedies, or both, in any combination, with which it disagreed. 

* * * * * 

PART 286 – ACCOUNTS, RECORDS, MEMORANDA AND DISPOSITION OF 

CONTESTED AUDIT FINDINGS AND PROPOSED REMEDIES

5. The authority citation for part 286 is revised to read as follows: 

 Authority: 5 U.S.C. 551 et seq.; 15 U.S.C. 717-717w, 3301-3432; 42 

U.S.C. 7102-7352. 

6. Section 286.103 is revised to read as follows: 

§ 286.103 Notice to audited person. 

 An audit conducted by the Commission’s staff under authority of the Natural Gas 

Policy Act may result in a notice of deficiency or audit report or similar document 

containing a finding or findings that the audited person has not complied with a 
Docket No. RM06-2-001 25

requirement of the Commission with respect to, but not limited to, the following: A filed 

tariff or tariffs, contracts, data, records, accounts, books, communications or papers 

relevant to the audit of the audited person; matters under the Standards of Conduct or the 

Code of Conduct; and the activities or operations of the audited person. The notice of 

deficiency, audit report or similar document may also contain one or more proposed 

remedies that address findings of noncompliance. Where such findings, with or without 

proposed remedies, appear in a notice of deficiency, audit report or similar document, 

such document shall be provided to the audited person, and the finding or findings, and 

any proposed remedies, shall be noted and explained. The audited person shall timely 

indicate in a written response any and all findings or proposed remedies, or both, in any 

combination, with which the audited person disagrees. The audited person shall have 15 

days from the date it is sent the notice of deficiency, audit report or similar document to 

provide a written response to the audit staff indicating any and all findings or proposed 

remedies, or both, in any combination, with which the audited person disagrees, and such 

further time as the audit staff may provide in writing to the audited person at the time the 

document is sent to the audited person. The audited person may move the Commission 

for additional time to provide a written response to the audit staff and such motion shall 

be granted for good cause shown. Any initial order that the Commission subsequently 

may issue with respect to the notice of deficiency, audit report or similar document shall 

note, but not address on the merits, the finding or findings, or the proposed remedy or 

remedies, or both, in any combination, with which the audited person disagreed. The 

Commission shall provide the audited person 30 days to respond to the initial 
Docket No. RM06-2-001 26

Commission order concerning a notice of deficiency, audit report or similar document 

with respect to the finding or findings or any proposed remedy or remedies, or both, in 

any combination, with which it disagreed. 

* * * * * 

PART 349 – DISPOSITION OF CONTESTED AUDIT FINDINGS AND 

PROPOSED REMEDIES

7. The authority citation for part 349 is revised to read as follows: 

 Authority: 42 U.S.C. 7101-7352; 49 U.S.C. 1, et seq. 

8. Section 349.1 is revised to read as follows: 

§ 349.1 Notice to audited person. 

 An audit conducted by the Commission or its staff under authority of the Interstate 

Commerce Act may result in a notice of deficiency or audit report or similar document 

containing a finding or findings that the audited person has not complied with a 

requirement of the Commission with respect to, but not limited to, the following: A filed 

tariff or tariffs, contracts, data, records, accounts, books, communications or papers 

relevant to the audit of the audited person; and the activities or operations of the audited 

person. The notice of deficiency, audit report or similar document may also contain one 

or more proposed remedies that address findings of noncompliance. Where such 

findings, with or without proposed remedies, appear in a notice of deficiency, audit report 

or similar document, such document shall be provided to the audited person, and the 

finding or findings, and any proposed remedies, shall be noted and explained. The 

audited person shall timely indicate in a written response any and all findings or proposed 
Docket No. RM06-2-001 27

remedies, or both, in any combination, with which the audited person disagrees. The 

audited person shall have 15 days from the date it is sent the notice of deficiency, audit 

report or similar document to provide a written response to the audit staff indicating any 

and all findings or proposed remedies, or both, in any combination, with which the 

audited person disagrees, and such further time as the audit staff may provide in writing 

to the audited person at the time the document is sent to the audited person. The audited 

person may move the Commission for additional time to provide a written response to the 

audit staff and such motion shall be granted for good cause shown. Any initial order that 

the Commission subsequently may issue with respect to the notice of deficiency, audit 

report or similar document shall note, but not address on the merits, the finding or 

findings, or the proposed remedy or remedies, or both, in any combination, with which 

the audited person disagreed. The Commission shall provide the audited person 30 days 

to respond to the initial Commission order concerning a notice of deficiency, audit report 

or similar document with respect to the finding or findings or any proposed remedy or 

remedies, or both, in any combination, with which it disagreed. 

* * * * *