Document ID: FERC-2006-1031-0001
Agency: ferc
Document Type: Rule
Title: Procedures for Disposition of Contested Audit Matters
Posted Date: 2006-05-24T04:00Z

[Federal Register: May 24, 2006 (Volume 71, Number 100)]
[Rules and Regulations]               
[Page 29779-29785]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24my06-5]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 41, 158, 286 and 349

[Docket No. RM06-2-001; Order No. 675-A]

 
Procedures for Disposition of Contested Audit Matters

Issued May 18, 2006.
AGENCY: Federal Energy Regulatory Commission; DOE.

ACTION: Final rule, order on rehearing and clarification.

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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.

DATES: Effective Date: This Final Rule will become effective June 23, 
2006.

FOR FURTHER INFORMATION CONTACT: John R. Kroeger, Office of 
Enforcement, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426. (202) 502-8177. John.Kroeger@ferc.gov.

SUPPLEMENTARY INFORMATION: 

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly.

Order No. 675-A

Order on Rehearing and Clarification

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 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 non-financial audit matters approved by the 
Commission were required to seek rehearing of that order to obtain 
further Commission review.
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    \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).
    \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).
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    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

[[Page 29780]]

(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.
    3. The Commission will honor the audited person's timely election 
(unless a trial-type 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.
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    \7\ See 16 U.S.C. 825l(a) (2000).
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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\
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    \8\ Order No. 675 at P 11, 38.
    \9\ Order No. 675 at P 11.
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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 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 complaint \12\ filed by the interested entity.\13\
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    \10\ EEI Request for Rehearing and Clarification at p. 6.
    \11\ EEI Request for Rehearing and Clarification at pp. 5-7.
    \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 (DC 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 (DC 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.'''
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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 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.
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    \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).
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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\
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    \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 (DC Cir. 1999) (Alaska 
Professional Hunters Ass'n).
    \17\ To support this position, EEI cites Appalachian Power Co. 
v. EPA, 208 F.3d 1015, 1024 (DC Cir. 2000) (Appalachian Power).
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2. Commission Determination
    9. The Commission grants EEI's request for clarification. Orders 
that the

[[Page 29781]]

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 trial-type proceeding.\18\
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    \18\ EEI Request for Rehearing and Clarification at pp. 10-11.
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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 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 Sec. Sec.  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 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 Sec. Sec.  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 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 Sec. Sec.  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.''
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    \19\ Order No. 675 at P 24-25.
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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\
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    \20\ Order No. 675 at P 32.
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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

[[Page 29782]]

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\
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    \21\ FGT, 876 F.2d at 44 (citations omitted). EEI also cites PPL 
Wallingford Energy LLC v. FERC, 419 F.3d 1194 (DC 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.
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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\
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    \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).
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    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 
explanation \25\ 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 proceeding, 
the Commission will provide a reasoned explanation to comply with 
applicable legal standards.
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    \25\ Florida Gas Transmission Co., 49 FERC ] 61,375 (1989).
    \26\ Monsanto Co. v. FERC, 963 F.2d 827 (5th Cir. 1992).
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    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 
Sec.  1b.16 of the Commission's regulations,\27\ which 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 of the Final Rule, but 
instead should be able to consult the Commission's regulations, to 
learn this information.\28\
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    \27\ 18 CFR 1b.16 (2005).
    \28\ EEI Request for Rehearing and Clarification at pp. 11-14.
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    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 Sec.  385.214(b) of its 
regulations \29\ 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 
regulations \30\ 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.
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    \29\ 18 CFR 85.214(b) (2005).29
    \30\ 18 CFR part 385 (2005).30
    \31\ EEI's request with respect to the 30-day time frame for an 
audit person's response is addressed supra P 11-13.31
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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 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\
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    \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.' '').
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    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 Sec.  
385.214(b),\33\ which is in subpart B of Part 385 of the Commission's 
regulations, for permitting interested

[[Page 29783]]

entities to file memoranda in the shortened 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.
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    \33\ 18 CFR 385.214(b) (2005).
    \34\ 18 CFR 385.201 (2005).
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    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.
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    \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.
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    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. 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.
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    \36\ Rules Relating to Investigations, Order No. 8, 43 FR 27174 
(Jun. 23, 1978), FERC Stats. & Regs., Regulations Preambles 1977-
1981 ] 30,012 (1978).
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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 Functions \37\ 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 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\
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    \37\ 101 FERC ] 61,340 (2002).
    \38\ P.L. No. 109-58, 119 Stat. 594 (2005).
    \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.
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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.
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    \41\ 101 FERC ] 61,340 (2002).
    \42\ 18 CFR 385.2202 (2005).
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    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\
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    \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).
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    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 from a prior 
proceeding in which it endorsed the sharing of information among 
different staffs:
---------------------------------------------------------------------------

    \44\ Trans Alaska Pipeline System, 9 FERC at 61,371-372.

    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\
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    \45\ Id. at 61,372, quoting Tenneco, Inc., 7 FERC ] 61,258 at 
61,541-542 (1979) (footnotes omitted).

    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

[[Page 29784]]

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.
Magalie R. Salas,
Secretary.

List of Subjects

18 CFR Part 41

    Administrative practice and procedure, Electronic utilities, 
Reporting and recordkeeping requirements, Uniform System of Accounts.

18 CFR Part 158

    Administrative practice and procedure, Natural gas, Reporting and 
recordkeeping requirements.

18 CFR Parts 286 and 349

    Administrative practice and procedure, Natural gas, Price Controls.

0
In consideration of the foregoing, the Commission amends parts 41, 158, 
286 and 349, Chapter I, Title 18 of the Code of Federal Regulations, as 
follows:

PART 41--ACCOUNTS, RECORDS, MEMORANDA AND DISPOSITION OF CONTESTED 
AUDIT FINDINGS AND PROPOSED REMEDIES

0
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.

0
2. Section 41.1 is revised to read as follows:

Sec.  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, 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.

PART 158--ACCOUNTS, RECORDS, MEMORANDA AND DISPOSITION OF CONTESTED 
AUDIT FINDINGS AND PROPOSED REMEDIES

0
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.

0
4. Section 158.1 is revised to read as follows:

Sec.  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, 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

0
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.

[[Page 29785]]

0
6. Section 286.103 is revised to read as follows:

Sec.  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 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 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

0
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.

0
8. Section 349.1 is revised to read as follows:

Sec.  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 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.

[FR Doc. 06-4814 Filed 5-23-06; 8:45 am]

BILLING CODE 6717-01-P