FERC's Proposed "Duty of Candor" Draws Significant Opposition

The Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (180 FERC ¶ 61,052 (2022))(Proposed Rule) on July 28, 2022, that would impose a sweeping "duty of candor" across all energy industries regulated by FERC. The Proposed Rule provided:

§ 1d.1 Accuracy of communications

Any entity must provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with the Commission, Commission-approved market monitors, Commission-approved regional transmission organizations, Commission-approved independent system operators, jurisdictional transmission or transportation providers, or the Electric Reliability Organization and its associated Regional Entities, where such communication relates to a matter subject to the jurisdiction of the Commission, unless the entity exercises due diligence to prevent such occurrences.

Approximately 35 entities eventually submitted comments on the Proposed Rule. Predictably, commenters readily agreed on the need for accurate, truthful communications between and among industry participants, FERC, regulatory bodies and regulated entities. Beyond that, however, the Proposed Rule engendered a barrage of criticism and proposed modifications from virtually every corner of the energy industry. Commenters repeatedly characterized the Proposed Rule as a statutorily baseless "solution in search of a problem," a cure "worse than any general disease," "unwarranted" and "not needed," "counterproductive," "unreasonably broad" and "unduly burdensome." Commenters repeatedly cautioned that the Proposed Rule's "impermissibly vague" language would produce "unintended consequences" and a far-reaching "chilling effect" due to the absence of "meaningful guidance" leading to "unpredictable applications." Even those few commentators expressing sympathy for the Proposed Rule nonetheless proffered modifications.

Key Criticisms of the Proposed Rule

The following are among the more significant criticisms leveled at the Proposed Rule:

• FERC has not demonstrated any systematic issues involving dishonesty or lack of candor that might warrant the Proposed Rule, rendering the Proposed Rule arbitrary and capricious under the Administrative Procedure Act (APA).
• The Proposed Rule lacks a statutory basis in any of FERC's governing statutes.
• The Proposed Rule is overly broad as it would apply to all "entities" and a broad set of "communications" that "relate" to matters within FERC's jurisdiction.
• The Proposed Rule is vague regarding the actions forbidden, potential enforcement parameters and penalties, and standards for exercising "due diligence."
• The Proposed Rule lacks an intent or materiality requirement, effectively imposing a strict liability standard for even unintended, trivial mistakes.
• The Proposed Rule poses free speech concerns under the First Amendment and due process concerns under the Fifth Amendment.
• The Proposed Rule would have a chilling effect on
  • informal communications conducted in the ordinary course of business
  • dispute resolution, including FERC settlement procedures
  • discussions among industry members, including during emergency situations
  • communications with FERC in such contexts as pre-filing discussions, technical conferences and voluntary communications with commissioners and staff
  • trade association discussions
  • participation in regional transmission organization (RTO) and/or independent system operator (ISO) processes
• The Proposed Rule would compromise the attorney-client privilege by forcing entities to divulge privileged information or risk penalties when "due diligence" involves communications with attorneys.

Suggested Modifications

Should FERC continue its consideration of the Proposed Rule, commenters have identified a number of significant potential modifications, including:

• The Proposed Rule should apply to FERC staff.
• The Proposed Rule should apply to communications from regulated pipelines to shippers.
• The Proposed Rule should apply to communications from RTOs/ISOs, market monitors and transmission providers to customers and other stakeholders.
• The Proposed Rule should apply to virtual traders, financial transmission rights traders and curtailment service/demand response providers.
• The Proposed Rule should define a "material" omission.
• The Proposed Rule should include a scienter requirement.
• The Proposed Rule should limit the scope of its application concerning communications with FERC, FERC staff and regulated entities.
• The Proposed Rule should provide guidance for assessing penalties.
• The Proposed Rule should not apply to communications made by attorneys on behalf of clients.
• The Proposed Rule should not apply to communications made during negotiations.
• The Proposed Rule should include a safe harbor for opinions, forward-looking statements and projections, and an exclusion for "puffery."

Conclusion

In light of the extensive criticisms and proposed modifications identified by the comments received to date, it seems unlikely that FERC would adopt the Proposed Rule in its current form. Like the now-draft Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews and Certification of New Interstate Natural Gas Facilities policy statements, the Proposed Rule may be destined for a retreat and reconsideration by FERC.

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