Legal Letters Issue IV: Questions remain about FERC’s settlement with Constellation Energy

/, FERC, Mandelbaum, Transparency/Legal Letters Issue IV: Questions remain about FERC’s settlement with Constellation Energy

By Chaim Mandelbaum
FME Law Counsel

On March 8th 2012 the Constellation Energy Group agreed to a settlement with the Federal Energy Regulatory Commission (FERC).

[1] The $245 million dollar settlement was a huge win for FERC’s Office of Enforcement, which had opened the investigation into Constellation in January 2008, only to see it languish for four years. When Constellation and FERC agreed to the settlement, the case against Constellation had still not proceeded to a formal administrative hearing or been filed in court.

FERC’s Office of Enforcement had opened its investigation into Constellation Energy with regard to its trading in the New York Independent System Operator energy market. The claim was that Constellation traders were engaged in “market manipulation” through making unprofitable trades to impact the market. Yet many experts agree that this sort of trading is entirely legal.[2] Further there was mounting criticism directed at FERC’s Office of Enforcementsince the agency had begun to act more like a prosecutor than a regulator.[3] This problem had become more pronounced after Norman Bay, a former federal prosecutor with little experience in the energy field, was named head of FERC’s Enforcement division in 2009.[4]

The timing of the settlement was especially noteworthy because the next day, on March 9th 2012, FERC approved the merger between Constellation and another energy company, Exelon Corporation. It had been almost a year earlier, in May 2011 that Constellation and Exelon had sought FERC approval for their merger. The timing of the settlement and the approval for the merger raised a number of questions.

These questions intensified when it became clear the settlement agreement between FERC and Constellation contained express reference to Constellations merger with Exelon, which was awaiting FERC approval. The settlement agreement called for Constellation to pay FERC $135 million dollars in civil fines and to disgorge $110 million dollars in profits, which at the time represented the largest settlement FERC had ever negotiated with regard to allegations of energy market manipulations.

However, the agreement between the parties included a term that delayed the effective date of when the agreement would go into effect, and when Constellation would have the obligation to actually pay the civil fines and the disgorgement. Paragraph 44 of the Stipulations and Consent Decree stated “The Effective Date of this Agreement shall be the later of the date on which: (a) the Commission issues an order approving this Agreement without material modification; or (b) the merger pursuant to the Agreement and Plan of Merger among Constellation Energy Group, Inc., Exelon Corporation, and Bolt Acquisition Corporation, dated April 28, 2011, is consummated.” (emphasis added) Under the terms of this clause the settlement would not go into effect until the consummation of the merger between Constellation and Exelon occurred. Thus no money would be due until FERC approved the $8.9 billion dollar merger between Constellation and Exelon. Yet the very next day FERC gave approval for the merger. FERC approval was the last thing needed for the merger to be complete, and the merger closed on March 12th 2012, three days later. [5]

The timing of the settlement and merger raised questions about whether there had been some of quid pro quo between FERC and the energy companies, or whether FERC had tied approval of the merger to Constellation agreeing to settle. These questions persisted when Norman Bay, the Director of Enforcement, was nominated by the President to become a FERC Commissioner and the Chairman of FERC.

When Norman Bay went before the Senate Committee on Energy and Natural Resources during his confirmation process to become a FERC Commissioner he was specifically asked about the Constellation settlement. Alaskan Senator Lisa Murkowski, after noting the facts about the timing of the settlement and merger asked him whether he was concerned about any quid pro quo. He stated “I would be concerned about the appearance of a quid pro quo in a connection between merger reviews and enforcement.” When asked to explain why there was express reference to the merger in the settlement he responded by saying “The Commission determined that accepting the settlement, including this provision, would be in the public interest.” While Bay stated that generally he oversees and audits all reports on mergers in his role, that he nonetheless did not get involved in the Constellation-Exelon merger, claiming that “Moreover, the merger review was led by staff from the Commission’s Offices of General Counsel and Energy Market Regulation while the investigation into Constellation Energy Commodities Group trading activities was conducted separately by staff from the Office of Enforcement.” [6]

These answers were so evasive and unsatisfying that Senator Murkowski, speaking on the Senate floor about Norma Bay’s nomination stated “To begin, there are questions about the fairness and transparency of the functioning of the FERC Office of Enforcement during Mr. Bay’s tenure there. Third are the answers that Mr. Bay provided to questions from those of us on the energy committee. At best, many were unclear and, at worst, his responses were simply evasive.”[7]

As a consequence of the questions raised by the Constellation settlement and the lack of transparency in explaining why the settlement and merger were linked, the Energy and Environment Legal Institute (E&E Legal) and the Free Market Environmental Law Clinic (FME Law) issued a Freedom of Information Act (FOIA) request to FERC on June 23rd 2014, seeking information on why the Constellation settlement decree referenced the Constellation-Exelon merger and how what role Norman Bay as FERC’s Director of Enforcement played in deciding these two issues.[8] However thus far FERC has rejected all attempts to increase transparency and public understanding of this issue, instead claiming the right to fully withhold all documents under Exemptions 4, 5 and 6 of FOIA. E&E Legal and FME Law have appealed this decision in hopes that FERC will recognize its obligations under FOIA and the need to explain to the public why there was such a questionable relationship between the Constellation settlement and the merger. If FERC still refuses to cooperate, then E&E Legal and FME Law are ready to ask the Federal Courts to force FERC properly obey FOIA and release public documents.

[1] Eileen O’Grady, FERC settlement with Constellation largest since 2005, Reuters

[2] Julie Carey, Cliff Hamal, and Ben Ullman, Trading Firms In Bullseye Amid Stepped Up Oversight Of Energy Markets, Forbes

[3] William Pentland, Did Obama’s New FERC Nominee ‘Criminalize’ Energy Regulation?, Forbes; see also The compliance risk equation: Preparing for the “new” FERC, a joint publication of Deloitte and Ballard Spahr

[4] FERC Appoints Former Prosecutor as Head of Enforcement Office, June 24, 2009, Energy Legal Blog

[5] Exelon-Constellation Merger Closes, Creating Nation’s No. 1 Competitive Energy Provider, March 12 2012

[6] Testimony of Norman Bay to United States Senate Committee on Energy and Natural Resources, Responses to Questions for the Record posed by members of the Committee; Response to Question 5 from Ranking Sen. Lisa Murkowski, pp. 50-52.

[7] Congressional Record, Vol. 160, No. 110, page S4473, July 15, 2014.

[8] See FOIA FY14-93 issued by FERC August 5, 2014.
2016-12-11T17:07:57+00:00 September 4th, 2014|E&E Legal Letters, FERC, Mandelbaum, Transparency|