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Norman Bay Should Not be FERC Chairman

Washington, D.C., May 28, 2014 – Norman Bay is the wrong choice to head the Federal Energy Regulatory Commission. Currently head of FERC’s enforcement office, Bay has demonstrated that he is a skillful and tenacious prosecutor. That may be what FERC needs in its staff enforcement office. It’s not what the agency needs at the steering wheel.

Close observers of FERC’s enforcement of alleged market manipulation cases, and the high-profile, high-dollar settlements that have often resulted, have been raising questions about the way Bay’s office has conducted itself. Those questions go back months before the Obama administration picked Bay to fill John Wellinghoff’s vacant seat and assume the agency chairmanship.

Economist Bill Hogan of Harvard’s Kennedy School of Government and the intellectual father of modern wholesale electricity markets told me back in November, before the Bay nomination, that FERC’s entire enforcement program is “opaque.” Traders, he said, simply don’t know in advance whether trades they are making will trigger FERC enforcement action or will pass without a whistle from the market cops.

In a paper delivered at an industry conference last fall, Hogan raised the case of a January 2013 settlement of a small case involving Deutsche Bank’s energy trading arm. FERC hammered Deutsche Bank in the case. Hogan said the Deutsche Bank case departs radically from the standard established in the 2008 case of D.C. Energy v. H.Q. Energy Services (124 FERC ¶61,295).

In that earlier case, FERC applied a stand-alone profitability test: “There is no evidence that HQ Energy acted against its economic interest in any market. Rather, the facts of the case show that HQ Energy made price-taker bids and used [Financial Transmission Rights] to hedge congestion risk in a manner explicitly contemplated by the Commission.” There was no evidence that the trader manipulated losses in one part of the complex market in order to reap larger profits in another sector.

Since then, FERC’s enforcement office has changed its standard. It now appears that FERC views any speculative transaction that results in a profit to the speculator as market manipulation. But, as Hogan pointed out, it’s difficult to dig into the settlement agreements that FERC works out with those it has charged with gaming the market. Those deals are not public. FERC refuses to disclose the details, and has forced the parties to sign non-disclosure agreements.

Now the veil of secrecy has lifted. Kevin and Rich Gates, principals of Powhatan Energy Fund, have laid out all the details of their long and nasty experience with Bay’s enforcement office. They have disclosed all their dealings with FERC, as well as marshaled expert testimony on their behalf. The case they have made – admittedly one-sided – portrays FERC as a bullying regulator unable to accept that exploiting agency-created loopholes in FERC’s market rules in order to make a profit is somehow illegal. It clearly is not.

Adding to the burden on the ill-conceived Bay nomination is a recent article in the Energy Law Journal, and a Wall Street Journal op-ed article by former FERC general counsel Bill Scherman, who now represents clients engaged in legal battles with the enforcement office. Scherman wrote that “while most members of the regulated community and practitioners within the energy bar are reluctant to say so publicly, there is a wide-spread view that the FERC enforcement process has become lop-sided and unfair.”

Scherman accused Bay’s office of failure to share information – including exculpatory material — with the subjects of its investigations. When asked about this at his Senate Energy Committee confirmation hearing earlier this month, Bay skated around the topic, saying he was not cleared by the commission itself to disclose investigatory information.

Republicans on the Senate committee also pointed out Bay’s notable lack of experience in energy policy issues, compared to the long record of the acting chair, Cheryl LaFleur.

How did Bay get the nomination? As best I can ascertain, former chair Jon Wellinghoff, a Nevadan working through his patron, Senate Majority Leader Harry Reid of Nevada, pushed the Bay nomination. Wellinghoff picked Bay for the FERC enforcement job in 2009. Wellinghoff, I’m told, was also behind the failed nomination of former Colorado consumer advocate and regulator Ron Binz to succeed Wellinghoff at FERC.

However the nomination came to pass, it is a mistake. Norman Bay, who is smart and talented, with a fine record as a U.S. Attorney in New Mexico (and a questionable record as FERC’s top cop) is the wrong choice to sit on the FERC and, even more, the wrong choice to be its chairman.