[Federal Register Volume 71, Number 38 (Monday, February 27, 2006)]
[Rules and Regulations]
[Pages 9698-9709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1765]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 41, 158, 286 and 349

[Docket No. RM06-2-000; Order No. 675]


Procedures for Disposition of Contested Audit Matters

Issued February 17, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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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 March 29, 
2006.

FOR FURTHER INFORMATION CONTACT: John Kroeger, Office of Market 
Oversight and Investigations, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, (202) 502-8177, 
[email protected].

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

I. Introduction

    1. The Final Rule expands the procedural rights of persons subject 
to audits conducted by Commission staff under the Federal Power Act 
(FPA),\1\ the Natural Gas Act (NGA),\2\ the Natural Gas Policy Act of 
1978 (NGPA) \3\ and the Interstate Commerce Act (ICA).\4\ Under current 
practice, audited persons who disagree with non-financial audit matters 
approved by the Commission must seek rehearing of that order. Under the 
Final Rule, such audited persons may elect to file briefs with the 
Commission, or, in appropriate circumstances, participate in a trial-
type hearing to challenge audit matters before the Commission makes its 
decision on the merits. This revised procedure affords enhanced due 
process to audited persons who disagree with the findings or proposed 
remedies suggested by audit staff.\5\
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    \1\ 16 U.S.C. 791a et seq. (2000).
    \2\ 15 U.S.C. 717 et seq. (2000).
    \3\ 15 U.S.C. 3301 et seq. (2000).
    \4\ 49 U.S.C. App. 1 et seq. (2000).
    \5\ As explained below, the Final Rule does not apply to audits 
pertaining to reliability that the Commission authorized in Order 
No. 672, Rules Concerning Certification of the Electric Reliability 
Organization; and Procedures for the Establishment, Approval, and 
Enforcement of Electric Reliability Standards, Docket No. RM05-30-
000, 114 FERC ] 61,104 (February 2, 2006) (ERO Audits).
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    2. Under the Final Rule, following completion of the audit process, 
the Commission will issue an order on the merits with respect to non-
disputed audit matters contained in a notice of deficiency, audit 
report, or similar document, and will notice, without making any 
findings on the merits, any disputed audit matters. The audited person 
may then elect a shortened procedure \6\ or a trial-type procedure to 
challenge the disputed audit matters. The Commission would honor this 
election unless the Commission determines that there are no material 
facts in dispute which require a trial-type proceeding.
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    \6\ The term ``shortened procedure'' as used in the Final Rule 
and the accompanying regulatory text refers to a ``paper hearing'' 
or briefing of matters only, and it does not include a trial-type 
hearing.
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    3. As set forth in further detail below, twelve companies filed 
initial comments \7\ and four companies filed

[[Page 9699]]

reply comments \8\ to the Notice of Proposed Rulemaking (NOPR) which 
the Commission issued in this docket.\9\ In response to the comments, 
and as discussed more fully below, the Commission, among other things: 
Clarifies the scope of application of the Final Rule; addresses the 
role of interested persons in the proposed procedures; discusses 
informal procedures for resolving disputed audit matters between 
audited persons and the Commission's audit staff; and addresses 
comments that pertain to implementation issues and audit practices and 
other matters that underlie the procedures in the Final Rule.
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    \7\ The entities filing initial comments in this proceeding 
(initial comments) were Ameren Services Company (Ameren); American 
Public Gas Association (APGA); American Public Power Association 
(APPA); American Transmission Company LLC (ATC); Association of Oil 
Pipe Lines (AOPL); Central Hudson Gas & Electric Corporation, 
Consolidated Edison Company of New York, Inc., LIPA, New York Power 
Authority, New York State Electric & Gas Corporation, Orange and 
Rockland Utilities, Inc. and Rochester Gas and Electric Corporation 
(Indicated New York Transmission Owners); Edison Electric Institute 
(EEI); Interstate Natural Gas Association of America (INGAA); LG&E 
Energy LLC (LG&E); Midwest ISO Transmission Owners; Public Service 
Company of New Mexico and Texas-New Mexico Power Company (PNM-TNMP); 
and Williston Basin Interstate Pipeline Company (Williston Basin).
    \8\ The entities filing reply comments in this proceeding (reply 
comments) were APGA; EEI; INGAA; and Williston Basin.
    \9\ Procedures for Disposition of Contested Audit Matters, 70 FR 
65866 (Nov. 1, 2005); IV FERC Stats. & Regs., Proposed Regulations ] 
32,592 (2005).
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    4. In response to the filed comments, the Commission finds that a 
change to the proposed regulatory text is warranted to permit an 
audited person who has elected the shortened procedure to file a motion 
with the Commission for a trial-type proceeding in circumstances where 
a party has raised one or more new issues in the shortened procedure. 
In addition, three minor changes to the wording of the proposed 
regulatory text are warranted: (1) Clarifying that an audited person 
\10\ may challenge, using the procedures set forth in the Final Rule, 
either one or more audit findings, or one or more proposed remedies, or 
both, in any combination; (2) specifying the number of days an audited 
person has to notify the Commission of its election of shortened 
procedures or a trial-type hearing and the number of days to file 
memoranda under the shortened procedure; and (3) deleting reference to 
Standards of Conduct or Codes of Conduct in section 349.1, which 
pertains to oil pipeline companies.
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    \10\ The term ``person'' as used in the NOPR and in the Final 
Rule and the accompanying regulatory text is the same as the 
definition of person found in parts 101 (Definition 24) and 201 
(Definition 27) of the Commission's regulations, which define 
``person'' as follows: ``An individual, a corporation, a 
partnership, an association, a joint stock company, a business 
trust, or any other organized group of persons, whether incorporated 
or not, or any receiver or trust.''
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II. Background

    5. On October 20, 2005, the Commission issued an NOPR to apply 
existing procedures for challenging the Commission staff's financial 
audit findings and proposed remedies to all Commission staff audits, 
including operational audit findings and proposed remedies. Pursuant to 
section 309 of the FPA,\11\ section 16 of the NGA,\12\ sections 20 and 
204(a)(6) of the ICA \13\ and section 501 of the NGPA,\14\ the 
Commission proposed to amend part 41 under Subchapter B, part 158 under 
Subchapter E and part 286 under Subchapter I, and to add a part 349 
under Subchapter P, to Title 18 of the Code of Federal Regulations. 
Under the proposed regulations, an audited person would be able to 
challenge staff audit findings and proposed remedies (collectively, 
audit matters) before the issuance of a Commission order on the merits 
of those audit matters.
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    \11\ 16 U.S.C. 825h (2000).
    \12\ 15 U.S.C. 717o (2000).
    \13\ 49 U.S.C. App. 20 and 204(a)(6) (2000).
    \14\ 15 U.S.C. 3411 (2000).
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    6. As explained in the NOPR, relevant portions of the existing 
language of parts 41 and 158 of the Commission's regulations that 
relate to procedures for challenging audit matters date at least to 
1937.\15\ Those regulations address audits of financial matters. In 
more recent years, the Commission has expanded the scope of its audits 
to determine compliance with the Commission's Standards of Conduct,\16\ 
Open Access Transmission Tariff requirements, and Codes of Conduct, 
among other requirements. The Final Rule will provide the enhanced 
procedures long applicable to financial audits to all audits, other 
than ERO Audits, conducted by the Commission or its staff.
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    \15\ See Federal Power Commission, Rules of Practice and 
Regulations 301(a) (Revised Jan. 1, 1937).
    \16\ See 18 CFR part 358 (2005).
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III. Discussion

    7. The 12 initial comments and four reply comments were 
overwhelmingly supportive of the Commission's efforts to provide a more 
complete and expansive procedure for persons subject to non-financial 
audits. We first address comments that identified issues pertaining to 
the primary scope of the proposed rule: (1) The role of interested 
persons; (2) appropriate informal procedures; and (3) the application 
of the proposed regulations to reliability audits. Next, we address 
comments suggesting changes to the proposed regulatory text. Finally, 
we address comments regarding the conduct of audits and related 
matters. Although these comments are beyond the scope of the issues set 
forth in the NOPR, the Commission believes that a discussion of these 
comments will add clarity to the agency's enforcement program.

A. The Role of Interested Entities

    8. The proposed rule states that ``any other interested entities'' 
may submit memoranda in the shortened procedure. Similarly, the 
existing rule makes provision for filing by ``any other parties 
interested.''
1. Comments
    9. Several commenters address whether anyone other than the audited 
person and the Commission staff should be able to file memoranda in the 
shortened procedure. For example, EEI comments that neither the 
proposed rule nor the Commission's regulations define the term ``any 
other interested entities.'' EEI asserts that historically only utility 
customers have intervened in contested proceedings concerning financial 
audits. EEI states that operational audits, in most cases, do not 
present rate implications, and that therefore there is no reason to 
permit other interested entities to file memoranda in the shortened 
procedure in matters involving operational audits. EEI also expresses 
the concern that an entity other than the audited person or Commission 
staff that files a memorandum in the shortened procedure could arguably 
be entitled to obtain in discovery non-public information pertaining to 
the underlying audit. EEI further seeks clarification regarding whether 
an interested entity may appeal the findings of an operational 
audit.\17\
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    \17\ EEI initial comments at 16-17.
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    10. The Indicated New York Transmission Owners likewise comment 
that the Commission should clarify the role of ``other interested 
persons'' in the contested audit proceeding.\18\ Ameren comments that 
allowing interventions would jeopardize the controlled and confidential 
process that has traditionally allowed audited persons and the 
Commission staff to address compliance issues.\19\ INGAA expresses the 
concern that, because any interested person could intervene in the 
shortened procedure and raise new facts or allegations or proposals for 
new remedies, an audited person should be

[[Page 9700]]

able to change its election from shortened procedure to trial-type 
proceeding for good cause shown in light of any new issues raised.\20\ 
Finally, APGA comments that an interested entity should be able to 
participate in the decision of whether a shortened procedure or a 
trial-type hearing will be used to determine contested audit matters, 
and that the rights of interested entities should be strengthened.\21\
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    \18\ Indicated New York Transmission Owners initial comments at 
3-4.
    \19\ Ameren initial comments at 3-4.
    \20\ INGAA initial comments at 2-3.
    \21\ APGA initial comments at 4.
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2. Commission Determination
    11. In this Final Rule, as is now the case in financial audits, the 
Commission will permit other interested entities to file memoranda in 
the shortened procedure. 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. The Commission will use the same standard for 
permitting interested entities to file memoranda in the shortened 
procedure as it uses to permit interventions in other proceedings.\22\ 
In addition, an interested entity may include in its initial memorandum 
filed pursuant to the shortened procedure a motion to intervene in the 
proceeding.\23\
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    \22\ See 18 CFR 385.214(b) (2005).
    \23\ If an interested entity is granted intervention, that 
entity will obtain party status with all the ensuing rights and 
responsibilities of a party.
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    12. The Final Rule defines the shortened procedure as consisting of 
the filing of two rounds of memoranda, and thus there will be no 
opportunity in this procedure for any interested entity to use the 
discovery process to obtain information from the audited person.\24\ By 
permitting interested entities to file memoranda in the shortened 
procedure, the Commission is not affecting the non-public conduct of 
the audit that includes communications between the audited person and 
the Commission staff regarding compliance issues. The interested entity 
that files memoranda in the shortened procedure will have access only 
to publicly available filings and not to any non-public communications.
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    \24\ With respect to discovery in a trial-type proceeding 
conducted pursuant to the Final Rule, the applicable standards under 
part 385 of the Commission's regulations will apply. The presiding 
administrative law judge will rule on discovery procedures and 
motions as in other contested hearings.
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    13. The Commission adopts in part INGAA's suggestion that an 
audited person be permitted to change its election of the shortened 
procedure in favor of a trial-type procedure for good cause shown after 
an interested entity files a memorandum in the shortened procedure that 
raises a new matter. Within 20 days after the last date that reply 
memoranda under the shortened procedure may be timely filed, the 
audited person who elected the shortened procedure may file a motion 
with the Commission requesting a trial-type hearing if new issues are 
raised by a party. To prevail in such a motion, the audited person must 
show that a party to the shortened procedure raised one or more new 
issues of material fact relevant to resolution of a matter in the 
shortened procedure such that fundamental fairness requires a trial-
type hearing to resolve the new issue or issues so raised. Parties to 
the shortened procedure and the Commission staff may file responses to 
the motion. In ruling upon the motion, the Commission may determine 
that some or all of the issues be litigated in a trial-type hearing. 
Further, the Commission can also set a matter for hearing sua sponte, 
if warranted.
    14. The Commission declines to adopt APGA's suggestion that the 
Commission permit an interested entity to participate in the initial 
election of the shortened procedure or the trial-type hearing. The 
election belongs to the audited person. The election provides the 
audited person a voice in how it may contest audit findings with which 
it disagrees. We conclude that the best approach is to permit the 
audited person to make the election for the shortened procedure or the 
trial-type election alone, subject to the requirement, as stated in the 
proposed rule, that the Commission will honor that election except when 
there are no material facts in dispute requiring a trial-type hearing.

B. Informal Procedures

    15. In the NOPR, the Commission invited public comments on whether 
the Commission should also provide informal procedures before 
proceeding with the formal procedures contained in the NOPR.\25\
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    \25\ NOPR at P 11.
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1. Comments
    16. A number of commenters express support for the continuation of 
informal contacts between the audit staff and the audited person during 
the course of the audit and up to the point where the audited person 
informs audit staff in writing that the audited person contests one or 
more audit findings or proposed remedies.\26\ Commenters also provide 
suggestions for additional informal procedures. EEI urges the 
Commission to provide for a mechanism by which the audited company may 
raise a concern with the management of the audit staff. EEI further 
states that it would support an additional informal procedure to 
resolve disputes after an audit concludes but before the shortened 
procedure or the trial-type hearing begins.\27\ Ameren comments in 
favor of an additional informal procedure that would provide the 
audited person an opportunity to review draft audit findings and 
discuss those findings with audit staff.\28\ Williston Basin comments 
that an informal audit conference would allow the audited person to 
resolve issues without incurring the expense of more formal 
procedures.\29\ APGA notes the ``long-standing practice'' of the audit 
staff engaging in informal contacts and discussions with audited 
persons, but requests that the Commission explicitly state that only 
formal contacts may occur between the audit staff and the audited 
person with respect to the substance of any audit.\30\
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    \26\See EEI initial comments at 20-21; LG&E initial comments at 
3.
    \27\EEI initial comments at 21.
    \28\Ameren initial comments at 7.
    \29\Williston Basin initial comments at 3-4.
    \30\APGA initial comments at 3.
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2. Commission Determination
    17. The Commission agrees with the commenters that asserted that 
informal discussions between the audited person and audit staff are 
useful and should continue where they are appropriate. Nothing in the 
Final Rule is intended to discourage these informal contacts. While it 
is not clear precisely what APGA means by ``formal contacts,'' 
requiring such contacts, as APGA suggests, would unduly impede the flow 
of communication between audit staff and an audited person that is 
essential to understand company records and the Commission therefore 
rejects this suggestion.
    18. The Commission also does not see a compelling need to establish 
a specific informal procedure. An audited person may request to speak 
with management of the audit staff at any time during an audit up to 
the time that it indicates in writing that it contests specified 
findings or proposed remedies.\31\ An audited person may contact 
management of the audit staff directly or through the audit staff. 
Informal resolution of issues that arise in audits is in the public 
interest. Furthermore, a specific informal procedure is not necessary 
to provide an audited person

[[Page 9701]]

an opportunity to comment on a draft audit report. Under the audit 
staff's current practice, at the end of the audit process the audit 
staff provides an audited person a draft audit report for review and 
comment. Audit staff considers these comments and discusses them with 
the audited person. Finally, an audited person is routinely provided an 
audit conference at the end of the audit process to try to resolve 
disputed issues or clarify points that the audited person believes are 
not clear. At this ``wrap-up'' conference, the audited person may 
discuss with the audit staff and its management proposed audit findings 
and proposed remedies, as well as information provided to staff in the 
audit and the application of that information to applicable law.\32\ 
The wrap-up conference is similar to the meeting that EEI described in 
its comments. The availability of a wrap-up conference ensures that the 
questions and concerns of audited persons are meaningfully addressed 
and obviates the need for the Commission to promulgate a specific 
informal procedure.
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    \31\ For an explanation of how staff conducts an audit, see 
http://www.ferc.gov/legal/maj-ord-reg/land-docs/order2004/resources.asp.
    \32\ Audit staff will provide the audit report, notice of 
deficiency or similar document before it is made public. The wrap-up 
conference is also described on the Commission's Web site at http://www.ferc.gov/legal/maj-ord-reg/land-docs/order2004/resources.asp.
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C. Reliability Audits

1. Comments
    19. Two commenters ask whether the proposed rule would apply to 
reliability audits.\33\
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    \33\ See EEI initial comments at 19-20; and Indicated New York 
Transmission Owners initial comments at 4.
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2. Commission Determination
    20. The Final Rule will apply to all audits conducted by Commission 
staff except for ERO Audits. A little background regarding ERO Audits 
will provide useful context. Order No. 672 was promulgated under the 
authority of the Energy Policy Act of 2005 (EPAct 2005).\34\ Section 
1211 of the EPAct 2005 amended the FPA by adding a new section 215 on 
electric reliability. FPA section 215(e) establishes an Electric 
Reliability Organization (ERO) with authority to impose a penalty under 
certain circumstances on a user, owner or operator of the bulk-power 
system for violation of a reliability standard approved by the 
Commission. FPA section 215(e) also authorizes the Commission, on its 
own motion or upon complaint, to order compliance with a reliability 
standard and to impose a penalty against a user or owner or operator of 
the bulk-power system.
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    \34\ Public Law 109-58, 119 Stat. 594 (2005).
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    21. Any audit or review of compliance with reliability standards 
conducted by an ERO will, by definition, not be an audit conducted by 
the Commission. Accordingly, the procedures set forth in the Final Rule 
will not apply to audits or compliance reviews conducted by an ERO. In 
addition, audits that are expressly conducted by the Commission staff 
pursuant to the provisions of Order No. 672 will not be subject to the 
procedures contained in the Final Rule. The Commission is excluding ERO 
Audits from the scope of the Final Rule because aspects of the 
Commission's program with respect to such audits remain to be 
determined. The Commission may reconsider this decision after an ERO is 
certified.

D. Right To Challenge Audit Findings or Proposed Remedies

1. Comments
    22. Ameren and EEI point out that in the NOPR the Commission 
referred to audit findings and proposed remedies collectively as audit 
matters and seeks assurance that an audited person may use the 
procedures set forth in the proposed regulations to challenge either an 
audit finding, or a proposed remedy, or both.\35\
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    \35\ Ameren initial comments at 7-8; EEI initial comments at 17-
18.
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2. Commission Determination
    23. A situation may occur in which an audited person does not 
challenge a finding that it violated a Commission requirement, but the 
audited person does not agree with the remedial measure associated with 
the finding. In this situation, the audited person may wish to 
challenge the audit report, deficiency report, or other document with 
respect to the proposed remedy alone. The NOPR did not clearly specify 
that an audited person may challenge just the proposed remedy. The 
Commission clarifies that an audited person may do so, and the 
regulatory text is modified accordingly to clearly state that an 
audited person may challenge one or more audit findings, or one or more 
proposed remedies, or both, in any combination.

E. Time Frames

1. Comments
    24. EEI notes that under the proposed section 41.1, the Commission 
shall provide the audited person a specified number of days to respond 
with respect to disputed audit matters. EEI also notes that the 
Commission did not specify the number of days in section 41.3 that an 
audited person will have to file memoranda pursuant to the shortened 
procedure. EEI urges that the Commission specify in sections 41.1 and 
41.2 that an audited person shall have 30 days to respond to a 
Commission order that notes, but does not address on the merits, one or 
more disputed findings or proposed remedies. EEI also urges that the 
Commission specify in section 41.3 that initial memoranda be filed 
within 45 days and that reply memoranda be filed 20 days later.\36\
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    \36\ EEI initial comments at 18. AOPL also advocated that 
specific filing time periods be provided. AOPL initial comments at 
2-3.
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2. Commission Determination
    25. The Commission accepts EEI's recommended changes with respect 
to the noted time limits for filings. The existing section 41.1 does 
not specify a time period for an audited person to respond to the 
Commission with respect to a noticed finding or proposed remedy with 
which he or she may disagree. Specifying the number of days for the 
noted filings will promote certainty. Therefore, the Commission will 
change the regulatory text to indicate the number of days for making 
the noted filings.\37\ Specifically, section 41.1 will indicate that an 
audited person will have 30 days to respond with respect to a disputed 
audit matter. Section 41.3 will indicate that initial memoranda must be 
filed within 45 days and reply memoranda must be filed 20 days 
later.\38\
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    \37\ Under the Commission's existing authority, it retains the 
right to modify the time limits in appropriate circumstances.
    \38\ Conforming changes are made in 18 CFR 158.1, 158.3, 
286.103, 286.105, 349.1 and 349.3.
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F. Excision of Certain References in Part 349

1. Comments
    26. AOPL notes that the proposed section 349.1, which would apply 
to oil pipelines, provides that an audit may result in findings that an 
audited person has not complied with the Commission's requirements 
under the Standards of Conduct or the Code of Conduct, and that these 
requirements do not apply to oil pipelines.\39\
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    \39\ AOPL initial comments at 3.
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2. Commission Determination
    27. The referenced requirements do not apply to oil pipelines. 
Accordingly, to avoid confusion, the Commission shall excise the phrase 
``matters under the Standards of Conduct or the Code of Conduct'' from 
the regulatory text of section 349.1 in the Final Rule.

[[Page 9702]]

G. The Commission May Take ``Other Action''

1. Comments
    28. Williston Basin requests that the Commission remove the phrase 
``or taking other action'' from proposed sections 41.2, 158.2, 286.104 
and 349.2 because it appears to give the Commission the opportunity to 
change the findings or proposed remedies or possibly to take other 
action inconsistent with the original findings and proposed remedies. 
The relevant language reads as follows: ``Upon issuance of a Commission 
order that notes a finding or findings, with or without proposed 
remedies, with which the audited person has disagreed, the audited 
person may: Acquiesce in the findings and proposed remedies by not 
timely responding to the Commission order, in which case the Commission 
may issue an order approving them or taking other action * * *.''
2. Commission Determination
    29. The Commission declines to remove the words ``or taking other 
action'' as Williston Basin requests. These words are needed to permit 
the Commission flexibility to decline to adopt the finding or findings 
or proposed remedy or remedies to which the audited person acquiesced 
by not timely filing the required document. The Commission may revise 
an audit report even where there is no party challenging the contents 
of that report because the Commission must always discharge its 
obligation to act consistent with the public interest according to its 
statutory authority.\40\ An audited person who believes it is aggrieved 
by a Commission order that changes an audit report in the circumstances 
Williston Basin describes may seek rehearing of the Commission order.
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    \40\ For this reason, the Commission may revise or reject an 
uncontested settlement. See Panhandle Eastern Pipe Line Company, 95 
F.3d 62, 64 (D.C. Cir. 1996) (``[W]e have held that the Commission 
should approve an uncontested settlement `only upon a finding that 
the settlement appears to be fair and reasonable and in the public 
interest.' '' (Citation omitted.)); Alternative Dispute Resolution, 
Order No. 578, 60 FR 19494 (Apr. 19, 1995), FERC Stats. & Regs. ] 
31,018 at 31,331 (1995) (``[T]he Commission may refashion an 
uncontested settlement to comport with the public interest * * 
*.''); Carolina Power & Light Company, 51 FERC ] 61,403 (1990) (The 
Commission rejected a provision of an uncontested settlement).
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H. Other Issues

    30. A number of commenters assert that a lack of clear rules causes 
them to be surprised by new and changing regulatory requirements. 
Despite good faith attempts at compliance, these commenters state, they 
are subject to a ``gotcha'' approach to auditing that forces them to 
meet ``moving target'' requirements. As noted above, while these and 
similar comments regarding the audit process are outside the scope of 
the proposed rule, the Commission believes that addressing them will 
provide greater clarity to the agency's enforcement program.
1. Precedential Value of Audit Findings
a. Comments
    31. Several commenters ask the Commission to clarify whether audit 
reports, settlements and orders on contested audit matters constitute 
binding precedent for non-parties. EEI states that the Commission must 
provide an opportunity for comment with respect to any requirement set 
forth in an audit report, settlement or order on a contested audit 
matter that the Commission proposes to make generally applicable.\41\ 
APGA asks the Commission to explain the precedential value of an audit 
finding.\42\ Ameren urges that if the Commission seeks to impose 
requirements or remedies imposed in an individual audit proceeding on 
the regulated community in general, the Commission should proceed by a 
separate generic proceeding that provides notice to the public and the 
opportunity to comment.\43\ PNM-TNMP comments that the settlement of an 
audit or investigation should not have precedential effect except as to 
the settling entity.\44\
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    \41\ EEI initial comments at 6-7.
    \42\ APGA initial comments at 3.
    \43\ Ameren initial comments at 3.
    \44\ PNM-TNMP initial comments at 3.
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b. Commission Determination
    32. Unless the Commission expressly states it is making findings 
that apply to other parties, an audit report and a Commission order 
approving an uncontested audit report are not binding on entities other 
than the audited person or persons who agreed not to contest the audit 
report that the Commission approved. To this extent, such an order, 
like an order approving an uncontested settlement, does not have 
precedential value.\45\ The Commission routinely makes this point in 
orders it issues approving stipulation and consent agreements in part 
1b investigations.\46\ An uncontested audit report is similar to a 
stipulation and consent agreement to the extent that the audited person 
consents to the contents of the audit report. By contrast, a Commission 
order to resolve a contested matter does have precedential effect.\47\ 
An audited person that selects the shortened procedure or the trial-
type hearing to resolve a dispute regarding an audit staff finding or 
remedy 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 apply to non-parties. 
The Commission has substantial discretion to establish rules of general 
application by adjudication and need not necessarily employ a separate 
generic proceeding.\48\
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    \45\ See, e.g., United Municipal Distributors Group v. FERC, 732 
F.2d 202, 207 n. 8 (D.C. Cir. 1984) (``The Commission's regulations 
thus permit it to approve uncontested offers of settlement without a 
determination on the merits that the rates approved are `just and 
resonable.' The Commission's approval of an uncontested settlement 
has no precedential value as settled practice.''); New York Power 
Authority, 105 FERC ] 61,102 at P 87 (2003) (``It is well 
established that settlements have no precedential value.''). See 
also Kelley v. FERC, 96 F.3d 1482, 1490 (D.C. Cir. 1996) (collecting 
cases).
    \46\ See. e.g., The Willliams Companies, 111 FERC ] 61,392 at 
62,651 (2005) (``The Commission's approval of the Agreement does not 
constitute precedent regarding any principle or issue in any 
proceeding.'').
    \47\ See, e.g., Enbridge Pipelines (KPC), 102 FERC ] 61,310 at 
n. 74 (2003) (a Commission order approving a contested settlement is 
a legal precedent of the Commission).
    \48\ NLRB v. Bell Aerospace Corp., 416 U.S. 267, 294 (1974) 
(``[A]djudicative cases may and do serve as vehicles for the 
formulation of agency policies.''); SEC v. Chenery Corp., 332 U.S. 
194, 203 (1947) (``[T]he 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.''); 
Michigan-Wisconsin Pipeline Co. v. FPC, 520 F.2d 84, 89 (D.C. Cir. 
1975) (``[T]here is no question that the Commission may attach 
precedential and even controlling weight to principles developed in 
one proceeding and then apply them under appropriate circumstances 
in a stare decisis manner.''); Pacific Gas and Electric Co. v. FPC, 
506 F.2d 33, 38 (D.C. Cir. 1974) (``[A]gency may establish binding 
policy through rulemaking procedures * * * or through adjudications 
which constitute binding precedents.''); AEP Power Marketing, Inc., 
108 FERC ] 61,026 at P 187 (2004) (``Our decision to establish new 
policy in the context of case-specific proceedings is clearly within 
our authority.''); Investigation of Terms and Conditions of Public 
Utility Market-Based Rate Authorizations, 103 FERC ] 61,349 at P 51 
(2003) (``The Commission, moreover, is not limited to notice and 
comment rulemaking to develop policy. Agencies generally are 
permitted considerable discretion to choose whether to proceed by 
rulemaking or by adjudication.'').
---------------------------------------------------------------------------

2. Cooperation With Audit Staff
a. Comments
    33. Some commenters ask the Commission to clarify a number of 
issues regarding cooperation of audited persons. EEI asserted that it 
should not be considered a lack of cooperation for a company being 
audited to seek to narrow the scope of information requests. EEI 
requests that the Commission clarify whether the discussions with staff 
of this nature

[[Page 9703]]

would indicate a lack of cooperation.\49\ EEI and Ameren also ask the 
Commission to clarify that it does not demonstrate a lack of 
cooperation to assert the attorney-client privilege in good faith.\50\
---------------------------------------------------------------------------

    \49\ EEI initial comments at 12-14.
    \50\ EEI initial comments at 14; Ameren initial comments at 5.
---------------------------------------------------------------------------

b. Commission Determination
    34. On October 20, 2005, the Commission issued a policy statement 
to provide guidance and regulatory certainty regarding the agency's 
enforcement of the statutes, orders, rules and regulations it 
administers.\51\ The Policy Statement addressed the factors the 
Commission will take into account in determining remedies for 
violations, including applying the enhanced civil penalty authority 
provided by EPAct 2005. The Commission stressed that one of these 
factors would be cooperation, which was discussed in a general sense 
\52\ and described with respect to specific factors.\53\ The Commission 
also addressed qualitative factors, such as wholehearted cooperation 
and cooperation with respect to certain aspects yet not with 
others.\54\ In addition, the Commission listed conduct that would 
indicate a lack of cooperation.\55\
---------------------------------------------------------------------------

    \51\ Enforcement of Statutes, Orders, Rules, and Regulations, 
113 FERC ] 61,068 (2005).
    \52\ 113 FERC ] 61,068 at n.2.
    \53\ Id. at P 26.
    \54\ Id. at P 27.
    \55\ Id.
---------------------------------------------------------------------------

    35. In sum, the Policy Statement set forth that the Commission 
expects cooperation, that the Commission will give consideration to 
exemplary cooperation, i.e., ``cooperation which quickly ends wrongful 
conduct, determines the facts, and corrects a problem,'' \56\ and that 
a lack of cooperation would be weighed in deciding appropriate remedies 
for non-compliance.\57\ The Commission did not suggest that efforts by 
an audited person taken in good faith to resolve issues that arise in 
the course of an audit would be construed as evidence of non-
cooperation. Where an audited person believes that data requests create 
a substantial burden that could be relieved by limiting the scope of 
the request, by the audited person providing other information that 
would achieve the same purpose, or by some other resolution that would 
satisfy audit staff, an audited person is not failing to cooperate if 
it suggests changes to, or narrowing of, the data requests. Similarly, 
an audited person who appropriately interposes the attorney-client 
privilege will not be considered non-cooperative. However, the 
interposition of the privilege where it does not apply and that is 
designed to frustrate audit staff's efforts to obtain information could 
be evidence of non-cooperation.
---------------------------------------------------------------------------

    \56\ Id. at P 26.
    \57\ Id. at P 26-27.
---------------------------------------------------------------------------

3. Public Treatment of Contested Audit Matters
a. Comments
    36. Two commenters ask the Commission to keep information regarding 
contested audit matters confidential. Ameren asserts that the 
Commission should ensure that all contested audit proceedings remain 
completely confidential until a final Commission determination has been 
made. Ameren also asks the Commission to clarify that, if an audited 
company challenges any of the audit staff's proposed findings under the 
contested audit procedures, the Commission not issue a notice or other 
statement releasing any proposed staff findings or remedies to the 
public. Instead, Ameren urges that any additional paper or formal 
hearing procedures on the contested audit findings should be kept 
confidential until a final determination is made by the Commission. 
Ameren notes that the public release of proposed remedies could have an 
immediate and harmful impact on the audited person's stock price or 
credit rating.\58\ Williston Basin asks the Commission to clarify that 
the notice setting a schedule for the filing of memoranda be non-
public.\59\
---------------------------------------------------------------------------

    \58\ Ameren initial comments at 5-6.
    \59\ Williston Basin initial comments at 6.
---------------------------------------------------------------------------

b. Commission Determination
    37. All Commission issuances regarding the resolution of contested 
audit matters under the Final Rule will be public. A brief statement of 
the relevant processes under the Final Rule at this juncture will help 
inform this discussion. In instances in which the audited person and 
the audit staff are unable to agree upon the findings and proposed 
remedies contained in a draft audit report, the following steps occur:
     The audited person may provide in writing to the audit 
staff a response to the 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 proposed final audit report. At this point, 
the Commission may direct the audit staff to undertake further 
analysis, obtain further information from the audited person, or take 
other action. The audited person's response indicating disputed 
findings or proposed remedies becomes public when the audit report 
becomes public, i.e., at the time the Commission issues an order on the 
merits of the final 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 audit report that are not in dispute and will publicly 
notice the disputed items. The order will not constitute final agency 
action with respect to the disputed items and will provide the audited 
person the opportunity to elect in writing the shortened procedure 
(submission of briefs) or the trial-type hearing by a date certain.
     If the audited person does not respond within 30 days to 
the notice, the Commission may issue an order on the merits regarding 
the noticed items. Alternatively, 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.
     If the audited person makes a timely election, the 
Commission will honor the election (unless a trial-type proceeding 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.
    38. The Commission is aware that noticed findings or proposed 
remedies may have financial consequences for an audited person. The 
public has an appropriate interest, however, in seeing the Commission's 
resolution of disputed, jurisdictional matters before it. Regulated 
companies may need to be aware of Commission determinations regarding 
disputed audit matters to comply with Commission requirements. Further, 
the Commission must publicly notice the disputed audit findings or 
proposed remedies to provide potential interested parties an 
opportunity to determine whether to participate in the contested audit 
procedures. The audited person's response and the Commission's notice 
establishing a briefing schedule or beginning a trial-type hearing must 
also be public to enable potential interested parties to participate in 
the proceeding. Nevertheless, audited persons may seek to file 
proprietary materials with a request for confidential treatment under 
section 388.112 of the

[[Page 9704]]

Commission's regulations.\60\ Parties appearing before the Commission 
and its administrative law judges may also seek protective orders to 
protect the confidentiality of information. These methods of keeping 
information non-public are adequate for the purposes of the Final Rule.
---------------------------------------------------------------------------

    \60\ 18 CFR 388.112 (2005).
---------------------------------------------------------------------------

4. Applicability of part 1b of the Commission's Regulations to Audits
a. Comments
    39. Three commenters request clarification regarding the role that 
part 1b of the Commission's regulations plays in audits.\61\ These 
commenters ask the Commission to clarify that any new rule will not 
modify existing protections regarding investigations that are provided 
in part 1b of the Commission's regulations.\62\
---------------------------------------------------------------------------

    \61\ 18 CFR part 1b (2005).
    \62\ See Ameren initial comments at 7; EEI initial comments at 
15; INGAA reply comments at 3-4, 7.
---------------------------------------------------------------------------

    40. In addition, EEI states that audited persons are uncertain as 
to whether the operational audits constitute part 1b investigations or 
whether part 1b investigations are separate and apart from the 
operational audits and the proposed procedures. EEI asserts that if 
audits are not conducted pursuant to part 1b, the Commission must 
establish procedures that define the rights of an audited person. In 
particular, EEI claims that new procedures are needed to both ensure 
the confidentiality of the audited person's proprietary or otherwise 
sensitive information during an audit and when the audited person 
contests the findings or remedies proposed by the audit staff. EEI 
calls on the Commission to issue a policy statement, with an 
opportunity for public comment, to establish the appropriate 
relationship between the audit staff and the enforcement staff during 
an audit, consistent with separations of functions requirements.\63\ 
EEI also seeks clarification regarding when audit staff may communicate 
with an audited person's employees without an attorney present and how 
the right to have an attorney present changes during the audit process, 
shortened and trial-type procedures, and part 1b investigations.\64\
---------------------------------------------------------------------------

    \63\ EEI initial comments at 8-11.
    \64\ EEI initial comments at 11.
---------------------------------------------------------------------------

    41. INGAA also asks the Commission to clarify whether audits are 
conducted under part 1b of its regulations.\65\ In addition, Ameren 
asks the Commission to confirm that any new rule resulting from the 
NOPR will not modify existing confidentiality protections that are 
provided in part 1b.\66\
---------------------------------------------------------------------------

    \65\ INGAA reply comments at 3-4, 7.
    \66\ Ameren initial comments at 7.
---------------------------------------------------------------------------

b. Commission Determination
    42. Although not directly related to this rulemaking proceeding, we 
address the concerns about the role of investigations with respect to 
audits as part of the Commission's recent efforts to clarify its 
enforcement program. Investigations and audits are distinct methods the 
Commission uses to determine and address compliance with its 
requirements. Part 1b applies to investigations and not to audits.\67\ 
Audits are conducted pursuant to the authority conferred in FPA section 
301,\68\ NGA section 8,\69\ NGPA section 504 \70\ and ICA sections 20 
and 204(a)(6).\71\ The Commission's audit staff routinely informs the 
subject of an audit in an initial letter that an audit has commenced 
pursuant to specific statutory authority. Similarly, the Commission's 
enforcement staff routinely informs the subject of an investigation in 
an initial letter that an investigation has commenced pursuant to part 
1b of the Commission's regulations. The Commission's practice is that 
audits begin with issuance of a public commencement letter and end with 
issuance of a public audit report. By contrast, investigations 
undertaken pursuant to part 1b begin and end without notice to the 
public, unless the Commission orders otherwise. The Final Rule will not 
affect investigations conducted under part 1b.
---------------------------------------------------------------------------

    \67\ 18 CFR 1b.2 (2005).
    \68\ 16 U.S.C. 825 (2000).
    \69\ 15 U.S.C. 717g (2000).
    \70\ 15 U.S.C. 3415 (2000).
    \71\ 49 U.S.C. App. 20 and 204(a)(6) (2000).
---------------------------------------------------------------------------

    43. It is not necessary, as EEI asserts, for the Commission to 
establish new procedures that define the rights of audited persons to 
ensure the confidentiality of the audited person's sensitive 
information. Audited persons provide information to the audit staff on 
a non-public basis. In that regard, the FPA specifies that ``[n]o 
member, officer, or employee of the Commission shall divulge any fact 
or information which may come to his knowledge during the course of 
examination of books or other accounts, as hereinbefore provided, 
except insofar as he may be directed by the Commission or by a court.'' 
\72\
---------------------------------------------------------------------------

    \72\ See FPA section 301(b), 16 U.S.C. 825(b) (2000). See also 
NGA section 8(b), 15 U.S.C. 717g(b) (2000). The Commission's 
regulations reiterate that requirement. 18 CFR 3c.2(a) (2005).
---------------------------------------------------------------------------

    44. No new procedures are required to establish the relationship 
between audit staff and enforcement staff. Information obtained in an 
audit may be shared with Commission staff conducting a related 
investigation.\73\ This sharing is appropriate to effectively enforce 
compliance with the Commission's rules and regulations. This sharing of 
information promotes efficiency; it would be pointless to require an 
audited person to produce the same information twice. Further, the 
knowledge that an audit may lead to an investigation should encourage 
entities subject to the Commission's jurisdiction to volunteer the 
existence of violations and to cooperate to the maximum extent 
practicable to expose and remedy misconduct promptly.\74\
---------------------------------------------------------------------------

    \73\ Trans Alaska Pipeline System, 9 FERC ] 61,205 (1979). See 
also The House Committee Report on the Government in the Sunshine 
Act, Pub. L. 94-409 (1976), which amended the Administrative 
Procedure Act, 5 U.S.C. 500 et seq. (2000), discussing the scope of 
ex parte prohibitions, states in part that ``[t]he rule forbids ex 
parte communications between interested persons outside the agency 
and agency decisionmakers * * *. Communications solely between 
agency employees are excluded from the section's prohibitions.'' 
1976 U.S.C.C.A.N. 2183, 2202.
    \74\ Enforcement of Statutes, Orders, Rules, and Regulations, 
113 FERC ] 61,068 at P 26-27 (2005).
---------------------------------------------------------------------------

    45. The Commission has explained that the same person on its staff 
may perform more than one function ``provided (1) such combination 
enhances the Commission's understanding of energy markets and related 
issues; and (2) parties in individual proceedings appear to and 
actually receive a fair and impartial adjudication of their claims.'' 
\75\ The Commission has further specified that ``[u]nless an 
investigator is assigned to serve as a litigator, she may freely speak 
to persons inside the Commission about an investigation * * *.'' \76\ 
The same observation holds true for an auditor, or, indeed, for a 
person on Commission staff who works on audits and investigations. 
Prior to a matter becoming an on-the-record proceeding, i.e., while it 
is still an audit or investigation, the separations of functions rule 
set forth in section 2202 of the Commission's Rules of Practice and 
Procedure \77\ does not apply.\78\ Of course, if the Commission permits 
an interested entity to intervene in the shortened procedure with 
respect to a disputed issue, the Commission's ex parte rule would 
apply.\79\
---------------------------------------------------------------------------

    \75\ Separation of Functions, 101 FERC ] 61,340 at P 1 (2002).
    \76\ Id. at P 26.
    \77\ 18 CFR 385.2202 (2005).
    \78\ 101 FERC ] 61,340 at P 26.
    \79\ 18 CFR 385.2201 (2005).
---------------------------------------------------------------------------

    46. Finally, with respect to EEI's request for clarification 
regarding when an attorney may be present during employee interviews, 
the Commission

[[Page 9705]]

agrees that an audited person's employees may have counsel present at 
any time, during any part of an audit.
5. Best Practices
a. Comments
    47. Several commenters express concern about the role of ``best 
practices'' in the audit process. EEI states that the audit staff has 
developed and utilized a non-public list of best practices in its 
audits for Standards of Conduct and Code of Conduct compliance. EEI 
further states that best practices are not necessarily regulatory 
requirements and that on a cost-benefits basis, best practices may not 
be warranted.\80\ Ameren states that audit reports have recommended 
certain best practices for Standards of Conduct compliance even though 
the actual rules do not require that companies use these practices to 
comply with the Standards of Conduct.\81\ PNM-TNMP states that the 
audit staff comments and previously issued audit reports should not be 
a basis for a best practices requirement.\82\
---------------------------------------------------------------------------

    \80\ EEI initial comments at 4-6.
    \81\ Ameren initial comments at 3.
    \82\ PNM-TNMP initial comments at 3.
---------------------------------------------------------------------------

b. Commission Determination
    48. The Commission acknowledges that because a practice was 
successfully implemented by one audited person does not necessarily 
mean that practice will be a good fit elsewhere. Practices that 
companies implement to improve compliance may serve as useful 
references, but they are not binding on others. For example, experience 
has shown that the taking of minutes at meetings in which transmission 
function and energy affiliate employees are present may be useful to 
address and prevent Standards of Conduct violations. However, taking 
minutes at such meetings is not a requirement. For some audited 
persons, the presence of a compliance officer may be sufficient, or 
other measures may be adopted that are equally effective. There is 
often not a one-size-fits-all response to help ensure compliance. The 
Commission does not intend to bind all companies to adhere to a remedy 
that one company may have adopted. A person need only comply with 
Commission requirements.
    49. The staff does not have a non-public list of best practices as 
EEI suggests. The audit staff, however, has observed a broad array of 
company practices that address and prevent violations of Commission 
requirements with varying degrees of effectiveness. Some of these 
company practices are reflected in Frequently Answered Questions (FAQs) 
on the Commission's Web site.\83\ There, the Commission staff has 
provided detailed responses to many FAQs about the process and 
substance of financial and operational audits. These responses include 
company practices that may be appropriate in some circumstances. They 
are not, however, intended to be new legal requirements.
---------------------------------------------------------------------------

    \83\ http:/www.ferc.gov/legal/maj-ord-reg/land-docs/stand-cond/stand-cond-faqs.pdf.
---------------------------------------------------------------------------

6. Audit Cycles
a. Comments
    50. LG&E encourages the Commission to consider promulgating audit 
cycles for most of what LG&E refers to as the Commission's ``standard'' 
audits. For example, LG&E suggests that compliance with wholesale fuel 
adjustment clauses might occur on a three-year cycle.\84\
---------------------------------------------------------------------------

    \84\ LG&E initial comments at 3-4.
---------------------------------------------------------------------------

b. Commission Determination
    51. The Commission declines to adopt LG&E's suggestion. The audit 
staff does not necessarily commence audits based on a schedule. The 
audit staff selects companies and subjects to audit based on a variety 
of factors.
7. Auditing Standards
a. Comments
    52. LG&E encourages the Commission to develop or adopt auditing 
standards for all audits.
b. Commission Determination
    53. The audit staff adheres to auditing standards.\85\ The audit 
staff follows Generally Accepted Government Auditing Standards as 
prescribed by the Comptroller General of the United States.\86\
---------------------------------------------------------------------------

    \85\ Government Auditing Standards, 2003 Version issued by the 
Comptroller General of the United States, June 2003.
    \86\ http://www.gao.gov/govaud/yb2003.pdf.
---------------------------------------------------------------------------

IV. Information Collection Statement

    54. Office of Management and Budget (OMB) regulations require OMB 
to approve certain information collection requirements imposed by 
agency rule.\87\ The Final Rule does not contain any information 
collection requirements and compliance with the OMB regulations is thus 
not required.
---------------------------------------------------------------------------

    \87\ 5 CFR 11320.12 (2005).
---------------------------------------------------------------------------

V. Environmental Analysis

    55. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\88\ The 
Commission has categorically excluded certain actions from this 
requirement as not having a significant effect on the human 
environment. Included in the exclusion are rules that are clarifying, 
corrective, or procedural or that do not substantially change the 
effect of the regulations being amended.\89\ The Final Rule is 
procedural in nature and therefore falls under this exception; 
consequently, no environmental consideration is necessary.
---------------------------------------------------------------------------

    \88\ Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs. ] 30,783 (1987) (Codified at 18 CFR part 380 (2005)).
    \89\ 18 CFR 380.4(a)(2)(ii) (2005).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act Certification

    56. The Regulatory Flexibility Act of 1980 \90\ generally requires 
a description and analysis of final rules that will have significant 
economic impact on a substantial number of small entities. The 
Commission is not required to make such analyses if a rule would not 
have such an effect. The Commission certifies that the Final Rule will 
not have such an impact on small entities. The Final Rule is procedural 
only, expands due process rights of certain audited persons and does 
not involve additional filing or recordkeeping requirements or any 
similar burden. By providing an additional due process opportunity, the 
Commission has enhanced benefits to small entities.
---------------------------------------------------------------------------

    \90\ 5 U.S.C. 601-612 (2000).
---------------------------------------------------------------------------

VII. Document Availability

    57. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's home page http://www.ferc.gov and the FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    58. From FERC's home page on the Internet, this information is 
available in the Commission's document management system, eLibrary. The 
full text of this document is available on eLibrary in PDF and 
Microsoft Word format for viewing, printing, and/or downloading. To 
access this document in eLibrary, type the docket number excluding the 
last three digits of this document in the docket number field.
    59. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours. For assistance, please contact FERC 
Online Support at 1-866-208-3676 (toll free) or

[[Page 9706]]

202-502-6652 (e-mail at [email protected]), or the Public 
Reference Room at 202-502-8371, TTY 202-502-8659 (e-mail at 
[email protected]).

VIII. Effective Date

    60. These regulations are effective March 29, 2006.
    61. The provisions of 5 U.S.C. 801 regarding Congressional review 
of Final Rules does not apply to the Final Rule because the rule 
concerns agency procedure and practice and will not substantively 
affect the rights of non-agency parties.

List of Subjects

18 CFR Part 41

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

18 CFR Part 158

    Administrative practice and procedure, Natural gas, Reporting and 
recordkeeping requirements, Uniform System of Accounts.

18 CFR Part 286

    Administrative practice and procedure, Natural gas, Price controls.

18 CFR Part 349

    Administrative practice and procedure, Pipelines.

    By the Commission.
Magalie R. Salas,
Secretary.


0
In consideration of the foregoing, the Commission amends parts 41, 158 
and 286, and adds part 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. The heading of part 41 is revised to read as set forth above.

0
3. Sections 41.1, 41.2 and 41.3 and the undesignated center heading 
preceding them are revised to read as follows:

Disposition of Contested Audit Findings and Proposed Remedies


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 this chapter.
    (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. 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 remedy or remedies, or both, in any 
combination, with which it disagreed.


Sec.  41.2  Response to notification.

    Upon issuance of a Commission order that notes a finding or 
findings, or proposed remedy or remedies, or both, in any combination, 
with which the audited person has disagreed, the audited person may: 
Acquiesce in the findings and/or proposed remedies by not timely 
responding to the Commission order, in which case the Commission may 
issue an order approving them or taking other action; or challenge the 
finding or findings and/or any proposed remedies, with which it 
disagreed by timely notifying the Commission in writing that it 
requests Commission review by means of a shortened procedure or, if 
there are material facts in dispute which require cross-examination, a 
trial-type hearing.


Sec.  41.3  Shortened procedure.

    If the audited person subject to a Commission order described in 
Sec.  41.1 notifies the Commission that it seeks to challenge one or 
more audit findings, or proposed remedies, or both, in any combination, 
by the shortened procedure, the Commission shall thereupon issue a 
notice setting a schedule for the filing of memoranda. The person 
electing the use of the shortened procedure, and any other interested 
entities, including the Commission staff, shall file, within 45 days of 
the notice, an initial memorandum that addresses the relevant facts and 
applicable law that support the position or positions taken regarding 
the matters at issue. Reply memoranda shall be filed within 20 days of 
the date by which the initial memoranda are due to be filed. Only 
participants who filed initial memoranda may file reply memoranda. 
Subpart T of part 385 of this chapter shall apply to all filings. 
Within 20 days after the last date that reply memoranda under the 
shortened procedure may be timely filed, the audited person who elected 
the shortened procedure may file a motion with the Commission 
requesting a trial-type hearing if new issues are raised by a party. To 
prevail in such a motion, the audited person must show that a party to 
the shortened procedure raised one or more new issues of material fact 
relevant to resolution of a matter in the shortened procedure such that 
fundamental fairness requires a trial-type hearing to resolve the new 
issue or issues so raised. Parties to the shortened procedure and the 
Commission staff may file responses to the motion. In ruling upon the 
motion, the Commission may determine that some or all of the issues be 
litigated in a trial-type hearing.

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

0
4. 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
5. The heading of part 158 is revised to read as set forth above.

0
6. Sections 158.1, 158.2 and 158.3 and the undesignated center heading 
preceding them are revised to read as follows:

[[Page 9707]]

Disposition of Contested Audit Findings and Proposed Remedies


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


Sec.  158.2  Response to notification.

    Upon issuance of a Commission order that notes a finding or 
findings, or proposed remedy or remedies, or both, in any combination, 
with which the audited person has disagreed, the audited person may: 
Acquiesce in the findings and/or proposed remedies by not timely 
responding to the Commission order, in which case the Commission may 
issue an order approving them or taking other action; or challenge the 
finding or findings and/or any proposed remedies, with which it 
disagreed by timely notifying the Commission in writing that it 
requests Commission review by means of a shortened procedure or, if 
there are material facts in dispute which require cross-examination, a 
trial-type hearing.


Sec.  158.3  Shortened procedure.

    If the audited person subject to a Commission order described in 
Sec.  158.1 notifies the Commission that it seeks to challenge one or 
more audit findings, or proposed remedies, or both, in any combination, 
by the shortened procedure, the Commission shall thereupon issue a 
notice setting a schedule for the filing of memoranda. The person 
electing the use of the shortened procedure, and any other interested 
entities, including the Commission staff, shall file, within 45 days of 
the notice, an initial memorandum that addresses the relevant facts and 
applicable law that support the position or positions taken regarding 
the matters at issue. Reply memoranda shall be filed within 20 days of 
the date by which the initial memoranda are due to be filed. Only 
participants who filed initial memoranda may file reply memoranda. 
Subpart T of part 385 of this chapter shall apply to all filings. 
Within 20 days after the last date that reply memoranda under the 
shortened procedure may be timely filed, the audited person who elected 
the shortened procedure may file a motion with the Commission 
requesting a trial-type hearing if new issues are raised by a party. To 
prevail in such a motion, the audited person must show that a party to 
the shortened procedure raised one or more new issues of material fact 
relevant to resolution of a matter in the shortened procedure such that 
fundamental fairness requires a trial-type hearing to resolve the new 
issue or issues so raised. Parties to the shortened procedure and the 
Commission staff may file responses to the motion. In ruling upon the 
motion, the Commission may determine that some or all of the eissues be 
litigated in a trial-type hearing.

PART 286--ACCOUNTS, RECORDS, MEMORANDA AND DISPOSITION OF CONTESTED 
AUDIT FINDINGS AND PROPOSED REMEDIES

0
7. 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.


0
8. The heading of part 286 is revised to read as set forth above.
0
9. Sections 286.103 through 286.109 and a new undesignated center 
heading preceding them are added to read as follows:

Disposition of Contested Audit Findings and Proposed Remedies


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


Sec.  286.104  Response to notification.

    Upon issuance of a Commission order that notes a finding or 
findings, with or without proposed remedies, with which the audited 
person has disagreed, the audited person may: Acquiesce in the findings 
and proposed remedies by not timely responding to the Commission order, 
in which case the Commission may issue an order approving them or 
taking other action; or challenge the finding or findings and any 
proposed remedies with which it disagreed by timely notifying the 
Commission in writing that it requests Commission review by means of a 
shortened procedure, or, if there are material facts in dispute which 
require cross-examination, a trial-type hearing.

[[Page 9708]]

Sec.  286.105  Shortened procedure.

    If the audited person subject to a Commission order described in 
Sec.  286.103 notifies the Commission that it seeks to challenge one or 
more audit findings, or proposed remedies, or both, in any combination, 
by the shortened procedure, the Commission shall thereupon issue a 
notice setting a schedule for the filing of memoranda. The person 
electing the use of the shortened procedure, and any other interested 
entities, including the Commission staff, shall file, within 45 days of 
the notice, an initial memorandum that addresses the relevant facts and 
applicable law that support the position or positions taken regarding 
the matters at issue. Reply memoranda shall be filed within 20 days of 
the date by which the initial memoranda are due to be filed. Only 
participants who filed initial memoranda may file reply memoranda. 
Subpart T of part 385 of this chapter shall apply to all filings. 
Within 20 days after the last date that reply memoranda under the 
shortened procedure may be timely filed, the audited person who elected 
the shortened procedure may file a motion with the Commission 
requesting a trial-type hearing if new issues are raised by a party. To 
prevail in such a motion, the audited person must show that a party to 
the shortened procedure raised one or more new issues of material fact 
relevant to resolution of a matter in the shortened procedure such that 
fundamental fairness requires a trial-type hearing to resolve the new 
issue or issues so raised. Parties to the shortened procedure and the 
Commission staff may file responses to the motion. In ruling upon the 
motion, the Commission may determine that some or all of the issues be 
litigated in a trial-type hearing.


Sec.  286.106  Form and style.

    Each copy of such memorandum must be complete in itself. All 
pertinent data should be set forth fully, and each memorandum should 
set out the facts and argument as prescribed for briefs in Sec.  
385.706 of this chapter.


Sec.  286.107  Verification.

    The facts stated in the memorandum must be sworn to by persons 
having knowledge thereof, which latter fact must affirmatively appear 
in the affidavit. Except under unusual circumstances, such persons 
should be those who would appear as witnesses if hearing were had to 
testify as to the facts stated in the memorandum.


Sec.  286.108  Determination.

    If no formal hearing is had the matter in issue will be determined 
by the Commission on the basis of the facts and arguments submitted.


Sec.  286.109  Assignment for oral hearing.

    Except when there are no material facts in dispute, when a person 
does not consent to the shortened procedure, the Commission will assign 
the proceeding for hearing as provided by subpart E of part 385 of this 
chapter. Notwithstanding a person's not giving consent to the shortened 
procedure, and instead seeking assignment for hearing as provided for 
by subpart E of part 385 of this chapter, the Commission will not 
assign the proceeding for a hearing when no material facts are in 
dispute. The Commission may also, in its discretion, at any stage in 
the proceeding, set the proceeding for hearing.

0
10. Part 349 is added to Subchapter P to read as follows:

PART 349--DISPOSITION OF CONTESTED AUDIT FINDINGS AND PROPOSED 
REMEDIES

Sec.
349.1 Notice to audited person.
349.2 Response to notification.
349.3 Shortened procedure.
349.4 Form and style.
349.5 Verification.
349.6 Determination.
349.7 Assignment for oral hearing.

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


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


Sec.  349.2  Response to notification.

    Upon issuance of a Commission order that notes a finding or 
findings, or proposed remedy or remedies, or both, in any combination, 
with which the audited person has disagreed, the audited person may: 
Acquiesce in the findings and/or proposed remedies by not timely 
responding to the Commission order, in which case the Commission may 
issue an order approving them or taking other action; or challenge the 
finding or findings and/or any proposed remedies with which it 
disagreed by timely notifying the Commission in writing that it 
requests Commission review by means of a shortened procedure, or, if 
there are material facts in dispute which require cross-examination, a 
trial-type hearing.


Sec.  349.3  Shortened procedure.

    If the audited person subject to a Commission order described in 
Sec.  349.1 notifies the Commission that it seeks to challenge one or 
more audit findings, or proposed remedy or remedies, or both, in any 
combination, by the shortened procedure, the Commission shall thereupon 
issue a notice setting a schedule for the filing of memoranda. The 
person electing the use of the shortened procedure, and any other 
interested entities, including the Commission staff, shall file, within 
45 days of the notice, an initial memorandum that addresses the 
relevant facts and applicable law that support the position or 
positions taken regarding the matters at issue. Reply memoranda shall 
be filed within 20 days of the date by which the initial memoranda are 
due to be filed. Only participants who filed initial memoranda may file 
reply memoranda. Subpart T of part 385 of this chapter shall apply to 
all filings. Within 20 days after the last date that reply memoranda 
under the shortened procedure may be timely filed, the audited person 
who elected the shortened procedure may

[[Page 9709]]

file a motion with the Commission requesting a trial-type hearing if 
new issues are raised by a party. To prevail in such a motion, the 
audited person must show that a party to the shortened procedure raised 
one or more new issues of material fact relevant to resolution of a 
matter in the shortened procedure such that fundamental fairness 
requires a trial-type hearing to resolve the new issue or issues so 
raised. Parties to the shortened procedure and the Commission staff may 
file responses to the motion. In ruling upon the motion, the Commission 
may determine that some or all of the issues be litigated in a trial-
type hearing.


Sec.  349.4  Form and style.

    Each copy of such memorandum must be complete in itself. All 
pertinent data should be set forth fully, and each memorandum should 
set out the facts and argument as prescribed for briefs in Sec.  
385.706 of this chapter.


Sec.  349.5  Verification.

    The facts stated in the memorandum must be sworn to by persons 
having knowledge thereof, which latter fact must affirmatively appear 
in the affidavit. Except under unusual circumstances, such persons 
should be those who would appear as witnesses if hearing were had to 
testify as to the facts stated in the memorandum.


Sec.  349.6  Determination.

    If no formal hearing is had the matter in issue will be determined 
by the Commission on the basis of the facts and arguments submitted.


Sec.  349.7  Assignment for oral hearing.

    Except when there are no material facts in dispute, when a person 
does not consent to the shortened procedure, the Commission will assign 
the proceeding for hearing as provided by subpart E of part 385 of this 
chapter. Notwithstanding a person's not giving consent to the shortened 
procedure, and instead seeking assignment for hearing as provided for 
by subpart E of part 385 of this chapter, the Commission will not 
assign the proceeding for a hearing when no material facts are in 
dispute. The Commission may also, in its discretion, at any stage in 
the proceeding, set the proceeding for hearing.

[FR Doc. 06-1765 Filed 2-24-06; 8:45 am]
BILLING CODE 6717-01-P