August 1, 2022

FERC Issues Proposed Rulemaking to Expand 'Duty of Candor'

Holland & Knight Energy and Natural Resources Blog
Paul F. Forshay
wind turbine and solar panel

The Federal Energy Regulatory Commission (Commission) on July 28, 2022, issued a Notice of Proposed Rulemaking (NOPR) that would impose a broad "duty of candor" on "all entities communicating with the Commission or other specified organizations related to a matter subject to the jurisdiction of the Commission." Under the proposed rule, an entity would be required to "submit accurate and factual information and not submit false or misleading information or omit material information." The exercise of "due diligence to prevent such occurrences" is intended to provide a safe harbor against violation of this proposed regulation.

The NOPR proposes to extend the duty of candor previously promulgated and applied to "Sellers" in electric markets, i.e., a person that has obtained or applied for market-based rate authority under the Federal Power Act. The NOPR reviews the extensive network of existing duties of candor applicable to various Commission-related contexts, but dismisses them as providing only an incomplete "patchwork" of "individually limited" obligations. The NOPR, however, fails to explain why the Commission is seeking to extend this duty of candor in this manner at this time, and points to no single event or confluence of events necessitating the NOPR.

The reach of the proposed rule is breathtaking. The term "entity" is intended to encompass all types of organizations as well as individuals, and applies to both the entity making the communication and the entity responsible for the communication. Moreover, the proposed duty of candor would apply not only to communications directly with the Commission, but also to any communications with 1) Commission-approved market monitors, 2) Commission-approved regional transmission organizations (RTOs) and independent system operators (ISOs), 3) jurisdictional transmission and transportation providers, and 4) the Electric Reliability Organization and its associated Regional Entities. Covered "communications" would include anything that "relates to a matter subject to the jurisdiction of the Commission" whether formal or informal, verbal or written, or via any transmission method. The term "Commission" includes the Commission staff, while communications with the other listed entities would include communications to individuals employed or acting on behalf of those entities, including their agents and contractors.

The Commission's assessment of due diligence, meanwhile, would include "all relevant facts related to whether reasonable steps were taken . . . to ensure the accuracy and completeness of a communication in light of all circumstances." The Commission does not intend to penalize inadvertent errors, "especially those of limited scope and impact."

The NOPR drew a vigorous dissent from Commissioner James Danly, who complains that the proposed rule "encompasses a far greater range of activities by a far greater number of speakers than the existing duty of candor and does so without standards of materiality or intent, or a clearly defined safe harbor to protect the unwary from liability." Commissioner Danly would reject the NOPR as unduly vague and failing to identify the penalties for violation of the proposed rule. Commissioner Danly also cautions that the NOPR would impinge on First Amendment-protected speech, and asks whether inclusion of an intent or materiality requirement would cure that concern.

In sum, any entity that communicates with any Commission-regulated entity on a matter within the Commission's jurisdiction (e.g., a shipper on a Commission-regulated oil or natural gas pipeline with the pipeline or a pipeline certificate applicant) would find those communications subject to the proposed duty of candor. While Commissioner Danly notes the natural reluctance of companies to oppose a proposed rule of candor, the NOPR appears to be unnecessary, overly broad and unduly vague and warrants comments addressed to those concerns. Comments on the NOPR are due 60 days from the date of the NOPR's publication in the Federal Register.

Related Insights