The coal industry lobby that sank Ron Binz’ nomination to the Federal Energy Regulatory Commission won’t have a clear shot at President Obama’s new choice as FERC chair.
But that doesn’t necessarily mean smooth sailing for nominee Norman Bay, who has served as director of FERC’s Office of Enforcement since 2009.
While Binz, a former Colorado regulator, called for a new “regulatory compact” and opined on the future of coal and natural gas, those combing through Bay’s history will find little on utility law or energy policy.
A former federal prosecutor and law school professor, Bay has written extensively on criminal law and national security issues. But his opinions on the major policy issues facing the commission — the role of demand response and renewables, implementing Order 1000 — are unknown. Unlike most FERC commissioners in the last decade, Bay has never served as a state utility regulator.
Of the 15 FERC commissioners who have served since 2000, 10 served as commissioners or staffers at state regulatory agencies prior to their appointments. Four of the others worked in energy-related posts in state or federal legislative committees or executive agencies; one was a former utility executive. (See table.)
The last five chairmen served a median of 30 months before becoming chair. Only one, Patrick H. Wood III, served less than a year on the panel before his promotion.
Alaska Sen. Lisa Murkowski, ranking Republican on the Energy and Natural Resources Committee, had criticized Obama’s plan to elevate Binz directly into the chairmanship. She also has reservations about the president’s plans for Bay. “It’s curious that they would elevate him to chairman over existing qualified members,” spokesman Robert Dillon told Bloomberg News.
In his favor, Bay has no obvious enemy constituencies — except, perhaps for members of the energy bar, some of whom believe his office has been overzealous in its enforcement actions.
Harvard Law Graduate
The son of Chinese immigrants, Bay studied history at Dartmouth before getting his law degree from Harvard. He clerked with a judge on the Ninth Circuit appeals court and worked in the Legal Adviser’s Office of the U.S. State Department before beginning an 11-year stint as an assistant U.S. Attorney in Washington and Albuquerque, where he prosecuted violent crime.
In 2000, President Clinton appointed him U.S. Attorney for New Mexico, where Bay led a staff of more than 130 and inherited the government’s controversial case against Wen Ho Lee, a scientist at the Los Alamos Nuclear Laboratory.
Lee was indicted on 59 counts for allegedly stealing secrets about the U.S. nuclear arsenal for the People’s Republic of China. But after keeping Lee in solitary confinement for nine months, the government dropped the case in return for Lee’s guilty plea to a single count of mishandling classified material.
The judge who accepted the plea apologized to Lee for what he called misconduct by senior Justice Department officials and Bay’s predecessor as U.S. Attorney. In 2006, Lee received $1.6 million from the federal government and five media organizations to settle a civil suit he had filed against them for leaking his name to the press before charges had been filed.
Although he was not personally implicated in any wrongdoing, Bay was called before a Senate oversight hearing into the case. He resigned as U.S. Attorney in 2001, after the election of President George W. Bush.
As a professor at the University of New Mexico School of Law between 2002-2009, he taught criminal law, evidence, constitutional law, national security law, and ethics. His law journal articles include Prosecutorial Discretion in the Post-Booker World and Executive Power and the War on Terror.
Evolution of FERC Enforcement Unit
When manipulative schemes by traders at Enron and other power marketers roiled the Western energy markets in 2000-01, FERC’s enforcement staff consisted of 20 lawyers in the Office of General Counsel. The maximum penalty FERC could impose was $10,000 per violation per day.
Since then, FERC created a separate enforcement division now staffed with 200 economists, accountants, auditors, former traders and attorneys, including former prosecutors. (Full disclosure: RTO Insider editor Rich Heidorn Jr. worked for the Enforcement Division between 2002-2010.)
Bay created a new unit in 2012, the Division of Analytics and Surveillance, which runs automated screens to detect potential manipulative behavior.
Since passage of the 2005 Energy Policy Act, which increased the penalties to $1 million per violation per day, FERC has collected $873 million in civil penalties and disgorgements. They included cases against Morgan Stanley, Constellation Energy Group Inc., Deutsche Bank AG and JP Morgan Chase.
Barclays PLC meanwhile is fighting a FERC order that it pay a $453 million fine and $35 million in unjust profits over alleged manipulation of Californian and other western power markets by the British bank in the last decade.
But consumer advocates and other critics say regulators’ enforcement actions have neither provided sufficient deterrent nor made consumers and honest market participants whole. Moreover, some say regulators will never be able to catch up with clever traders looking to exploit the rules. (See JP Morgan Settlement: A Verdict on Electric Markets?)
Appellate Loss
FERC also has been criticized for overreaching in its enforcement under Bay. The D.C. Circuit last year threw out FERC’s market manipulation case against Brian Hunter, whose natural gas trades contributed to the collapse of hedge fund Amaranth Advisors LLC.
FERC had accused Hunter of selling natural gas futures contracts at the end of the trading day, which depressed the futures closing price but benefited the hedge fund’s swap positions in physical markets.
The court ruled that the agency had encroached on the jurisdiction of the Commodity Futures Trading Commission (CFTC), which sided with Hunter in the case in claiming exclusive jurisdiction over futures contracts.
“Although the Commission reads the Hunter decision as narrow in scope, some market participants interpret the decision more broadly to cover not only manipulation in the futures market, but also many additional transactions and products, including those squarely within FERC’s jurisdictional markets,” Bay told the Senate Banking Committee in testimony last month. “Accordingly, a legislative fix to eliminate uncertainty on this matter could ensure that FERC has the full authority needed to police manipulation of wholesale physical natural gas and electric markets.”
FERC and the CFTC took a step toward settling their long-running turf battle in January, signing two Memoranda of Understanding to address jurisdictional issues and information sharing.
Criticism of FERC Enforcement
At the National Association of Regulatory Utility Commissioners annual meeting in November, a panel including former FERC Chairman Joseph Kelliher and former General Counsel William Scherman attacked FERC’s enforcement as opaque and a threat to market liquidity.
Kelliher, now executive vice president for NextEra Energy Inc., said he now realizes “it’s much harder to comply [with market rules] than I thought.” He said the commission has not clearly defined what constitutes a “strong compliance culture,” a consideration when calculating penalties. Because most of FERC’s enforcement cases have resulted in settlements, the agency has not created a full record to define behavior it considers manipulative.
Scherman went further, saying that FERC’s actions are causing companies to leave the energy markets, reducing liquidity and increasing volatility.
They were joined in criticism by Harvard professor William Hogan, who said FERC needs to be transparent regarding its definition of market manipulation.
Bay was not present at the NARUC conference. His deputy, Larry Gasteiger, defended FERC’s record, saying it was following the direction of Congress, which allowed FERC to determine on a case-by-case basis whether trading behavior is manipulative.
LaFleur’s Future?
Bay’s nomination leaves the future of acting FERC Chair Cheryl LaFleur in question. LaFleur, named acting chair in November with the expiration of former Chairman Jon Wellinghoff’s term, told reporters last week she’d like to be renominated for another term, whether or not it was as chair. (See Acting FERC Chair Wants to Keep Her Job.) Her term expires in June.
Asked Friday whether President Obama will nominate LaFleur to a second term, a White House spokesman replied cryptically, “I have no personnel announcements to make.”
Wellinghoff, who hired Bay at FERC, reportedly lobbied for him as his replacement. “Norman Bay did a great job as the Office Director of the Office of Enforcement and I think he will make a great commissioner,” Wellinghoff said in an email to RTO Insider.
