WASHINGTON — FERC Chairman Kevin McIntyre declined to say Thursday whether the commission will investigate how attorney William S. Scherman allegedly learned the contents of a pending order before its issuance Jan. 12. McIntyre described Scherman, a former FERC general counsel now with Gibson Dunn, as a “good friend.”

Commissioner Neil Chatterjee filed a memo on Jan. 12 reporting that Scherman had attempted to privately lobby him a day earlier on FirstEnergy’s request to transfer a struggling coal-fired generator from its merchant unit to a regulated affiliate. The commission’s order rejected the request as not in the public interest (EC17-88).

Chatterjee reported that Scherman called him on Jan. 11, “indicating his concern that the commission would shortly issue an order adverse to the interests of [FirstEnergy affiliate] Monongahela Power. Mr. Scherman also stated that he would prefer that the commission set the issue for hearing instead of issue an adverse order. As soon as I realized that Mr. Scherman’s communication concerned the merits of the contested proceeding, I terminated the communication and did not respond to Mr. Scherman’s statements. I then drafted this memorandum to memorialize the ex parte communication for the record.”

McIntyre Press Conference

RTO Insider asked McIntyre at his press conference following Thursday’s open meeting whether the commission would investigate who may have leaked the information to Scherman.

“I read that in [Chatterjee’s] statement and I am going to be discussing that with my staff,” McIntyre responded. “In the meantime, I just want to say that the system that we have in place for situations just such as that where there’s an ex parte communication worked perfectly. We have a system in place. Commissioner Chatterjee did exactly the right thing and the system worked. So as far as I’m concerned, I’m very satisfied with where it came out.”

Commissioners Cheryl LaFleur, Robert Powelson and Richard Glick told RTO Insider on Jan. 16 that Scherman had not attempted to contact them on the case. McIntyre said Thursday that he also had not been contacted.

“Bill Scherman and I are old friends. I consider him a terrific lawyer and a good friend,” McIntyre said. “In this instance, I had no contact with him about the matter.”

FirstEnergy merchant affiliate Allegheny Energy Supply had requested permission to transfer ownership of the 1,159-MW Pleasants Power Station to regulated affiliate Mon Power, with the latter assuming a $142 million obligation for pollution controls Allegheny installed at the plant. The commission’s unanimous Jan. 12 order concluded the deal was not in the public interest because it resulted from an “overly narrow” solicitation. (See FERC Blocks FirstEnergy Sale of Merchant Plant to Affiliate.)

Ex Parte Communications Common

Ex parte communications (one side only) are quite common at FERC — so frequent, in fact, that FERC’s secretary publishes a list of disclosures about every two weeks (RM98-1).

Most of the dozens of communications reported in the last year concerned pipeline projects and involved letters or flyers sent to commissioners rather than filed as formal comments in the dockets. Residents near the projects were the most frequent offenders, but chambers of commerce, economic development authorities and labor unions also were listed. The communications are filed in the dockets to document them but are not considered part of the evidence before the commission.

The commissioners also hear frequently from state and federal elected officials, but such communications are exempt from ex parte rules.

No Foul?

Ex parte phone calls to commissioners by members of the energy bar are not common, however.

“Everyone else in the FERC bar manages to follow the rules. FERC shouldn’t let cheaters get away scot-free,” said a former member of the commission’s general counsel’s office who asked not to be identified to protect his working relationships. “And Commissioner Chatterjee’s description gives the lie to the assertion that this was a gray area. Setting a matter for hearing as opposed to denying it is about as substantive as it can get.”

Scherman told RTO Insider last week that he had done nothing wrong and said the commission should change its ex parte rules, which prohibit private communications with commissioners in contested case specific proceedings. “Based upon my experience, I do not believe I engaged in any ex parte communications,” Scherman said in an email. (See FirstEnergy Lawyer Sought to Lobby Chatterjee on Plant Deal.)

Scherman declined to answer additional questions Monday morning but later asked that the story include comments on an unrelated matter (see Editor’s Note, below). First Energy has declined to comment.

Rule 2201, revised by FERC Order 718 in 2008, states that “in any contested on-the-record proceeding, no person outside the commission shall make or knowingly cause to be made to any decisional employee, and no decisional employee shall make or knowingly cause to be made to any person outside the commission, any off-the-record communication. … Commission employees who are found to have knowingly violated this rule may be subject to the disciplinary actions prescribed by the agency’s administrative directives.”

Who is the Mole?

FERC draft orders are typically circulated among the commissioners’ aides and staffers in divisions who are responsible for writing the legal and technical language of the ruling. The drafts are generally not secured with any kind of watermark that would indicate where a leaked copy originated.

The commission’s ethics rules state that staff “may not disclose nonpublic information, including draft orders and internal discussions, to the public.” Staff are also barred from disclosing “the nature or the time of any proposed action by the commission to anyone outside the commission.”

But Washington’s revolving door culture means that those who depart FERC leave behind former colleagues able to share information with them — carelessly or maliciously — in social settings.

A former FERC policy adviser who now works as a consultant said he thinks such disclosures are “very rare.”

“I feel like it would harm relationships to even put staff in that position by asking a question” regarding a pending matter, he said. “But clearly others do, and somebody [on FERC staff is] playing ball.”

The former adviser speculated that Chatterjee, a former aide to Senate Majority Leader Mitch McConnell (R-Ky.), was slow to realize what he had gotten into when he agreed to talk to Scherman. “In the legislature, intelligence is the coin of the realm. And sharing intelligence is how you get intelligence. It wouldn’t surprise me if he started to get into that game a little bit and realized his entire reputation could be damaged” by sharing information.

An industry analyst agreed that improper disclosures are rare.

“The commission goes out of its way not to discuss matters with parties to a case,” the analyst said. “I tell my clients, ‘If you bring this up [in a meeting with FERC officials], you can expect to be shut down.’ FERC is fairly discreet. I think they are cognizant that [their comments] can move a stock.

“You can talk in hypotheticals [with FERC officials], but then you may find that what you have been told is not something you can take to the bank. I’ve had conversations where someone says, ‘Commissioner so-and-so told me X.’ It’s just one person’s opinion. A staffer close to one commissioner saying, ‘I think this is going to happen.’ That’s only one of five votes.

“My guess is somebody probably tipped Bill and that was inappropriate,” the analyst said. But FERC’s “pretty aggressive” deficiency letter, filed in the docket in June, indicated the commission’s skepticism of the Pleasants deal, the analyst added.

“The commission should be investigating whether Scherman did in fact obtain nonpublic information,” Tyson Slocum, director of Public Citizen’s Energy Program, said in an email. “If FERC refuses, the Senate Energy and Natural Resources Committee should step in.”

The Department of Energy’s Inspector General also has authority to investigate the commission. (See DOE IG Warns FERC Information Security ‘Severely Lacking.’)

An IG spokeswoman on Monday declined to say whether it was investigating the Scherman incident. “We are an independent organization. We take a number of factors into consideration when deciding to initiate an investigation,” she said.

Penalties, Prior Incidents

Rule 2201 allows the commission to bar Scherman from practicing before it: “If a person knowingly makes or causes to be made a prohibited off-the-record communication, the commission may disqualify and deny the person, temporarily or permanently, the privilege of practicing or appearing before it, in accordance with Rule 2102 (Suspension).” [See 18 CFR section 385.2201 (i)(2).]

Rule 2102 permits FERC to disqualify a person who is found “to have engaged in unethical or improper professional conduct.”

This is not the first time Scherman has been accused of flouting the commission’s ex parte rules. In 1992, congressional investigators suggested Scherman — then FERC general counsel — had whitewashed an ex parte meeting at which FERC staff discussed with sponsors of the Iroquois Gas Transmission System pipeline project ways to expedite the commission’s approval without notifying opponents of the project.

The meeting, on March 15, 1990, was requested by commission staff, according to an account in the Energy Law Journal, which said the applicants also met with at least one commissioner about the status of the application.

Martin Fitzgerald, special assistant to the general counsel at the General Accounting Office, told the House Government Operations Committee panel in 1992 that the discussions involved amendments to the application, the timetable for the commission’s review of new aspects of the project and a change in the project’s gas capacity, according to the Journal of Commerce.

Scherman, who was assigned to investigate the issue, reported on June 29, 1990, that the meeting dealt only with procedural matters and thus did not violate FERC rules.

But Environment, Energy and Natural Resources Subcommittee Chairman Mike Synar (D-Okla.) released a memo Scherman had written to FERC Chairman Martin L. Allday weeks before that report was issued — and before the investigation was complete — indicating Scherman had already reached that conclusion. A second GAO investigator told the subcommittee that FERC employees who were at the meeting said Scherman asked them only perfunctory questions about it, according to a Washington Post account.

The commission’s ruling on the pipeline application sided with Scherman on the characterization of the meeting (CP89-634), as did the D.C. Circuit Court of Appeals.

Second Incident

Scherman also was criticized for not disclosing that Transcontinental Gas Pipe Line Corp. had asked him and the commission’s deputy general counsel for oral argument prior to commission action on a rehearing request. A divided commission ruled in January 1992 that the request should have been treated as an ex parte communication and made public.

According to the order, the request was made following the commission’s September 1990 order denying Transco’s request for an oral argument. “Counsel for Transco orally asked the general counsel and the deputy general counsel of the commission for an oral argument prior to the commission acting on rehearing in this case. That oral request was not disclosed to the parties or to the commission. Subsequent to these communications, the general counsel and the deputy general counsel recommended to the commission that it grant an oral argument.”

Citing the Iroquois opinion, the majority said, “this is the kind of doubtful situation that should be treated as involving comments related to the merits in order to protect the integrity of the decision-making process.” The dissenting commissioners concluded the request for oral argument was procedural and thus permissible (TA85-3-29).

Editor’s Note from Rich Heidorn Jr.

After saying Monday morning that he had no further comment on the Chatterjee incident, Scherman emailed RTO Insider in the afternoon, saying he wanted to go on the record with criticism of me over my role as a FERC whistleblower in a 2006 incident.

The incident occurred after then-FERC Chief of Staff Daniel Larcamp negotiated a settlement to end an investigation by the commission’s Office of Administrative Law (OAL) under circumstances that suggested that Southern Co. and FERC management had engaged in ex parte communications.

As a staffer in FERC’s Office of Enforcement, I had been loaned to OAL’s trial staff to aid in the investigation, which concerned whether Southern was improperly sharing nonpublic information with the company’s marketing affiliate.

When I confirmed with my superiors that Larcamp’s settlement would have improperly allowed Southern to continue sharing nonpublic information — but was unable to persuade them to block it — I consulted with an attorney with the Government Accountability Project, an organization that represents whistleblowers.

Based on my attorney’s advice, I went public with my concerns through Rep. Henry Waxman, then the ranking Democrat on the House Oversight and Government Reform Committee. I also was quoted in the press. The commission ultimately rejected the settlement Larcamp negotiated and imposed tougher conditions.

Larcamp’s Entry

Larcamp entered the case in September 2005, after trial staff had obtained evidence indicating that Southern’s subsidiary, Southern Power, attended meetings at which sensitive information (i.e., plant retirements, present and future load characteristics, expected resource additions and industrial energy sales) was exchanged. This is information that Southern Power would not have been allowed to receive were it properly classified as a “marketing” affiliate under FERC’s regulations.

On Sept. 21, 2005, Larcamp declared himself “non-decisional,” meaning that, like trial staff, he was not prevented from talking to Southern under ex parte rules. Doing so, however, meant he could not discuss the matter with any commissioners or other “decisional” FERC staff.

Larcamp never met with the trial team to discuss the evidence in the case before beginning his settlement talks with Southern. The team did not even know Larcamp was talking to Southern until he abruptly informed OAL managers in November, while team members were deposing Southern officials in Birmingham and Atlanta. Staff were ordered to cancel the remaining depositions and return to D.C.

Larcamp said he was settling the case at the behest of then-Chairman Joseph Kelliher, who took the gavel two months after the case was initiated under Chairman Pat Wood.

“[Larcamp] said Southern thinks it has two votes on the commission in its favor on this issue,” according to an internal memo I provided to Waxman. “He said that if that didn’t work, Southern would likely apply political pressure. … But he said that even if the case goes forward, the chairman would not be eager to expedite it, and it would likely languish through 2007.”

Scherman’s Statement

Here is Scherman’s statement in full:

“In your short time at FERC, it was public information that you engaged in unethical and unlawful actions. As you know, at that time, I, along with others, publically [sic] stated that on the record. As you know, I, along with those who were at the FERC at that time, were highly critical of your improper and unethical conduct. As a result, you should recuse yourself from any potential story where I am involved given your obvious prejudice and bias. Seeking to settle an old score is unethical and unscrupulous conduct that exhibits actual malice. Any reputable ‘journalist’ would be disreputable by failing to include fully this on-the-record comment in any story that might run.”

For the record, I worked for FERC for eight years, from 2002 to 2010 (and had frequent contact with Scherman on matters concerning his client, Entergy). FERC never took any disciplinary action against me for my role. In October 2006, the commission unanimously rejected the settlement Larcamp negotiated and imposed tougher conditions (EL05-102).

Commissioner Suedeen G. Kelly, writing in a concurring statement, said, “It is well-known that the process leading up to the filing of this settlement was highly unusual and caused great controversy.”

Kelly cited comments that Administrative Law Judge Edward M. Silverstein made to a member of the commission’s trial staff during oral arguments following the settlement. “I’ve been here almost 15 years, and I’ve never been involved in a case in which somebody representing the commission — other than trial counsel — negotiated a settlement. And so, I think your position is unique and maybe even dangerous,” Silverstein said.

Six months after FERC’s ruling, Larcamp left the commission for a new job — with Southern’s law firm, Troutman Sanders.