By Paul Korman, Andrew Art, Kelli Lozier, and D. John Frenkil
On September 17, 2010, the Federal Energy Regulatory Commission (FERC) issued revisions to its Policy Statement on Penalty Guidelines (Penalty Guidelines) in response to comments from the industry. The Penalty Guidelines inform FERC’s exercise of its enforcement authority, which allows the agency to impose civil penalties of up to $1 million per day per violation.
In September 2011, FERC enforcement staff will hold a technical conference on the implementation of the Penalty Guidelines and will entertain comments and questions from the industry.
KEY CHANGES TO THE PENALTY GUIDELINES
FERC’s revised Penalty Guidelines include a number of changes that will affect the design and implementation of corporate compliance programs. Among other things, the revised Penalty Guidelines reflect the following modifications:
Applicability of the Penalty Guidelines to Violations of the Reliability Standards
FERC clarified that it will use the Penalty Guidelines “solely for [its] own Part 1b investigations and enforcement actions” and not for its review of Notices of Penalty issued by the North American Electric Reliability Corporation (NERC).
Base Violation Level for Violations of Reliability Standards
The Penalty Guidelines contain several steps that must be analyzed to determine the appropriate range of civil penalties. The initial step is the determination of a base penalty, which depends on the base violation level assigned to a particular conduct, and certain enhancements. Next, the Penalty Guidelines determine a “culpability score.” The culpability score is then used to determine the maximum and minimum penalty multipliers.
The revised Penalty Guidelines reduce the base violation level for reliability violations from 16 down to 6, but increase the risk of harm enhancements for reliability violations. While the base violation level is now the same for reliability violations and other violations, the penalty multiplier adjustments for reliability violations have been increased.
Load Loss
Under the revised Penalty Guidelines, FERC will not attempt to conduct a specific, individualized assessment of the value of losses of load that result from reliability violations. Instead, FERC will use the quantity of load lost, in MWh, as one measure of the seriousness of the violation. FERC reasoned that such an approach will avoid the substantial commitment of time and resources that it would take for both the entity under investigation and FERC staff to assign a value to a particular quantity of lost load. In addition, the revised Penalty Guidelines state that entities that shed load in compliance with a Reliability Standard will “always face lower civil penalties.”
Partial Compliance Credit
FERC added a provision to the Penalty Guidelines that awards partial compliance credit to organizations that have effective, yet imperfect, compliance programs.
Senior-Level Involvement
FERC removed the provision in the Penalty Guidelines that eliminates compliance credit when an organization’s high-level personnel, substantial authority personnel, or individuals with operational responsibility for compliance participated in, condoned, or were willfully ignorant of the violation. FERC explained that it would be unfair to automatically withhold all compliance credit for an organization that exercises diligence and provides clear direction, because it is possible that a particular employee may not adhere to company policy. Instead, FERC will determine on a case-by-case basis whether the senior-level employee acted on his or her own or at the direction of the organization’s governing authority.
Mitigation Credits
Recognizing that various factors carry independent value and should be credited accordingly, FERC revised its Penalty Guidelines by unbundling the mitigation credits for self-reports, cooperation, avoidance of trial-type hearings, and acceptance of responsibility. This will provide an opportunity for mitigation credits when an organization meets some, but not all of the requirements required for full credit.
Misrepresentations and False Statements
Because FERC has historically limited its enforcement efforts to intentional and reckless conduct, it revised the Penalty Guidelines to include a scienter requirement with respect to misrepresentations and false statements.
IMPLICATIONS
While modified in response to industry comments, the revised Penalty Guidelines continue to reflect FERC’s commitment to aggressively pursue violations of its regulations. Although the Penalty Guidelines suggest that a base penalty and multiplying and mitigating factors will be determined with a mathematical formula, in fact, many of the factors used to evaluate and calculate the penalties will continue to rely on subjective determinations. Moreover, FERC retains discretion to deviate from the Penalty Guidelines. Therefore, applying the Penalty Guidelines to similar sets of facts in different cases may still lead to different civil penalty determinations. Importantly, the revised Penalty Guidelines reinforce the importance of having a robust and effective compliance program to prevent, identify, and mitigate compliance violations. A robust compliance program remains the single best preventative measure all regulated entities can employ to minimize exposure to civil penalties.
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Van Ness Feldman regularly assists clients with reliability compliance matters before FERC, NERC, and Regional Reliability Entities. If you would like additional information on FERC’s revised Penalty Guidelines, or need assistance developing compliance programs, please contact Paul Korman, Andrew Art, Kelli Lozier or any member of our Electricity or Natural Gas practice at (202) 298-1800 in Washington, D.C. or (206) 623-9372 in Seattle, WA, or at www.vnf.com.