On Friday, Sep. 17, 2010, FERC issued a Revised Policy Statement on Penalty Guidelines, 132 FERC ¶ 61,216 (the “Guidelines”). The Guidelines identify the factors enforcement staff and the Commission will consider in determining a penalty in an enforcement action for violations of the Federal Power Act or Natural Gas Act. The Guidelines, modeled on the criminal Sentencing Guidelines used by the Department of Justice, establish base offense levels and aggravating and mitigating factors from which a numerical penalty range can be calculated.
When initially proposed in March 2010, the penalty guidelines prompted an industry outcry. Several companies noted that even inadvertent violations of Reliability Standards could lead to fines in the tens of millions of dollars. Moreover, fines for such violations were tied to the monetary impact associated with load losses or potential load losses. Others pointed out that the guidelines gave insufficient credit for compliance programs or self-reporting.
The revised guidelines partially address some of the industry’s concerns. The Guidelines reduce the base violation level for reliability violations from 16 to six, P 62, provide partial compliance credit to organizations that have effective but imperfect compliance programs, PP 115-19, and limit application of the Guidelines for misrepresentations and false statements to intentional or reckless conduct, PP 171-73. Also, credits for self-reporting, cooperation, and acceptance of responsibility are no longer contingent on whether a company settles. PP 140- 45.
With respect to reliability violations, the Guidelines will not apply to FERC’s review of NERC’s notices of penalty, and will only apply to investigations conducted under Part 1b of FERC’s regulations and its enforcement actions. P 56. This reflects a departure from the original guidelines wherein FERC said it would apply its penalty grid in evaluating serious violations of NERC reliability rules. Nevertheless, we suspect that NERC will likely rely on the Guidelines in calculating penalties in its own enforcement actions.
In ruling on one of the most controversial issues in the guidelines, FERC stated that it will continue to account for loss of load in assessing penalties for reliability violations. P 76. In trying to strike a balance between its enforcement goals and the industry’s concern about significantly higher penalties for violations that cause load loss, FERC stated that it will not use the monetary value of load losses in calculating the penalty, but instead, will take into account the quantity of load lost in MWh. P 75. FERC will use a sliding scale that escalates the penalty with the quantity of load shed. Id. FERC was mindful that NERC reliability standards may require load shedding, and clarified that system operators will not be penalized unreasonably for shedding load to comply with those standards. P 79. Nevertheless, the Guidelines still account for load losses in assessing penalties for underlying violations that are causally connected to load shedding. P 77. Thus, one of the most difficult decisions for transmission operators will be when to shed load (to the extent they have discretion) knowing that NERC and FERC may still take the amount of load shed into account in setting fines for later-discovered reliability violations, and recognizing that the failure to shed load when required by the reliability standards would result in a separate violation.
Of particular note, the Guidelines may still expose companies to significant penalties for reliability violations that do not cause actual harm but which FERC views as posing a risk of loss. PP 76, 78. This feature of the revised guidelines is unchanged from FERC’s original proposal. The Guidelines provide little guidance on how FERC will exercise its discretion in determining the existence and severity of the risk of harm arising from a particular violation. Also, FERC will apparently consider all potential losses that could have resulted from a reliability violation, no matter how remote. The risk of harm penalty factor thus has the potential to be a highly contentious issue in future enforcement actions where FERC staff seeks to take it into account.
Responding to concerns that the guidelines should better reflect the varying range of the seriousness of different reliability violations, FERC adjusted the enhancements for risk of harm. PP 63-65. These adjustments, along with the reduction in the base violation level, reduce the base penalty for most violations and should generally equate to lesser penalties for relatively minor reliability violations. FERC, however, increased the risk of harm enhancements for the most serious reliability violations by 10 levels, thereby compensating for the 10 level reduction in the base violation level. P 65. Hence, reliability violations deemed by FERC to pose severe risks will generally be penalized just as harshly as they would have been penalized under the original guidelines – meaning fines in the millions, if not tens of millions of dollars.
The Guidelines also create uncertainty about how FERC will treat conduct that involves multiple violations or ongoing conduct. On the one hand, FERC states that it will evaluate multiple reliability violations that are related to the same conduct or event as a single violation, and will ensure that the calculated penalty does not exceed the $1 million per day per violation statutory cap. P 104 and n. 260. While this would suggest that FERC will impose a fine that is the lesser of the amount calculated under the Guidelines or the statutory cap, a more cautious view is that FERC reserves the right to treat related violations as distinct infractions when doing so preserves its ability to impose severe fines that would otherwise exceed the penalty cap for a single violation. Underscoring this cautious view is FERC’s statement that in cases of fraud, market misconduct, or tariff violations, it will treat multiple episodes of the same conduct as separate violations but will assess penalties in those instances based on the cumulative harm and the duration of the conduct. Because the base penalties calculated under the Guidelines increase almost exponentially as the loss from the violation increases, the accumulation of the violations will result in greater fines than if each act were fined separately. For example, the total penalty for 10 separate tariff violations spanning over the course of six days each and resulting in a loss of $50,000 per violation would range from $25,000 to $100,000 (assuming a zero culpability score and no pecuniary gain). By contrast, by aggregating the harm and duration of the conduct, FERC can increase the penalty range to a range of $105,000 to $420,000 (again, assuming a zero culpability score and no pecuniary gain).
FERC rejected industry recommendations that the Guidelines explicitly take into account whether there is a “legitimate ambiguity over what the law requires.” P 30. FERC thus is reserving the right to impose significant fines for conduct which the law does not unequivocally proscribe. Moreover, although FERC notes that it will consider ambiguities in its orders or regulations or relevant tariffs in its enforcement decisions, it is unclear whether such ambiguities will merely be a factor when FERC decides whether to seek a penalty at the high or low end of the range calculated under the Guidelines, or whether FERC instead will weigh ambiguities in the law when deciding whether to seek any fine.
The Guidelines will apply to all future violations and any pending investigation where enforcement staff has not yet entered into settlement negotiations. The penalty range determined under the Guidelines will be presumptively applied, but staff may recommend downward and upward departures from the Guidelines, and the Commission retains the discretion to depart from the Guidelines when appropriate. PP 29, 31-32. FERC declined to clarify the criteria it will consider in deciding whether to depart from the Guidelines. P 32.
Since FERC issued the Guidelines as a policy statement, companies may seek clarification of the Guidelines, but may not seek rehearing until FERC applies them in a specific case.