FERC will utilize guidelines modeled after the U.S. Sentencing Guidelines to assess civil penalties for enforcement violations.
On March 18, 2010, the Federal Energy Regulatory Commission (FERC) issued the Policy Statement on Penalty Guidelines in order to increase fairness, consistency and transparency in its calculation of civil penalties for violations under the Natural Gas Act, Part II of the Federal Power Act and the Natural Gas Policy Act. This policy statement is the latest effort by FERC to clarify the enforcement powers that the U.S. Congress granted to FERC in the Energy Policy Act of 2005, including the power to assess civil penalties of up to $1 million per day, per violation.
Since its first actions under this expanded penalty authority in early 2007, FERC has exercised its discretion by adopting a case-by-case approach for calculating penalties, in light of its statutory mandate to take into account the seriousness of the offense and the violator’s efforts to remedy the violation. FERC’s new Penalty Guidelines—issued without an opportunity for industry comment—depart from the case-by-case approach that has been used by similar market regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, in favor of a defined calculation scheme. The Penalty Guidelines are modeled after the U.S. Sentencing Guidelines, and generally follow the methodologies used by the Environmental Protection Agency, the Occupational Safety and Health Administration, the Nuclear Regulatory Commission and the Federal Communications Commission.
Noting the shortcomings of using a prescribed penalty calculation system, FERC intends to employ the flexibility provided for under the sentencing guidelines to allow for departures from a strict application of the guidelines where necessary or justified. Ultimately, FERC’s decision to adopt the Penalty Guidelines is based on its belief that the guidelines will promote fairness, consistency, transparency and administrative ease with regard to the calculation of penalties. Under the Penalty Guidelines, FERC will conduct the following five-step analysis that takes into account the penalty enhancement factors (e.g., senior management involvement, willfulness of the violation, harm caused by the violation) and mitigation factors (e.g., self-reporting, cooperation with staff, robust compliance program) listed in the Revised Policy Statement on Enforcement issued in May 2008:
Step one consists of determining the Base Violation Level, which depends on which of the following categories a violation falls into:
- Electric reliability standards
- Fraud, manipulation or anticompetitive conduct, and violations of tariffs, orders or regulations
- Violations involving misrepresentation and false statements to FERC
It is noteworthy that FERC lumped market manipulation violations into the same category as tariff violations.
The next step involves applying adjustments to the Base Violation Level to reflect the seriousness of the offense. For example, in the case of manipulation, the adjustments will ensure that the penalty reflects the related “loss,” the volume of natural gas or electricity involved in the violation, and the duration of the violation. A violation posing a serious threat to market transparency will face an upward adjustment in the resulting penalty. The adjustments made to the Base Violation Level result in the final Violation Level. Each Violation Level corresponds to a dollar value penalty amount (from $5,000 to $72,500,000).
Once FERC has determined a violation penalty amount, it establishes the Base Penalty, which is the greater of the following:
- Dollar amount corresponding to the Violation Level
- Dollar value of the pecuniary gain from the violation
- Dollar amount of the pecuniary loss from the violation caused by the organization
In this step, FERC will set the Base Penalty aside as it determines the Culpability Score, which, among other factors, reflects the following:
- The degree of senior management involvement and an organization’s acceptance of responsibility
- The company’s history of violations
- The organization’s compliance and ethics program
- The extent to which the company self-reported the violations
The final Culpability Score corresponds to minimum and maximum Culpability Multipliers, which are listed in a table.
FERC concludes its penalty calculation by multiplying the Base Penalty determined in step three of the process by the minimum and maximum Culpability Multipliers (established in step four), to establish the penalty range. The ranges will tend to be wide, which gives FERC added discretion when issuing civil penalties.
The policy statement includes examples of how the Penalty Guidelines would operate under a variety of circumstances.
The Penalty Guidelines apply only to organizations and not to individuals. The agency also noted that the Penalty Guidelines do not displace disgorgement when unjust profits from a violation can be calculated. In fact, the agency will reduce a penalty if it will impair a company’s ability to make full disgorgement. As noted above, FERC also is reserving its right to depart from the guidelines when, at its discretion, a different penalty outcome is warranted under the circumstances.
In addition, FERC explained that it will use its discretion to apply its penalty calculations for violations that involve more than one category of violations (see step one), such as reliability violations that also involve tariff violations, or tariff violations that include misrepresentations to FERC. Finally, FERC retains its discretion to reduce a penalty calculated under the guidelines to the extent it results in a penalty that exceeds the agency’s $1 million per violation, per day authority.
The Penalty Guidelines take effect immediately and will apply to pending investigations unless the enforcement staff has already begun settlement negotiations with the subject of the investigation.