On September 17, 2010, the Federal Energy Regulatory Commission (FERC or Commission) issued a Revised Policy Statement on Penalty Guidelines (Revised Policy Statement).1 The Revised Policy Statement modifies the penalty guidelines that were issued on March 23, 2010 and subsequently suspended to allow for public comments.2 The newly issued Penalty Guidelines base penalties on the same factors as in existing enforcement policy statements but are intended to add fairness, consistency and transparency to future civil penalty determinations.
FERC's Response to Public Comments
The Commission determined to continue to model the Penalty Guidelines on the U.S. Sentencing Guidelines. The Commission clarified that zero dollar penalties are possible under their guidelines-based approach and that Enforcement Staff have the discretion to close investigations or self-reports with no sanctions even if a violation occurred. The Commission confirmed that achieving compliance is its main goal. In that vein, FERC agreed to give partial compliance credit to firms that have effective, yet imperfect, compliance programs and to delete a provision that would have automatically eliminated compliance credit when senior level personnel were involved in a violation. In addition, the Commission agreed to unbundle the mitigation credits for self-reports, cooperation, avoidance of trial-type hearings and acceptance of responsibility.
The Commission received many comments concerning application of the Penalty Guidelines to violations of electric reliability standards. In response, the Commission determined to apply the Penalty Guidelines to FERC investigations under Part 1b of its regulations and agreed not to apply the Penalty Guidelines to its review of Notices of Penalty. The Commission also agreed to reduce the base violation level for the reliability guideline from sixteen to six. With regard to loss of load, FERC determined that it would not attempt to assess the value of the loss of load as a measure of harm and would instead use the quantity of lost load as one measure of the seriousness of the violation.
The Commission confirmed that its prior policy statements on enforcement, as well as its policy statement on compliance, remain valid and that any conflicts would be resolved in favor of the Penalty Guidelines. Like the U.S. Sentencing Guidelines, FERC's guidelines generate a penalty range based on a "violation level" and a "culpability score."
Calculating the Penalty Range
The Violation Level calculation involves three
steps in the five-step process of
calculating the penalty range.
- Step 1 involves determining the "base violation
level," which depends on whether the violation is (1) a
violation of the reliability standards, (2) a violation involving
fraud, manipulation or other anti-competitive conduct, or a
violation of rules, tariffs and orders, or (3) a violation
involving intentional or reckless misrepresentations and false
statements to the Commission.3
- Step 2 involves applying appropriate adjustments to the base
violation level. The adjustments account for circumstances specific
to the type of violation and, once added to the base violation
level, result in a "final violation level." The final
violation level corresponds to a specific penalty that ranges from
$5,000 to $72,500,000.
- Step 3 involves calculating a base penalty that is the greater
of (1) the final violation level, (2) the pecuniary gain to the
organization, or (3) the pecuniary loss to others from the
violation. Unless the violation results in a pecuniary loss to
others or a gain to the organization greater than the final
violation level, the final violation level becomes the "base
penalty."
The Culpability Score calculation in Step 4 involves adjustments to a base score of five.
- The culpability score will be adjusted upward if
"high-level personnel" participated in, condoned or were
willfully ignorant of the violation or if tolerance of the
violation by "substantial authority personnel" was
pervasive.4 This factor is tied to the size of the
organization. The culpability score will also be increased if the
organization has a prior history of committing violations, the
violation violated a judicial or Commission order or injunction
directed at the organization, or the organization willfully
obstructed justice or encouraged obstruction of justice.
- The culpability score will be adjusted downward if the
violation occurred despite the existence of an effective compliance
program. The culpability score will also be adjusted downward if
the organization self-reported the violation within a reasonable
time, cooperated fully during the investigation, accepted
responsibility for the violation, or resolved the violation without
the need for a trial-type hearing.
- The final culpability score corresponds to "minimum and
maximum multipliers" ranging from 0.05 to 0.2 for the lowest
culpability score and 2.00 to 4.00 for the highest.
The Penalty Range calculation in Step 5 involves multiplying the "base penalty" amount by the "minimum and maximum multipliers" to produce the applicable penalty range.
- The culpability score multipliers can greatly affect the ultimate penalty range. For example, a $10,000 base penalty combined with the lowest culpability score would result in a penalty range of $500 to $2,000. The same base penalty with the highest culpability score would result in a penalty range of $20,000 to $40,000.
Implications for Regulated Entities
Although the Penalty Guidelines are intended to add fairness, consistency and transparency to future civil penalty determinations, the Commission has retained significant discretion to depart from the penalty range that would result from the Penalty Guidelines. It remains to be seen how the Penalty Guidelines will work in practice.
The potential downward adjustment to the culpability score emphasizes the Commission's commitment to a strong culture of compliance in all FERC-regulated entities. This reinforces the need to have a compliance program that includes measures that would allow an organization to take advantage of the possibility of significantly reducing a potential penalty.
The Commission intends to hold a technical conference one year from implementation of the Penalty Guidelines to address how they have worked and to permit questions and comments from industry. It is important during the intervening year that entities regulated by FERC seek to fully understand their regulatory compliance obligations, develop and implement compliance programs, and stay abreast of the Commission's ongoing dialogue concerning compliance.
Footnotes
1. Enforcement of Statutes, Orders, Rules, and
Regulations, 132 FERC ¶ 61,216 (2010) (Revised Policy
Statement ). The modified Penalty Guidelines are attached to the
Revised Policy Statement.
2. In an Update issued on March 23, 2010, we reported that the FERC
had issued a policy statement and new civil penalty guidelines.
Enforcement of Statutes, Orders, Rules, and Regulations,
130 FERC ¶ 61,220 (2010). In a subsequent Update, we noted
that on April 15, 2010, less than one month after issuing its
policy statement and after holding three public workshops on the
penalty guidelines, the Commission issued an order suspending the
policy statement and application of the penalty guidelines.
Enforcement of Statutes, Orders, Rules, and Regulations,
131 FERC ¶ 61,040 (2010). In the April 15 order, the
Commission stated that it had determined that the public interest
would be served by affording interested entities a broader
opportunity to comment on the penalty guidelines before issuing a
final order and putting them into effect.
3. The separate guidelines and base violation level for each of the
three types of violations are set out in Chapter 2 of the Penalty
Guidelines.
4. The Penalty Guidelines include definitions of certain terms
included in quotation marks throughout this Update.