FERC Issues New Civil Penalty Guidelines

March 24, 2010 // Franchising.com // On March 18, 2010, the Federal Energy Regulatory Commission (FERC or Commission) issued a policy statement and new civil penalty guidelines (Penalty Guidelines) intended to add fairness, consistency and transparency to future civil penalty determinations.[1] Although the Commission previously declined to adopt a guidelines approach, it explained in the Policy Statement that it now believes the advantages of such an approach outweigh the disadvantages and that it has gained sufficient experience to employ a guidelines approach as a significant factor in considering civil penalties.

The Penalty Guidelines are modeled on the U. S. Sentencing Guidelines and are discretionary only. FERC's prior policy statements on enforcement, as well as its policy statement on compliance remain valid, but any conflicts would be resolved in favor of the Penalty Guidelines.

In the Policy Statement, FERC provides background on why the Penalty Guidelines were developed, explains how it will calculate penalty ranges using a five-step process and provides a number of hypothetical examples. 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.

• 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 misrepresentations and false statements to the Commission.[2]
• Step 2 involves applying appropriate adjustments to the base level violation. The adjustments account for circumstances specific to the type of violation and, once added to the base level violation, 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 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 violations or if tolerance of the violation by "substantial authority personnel" was pervasive.[3] 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 obstructed justice or encouraged obstruction of justice.
• The culpability score will be adjusted downward if the violations occurred despite the existence of an effective compliance and ethics program, the organization self-reported the violation, cooperates during the investigation and accepts responsibility for the violation, the organization resolves the violation without the need for a trial-type hearing or the organization admits the violation.
• 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.

Scope of the Penalty Guidelines

The Commission noted in the Policy Statement that the Penalty Guidelines, in addition to being discretionary, do not apply to all circumstances. For example, the Penalty Guidelines do not apply to natural persons or to current settlement negotiations. Also, penalties under the Penalty Guidelines will be reduced if the minimum penalty would exceed FERC's statutory authority or impair an organization's ability to disgorge profits and if an organization is not able to pay the minimum penalty. In addition, FERC stated that consistent with its current approach concerning violations of the reliability standards, it does not anticipate applying the Penalty Guidelines in its review of most reliability notices of penalty, but it may consider the results of the Penalty Guidelines for an out-of-ordinary penalty for a serious reliability violation.[4]

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. In addition, it appears a zero-dollar penalty is not an option under the Penalty Guidelines unless the Commission exercises its discretion to not impose a penalty. This may mean that the Commission will impose penalties in significantly more enforcement cases than it did in the past.

The potential downward adjustment to the culpability score underscores the Commission's commitment to a strong culture of compliance in all regulated entities. This reinforces the need to have a compliance program to take advantage of the possibility of significantly reducing a potential penalty.

The Commission stated that the Penalty Guidelines will be adjusted and amended as necessary in light of reason and practice and to reflect changes in the law and enforcement practice and policy. In addition, enforcement staff will hold a technical conference within one year from the implementation of the Penalty Guidelines to discuss how the Penalty Guidelines have worked and to permit questions and comments from the industry. According to FERC Chairman Jon Wellinghoff, the Commission will also hold a series of workshops in the near future to explain the Penalty Guidelines in greater detail and respond to questions.

Entities regulated by FERC should seek counsel for advice on understanding their regulatory compliance obligations, developing and implementing compliance programs, and staying abreast of the Commission's ongoing dialogue concerning compliance.

###