Compliance with Statutes, Regulations, and Orders

125 FERC ¶ 61,058

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Joseph T. Kelliher, Chairman;

Suedeen G. Kelly, Marc Spitzer,

Philip D. Moeller, and Jon Wellinghoff.

Compliance with Statutes, Regulations, and Orders

Docket No. PL09-1-000

POLICY STATEMENT ON COMPLIANCE

(Issued October 16, 2008)

1.

The Commission believes it is in the public interest to encourage companies1

subject to our regulatory requirements to develop rigorous compliance programs that will

help minimize the potential for violations of applicable requirements, and to give

significant weight to those programs when we determine whether to assess a civil penalty

or other remedy for a violation. Achieving compliance, not assessing penalties, is the

central goal of our enforcement efforts. Improved compliance as a result of a company’s

commitment to and successful implementation of a strong compliance program should

result in fewer violations over time. In particular, improved compliance should result in a

reduction of serious violations, that is, those violations that involve significant harm, risk

of significant harm, or damage to the integrity of the Commission’s regulatory program.

Improved compliance by regulated companies will also improve the ability of the

Commission to accomplish the public policy goals assigned to it by Congress.

2.

Accordingly, the purpose of this Policy Statement is to provide additional

guidance to the public on compliance with our governing statutes, regulations and orders

m, or damage to the integrity of the Commission’s regulatory program.

Improved compliance by regulated companies will also improve the ability of the

Commission to accomplish the public policy goals assigned to it by Congress.

2.

Accordingly, the purpose of this Policy Statement is to provide additional

guidance to the public on compliance with our governing statutes, regulations and orders.

In response to input from participants in the Commission’s July 8, 2008, staff workshop

on compliance, and based on our experience in implementing our new civil penalty

authority thus far, we discuss further some of the factors related to effective compliance

that the Commission will take into account in considering whether to reduce or even to

eliminate civil penalties for violations. These factors are: (1) the role of senior

management in fostering compliance; (2) effective preventive measures to ensure

compliance; (3) prompt detection, cessation, and reporting of violations; and

1 For purposes of this Policy Statement, the term “company” or “companies”

includes all entities and organizations subject to our regulatory requirements.

Docket No. PL09-1-000

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(4) remediation efforts. The Commission will provide additional guidance as necessary

in the form of additional orders or periodic workshops.2

3.

We also discuss the benefits of effective compliance efforts by companies subject

to our statutes, regulations, and orders. For companies engaged in wholesale electric and

natural gas market activities, the range of such requirements is substantial and the cost of

implementing thorough systemic protections may be significant. Moreover, even when

strong compliance measures are taken, violations may still occur

e benefits of effective compliance efforts by companies subject

to our statutes, regulations, and orders. For companies engaged in wholesale electric and

natural gas market activities, the range of such requirements is substantial and the cost of

implementing thorough systemic protections may be significant. Moreover, even when

strong compliance measures are taken, violations may still occur. In order to demonstrate

the benefits that inure to companies that undertake effective compliance programs, we

describe in more detail the civil penalty credit we will provide, including complete

forgiveness of civil penalties under certain circumstances.

4.

This Policy Statement supplements the Revised Policy Statement on Enforcement

issued May 15, 2008,3 which discussed various other factors, such as harm from the

violation, seriousness of the offense, self-reporting, cooperation, and other available

remedies, all of which are relevant, along with a company’s compliance efforts, in

determining whether a civil penalty is appropriate for a violation. As discussed further

herein, our policy is that if a company acts aggressively to adopt, foster, and maintain a

effective corporate culture of compliance, and has in place rigorous procedures and

processes that provide effective accountability for compliance, but a violation

nonetheless occurs, the Commission may provide a significant reduction in, or even in

some cases the elimination of, the civil penalty that otherwise would be imposed.

I.

Background

5

aggressively to adopt, foster, and maintain a

effective corporate culture of compliance, and has in place rigorous procedures and

processes that provide effective accountability for compliance, but a violation

nonetheless occurs, the Commission may provide a significant reduction in, or even in

some cases the elimination of, the civil penalty that otherwise would be imposed.

I.

Background

5.

The Commission’s interest in compliance is long standing, and relates to the

statutory requirement that the Commission consider what efforts a company has made to

remedy a violation in a timely manner.4 The importance of creating a strong atmosphere

of compliance in a company—both to prevent violations in the first instance and to deal

promptly and effectively with misconduct should it occur—was emphasized in the

Commission’s first Policy Statement on Enforcement, which listed a number of factors

2 Enforcement of Statutes, Regulations, and Orders, 123 FERC ¶ 61,156, at P 59

(2008) (Revised Policy Statement). As discussed below in P 7, the Commission has

already held one of these workshops.

3 Revised Policy Statement, 123 FERC ¶ 61,156 (2008).

4 Section 22 of the Natural Gas Act, 15 U.S.C. § 717t-1 (2006); section 316A of

the Federal Power Act, 16 U.S.C. § 825o-1 (2006). Cf. Jennifer Arlen & Reinier

Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability

Regimes, 72 N.Y.U.L. Rev. 687, 688 (1997) (mitigation credit appropriate for companies

with effective compliance programs).

ent, 123 FERC ¶ 61,156 (2008).

4 Section 22 of the Natural Gas Act, 15 U.S.C. § 717t-1 (2006); section 316A of

the Federal Power Act, 16 U.S.C. § 825o-1 (2006). Cf. Jennifer Arlen & Reinier

Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability

Regimes, 72 N.Y.U.L. Rev. 687, 688 (1997) (mitigation credit appropriate for companies

with effective compliance programs).

Docket No. PL09-1-000

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that would be considered in determining whether to provide mitigation credit for

compliance efforts in any penalty decisions.5 These factors include the nature and

structure of a company’s compliance program, the active support of senior management,

the scope and depth of employee training, a process for auditing compliance, and the

response of a company to misconduct by its employees.6

6.

The Revised Policy Statement carries forward these elements and additionally

emphasizes the importance of “(i) systems and protocols for monitoring, identifying and

correcting possible violations, (ii) a management culture that encourages compliance

among company personnel, and (iii) tools and training sufficient to enable employees to

comply with Commission requirements,” as well as the actions a company takes to

correct the activity that produced the violation.7 Significantly, the Revised Policy

Statement elevates the importance of compliance programs by making clear that, among

all the factors considered, “the most important in determining the amount of the penalty

are the seriousness of the offense and the strength of the entity’s commitment to

compliance.”8 The Commission also suggested specific actions to aid companies in

developing compliance programs, and recognized that each company’s circumstances are

unique and that no one size fits all.9

(continued…)

5 Enforcement of Statutes, Orders, Rules, and Regulations, 113 FERC ¶ 61,068, at

P 21-23 (2005) (Policy Statement on Enforcement).

6 Id. P 22

f the entity’s commitment to

compliance.”8 The Commission also suggested specific actions to aid companies in

developing compliance programs, and recognized that each company’s circumstances are

unique and that no one size fits all.9

(continued…)

5 Enforcement of Statutes, Orders, Rules, and Regulations, 113 FERC ¶ 61,068, at

P 21-23 (2005) (Policy Statement on Enforcement).

6 Id. P 22.

7 Revised Policy Statement at P 57.

8 Id. at P 54. In addition, at the time we issued the Revised Policy Statement, we

also reviewed the various mechanisms by which those seeking assistance on compliance

issues can obtain guidance from the Commission or our staff. These options include

declaratory orders, no-action letter requests, General Counsel opinion letters, accounting

interpretations, the Enforcement Hotline, the recently-created Help Desk, pre-filing

meetings, and other informal contacts with staff. Obtaining Guidance on Regulatory

Requirements, 123 FERC ¶ 61,157 (2008). We encourage companies to make use of the

appropriate Commission resources as part of their compliance efforts. Each source of

guidance is somewhat different, and those who seek guidance should select the

mechanism that best fits the circumstances presented.

9 Revised Policy Statement at P 59. The actions noted by the Commission are:

• Prepare an inventory of current compliance risks and practices

• Create an independent Compliance Officer who reports to the Chief Executive

Officer and the Board, or to a committee thereof

is somewhat different, and those who seek guidance should select the

mechanism that best fits the circumstances presented.

9 Revised Policy Statement at P 59. The actions noted by the Commission are:

• Prepare an inventory of current compliance risks and practices

• Create an independent Compliance Officer who reports to the Chief Executive

Officer and the Board, or to a committee thereof

Docket No. PL09-1-000

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7.

On July 8, 2008, the Commission’s staff held a public compliance workshop,

which was attended by more than 400 individuals. The workshop consisted of panel

presentations by industry representatives with staff and audience questions and comments

concerning the development of a sound compliance program. Many useful points were

made, both at the workshop and in the comments filed after the workshop discussion.

The Commission encourages all interested persons to continue to share appropriate

compliance-related information and to work with industry associations to develop best

practices and to facilitate adoption of effective compliance measures. The Commission

also will consider whether to sponsor additional future workshops or other forums to

encourage the continuing exchange of ideas and best practices among regulated

companies and the Commission and our staff.

8.

As discussed in the Policy Statement on Enforcement and emphasized in the

Revised Policy Statement,10 the Commission places great emphasis on a company’s

efforts to assure compliance with all applicable regulatory requirements. Given the

breadth of the Commission’s responsibilities, the nature of these requirements vary

significantly

gulated

companies and the Commission and our staff.

8.

As discussed in the Policy Statement on Enforcement and emphasized in the

Revised Policy Statement,10 the Commission places great emphasis on a company’s

efforts to assure compliance with all applicable regulatory requirements. Given the

breadth of the Commission’s responsibilities, the nature of these requirements vary

significantly. Some areas lend themselves to very specific mandatory compliance

measures, such as hydroelectric dam safety and pipeline and liquefied natural gas

construction and environmental impacts, where the Commission has developed active

and prescriptive compliance programs through the Office of Energy Projects. More

• Provide sufficient funding for the administration of compliance programs by

the Compliance Officer

• Promote compliance by identifying measurable performance targets

• Tie regulatory compliance to personnel assessments and compensation,

including compensation of management

• Provide for disciplinary consequences for infractions of Commission

requirements

• Provide frequent mandatory training programs, including relevant “real world”

examples and a list of prohibited activities

• Implement an internal Hotline through which personnel may anonymously

report suspected compliance issues

• Implement a comprehensive compliance audit program, including the tracking

and review of any incidents of noncompliance, with submission of the results

to senior management and the Board

Taken as a whole, these actions facilitate senior management’s demonstration of

commitment to compliance, make preventive measures more effective, encourage

detection and reporting of violations, and should lead to prompt and effective remediation

of violations.

10 Revised Policy Statement at P 57-60.

ents of noncompliance, with submission of the results

to senior management and the Board

Taken as a whole, these actions facilitate senior management’s demonstration of

commitment to compliance, make preventive measures more effective, encourage

detection and reporting of violations, and should lead to prompt and effective remediation

of violations.

10 Revised Policy Statement at P 57-60.

Docket No. PL09-1-000

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recently, through the Office of Electric Reliability, the Commission has addressed our

new responsibilities to assure the reliability of the nation’s bulk power system, including

allowing the electric reliability organization and regional entities to use a matrix-based

approach to civil penalties for violations of reliability standards.

9.

Other areas where the Commission engages in economic regulation, including the

reliance the Commission has placed in certain circumstances on open and competitive

wholesale energy markets as a substitute for traditional regulation, are subject to a variety

of requirements, including the recent rules prohibiting market manipulation.11 In certain

situations, companies are in the best position to determine the risks their activities entail

and how best to train and monitor employees to assure compliance.12 Moreover, an

effective compliance program will differ based on the nature of the conduct regulated. A

program designed to assure compliance with specific safety, reliability, or environmental

conditions will differ from one designed to prevent market manipulation, which in turn

will differ from one designed to prevent discrete tariff violations. This Policy Statement

emphasizes the benefit to companies that take such compliance measures seriously and

implement effective programs to assure compliance in their regulated activities.

10

pecific safety, reliability, or environmental

conditions will differ from one designed to prevent market manipulation, which in turn

will differ from one designed to prevent discrete tariff violations. This Policy Statement

emphasizes the benefit to companies that take such compliance measures seriously and

implement effective programs to assure compliance in their regulated activities.

10.

The Commission expects companies to invest appropriate time and effort in the

creation, monitoring, and growth of strong internal compliance programs. Depending on

a company’s size and organizational structure, the nature and complexity of the

company’s involvement in activities subject to Commission regulation, and the range of

compliance risks resulting from those activities, a comprehensive and effective

compliance program may be time and resource intensive. The needs and circumstances

of each company are unique, and we recognize that a company may meet its compliance

obligation with internal resources, outside assistance, or a combination of the two. Some

workshop commenters agreed with our view that there is no one template or approach for

a good compliance program, and that market participants are in the best position to assess

their regulatory risks and to devise the optimum mix of measures that will provide the

11 18 C.F.R. Part 1c (2008). As we noted in the Revised Policy Statement, the

Commission found it impractical to develop a penalty schedule or matrix at this time

given that the “complex mix of requirements cannot neatly be reduced to a penalty

schedule or matrix, at least not until the Commission develops more experience in

reviewing matters involving its enforcement authority.” Revised Policy Statement at

P 53.

12 Charles Walsh & Alissa Pyrich, Corporate Compliance Programs as a Defense

to Criminal Liability: Can a Corporation Save its Soul?, 47 Rutgers L. Rev. 605, 636-37

equirements cannot neatly be reduced to a penalty

schedule or matrix, at least not until the Commission develops more experience in

reviewing matters involving its enforcement authority.” Revised Policy Statement at

P 53.

12 Charles Walsh & Alissa Pyrich, Corporate Compliance Programs as a Defense

to Criminal Liability: Can a Corporation Save its Soul?, 47 Rutgers L. Rev. 605, 636-37

(1995) (corporations, given their knowledge of their own businesses, are in the best

position to detect and deter wrongdoing).

Docket No. PL09-1-000

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best conditions for ongoing compliance.13 The elements noted in the Revised Policy

Statement can be helpful, but should be tailored, along with other appropriate measures,

to create a compliance program that best fits the needs of each individual company.

11.

We recognize that smaller companies have more limited resources. While all

companies involved in activities subject to the Commission’s jurisdiction should be

proactive in developing appropriate compliance programs, there is no set amount that

must be invested in compliance measures and no requirement to use outside resources to

devise and implement compliance programs. At the same time, companies engaging in

certain activities, such as construction and operation of hydroelectric facilities, or of

interstate gas pipelines or liquefied natural gas facilities, must adhere to project-specific

requirements regardless of the size of the company.

12.

The Commission cannot spell out what constitutes a effective compliance program

in all circumstances, but we can identify the compliance-related credit factors we will

consider when companies, despite strong compliance efforts, have lapses that result in

violations of Commission statutes, regulations, or orders.14 A proactive approach to

correcting such violations and reporting them to the Commission is demonstrably

beneficial

constitutes a effective compliance program

in all circumstances, but we can identify the compliance-related credit factors we will

consider when companies, despite strong compliance efforts, have lapses that result in

violations of Commission statutes, regulations, or orders.14 A proactive approach to

correcting such violations and reporting them to the Commission is demonstrably

beneficial. For example, in NRG Energy, Inc., NRG self-reported an intentional

misrepresentation of unit availability by plant employees acting contrary to established

company protocol. NRG took disciplinary action against the employees and provided

exemplary cooperation with the Commission. The relatively modest penalty amount

($500,000) is directly attributable to NRG’s proactive compliance actions.15 While all of

the facts and circumstances of each situation must be evaluated to determine the

13 These commenters also noted that smaller companies have more limited

resources available to address compliance matters. See, e.g., Post-Workshop Comments

of the American Gas Association, Docket No. AD08-5-000, at 1-3 (filed July 22, 2008);

Comments of the Process Gas Consumer Group, Docket No. AD08-5-000, at 3-5 (filed

July 22, 2008).

14 “Regardless of how good a company’s compliance program is, violations will

occur. This is especially true of large companies.” Dr. John D. Copeland, The Tyson

Story: Building an Effective Ethics and Compliance Program, 5 Drake J. Agric. L. 305

No. AD08-5-000, at 1-3 (filed July 22, 2008);

Comments of the Process Gas Consumer Group, Docket No. AD08-5-000, at 3-5 (filed

July 22, 2008).

14 “Regardless of how good a company’s compliance program is, violations will

occur. This is especially true of large companies.” Dr. John D. Copeland, The Tyson

Story: Building an Effective Ethics and Compliance Program, 5 Drake J. Agric. L. 305

(2000).

15 NRG Energy, Inc., 118 FERC ¶ 61,025 (2007). A company’s aggressive

approach to correcting violations and improving compliance may also, in appropriate

circumstances, lead staff to resolve violations with compliance measures rather than

penalties, particularly where the violation is not serious. Staff Report on Enforcement,

Docket No. AD07-13-000 at 22 (Nov. 14, 2007).

Docket No. PL09-1-000

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appropriate amount of credit given,16 it is possible to describe four key compliance

factors that may lead to the reduction or even elimination of a civil penalty.

II.

Factors for Vigorous Compliance Programs

A.

Actions of senior management

13.

One recurring theme at the July 8 workshop was the critical importance of the role

of senior management in fostering a strong compliance ethic within a company. While

there are numerous issues to address and steps to take to create a sound compliance

program, the best program will not succeed unless senior management actively embraces

the importance of compliance and sets the standard within a company for proactive

compliant behavior. Developing a strong and continuing culture of compliance is a

critical task for every company subject to our statutes, regulations, and orders, and the

responsibility for a culture of compliance rests squarely on the shoulders of senior

management.17

14.

In addition to providing adequate funds and resources for compliance, there are

some common steps that senior management can take to instill a culture of compliance

ontinuing culture of compliance is a

critical task for every company subject to our statutes, regulations, and orders, and the

responsibility for a culture of compliance rests squarely on the shoulders of senior

management.17

14.

In addition to providing adequate funds and resources for compliance, there are

some common steps that senior management can take to instill a culture of compliance.

As noted by one commenter,18 senior management should communicate its commitment

to compliance frequently, both formally and informally, to employees. Senior

management should set aside the time necessary to address compliance issues as they

arise, both to vet proposed actions to avoid violations and to address misconduct if it

should occur. Senior management should actively encourage employees to raise

questions and to obtain the views of supervisors or designated compliance personnel.

Finally, senior management should assure that designated compliance personnel are

actively included in the development of new transaction structures or business

initiatives.19

16 We note that while credit may apply to civil penalties, if there are unjust profits,

we will seek disgorgement as a matter of course. Revised Policy Statement at P 43.

17 Charles Walsh and Alissa Pyrich, supra note 12 at 646-649 (senior management

must support a compliance program for it to be effective and supervisory personnel

should be responsible for maintaining and enforcing company policy).

18 Post-Workshop Comments of JPMorgan Chase & Co., Docket No. AD08-5-

000, at 2 (filed July 22, 2008).

19 Id.

atter of course. Revised Policy Statement at P 43.

17 Charles Walsh and Alissa Pyrich, supra note 12 at 646-649 (senior management

must support a compliance program for it to be effective and supervisory personnel

should be responsible for maintaining and enforcing company policy).

18 Post-Workshop Comments of JPMorgan Chase & Co., Docket No. AD08-5-

000, at 2 (filed July 22, 2008).

19 Id.

Docket No. PL09-1-000

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15.

Senior management may designate one or more persons as compliance officials

within the company.20 This may be a position devoted exclusively to compliance matters

or may be an assigned duty of an employee. Compliance official independence is an

important hallmark of a strong commitment to compliance. For example, compliance

officials should be able to bring compliance matters directly to the Board of Directors or

a committee of the Board (or equivalent governance of other organizations). The

compensation provisions and reporting structure of the company should encourage the

compliance officials and all employees to follow senior management’s lead in embracing

a strong compliance culture.

B.

Effective preventive measures

16.

The second factor, systematic and effective preventive measures (such as careful

hiring, training, accountability, and supervision), is fundamental to an effective

compliance program. It is not enough to create a good compliance program on paper; the

company must carry through to implement the program with effective accountability for

compliance and periodic review and evaluation of the effectiveness of the program.

Although we believe companies already have strong incentives to develop mechanisms to

prevent violations,21 it is appropriate for the Commission to give credit when companies

invest in systematic preventive measures to keep the company in compliance with the

Commission’s statutes, regulations and orders

ty for

compliance and periodic review and evaluation of the effectiveness of the program.

Although we believe companies already have strong incentives to develop mechanisms to

prevent violations,21 it is appropriate for the Commission to give credit when companies

invest in systematic preventive measures to keep the company in compliance with the

Commission’s statutes, regulations and orders. We also recognize that even the best

efforts, fully and actively supported by senior management, may still not avoid a

violation, particularly if the company is dealing with a rogue employee not adhering to

clear direction from the company.22 However, it is possible to assess in general the

degree to which a company demonstrates consistent serious commitment to preventive

compliance measures, and demonstrates that its compliance program generally satisfied

the relevant actions identified in our Revised Policy Statement. Where there is evidence

that the company has adopted effective preventive measures, with the appropriate

accountability and review mechanisms, we may reduce the amount of penalty that might

otherwise be applied.

17.

The Commission recognizes that each company’s situation may be different.

Companies vary widely in their size and structure, in the degree to which they participate

20 Companies subject to the Standards of Conduct must designate a Chief

Compliance Officer to be responsible for the company’s compliance with the Standards

of Conduct. 18 C.F.R. § 358.4(e)(6) (2008).

21 Walsh & Pyrich, supra note 12 at 681 (implementation of corporate compliance

programs ultimately will prove cost effective for corporations).

22 As discussed earlier, this was the case for NRG, where the plant operators acted

inconsistently with company protocol for reporting unit availability.

e for the company’s compliance with the Standards

of Conduct. 18 C.F.R. § 358.4(e)(6) (2008).

21 Walsh & Pyrich, supra note 12 at 681 (implementation of corporate compliance

programs ultimately will prove cost effective for corporations).

22 As discussed earlier, this was the case for NRG, where the plant operators acted

inconsistently with company protocol for reporting unit availability.

Docket No. PL09-1-000

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in markets or activities subject to the Commission’s jurisdiction, and the compliance risks

that those activities present. Because comprehensive compliance program measures can

be expensive, each company has to determine the optimum investment to make in

compliance measures in light of its resources and risks. The Commission will take into

account the size of a company and the nature and extent of its jurisdictional activities in

reviewing the adequacy of preventive measures undertaken.23

C.

Prompt detection, cessation, and reporting of the offense

18.

The third factor relates to the method by which a violation is detected and the

behavior of the company thereafter. There is no specific amount of time by which a

company must find or report a violation in order to be considered prompt. We recognize

that in some circumstances a company’s inquiry into conduct by its employees may take

time to determine whether an act violates our regulations or requirements, how many

times the violation occurred, or what the consequences of the violations are. Prompt

detection may result from a high quality and comprehensive internal monitoring system,

or actively-promoted company hotline, or other measures to ensure that transactions are

reviewed for conformance to regulatory requirements on a real-time basis.

19.

Because the Commission encourages companies to have effective controls in place

to identify possible misconduct, violations discovered as a result of systematic internal

auditing and supervision programs normally will be given substantial credit

ed company hotline, or other measures to ensure that transactions are

reviewed for conformance to regulatory requirements on a real-time basis.

19.

Because the Commission encourages companies to have effective controls in place

to identify possible misconduct, violations discovered as a result of systematic internal

auditing and supervision programs normally will be given substantial credit. Once

discovered, we expect that companies will act expeditiously to end the wrongful conduct

and will report it promptly.24 A company will receive credit for prompt reporting if it

reports a violation to Enforcement staff shortly after discovery, or if it calls Enforcement

staff to let staff know the company is investigating a matter. In other words, based on the

circumstances of each case, a company can demonstrate the extent to which it was

diligent in discovering misconduct, correcting the problem, and reporting the offense

promptly.

23 Under the Federal Sentencing Guidelines, discussed infra, small organizations

are expected to “demonstrate the same degree of commitment to ethical conduct and

compliance with the law as large organizations” but that “a small organization may meet

the requirements . . . with less formality and fewer resources than would be expected of

large organizations.” Federal Sentencing Guidelines § 8B2.1 commentary n.2.c (2007).

24 As we noted in the Revised Policy Statement at P 63, we expect companies to

take appropriate steps to cure violations. For example, if a violation involves the failure

to make a required filing or disclosure to the Commission or another regulator,

companies are encouraged to cure the defect by making the appropriate filing or

disclosure as well as reporting the lapse to the Office of Enforcement.

noted in the Revised Policy Statement at P 63, we expect companies to

take appropriate steps to cure violations. For example, if a violation involves the failure

to make a required filing or disclosure to the Commission or another regulator,

companies are encouraged to cure the defect by making the appropriate filing or

disclosure as well as reporting the lapse to the Office of Enforcement.

Docket No. PL09-1-000

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20.

Implementation of an aggressive compliance program and strong direction by

senior management to search out and report regulatory compliance issues may result in

an increase of violations self-reported to the Commission. If a company demonstrates

that such self-reported violations are the result of implementing increased compliance

measures, the Commission will take these circumstances into account. There is no

blanket waiver of sanctions in such instances, but companies that fail to report violations

discovered as a result of improved compliance monitoring can expect to be penalized far

more severely than if they self-report such violations.

D.

Remediation

21.

The fourth factor, remediation of the misconduct, is one of the statutory

considerations25 and is inherently case-specific. There will be fact-specific questions in

each case about the steps taken by a company to end violations and remedy the

misconduct. As to employees engaged in misconduct, the issue of whether disciplinary

action is appropriate (e.g., reprimand, suspension, reduction in pay or bonus, termination,

etc.) depends on the circumstances surrounding the offense and the involvement of

supervisory personnel or senior management.26 Similarly, the question of whether new

or modified prospective controls are needed to prevent a recurrence is highly fact-

specific. The Commission will weigh the response of a company to misconduct it

discovers in determining whether civil penalty reduction is appropriate for this factor.

III.

Penalty Credit

22

e offense and the involvement of

supervisory personnel or senior management.26 Similarly, the question of whether new

or modified prospective controls are needed to prevent a recurrence is highly fact-

specific. The Commission will weigh the response of a company to misconduct it

discovers in determining whether civil penalty reduction is appropriate for this factor.

III.

Penalty Credit

22.

The factors discussed above will be applied in light of each company’s

commitment to compliance and the results of that compliance program. Because there

are many factors to take into account in every situation, the appropriate result must be

determined on a case-by-case basis. We will continue to determine whether to apply civil

25 See supra note 4.

26 Another comment at the July workshop was that there is a delicate balance to be

struck when tying regulatory compliance to compensation of employees and senior

management. See, e.g., panel comments of Jeff Guldner, Arizona Public Service

Company; Post-Workshop Comments of the Edison Electric Institute, Docket No. AD08-

5-000, at 6-7 (filed July 22, 2008). We recognize that compliance is one among several

important goals for companies, and that incentives in compensation should recognize

legitimate goals other than compliance. We also understand the risk that too great an

emphasis on compliance in compensation may actually discourage employees or senior

management from acknowledging compliance lapses within a company and self-

reporting those matters to the Commission. Here again, each company must evaluate its

circumstances and determine the appropriate degree to which compensation should relate

to successful compliance.

understand the risk that too great an

emphasis on compliance in compensation may actually discourage employees or senior

management from acknowledging compliance lapses within a company and self-

reporting those matters to the Commission. Here again, each company must evaluate its

circumstances and determine the appropriate degree to which compensation should relate

to successful compliance.

Docket No. PL09-1-000

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penalties, or the amount of penalties, based on the totality of facts and circumstances

presented, including those related to senior management’s commitment and the presence

of vigorous compliance measures. Such cases may provide an opportunity for the

Commission to provide specific future guidance to the public on issues resolved in those

cases.27

23.

The Commission is aware that in other contexts, specific credit is given based on

the existence of an effective compliance and ethics program. For instance, the Federal

Sentencing Guidelines provide reductions to the “culpability score” used to determine

fines for business organizations if there is an effective compliance and ethics program.28

If the organization had an effective compliance and ethics program in place, it receives a

reduction from the base culpability score.29 Combined with credit for self-reporting and

cooperation, the compliance credit can completely offset the culpability score points

27 We also note that in many instances violations reported to the Commission are

closed without sanctions. These usually involve inadvertent violations or violations that

resulted from errors or misunderstandings of regulatory requirements, and which were

not serious. Such resolutions normally are not made public. During the first two years of

enforcement activity since passage of the Energy Policy Act of 2005, Pub. L. No. 109-58,

119 Stat

eported to the Commission are

closed without sanctions. These usually involve inadvertent violations or violations that

resulted from errors or misunderstandings of regulatory requirements, and which were

not serious. Such resolutions normally are not made public. During the first two years of

enforcement activity since passage of the Energy Policy Act of 2005, Pub. L. No. 109-58,

119 Stat. 594 (2005), approximately 70 percent of staff investigations were terminated

without any penalty, including many instances where a violation occurred. Staff Report

on Enforcement, supra note 15, at 22.

28 The Sentencing Guidelines require courts to calculate a culpability score as one

step in determining the appropriate fine for an organization. Federal Sentencing

Guidelines § 8C2.8(a)(8) (2007). The relationship of compliance programs to the

culpability score is explained in Federal Sentencing Guidelines §§ 8B2.1 and 8C2.5

(2007). Compliance programs also may be taken into consideration in determining

whether to take action against an organization. In this respect, the Sentencing Guidelines

provide strong incentives for organizations to establish compliance programs. “Effective

programs do not guarantee immunity from prosecution, but the existence of a qualifying

compliance program may influence a prosecutor’s decision to prosecute.” Melissa Ku &

Lee Pepper, Corporate Criminal Liability, 45 Am. Crim. L. Rev. 275, 297-300 (2008).

Similarly, the existence of effective compliance protocols may be taken into account by

the Commission in determining whether to investigate or sanction violations.

29 Courts must consider whether “the offense occurred even though the

organization had in place at the time of the offense an effective compliance and ethics

program.” Federal Sentencing Guidelines § 8C2.5(f)(1) (2007). If so, the culpability

score is reduced.

ive compliance protocols may be taken into account by

the Commission in determining whether to investigate or sanction violations.

29 Courts must consider whether “the offense occurred even though the

organization had in place at the time of the offense an effective compliance and ethics

program.” Federal Sentencing Guidelines § 8C2.5(f)(1) (2007). If so, the culpability

score is reduced.

Docket No. PL09-1-000

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the

y

sed by

n.

otherwise applicable and, when combined with the other elements of determining fines,

substantially reduce or even eliminate civil fines that otherwise would be assessed.30

24.

Effective compliance and ethics programs are also recognized by other

administrative agencies. The Securities and Exchange Commission (SEC) has issued

orders providing guidance on the circumstances under which it will give credit for self-

policing, self-reporting, remediation, and cooperation.31 The Environmental Protection

Agency (EPA) has adopted detailed incentives for self-policing to encourage discovery,

disclosure, correction, and prevention of violations of environmental statutes and

regulations.32 The EPA assesses penalties based on both the economic benefit a

company derived from the environmental violation and a punitive “gravity-based”

component. Under the EPA’s approach, the economic benefit component is still

assessed, but the gravity-based component may be reduced to zero if all conditions of

self-policing policy are met fully. The Commission notes that the EPA economic benefit

assessment is similar to disgorgement of unjust profits, which the Commission routinel

requires.33 The EPA’s gravity-based component is similar to a civil penalty impo

the Commissio

25.

The Commission will take an approach to civil penalties similar to those of the

Federal Sentencing Guidelines and the EPA

self-policing policy are met fully. The Commission notes that the EPA economic benefit

assessment is similar to disgorgement of unjust profits, which the Commission routinel

requires.33 The EPA’s gravity-based component is similar to a civil penalty impo

the Commissio

25.

The Commission will take an approach to civil penalties similar to those of the

Federal Sentencing Guidelines and the EPA. Where a violation is not serious, that is, the

violation does not involve significant harm, risk of significant harm, or damage to the

integrity of the Commission’s regulatory program, and all four elements of vigorous

compliance are present, the Commission may reduce the level of civil penalty that

otherwise would be imposed to zero. The Commission adopts this approach to

30 Even if the combination of an effective compliance program and self-reporting

and cooperation reduces the culpability score to zero, under the Federal Sentencing

Guidelines the application of the multiplier (based on the culpability score) to the base

fine and other elements of determining the appropriate fine may still result in a monetary

fine. Federal Sentencing Guidelines, Chapter 8, Part C.

31 Accounting and Auditing Enforcement, SEC Release No. 1470 (October 23,

2001).

32 Incentives for Self-Policing: Discovery, Disclosure, Correction, and Prevention

of Violations, Environmental Protection Agency, 65 Fed. Reg. 19,618 (April 11, 2000)

(Audit Policy). The EPA has resolved thousands of violations through its Audit Policy

and recently extended additional incentives to new owners of problem facilities on an

interim basis further to increase remediation of violations. Interim Approach To

Applying the Audit Policy to New Owners, Environmental Protection Agency, 73 Fed.

Reg. 44,991 (August 1, 2008).

33 Revised Policy Statement at P 42-43.

y). The EPA has resolved thousands of violations through its Audit Policy

and recently extended additional incentives to new owners of problem facilities on an

interim basis further to increase remediation of violations. Interim Approach To

Applying the Audit Policy to New Owners, Environmental Protection Agency, 73 Fed.

Reg. 44,991 (August 1, 2008).

33 Revised Policy Statement at P 42-43.

Docket No. PL09-1-000

- 13 -

demonstrate the benefit to a company of developing and implementing strong compliance

measures related to Commission regulatory requirements. On the other hand, where there

is an inadequate or incomplete compliance program, or where despite a demonstrated

commitment to compliance serious violations occur, a civil penalty will be imposed. In

such circumstances, however, the Commission will consider whether, in light of all the

circumstances, a reduction in the civil penalty is warranted.

26.

Thus, for complete elimination of a civil penalty, a company must affirmatively

demonstrate (1) that its violation was not serious and (2) that its senior management has

made a commitment to compliance, that the company adopted effective preventive

measures, that when a violation is detected it is halted and reported to the Commission

promptly, and that the company took appropriate remediation steps. All of the

components must be present for complete elimination of a civil penalty; reduction of the

penalty will be considered where the company meets some but not all of the

requirements. The Commission retains discretion to determine whether the actions taken

by a company are sufficient to meet the requirements.

27.

Given the scope and breadth of the Commission’s regulatory responsibility, it is

not feasible to catalog or to list examples of violations that might be eligible for an

elimination of a civil penalty

here the company meets some but not all of the

requirements. The Commission retains discretion to determine whether the actions taken

by a company are sufficient to meet the requirements.

27.

Given the scope and breadth of the Commission’s regulatory responsibility, it is

not feasible to catalog or to list examples of violations that might be eligible for an

elimination of a civil penalty. We emphasize that where the violation is not serious and

there is a demonstration of substantial commitment to compliance, the Commission is

more likely to reduce or eliminate a civil penalty. In all instances, our goal is a firm but

fair application of the Commission’s civil penalty and remedial authority according to the

unique facts of each case. We also emphasize that other sanctions, such as disgorgement

of unjust profits and prospective compliance monitoring, may still be imposed.

IV.

Conclusion

28.

We remain committed to informing and updating the public concerning our

enforcement policies, including our policies with respect to compliance programs. We

will continue to provide guidance about our policies and to increase public understanding

of all matters related to enforcement, including the importance of compliance programs

by companies engaged in activities subject to our jurisdiction. As we noted in the

Docket No. PL09-1-000

- 14 -

Revised Policy Statement, it is our desire that enforcement actions ultimately result in

increased compliance with regulatory requirements and fewer violations of our governing

statutes, regulations, and orders.34

By the Commission. Commissioner Moeller concurring with a separate statement

attached.

( S E A L )

Kimberly D. Bose,

Secretary.

34 Revised Policy Statement at P 72.

icy Statement, it is our desire that enforcement actions ultimately result in

increased compliance with regulatory requirements and fewer violations of our governing

statutes, regulations, and orders.34

By the Commission. Commissioner Moeller concurring with a separate statement

attached.

( S E A L )

Kimberly D. Bose,

Secretary.

34 Revised Policy Statement at P 72.

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

C ompliance with Statutes, Regulations, and Orders

Docket No. PL09-1-000

(Issued October 16, 2008)

MOELLER, Commissioner concurring:

As I stated in May, “[t]hose who are subject to Commission penalties need to

know, in advance, what they must do to avoid a penalty.”1 This policy statement

provides further guidance to the industry, and that is why I support it.

Nevertheless, I would also support the development of a model compliance

program for the industries we regulate. Such a model program would need to be

individualized to the needs of the companies adopting it, but that does not mean that the

industry would not benefit from seeing a basic model containing the essentials that every

program should contain. Perhaps we could even adopt several model programs; they

could be tailored to each of the basic market activities and industries that we regulate.

Given that this Commission has not yet provided the industry with a model

program or programs, I encourage trade associations within the industries we regulate to

consider developing their own model programs. Such model programs would provide

industry with an opportunity to share best practices and consider which aspects of a

compliance program are so important that they belong in a model program.

_______________________

Philip D

the industries we regulate to

consider developing their own model programs. Such model programs would provide

industry with an opportunity to share best practices and consider which aspects of a

compliance program are so important that they belong in a model program.

_______________________

Philip D. Moeller

Commissioner

1 See Concurring Opinion of Commissioner Moeller, Enforcement of Statutes,

Regulations and Orders, 123 FERC ¶ 61,156 (2008).