Revised Policy Statement On Penalty Guidelines
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132 FERC ¶ 61,216
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Jon Wellinghoff, Chairman;
Marc Spitzer, Philip D. Moeller,
John R. Norris, and Cheryl A. LaFleur.:
Enforcement of Statutes, Orders, Rules,
and Regulations
Docket No.
PL10-4-000
REVISED POLICY STATEMENT ON PENALTY GUIDELINES
(Issued September 17, 2010)
1.
The Commission issues this Revised Policy Statement on Penalty
Guidelines to address comments we received on our Policy Statement on Penalty
Guidelines, which we issued on March 18, 2010.1 In addition to addressing these
comments, the Commission describes modifications we have made to the Penalty
Guidelines based on the comments. The Penalty Guidelines, in their modified
form, are attached to this Revised Policy Statement.2 Enforcement staff will hold
a technical conference one year from the issuance of these modified Penalty
Guidelines to discuss how they have worked and to permit comments and
questions from the industry.
2.
The modified Penalty Guidelines will play a significant role in our
determinations of civil penalties and will add greater fairness, consistency, and
transparency to our enforcement program. These Penalty Guidelines continue to
base penalties on the same factors as those present in our policy statements on
enforcement,3 but do so in a more focused manner by assigning specific and
(continued...)
1 Enforcement of Statutes, Orders, Rules, and Regulations, 130 FERC
¶ 61,220 (2010) (Policy Statement on Penalty Guidelines).
2 The Penalty Guidelines will apply to any pending investigation where our
Office of Enforcement staff (Enforcement staff or staff) and the organization have
not yet entered into settlement negotiations
(continued...)
1 Enforcement of Statutes, Orders, Rules, and Regulations, 130 FERC
¶ 61,220 (2010) (Policy Statement on Penalty Guidelines).
2 The Penalty Guidelines will apply to any pending investigation where our
Office of Enforcement staff (Enforcement staff or staff) and the organization have
not yet entered into settlement negotiations.
3 Enforcement of Statutes, Regulations and Orders, 123 FERC ¶ 61,156, at
P 50-71 (2008) (Revised Policy Statement); Enforcement of Statutes, Orders,
Docket No. PL10-4-000
- 2 -
transparent weight to each factor. For example, we will continue to base penalties
on the seriousness of the violation, measured in large part by the harm or risk of
harm caused, an organization’s efforts to remedy the violation, as well as other
culpability factors, such as senior-level involvement, prior history, compliance,
self-reporting, and cooperation.4 While these factors remain the same,
organizations will now know with more certainty how each is applied. At the
same time, the modified Penalty Guidelines do not restrict our discretion to make
an individualized assessment based on the facts presented in a given case.
3.
Further, our Penalty Guidelines are still modeled on the United States
Sentencing Guidelines (Sentencing Guidelines), though we have departed from
certain sections of that model based on some commenters’ recommendations and
have made some important modifications to specific sections of the Penalty
Guidelines.
4.
The following points highlight our responses to some of the commenters’
recommendations:
We continue to believe that it is appropriate to model the Penalty
Guidelines on the Sentencing Guidelines.
We clarify that the Penalty Guidelines will not affect Enforcement staff’s
exercise of discretion to close investigations or self-reports without
sanctions
alty
Guidelines.
4.
The following points highlight our responses to some of the commenters’
recommendations:
We continue to believe that it is appropriate to model the Penalty
Guidelines on the Sentencing Guidelines.
We clarify that the Penalty Guidelines will not affect Enforcement staff’s
exercise of discretion to close investigations or self-reports without
sanctions.
The Penalty Guidelines will apply to violations of the Reliability Standards
only in the Commission’s Part 1b investigations and enforcement actions.
We will not apply the Penalty Guidelines to our review of NERC’s Notices
of Penalty.
We accept the commenters’ recommendation to reduce the base violation
level for reliability violations from sixteen to six and to increase the risk of
harm enhancements for reliability violations.
Rules, and Regulations, 113 FERC ¶ 61,068, at P 17-27 (2005) (2005 Policy
Statement).
4 Compare Penalty Guidelines §§ 1C2.3, 2A1.1, 2B1.1 with Revised Policy
Statement, 123 FERC ¶ 61,156 at P 54-68.
Docket No. PL10-4-000
- 3 -
We accept the commenters’ suggestion that we not attempt to conduct a
specific, individualized assessment of the value of losses of load that result
from reliability violations. Instead, we will use the quantity of load lost, in
MWh, as one measure of the seriousness of the violation. We recognize,
however, that shedding load may be necessary in certain circumstances to
comply with the Reliability Standards, and no penalty would be sought for
an operator’s decision to shed load in such circumstances.
We have modified the Penalty Guidelines’ provision on compliance credit,
section 1C2.3(f), in two respects. First, we agree to give partial
compliance credit to organizations that have effective, yet imperfect,
compliance programs
certain circumstances to
comply with the Reliability Standards, and no penalty would be sought for
an operator’s decision to shed load in such circumstances.
We have modified the Penalty Guidelines’ provision on compliance credit,
section 1C2.3(f), in two respects. First, we agree to give partial
compliance credit to organizations that have effective, yet imperfect,
compliance programs. Second, we agree to delete the provision in the
Penalty Guidelines that eliminates compliance credit when an
organization’s high-level personnel, substantial authority personnel, or
individuals with operational responsibility for compliance participated in,
condoned, or were willfully ignorant of the violation.
We agree to unbundle the mitigation credits for self-reports, cooperation,
avoidance of trial-type hearings, and acceptance of responsibility,
recognizing that these factors carry independent value and should be
credited accordingly.
We agree to include a scienter requirement with respect to
misrepresentations and false statements under section 2C1.1 of the Penalty
Guidelines.
I.
Background
5.
On March 18, 2010, the Commission issued the Penalty Guidelines in an
effort to provide greater fairness, transparency, and consistency in our civil
penalty determinations. We explained that the Penalty Guidelines would provide
more clarity and consistency by assessing civil penalties based on objective
characteristics and a uniform set of factors weighted similarly for similar
violations and similar violators. We emphasized further that the Penalty
Guidelines would provide transparency by describing the factors we consider in
our penalty determinations and the weight afforded to each factor. We also said
that the Penalty Guidelines would provide us sufficient flexibility to depart from
them whenever we deem appropriate.
6
tors weighted similarly for similar
violations and similar violators. We emphasized further that the Penalty
Guidelines would provide transparency by describing the factors we consider in
our penalty determinations and the weight afforded to each factor. We also said
that the Penalty Guidelines would provide us sufficient flexibility to depart from
them whenever we deem appropriate.
6.
We explained that the Penalty Guidelines were based on Chapter Eight of
the Sentencing Guidelines related to organizations (Organizational Sentencing
Guidelines). The Sentencing Guidelines, applied for over two decades in federal
courts, were designed to provide certainty, fairness, and transparency, and
Docket No. PL10-4-000
- 4 -
examine many of the same factors that the Commission has considered in
assessing penalties, such as the harm caused by violations and an organization’s
culpability.
7.
After the Commission issued the Penalty Guidelines, Enforcement staff
held workshops in Washington, DC, Houston, and San Francisco to provide a
forum for interested participants to ask questions on the interpretation and
application of the Penalty Guidelines. Staff invited interested parties to attend the
workshops and accepted questions in advance of the workshops. At each
workshop, staff gave a demonstration on the Penalty Guidelines, including the
mechanics of how they would work. In addition, staff addressed a broad range of
questions from both the electric and natural gas industries.
8.
On April 15, 2010, the Commission suspended the Policy Statement on
Penalty Guidelines and application of the Penalty Guidelines to allow sixty days
within which comments could be submitted.5 We believed that the public interest
would be served by affording entities the opportunity to submit written comments
on the Penalty Guidelines.
9
the electric and natural gas industries.
8.
On April 15, 2010, the Commission suspended the Policy Statement on
Penalty Guidelines and application of the Penalty Guidelines to allow sixty days
within which comments could be submitted.5 We believed that the public interest
would be served by affording entities the opportunity to submit written comments
on the Penalty Guidelines.
9.
The Commission has received forty-one sets of comments on the Penalty
Guidelines addressing a broad range of issues, each of which we will address
below.6
II.
Discussion
A.
Sentencing Guidelines as a Model for the Penalty Guidelines
1.
Comments
10.
EEI, INGAA, NERC, MISO, NorthWestern, National Grid, the Joint
Municipals, TANC, and Turlock comment that there are fundamental distinctions
5 Enforcement of Statutes, Orders, Rules, and Regulations, 131 FERC
¶ 61,040 (2010).
6 Many commenters endorse and support the comments of EEI and the joint
comments of APPA, LPPC, and NRECA in addition to providing specific
comments of their own. An appendix is attached to this Policy Statement with a
complete list of commenters, including the abbreviations that we will use for each
commenter throughout this Policy Statement.
Docket No. PL10-4-000
- 5 -
between civil and criminal law that make it inappropriate to use the Sentencing
Guidelines as a model for our assessment of civil penalties.7 Specifically, these
commenters suggest that modeling the Penalty Guidelines on a criminal
framework is wrong because, unlike in the civil and regulatory context, criminal
cases require the government to prove, and an independent jury or judge to find, a
defendant guilty beyond a reasonable doubt before imposing penalties on
organizations.
11.
Some commenters also believe that the Sentencing Guidelines’ model is
problematic because of the differences between the scienter requirements in the
civil and criminal context
civil and regulatory context, criminal
cases require the government to prove, and an independent jury or judge to find, a
defendant guilty beyond a reasonable doubt before imposing penalties on
organizations.
11.
Some commenters also believe that the Sentencing Guidelines’ model is
problematic because of the differences between the scienter requirements in the
civil and criminal context. For example, EEI, APPA, ELCON, MISO, WIRAB,
and PPC comment that using the Sentencing Guidelines as a model for the
Commission’s assessment of penalties is inappropriate because violations in the
civil regulatory context are often unintentional, narrowly focused errors arising
from complex and obscure regulations, whereas the Sentencing Guidelines focus
on intentional or reckless behavior.8
12.
This difference in scienter requirements is of particular concern to
commenters with respect to reliability violations, which, the commenters point
out, can result from unintentional, inadvertent errors, including documentation
errors. For example, EEI believes that it is inappropriate to use a criminal model
that results in severe penalties for public welfare offenses, like violations of the
Reliability Standards.9 Similarly, APPA believes it is not appropriate to analogize
“failures to achieve 100 percent compliance with the myriad, detailed (and in
some cases unclear) mandatory reliability standards . . . to malum in se criminal
behavior.”10 ELCON comments that “[u]nlike a civil regulatory context where
violations generally are unintentional, narrowly focused miscues in following
complex and sometimes obscure provisions, these considerations are not viewed
as germane in the criminal context.”11 WIRAB asserts that few, if any, violations
7 See Comments of EEI at 16-17; INGAA at 1-2; NERC at 14; MISO at 3;
NorthWestern at 1; National Grid at 4-5; the Joint Municipals at 3-4; TANC at 8;
and Turlock
used miscues in following
complex and sometimes obscure provisions, these considerations are not viewed
as germane in the criminal context.”11 WIRAB asserts that few, if any, violations
7 See Comments of EEI at 16-17; INGAA at 1-2; NERC at 14; MISO at 3;
NorthWestern at 1; National Grid at 4-5; the Joint Municipals at 3-4; TANC at 8;
and Turlock. Turlock did not provide page numbers with its comments.
8 See Comments of EEI at 16-18; APPA at 4; ELCON at 2; MISO at 6-7;
WIRAB at 2; and PPC at 5.
9 Comments of EEI at 18-19.
10 Comments of APPA at 5.
Docket No. PL10-4-000
- 6 -
of Reliability Standards will occur as a result of intentional, fraudulent, or criminal
behavior and states that the Sentencing Guidelines are geared to deter that kind of
conduct.12
13.
In addition, EEI, NERC, and ReliabilityFirst comment that the Sentencing
Guidelines provide an inappropriate model because their use is in decline in
federal courts.13 For example, EEI claims that the Sentencing Guidelines have
been criticized by federal judges for their rigidity and harshness and, after the
Supreme Court made them discretionary in United States v. Booker, 543 U.S. 220
(2005), federal judges sharply reduced their use of them.14 Furthermore, EEI
asserts that a 1999 Department of Justice memorandum issued by then Deputy
Attorney General Eric Holder, known as the “Holder Memo,” encouraged
prosecutors not to prosecute organizations that engaged in specified good
corporate conduct.15 According to EEI, following the issuance of the Holder
Memo, prosecutors “increasingly chose not to prosecute firms [pursuant to the
Sentencing Guidelines] if the crime occurred notwithstanding an effective
compliance program, or, more commonly, if the firm reported wrongdoing and/or
cooperated.”16 NERC and ReliabilityFirst state that use of the Sentencing
Guidelines is controversial in the criminal context and NERC comments that they
are merely advisory.17
14
ncreasingly chose not to prosecute firms [pursuant to the
Sentencing Guidelines] if the crime occurred notwithstanding an effective
compliance program, or, more commonly, if the firm reported wrongdoing and/or
cooperated.”16 NERC and ReliabilityFirst state that use of the Sentencing
Guidelines is controversial in the criminal context and NERC comments that they
are merely advisory.17
14.
Finally, Turlock comments that, unlike the Sentencing Guidelines, the
Penalty Guidelines are not based on an extensive analysis of empirical evidence,
such as years of sentencing data.18
11 Comments of ELCON at 2-3.
12 Comments of WIRAB at 2.
13 See Comments of EEI at 15-16; NERC at 14; and ReliabilityFirst at 10.
14 Comments of EEI at 15.
15 See Comments of EEI at 16 (citing Memorandum from Eric Holder to
Heads of Department Components and United States Attorneys, June 16, 1999
(Holder Memo)).
16 Id.
17 Comments of NERC at 3; ReliabilityFirst at 10.
18 Comments of Turlock.
Docket No. PL10-4-000
- 7 -
2.
Commission Determination
15.
Although the Commission’s guidelines approach to determine civil
penalties is patterned after the Organizational Sentencing Guidelines, we do not
intend to “criminalize” violations of our statutes, rules, and regulations in any
manner. Rather, we believe “that the Sentencing Guidelines provide the best
model to adapt to the Commission purposes because they focus on factors—such
as the seriousness and remediation of a violation—that reflect the requirements of
EPAct 2005 and that we believe are the centerpiece of our penalty regime.”19 The
Commission does not agree that our use of the Sentencing Guidelines’ analytical
structure reflects a failure to appreciate distinctions between criminal and civil
law
t to the Commission purposes because they focus on factors—such
as the seriousness and remediation of a violation—that reflect the requirements of
EPAct 2005 and that we believe are the centerpiece of our penalty regime.”19 The
Commission does not agree that our use of the Sentencing Guidelines’ analytical
structure reflects a failure to appreciate distinctions between criminal and civil
law. There is nothing inherently “criminal” in the Sentencing Guidelines, just as
there is nothing inherently “civil” or “regulatory” about the Penalty Guidelines.
Neither the Sentencing Guidelines nor the Penalty Guidelines create or define
prohibited conduct. Each is simply an analytical tool designed to provide
objectivity, consistency, and transparency in penalty determinations. The
prohibited conduct is supplied by statutes, rules, and regulations that exist
independent of the guidelines. Although the Sentencing Guidelines and the
Penalty Guidelines operate in different contexts, they share common purposes,
including compliance and deterrence.
16.
Furthermore, using the Sentencing Guidelines as an analytical model for
the Penalty Guidelines does not affect our consistent practice in making our
penalty determinations by focusing on the two statutorily-mandated factors:
“seriousness of the violation” and “efforts to remedy the violation.”20 Nor does
our adopting these Penalty Guidelines alter the factors on which we have always
focused in assessing a violation’s seriousness, such as pecuniary loss or gain, harm
and risk of harm, and intent.21 Also, by using the Sentencing Guidelines as a
model, the Penalty Guidelines consider many of the same culpability factors that
19 Policy Statement on Penalty Guidelines, 130 FERC ¶ 61,220 at P 26.
20 See Revised Policy Statement, 123 FERC ¶ 61,156 at P 51 (“[W]e
implement [our] statutory mandates . .
r gain, harm
and risk of harm, and intent.21 Also, by using the Sentencing Guidelines as a
model, the Penalty Guidelines consider many of the same culpability factors that
19 Policy Statement on Penalty Guidelines, 130 FERC ¶ 61,220 at P 26.
20 See Revised Policy Statement, 123 FERC ¶ 61,156 at P 51 (“[W]e
implement [our] statutory mandates . . . by taking into account numerous factors in
determining the appropriate civil penalty for a violation, including the nature and
seriousness of the violation and the company’s efforts to remedy it.”).
21 Id. P 55.
Docket No. PL10-4-000
- 8 -
we have always considered, including prior history of violations, senior
management involvement, compliance efforts, self-reporting, and cooperation.22
17.
Thus, we are not persuaded that modeling the Penalty Guidelines on the
Sentencing Guidelines inappropriately inserts criminal law principles into our
determination of civil penalties. Nor did the Commission in any way intend to
insert such criminal law principles into our penalty regime. The Commission’s
ability to impose significant monetary penalties under the Penalty Guidelines for
statutory and regulatory violations that do not require proof of intent or
recklessness is not a function of using the Sentencing Guidelines as a model for
our Penalty Guidelines. Rather, it is a result of a Congressional determination that
persons and organizations that violate the statutes we administer can be subjected
to civil penalties of up to $1 million per day per violation.23
18
statutory and regulatory violations that do not require proof of intent or
recklessness is not a function of using the Sentencing Guidelines as a model for
our Penalty Guidelines. Rather, it is a result of a Congressional determination that
persons and organizations that violate the statutes we administer can be subjected
to civil penalties of up to $1 million per day per violation.23
18.
We are also not persuaded by a related point advanced by EEI that the
Sentencing Guidelines are a poor model for our Penalty Guidelines because “the
Sentencing Guidelines for Organizations were not intended, even by their drafters,
to apply to violations of regulatory regimes of the sort enforced by the
Commission.”24 We have found nothing in the text of the Sentencing Guidelines
22 See id. P 55-68. This point addresses the related concerns that the
Sentencing Guidelines are an inappropriate model because they focus on
intentional or reckless conduct, while some of the violations we address have no
such requirements. We have chosen to employ the Sentencing Guidelines’
analytical approach, not the substantive judgments they incorporate regarding the
appropriate penalties for the criminal behavior to which they apply. Moreover, the
Sentencing Guidelines are not applied exclusively to intentional criminal conduct.
See, e.g., 33 U.S.C. § 1319(c)(1) (2006) (negligent violation of Clean Water Act);
id. § 1319(c)(6) (responsible corporate officer is subject to criminal penalties
without proof of criminal act or personal knowledge of criminal act).
23 In expanding the Commission’s civil penalty authority, Congress did not
limit this authority to intentional violations. Moreover, Congress reserved
criminal sanctions for intentional violations, see 16 U.S.C. § 825o (2006),
confirming that unintentional violations are subject to the Commission’s civil
penalty authority
without proof of criminal act or personal knowledge of criminal act).
23 In expanding the Commission’s civil penalty authority, Congress did not
limit this authority to intentional violations. Moreover, Congress reserved
criminal sanctions for intentional violations, see 16 U.S.C. § 825o (2006),
confirming that unintentional violations are subject to the Commission’s civil
penalty authority. Some of our cases involve violations that do not require proof
of scienter, such as violations of most Reliability Standards. Others involve
violations with a scienter requirement, such as violations of our anti-manipulation
rules.
24 Comments of EEI at 18.
Docket No. PL10-4-000
- 9 -
that supports the claim that violations of regulatory regimes were excluded from
application of the Sentencing Guidelines.25
19.
EEI’s suggestion that use of the Sentencing Guidelines has been reduced in
recent years is refuted by the Supreme Court’s decision in Gall v. United States,
552 U.S. 38 (2007), in which the Court, considering the proper role of the
Sentencing Guidelines in the determination of federal sentences post-Booker,
instructed that “a district court should begin all sentencing proceedings by
correctly calculating the applicable Guidelines range. As a matter of
administration and to secure nationwide consistency, the Guidelines should be the
starting point and the initial benchmark.”26 The Court also ruled that a district
court “must make an individualized assessment based on the facts presented.”27
(continued...)
25 There is no exclusion of “regulatory offenses” from the plenary
application of the Organizational Sentencing Guidelines. See U.S.S.G. § 8A1.1.
Similarly, we find nothing to support this claim in EEI’s citation of I. Nagel & W.
Swenson, The Federal Sentencing Guidelines for Corporations: Their
Development, Theoretical Underpinnings, and Some Thoughts About Their
Future, 71 Wash. U.L.Q. 205 (1993)
is no exclusion of “regulatory offenses” from the plenary
application of the Organizational Sentencing Guidelines. See U.S.S.G. § 8A1.1.
Similarly, we find nothing to support this claim in EEI’s citation of I. Nagel & W.
Swenson, The Federal Sentencing Guidelines for Corporations: Their
Development, Theoretical Underpinnings, and Some Thoughts About Their
Future, 71 Wash. U.L.Q. 205 (1993). EEI’s attempt to use the exclusion of
environmental offenses from the fine provisions of the Organizational Sentencing
Guidelines is equally unavailing to its argument that it is inappropriate to impose
monetary penalties under the Penalty Guidelines on organizations that violate the
“regulatory” statutes enforced by the Commission. Although the Sentencing
Commission decided to exempt corporate environmental offenders from the
Sentencing Guidelines’ fine provisions, section 8C2.10 of the Sentencing
Guidelines instructs federal judges that they should use 18 U.S.C. §§ 3553 and
3572 (2006) in calculating monetary penalties for such offenses. The factors
considered in calculating fines under these provisions are the same factors the
Commission considers in applying the Penalty Guidelines. Furthermore, we note
that corporate offenders are subject to the other types of penalties generally
available under the Sentencing Guidelines, irrespective of the type of offense.
Therefore, the treatment of “regulatory” offenses under the Sentencing Guidelines
does not persuade us that we have erred in deciding to use a guidelines model to
determine penalties for violations of the statutes we enforce.
26 Gall v. United States, 552 U.S. 38, 49-50 (2007) (emphasis added).
27 Id. at 50. Furthermore, while it may have been historically true, as EEI
claims, that many federal judges felt unduly constrained by the pre-Booker regime
of mandatory guidelines, federal judges now regard the current discretionary use
of guidelines—which is the model adopted by the Commission—as the one that
enforce.
26 Gall v. United States, 552 U.S. 38, 49-50 (2007) (emphasis added).
27 Id. at 50. Furthermore, while it may have been historically true, as EEI
claims, that many federal judges felt unduly constrained by the pre-Booker regime
of mandatory guidelines, federal judges now regard the current discretionary use
of guidelines—which is the model adopted by the Commission—as the one that
Docket No. PL10-4-000
- 10 -
Thus, the federal judiciary continues to use the Sentencing Guidelines as a first
step in determining an appropriate penalty but departs where appropriate.
Likewise, our decision to adopt a guidelines-based approach does not restrict the
discretion that we have always exercised and will continue to exercise in order to
make an individualized assessment based on the facts presented in a given case.
The federal judiciary’s continued use of the Sentencing Guidelines confirms our
previously expressed view that “[t]he adoption of the Penalty Guidelines promotes
greater fairness and ensures greater proportionality . . . by more rigorously
imposing appropriately different penalties for conduct of differing severity.”28
20.
We also reject EEI’s claim that we should not use the Sentencing
Guidelines as a model because “federal prosecutors do not use [the Sentencing
Guidelines] consistently because they provide such poor incentives for corporate
compliance programs.”29 EEI’s asserted support for this position in the Holder
Memo is unavailing. The argument fails to recognize that the Holder Memo and
the Organizational Sentencing Guidelines address two different decisions made at
two different stages in the enforcement process. The Holder Memo applies at the
outset of the enforcement process and provides guidance to the Department of
Justice (DOJ) staff in its exercise of discretion of whether to seek sanctions against
a corporation
he argument fails to recognize that the Holder Memo and
the Organizational Sentencing Guidelines address two different decisions made at
two different stages in the enforcement process. The Holder Memo applies at the
outset of the enforcement process and provides guidance to the Department of
Justice (DOJ) staff in its exercise of discretion of whether to seek sanctions against
a corporation. In contrast, the Organizational Sentencing Guidelines apply only
after this decision to seek sanctions has been reached and provide guidance on the
appropriate sanction for an admitted or proven violation.30 Moreover, while EEI
(continued...)
best achieves the goals of sentencing. See United States Sentencing Commission,
“Results of Survey of United States District Judges, January 2010 through March
2010,” Table 19 (seventy-five percent of judges endorsing current Sentencing
Guidelines system). As we noted earlier, supra at P 15, the Penalty Guidelines
and the Organizational Sentencing Guidelines share a common set of purposes,
including achieving compliance with regulatory requirements and deterring
violations.
28 Policy Statement on Penalty Guidelines at P 27.
29 Comments of EEI at 16 (quoting Jennifer Arlen, White Paper:
Evaluation of the FERC Policy Statement on Penalty Guidelines (Arlen), at 5).
30 Indeed, the Holder Memo itself provides the strongest refutation of EEI’s
argument that the DOJ’s supposed dissatisfaction with the Sentencing Guidelines
ought to make the Commission hesitant in using them as a model for the Penalty
Guidelines. Specifically, it instructs DOJ staff that “[o]nce the decision to charge
is made, the same rules as govern charging natural persons apply. These rules
deed, the Holder Memo itself provides the strongest refutation of EEI’s
argument that the DOJ’s supposed dissatisfaction with the Sentencing Guidelines
ought to make the Commission hesitant in using them as a model for the Penalty
Guidelines. Specifically, it instructs DOJ staff that “[o]nce the decision to charge
is made, the same rules as govern charging natural persons apply. These rules
Docket No. PL10-4-000
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suggests that the DOJ policy reflected in the Holder Memo supports its position
that the Commission should not seek penalties for the violations of employees
from corporations that engage in “specified good corporate conduct,” we reject
both the argument and the suggestion that the Holder Memo endorses such a
practice.31
B.
The Penalty Guidelines’ Effect on Commission and Enforcement
Staff Discretion
1.
Comments
21.
EEI recommends that the preamble to the Penalty Guidelines clarify when,
how, or by whom, the discretionary nature of the Penalty Guidelines may be
applied.32 EEI, INGAA, and TAPS recommend that the Commission clarify that
civil penalties will not generally be assessed for minor, inadvertent violations,
particularly those that are self-reported.33 EEI further recommends that the
Commission clarify that: (1) Enforcement staff has discretion to dismiss
investigations, recommend downward departures, and settle for less than the
Penalty Guidelines’ range; and (2) the Commission alone has the discretion to
authorize upward departures.34 EPSA asks the Commission to clarify that civil
penalties will be reserved for cases with material harm or risk of harm and
intentional or willful violations.35 EEI also encourages the Commission to clarify
that penalties will not be imposed under the Penalty Guidelines in cases where
there is a legitimate ambiguity over what the law requires.36 On this latter point,
require a faithfu
entional or willful violations.35 EEI also encourages the Commission to clarify
that penalties will not be imposed under the Penalty Guidelines in cases where
there is a legitimate ambiguity over what the law requires.36 On this latter point,
require a faithful and honest application of the Sentencing Guidelines.” Holder
Memo § XI, Charging a Corporation: Selecting Charges.
31 Holder Memo § IV, “Charging a Corporation: Pervasiveness of
Wrongdoing” (adopting Sentencing Guidelines’ definition of “pervasiveness”);
§ VI, “Charging a Corporation: Voluntary Disclosure” (citing the Sentencing
Guidelines’ treatment of this factor).
32 Comments of EEI at 22.
33 See Comments of EEI at 21-22; INGAA at 3-4; and TAPS at 28.
34 Comments of EEI at 22.
35 Comments of EPSA at 8.
36 Comments of EEI at 21.
Docket No. PL10-4-000
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EEI states that in Order No. 693 the Commission held that “‘if a dispute arises
over compliance and there is a legitimate ambiguity regarding a particular fact or
circumstance, that ambiguity can be taken into account in the exercise of the
Commission’s enforcement discretion.’”37
22.
Similarly, TANC believes that the Commission should revise its proposed
penalty structure such that utilities will not be exposed to penalties for every
violation.38 Accordingly, TANC comments that the Commission’s policy should
not expose entities to penalties for non-serious violations, especially violations
involving Reliability Standards where the entity already has a comprehensive
compliance program in place and appropriately rectifies the condition that gives
rise to the violation.39 TANC believes that the Commission should decline to
impose a penalty for “non-serious” violations if the entity adopted reasonable
preventive measures to deter misconduct, detected and reported the violation
promptly, and took appropriate remedial action i
ity already has a comprehensive
compliance program in place and appropriately rectifies the condition that gives
rise to the violation.39 TANC believes that the Commission should decline to
impose a penalty for “non-serious” violations if the entity adopted reasonable
preventive measures to deter misconduct, detected and reported the violation
promptly, and took appropriate remedial action in response to the violation.40
23.
ISO/RTO Council recommends that the Commission clarify that the use of
the Penalty Guidelines is discretionary. Specifically, ISO/RTO Council urges the
Commission to clarify that the Commission will apply the Penalty Guidelines only
when it determines that a penalty is appropriate and that the Commission retains
the discretion not to impose a penalty and, hence, not apply the Penalty Guidelines
in the first place.41
24.
NERC makes note of the Commission’s statement in the Policy Statement
on Penalty Guidelines that we do not intend to depart from the Penalty Guidelines
regularly but will not always adhere to a rigid application of them. NERC asks
what criteria the Commission will consider in making such a determination and
37 Id. (quoting Mandatory Reliability Standards for the Bulk-Power System,
Order No. 693, FERC Stats. & Regs. ¶ 31,242, at P 275 (2007)).
38 Comments of TANC at 13.
39 Id.
40 Id. at 14-15.
41 Comments of ISO/RTO Council at 5.
o a rigid application of them. NERC asks
what criteria the Commission will consider in making such a determination and
37 Id. (quoting Mandatory Reliability Standards for the Bulk-Power System,
Order No. 693, FERC Stats. & Regs. ¶ 31,242, at P 275 (2007)).
38 Comments of TANC at 13.
39 Id.
40 Id. at 14-15.
41 Comments of ISO/RTO Council at 5.
Docket No. PL10-4-000
- 13 -
whether the guidelines will be consistently applied if the Commission were to
routinely depart from their application.42
25.
On a related note, SMUD urges the Commission to clarify that zero or low
dollar penalties may be appropriate in certain circumstances.43 Although staff
explained at the April 7, 2010, workshop that the Commission will retain the
discretion to assess zero dollar penalties in certain circumstances, SMUD states
that the Penalty Guidelines give little guidance as to when it would be appropriate
to exercise such discretion. Without such clarification, SMUD fears the starting
point for negotiations of any future violations of the Reliability Standards will be
between $8,750 and $35,000.44
26.
Similarly, Cities/M-S-R comments that the Commission should revise the
Penalty Guidelines to include the possibility of a zero dollar penalty result.45
Cities/M-S-R states that the Policy Statement on Penalty Guidelines indicates at
P 32 that discretion will be applied within the range of penalties determined by the
Penalty Guidelines, which never includes zero.46 National Grid and TANC also
comment that a perfect score for cooperation, self-reporting, and a near perfect
compliance plan cannot result in reduction to a zero dollar penalty.47
2.
Commission Determination
27.
The Commission clarifies that the Penalty Guidelines will not affect
Enforcement staff’s exercise of discretion to close investigations or self-reports
without sanctions
zero.46 National Grid and TANC also
comment that a perfect score for cooperation, self-reporting, and a near perfect
compliance plan cannot result in reduction to a zero dollar penalty.47
2.
Commission Determination
27.
The Commission clarifies that the Penalty Guidelines will not affect
Enforcement staff’s exercise of discretion to close investigations or self-reports
without sanctions. Staff will continue to close all investigations where no
violation is found, and to close some investigations without sanctions for certain
violations that are relatively minor in nature and that result in little or no potential
or actual harm. Similarly, staff’s review of self-reports will continue to result in
many instances where staff does not even open investigations, particularly for
42 Comments of NERC at 23.
43 Comments of SMUD at 9.
44 Id. at 11.
45 Comments of Cities/M-S-R at 12.
46 Id.
47 Comments of National Grid at 7; TANC at 16.
Docket No. PL10-4-000
- 14 -
minor violations that do not cause harm and where preventive measures have been
implemented to avoid recurrences. The Penalty Guidelines come into effect only
after determining that a violation has been committed and that the violation
warrants the imposition of a penalty by the Commission.
28.
We decline, however, to adopt a bright-line rule that the Penalty Guidelines
will not apply to non-serious violations, though we will consider the nature of the
violation in our penalty determination. For example, if an organization has a
pattern of multiple non-serious violations, circumstances might dictate the
application of the Penalty Guidelines.
29.
In response to EEI’s specific requests for clarification on this issue, we
emphasize that Enforcement staff has discretion to dismiss investigations and to
recommend both downward and upward departures from the Penalty Guidelines’
penalty range
e, if an organization has a
pattern of multiple non-serious violations, circumstances might dictate the
application of the Penalty Guidelines.
29.
In response to EEI’s specific requests for clarification on this issue, we
emphasize that Enforcement staff has discretion to dismiss investigations and to
recommend both downward and upward departures from the Penalty Guidelines’
penalty range. We clarify that while Enforcement staff can recommend downward
and upward departures from the Penalty Guidelines, only the Commission can
authorize such departures.
30.
EEI also proposes that we adopt a rule that penalties not be imposed in
cases where there is a “legitimate ambiguity over what the law requires.”48 Our
position on this issue has not changed since Order No. 693, in which we stated, “if
a dispute arises over compliance and there is a legitimate ambiguity regarding a
particular fact or circumstance, that ambiguity can be taken into account in the
exercise of the Commission’s enforcement discretion.”49
31.
The Commission clarifies that zero dollar penalties are still possible under
our guidelines-based approach. Specifically, Enforcement staff still has the
discretion to close an investigation with no sanctions even when a violation
occurred. In addition, Enforcement staff can recommend and the Commission can
decide to depart from the Penalty Guidelines altogether, and such a departure
could result in a zero dollar penalty. The Commission can also depart from the
Penalty Guidelines in the absence of a staff recommendation or contrary to staff’s
recommendation.
32.
Finally, in response to NERC’s request for clarification on the criteria we
will consider in deciding whether to depart from the Penalty Guidelines, no
48 Comments of EEI at 21.
49 Order No. 693, FERC Stats. & Regs. ¶ 31,242 at P 275.
m the
Penalty Guidelines in the absence of a staff recommendation or contrary to staff’s
recommendation.
32.
Finally, in response to NERC’s request for clarification on the criteria we
will consider in deciding whether to depart from the Penalty Guidelines, no
48 Comments of EEI at 21.
49 Order No. 693, FERC Stats. & Regs. ¶ 31,242 at P 275.
Docket No. PL10-4-000
- 15 -
guidelines could include an exhaustive list of factors, and each decision will
depend on the particular facts and circumstances. As we emphasize throughout
the Revised Policy Statement, our decision to adopt a guidelines-based approach
does not restrict the discretion that we have always exercised and will continue to
exercise in order to make an individualized assessment based on the facts
presented in a given case.50 Generally, we recognize that the Penalty Guidelines
may not always account for the specific facts and circumstances of every case.
This is an inevitable feature of a guidelines-based approach to determining
penalties. It may be appropriate to depart from applying the Penalty Guidelines
where they do not account for significant circumstances surrounding a violation,
which is why we include the flexibility to depart as necessary. When the
Commission determines that it is appropriate to depart upward or downward from
the Penalty Guidelines, we will set out on the record the considerations that caused
us to conclude a departure was appropriate.51
C.
Reliability-Related Issues
1.
Applicability of the Penalty Guidelines to Violations of the
Reliability Standards
a.
Comments
33.
Many commenters from the electric industry argue that the Penalty
Guidelines should not apply to violations of the Reliability Standards because
there are already guidelines—the NERC Sanction Guidelines—that apply to
reliability violations.52 Many of these commenters support and endorse the
comments filed by EEI and APPA on this issue
olations of the
Reliability Standards
a.
Comments
33.
Many commenters from the electric industry argue that the Penalty
Guidelines should not apply to violations of the Reliability Standards because
there are already guidelines—the NERC Sanction Guidelines—that apply to
reliability violations.52 Many of these commenters support and endorse the
comments filed by EEI and APPA on this issue.
(continued...)
50 See supra P 2.
51 See Policy Statement on Penalty Guidelines, 130 FERC ¶ 61,220 at P 65
(“[W]e expect that all orders imposing penalties shall describe the facts that
support the penalty amount.”). In the context of settlement discussions, staff will
inform the subject of the investigation of any departures.
52 See, e.g., Comments of EEI at 5-7; APPA at 7-10; BPA at 10; ELCON at
4; FRCC at 1; MRO at 5-6; National Grid at 12-13; NERC at 8; NPCC at 7;
NCPA at 3-4; NorthWestern at 2; PPC at 11-12; ReliabilityFirst at 12; SMUD at
3-5; SCE at 1-2; Joint Municipals at 3-8; Cities/M-S-R at 7; TAPS at 2; TANC at
1-2; WIRAB at 1; and Xcel at 3-5. In addition, MISO comments that the Penalty
Docket No. PL10-4-000
- 16 -
34.
EEI states that consistency and predictability are not achieved by having
two sets of guidelines for the same type of violations.53 Specifically, EEI
comments that the Commission has already approved the NERC Sanction
Guidelines and argues that consistency is not achieved by layering a different set
of guidelines on top of NERC’s existing framework.54 EEI and other commenters
from the electric industry believe that having two sets of potentially conflicting
guidelines will result in confusion and inconsistency.55 For example, APPA
believes that “instead of bringing greater consistency, FERC’s proposal of a
completely different set of Penalty Guidelines . .
by layering a different set
of guidelines on top of NERC’s existing framework.54 EEI and other commenters
from the electric industry believe that having two sets of potentially conflicting
guidelines will result in confusion and inconsistency.55 For example, APPA
believes that “instead of bringing greater consistency, FERC’s proposal of a
completely different set of Penalty Guidelines . . . increases uncertainty by
overlaying a second penalty regime and much higher potential penalties in
selected cases.”56 In addition, EEI believes that it weakens NERC and the regions
to have them calculate penalties under one process only to have the Commission
use another method.57
35.
Similarly, PPC, EPSA, and National Grid are concerned that the Penalty
Guidelines create confusion regarding when and how they will apply to violations
already assessed under the NERC Sanction Guidelines.58 PPC states that because
the Commission does not propose to eliminate the existing NERC and Regional
Entity penalty structure, all the Penalty Guidelines would do is conflict with and
potentially override the existing penalty structure.59
36.
As an alternative argument, EEI, NERC, and NorthWestern argue that if we
decide to adopt the Penalty Guidelines for reliability violations, we should clarify
that they would apply only to the Commission’s own investigations conducted
Guidelines should apply only to serious reliability violations. Comments of MISO
at 8.
53 Comments of EEI at 5.
54 Id. at 6.
55 See, e.g., id. at 6-7.
56 Comments of APPA at 8.
57 Comments of EEI at 6.
58 See Comments of PPC at 6; EPSA at 9; and National Grid at 12.
59 Comments of PPC at 6.
Guidelines should apply only to serious reliability violations. Comments of MISO
at 8.
53 Comments of EEI at 5.
54 Id. at 6.
55 See, e.g., id. at 6-7.
56 Comments of APPA at 8.
57 Comments of EEI at 6.
58 See Comments of PPC at 6; EPSA at 9; and National Grid at 12.
59 Comments of PPC at 6.
Docket No. PL10-4-000
- 17 -
under Part 1b of our regulations.60 This clarification, EEI contends, will avoid
conflict and uncertainty that would result from having NERC and the Regional
Entities calculate penalties under one process but have the Commission review
and potentially reverse their determinations under a different method.61
37.
Instead of applying the Penalty Guidelines to reliability violations, many
commenters argue that the NERC Sanction Guidelines should govern enforcement
of the Reliability Standards.62
38.
EEI states that the Commission approved the Sanction Guidelines to
provide a predictable, uniform, and rational approach for determining penalties.63
EEI comments that the NERC Sanction Guidelines accomplish these goals through
a detailed set of Violation Risk Factors (VRF) and Violation Severity Levels
(VSL), which create a base penalty range. EEI states that aggravating and
mitigating factors are then applied to select a penalty within that range.64
39.
NERC comments that its Sanction Guidelines are designed and applied to
foster a proactive reliability risk management assessment by scaling base penalties
to risks to the Bulk-Power System and by using technical judgment in applying
mitigating and aggravating factors to arrive at the ultimate penalty.65 NERC states
that the prospect of very high, rapidly escalating penalties, as set out in the Penalty
Guidelines, will cause entities to make compliance risk management more
important than reliability risk management when the first focus should be on
60 See Comments
applying
mitigating and aggravating factors to arrive at the ultimate penalty.65 NERC states
that the prospect of very high, rapidly escalating penalties, as set out in the Penalty
Guidelines, will cause entities to make compliance risk management more
important than reliability risk management when the first focus should be on
60 See Comments of EEI at 7; NERC at 25; and NorthWestern at 4. EPSA
also urges the Commission to clarify that the Penalty Guidelines would apply only
to the Commission’s own investigations conducted under Part 1b of our
regulations. Comments of EPSA at 7-8.
61 Comments of EEI at 6.
62 See, e.g., Comments of EEI at 5-7; ELCON at 4; NERC at 2-3; APPA at
7-8; MRO at 5-6; NPCC at 7; NCPA at 3-4; NorthWestern at 2; ReliabilityFirst at
8-9; FRCC at 1; SWTDUG at 5; MISO at 7-8; TAPS at 5; WECC at 1; Hoosier at
3-4; and Xcel at 3-5.
63 Comments of EEI at 5-7.
64 Id. at 5.
65 Comments of NERC at 12.
Docket No. PL10-4-000
- 18 -
reliability improvement and not penalty avoidance. NERC believes that such a
risk averse posture will ultimately lead to the detriment of the reliability of the
Bulk-Power System.66
40.
ReliabilityFirst comments that the Commission-approved NERC Sanction
Guidelines provide an effective and transparent model to determine penalties
because they utilize a straightforward Base Penalty Amount Table which has been
consistently and fairly applied for almost three years.67
41.
MISO further argues that the Penalty Guidelines will likely cause confusion
because they do not expressly incorporate VRFs or VSLs, which are the most
important factors in calculating penalties under the NERC Sanction Guidelines.68
APPA also asserts that a dual penalty regime will substantially undermine
NERC’s Commission-approved model for no good purpose.69
42
most three years.67
41.
MISO further argues that the Penalty Guidelines will likely cause confusion
because they do not expressly incorporate VRFs or VSLs, which are the most
important factors in calculating penalties under the NERC Sanction Guidelines.68
APPA also asserts that a dual penalty regime will substantially undermine
NERC’s Commission-approved model for no good purpose.69
42.
Finally, in arguing that the NERC Sanction Guidelines should be the single
and sole standard for violations of the Reliability Standards, SWTDUG asserts that
the Commission’s role should be limited to an appellate function.70 Specifically,
SWTDUG suggests that the Commission should assume the role of an appellate
court if we deem it necessary to review NERC’s penalty assessment on a case by
case basis in the future “but should also make it clear that [our] review will
constitute acceptance or in the alternative remand to NERC on a basis, with
instructions, that sets a clear and understandable national policy.”71
b.
Commission Determination
43.
The Commission disagrees with the commenters’ suggestion that we not
apply the Penalty Guidelines to violations of the Reliability Standards. The
Commission has decided that we will apply the Penalty Guidelines in enforcing
66 Id.
67 Comments of ReliabilityFirst at 8-9.
68 Comments of MISO at 7.
69 Comments of APPA at 9.
70 Comments of SWTDUG at 5.
71 Id.
disagrees with the commenters’ suggestion that we not
apply the Penalty Guidelines to violations of the Reliability Standards. The
Commission has decided that we will apply the Penalty Guidelines in enforcing
66 Id.
67 Comments of ReliabilityFirst at 8-9.
68 Comments of MISO at 7.
69 Comments of APPA at 9.
70 Comments of SWTDUG at 5.
71 Id.
Docket No. PL10-4-000
- 19 -
our regulations and requirements and, because enforcement of the Reliability
Standards falls under our direct enforcement authority, we see no reason to treat
these requirements any differently than any of the other requirements that the
Commission administers. In EPAct 2005, Congress granted the Commission
explicit authority to directly enforce the Reliability Standards.72 This authority is
separate from the authority of the Electric Reliability Organization (ERO) to
enforce the Reliability Standards and the Commission’s authority to review the
ERO’s enforcement determinations.73
44.
We have exercised our discretion to enforce the Reliability Standards and
will continue to do so.74
45.
The commenters’ argument about having two sets of guidelines for
enforcement of the Reliability Standards is unrelated to our issuance of the Penalty
Guidelines. After all, there always have been two sets of standards governing the
enforcement of the Reliability Standards. When investigating and settling
reliability matters prior to issuance of the Penalty Guidelines, the Commission
applied the enforcement factors enumerated in our Revised Policy Statement to
determine an appropriate penalty.75 Meanwhile, NERC applied the NERC
Sanction Guidelines to its enforcement actions. Thus, the existence of two
enforcement regimes for the Reliability Standards is not a new phenomenon
created by the Penalty Guidelines.
72 See 16 U.S.C
applied the enforcement factors enumerated in our Revised Policy Statement to
determine an appropriate penalty.75 Meanwhile, NERC applied the NERC
Sanction Guidelines to its enforcement actions. Thus, the existence of two
enforcement regimes for the Reliability Standards is not a new phenomenon
created by the Penalty Guidelines.
72 See 16 U.S.C. § 824o(e)(3) (2006) (“On its own motion or upon
complaint, the Commission may order compliance with a reliability standard and
may impose a penalty against a user or owner or operator of the bulk-power
system if the Commission finds, after notice and opportunity for a hearing, that the
user or owner or operator of the bulk-power system has engaged or is about to
engage in any acts or practices that constitute or will constitute a violation of a
reliability standard.”).
73 See 16 U.S.C. § 824o(e)(1)-(2).
74 See, e.g., Florida Blackout, 129 FERC ¶ 61,016 (2009); Florida
Blackout, 130 FERC ¶ 61,163 (2010).
75 See, e.g., Florida Blackout, 129 FERC ¶ 61,016 (settlement with FPL);
Florida Blackout, 130 FERC ¶ 61,163 (settlement with Florida Reliability
Coordinating Council (FRCC)). This has also been the approach while the Penalty
Guidelines have been suspended.
Docket No. PL10-4-000
- 20 -
46.
The Commission is not persuaded by the commenters’ suggestion that there
cannot continue to be two sets of guidelines for enforcement of the Reliability
Standards. The Commission and NERC, the Commission-approved ERO, have
complementary, but separate, authority to enforce the Reliability Standards. The
Penalty Guidelines will apply to the Commission’s investigations conducted under
18 C.F.R. Part 1b (2010) as well as to our enforcement actions. These are separate
from NERC’s enforcement processes. And, as we explain more fully below, we
will not apply the Penalty Guidelines to our review of Notices of Penalty.76
47
, but separate, authority to enforce the Reliability Standards. The
Penalty Guidelines will apply to the Commission’s investigations conducted under
18 C.F.R. Part 1b (2010) as well as to our enforcement actions. These are separate
from NERC’s enforcement processes. And, as we explain more fully below, we
will not apply the Penalty Guidelines to our review of Notices of Penalty.76
47.
NERC comments that “there are cases in which the Commission and NERC
have concurrent [Part] 1b and compliance violation investigation proceedings,”
and “expects that [the Commission] and NERC will jointly work to determine the
penalty” in such proceedings.77 The Commission acknowledges that in many, if
not all, instances where we have initiated Part 1b investigations, our staff works
jointly with NERC staff. In such matters, the Commission will use the Penalty
Guidelines in determining an appropriate penalty.
48.
The Commission also rejects the commenters’ suggestion that we apply the
NERC Sanction Guidelines in our own investigations and enforcement actions
instead of applying the Penalty Guidelines. As we explained above, EPAct 2005
empowers the Commission to exercise direct enforcement authority over the
Reliability Standards. We see no reason to treat these requirements any differently
than any of the other conduct that the Commission regulates.
49.
Applying the Sanction Guidelines to the Commission’s own Part 1b
enforcement actions would be a significant and unwarranted break from
Commission practice. We have previously recognized that when conducting our
own reliability enforcement actions, we would proceed with a penalty calculation
that would rely on our own policy statements on enforcement.78 Perhaps more
(continued...)
76 See infra section II.C.2.b.
77 Comments of NERC at 10
rranted break from
Commission practice. We have previously recognized that when conducting our
own reliability enforcement actions, we would proceed with a penalty calculation
that would rely on our own policy statements on enforcement.78 Perhaps more
(continued...)
76 See infra section II.C.2.b.
77 Comments of NERC at 10.
78 North American Electric Reliability Corporation, 118 FERC ¶ 61,030, at
P 93 (2007) (“In any event, if NERC does not submit Violation Risk Factors and
Violation Severity Levels in sufficient time for their use when NERC’s
enforcement program is to become effective in June 2007, we reserve the ability to
take appropriate action to ensure that the penalty-setting process described in the
Sanction Guidelines is operative. Alternatively, the Commission is prepared to
assess monetary penalties for violations of Reliability Standards itself, pursuant to
Docket No. PL10-4-000
- 21 -
significantly, when we have actually sought civil penalties under our own
authority in the past, we have not been bound by the Sanction Guidelines. We
have not operated under the Sanction Guidelines, even when NERC participated in
the enforcement action.79 The Commission, for example, instituted an
investigation using its own authority into the events surrounding the 2008 Florida
Blackout and entered into two settlements as part of the investigation, one with
FPL and the other with the FRCC.80 Neither settlement order cited the NERC
Sanction Guidelines as the basis for setting the penalty amount, though both of
these investigations were conducted jointly with NERC. NERC was a signatory to
both settlements and received a portion of the penalty dollars equal to the amount
paid to the United States Treasury. The commenters have not provided a good
justification for changing this approach.
50
cited the NERC
Sanction Guidelines as the basis for setting the penalty amount, though both of
these investigations were conducted jointly with NERC. NERC was a signatory to
both settlements and received a portion of the penalty dollars equal to the amount
paid to the United States Treasury. The commenters have not provided a good
justification for changing this approach.
50.
Finally, the Commission rejects SWTDUG’s suggestion that we limit our
enforcement of the Reliability Standards to an appellate function. This suggestion
ignores the statutory framework under which we operate. As we have stated,
Congress granted the Commission explicit authority to enforce the Reliability
Standards, and we have exercised this authority for serious violations of these
standards. We also have authority to review NERC’s and the Regional Entities’
penalty determinations. We will continue to exercise both of these statutory
functions, although, as explained below, when reviewing Notices of Penalty we
will not apply the Penalty Guidelines.
2.
Penalty Guidelines’ Applicability to Notices of Penalty
a.
Comments
51.
EEI, MRO, EPSA, and PNGC recommend that the Commission specify
that the Penalty Guidelines will not be used to evaluate Notice of Penalties.81
NPCC further recommends that the Commission continue to utilize the NERC
the Policy Statement on Enforcement, if NERC and the Regional Entities are
unable to do so.”).
79 Id.
80 See Florida Blackout, 129 FERC ¶ 61,016; Florida Blackout, 130 FERC
¶ 61,163.
81 See Comments of EEI at 6; MRO at 6; EPSA at 11; and PNGC at 6.
he NERC
the Policy Statement on Enforcement, if NERC and the Regional Entities are
unable to do so.”).
79 Id.
80 See Florida Blackout, 129 FERC ¶ 61,016; Florida Blackout, 130 FERC
¶ 61,163.
81 See Comments of EEI at 6; MRO at 6; EPSA at 11; and PNGC at 6.
Docket No. PL10-4-000
- 22 -
Sanction Guidelines and corresponding Commission case law when reviewing
Notices of Penalty.82
52.
TANC, NERC, APPA, ISO/RTO Council, BPA, Joint Municipals,
ReliabilityFirst, and Turlock state that, although the Commission has stated that
the Penalty Guidelines will generally not apply during the Commission’s review
of Notices of Penalty, the Commission also said that we may consider the results
of applying the Penalty Guidelines for “out-of-ordinary” Notices of Penalty that
describe “serious” violations.83 These commenters believe that both “out-of-
ordinary” and “serious,” as used in the Penalty Guidelines, are vague and
ambiguous terms. They state that these terms are not defined and it is not clear
when and how they will be applied. These commenters assert that this lack of
clarity will create confusion and inefficiencies. They claim that vagueness will
create confusion at the regional level regarding whether the NERC Sanction
Guidelines or the Penalty Guidelines must be consulted or govern a particular
determination, and confusion, in turn, will result in inefficiencies. ISO/RTO
Council further recommends that the Commission provide examples of “out-of-
ordinary” circumstances when we might apply the Penalty Guidelines when
reviewing Notices of Penalty.84
53
he regional level regarding whether the NERC Sanction
Guidelines or the Penalty Guidelines must be consulted or govern a particular
determination, and confusion, in turn, will result in inefficiencies. ISO/RTO
Council further recommends that the Commission provide examples of “out-of-
ordinary” circumstances when we might apply the Penalty Guidelines when
reviewing Notices of Penalty.84
53.
Moreover, APPA interprets P 64 of the Policy Statement on Penalty
Guidelines to mean that if the Commission thinks a penalty NERC has levied for a
serious violation is “too low” as compared to the penalty the Commission itself
would levy, it will review that penalty.85 APPA states that P 64 of the Policy
Statement, taken together with the Commission’s action to review the penalty
levied against Turlock in Docket No. NP10-18-000 (Turlock Notice of Penalty)
indicates that the Commission is reserving the right to second guess penalties
NERC assesses under its own guidelines in all “serious” cases.86
82 Comments of NPCC at 5.
83 See, e.g., Comments of TANC at 18; NERC at 10; APPA at 8; ISO/RTO
Council at 7; BPA at 6; Joint Municipals at 11; ReliabilityFirst at 4; and Turlock.
84 Comments of ISO/RTO Council at 7.
85 Comments of APPA at 8.
86 Id.
Docket No. PL10-4-000
- 23 -
54.
WIRAB believes that use of the Penalty Guidelines could complicate and
confuse the existing standards enforcement regime because the Policy Statement
on Penalty Guidelines states that the Commission would apply its guidelines in
“out-of-ordinary” cases, essentially adding a new and different enforcement
regime to that applicable in “ordinary” cases.87 WIRAB presumes that NERC
enforcement actions comprise the universe of “ordinary” cases, but states that it is
unclear whether a Commission review of a Notice of Penalty would make a case
“out-of-ordinary,” or whether a case would become “out-of-ordinary” only if the
Commission initiated the investigation.88
55
new and different enforcement
regime to that applicable in “ordinary” cases.87 WIRAB presumes that NERC
enforcement actions comprise the universe of “ordinary” cases, but states that it is
unclear whether a Commission review of a Notice of Penalty would make a case
“out-of-ordinary,” or whether a case would become “out-of-ordinary” only if the
Commission initiated the investigation.88
55.
APPA states that it takes no comfort in the fact that the Turlock Notice Of
Penalty is the only Notice of Penalty the Commission has chosen to review thus
far.89 It believes that the Commission’s decision to review the penalty that the
Regional Entity and NERC assessed in the Turlock Notice of Penalty is both
inappropriate and unwarranted, and only heightens the commenters’ concerns
about the Penalty Guidelines’ applicability. In light of the Commission’s review
of the Turlock Notice of Penalty, APPA believes that “no user, owner, or
operator” of the Bulk-Power System is safe from arbitrary and capricious reviews
of NERC-assessed penalties.90
b.
Commission Determination
56.
The Commission agrees not to apply the Penalty Guidelines in our review
of Notices of Penalty. In the Policy Statement on Penalty Guidelines we stated
that we may consider the results of applying the Penalty Guidelines for out-of-the-
ordinary Notices of Penalty that describe serious violations.91 The Commission
now believes, however, that our use of the Penalty Guidelines should be reserved
solely for our own Part 1b investigations and enforcement actions and not for our
87 Comments of WIRAB at 3.
88 Id.
89 Comments of APPA at 17-18.
90 Id. at 18. The Commission views APPA’s specific comments on the
merits of the Turlock Notice of Penalty as beyond the scope of the Penalty
Guidelines. This is not the proper proceeding to discuss the merits of individual
Notices of Penalty.
91 Policy Statement on Penalty Guidelines, 130 FERC ¶ 61,220 at P 64.
87 Comments of WIRAB at 3.
88 Id.
89 Comments of APPA at 17-18.
90 Id. at 18. The Commission views APPA’s specific comments on the
merits of the Turlock Notice of Penalty as beyond the scope of the Penalty
Guidelines. This is not the proper proceeding to discuss the merits of individual
Notices of Penalty.
91 Policy Statement on Penalty Guidelines, 130 FERC ¶ 61,220 at P 64.
Docket No. PL10-4-000
- 24 -
review of NERC’s Notices of Penalty. This will ensure consistent and predictable
review of Notices of Penalty.
57.
The Commission will continue to consider the same substantive factors that
we have always considered in determining whether to review a Notice of Penalty,
including the seriousness of the violation, as measured by the VRF and the VSL,
as well as the potential risk to the reliability of the Bulk-Power System and any
actual harm that resulted. We will also consider the need to ensure consistency of
penalties and the need to improve compliance with the Reliability Standards.92
3.
Base Violation Level for Violations of Reliability
Standards
a.
Comments
58.
Many commenters from the electric industry believe that a base violation
level of sixteen for a violation of the Reliability Standards is too high and that the
Commission has failed to explain and justify why the base violation level for a
reliability violation should be set at sixteen.93 These commenters suggest that this
base violation level is unjustified, particularly when compared to the base
violation level of six for market manipulation, fraud, anti-competitive conduct,
and other rule, tariff, and order violations. The commenters argue that violations
of the Reliability Standards often involve documentation errors, negligence, and
mistake, which are less culpable than the scienter required for market
manipulation and fraud.
59
ustified, particularly when compared to the base
violation level of six for market manipulation, fraud, anti-competitive conduct,
and other rule, tariff, and order violations. The commenters argue that violations
of the Reliability Standards often involve documentation errors, negligence, and
mistake, which are less culpable than the scienter required for market
manipulation and fraud.
59.
EEI believes that there is no basis to treat reliability violations with a
sixteen base violation level, stating that such level is used for serious crimes under
the Sentencing Guidelines.94 Similarly, Empire argues that the base violation
92 See Review of Notices of Penalty for Violations of Reliability Standards,
123 FERC ¶ 61,046, P 11 (2008).
93 See, e.g., Comments of EEI at 23-24; BPA at 7-8; NERC at 14-15;
Empire at 1; APPA at 6-7; NPCC at 5; NCPA at 6; PNGC at 2; SMUD at 12-14;
TAPS at 9-10; TANC at 3; and Turlock.
94 Comments of EEI at 23.
Docket No. PL10-4-000
- 25 -
level for reliability violations fails to appropriately assess the severity of partic
violations.
ular
95
60.
EEI proposes a modification to the base violation level and reliability
adjustments to better account for the varying types of reliability violations.96
Specifically, EEI proposes that, in connection with a reduction of the base penalty
to six, the enhancement for risk for violations involving a low risk of minor harm
remain at zero, while the enhancements in cases involving either a low risk of
substantial harm or a moderate risk of minor harm increase from +3 to +5, and that
the enhancements for a moderate risk of substantial harm or a high risk of minor
harm increase from +5 to +8
tion with a reduction of the base penalty
to six, the enhancement for risk for violations involving a low risk of minor harm
remain at zero, while the enhancements in cases involving either a low risk of
substantial harm or a moderate risk of minor harm increase from +3 to +5, and that
the enhancements for a moderate risk of substantial harm or a high risk of minor
harm increase from +5 to +8. For cases involving either a low risk of major harm
or a high risk of substantial harm, EEI proposes increasing the enhancement from
+7 to +11, while in cases involving a moderate risk of major harm, EEI proposes
increasing the enhancement from +9 to +14. EEI proposes increasing the
enhancement from +12 to +18 in cases involving either a low risk of extreme harm
or a high risk of major harm, while increasing the enhancement from +14 to +22 in
cases involving a moderate risk of extreme harm. Finally, EEI proposes
increasing the enhancement from +16 to +26 in cases involving a high risk of
extreme harm.97
61.
EEI believes this to be a better approach because a high base violation level
of sixteen is not appropriate for non-serious reliability matters, yet the
modification to the enhancements still allows the Commission to assess significant
penalties for more serious cases.98 BPA similarly suggests that the Commission
should lower the base violation level for Reliability Standard violations and
increase the penalty level based on the type of conduct involved.99
95 Comments of Empire at 1.
96 See Comments of EEI at 25.
97 These modifications are summarized in chart form in EEI’s comments
at 25.
98 Comments of EEI at 24.
99 Comments of BPA at 8.
cases.98 BPA similarly suggests that the Commission
should lower the base violation level for Reliability Standard violations and
increase the penalty level based on the type of conduct involved.99
95 Comments of Empire at 1.
96 See Comments of EEI at 25.
97 These modifications are summarized in chart form in EEI’s comments
at 25.
98 Comments of EEI at 24.
99 Comments of BPA at 8.
Docket No. PL10-4-000
- 26 -
b.
Commission Determination
62.
We agree to reduce the base violation level for the reliability guideline from
sixteen to six. This reduction equates the base violation level for reliability
violations to the violation level in section 2B1.1 for violations of other
Commission requirements. Setting the violation level at six still reflects the
seriousness with which the Commission treats all violations of the Reliability
Standards without differentiating them from violations of other Commission rules,
requirements, and orders.
63.
With respect to the enhancements for risk of harm, we find merit in EEI’s
suggestion for the relatively less serious reliability violations. Thus, we agree to
EEI’s proposal that, in connection with a reduction of the base violation level to
six, the enhancement for violations involving a low risk of minor harm remain at
0, while the enhancements in cases involving either a moderate risk of minor harm
or a low risk of substantial harm increase from +3 to +5, and that the
enhancements for a high risk of minor harm or a moderate risk of substantial harm
increase from +5 to +8. We accept these suggestions as appropriately balancing
the need for an adequate deterrent for reliability violations while recognizing that
relatively less severe violations should receive relatively smaller penalties.
64.
We do not accept EEI’s proposal on the risk of harm enhancements for the
more serious reliability violations because we believe that more significant
enhancements are necessary
pt these suggestions as appropriately balancing
the need for an adequate deterrent for reliability violations while recognizing that
relatively less severe violations should receive relatively smaller penalties.
64.
We do not accept EEI’s proposal on the risk of harm enhancements for the
more serious reliability violations because we believe that more significant
enhancements are necessary. For cases involving either a low risk of major harm
or a high risk of substantial harm, EEI has proposed increasing the enhancement
from +7 to +11, while in cases involving a moderate risk of major harm, EEI
proposes increasing the enhancement from +9 to +14. Instead, we set the
enhancement for violations involving a high risk of substantial harm or a low risk
of major harm at +13 and the enhancement for violations involving a moderate
risk of major harm at +18. The resulting total violation level for these violations,
however, is lower than would be imposed under the original Penalty Guidelines.
The total violation levels in the original Penalty Guidelines for violations falling
within these categories were twenty-three and twenty-five. Under these revisions,
the violation levels are reduced to nineteen and twenty-four.
65.
For the most serious violations of the Reliability Standards imposing the
greatest risk to the system, i.e., those that threaten a high risk of major harm or
pose any risk of extreme harm, we believe the original Penalty Guidelines reached
an appropriate outcome. The EEI proposal would produce substantially lower
violation levels in cases of extreme harm than those outlined in the original
Penalty Guidelines even though the examples of “extreme harm” given in the
Penalty Guidelines involve the type of widespread, cascading outages in the 2003
Northeast Blackout that led to the development of mandatory Reliability Standards
ed
an appropriate outcome. The EEI proposal would produce substantially lower
violation levels in cases of extreme harm than those outlined in the original
Penalty Guidelines even though the examples of “extreme harm” given in the
Penalty Guidelines involve the type of widespread, cascading outages in the 2003
Northeast Blackout that led to the development of mandatory Reliability Standards
Docket No. PL10-4-000
- 27 -
in the first place. As a result, we have increased the risk enhancement for those
violations by ten levels to compensate for the ten-level reduction in the base
violation level. These levels reflect the need to communicate the seriousness with
which the Commission takes its authority to protect against major blackouts and
other significant reliability incidents.
66.
The following table compares the base violation levels, risk of harm
adjustments, total violation levels, and base penalties in our original Penalty
Guidelines and the modified Penalty Guidelines:
Risk of Harm
Base
Adj.
Total
Base
Base
Adj.
Total
Base
Penalty
Penalty
Low Risk-Minor Harm
16
0
16
$175,000
6
0
6
$5,000
Low Risk-Substantial Harm;
16
3
19
$500,000
6
5
11
$30,000
Moderate Risk-Minor Harm
16
3
19
$500,000
6
5
11
$30,000
Moderate Risk-Substantial Harm;
16
5
21
$910,000
6
8
14
$85,000
High Risk-Minor Harm
16
5
21
$910,000
6
8
14
$85,000
Low Risk-Major Harm;
16
7
23
$1,600,000
6
13
19
$500,000
High Risk-Substantial Harm
16
7
23
$1,600,000
6
13
19
$500,000
Moderate Risk-Major Harm
16
9
25
$2,800,000
6
18
24
$2,100,000
Low Risk-Extreme Harm;
16
12
28
$6,300,000
6
22
28
$6,300,000
High Risk-Major Harm
16
12
28
$6,300,000
6
22
28
$6,300,000
Moderate Risk-Extreme Harm
16
14
30
$10,500,000
6
24
30
$10,500,000
High Risk-Extreme Harm
16
16
32
$17,500,000
6
26
32
$17,500,000
Comparison of Base Violation Levels and Risk of Harm Adjustments
Original Guidelines
Modified Guidelines
4.
Load Loss
a.
Comments
67
0,000
Low Risk-Extreme Harm;
16
12
28
$6,300,000
6
22
28
$6,300,000
High Risk-Major Harm
16
12
28
$6,300,000
6
22
28
$6,300,000
Moderate Risk-Extreme Harm
16
14
30
$10,500,000
6
24
30
$10,500,000
High Risk-Extreme Harm
16
16
32
$17,500,000
6
26
32
$17,500,000
Comparison of Base Violation Levels and Risk of Harm Adjustments
Original Guidelines
Modified Guidelines
4.
Load Loss
a.
Comments
67.
Many commenters from the electric industry express concern over the
Commission’s consideration of load loss and, particularly, the value of such loss,
in our penalty assessments.100
(continued...)
100 See, e.g., Comments of EEI at 23; EPSA at 9; ELCON at 3-4; Empire
at 1; ISO-NE at 3-9; APPA at 11-13; NARUC at 2; NERC at 15-20; NPCC at 6;
Docket No. PL10-4-000
- 28 -
68.
Many of these commenters believe that factoring load loss into penalty
determinations will have a perverse incentive on operators not to shed load when
doing so would be necessary to maintain reliability and avoid cascading
outages.101 For example, NERC states that it and the Regional Entities have
worked for decades to educate utility management and system operators on the
importance of shedding load in a timely fashion when it is necessary to protect the
integrity of the Bulk-Power System.102 NERC and NARUC believe that the
failure to shed load on a timely basis to protect overall system integrity was the
root cause of the July 1977 blackout in New York City and the 2003 Northeast
Blackout.103 NERC states further that when shedding load is required, it must be
done without hesitation or fear of penalty or other sanction and that the existence
of Penalty Guidelines that emphasize increased penalties for shedding load could
have a chilling effect on system operators’ willingness to exercise their authority
to shed load when necessary.104
69
ity and the 2003 Northeast
Blackout.103 NERC states further that when shedding load is required, it must be
done without hesitation or fear of penalty or other sanction and that the existence
of Penalty Guidelines that emphasize increased penalties for shedding load could
have a chilling effect on system operators’ willingness to exercise their authority
to shed load when necessary.104
69.
APPA believes that in addition to creating this perverse incentive, the load
loss factor places “inappropriate stress on transmission system operators, who
must often make decisions whether or not to shed load in very short order. These
are engineers and other comparable professionals doing their best to carry out a
difficult and very technical job.”105 PPC comments that under the current penalty
and compliance framework, member utilities are reporting that experienced
engineers and technical staff are retiring or requesting transfers in order to avoid
duties that involve compliance activities. PPC states that these employees fear
that, despite their best intentions, judgment and actions, they will be held
NorthWestern at 3; PNGC at 3-4; PPC at 7-8; SMUD at 7-9; SCE at 10-11; Joint
Municipals at 8-10; TAPS at 13-17; TANC at 3-4; WIRAB at 3; and Xcel at 3-4.
101 See, e.g., Comments of NERC at 17; ELCON at 3; APPA at 11;
NARUC at 2; NPCC at 6; PNGC at 3; PPC at 7-8; SMUD at 7-9; Joint Municipals
at 8-10; TAPS at 13-14; and WIRAB at 3.
102 Comments of NERC at 17.
103 Comments of NERC at 18; NARUC at 2.
104 Comments of NERC at 18.
105 Comments of APPA at 12.
; Joint
Municipals at 8-10; TAPS at 13-17; TANC at 3-4; WIRAB at 3; and Xcel at 3-4.
101 See, e.g., Comments of NERC at 17; ELCON at 3; APPA at 11;
NARUC at 2; NPCC at 6; PNGC at 3; PPC at 7-8; SMUD at 7-9; Joint Municipals
at 8-10; TAPS at 13-14; and WIRAB at 3.
102 Comments of NERC at 17.
103 Comments of NERC at 18; NARUC at 2.
104 Comments of NERC at 18.
105 Comments of APPA at 12.
Docket No. PL10-4-000
- 29 -
responsible for violations of Reliability Standards.106 PPC states that these
employees play a key role in ensuring reliable system operation and
maintenance.107 PPC believes that given the penalties that are possible under the
Penalty Guidelines, member utilities expect to see employee reassignment
requests, retirements, and departures from the industry to continue or accelerate.108
NorthWestern states that system operators “should be left to manage reliability,
not penalty risk.”109
70.
Many commenters also believe that it is inappropriate, and contrary to well-
established law, to hold utilities liable for consequential damages that result from
electrical outages.110 EEI, for example, claims that holding utilities liable for such
damages “conflicts with decades of settled law and threatens to embroil the
Commission in wasteful litigation over food spoilage claims, lost sales by
commercial customers, etc.”111 EEI maintains that a limitation on the liability of
public utilities for outages lowers the electric rates paid by consumers, results in
greater fairness between customer classes, and corresponds to the highly regulated
nature of electric utilities.112 Xcel comments that it is neither cost effective nor in
106 Comments of PPC at 8. See also Affidavit of Robin E. Manning on
Behalf of EEI at 2 (asserting that the Penalty Guidelines’ consideration of load
loss “would introduce confusion, doubt and indecision in the process of load
shedding for reliability purposes”).
107 Id.
108 Id
tilities.112 Xcel comments that it is neither cost effective nor in
106 Comments of PPC at 8. See also Affidavit of Robin E. Manning on
Behalf of EEI at 2 (asserting that the Penalty Guidelines’ consideration of load
loss “would introduce confusion, doubt and indecision in the process of load
shedding for reliability purposes”).
107 Id.
108 Id.
109 Comments of NorthWestern at 3.
110 See, e.g., Comments of EEI at 8-13; NorthWestern at 3; PNGC at 3-4;
SCE at 10-11; and Xcel at 3-4.
111 Comments of EEI at 8; see also White Paper of Richard A. Epstein in
Support of EEI’s comments at 6-22 (asserting that state law has placed strict
limitations on consequential damages imposed on private parties who have failed
to comply with contractual or statutory standards and arguing that this law should
apply in the regulatory context).
112 Id. at 9-11.
Docket No. PL10-4-000
- 30 -
the best interest of customers to expose utilities to consequential damages
associated with customer outages.113
71.
Other commenters state that there are complexities and problems that arise
from trying to value load loss and the Commission’s failure to address how it
would analyze such value adds confusion on this issue.114
72.
SMUD, TANC, and NorthWestern argue further that factoring load loss
into penalty determinations will have a disparate impact on certain organizations.
SMUD, for example, believes that the load loss factor “exposes transmission
owners with load-serving obligations to significantly greater penalties than non-
load serving transmission owners.”115 TANC believes that the load loss factor
will have a disparate impact on smaller utilities and non-profit entities, and th
customers.
eir
degree
s
have a disparate impact on certain organizations.
SMUD, for example, believes that the load loss factor “exposes transmission
owners with load-serving obligations to significantly greater penalties than non-
load serving transmission owners.”115 TANC believes that the load loss factor
will have a disparate impact on smaller utilities and non-profit entities, and th
customers.
eir
degree
s.
116 NorthWestern states that rural transmission networks are
necessarily a different design than urban networks and to achieve the same
of reliability for both types of networks would impose significant and unneeded
costs on customer
117
73.
EEI and ISO-NE recognize that load loss can still be an appropriate factor
for the Commission to consider when assessing the seriousness of the violation,
but object to the use of value as the measuring tool.118 For example, ISO-NE asks
the Commission to consider whether “quantity is a better measuring stick to utilize
in order to arrive at consistent results that better align with how power systems are
planned and operated when considering loss of load as a penalty factor.”119 ISO-
NE believes that the quantity of lost load is a better factor than the value of lost
113 Comments of Xcel at 4.
114 See, e.g., Comments of ELCON at 3-4; NCPA at 5; SCE at 10-11; and
Joint Municipals at 8-10.
115 Comments of SMUD at 8.
116 Comments of TANC at 20.
117 Comments of NorthWestern at 3.
118 See Comments of EEI at 8; ISO-NE at 8.
119 Comments of ISO-NE at 8.
y factor.”119 ISO-
NE believes that the quantity of lost load is a better factor than the value of lost
113 Comments of Xcel at 4.
114 See, e.g., Comments of ELCON at 3-4; NCPA at 5; SCE at 10-11; and
Joint Municipals at 8-10.
115 Comments of SMUD at 8.
116 Comments of TANC at 20.
117 Comments of NorthWestern at 3.
118 See Comments of EEI at 8; ISO-NE at 8.
119 Comments of ISO-NE at 8.
Docket No. PL10-4-000
- 31 -
load because the use of value would result in different penalties for violations of
the same standards for the same amount of load.120
74.
Finally, PJM and Cities/M-S-R, while not directly rejecting the
Commission’s consideration of load loss, seek clarification on the issue. First,
PJM recognizes that load loss should be an element in calculating penalties that
arise from a violation of a Reliability Standard, but it seeks clarification that “load
shedding, which results in ‘loss of load’ is an entirely appropriate and prudent
remedial action to take in certain circumstances to protect the larger
interconnection as a whole.”121 Second, Cities/M-S-R requests further
information on how the Commission plans to calculate losses o
122
f load.
b.
Commission Determination
75.
We accept the suggestion that we not attempt to conduct a specific,
individualized assessment of the value of the loss of load as a measure of the harm
from the violation. While measuring value would allow enforcement actions to
focus more specifically on the facts of the violation in any given case, such a
calculation requires a substantial commitment of time and resources on behalf of
the entity under investigation and Commission staff. Instead, we agree with the
proposal of ISO-NE that we use the quantity of load lost as one measure of the
seriousness of the violation. To reach this result, in the modified version of
section 2A1.1, we included escalating penalties for increasing quantities of lost
load in place of the valuation of lost load as a measure of harm
ehalf of
the entity under investigation and Commission staff. Instead, we agree with the
proposal of ISO-NE that we use the quantity of load lost as one measure of the
seriousness of the violation. To reach this result, in the modified version of
section 2A1.1, we included escalating penalties for increasing quantities of lost
load in place of the valuation of lost load as a measure of harm. We believe that
such an approach provides additional clarity and transparency to our penalty
calculations while avoiding the potentially difficult effort to assign a value to a
particular quantity of lost load.
76.
To the extent that commenters propose that we not consider the loss of load
entirely in calculating a civil penalty for reliability violations, we reject that
suggestion. The Commission has always made clear that it considers violations
involving loss of load more seriously than similar incidents where no blackout
120 Id.
121 Comments of PJM at 2.
122 Comments of Cities/M-S-R at 10.
Docket No. PL10-4-000
- 32 -
occurred.123 Federal Power Act (FPA) section 215(e) requires the Commission to
ensure that any penalty imposed for a violation of a Reliability Standard bears “a
reasonable relation to the seriousness of the violation.” We have interpreted this
obligation as requiring us to consider any actual harm as well as the risk to
reliability posed by a violation of a Reliability Standard.124 The role of loss of
load has been especially significant in the Commission’s exercise of its
enforcement authority. As stated earlier, we instituted an investigation into the
events surrounding the 2008 Florida Blackout based on the significance of that
event.125
77.
We disagree with the commenters who suggest that increasing penalties
when blackouts occur will increase the risk to the reliability of the Bulk-Power
System. As we have emphasized previously, we recognize that “[l]oad shedding is
not, alone, a violation, and . .
uted an investigation into the
events surrounding the 2008 Florida Blackout based on the significance of that
event.125
77.
We disagree with the commenters who suggest that increasing penalties
when blackouts occur will increase the risk to the reliability of the Bulk-Power
System. As we have emphasized previously, we recognize that “[l]oad shedding is
not, alone, a violation, and . . . load shedding may sometimes be necessary or
required.”126 While some commenters suggest that factoring loss of load into
penalty determinations will have a perverse incentive on operators not to shed load
when doing so would be necessary to comply with the Reliability Standards, we
emphasize that we do not intend the Penalty Guidelines to have a chilling effect on
system operators’ willingness to shed load. Indeed, load shedding is sometimes
required by the Reliability Standards.127 Of course, neither the Commission nor
(continued...)
123 For example, the Commission recommended that the ERO revise its
Rules of Procedure to state specifically that, in relation to an investigation of a
blackout or other ongoing disturbance, the ERO will consider an enforcement
action for any violation it finds. North American Electric Reliability Corp., 116
FERC ¶ 61,062, at P 380 (Certification Order), order on reh’g and compliance,
117 FERC ¶ 61,126 (2006).
124 See Statement of Administrative Policy on Processing Reliability Notices
of Penalty and Order Revising Statement in Order No. 672, 123 FERC ¶ 61,046, at
P 11 (2008).
125 2008 Florida Blackout, 122 FERC ¶ 61,244, at P 2 (2008) (“Given the
significance of the Florida Blackout, we believe that Commission staff should
participate in the coordinated review being conducted by NERC and the FRCC.”).
126 North American Electric Reliability Corp., 130 FERC ¶ 61,151, at P 12
Penalty and Order Revising Statement in Order No. 672, 123 FERC ¶ 61,046, at
P 11 (2008).
125 2008 Florida Blackout, 122 FERC ¶ 61,244, at P 2 (2008) (“Given the
significance of the Florida Blackout, we believe that Commission staff should
participate in the coordinated review being conducted by NERC and the FRCC.”).
126 North American Electric Reliability Corp., 130 FERC ¶ 61,151, at P 12
(2010).
127 Under the Reliability Standards, load shedding can be required as a last
resort after all other measures have failed. See, e.g., Reliability Standards EOP-
Docket No. PL10-4-000
- 33 -
NERC can impose a civil penalty for conduct that does not violate the standards.
We consider loss of load only in those situations in which there is a causal
connection between a violation of a Reliability Standard and the loss of load.
When an operator decides to shed load because of the consequences of an
underlying violation, we will consider whether the decision to shed load was a
separate violation or whether the decision to shed load was required by the
Reliability Standards to avoid cascading outages that would have a broader effect
on system reliability.
78.
In the latter situation, an operator’s first responsibility is to comply with the
Reliability Standards. When an underlying violation requires an operator to shed
load pursuant to a Reliability Standard, we emphasize that the operator’s decision
to shed load is not itself a violation and no penalty would be sought for that
decision. In assessing the penalty for the underlying violation, where shedding
load was necessary in order to comply with a Reliability Standard, we will not
consider under section 2A1.1(b)(2) of the Penalty Guidelines the resulting MWh
of load shed to comply with the Reliability Standards. We will, however, consider
the fact that the underlying violation required load shedding in assessing the risk
created by the underlying violation under section 2A1.1(b)(1) of the Penalty
Guidelines
y in order to comply with a Reliability Standard, we will not
consider under section 2A1.1(b)(2) of the Penalty Guidelines the resulting MWh
of load shed to comply with the Reliability Standards. We will, however, consider
the fact that the underlying violation required load shedding in assessing the risk
created by the underlying violation under section 2A1.1(b)(1) of the Penalty
Guidelines. Indeed, given the statutory requirement that we consider the
seriousness of the violation, we believe it is appropriate to consider the loss of
load as a measure of the risk created by the underlying violation.
79.
Several commenters assume that entities will face lower penalties if they
inappropriately fail to shed load when such conduct would reduce the risk to the
system than if they appropriately shed load when it is necessary to do so. The
Penalty Guidelines are specifically designed to avoid that result. To ensure that
registered entities face appropriate incentives, we have clarified the Penalty
Guidelines by adding language to an application note in section 2A1.1 which now
explicitly states that entities will always face lower civil penalties in situations
where load is shed in compliance with a Reliability Standard.128 The Commission
will always take steps to ensure that entities are not penalized unreasonably when
they take steps to ensure the reliability of the Bulk-Power System consistent with
the Reliability Standards. Also, the Penalty Guidelines incent the prevention of
002-2 R6-R7; EOP-003-1 R1-R2. See also Table 1, Transmission System
Standards – Normal and Emergency Conditions, appended to Reliability Standards
TPL-001-0 through TPL-004-0 (outlining instances that call for planned losses of
load under Reliability Standards TPL-001-0 through TPL-004-0).
128 See Penalty Guidelines § 2A1.1 (Application Note 4).
002-2 R6-R7; EOP-003-1 R1-R2. See also Table 1, Transmission System
Standards – Normal and Emergency Conditions, appended to Reliability Standards
TPL-001-0 through TPL-004-0 (outlining instances that call for planned losses of
load under Reliability Standards TPL-001-0 through TPL-004-0).
128 See Penalty Guidelines § 2A1.1 (Application Note 4).
Docket No. PL10-4-000
- 34 -
cascading outages by increasing penalties in proportion to the quantity of lost
MWh.
5.
Risk of Harm Examples
a.
Comments
80.
EEI recommends that the Commission delete the hypothetical “risk of
harm” examples in the reliability section of the Penalty Guidelines.129 EEI states
that there are no criteria for making the “risk of harm” determinations and that this
is an example of how the Penalty Guidelines create numerical calculations that can
offer the appearance of certainty, but often rest on subjective and unexplained
criteria.130
b.
Commission Determination
81.
The Commission declines to delete the hypothetical “risk of harm”
examples in the reliability section of the Penalty Guidelines. We offer these as
illustrative examples of the varying levels of risk of harm that could exist as a
result of reliability violations. The examples do not provide an exhaustive list.
They are meant to provide some guidance to industry of the types of violations
that might fall within each risk of harm category.
6.
Double Penalty Concerns
a.
Comments
82.
Hoosier urges the Commission to ensure that entities are not subjected to
double penalties for the same violation of the Reliability Standards.131 Hoosier
suspects that if entities are subjected to double penalties, they are likely to react by
trying to eliminate the obligation to comply with Reliability Standards from future
contracts, even where an express obligation to comply may be warranted
sier urges the Commission to ensure that entities are not subjected to
double penalties for the same violation of the Reliability Standards.131 Hoosier
suspects that if entities are subjected to double penalties, they are likely to react by
trying to eliminate the obligation to comply with Reliability Standards from future
contracts, even where an express obligation to comply may be warranted. Hoosier
argues such a development would not serve the interests of the owners, operators,
or users of the Bulk-Power System, or of the Commission itself.132
129 Comments of EEI at 16.
130 Id. at 7.
131 Comments of Hoosier at 4.
132 Id.
Docket No. PL10-4-000
- 35 -
83.
FirstEnergy comments further that while section 215 of the FPA authorizes
the Commission to modify a NERC-approved penalty, section 215 does not allow
the Commission to impose a second, additive penalty on top of a NERC-approved
penalty.133 Accordingly, FirstEnergy recommends that the Commission’s
determination of civil penalties should displace, and not be additive to, any
determination of civil penalties by NERC.134
b.
Commission Determination
84.
The double penalty concerns of Hoosier and FirstEnergy are entirely
hypothetical and, as a matter of enforcement policy and discretion, we are hard
pressed to envision a situation in which we would penalize the same conduct for
which we had already approved a penalty imposed by NERC.
7.
Administrative and Documentation Violations of the
Reliability Standards
a.
Comments
85
ion
84.
The double penalty concerns of Hoosier and FirstEnergy are entirely
hypothetical and, as a matter of enforcement policy and discretion, we are hard
pressed to envision a situation in which we would penalize the same conduct for
which we had already approved a penalty imposed by NERC.
7.
Administrative and Documentation Violations of the
Reliability Standards
a.
Comments
85.
SMUD comments that in the three years since the Reliability Standards
became effective the Commission has received approximately 380 Notices of
Penalty but not a single Notice of Penalty involving a registered entity that
knowingly committed a violation or engaged in misconduct that ultimately led to a
violation.135 Rather, SMUD asserts that the vast majority of violations involved
administrative errors, documentation-related errors, or misapplication of the
requirements of a particular standard.136 Accordingly, SMUD argues that it is
unreasonable to apply the Penalty Guidelines to violations of the mandatory
Reliability Standards.137
133 Comments of FirstEnergy. FirstEnergy did not provide page numbers
with its comments.
134 Id.
135 Comments of SMUD at 3.
136 Id. at 4.
137 Id. at 3.
Docket No. PL10-4-000
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86.
MISO requests that the Commission adopt an express distinction between
serious Reliability Standard violations and inadvertent violations, particularly
documentation errors that do not have a serious impact on reliability.138
Specifically, MISO requests that the Commission’s Penalty Guidelines apply only
to violations of Reliability Standards that result from operator negligence or
willful misconduct, and that directly threaten or otherwise adversely affect the
reliability of the Bulk-Power System.139
87
vertent violations, particularly
documentation errors that do not have a serious impact on reliability.138
Specifically, MISO requests that the Commission’s Penalty Guidelines apply only
to violations of Reliability Standards that result from operator negligence or
willful misconduct, and that directly threaten or otherwise adversely affect the
reliability of the Bulk-Power System.139
87.
NorthWestern states that the base penalty for any reliability violation other
than a documentation error under the Penalty Guidelines is punitive and
unnecessary, and believes that the Penalty Guidelines are likely to discourage
firms from investing in measures to detect and report wrongdoing.140 NERC also
requests clarification on how the Commission intends to differentiate, in the base
penalty, between documentation violations and significant, operational
violations.141
b.
Commission Determination
88.
The Commission disagrees with SMUD that it is unreasonable to apply the
Penalty Guidelines to violations of the mandatory Reliability Standards simply
because some of these violations may involve administrative errors,
documentation-related errors, or misapplication of the requirements of a particular
standard. Although we recognize that some reliability violations involve
documentation and administrative errors, we do not intend to investigate minor
violations of the Reliability Standards that involve little or no harm or risk of
harm. We have not focused on such minor violations in past investigations and we
do not intend to change course now. On the other hand, we believe that the
Penalty Guidelines will be an effective tool in enforcing serious violations of the
Reliability Standards that impact the reliability of the Bulk-Power System.
89.
We reiterate that we retain discretion under the Penalty Guidelines not to
investigate and pursue penalties for every type of violation. Under the Penalty
138 Comments of MISO at 6.
139 Id
uidelines will be an effective tool in enforcing serious violations of the
Reliability Standards that impact the reliability of the Bulk-Power System.
89.
We reiterate that we retain discretion under the Penalty Guidelines not to
investigate and pursue penalties for every type of violation. Under the Penalty
138 Comments of MISO at 6.
139 Id. at 9.
140 Comments of NorthWestern at 3.
141 Comments of NERC at 23.
Docket No. PL10-4-000
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Guidelines, we will continue to investigate serious reliability violations, not minor
violations involving documentation or administrative errors that do not result in
harm or significant impact to reliability. Therefore, we find it unnecessary to
adopt a distinction, as MISO requests, between serious Reliability Standard
violations and inadvertent violations that do not have a serious impact on
reliability.
8.
Other Reliability Issues
90.
SCE states that reliability of the Bulk-Power System can be enhanced most
effectively through a performance-based approach to the Reliability Standards
rather than increasing penalty exposure.142 Therefore, SCE believes that we
should remove the Reliability Standards from the Penalty Guidelines and instead
take this opportunity to work with NERC and Bulk-Power System users, owners,
and operators, to implement a more collaborative and performance-based approach
to Reliability Standards development and compliance.143 In that regard, SCE
states that the nuclear industry provides a useful starting point to develop a model
of this approach based on the complementary roles of the Institute of Nuclear
Power Operations (INPO) and the Nuclear Regulatory Commission (NRC).144
91.
Although the Commission believes that INPO serves a valuable function in
the nuclear industry, it is not an enforcement function
143 In that regard, SCE
states that the nuclear industry provides a useful starting point to develop a model
of this approach based on the complementary roles of the Institute of Nuclear
Power Operations (INPO) and the Nuclear Regulatory Commission (NRC).144
91.
Although the Commission believes that INPO serves a valuable function in
the nuclear industry, it is not an enforcement function. INPO’s mission is to
promote the highest levels of safety and reliability, but it performs this function
not to supplant the regulatory role of the NRC, but to provide the means whereby
the industry itself can, acting collectively, make its nuclear operations safer. The
NRC still uses its enforcement powers, like us, to assess penalties and undertake
enforcement actions. Thus, while an INPO-like body could serve a valuable
purpose in the electric industry, that purpose would not supplant, or in any way
affect, our enforcement role. Therefore, we find SCE’s request to be outside the
scope of this proceeding.
92.
NorthWestern states that the timing of the decision to adopt the Penalty
Guidelines is particularly questionable because NERC is developing enhanced
142 Comments of SCE at 3.
143 Id.
144 Id. at 4.
Docket No. PL10-4-000
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VRFs to account for the experience over the last two years in implementing
section 215 of the FPA.145
93.
The Commission does not believe that NorthWestern’s comment warrants
further delay in our issuance of the Penalty Guidelines. Once approved by the
Commission, NERC’s development of enhanced VRFs will apply to NERC’s
enforcement processes, while the Penalty Guidelines will apply to our
enforcement authority.
94.
ISO/RTO Council argues that the Commission should clarify that activities
on radial transmission facilities cannot constitute violations of Reliability
Standards because, at present, radial facilities are excluded from NERC’s
definition of the Bulk-Power System.146
95
ll apply to NERC’s
enforcement processes, while the Penalty Guidelines will apply to our
enforcement authority.
94.
ISO/RTO Council argues that the Commission should clarify that activities
on radial transmission facilities cannot constitute violations of Reliability
Standards because, at present, radial facilities are excluded from NERC’s
definition of the Bulk-Power System.146
95.
The Commission believes that ISO/RTO Council’s comment is beyond the
scope of the Penalty Guidelines. This is not the forum to be making jurisdictional
determinations on the applicability of the Reliability Standards.
96.
BPA thinks penalties for violations of Reliability Standards should include
both monetary and non-monetary penalties.147 BPA states section 215 of the FPA
does not specify that penalties assessed for violations of the Reliability Standards
need to be only monetary in nature. BPA claims that the NERC Sanction
Guidelines recognize non-monetary sanctions as an important and preferred
enforcement tool because the focus is improving reliability and preventing repeat
violations.148 In contrast, BPA states that the Penalty Guidelines do not allow for
non-monetary sanctions. BPA states that the Commission should make the
Penalty Guidelines less restrictive to encourage entities to take proactive steps to
avoid violations and improve reliability.149
145 Comments of NorthWestern at 2.
146 Comments of ISO/RTO Council at 4.
147 Comments of BPA at 8.
148 Id.
149 Id. at 10.
do not allow for
non-monetary sanctions. BPA states that the Commission should make the
Penalty Guidelines less restrictive to encourage entities to take proactive steps to
avoid violations and improve reliability.149
145 Comments of NorthWestern at 2.
146 Comments of ISO/RTO Council at 4.
147 Comments of BPA at 8.
148 Id.
149 Id. at 10.
Docket No. PL10-4-000
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97.
We clarify that the Penalty Guidelines do allow for non-monetary
sanctions. The Commission has always had the discretion to assess non-monetary
sanctions, instead of or in addition to monetary penalties, such as requiring entities
to submit compliance monitoring reports and conduct audits. The Penalty
Guidelines do not change this practice.
98.
NERC comments that there are a number of places in the Penalty
Guidelines that rely on undefined terms, subjective criteria, and missing formulas
to make penalty determinations. NERC argues that failure to address these could
lead to inconsistency and confusion in the application of the Penalty Guidelines.150
Examples suggested by NERC are as follows:
99.
First, NERC comments that in the Penalty Guidelines the term “low risk” is
meant to apply to cases where there was a significant, albeit small, chance of
relevant level of harm. NERC states that use of terms “significant” and “small”
when describing the chance of relevant harm is confusing. Specifically, NERC
asks whether “low risk” means that there is a significant chance of relevant harm,
a small chance of relevant harm, or a small chance of a significant risk of harm.
100. NERC’s comment refers to the Commission’s reference to “low risk” in
Application Note 2 of section 2A1.1 related to reliability violations. As originally
drafted, this Application Note stated that “‘low risk’ is not meant to include cases
where there was virtually no risk of harm
ance of relevant harm,
a small chance of relevant harm, or a small chance of a significant risk of harm.
100. NERC’s comment refers to the Commission’s reference to “low risk” in
Application Note 2 of section 2A1.1 related to reliability violations. As originally
drafted, this Application Note stated that “‘low risk’ is not meant to include cases
where there was virtually no risk of harm. It is meant to apply to cases where
there was a significant, albeit small, chance of the relevant level of harm.” The
Commission was not using the term “significant” in this note to refer to a
particular degree of chance. Rather, the Commission meant that “low risk” refers
to situations where there is a real chance of harm, albeit a small chance. To avoid
any confusion, however, the Commission has revised this language in Application
Note 2. The important point is that “low risk” does not include circumstances
where there is no risk at all.
101. Second, NERC states that the Penalty Guidelines provide no explanation
for why the different terms “minor,” “substantial,” “major,” and “extreme” are
needed for reliability violations. NERC also comments that the Penalty
Guidelines do not define these four new terms and do not provide criteria to
evaluate the risk of harm.
150 See Comments of NERC at 21-22.
Docket No. PL10-4-000
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102. The Commission believes that these four terms help to differentiate varying
degrees of harm that could result from reliability violations. The terms are not
defined, but we have included illustrative examples to provide guidance on the
types of violations that could be included in each category. Also, over time the
Commission will apply these terms in our penalty determinations, thereby
developing precedent, which will provide further guidance on their meaning.
103
grees of harm that could result from reliability violations. The terms are not
defined, but we have included illustrative examples to provide guidance on the
types of violations that could be included in each category. Also, over time the
Commission will apply these terms in our penalty determinations, thereby
developing precedent, which will provide further guidance on their meaning.
103. Third, NERC raised several concerns with the Commission’s reliability
violation example at P 56 of the Policy Statement on Penalty Guidelines. NERC
states that the duration date is not identified in the example and that it is not clear
whether the proposed penalty range is a per-day penalty or a cumulative penalty or
how the per day issues are reflected in the penalty amount. NERC asks that the
Commission provide more information on the duration of the violation as
compared to the duration of the outage. In addition, NERC believes the
Commission should explain whether the loss of load figure includes direct,
indirect, special, consequential, or any other types of losses or damages. NERC
states that the Commission should also explain whether and how it took into
account state and federal limitations on liability with respect to outage costs,
including those that preclude recovery of losses for lost profit and spoiled food.
104. The reliability example in the Policy Statement on Penalty Guidelines was
purely hypothetical and not every fact was addressed. The purpose of the
hypothetical was simply to illustrate how the Penalty Guidelines calculate penalty
ranges. We recognize that the hypothetical raised concerns because it involved a
$15 million penalty, but this figure does not have significance other than
demonstrating the mechanics of a penalty calculation under the Penalty
Guidelines
purely hypothetical and not every fact was addressed. The purpose of the
hypothetical was simply to illustrate how the Penalty Guidelines calculate penalty
ranges. We recognize that the hypothetical raised concerns because it involved a
$15 million penalty, but this figure does not have significance other than
demonstrating the mechanics of a penalty calculation under the Penalty
Guidelines. That said, the Penalty Guidelines treat multiple reliability violations
that are related to the same conduct or event as a whole,151 and we would consider
the per day duration only to ensure that the guidelines’ minimum penalty would
not exceed the statutory maximum of $1 million per day per violation.
105. Finally, SUB submitted several comments, which, the Commission
believes, are outside the scope of the Penalty Guidelines.152 SUB’s comments
generally concern changes to the Reliability Standards over time, lack of clarity of
some Reliability Standards, the costs to organizations of responding to alleged
violations, and consulting services offered to organizations by former regulatory
151 We discuss this point in further detail infra at P 182-183.
152 These comments appear in SUB’s Comments at 5-12.
Docket No. PL10-4-000
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officials. Because these comments by SUB do not address the Penalty Guidelines,
but rather focus on enforcement practices more generally, they are beyond the
scope of this Policy Statement.
D.
Compliance Credit
1.
Compliance as a Central Goal of the Commission
a.
Comments
106. Several commenters suggest that the Penalty Guidelines should do more to
encourage and provide credit for strong compliance
use these comments by SUB do not address the Penalty Guidelines,
but rather focus on enforcement practices more generally, they are beyond the
scope of this Policy Statement.
D.
Compliance Credit
1.
Compliance as a Central Goal of the Commission
a.
Comments
106. Several commenters suggest that the Penalty Guidelines should do more to
encourage and provide credit for strong compliance. For example, EEI
recommends that the Commission explicitly state that we and our staff will be
guided by the principle that “achieving compliance, not assessing penalties, is the
central goal of our enforcement efforts,” as we stated in 2008 in our Policy
Statement on Compliance.153 INGAA urges the Commission to place more
emphasis on compliance through incentives rather than penalties.154 Similarly,
BPA believes that the Penalty Guidelines are premised on the idea that the threat
of large penalties, not providing sufficient incentives to mitigate penalties,
promotes compliance.155 INGAA also suggests that our focus should remain on
compliance with the Commission’s requirements and should not broaden the
concept to include an ethics program or areas unrelated to the Commission’s
regulations and requirements.156
107. EEI argues further that the Sentencing Guidelines do not provide a good
model on compliance, claiming that “federal prosecutors do not use them
consistently because they provide such poor incentives for corporate compliance
programs.”157 EEI relies on the Holder Memo to support this position, arguing
that the memo “encouraged prosecutors not to prosecute firms that engaged in
specified good corporate conduct” and that “[f]ollowing the Holder Memo,
153 Comments of EEI at 20.
154 Comments of INGAA at 2.
155 Comments of BPA at 4.
156 Comments of INGAA at 8.
157 Comments of EEI at 16 (citing Arlen at 5).
emo to support this position, arguing
that the memo “encouraged prosecutors not to prosecute firms that engaged in
specified good corporate conduct” and that “[f]ollowing the Holder Memo,
153 Comments of EEI at 20.
154 Comments of INGAA at 2.
155 Comments of BPA at 4.
156 Comments of INGAA at 8.
157 Comments of EEI at 16 (citing Arlen at 5).
Docket No. PL10-4-000
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prosecutors increasingly chose not to prosecute firms [pursuant to the Guidelines]
if the crime occurred notwithstanding an effective compliance program . . . .”158
108. In addition to the comments that generally urge the Commission to focus on
compliance, some commenters suggest that we specifically modify the Penalty
Guidelines to give greater weight to effective compliance programs. AGA, for
example, recommends that the Commission increase the credit for an effective
compliance program to five points instead of the three point credit provided under
section 1C2.3.159 AGA believes that this increased credit would better reflect the
importance the Commission places on compliance and would provide a significant
incentive for organizations to develop robust programs.160 Similarly, INGAA
comments that given the Commission’s focus on compliance, organizations should
be entitled to a larger credit.161 INGAA acknowledges that the Penalty
Guidelines’ three point credit stems from the Sentencing Guidelines, but believes
that no independent rationale exists for the Commission to adopt this number.162
National Grid also comments that we should give more credit to organizations that
strive for strong compliance.163 Finally, BPA suggests that extra compliance
credit should be awarded to encourage organizations to adopt the best compliance
programs rather than simply encourage them to meet the requirements listed in the
Penalty Guidelines.164
b.
Commission Determination
109
.162
National Grid also comments that we should give more credit to organizations that
strive for strong compliance.163 Finally, BPA suggests that extra compliance
credit should be awarded to encourage organizations to adopt the best compliance
programs rather than simply encourage them to meet the requirements listed in the
Penalty Guidelines.164
b.
Commission Determination
109. The Commission agrees with the commenters that achieving compliance
should remain the Commission’s main goal. Since EPAct 2005, the Commission
has continually placed a heavy emphasis on promoting industry-wide
158 Id. (quoting Arlen at 5).
159 Comments of AGA at 7.
160 Id.
161 Comments of INGAA at 6.
162 Id.
163 Comments of National Grid at 5.
164 Comments of BPA at 6.
Docket No. PL10-4-000
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compliance,165 and the Penalty Guidelines did nothing, either explicitly or
implicitly, to change this emphasis. Indeed, the Penalty Guidelines served only to
solidify the importance we place on compliance by providing substantial and
transparent mitigation credit for effective compliance programs. Specifically,
under the Penalty Guidelines, an effective compliance program could result in a
ninety-five percent reduction in penalties when combined with other factors. For
example, if the Commission finds that an organization had an effective compliance
program at the time of a violation, this finding, together with other mitigating
circumstances, could lead to a final culpability score of zero. A culpability score
of zero, in turn, reduces an organization’s base penalty by ninety-five percent, for
example, from $5 million down to $250,000. This is a significant credit, awarded,
in part, through the existence of an effective compliance program
gram at the time of a violation, this finding, together with other mitigating
circumstances, could lead to a final culpability score of zero. A culpability score
of zero, in turn, reduces an organization’s base penalty by ninety-five percent, for
example, from $5 million down to $250,000. This is a significant credit, awarded,
in part, through the existence of an effective compliance program. Moreover,
even if an organization fails to receive any reduction other than compliance credit,
the compliance credit alone could still reduce a penalty by sixty percent, for
example, from $5 million to $2 million.
110. Thus, the Commission agrees with the commenters that achieving
compliance should remain a central goal for the Commission and, to clarify this
point, we agree to adopt EEI’s proposal that we state explicitly in the Penalty
Guidelines that “[a]chieving compliance, not assessing penalties, is the central
goal of the Commission’s enforcement efforts,” as we have previously stated in
our Policy Statement on Compliance.166 Given the substantial credit awarded for
effective compliance under the Penalty Guidelines, however, the Commission
declines the commenters’ request for a larger credit than the three point credit
currently in the Penalty Guidelines.
111. Although we accept EEI’s general statement that compliance should remain
our focus, we disagree with EEI’s argument that the Holder Memo somehow
165 See, e.g., 2005 Policy Statement, 113 FERC ¶ 61,068 at P 22 (“We
encourage companies engaged in jurisdictional activities to take steps to create a
strong atmosphere of compliance in their organizations.”); Revised Policy
Statement, 123 FERC ¶ 61,156 at P 54 (listing the “strength of an entity’s
commitment to compliance” as one of the most important factors in determining
penalty amounts); Compliance with Statutes, Regulations, and Orders, 125 FERC
¶ 61,058, at P 8 (2008) (Policy Statement on Compliance) (“[T]he Commission
places
eate a
strong atmosphere of compliance in their organizations.”); Revised Policy
Statement, 123 FERC ¶ 61,156 at P 54 (listing the “strength of an entity’s
commitment to compliance” as one of the most important factors in determining
penalty amounts); Compliance with Statutes, Regulations, and Orders, 125 FERC
¶ 61,058, at P 8 (2008) (Policy Statement on Compliance) (“[T]he Commission
places great emphasis on a company’s efforts to assure compliance with all
applicable regulatory requirements.”).
166 See Policy Statement on Compliance, 125 FERC ¶ 61,058 at P 1.
Docket No. PL10-4-000
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encouraged prosecutors not to use the Sentencing Guidelines because they provide
poor incentives for compliance. First, as we stated supra in section II.A.2, the
implication that prior to the Holder Memo prosecutors determined whether they
should charge a corporation based upon the sanctions available under the
Organizational Sentencing Guidelines is incorrect. As the Holder Memo itself
points out, the Sentencing Guidelines are taken into account only after “a
prosecutor has decided to charge a corporation.”167 Second, EEI’s reliance on this
memo for its compliance argument ignores a central element of the memo’s
treatment of the weight accorded to a corporation’s compliance program in the
charging decision, specifically, that “the existence of a compliance program is not
sufficient, in and of itself, to justify not charging a corporation for criminal
conduct undertaken by its officers, directors, employees, or agents.”168 Third,
EEI’s suggestion that the Holder Memo reflects a rejection of the Sentencing
Guidelines’ treatment of compliance programs ignores the memo’s instruction that
prosecutors should consult the Sentencing Guidelines “for a detailed review of
[the factors to consider] concerning corporate compliance programs.”169
112. The Commission does not view assessing civil penalties and encouraging
compliance as mutually exclusive. This is not an “either/or” situation
Sentencing
Guidelines’ treatment of compliance programs ignores the memo’s instruction that
prosecutors should consult the Sentencing Guidelines “for a detailed review of
[the factors to consider] concerning corporate compliance programs.”169
112. The Commission does not view assessing civil penalties and encouraging
compliance as mutually exclusive. This is not an “either/or” situation. Rather,
civil penalties are an important tool to achieve compliance. It has been widely
recognized that “regulators have an array of persuasive tools at hand, such as
warnings, civil penalties including fines, and license suspension, with which to
achieve compliance.”170 The Commission expects that civil penalties will prompt
organizations to devote significant efforts and resources to compliance in order to
avoid future penalties.
167 Holder Memo § XI.
168 Id. § VII.
169 Id.
170 Geraldine Szott Moohr, The Balance Among Corporate Criminal
Liability, Private Civil Suits, and Regulatory Enforcement, 46 Am. Crim. L. Rev.
1459, 1476 (2009) (emphasis added); see also John D. Copeland, The Tyson Story:
Building an Effective Ethics and Compliance Program, 5 Drake J. Agric. L. 305,
n.7 (2000) (“Criminal penalties are imposed on corporations to encourage them to
develop effective compliance programs.”).
Docket No. PL10-4-000
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113. Finally, the Commission agrees with INGAA that our focus should remain
on compliance with the Commission’s requirements and that we should not
broaden the concept to include an ethics program or areas unrelated to the
Commission’s regulations and requirements. The Commission is concerned about
compliance with the statutory and regulatory requirements that we oversee
PL10-4-000
- 45 -
113. Finally, the Commission agrees with INGAA that our focus should remain
on compliance with the Commission’s requirements and that we should not
broaden the concept to include an ethics program or areas unrelated to the
Commission’s regulations and requirements. The Commission is concerned about
compliance with the statutory and regulatory requirements that we oversee. Thus,
we have modified the language in section 1C2.3 to clarify that the compliance
credit relates to compliance with the Commission’s requirements and not an
organization’s ethics program or areas unrelated to the Commission’s
requirements.171
2.
Partial Compliance Credit
a.
Comments
114. Some commenters take issue with the Penalty Guidelines’ lack of partial
compliance credit for organizations that meet some, but not all, of the
requirements listed in section 1B2.1(b) of the Penalty Guidelines. EEI, for
example, proposes that the Commission change the “all or nothing” nature of the
compliance credit so that organizations can receive partial credit for effective
compliance programs that do not meet all of the requirements listed in section
1B2.1.172 EEI also proposes that an effective compliance program that meets all
of the requirements in section 1B2.1 receive three points, while a program that
meets most, but not all requirements, receive two points.173 INGAA comments
that it is unreasonable not to award partial credit because many of the criteria
listed in section 1B2.1 are subjective.174 Thus, INGAA proposes increasing the
compliance credit to seven points, corresponding to the seven requirements listed
in section 1B2.1, to give the Commission flexibility to award partial credi
organizations that meet some of those requirements.
t to those
175 Xcel also believes that
171 References to “ethics” have been deleted from sections 1B2.1 and 1C2.3
of the Penalty Guidelines.
172 Comments of EEI at 36.
173 Id
ponding to the seven requirements listed
in section 1B2.1, to give the Commission flexibility to award partial credi
organizations that meet some of those requirements.
t to those
175 Xcel also believes that
171 References to “ethics” have been deleted from sections 1B2.1 and 1C2.3
of the Penalty Guidelines.
172 Comments of EEI at 36.
173 Id.
174 Comments of INGAA at 7.
175 Id.
Docket No. PL10-4-000
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partial compliance credit is warranted, but does not propose a specific range of
credit.176
b.
Commission Determination
115. The Commission believes there is merit to the commenters’ proposal that
organizations receive partial credit for effective compliance programs that do not
meet every requirement in section 1B2.1 of the Penalty Guidelines. Section 1B2.1
lists seven factors we will consider to determine whether an organization has an
effective compliance program.177 This section offers organizations a useful
checklist for creating effective compliance programs, and organizations can
receive the maximum amount of credit given (three points) for implementing and
carefully following this guidance. The Commission recognizes, however, that an
organization might achieve effective compliance without following every element
and sub-element listed in the Penalty Guidelines. Therefore, we agree to award
partial credit to organizations that have effective compliance programs, but that do
not follow the section 1B2.1 requirements exactly.
116. In general, effective compliance programs should account in some fashion
for the seven factors listed in the Penalty Guidelines
compliance without following every element
and sub-element listed in the Penalty Guidelines. Therefore, we agree to award
partial credit to organizations that have effective compliance programs, but that do
not follow the section 1B2.1 requirements exactly.
116. In general, effective compliance programs should account in some fashion
for the seven factors listed in the Penalty Guidelines. These seven factors are
consistent with the four hallmarks we enumerated in our 2008 Policy Statement on
Compliance: (1) active engagement and leadership by senior management; (2)
effective preventive measures; (3) measures for the prompt detection and cessation
of violations and voluntary reporting of violations; and (4) measures for
remediation of the misconduct.178 The Commission would likely give some
degree of compliance credit to organizations that achieve these four factors, even
if the organization fails to specifically meet each of the requirements explicitly
listed in the Penalty Guidelines.
117. Our decision to grant partial compliance credit is consistent with our prior
statement that “the facts and circumstances of each situation should be evaluated
to determine the appropriate amount of credit given.”179 It also accords with our
176 Comments of Xcel at 5.
177 See Penalty Guidelines § 1B2.1(b).
178 Policy Statement on Compliance, 123 FERC ¶ 61,058 at P 13-21.
179 Id. P 12.
credit is consistent with our prior
statement that “the facts and circumstances of each situation should be evaluated
to determine the appropriate amount of credit given.”179 It also accords with our
176 Comments of Xcel at 5.
177 See Penalty Guidelines § 1B2.1(b).
178 Policy Statement on Compliance, 123 FERC ¶ 61,058 at P 13-21.
179 Id. P 12.
Docket No. PL10-4-000
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continuing view that “there is no one template or approach for a good compliance
program, and . . . market participants are in the best position to assess their
regulatory risks and to devise the optimum mix of measures that will provide the
best conditions for ongoing compliance.”180
118. Although the Commission agrees to give organizations partial compliance
credit, we reject EEI’s and INGAA’s proposal to specifically delineate the varying
degrees of weight given. The Commission believes that the better approach is to
assess the effectiveness of each compliance program individually and to decide the
appropriate degree of credit warranted on a case-by-case basis. This approach will
allow the Commission to consider the appropriate mix of compliance measures for
each organization rather than simply looking at a list of factors in isolation.
119. Thus, the Commission has revised the section of the Penalty Guidelines
providing compliance credit—section 1C2.3—to make explicit that: (1) a three-
point credit is the maximum that an organization can earn for an effective
compliance program, and (2) organizations can earn partial credit for compliance
programs that do not meet every requirement listed in section 1B2.1, but,
nonetheless, are effective.181
3.
Compliance Credit and Senior-Level Involvement
a.
Comments
120
nce credit—section 1C2.3—to make explicit that: (1) a three-
point credit is the maximum that an organization can earn for an effective
compliance program, and (2) organizations can earn partial credit for compliance
programs that do not meet every requirement listed in section 1B2.1, but,
nonetheless, are effective.181
3.
Compliance Credit and Senior-Level Involvement
a.
Comments
120. EEI, Xcel, and INGAA recommend that the Commission delete the
provision in the Penalty Guidelines that would eliminate any compliance credit for
violations where an organization’s high-level personnel, substantial authority
personnel, or individuals with operational responsibility for compliance
participated in, condoned, or were willfully ignorant of the violation.182 EEI
argues that this provision provides a disincentive to Boards of Directors to adopt
compliance programs that monitor senior-level employees’ conduct because if
such personnel engage in misconduct, no credit will be earned for compliance.183
EEI also states that Boards of Directors cannot eliminate the risk of hiring errant
180 Id. P 10.
181 Penalty Guidelines § 1C2.3(f) (Application Note 9).
182 See Comments of EEI at 36-37; Xcel at 5; and INGAA at 9.
183 Comments of EEI at 36.
Docket No. PL10-4-000
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managers.184 Xcel shares the views of EEI and states that effective compliance
programs serve as a deterrent, not a guarantee.185
121
f hiring errant
180 Id. P 10.
181 Penalty Guidelines § 1C2.3(f) (Application Note 9).
182 See Comments of EEI at 36-37; Xcel at 5; and INGAA at 9.
183 Comments of EEI at 36.
Docket No. PL10-4-000
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managers.184 Xcel shares the views of EEI and states that effective compliance
programs serve as a deterrent, not a guarantee.185
121. Finally, INGAA encourages the Commission to adopt a current amendment
proposed by the Sentencing Commission that could allow an organization to
receive credit for an effective compliance program despite having high-level
personnel involved in the violation.186 Under the amendment, to receive
compliance credit where high-level personnel were involved, the organization
must meet certain criteria, including that no individual with operational
responsibility for the compliance program participated in, condoned, or was
willfully ignorant of the offense.
b.
Commission Determination
122. The Commission agrees to delete the provision in the Penalty Guidelines
that would automatically eliminate any compliance credit where an organization’s
high-level personnel, substantial authority personnel, or individuals with
operational responsibility for compliance (collectively referred to as “senior-level
personnel”) participated in, condoned,187 or were willfully ignorant of the
violation. In agreeing to adopt this change to the Penalty Guidelines, we
recognize that despite devoting significant efforts and resources to compliance,
organizations may still not be able to avoid a violation, particularly if the
184 Id. at 37.
185 Comments of Xcel at 5.
186 Comments of INGAA at 9. The proposed amendment would add
subsection 8C2.5(f)(3)(C) to the Sentencing Guidelines. See Amendments to the
Sentencing Guidelines (May 3, 2010), available at
http://www.ussc.gov/2010guid/20100503_Reader_Friendly_Proposed_Amendmen
ts.pdf
id a violation, particularly if the
184 Id. at 37.
185 Comments of Xcel at 5.
186 Comments of INGAA at 9. The proposed amendment would add
subsection 8C2.5(f)(3)(C) to the Sentencing Guidelines. See Amendments to the
Sentencing Guidelines (May 3, 2010), available at
http://www.ussc.gov/2010guid/20100503_Reader_Friendly_Proposed_Amendmen
ts.pdf.
187 While defining the type of activity by senior-level personnel that
constitutes “condoning” improper behavior is difficult in the abstract, the
Commission will review the actions of senior-level personnel on a case-by-case
basis to determine whether to eliminate compliance credit. If we determine that
senior-level personnel acted in good-faith after a deliberative process, we may
choose not to eliminate the compliance credit even where senior-level personnel
approved of conduct that violates Commission regulations.
Docket No. PL10-4-000
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organization is dealing with a rogue employee not adhering to clear direction from
the company. In such situations, the Commission believes that it would be unfair
to automatically withhold all compliance credit for an organization exercising
diligence to comply with the law.
123. Thus, in situations where there is senior-level personnel involvement in a
violation, the Commission will not automatically eliminate all compliance credit.
Instead, we will consider whether the senior-level employee acted on his or her
own or at the direction or supervision, or with tacit acquiescence of the
organization’s governing authority.188
124. The Commission emphasizes that although we will not automatically
eliminate compliance credit where there is senior-level personnel involvement, we
would likely find that compliance credit is not warranted where senior-level
personnel involvement in a violation is so pervasive throughout the organization
that it reflects the collective actions of the organization as a whole
thority.188
124. The Commission emphasizes that although we will not automatically
eliminate compliance credit where there is senior-level personnel involvement, we
would likely find that compliance credit is not warranted where senior-level
personnel involvement in a violation is so pervasive throughout the organization
that it reflects the collective actions of the organization as a whole. Compliance
credit also would not be warranted where there is evidence that an organization’s
governing authority knew of the senior-level involvement in a violation or failed
to take timely remedial action.
4.
Compliance Credit and Self-Reporting
a.
Comments
125. EEI, Xcel, and INGAA also propose that the Commission delete the
provision that eliminates compliance credit when an organization fails to timely
report a violation.189 EEI and INGAA believe that an organization should not lose
all compliance credit if it detects and remedies a violation on its own without also
188 Under the Penalty Guidelines, “Governing authority” means “(A) the
Board of Directors; or (B) if the organization does not have a Board of Directors,
the highest-level governing body of the organization.” Penalty Guidelines § 1B2.1
(Application Note 1).
189 See Comments of EEI at 37; Xcel at 5; and INGAA at 8. EEI uses the
phrase “timely reported.” Under the Penalty Guidelines, an organization will not
receive compliance credit “if, after becoming aware of a violation, the
organization unreasonably delayed reporting the violation to appropriate
governmental authorities.” Penalty Guidelines § 1C2.3(f)(2).
1B2.1
(Application Note 1).
189 See Comments of EEI at 37; Xcel at 5; and INGAA at 8. EEI uses the
phrase “timely reported.” Under the Penalty Guidelines, an organization will not
receive compliance credit “if, after becoming aware of a violation, the
organization unreasonably delayed reporting the violation to appropriate
governmental authorities.” Penalty Guidelines § 1C2.3(f)(2).
Docket No. PL10-4-000
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self-reporting it.190 Xcel states that even effective compliance programs might not
result in discovery of all violations by a company.191
126. On a related note, AGA comments that the Penalty Guidelines are unclear
as to what would constitute an “unreasonable” delay in reporting or a “reasonable”
period of time to conduct an investigation.192 AGA submits that the Penalty
Guidelines should specify the factors that would be considered in determining
whether a particular period of time is “reasonable.”193
b.
Commission Determination
127. The Commission disagrees with the commenters’ request that we eliminate
the requirement that, for compliance credit to be received, a detected violation
must be reported without unreasonable delay. The Commission has always
expected prompt reporting of violations as part of an organization’s compliance
program. For example, we made clear in the Policy Statement on Compliance that
after a violation is detected “we expect that companies will act expeditiously to
end the wrongful conduct and will report it promptly.”194 The Penalty Guidelines
do not change this expectation. The Commission believes that giving
organizations credit for prompt reporting of violations increases compliance by
providing an incentive for, and increasing the likelihood of, early detection of
violations.
128
s detected “we expect that companies will act expeditiously to
end the wrongful conduct and will report it promptly.”194 The Penalty Guidelines
do not change this expectation. The Commission believes that giving
organizations credit for prompt reporting of violations increases compliance by
providing an incentive for, and increasing the likelihood of, early detection of
violations.
128. Thus, because the Commission continues to expect prompt reporting of
violations as part of an organization’s compliance efforts, we will not eliminate
the requirement that, for compliance credit to be received, a detected violation
must be reported without unreasonable delay.195
190 Comments of EEI at 37; INGAA at 8.
191 Comments of Xcel at 5.
192 Comments of AGA at 6.
193 Id.
194 Policy Statement on Compliance, 125 FERC ¶ 61,058 at P 19 (emphasis
added).
195 The Commission, however, has unbundled self-reporting credit from the
credits for cooperation, avoidance of trial-type hearings and acceptance of
responsibility. See infra section II.E.1.
Docket No. PL10-4-000
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129. The Commission will consider the particular facts and circumstances to
determine whether a self-report was “unreasonably delayed.” Among the factors
we will consider are: (1) the time between when the violation was discovered, or
reasonably should have been discovered, and the time of the report; (2) the steps
the organization took before reporting the violation; and (3) the nature of the
violation. The Commission recognizes that an organization’s inquiry into conduct
by its employees could, in some circumstances, take considerable time to
determine whether an act violates our regulations and requirements.196 It also
could take time for an organization to determine the nature and duration of
violations. An organization, however, can always inform Enforcement staff that it
is investigating a matter
on recognizes that an organization’s inquiry into conduct
by its employees could, in some circumstances, take considerable time to
determine whether an act violates our regulations and requirements.196 It also
could take time for an organization to determine the nature and duration of
violations. An organization, however, can always inform Enforcement staff that it
is investigating a matter. In fact, the Commission encourages organizations that
discover violations to contact Enforcement staff before submitting a full report.
This contact could allow Enforcement staff to provide guidance to the
organization on the matters to explore and present in its written report. In turn,
this could lead to a more complete self-report and a more well-informed and
prompt conclusion to staff’s inquiry.
5.
Upward Adjustment for the Lack of a Compliance
Program
a.
Comments
130. CPUC is concerned that the Penalty Guidelines do not address the lack of
any compliance program and recommend that the lack of an “effective” program
be considered as an upward adjustment in determining an organization’s
culpability score under section 1C2.3.197 Further, CPUC recommends that the
Application Notes to section 1B2.1 specifically reference record retention and
electronic recordkeeping policies as part of an effective compliance program.198
b.
Commission Determination
131. The Commission shares CPUC’s concern that entities might lack effective
compliance programs. We believe, however, that the Penalty Guidelines
196 The Penalty Guidelines “contemplate that the organization will be
allowed a reasonable period of time to conduct an internal investigation.” Penalty
Guidelines § 1C2.3 (Application Note 9).
197 Comments of CPUC at 2-3.
198 Id. at 4.
rn that entities might lack effective
compliance programs. We believe, however, that the Penalty Guidelines
196 The Penalty Guidelines “contemplate that the organization will be
allowed a reasonable period of time to conduct an internal investigation.” Penalty
Guidelines § 1C2.3 (Application Note 9).
197 Comments of CPUC at 2-3.
198 Id. at 4.
Docket No. PL10-4-000
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adequately address this concern. Calculations under the Penalty Guidelines result
in a wide range of possible penalties, and we can use this range to address the
entity that might not have an effective compliance program. For example, we can
assess a penalty that falls on the higher side of the penalty range. Or, in the case
of a widespread disregard for compliance or little or no culture of compliance we
may decide to depart from applying the Penalty Guidelines. These ways of
addressing the lack of an effective compliance program give us the flexibility to
consider the particular compliance program and its degree of effectiveness in
particular circumstances.
132. Also, in reviewing an organization’s compliance program, the Penalty
Guidelines do not affect the Commission’s ability to consider an organization’s
record retention and electronic recordkeeping policies.
6.
Size as a Relevant Factor for Compliance Credit
a.
Comments
133. AGA comments that the commentary to section 1B2.1 on compliance
explains that size, including whether an organization is “large” or “small,” is
relevant to whether an organization meets the requirements for an effective
compliance program. AGA states, however, that the Commission fails to define
“large” or “small.”199 AGA urges the Commission to: (1) define “large” and
“small;” (2) clarify whether size is determined based on the number of employees
and whether other factors may be relevant; and (3) specify the level and type of
employees or other criteria that would constitute a “large” or “small”
organization.200
b
gram. AGA states, however, that the Commission fails to define
“large” or “small.”199 AGA urges the Commission to: (1) define “large” and
“small;” (2) clarify whether size is determined based on the number of employees
and whether other factors may be relevant; and (3) specify the level and type of
employees or other criteria that would constitute a “large” or “small”
organization.200
b.
Commission Determination
134. The Commission will consider the size of an organization for purposes of
determining whether an organization has met the requirements for an effective
compliance program. We believe that size is an important factor because, for
example, a large organization should be able to devote more formal operations and
greater resources for compliance than a small organization. Small organizations,
while being equally devoted to compliance, might be able to meet their
199 Comments of AGA at 4-5.
200 Id. at 5.
Docket No. PL10-4-000
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compliance needs with less formality and fewer resources than large
organizations.
135. The Commission has not defined “large” or “small” for purposes of
determining the size of an organization. A precise definition would not be helpful
to the Commission or industry because determining an organization’s size for
compliance purposes is not as simple as fitting the organization into a pre-
determined definition of “large” or “small.” Rather, size should be determined by
looking at multiple factors that might vary depending on the particular
organization. Among the factors that we will consider include: (1) the number of
employees; (2) the annual revenue, profits, and budget of the organization; (3) the
number of separate operating divisions or units within the organization; (4) the
number of senior-level employees; and (5) the corporate structure of the
organization
multiple factors that might vary depending on the particular
organization. Among the factors that we will consider include: (1) the number of
employees; (2) the annual revenue, profits, and budget of the organization; (3) the
number of separate operating divisions or units within the organization; (4) the
number of senior-level employees; and (5) the corporate structure of the
organization. While not an exhaustive list, these factors provide a good indication
of what we believe to be relevant to size and to whether an organization has shown
sufficient commitment to warrant credit for an effective compliance program.
E.
Credits for Self-Reporting, Cooperation, Avoidance of Trial-
Type Hearing, and Acceptance of Responsibility
1.
Unbundling the Credits
a.
Comments
136. Several commenters suggest that the Commission should unbundle the
credits for self-reports, cooperation, avoidance of trial-type hearings, and
acceptance of responsibility. EEI, National Grid, and TAPS, for example, state
that the Commission should unbundle the mitigation credits for self-reports and
cooperation because there is value from self-reporting that is separate from the
value of cooperation.201 Self-reports are valuable, EEI believes, because without
them the Commission may never know that a violation occurred.202 Cooperation,
on the other hand, is valuable, EEI asserts, because it facilitates Enforcement
staff’s review of misconduct.203 EEI and INGAA also argue that tying the credits
for self-reports and cooperation could create a disincentive to self-reporting in
201 See Comments of EEI at 37; National Grid at 7; and TAPS at 30.
202 Comments of EEI at 38.
203 Id.
on the other hand, is valuable, EEI asserts, because it facilitates Enforcement
staff’s review of misconduct.203 EEI and INGAA also argue that tying the credits
for self-reports and cooperation could create a disincentive to self-reporting in
201 See Comments of EEI at 37; National Grid at 7; and TAPS at 30.
202 Comments of EEI at 38.
203 Id.
Docket No. PL10-4-000
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instances where the organization cannot be certain whether it will receive
cooperation credit.204
137. EEI and TAPS also propose that we unbundle the credits for cooperation
and avoidance of trial-type hearings because, they contend, these are unrelated
concepts.205 Specifically, EEI states that cooperation helps Enforcement staff
during the preliminary phase of an investigation and a trial-type hearing occurs,
not because of the absence of cooperation, but because of legal or factual
disputes.206 INGAA also takes issue with bundling these credits. It states that a
company should not forego the cooperation credit by contesting a penalty
calculation, commenting that an organization should have the right to admit a
violation, but nonetheless contest the proposed penalty calculation in a trial-type
hearing.207
138. Similarly, AGA states that, under the Penalty Guidelines, no credit is given
for self-reporting, cooperating, and accepting responsibility unless the
organization resolves the matter without the need for a trial-type hearing. AGA
believes that this aspect of the Penalty Guidelines appears to undervalue self-
reporting, cooperation, and acceptance of responsibility by conditioning credit for
them on a settlement.208 AGA recommends that we restructure this model to
provide separate credits for each of the identified actions.209
139
s the
organization resolves the matter without the need for a trial-type hearing. AGA
believes that this aspect of the Penalty Guidelines appears to undervalue self-
reporting, cooperation, and acceptance of responsibility by conditioning credit for
them on a settlement.208 AGA recommends that we restructure this model to
provide separate credits for each of the identified actions.209
139. Finally, INGAA recommends unbundling the credits for cooperation and
acceptance of responsibility from the credit for resolving a matter without a trial-
type hearing because an organization should not be deemed uncooperative or
unwilling to accept responsibility by seeking a trial-type hearing where there is a
good-faith basis for a disagreement over the law or facts of a case.210
204 See Comments of EEI at 38; INGAA at 13.
205 See Comments of EEI at 38-39; TAPS at 30.
206 Comments of EEI at 39.
207 Comments of INGAA at 13-14.
208 Comments of AGA at 7.
209 Id. at 7-8.
210 Comments of INGAA at 13-14.
Docket No. PL10-4-000
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b.
Commission Determination
140. The Commission agrees to modify the Penalty Guidelines so that the
mitigation credits for self-reports, cooperation, avoidance of trial-type hearings,
and acceptance of responsibility are not tied together. Each of these factors carries
independent value and should be credited accordingly.
141. Self-reports, for example, add significant value to overall industry
compliance, and the Commission will continue to place great importance on self-
reporting. As we stated in the 2005 Policy Statement, “[c]ompanies are in the best
position to detect and correct violations o
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