FERC Enforcement and Compliance
Apr 13, 2011 QuickCounsel Download PDF
By Kristin Gibbs, Dan Frank, Michael Brooks, Melissa McGoogan, Benjamin Norris & Sandra Safro - Sutherland Asbill & Brennan LLP
The Federal Energy Regulatory Commission ("FERC" or the "Commission") regulates, among other things, the interstate transmission, transportation and wholesale sale of natural gas and electricity in the United States. FERC's enforcement authority and efforts in the natural gas and electricity markets have increased substantially during the last decade. As a result, it is increasingly important for any company that purchases or sells natural gas or electricity, or provides or uses interstate transmission or transportation services, to implement effective compliance measures to manage the risks associated with FERC enforcement.
The Energy Policy Act of 2005 ("EPAct 2005") authorizes FERC to impose civil penalties of up to $1 million per day per violation for violations of the Natural Gas Act ("NGA"), the Federal Power Act ("FPA"), "or any rule, regulation, restriction, condition, or order made or imposed by [FERC pursuant to its authority under the Acts]." Prior to EPAct 2005, FERC was authorized to impose penalties that ranged from $5,000 to $11,000 per day under the applicable Acts. EPAct 2005 also increased criminal penalties to up to $1 million and five years' imprisonment for statutory violations.
FERC has adopted Market Behavior Rules for electric public utilities' market-based rate tariffs and rate schedules, along with analogous regulations governing jurisdictional sellers of natural gas. The Market Behavior Rules are as follows:
EPAct 2005, through amendments to the NGA and FPA, makes it unlawful for any entity to willingly and knowingly report to a federal agency any false information relating to the price of natural gas or electricity sold at wholesale or the availability of electric transmission capacity with the intent to fraudulently affect the data being compiled by the federal agency. Submitting false market information can also be a violation of the Commodity Exchange Act, and may also result in criminal penalties (imprisonment and fines) if it constitutes mail or wire fraud.
FERC retains the full panoply of remedies for any violations of the anti-fraud rules, including those that had been identified in the Market Behavior Rules. Thus, for violations, FERC may: (1) condition, suspend, or revoke market-based rate authority; (2) order the disgorgement of unjust profits; and (3) impose civil penalties.
In addition to the market behavior and anti-fraud and manipulation rules, there are many rules and policies that govern the natural gas and electricity wholesale markets, including rules related to the transportation and storage of natural gas and the transmission of electricity. These rules also are subject to FERC's $1 million penalty authority. The rules are discussed at a high level in the ACC InfoPAK, FERC 101: An In-house Lawyer's Guide and should be included in any FERC natural gas or electricity compliance program.
FERC has levied significant penalties under its new penalty authority, including penalties for alleged attempted manipulation as well as violations of FERC's other policies, rules, and regulations intended to promote market transparency. The cases to date illustrate FERC's vigorous approach to the enforcement of its rules, including enforcement of its natural gas pipeline and storage capacity release rules.
FERC has issued a series of policy statements on compliance and enforcement outlining the factors it will consider when determining the appropriate penalty for violations. Among the factors to be considered are the seriousness of the offense, including what harm was caused by the violation, whether the violation was willful or the result of manipulation, deceit or artifice, and whether it is a repeat offense. FERC also indicated that it will take into account self-reporting and cooperation during any investigation, any remedial measures taken by the party, and the party's "culture of compliance."
In March 2010, FERC issued a Policy Statement on Penalty Guidelines, which was revised in September 2010. The Penalty Guidelines are intended to be used to determine civil penalties for violations. They use a five-step approach to generate a penalty range applicable to a violation. The steps include establishing a base level (based on the nature of the violation) that is then adjusted for various factors relating to the seriousness of the violation and the organization's culpability (which quantifies the organization's past and current conduct and remedial efforts); the adjusted violation level is then used to determine the ultimate penalty range. The Penalty Guidelines do not affect FERC's practice of requiring the disgorgement of unjust profits resulting from violations. Additionally, the Penalty Guidelines will not be used by FERC in reviewing penalties proposed by the North American Electric Reliability Corporation ("NERC") for violations of the NERC Reliability Standards; however, FERC will use the Penalty Guidelines in determining an appropriate penalty for such violations when FERC conducts its own investigations of Reliability Standards violations.
FERC has applied its enhanced penalty authority in a variety of cases ranging from alleged manipulation to relatively technical violations of its policies, rules, and regulations. In the natural gas arena, FERC has settled numerous matters involving violations of its capacity release rules with penalties and disgorged profits exceeding $1 million. In the electricity arena, FERC also has approved settlements on alleged violations of open access requirements, with penalties and disgorged profits also exceeding $1 million. In both areas, FERC also has imposed requirements on the development, implementation, and monitoring of compliance programs. In addition, each year FERC Enforcement Staff publishes a report of enforcement activities.
On October 16, 2008, FERC issued its Policy Statement on Compliance, which supplemented the May 15, 2008 Revised Policy Statement on Enforcement. The Policy Statement on Compliance states that if a company acts "aggressively to adopt, foster, and maintain" an effective culture of compliance, and has in place "rigorous procedures and processes that provide effective accountability for compliance," FERC may reduce—or even eliminate—the civil penalty that would otherwise be imposed if a violation occurs. FERC provides additional guidance on the "four hallmarks of effective compliance practices" that FERC will take into account when determining whether to impose a civil penalty.
Actions of Senior Management
FERC stated that the "responsibility for a culture of compliance rests squarely on the shoulders of senior management," and that in order to create a sound compliance plan, senior management must be actively involved. In addition to ensuring allocation of resources for management, FERC indicated that senior management also should communicate frequently to employees, both formally and informally, its commitment to compliance. FERC also expects that senior management will set aside the time and resources necessary to address compliance issues and will ensure that designated compliance personnel are actively included in new business ideas and initiatives. FERC noted that the compliance officer's independence is an "important hallmark" of a strong commitment to compliance, which FERC has repeatedly emphasized in statements regarding compliance and enforcement.
Effective Preventive Measures
It is not enough that a company creates a compliance program that appears to be strong in theory; the company must implement the program with "effective accountability for compliance and periodic review and evaluation of the effectiveness of the program." Recognizing that companies vary in their size, structure and available resources, and that compliance program measures can be expensive, FERC stated that it will take into account the size of a company and the nature and extent of its jurisdictional activities when considering whether the preventive measures taken are suitable.
Prompt Detection, Cessation, and Reporting of the Offense
In general, FERC noted that there is no set time by which a company must find or report a violation in order to be considered prompt. However, FERC will normally give credit to companies whose violations are uncovered as a result of systematic internal auditing and supervision programs. In addition, a company will receive credit for prompt reporting if it reports a violation to FERC Enforcement Staff shortly after discovery, or if it calls Enforcement Staff to let them know that they are investigating a matter.
Finally, FERC identified remediation as a factor that would be considered, but cautioned that it is "inherently case-specific." FERC observed that the extent to which disciplinary action or new or modified prospective controls are needed to prevent recurrence depends on the circumstances and is "highly fact-specific." In sum, FERC will evaluate a company's response to misconduct that it discovers in determining whether civil penalty reduction is appropriate under this factor.
Additional ACC Resources
ACC Resource Library - Program Material
FERC Grid Resiliency – What’s Next
ACC Resource Library - Online Education
FERC Moves to Limit Acquisitions Requiring Preapproval: Summary and Key Takeaways
ACC Resource Library - Online Education
ACC Resource Library - Sample Form & Policy
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