Technical Conference on Penalty Guidelines
On November 17, FERC Staff held a Technical Conference to discuss the Penalty Guidelines issued on September 17, 2010 and their impact on compliance and enforcement matters. The first panel addressed whether the Penalty Guidelines and the seven elements identified as indicators of an effective compliance program were helpful to organizations in prioritizing their compliance efforts. While the panelists acknowledged that the Penalty Guidelines were helpful, they emphasized that additional clarity and regulatory certainty are necessary. They requested explanatory language, concrete examples of compliance and noncompliance, and further guidance on how penalties are calculated. The second panel examined the factors considered in calculating civil penalties, and the panelists commented on whether the volume and duration of violations should be considered, whether the Penalty Guidelines should account for the pass-through of gains received from violations to ratepayers, and whether penalties should be calculated based on each separate act or on the conduct as a whole.
- A. First Panel—Compliance Efforts Since Issuance of Penalty Guidelines
Industry members who participated in the first panel addressed whether the Penalty Guidelines have contributed to the creation and movement towards effective compliance programs and steps the Commission should take to promote effective application of the Penalty Guidelines. The first panel was composed of the following industry members:
- Andrew Soto, Senior Managing Counsel of the American Gas Association (AGA)
- Nancy Bagot, Vice President of Regulatory Policy of the Electric Power Supply Association
- Shari Gribbin, Assistant General Counsel and Manager for FERC Compliance of Exelon Corporation and Member of Edison Electric Institute
- Susan Kelly, Vice President of Policy Analysis and General Counsel of the American Public Power Association
- Richard Meyer, Senior Regulatory Counsel of the National Rural Electric Cooperative Association
- Joan Dreskin, General Counsel of the Interstate Natural Gas Association of America
The panelists emphasized the need for regulatory certainty and for the Commission to set out its expectations more clearly. The consensus was that the Penalty Guidelines have helped companies prioritize their efforts, modify their compliance programs, and calculate penalties, and that the seven elements have provided a good framework and foundation for developing and improving the compliance programs. However, companies have found the implementation of the Penalty Guidelines to be challenging and have requested explanatory language, concrete examples of compliance and noncompliance, and guidance as to how penalties are calculated. The panelists stated that this additional guidance would provide benchmarks from which the companies can identify the proper next steps when facing compliance issues.
The panelists requested the Commission to include greater detail as to what the Commission has found effective and deficient in company compliance programs in orders, reports, and other releases. For example, Andrew Soto requested that the Commission release guidance in which it identifies a problem, real or hypothetical, and details actions it expects the company to take and compliance policies that should be in place. The panelists stated that industry members value guidance that identifies compliance areas the Commission finds most important as such guidance can further companies’ efforts in reallocating their resources properly. Companies have been investing more resources in developing and enhancing their compliance programs and want to know whether the Commission agrees with their focus and direction.
Industry members are also curious about the factors considered and the weight given to each factor in the Commission’s calculation of penalties because the penalty orders that have been issued have merely stated that the Commission has “considered the Penalty Guidelines.” They want to know how the Commission values each violation and whether their compliance efforts factor into the calculations. For example, Shari Gribbin suggested that the Commission release penalty measurements in public audit reports or assessment markers to serve as a point of comparison.
Nancy Bagot provided comments concerning four issues: (1) the documentation requirement, (2) the self-reporting requirement, (3) potential benefits from holding preliminary interviews for certain investigations, and (4) the need for periodic communication during a pending investigation. Although the Commission has declined to provide guidance on the documentation requirement, Ms. Bagot asked for guidance concerning the extent of documentation required because as the need for documentation increases, the resources required also increase. She noted that over-documentation can be detrimental as too many resources could be allocated to documentation as opposed to other, potentially more important areas that are in need of resources. Sue Kelly also raised concerns about having to reallocate personnel from key operational areas to work on compliance issues, the bulk of which were documentation issues and not reliability issues.
Second, Ms. Bagot requested clarifications on the self-reporting requirements, specifically whether a self-report must be filed with the Commission if the violation was reported and was corrected with the RTO or affected entity and penalties were assessed. This request was rooted in the relatively long resolution time ranging anywhere from one to three years for even minor and administrative issues adding to the inefficient allocation of resources. Joan Dreskin raised concerns that self-reporting could be detrimental to a company, as it could be taken as evidence of both a stronger and a weaker compliance program. Richard Meyer added that the Commission should give more credit to companies for self-reporting and stated that in some instances companies do not find it worthwhile to self-report.
Third, Ms. Bagot suggested that, for certain investigations, the Commission should hold a preliminary interview to establish a mutual understanding between FERC Staff and the company of the issues and violations that need to be addressed. This interview would allow the company to better focus its resources and would further a more efficient resolution.
Lastly, Ms. Bagot emphasized the importance of receiving periodic communications from the Commission while an investigation is pending. She recognized that inquiries proceed at different paces but emphasized that additional communication and interaction would promote the proper allocation of resources. Mr. Meyer echoed Ms. Bagot’s remarks and suggested that the Commission should provide status calls every six months to notify the company that the investigation is still active. Ms. Bagot also requested the Commission to clearly notify the company when a case is closed.
Some panelists touched briefly on their respective companies’ compliance efforts since the issuance of the Penalty Guidelines. Mr. Soto stated that the AGA has continued to hold regular meetings to address compliance issues and has now begun to hold informal meetings. The AGA has also updated its FERC manual with the currently effective Penalty Guidelines and plans to discuss the Penalty Guidelines during its next compliance conference. Ms. Dreskin stated that the Interstate Natural Gas Association of America has incorporated the seven elements into its compliance program and noted that the Penalty Guidelines provide a useful checklist of questions to run through when determining whether to document a violation. She also added that member companies have held meetings to discuss their compliance programs and learn about others’ compliance efforts.
The panelists expressed their appreciation to FERC Staff for coordinating the Technical Conference but stated that one year was too short of a time period to gain experience and provide more constructive feedback on the Penalty Guidelines. For some companies, the issuance of the Penalty Guidelines has not yet necessitated major modifications of their compliance programs.
In response to the panelists’ remarks, the Commissioners indicated that they recognized the value of presenting more detailed facts and findings in their orders, reports, and releases but stated that a balance must be struck between transparency and confidentiality. In response to Commissioner LaFleur’s question of how the Commission can improve its communications, Ms. Kelly suggested that the Commission release notices or alerts when it sees repeat violations in certain areas. Mr. Meyer suggested that the Commission publish a notice when it conducts a more widespread investigation of a specific type of conduct. The panelists agree that increased dissemination of lessons learned is essential to helping companies move forward together in their compliance efforts.
- B. Second Panel—Various Issues Affecting Penalty Calculations
The second panel focused on the following three issues:
- Whether duration and volume are sufficiently accounted for in the loss calculation under Section 2B1.1(b)(2) of the Penalty Guidelines
- Whether the Penalty Guidelines should account for situations in which the entity that committed the violation passed any portion of the gain it received from the violation to the ratepayers
- Whether penalties should be calculated based on each separate act or on the conduct as a whole, or whether it should depend on the type of violation or particular facts and circumstances of the investigation
Panelists participating in the second panel included the following:
- Joseph Kelliher, Executive Vice President of Federal Regulatory Affairs of NextEra Energy, Inc.
- William Massey, Partner at Covington and Burling
- Frank Lindh, General Counsel of the California Public Utilities Commission
The panelists provided different answers in response to all three of the Commission’s prompts. With regard to the first issue, William Massey stated that in most cases, the volume and duration are sufficiently accounted for by the loss-enhancement factor. However, he stated that the Commission should use its discretion and apply the loss factor if the high volume and duration are not sufficiently reflected. By contrast, Joseph Kelliher stated that the Commission should consider striking the loss-enhancement factor while Frank Lindh supported its continued use.
The panelists’ remarks on the second issue also varied. Mr. Kelliher stated that the Penalty Guidelines should account for situations in which the entity that committed the violation passed the gain it received from the violation to its ratepayers. Mr. Massey agreed but made clear that although the pass-through to the ratepayers is relevant and should be taken into account, the penalty level does not need to be reduced dollar for dollar by the amount passed through. On the other hand, Mr. Lindh stated that the Commission should use its disgorgement authority (and its refund authority) to make the consumer whole because the pass-through could ultimately benefit the wrong people. He opposed giving an automatic credit based on whether the ratepayer benefitted from the misconduct.
The panelists were also in disagreement on the method of calculating penalties. Mr. Massey stated that penalties should be imposed on the conduct as a whole and should not be calculated based on each separate act. Although multiple violations can be interpreted as a serious disregard of the rules, Mr. Massey stated that imposing a penalty calculated based on each separate act can be excessive and inequitable. He encouraged the Commission to depart from a mechanical application of the Penalty Guidelines as it could lead to overly severe penalties, could be viewed as an abuse of discretion, and could even discourage settlement. Further, Mr. Massey emphasized the importance of the Commission’s application of its sound judgment, discretion, and common sense. By contrast, Mr. Lindh argued that penalties should be calculated based on each separate act and not by the conduct as a whole.
Both Mr. Kelliher and Mr. Massey commented on the topics covered in the first panel. Similar to the participants of the first panel, both recognized the value derived from the issuance of Penalty Guidelines but believe that the Commission should clarify what it considers to be an effective corporate compliance program because the lack of clarification dissipates the compliance resources of regulated entities. Mr. Kelliher suggested that the Commission issue advisories in which the company names are redacted, penalty orders providing explanations as to how the penalty was calculated and which factors were considered, and more detailed discussions in audit reports. Mr. Massey stated that the Commission should publish the gradation of penalties it would impose and a list of mitigating factors that could be taken into account.
 The AGA sponsors a FERC compliance conference in which it addresses regulatory compliance, compliance planning, and training for compliance. The next conference will be held in September 2012.
 Max Minzner, an Associate Professor of Law at the University of New Mexico School of Law, was unable to attend.
 While Mr. Lindh did address the Commission’s prompts, his responses to the prompts were extremely brief. Instead, he focused most of his allotted time reminding the Commission of the California refund cases and encouraging the Commission to renew its commitment to use its refund authority to make the consumers in California whole.