On December 20, 2012, the Federal Energy Regulatory Commission approved revisions proposed by the North American Electric Reliability Corporation to its Rules of Procedure. North Amer. Elec. Reliability Cor., 141 FERC ¶ 61,241. The approved revisions include numerous changes to Appendix 4B, Sanction Guidelines.
The Sanction Guidelines describe the factors considered by NERC and the Regional Entities in determining monetary Penalties for Reliability Standards violations. The revisions significantly shorten, simplify and clarify the Guidelines. Some factors previously considered in determining Penalty amounts are now explicitly stated, and some new factors are identified. Clean and redlined versions of the revised Sanction Guidelines are available here and here.
As required by Federal Power Act §215, the Sanction Guidelines specify that all Penalties must bear a reasonable relationship to the seriousness of the violation and reflect consideration of other listed factors (§2.3). As before, the starting point to determine a Penalty is the Base Penalty Amount range identified by applying the Violation Severity Level and Violation Risk Factor to the Base Penalty Amount table in the Sanction Guidelines. The Base Penalty Amount may be set at zero for a first violation with an inconsequential actual or foreseen impact. This relief will not apply if the violation was intentional, or the violator has a poor internal compliance program (ICP), poor culture of compliance, attempted to conceal the violation or failed to comply with compliance directives from NERC or the Regional Entity (§3.2).
The adjustment factors listed in §3.3 are then considered to determine the Adjusted Penalty Amount:
a. Repetitive violations and the violator’s compliance history – may increase the Penalty. Also considered are previous violations by the violator’s affiliates, particularly violations of the same/similar Reliability Standard Requirements, and whether they reflect recurring conduct by affiliates operated by, or whose compliance activities are conducted by, the same corporate entity. (§3.3.1)
b. Failure to comply with compliance directives (i.e., Remedial Action Directives or agreed corrective or Mitigating Activities for prior violations) – may increase the Penalty. (§3.3.2)
c. Violation disclosure through self-reporting or based on a self-analysis following a Bulk Power System event, and voluntary Mitigating Activities – may reduce the Penalty. (§3.3.3)
d. Degree and quality of the violator’s cooperation in investigation of the violation and in any Mitigating Activities – may increase or decrease the Penalty. (§3.3.4)
e. Presence and quality of the violator’s ICP and other indicators of its culture of compliance – Penalty may be reduced if the violator has a strong ICP and/or culture of compliance, but will not be increased if the violator has no, or a poor quality, ICP. (§3.3.5)
f. Settlement – The Penalty may be reduced if the violation is resolved through settlement, taking into account the speed with which it was reached. (§3.3.6)
g. Attempt to conceal the violation – The Penalty may significantly increase (presumption is that it will be doubled) if the violator attempted to conceal the violation or information needed to investigate it, and may increase if the violator resisted or impeded the discovery and review of the violation. (§3.3.7)
h. Violation was intentional (unless it was a good faith effort to avoid immediate and significantly greater harm to the reliability of the BPS) – The Penalty will increase (presumption is that it will at least double, or more if there were previous intentional violations). An economic choice to violate the Reliability Standard is considered intentional, and the minimum Penalty will be disgorgement of the violator’s economic gains. (§2.9, 2.10, 3.3.8)
i. Extenuating circumstances – Natural disasters or unique circumstances may reduce or eliminate the Penalty. (§2.8, 3.3.9)
After the Adjusted Penalty Amount is determined, it may be reduced or eliminated based on consideration of the violator’s financial ability to pay. It may also be adjusted to ensure that it results in disgorgement of unjust profits or economic benefits gained through the violation. (§3.4)
The revised Sanction Guidelines specify that a Penalty determined through a settlement can supersede the Penalty that would otherwise be determined through application of the Sanction Guidelines. (§2.1)
Based on the revised Sanction Guidelines, Registered Entities can take steps to reduce Penalties for Reliability Standards violations that may occur:
▪ Have a strong, documented ICP in place and document that you follow it, along with other indicators of a strong culture of compliance.
▪ Promptly self-report violations when identified. If involved in a BPS event, conduct a self-analysis to identify any violations that were committed and possible Mitigating Activities. Self-initiate Mitigating Activities for any violation.
▪ Cooperate fully with the Regional Entity and/or NERC in an investigation.
▪ Attempt to promptly arrive at a settlement of the violation.
▪ Affiliated entities should proactively share information, either directly or through the corporate parent, on each other’s violations and Mitigating Activities to avoid repetitive violations within the overall organization.
Owen MacBride is a partner with Schiff Hardin.