5 Tips for Surviving a NERC Audit with Your Sanity Intact

Fear, uncertainty, and doubt—nearly 5 years into mandatory electric reliability standards and there’s still plenty of it to go around. Some people seem to want it that way. But with regard to compliance audits, it’s just not necessary. I’ve been through a few. Follow these five tips and you too can come out the other end of a NERC audit calm, cool, and collected.

1. Ignore the audit

Perhaps that’s a bit of an exaggeration, but the point is that the audit should not be your focus. Put your attention on reliable operations. Be diligent at maintaining compliance. Keep proper documentation always. If you’re doing what you’re supposed to be doing all along, then the audit becomes no big deal.

2. Remember, it’s just an audit

Uncertainty and doubt breed fear. “What if we can’t find all the maintenance records in time?” “What if the auditor disagrees with our interpretation of that standard?”

Relax! It’s just an audit. The worst thing that can happen is the audit team issues findings of possible violations. You still have time to address those during the enforcement process before they become official alleged violations. After that, you can contest a violation and request a hearing. And you even have an opportunity to appeal a notice of penalty to FERC.

I’m not saying the audit is meaningless, just keep it in perspective. It’s the first step in an enforcement process with multiple opportunities to demonstrate compliance. Documents that take time to locate can be submitted later. Interpretations of standards can be argued at hearing.

3. Complain

Auditors asking for confidential records or showing up at your door (sometimes even with FERC representatives in the group) can be very intimidating. Don’t be afraid, though. Speak up! NERC and regional entity auditors aren’t always right and, in my experience, they usually could do a better job of explaining why they’re asking for something. Now, be careful about refusing to answer a question or provide a requested document. However, don’t hesitate to ask an auditor the basis for his or her request if it seems to imply an assumption or interpretation with which you disagree. At NERC’s recent seminar on audits, Michael Moon, Director of Compliance Operations, said, “This is not a gotcha game. It’s an open book test.” Throughout the seminar, the presenters also encouraged entities to ask questions of their auditors and provide feedback on the audit experience.

4. Shut up

While you should not hesitate to speak up for yourself during an audit, in general, I counsel people to be quiet. With nerves on edge and outsiders questioning one’s work product, there’s a natural tendency to talk—to explain, to justify, to relate interesting stories. This is even more the case when auditors, as they are trained to do, refrain from the personal smalltalk common in business meetings.

Don’t. An audit is not a typical business meeting. You and the auditors are not on the same team. These people are there to determine if you are being compliant with the reliability standards. Answer their questions. But stick to the facts.

5. Do what you say, say what you do

This is both the easiest thing to get wrong and the easiest thing to get right. A number of NERC standards require entities to develop procedures and then follow them. Examples of this include vegetation management plans, maintenance intervals, emergency operations plans, and facility ratings. But besides some general guidelines or limited criteria, the exact procedures or policies are left up to the entities themselves. What could be easier than writing your own standards?

Unfortunately it seems that many entities take this flexibility further than it was intended. They seem to think that because they get to write the procedures themselves, their practices can vary from the procedures if “within reason” or “for the purpose of maintaining reliability.”

Similarly, for many standards a specific procedure document isn’t required, yet an entity may have one for its own reasons. In such a case, there appears even less need to follow the procedure exactly.

Not true! With all due respect to the technical expertise of the engineers and technicians, you need to understand that what we’re dealing with are federal regulations. To be compliant, you must follow the standard exactly as written. If the standard says that you must write a procedure and then implement it, then that is what you must do. Sure, you could have written the procedure differently, but you didn’t. On the other hand, if what you’re doing is better, then change the procedure to match. Even if a procedure document wasn’t required, inconsistencies may lead auditors to question compliance in practice. Don’t let that happen.

FERC Technical Conference on Penalty Guidelines

The Federal Energy Regulatory Commission (FERC) recently held a technical conference to review experience with it’s penalty guidelines 1 year after their passage. Technical conferences aren’t the open conversations that you might expect them to be. So while I wouldn’t consider what was said to be representative of all stakeholders’ concerns, it’s worth studying to understand what the major players are thinking and what influences the commission.

This technical conference was divided in to two sessions. The first session was meant to explore how the penalty guidelines have affected organizations’ compliance efforts. In the main, the panelists said that the guidelines had not. In fact, they spent most of their time complaining about the lack of transparency in compliance enforcement. Richard Meyer of the National Rural Electric Cooperative Association requested better public explanation of actual assessed penalties, so that other entities can learn from case histories. He also stated that there must be an appreciation for the limited experience entities have with the new area of regulation that is the electric reliability standards, and for the fact that many of the standards are ambiguous. Joan Dreskin of the Interstate Natural Gas Association of America said that the public needs more information on how each element of the guidelines has been applied. She also asked for the commission’s consideration in the case of inadvertent errors. Andrew Soto said that the members of the American Gas Association need guidance on what constitutes compliance and a good compliance program, that the penalty guidelines don’t do this. When Commissioner Norris asked how it would be possible for the commission to give better information on penalties without revealing confidential information, Andrew Soto proposed a feedback or warning system, so that entities could regulate their behavior before penalties apply (sort of like those automated signs that warn drivers when they’re over the speed limit). Susan Kelly of the American Public Power Association said that the best part of the guidelines was the decision not to apply them to penalties set by NERC for reliability violations!

Another seemingly off-the-topic issue discussed by the panelists and FERC staff was the time required to complete investigations. Nancy Bagot of the Electric Power Supply Association complained about the length of FERC investigations, particularly about long periods with no communications from FERC staff. Andrew Soto, though, expressed his belief that it’s generally in the best interest of entities being investigated not to rush the process. Richard Meyer pointed out that while under investigation, individual employees are less efficient at their work and may find it difficult to advance in their careers or change jobs. He also said that FERC should pay more attention internally to the length of investigations (apparently implying that FERC staff lose track of ongoing cases).

The second panel focused on the actual calculation of penalties. Joseph Kelliher, the previous chairman of FERC and now with NextEra Energy, argued against tying penalties to the duration of a violation. He explained that some violations (e.g., the failure to maintain documentation) are by nature of an extended duration. William Massey, now a partner with Convington & Burling but also formerly a FERC commissioner, said that it was reasonable for the commission to apply volume and duration enhancements to penalties, but only in situations where their impact was not already accounted for by the loss factor. Both men agreed that the guidelines currently provide insufficient incentive for entities to self-report violations. (In the first panel, Richard Meyer had also said that if the goal is compliance, the commission should give a “heck of a lot more credit for self reporting”, because right now it simply isn’t worth it.)

Commissioner LaFleur observed that the overarching issue addressed by the second panel seemed to be the tradeoff between objectivity and subjectivity. I agree. The difficulty for industry is that providing clear objective rules goes against the nature of the commission. The commission never ties its own hands unless absolutely necessary. To the commission, maintaining flexibility is very important. Like all actions of the commission, penalty-setting is a political decision. Having clear, objective criteria would take away from the power of the commissioners—the power to set penalties high when a case has generated significant public outrage, and the power to set penalties low when the commission would rather focus on correcting the violation. This might not be what industry thinks it wants, but it should also be viewed as a positive. Penalties set strictly by formula would likely be higher.

I think that, similarly, the first panel was less concerned about broad penalty guidelines than having a clear record as to what is and what is not considered a violation. This certainly makes sense. What the commission will do about it, though, I don’t know. The open-committee development process has not yet produced consistently clear standards and the political nature of the relationship has left the commission unable to take a hard line with NERC. On the other hand, the panelists also asked for certain accommodations. Perhaps the commissioners will consider these accommodations, which up until now NERC and regional entity auditors and investigators have been willing to make but which FERC staff have not.

In regards to the length of investigations, Mr. Meyer may be surprised to learn that FERC staff and commissioners know very well how long investigations take. That’s bureaucracy for you.

FERC’s 3 Lessons for NERC Reliability Standards Compliance

On March 17th, the Federal Energy Regulatory Commission (FERC) approved an $80,000 settlement between NERC, WECC, and Turlock Irrigation District for the violation of electric reliability standards (order [DOC]). In several previous cases, FERC had requested additional information from NERC. However, this is the first and only case in which FERC chose to proceed with an actual review of a notice of penalty.

What can we learn about the Commission’s views on reliability compliance from a read-through of its decision?

1. Load Shedding and Harm Are Factors in Assessing the Severity of a Violation

There has been some debate as to whether or not loss of load should be considered an aggravating factor in the assessment of a reliability standard violation. The concern is that load shedding is an essential tool for protecting the grid from cascading failures. In fact, load shedding may be required by the reliability standards. System operators shouldn’t be discouraged from acting to contain an emergency because of a concern that their actions will result in larger penalties. Thus, the Commission states:

Moreover, an underlying violation may require an operator to shed load to comply with a Reliability Standard to protect customers from a larger, possibly cascading outage. In such a situation, the operator’s decision to shed load pursuant to the Reliability Standard is not itself a violation and the Commission would not approve or assess a penalty for that decision.

However, the Commission also makes it very clear that a failure to serve customer load is an important measure of the seriousness of a violation.

A loss of load caused by a violation of a Reliability Standard results in harm that is unnecessary and avoidable.

Therefore, when considering an appropriate penalty for a violation, the Commission declares that loss of load should be a factor.

In order to set penalties at an appropriate level, we will consider the quantity of load lost in our analysis of the harm when it occurs, based on the particulars of the load lost resulting from a violation.

2. Self-reporting Should Be Strictly Interpreted

Self-reporting a reliability standard violation is normally grounds for special consideration in the assessment of penalties. What, though, counts as a self-report? Several standards explicitly require companies to notify regional entities about certain events. In such situations, a report is required anyway. In some cases, auditors have allowed companies being audited to file self-reports when violations were discovered (before the audit report was turned in).

In this order, the Commission soundly rejects Turlock’s assertion that it had self-reported an FAC-003 violation. The Commission distinguishes between cooperation and self-reporting, explaining that submitting a report required by a standard does not justify the credit accorded self-reports.

3. Human Error Is No Excuse

The professor of my Human Factors class in college used to say that there is no such thing as human error. Obviously, people make mistakes. What he meant was that you should expect people to make mistakes and design machines and systems to accommodate them.

The Commission makes a similar point in the Turlock order and rejects human error as a mitigating factor in reliability standards violations.

Whether or not these occurrences resulted from human error is not relevant to our consideration of this matter… language translator The possibility of a significant monetary penalty for a violation of a Reliability Standard resulting from human error that adversely affects the BPS provides an incentive for registered entities to create and implement robust training and compliance programs and procedures to make human errors less likely.  Merely because a violation resulted from human error, however, does not by itself warrant reduction of a penalty.

One More Thing…

We can see in this decision hints of the dysfunctional relationship that exists between FERC and NERC. FERC will intervene in the compliance process but finds it difficult to contradict NERC on enforcement.

Regulated entities should understand that FERC is an active participant in the compliance monitoring process. While preparing to respond to the regional entity or NERC during an audit or investigation, companies should remember that there’s also another agency that’s very much involved in the decision-making.

FERC staff work closely with NERC investigators on nearly every case and can have a strong influence on the results. In this order, the Commission approved the settlement but also directed WECC to spot-check Turlock’s performance of several specific standards. During investigations, FERC staff, though they don’t have the authority to order NERC, will similarly raise issues, ask questions, and recommend findings.

However, while FERC is wont to intervene during the investigation stage, when it comes down to the final decision regarding what violations to declare and what penalties to assess, the agency hasn’t demonstrated the willpower to overrule NERC.

This case is the one-and-only review initiated by the Commission for notices of penalty covering 1,872 reliability standard violations. Not a record that suggests a strong position on oversight (unless, that is, you think that NERC and the regional entities did a good job on all 1,800+ violations). Further, NERC filed the notice of penalty on November 13, 2009 and the Commission initiated its review on February 26, 2010, so this decision took more than a year to issue! Finally, the language of the order is pretty clear that the Commission would rather have seen a larger penalty, yet it approved the settlement and justified the action with an acknowledgment that the violation occurred during the early start-up period of mandatory standards.

This article was last edited on June 23, 2011.