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 Interference With Reliability Standards Development

Last week, FERC held a technical conference on reliability policy. The main topic of conversation was the Environmental Protection Agency’s pending regulations on power plant emissions, which most panelists asserted could have a significant negative effect on electric power supply reliability. Some argued that the EPA should institute a blanket delay in implementing the regulations, some that the President should exercise his authority to grant an extension to all generators nationwide. Personally, I’d side with some of the other panelists, who suggested that if shutting down (either permanently or temporarily) any particular power plant would lead to a reliability problem, then the EPA, President, DOE, or FERC could certainly explore the possibility of granting that plant (and only that plant) an extension of time to comply.

But that’s not what I wanted to address with you today. That topic was covered thoroughly throughout the media. And further, FERC’s jurisdiction does not extend to generation resource adequacy, thus in my mind calling in to question why this issue would be addressed in a FERC conference on reliability policy.

Rather, I wanted to discuss an issue raised on the first day of the conference—an issue related to bulk-power-system reliability standards.

During the second panel, as part on a discussion of FERC intrusion in to the standards development process, Gerry Cauley, President of NERC, complained about FERC staff participation. He explained that FERC staff only partially participate in standards development, making occasional comments and complicating the discussion, but refusing to contribute specific proposals or commit support to a particular point-of-view on behalf of the commission. He said that FERC staff should either be “into or out of the tent.”

I spoke to FERC staff after the panel and know they took this comment seriously. However, resolving it is not a simple matter.

See, one possibility is for staff to “step into the tent.” This they’d be happy to do. But staff aren’t the decision-makers. That authority rests with the commission. And FERC attorneys regularly advise engineering staff not to speak on behalf of the commission, or commit to a specific result.

FERC staff could “step out” and allow the stakeholder-led process to go where it may. But that too seems unlikely. FERC’s Division of Reliability Standards has a staff of around 20 people dedicated to standards development and approval (not including CIP standards, for which there are additional staff in a separate division). The director of the Office of Electric Reliability also relies heavily on one particular senior staff member and one consultant, neither of whom hesitate to put their opinions ahead of those of NERC or other stakeholders.

An alternative is for the commission to make the Division of Reliability Standards non-decisional and reassign it to the Office of Administrative Litigation. No longer part of the team advising the commission on the approval of standards, these staff would then be free to participate fully in standards development without undermining the authority of the commission. I don’t know whether this would resolve the situation to Mr. Cauley’s satisfaction, but it would allow the commission to feel that it is still involved in the process—contributing rather than interfering.

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.