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.