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Penalty Shot

An interpretation of FERC’s first application of EPACT.

Fortnightly Magazine - April 2007

At its open meeting on Jan. 18, 2007, the Federal Energy Regulatory Commission (FERC) unanimously approved settlements with five electric utilities for a total of $22.5 million and other considerations (most notably commitments to effective compliance programs).

This action by the commission answers some important questions that energy market participants have been asking. In particular, the commission’s decision to issue multiple settlement orders at once helps market participants connect some important dots regarding the regulatory landscape in which they must operate, but it also raises important questions that market participants would like answered.

Overarching Lessons

The Energy Policy Act of 2005 (EPACT) gives FERC the authority to issue penalties of up to $1 million per day per violation. The financial penalties issued, through settlement agreements, varied from a high of $10 million to half a million dollars. Table 1 summarizes the penalties and briefly characterizes the alleged violations. FERC sought to enhance communication to the energy markets about its intent by discussing these settlements at its open meeting. The commission appeared acutely aware that the industry would draw lessons from these settlements.

Three lessons were particularly noteworthy. First, the commission’s action demonstrated its serious intent to enforce its rules. Although FERC has stated this clearly and repeatedly, some market participants had been in denial, believing the commission’s lack in exercising the new penalty authority would continue. Second, every commissioner emphasized the importance to herself or himself of “self-report” violations by market participants. The phrase “self report” was mentioned more than two dozen times. The third important lesson, addressed explicitly by the chairman, should be obvious to any energy executive: Although all five utilities were penalized for electricity matters, the commission is pursuing enforcement for all matters subject to its jurisdiction.

Key Factors

Lead attorney Robert Pease, director of FERC’s Investigations Division, and his deputy, Lee Anne Watson, presented the broad factors considered in determining a penalty and in a company’s efforts to remedy deficiencies in a timely manner.

They also mentioned “detailed factors” (see Table 2), including:

• Existence of a compliance program;
• Harm caused;
• Intent of manipulation or deceit;
• History of violations;
• Senior management involvement; and
• Speed of company action.

Each commissioner mentioned some of these factors. There were no surprises in this discussion. In fact, anyone who has read the commission’s enforcement policy statement would have been quite familiar with the factors discussed.

These factors will inform a wise leader’s development of a company’s compliance program and efforts to promote a culture of compliance.

Two Categories

There are at least two other sets of lessons that can

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