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Facing Compliance Risks

Enforcement trends call for a proactive approach to complying with market rules.

Fortnightly Magazine - April 2008

cause a problem.

An organization’s tolerance for risk and its confidence in its existing policies and practices will drive it to embrace one of these three basic approaches. A company’s attitude toward regulatory compliance across the enterprise also will play a prominent role in how it faces the challenges associated with demonstrating, documenting and reporting compliance.

Elements of Sustainable Compliance

Whether a company follows a passive, reactive or proactive model, its executives make specific organizational decisions—either deliberately or by default—as to how the company will approach regulatory compliance.

The choice regarding the preferred approach will be driven in part by the organizational culture within the enterprise. As an example, a company with a decentralized operating structure will tend to have separate systems for managing data and documents that support the demonstration of compliance to the respective regulatory bodies. In contrast, a centralized organization will tend to have a central compliance management system and an independent function that holds responsibility for coordinating and monitoring compliance activities ( e.g., the chief compliance officer). Regardless of the structure, however, the objective of any enterprise’s efforts will be to minimize the costs incurred in facilitating and demonstrating compliance and to mitigate the risk of non-compliance. In doing so, a company seeking to establish a sustainable program will focus on a series of six key elements:

Governance/Policies: Oversight structure and policy and procedure documentation;

Communication/Training: Methods used to communicate policies and reinforce desk-level procedures within the organization;

Controls & Monitoring: Checks and balances and the frequency of oversight;

Reporting (External/Internal): Frequency, content and distribution of performance data and metrics;

IT Systems & Data/Document Management: Information tools used to monitor, analyze and manage the enterprise’s regulatory compliance obligations; and

Program Integration & Organization: Either a centralized or decentralized approach to compliance across the enterprise affecting both systems and personnel.

Each of these six elements represents a discrete regulatory area that deserves individual consideration by an enterprise that owns, operates, or purchases services from assets used in wholesale energy markets. The list of affected parties includes, but is not limited to, owners, operators, and users of transmission, generation, gas storage, or natural gas pipeline assets.

Across each of these program elements, a company will possess different levels of maturity and sophistication. The objective is to develop, deploy and manage the program elements in such a way as to create a sustainable structure, resulting in consistency in reporting and documentation.

As an example of this point, FERC’s Policy Statement on Natural Gas and Electric Price Indices , dated July 24, 2003, documents the requirements and expectations for submitting data to index price developers such as Platts and Argus. Although natural gas wholesale price reporting is voluntary, there are specific regulatory expectations that accompany data submittal, data retention, and the delegation of responsibility for submission of data to index developers. The absence of consistency threatens both the integrity and reliability of the data and exposes the company to the risk of regulatory inquiry if there is a perceived issue with the data being submitted.