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Compliance Program Guidance

The industry debates how far FERC should go.

Fortnightly Magazine - April 2009

FERC issued in October 2008 provided sufficient guidance to industry for developing and maintaining the basic building blocks of a sustainable compliance program. However, some market participants still are clamoring for further guidance in the form of a “model compliance program.” The perception is that if FERC were to develop and provide such a program it would give the industry a more sufficient road map to follow. The challenge for FERC and the industry alike is that there is such diversity in the businesses from electric to gas and integrated regional entities to national energy companies, that the prospect of going beyond the guidance already provided risks delving too far into the details of how companies choose to manage their varied compliance obligations and mitigate their risks of non-compliance. Such far-reaching steps by FERC also could pose the risk of shifting responsibility for compliance to the regulators and away from the industry.

To gauge the sufficiency of guidance already provided by FERC, it’s useful to look at the direction that was provided in the Policy Statement on Compliance, dated Oct. 16, 2008. FERC states that companies with the following components in place will put themselves in a better position to reduce or possibly eliminate civil penalties:

• Management Involvement: Active engagement and leadership by senior management;
Preventive Measures : Preventive measures appropriate to the circumstances of the company that are effective in practice;
Detective Measures : Capabilities for prompt detection of problems, cessation of misconduct, and reporting of a violation; and
Remediation Program : Processes and practices that facilitate remediation of identified misconduct or non-compliance.

FERC views the combination of these components as the foundation upon which compliance programs should be based. Effective functioning of each of these components should, in theory, help companies to limit incidences of non-compliance and reduce the size of penalties imposed on companies for identified violations. FERC has continued to state that companies who self-report and demonstrate a commitment to proactive remediation will receive favorable consideration from FERC when the agency is considering sanctions. FERC has stated in several of its settlement reports that if remediation has occurred and minimal harm was caused, the investigation will be closed with no further action. In 2007 this was true for 75 percent of the self-reported cases; however, the figure dropped to only 40 percent in 2008. 7 The perceived complication around determining the appropriateness of monetary sanctions lies in the severity of the issue and its perceived or actual impact on the marketplace and other market participants. It appears that what helps to temper the magnitude of a penalty assessed by FERC, however, is the extent to which each of the above components is in place and active within a company.

The concern that companies have stated in news reports is that uncertainty remains over how much credit a company is given for having a robust compliance program and coming forward with identified issues. Their concern is rooted in the fact that about 20 percent of the settlement agreements entered into with FERC originated with a