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Preparing for the Inevitable

Mitigating enforcement penalties in NERC hearings and appeals.

Fortnightly Magazine - March 2010

the case should be developed and submitted at hearing. NERC and FERC have indicated that the hearing process is the forum for developing facts, and there might be few opportunities to present additional evidence during the later appeal. 35

The evidence will vary, but generally the record should provide enough detail to provide the registered entity’s side of the story regarding the violation and all remedial action taken. In particular, it’s important to include: evidence on any factors that mitigate the seriousness of the violation, the risk to the bulk power system resulting from the alleged violation, whether the alleged violator discovered the alleged violation through voluntary self-review, whether corrective actions were promptly taken, the extent and cost of such actions, and similar factors.

All of these factors are relevant in the determination of the appropriate penalty, which by law must “bear a reasonable relation to the seriousness of the violation” and must take into consideration efforts undertaken to “remedy the violation in a timely manner.” 36 Importantly, in order to mitigate the potential penalty, many of these actions should, and in some cases only can, be taken before the violation occurs or is discovered. Thus, for example, to get credit for self-reporting a potential violation or taking timely remediation efforts, the registered entity should have in place an effective compliance program that includes periodic self-assessments that would allow for timely detection and correction of potential violations. Accordingly, not only should a registered entity plan to present evidence on these matters should it find itself in a NERC hearing, but it must build such evidence in advance.

• Develop a Culture of Compliance: FERC has advised that of all the factors considered, “the most important in determining the amount of the penalty are the seriousness of the offense and the strength of the entity’s commitment to compliance.” 37 As recently as Nov. 13, 2009, FERC indicated that violations of the reliability standards that have minimal impact on reliability may merit a zero-dollar penalty—provided the registered entity has a demonstrated commitment to compliance. 38 A registered entity will have a much easier time showing a culture of compliance—and thus a much greater chance of avoiding violations and mitigating penalties—if it implements and documents its compliance measures.

Every registered entity should begin by creating a compliance plan as soon as possible. In fact, in almost all circumstances, the compliance staff will ask to see a copy of the plan. The plan should be designed to include provisions demonstrating active engagement by senior management, as well as preventative measures including training, discipline and regular audits. Also the plan should include documented procedures to detect and report violations, and a list of remediation efforts in the event a violation does occur.

FERC and NERC also expect each regulated entity to invest appropriate time and resources to creating and monitoring effective internal compliance programs. 39 A few measures taken now can go a long way in avoiding violations and hefty penalties. An ounce of prevention truly is worth the investment.

To date no registered entities have invoked