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Penalty Predictability

Bringing fairness to FERC enforcement.

Fortnightly Magazine - July 2010

violation continues; under the Natural Gas Policy Act of 1978 (NGPA), $1 million for any one violation; and under the Federal Power Act (FPA) Part II, $1 million for each day that such violation continues. 5

As matters of prudent business judgment, organizations negotiating penalty settlements with the enforcement staff must consider those maximums as worst-case outcomes. The mere possibility of incurring such large penalties can strengthen the staff’s hand in case-by-case negotiations. Should it so decide, the staff has the option to stand firm for large—and perhaps excessive—penalties that can appear more palatable when compared to $1 million a day per violation.

The policy statement acknowledges FERC’s responsibility to implement its NGA, NGPA, and FPA civil penalty authority carefully, and to seek to improve its application of that authority based on experience. The guidelines promote greater consistency because penalties are based on more objective and uniform factors that are assigned transparent values and are weighted similarly for similar violations and violators. Proposed new analytic consistency can increase notice and certainty in FERC civil penalty determinations. Penalties perhaps speculatively and unfairly proposed case-by-case in the short term can be avoided in favor of the more practical, more consistent guidelines approach for the long term. Under the guidelines, both the enforcement staff, in its penalty recommendations to FERC, and FERC itself, can exercise judgment carefully as a matter of best regulatory practice to avoid inaccurate, conclusory or otherwise inappropriate civil penalty determinations. Compared with the case-by-case approach, increased consistency and penalty predictability under the guidelines can inform prosecutorial discretion and fortify its application.

Mechanics Promote Consistency

While FERC may depart from penalties under the guidelines to account for a violation’s particular facts and circumstances, the discipline of using the guidelines’ objective characteristics in the first place will result in more consistent penalty fine ranges, even if departures are needed.

The NGA and the FPA require FERC to consider both a violation’s nature and seriousness and the violator’s efforts to remedy the violation. Appended to the policy statement as chapters 1 and 2, the guidelines follow a step-by-step analysis. A violation level, consisting of a base level adjusted for various seriousness factors, is determined. The violation level is matched to a base penalty amount from the violation level penalty table, or is increased to the amount of the pecuniary gain or loss. A culpability score is determined based on an organization’s past and present conduct and its efforts to remedy the violation, and then is assigned minimum and maximum penalty multipliers. A corresponding penalty fine range results from the product of the base penalty amount and the penalty multipliers ( see “ Guidelines in Practice ).

The analysis determines the adjusted base violation level by applying consistent characteristics, as follows:

• Identify one of three base violation levels, and apply appropriate adjustments to derive a final violation level corresponding to a specific, ch. § 1C2.2(b) violation level penalty table amount. Initially, for electric industry ch. § 2A1.1 violations of FERC-approved reliability standards, the base violation level is 16, emphasizing the seriousness of such