Compliance with Dodd-Frank might not be as complicated as feared; however, companies must be vigilant in order to maintain the relevant exemptions.
Penalty Predictability Enhanced
FERC modifies its enforcement guidelines.
one part stating general principles of applicability, § 1A1.1, and other parts discussing disgorging gain from violations and describing how to conduct an effective compliance program, §§ 1B1.1 & 1B2.1. Along with Chapter 2 (§§ 2A1.1 to 2C1.1), Chapter 1 also determines and implements civil penalties step-by-step, §§ 1C1.1 to 1C2.3. As the NGA and FPA require, the guidelines consider first the nature and seriousness of the violation, and then make any adjustments for culpability or efforts at remediation. 6
Chapter 2 of the guidelines specifies base violation levels for three different types of serious violations: misrepresentations, market or other violations, and electricity reliability. The base violation level is the starting place to estimate the seriousness of the violation, and also for enforcement staff penalty recommendations or FERC penalty determinations. Chapter 1 then provides various factors to adjust the Chapter 2 base violation levels, as may be applicable to define the seriousness more accurately.
Intentional or reckless misrepresentations and false statements to FERC or its staff, as the most serious violations, are assigned the highest base violation level (18), § 2C1.1. This guideline is modified to apply only to intentional or reckless acts, with an increased prosecutorial burden on enforcement staff to prove such scienter. 7 It doesn’t apply to inadvertent errors in filings, such as tariff or posting errors not presenting serious threats to market transparency, or to communications not aimed to mislead FERC or its staff. Specific violation characteristics for misrepresentations include substantial interference with the administration of justice ( i.e., add 3 levels), and destruction, alteration, or fabrication of a substantial number of records, documents, or tangible objects; selection of essential or especially probative records, documents, or tangible objects for destruction or alteration; or a violation otherwise extensive in scope, planning, or preparation (add 2 levels).
A base violation level of 6 applies to violations of fraud, anti-competitive conduct, and other rule, tariff, or order violations, § 2B1.1. Specific violation characteristics include more levels for greater dollar losses. Sixteen stages for loss range from $5,000 or less (no level increase) to more than $400 million (add 30 levels), § 2B1.1(b)(1). A violation involving greater quantities of gas or electricity adds 2-6 levels, depending on the volume of loss, § 2B1.1(b)(2), and a violation continuing for more than 10, 50, or 250 days also adds 2-6 levels, § 2B1.1(b)(2). Thus, an organization committing a fraudulent act (6 levels) with a dollar loss amount (add 0-30 levels), and a quantity of gas or electricity lost (add 2-6 more levels) over the course of a number of days (add 2-6 more levels) could have a final violation levels total between 10 and 48. Furthermore, conduct presenting a serious threat to market transparency independently requires a minimum violation level of 16, § 2B1.1(b)(3).
Serious Reliability Violations
Considering its EPAct 2005 authority, agency discretion, and public comments, 8 FERC reduces the base violation level for § 2A1.1 violations of FERC-approved, electric industry reliability standards from 16 to 6. FERC makes that modification and others, including changing certain risk of harm enhancements, for its