Seeking to add consistency, transparency, and fairness to its enforcement process, the Federal Energy Regulatory Commission (FERC) proposed civil penalty guidelines in its March 18, 2010, interim policy statement for organizations violating statutes, orders, rules, regulations, and tariffs that FERC oversees.1 Initially effective on issuance but then suspended to allow for public comment,2 the proposed guidelines would improve the predictability of FERC’s exercise of its penalty-making powers over the natural gas pipeline and electric utility industries, which powers were expanded substantially by Congress in 2005.
The guidelines first measure the seriousness of the violation. Base violation levels are specified for different genres of violations, and then they can be calibrated with adjustments, if applicable, to define the seriousness more accurately. The highest base violation levels are assigned to misrepresentations or false statements, closely followed by violations of important electric industry reliability standards, and then by fraud, market manipulation, or anti-competitive conduct. Next, the guidelines measure the degree of the violator organization’s culpability, which can raise or lower penalty fine ranges significantly. Culpability adjustments add important analytic flexibility either by increasing or reducing the violator’s base culpability score. The guidelines conclude with possible penalty fine ranges, based on a final violation level and degree of culpability calculation, that aren’t mandatory, but remain fully subject to further FERC discretion.3
Compared to standard model, case-by-case penalty determinations, the guidelines’ more consistent analysis will make penalties more predictable. Such increased predictability can benefit the FERC enforcement regime in several ways.
Potential Risk and Actual Benefits
The March 18 policy statement notes that increased penalty predictability carries a potential risk that an organization could balance civil penalty costs against a violation’s benefits and, if it thinks the game is worth the candle, decide to commit the violation anyway. That risk is dismissed due to the difficulty of predicting all of the effects of misconduct, which would hinder the organization’s ability to estimate a penalty in advance. Also, such gaming likely would trigger enhanced penalties for willful misconduct.
FERC further observes that the U.S. Sentencing Commission’s sentencing guidelines provide an actual benefit of deterring misconduct because they provide predictable sentencing.4 The sentencing guidelines are designed to provide “certainty and fairness by avoiding unjustified disparity among offenders with similar characteristics.” FERC asserts the sentencing guidelines supply a useful model for its own proposed guidelines because the sentencing guidelines focus on the seriousness of violations and their remediation, allow for consideration of a wide range of additional factors, and provide sufficient flexibility where necessary.
Taking FERC’s extensive penalty arsenal into account, there are other benefits from increased penalty predictability. After the Energy Policy Act of 2005 (EPAct 2005), gas and electric industry violators targeted in FERC’s enforcement mechanisms have faced enormous maximum penalty exposures. The penalties include: under the Natural Gas Act (NGA), $1 million a day per violation for as long as the 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 violations in FERC’s view. The specific violation characteristics concern the risk of loss in eight stages, from a low risk of minor harm (i.e., no base violation level increase) to a high risk of extreme harm (i.e., add 16 levels, for a total violation level of 32).
Also, gas or electric industry ch. § 2B1.1 violations involving fraud, market manipulation, anti-competitive conduct, or violations of rules, tariffs, and orders, carry a base violation level of 6, with specific violation characteristics for dollar loss that increase the violation level. The 16 stages for loss range from $5,000 or less (i.e., no level increase) to more than $400 million (i.e., add 30 levels). A violation involving greater quantities of gas or electricity will add two, four or six levels to the violation depending on the volume of loss.6 A violation continuing for more than 10, 50, or 250 days can increase the violation level by two, four or six levels, respectively. A FERC official has explained that the nature of ch. § 2B1.1 violations (e.g., fraud, market manipulation, etc.) makes it more likely their lower base violation level of 6 readily will increase for those considerations of loss, quantity, or duration.7 Also, when a total violation level is less than 16 but the violation involved conduct presenting a serious threat to market transparency, the violation level can increase to 16.
Last, ch. § 2C1.1 violations involving misrepresentations and false statements to FERC or its staff have a base violation level of 18. Specific violation characteristics concern substantial interference with the administration of justice (i.e., add three 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 (i.e., add two levels).
Three more steps derive a final penalty fine range:
• When the final violation level is set, then the base penalty is identified, which is the greater of the ch. § 1C2.2(b) violation level penalty table dollar amount (corresponding to the final violation level), or the pecuniary gain to the organization from the violation, or the pecuniary loss from the violation caused by the organization.8 FERC’s practice of requiring disgorgement of unjust profits is not affected, and FERC can enter disgorgement orders for such gains, plus interest.
• Calculate a ch. § 1C2.3 culpability score. The base culpability score is five, to be adjusted up or down for these six considerations: 1) whether high-level personnel participated in, condoned, or were willfully ignorant of the violation (larger organizations receive greater additions to the base culpability score); 2) whether the organization has a prior history of committing violations. Violations within the last five years add more to the base culpability score than do violations within the last six to 10 years; 3) whether a judicial order or injunction, or one by FERC or another federal or state enforcement agency, directed at the organization was violated; 4) whether the organization obstructed justice or encouraged obstruction during investigation or resolution of the violation—or knew of such obstruction, but failed to take reasonable steps to prevent it; 5) whether the base score can be reduced due to the existence of an effective compliance and ethics program at the time of a violation. Such a program would consist of active senior management engagement and leadership, effective preventive measures, prompt detection, cessation, and voluntary reporting of violations, and remediation of misconduct;9 or 6) whether self-reporting, cooperation, acceptance of responsibility, and resolution of the matter without need for a trial-type hearing support specific, transparent, and measurable credit to decrease the culpability score. If an organization self-reports, exhibits full cooperation during an investigation, admits the violation and resolves it without trial-type hearing, FERC will reduce its culpability score five points.10
The last two considerations reveal an organization’s compliance culture, which if developed can reduce its penalty exposure. A senior FERC official has declared the agency’s focus on compliance thus: “The first and foremost goal is to foster compliance … in the market arenas,” which are “any place that attracts a great deal of money… Industry needs to take compliance seriously … [because the] culture of compliance … takes work. Compliance is important.”11
Such adjustments to the base culpability score produce a final culpability score, which corresponds to the guidelines ch. § 1C2.4 minimum and maximum multipliers. Multipliers range from a minimum multiplier range of 0.05 to 0.20 (from a culpability score of zero or less), to a maximum multiplier range of 2.00 to 4.00 (from a culpability score of 10 or more), with various ranges in between.
• As the final step, multiply the base penalty by the minimum and maximum multipliers to produce the ch. § 1C2.5 guideline penalty fine range for organizations.
Meeting of the Minds
Considering its March 18, 2010, action as interim, on April 15 FERC suspended the policy statement and application of the guidelines, inviting comments from interested entities by June 14, 2010. Recasting FERC’s emphasis on the importance of industry compliance, a senior agency official observed that a “meeting of the minds” on the guidelines with affected energy industry constituents would be appreciated.12
The proposed guidelines furnish the opportunity for improved regulation. Using the guidelines’ more practical, more consistent characteristics to determine penalty fine ranges serves the public interest by increasing penalty predictability for gas and electric industry violations of the NGA, the NGPA, or the FPA. The guidelines foster FERC’s application of its EPAct 2005 civil penalty authority because they make FERC’s exercise of that authority more transparent. Finally, working through detailed guidelines mechanics helps ensure fair FERC penalty assessments.
1. Enforcement of Statutes, Orders, Rules, and Regulations, Policy Statement on Penalty Guidelines,130 FERC ¶ 61,220 (Policy Statement), text paras. (PP) 1-2, 5.
2. Enforcement of Statutes, Orders, Rules, and Regulations, Order Regarding Policy Statement On Penalty Guidelines, 131 FERC ¶ 61,040 (2010).
3. Policy Statement, PP 2-3, 26-27, 30, 32 (FERC also retains “…some discretion because the Penalty Guidelines produce a penalty range, rather than an absolute figure…”), 58, 60-64.
4. Id., P 20. The Sentencing Commission (www.ussc.gov) is an independent agency created in 1984 in the U.S. judicial branch that establishes federal court sentencing policies and practices, including guidelines on the appropriate form and severity of punishment for offenders convicted of federal crimes. The Sentencing Commission created a new sentencing guidelines chapter related to organizations in 1991. Id., PP 21-23.
5. 15 U.S.C. § 717t-1(a); 15 U.S.C. § 3414(b)(6)(A); 16 U.S.C. § 825-o-1(b); Policy Statement, P 5; J. Michel Marcoux, Day of Decision for FERC, 143 Pub. Utils. Fort., No. 12, 55, 58 (Dec. 2005)(“Stiff New Penalties” chart). The EPAct 2005 increased criminal penalties (fines, prison terms) for NGA, NGPA, and FPA violations, id.; see also Marcoux, Canaries in the Coal Mine: Facts From Securities Fraud Private Civil Actions Can Identify Intent To Manipulate Energy Markets, 29 Energy L.J. 141, 144 (2008).
6. Id., ch. § 2B1.1(b)(2): 70,000 MMBtus or 10,000 MWh (increase 2 levels); 140,000 MMBtus or 20,000 MWh (increase 4 levels); 700,000 MMBtus or 100,000 MWh (increase 6 levels).
7. Ted P. Gerarden, Branch Chief, Div. of Investigations, Off. of Enforcement, Remarks at Bruder, Gentile & Marcoux, L.L.P.’s 16th Annual FERC Briefing, Wash., D.C. (May 6, 2010).
8. Policy Statement, PP 42, 57.
9. Id., P 48; Compliance with Statutes, Regulations, and Orders, 125 FERC ¶ 61,058 PP 13-21 (2008).
10. Policy Statement, P 49.
11. Larry R. Parkinson, Director, Div. of Investigations, Off. of Enforcement, Remarks at Energy Bar Ass’n. Nat. Gas Reg. & Compliance & Enforcement Comms. Seminar & Teleconference “Current Enforcement Perspectives,” Wash., D.C. (May 17, 2010).
12. Thomas R. Sheets, General Counsel, FERC, Remarks at Bruder, Gentile & Marcoux, L.L.P.’s 16th Annual FERC Briefing, Wash., D.C. (May 6, 2010).