FERC Clarifies Effect of Load Loss and Self-Reporting on Penalty Assessments
On June 21, 2012, FERC denied rehearing of its previous order affirming an $80,000 penalty assessed against Turlock Irrigation District (“Turlock”). Additionally, FERC took the opportunity to clarify that: (1) the North American Electric Reliability Corporation (“NERC”) must consider loss of load and harm to consumers when assessing penalties for violating a mandatory reliability standard; and (2) all self-reports will not automatically warrant a penalty “credit,” particularly when there is another existing obligation to report the violation in question.
In August 2007, Turlock self-reported certain reliability standard violations to the Western Electricity Coordinating Council resulting from failure to maintain vegetation clearance from its transmission lines. The violation caused Turlock and a neighboring utility to shed load, affecting approximately 40,000 customers. On November 13, 2009, NERC issued a Notice of Penalty (“NOP”) for $80,000. On February 26, 2012, FERC initiated, on its own motion, a review of the NOP to determine if the penalty amount was appropriate.
On March 17, 2011, FERC issued an order affirming the penalty amount and clarifying several factors that NERC should consider when assessing a penalty. Specifically, FERC stated that:
- “Cooperation credit” may be given when an entity provides useful information about the facts and circumstances surrounding a violation, even when that entity is not eligible to receive a self-report credit;
- Any penalty assessed must bear a reasonable relation to the seriousness of the violation, and the penalty must consider actual harm caused and the reliability risk posed by a violation;
- Loss of load is relevant to the harm posed by a violation, but this factor should not have a chilling effect on system operators that must shed load to comply with other reliability standards;
- The size of an entity being evaluated by NERC includes multiple factors, such as employees and annual revenue/profits; and
- NERC should file complete and accurate records for each NOP because, had FERC not initiated its own review, critical information would not have been discovered.
In its order on rehearing, FERC reasoned that it is indeed necessary to consider load loss and customer harm in penalty assessments because the Federal Power Act requires penalties to be reasonable in relation to the severity of a violation. However, FERC also emphasized that it did not apply any particular penalty guidelines in the clarifying remarks made in its March 2011 order. Moreover, FERC noted that it was not giving NERC or any of the Regional Entities instructions on how to generally address load shedding or loss of load incidents. Instead, FERC stated that it was merely clarifying relevant factors to be evaluated when assessing a penalty.
With regard to self-reporting, FERC addressed several issues concerning the “credit” awarded to entities that self-report mandatory reliability standard violations. First, FERC emphasized that the credit should reward self-reports disclosing violations that, but for the self-report, would go undetected for a significant period of time. Therefore, FERC does not view all self-reports equally. Second, FERC clarified that, while self-reporting credits should not be awarded when an entity is already required to report a particular violation, if that violation leads to the disclosure of information on other related violations not required to be reported, then some credit maybe possible. Third, FERC stated that NERC and the Regional Entities still have flexibility when applying mitigating factors to a penalty. As such, NERC and the Regional Entities may provide some mitigating credit when a violation is already required to be reported under one reliability standard, and the initial report provides information especially valuable to either NERC or the Regional Entity in reviewing potential violations of other standards.
The June 21 rehearing order also addressed the size and nature of a registered entity, as well as the adequacy of the record filed for an NOP. FERC noted that, while it is appropriate to consider the size of an entity when assessing a penalty, it cannot be the only characteristic considered. Finally, FERC ruled that directing NERC to file a “complete and accurate record” did not undermine previous FERC orders directing NERC to streamline NOP submissions. Instead, FERC explained that, while it encourages NERC to use streamlined approaches, some serious violations, such as the Turlock violation, will simply not qualify for streamlined processing.
A full copy of the FERC order is available here.