On March 18, 2010, the Federal Energy Regulatory Commission (FERC) issued a Policy Statement on Penalty Guidelines to provide “fairness, consistency, and transparency” to its enforcement activities. FERC subsequently conducted three workshops to explain how the Guidelines work, after which it announced it would solicit additional comments before issuing final Guidelines.
The new Guidelines were necessary because the Energy Policy Act of 2005 granted FERC the ability to assess civil penalties up to $1 million per day per violation of FERC’s regulations. Before that, FERC had little ability to assess civil penalties. Since 2005, the industries regulated by FERC have asked for greater clarity on how FERC would assess civil penalties because no clear discernible pattern emerged in the amount of civil penalties assessed in cases.
FERC’s Guidelines follow the basic structure of the U.S. Sentencing Guidelines for Organizations in establishing a two-step process. In the first step, FERC calculates a base penalty. The base penalty is the greatest of three values. The first value is based upon the type of violation. The second is the pecuniary gain to the violator. The third is the loss to others caused by the violation. For example, consider a price manipulation case involving trades on a single day for more than 700,000 mmBtu of natural gas, a profit gain of $7 million and a market loss of $20 million. The violation type assessment is $17.5 million. But the base penalty is $20 million, the loss to others, because that is greater than both the violation type assessment and the gain to the violator.
In the second step, FERC multiplies the base penalty by minimum and maximum multipliers to provide ranges for civil penalties. The ranges allow FERC discretion in setting civil penalties based upon case-specific facts. The multipliers are based upon a “culpability score.” If the violation involved high-level personnel at a large company with a history of violations and the company obstructed FERC’s investigation, then the minimum and maximum multipliers would be at the highest levels of 2 and 4. If the violation did not involve high-level personnel, the company had no prior history of violations, the company had a vigorous compliance and ethics program, the violation was self-reported, and the company assisted the investigation, then the multipliers would be at the lowest levels of 0.05 and 0.2. In the example above, the civil penalty range would be $40 million to $80 million with the first set of multipliers and $1 million to $4 million with the second set. Thus, the culpability score is a major determinant of the civil penalties calculated under FERC’s Penalty Guidelines.