This post is the first in a series of practical pointers on dealing with enforcement actions and investigations by the Federal Energy Regulatory Commission’s (“FERC” or the “Commission”) Office of Enforcement, the National Energy Reliability Corporation (“NERC”), or other regional electric reliability organizations (“ERO”s).  Despite the overall focus of this series on investigations and enforcement actions, this particular piece deals with situations in which it makes sense for a regulated entity to take corrective action on its own before the Commission, NERC or a regional ERO issues a notice of penalty or otherwise instigates some sort of investigation – the self-report.

So how would that sort of situation come about? A typical scenario in which a company becomes aware of a potential problem before FERC or any other regulators become involved is the internal compliance hotline report.  As part of their compliance programs, many companies now have anonymous compliance hotlines, which employees can use to report possible fraudulent activity, potential violations of reliability standards, or other issues without fear of reprisal from their direct supervisors or other higher-ups.  Another common way companies become aware of potential problems is during audits by NERC or their regional reliability organization.  While preparing for an audit or responding to data requests during the course of an audit, a company may become aware of issues that are not the focus of the audit.  The auditors may not zero in on the issue, but the company discovers something problematic in the course of fulfilling its audit duties.  To date, the majority of self-reports have involved violations of the Open Access Transmission Tariff, and in particular, the Commission’s rules involving capacity release by entities in the natural gas industry.

After receiving a credible hotline report or becoming aware of a possible issue through other means, the company is on notice that there is a potential problem and should begin an internal investigation immediately.  The scope of the internal investigation will necessarily be determined by the seriousness of the potential issue.  At a bare minimum, the company needs to immediately put a data hold on If the internal investigation leads to evidence that the company might be in violation of one or more regulatory imperatives, it’s time for the decision-makers to discuss whether it makes sense to contact FERC and initiate the self-report process.

Although it might seem counter-intuitive to try to beat FERC to the punch by reporting yourself for a potential violation of the mandatory electric reliability standards or other FERC regulations, in some instances, a self-report can be the best choice a regulated entity can make.  During the Energy Bar Association’s (“EBA”) Primer for Lawyers and Energy Professionals last week [Dec. 2 – that phrase will mostly likely need to be changed], Norman Bay from the Office of Enforcement heavily emphasized self-reporting by regulated entities in his presentation, urging the practitioners in the room to use the process when feasible.  As noted in other presentations sponsored by the EBA and postings by other commenters, the Commission favors self-reporting and gives an entity that self-reports credit for doing so under its penalty guidelines.

To paraphrase Mr. Bay, FERC views a self-report as evidence that an entity has a robust compliance culture, and gives due credit for an entity’s efforts to self-monitor and adjust its compliance programs.  FERC’s Penalty Guidelines borrow heavily from the structure and format of the United States Sentencing Guidelines.  The penalty range is determined by multiplying a “violation level” by an entity’s “culpability score.”  As you can imagine, the decision to self-report can greatly lower the “culpability score,” resulting in a penalty with a much lower dollar amount or even a zero dollar finding.  FERC’s discretion to mitigate penalties can be a significant benefit, especially when you consider the fact that FERC has authority under the Energy Policy Act of 2005 to impose penalties of up to $1 million per day per violation.

FERC Office of Enforcement’s most recent Report on Enforcement, issued November 17, 2011, provides further evidence of the Commission’s favorable treatment of self-reported potential violations.  The Office of Enforcement received 107 self-reports in fiscal year 2011 – of those, staff closed 54 matters after an initial review – without even opening an official investigation.  At the date of the report, review was still pending on other 53 self-reports.  If history is an accurate guide, many of the pending self-reports will also be closed without further action.  In 2009 and 2010, the Office of Enforcement received 93 and 122 self-reports, respectively.   To date, FERC has been able to close __ of those matters without opening an investigation.

As a practical tip, Mr. Bay noted during his presentation last week that while it is important to prepare a thorough written self-report, it is best to contact the Office of Enforcement as soon as possible after deciding to possibly self-report – as early in the internal investigative process as possible.  The staff can provide guidance on what the self-report should include based on the facts of the situation, which increases the chances that the written self-report will answer most or all of OE’s questions.  This can ease the way for staff to be able to close the matter without a formal investigation in appropriate circumstances.