When does it make sense for a regulated entity to take corrective action on its own before FERC, NERC or a regional ERO issues a notice of penalty or otherwise instigates some sort of investigation – in order words, when should you self-report? 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. A typical scenario involves internal compliance hotline reports, where an employee reports a potential violation. Another common way companies become aware of potential problems is through an audit conducted 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. Although the auditors do not zero in on the issue, the company discovers an instance of non-compliance in the course of responding to the audit. Once the company is on notice that there is a potential problem, it should begin an internal investigation immediately. The scope of an internal investigation will necessarily be determined by the seriousness of the potential issue. Interviewing all relevant personnel to determine the scope of a potential problem is the first step. Once an assessment is made as to the likelihood that a violation exists, the company needs to immediately issue a data hold to relevant people within the organization (more on data holds and eDiscovery in an upcoming post). 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 in December 2011, Norman Bay, Director of 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 [PDF] 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.” It’s clear that 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, shows that the Commission 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 the other 53 self-reports. Based on the pattern shown in the reports for prior years, it is likely that many of the pending self-reports will also be closed without further action. Self-reporting to FERC can be a good strategic decision in some situations; however, it’s a decision that requires serious analysis by a company’s decision-makers, preferably as early as possible after becoming aware of a potential violation.