In the settlement, the ITC Companies stipulated to the relevant facts, admitted the 20 violations of Section 203 and the 174 violations of Section 205, and agreed to pay a civil penalty of $750,000 (not recoverable in rates), improve their compliance program, including by providing additional mandatory training to relevant personnel, and submit two semi-annual compliance reports during the coming year, with the potential of another year of compliance monitoring at OE’s discretion. In addition, the ITC Companies already have paid approximately $30,000 in time-value refunds to affected customers (which could increase).
Factors the FERC Considered in Determining the Penalty
In determining the penalty, the FERC noted that it considered, among other things, the lack of transparency in the market that the ITC Companies’ conduct caused, their failure to maintain an adequate compliance program, including providing for sufficient regulatory due diligence related to inherited agreements, the significant volume of unauthorized transactions and unfiled documents, the long period during which the violations occurred, the fact that one of the late Section 205 filings violated a FERC order, and the companies’ failure to self-report the Section 205 violations. The FERC also considered mitigating factors including OE’s determination that the violations “were not willful, fraudulent, intentional, or manipulative,” the ITC Companies’ self-reporting of their Section 203 violations, the absence of direct harm to the markets, the ITC Companies’ cooperation with OE, their admission of the violations, and their resolution of the matter without further litigation. It is rare for a company to admit violations in such a settlement.
Commissioner Moeller’s Dissent
Commissioner Moeller dissented from the order, arguing that the penalty was too harsh for the Section 205 violations. In the past, FERC’s practice has been to require companies that fail to timely file rates under Section 205 to pay the time value of the revenues collected during the period of non-compliance. He argues that there likely are many regulated entities facing similar filing requirement compliance issues and that the imposition of penalties for Section 205 violations that far exceed the usual time-value refund remedy will discourage, rather than encourage, similarly situated parties from voluntarily searching for and self-reporting potential violations. The punishment here, he opines, does not fit the crime. He also notes that it is unclear whether this decision represents a change in FERC policy regarding untimely Section 205 filings or will “be understood to be anomalous.”
The existing prior notice policy, Commissioner Moeller explains, would have required only the payment of time-value refunds to customers, i.e., the approximately $30,000 the ITC Companies already have refunded to date. In Commissioner Moeller’s opinion, a penalty “twenty-five times the remedy that has been consistently imposed” for prior notice violations since 1993, without sufficient explanation, will discourage regulated entities from voluntarily reviewing past practices “with an eye toward enhancing compliance.”
Commissioner Moeller also argues that such harsh penalties will not deter “inadvertent administrative errors” and that penalties any greater than the usual prior notice violation penalty should be applied equally to all entities that fail to comply with filing requirements. Based on the results in several other recent cases, this has not been the case. Commissioner Moeller further argues that public input should precede a change to the FERC’s prior notice penalty policy, as it did in 1993.
Finally, Commissioner Moeller questions the majority’s characterization of the ITC Companies’ compliance program as inadequate, noting that the majority does not identify its faults or provide specific guidance for improvement. If the standard for adequacy is the complete absence of unintentional errors, he notes, “every utility would be inadequate.”
Practical Implications
Whether the majority’s characterization of the ITC Companies conduct as “systemic neglect of statutory responsibilities and a serious shortfall in compliance efforts” is fair or unfair and whether the penalty imposed is an anomaly or represents a move toward a new normal for similar violations, this case provides yet another example of the critical importance for FERC-regulated entities to develop and maintain robust regulatory compliance programs capable of identifying and ensuring compliance with applicable statutes and FERC regulations. In addition, the order underscores the value of self-reporting discovered violations, cooperation during OE investigations, and the admission of violations when possible and prudent.
