
[Federal Register: April 23, 2008 (Volume 73, Number 79)]
[Rules and Regulations]               
[Page 21814-21818]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ap08-4]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 39

[Docket Nos. AD08-6-000 and RM05-30-000]

 
Rules Concerning Certification of the Electric Reliability 
Organization; and Procedures for the Establishment, Approval, and 
Enforcement of Electric Reliability Standards; Statement of 
Administrative Policy on Processing Reliability Notices of Penalty and 
Order Revising Statement in Order No. 672

Issued April 17, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final Rule: Statement of Administrative Policy.

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SUMMARY: On February 3, 2006, the Federal Energy Regulatory Commission 
issued a Final Rule (Order No. 672) implementing Subtitle A 
(Reliability Standards) of the Electricity Modernization Act of 2005, 
which is Title XII of the Energy Policy Act of 2005 (EPAct). The 
Commission is issuing a policy statement that adopts administrative 
policy on Commission review of notices of penalty for violation of 
Reliability Standards and that modifies Order No. 672.

Dates: Effective Date: April 17, 2008.

FOR FURTHER INFORMATION CONTACT:

Roger P. Morie, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8446.
Christy Walsh (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6523.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. 
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

    1. On February 3, 2006, the Commission issued a Final Rule (Order 
No. 672),\1\ implementing Subtitle A (Reliability Standards) of the 
Electricity Modernization Act of 2005, which is Title XII of the Energy 
Policy Act of 2005.\2\ Among other things, Order No. 672 amended the 
Commission's regulations to implement section 215(e) of the Federal 
Power Act (FPA), which authorizes the Electric Reliability Organization 
(ERO) to impose a penalty for a violation of a Reliability Standard by 
a user, owner or operator of the Bulk-Power System, subject to an 
opportunity for Commission review.\3\ In this order, the Commission 
adopts this statement of administrative policy on Commission review of 
these penalties.\4\ In addition, the Commission modifies our statement 
in Order No. 672 that any settlement of an alleged violation of a 
Reliability Standard that the ERO files with the Commission should be 
filed for information purposes only and that these settlements will not 
be subject to Commission review pursuant to section 39.7(e) of our 
regulations.\5\ Any settlement filed by the ERO after the date of this 
order will be subject to Commission review pursuant to section 39.7(e), 
although the Commission continues to encourage these settlements and 
expects that it will normally allow ERO or Regional Entity settlements 
to become effective.
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    \1\ Rules Concerning Certification of the Electric Reliability 
Organization; Procedures for the Establishment, Approval, and 
Enforcement of Electric Reliability Standards, Order No. 672, FERC 
Stats. & Regs. ] 31,204 (2006), order on reh'g, Order No. 672-A, 
FERC Stats. & Regs. ] 31,212 (2006).
    \2\ Public Law No. 109-58, Title XII, Subtitle A, 119 Stat. 594, 
941, codified at 16 U.S.C. 824o (Supp. V 2005).
    \3\ These implementing regulations are found in Part 39 of our 
regulations, 18 CFR Part 39 (2007).
    \4\ FPA section 215(e)(3) empowers the Commission itself to 
impose a penalty against a user, owner or operator for a violation 
of a Reliability Standard. This order does not address the 
Commission's procedures for imposing these penalties. The Commission 
discussed these procedures in Statement of Administrative Policy 
Regarding the Process for Assessing Civil Penalties, 117 FERC ] 
61,317, at P 5 & n.15 (2006).
    \5\ See Order No. 672 at P 598.
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I. Background

    2. Pursuant to FPA section 215(e)(1),\6\ the North American 
Electric Reliability Corporation (NERC), in its capacity as

[[Page 21815]]

the nation's ERO,\7\ may impose a penalty on a user, owner or operator 
of the Bulk-Power System for a violation of a Reliability Standard 
approved by the Commission. Pursuant to FPA section 215(e)(4),\8\ the 
Commission authorized NERC to delegate authority to impose such 
penalties to eight Regional Entities through Commission-approved 
Delegation Agreements.\9\ The Commission also approved, subject to 
further modifications, NERC's Compliance Monitoring and Enforcement 
Program (CMEP), which establishes procedures for Regional Entities to 
impose penalties and for NERC to review them, whether a registered 
entity appeals a Regional Entity determination, agrees not to contest 
it, or enters into a settlement with respect to the penalty.\10\ NERC 
itself may also impose a penalty.
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    \6\ 16 U.S.C. 824o(e)(1) (Supp. V (2005)).
    \7\ North American Electric Reliability Corp., 116 FERC ] 61,062 
(ERO Certification Order), order on reh'g and compliance, 117 FERC ] 
61,126 (2006).
    \8\ 16 U.S.C. 824o(e)(4) (Supp. V (2005)).
    \9\ North American Electric Reliability Corp., 119 FERC ] 61,060 
(Delegation Agreement Order), order on reh'g, 120 FERC ] 61,260 
(2007), order on responsive filing, 122 FERC ] 61,245 (2008) (Second 
Delegation Agreement Order). The Regional Entity Delegation 
Agreements went into effect on June 5, 2007. See Delegation 
Agreement Between the North American Electric Reliability Corp. and 
Texas Regional Entity, a division of ERCOT, 119 FERC ] 61,232 
(2007).
    \10\ See id. The relevant CMEP provisions are sections 5.1 
through 5.6.
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    3. FPA section 215(e)(2) provides that a penalty NERC or a Regional 
Entity imposes may take effect no earlier than 31 days after NERC files 
with the Commission a notice of penalty and the record of 
proceedings.\11\ FPA section 215(e)(2) further states, ``Such penalty 
shall be subject to review by the Commission, on its own motion or upon 
application by the user, owner or operator that is the subject of the 
penalty filed within 30 days after the date such notice is filed with 
the Commission.''
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    \11\ 16 U.S.C. 824o(e)(2) (Supp. V (2005)). See also 18 CFR 
39.7(e).
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    4. In Order No. 693, the Commission approved 83 Reliability 
Standards that NERC proposed.\12\ These Reliability Standards generally 
became effective on June 18, 2007. The Commission directed in Order No. 
693 that NERC and the Regional Entities, as a matter of enforcement 
discretion, focus their resources on the most serious violations during 
an initial period through December 31, 2007, and that this discretion 
should apply to all users, owners and operators of the Bulk-Power 
System.\13\ The Commission expects that, in due course, NERC will file 
notices of penalty with respect to certain violations of Reliability 
Standards that occurred during the June 18 to December 31, 2007 initial 
period. The Commission further expects that NERC will file notices of 
penalty representing settlements entered into by it or a Regional 
Entity of violations that occurred or are alleged to have occurred 
during this period. The Commission also expects that, in due course, 
NERC will file notices of penalty for violations that occurred or are 
alleged to have occurred after this initial six-month period. 
Accordingly, the Commission believes that an explanation of how it 
plans to process any notice of penalty filed by NERC will afford 
entities identified in notices of penalty, and the electric industry as 
a whole, increased transparency into the Commission's enforcement 
processes involving Reliability Standards.
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    \12\ Mandatory Reliability Standards for the Bulk-Power System, 
Order No. 693, FERC Stats. & Regs. ] 31,242, at P 1 (2007), order on 
reh'g, Order No. 693-A, 120 FERC ] 61,053 (2007). The Commission 
subsequently approved other Reliability Standards. North American 
Electric Reliability Corp., 119 FERC ] 61,260 (2007) (approving 
eight regional standards proposed by the Western Electricity 
Coordinating Council); Facilities Design, Connections and 
Maintenance Reliability Standards (Order No. 705), 121 FERC ] 61,296 
(2007); Mandatory Reliability Standards for Critical Infrastructure 
Protection (Order No. 706), 122 FERC ] 61,040 (2008).
    \13\ Order No. 693 at P 222.
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II. Commission Review of ERO-Approved Penalties

    5. Pursuant to section 39.7(e)(1) of our regulations, an entity 
subject to a notice of penalty may file an application for review of it 
within 30 days of the date NERC files the notice of penalty.\14\ Any 
answer, intervention or comment to an application for review of a 
proposed penalty must be filed within 20 days after the application is 
filed, unless otherwise ordered by the Commission.\15\ If the entity 
subject to a proposed penalty files an application for review of the 
proposed penalty, the Commission will take action on that application 
within 60 days of the date on which it is filed, unless the Commission 
determines on a case-by-case basis that an alternative expedited 
procedure is appropriate.\16\
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    \14\ 18 CFR 39.7(e)(1).
    \15\ 18 CFR 39.7(e)(4). All notices of penalty will receive a 
docket number with an ``NP'' prefix, as the Commission's Secretary 
stated in a February 7, 2008 notice.
    \16\ 18 CFR 39.7(e)(6). The Commission may determine that an 
alternative time period is appropriate at any point within the 
``default'' 60-day period that section 39.7(e)(6) establishes. If 
the Commission determines to extend that period in a particular 
proceeding, it will issue an order establishing the alternative time 
period.
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    6. In addition, any proposed penalty filed by NERC is subject to 
review by the Commission on its own motion within 30 days after the 
date on which NERC files the notice of penalty.\17\ Should the 
Commission determine to review a proposed penalty on its own motion, it 
will issue an order initiating review of the proposed penalty and 
establishing a filing date for any answers, interventions or comments. 
The Commission's regulations do not state when answers, interventions 
and comments ordinarily would be filed if the Commission were to 
initiate review of a notice of penalty. However, we generally will 
establish the filing deadline as 20 days after the date of the 
Commission's order initiating a review of a proposed penalty on its own 
motion. Likewise, the Commission's regulations do not specify a default 
time period for the Commission to complete the review of a notice of 
penalty on its own motion. The Commission nevertheless anticipates that 
it would ordinarily issue a determination within 60 days of ordering 
that review, unless issues in a particular case require a longer period 
for consideration.
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    \17\ 18 CFR 39.7(e)(1).
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    7. Section 39.7(e)(1) provides that the Commission may take action 
within 30 days after NERC files a notice of penalty, other than moving 
to review the notice of penalty, to prevent a proposed penalty from 
being affirmed by operation of law on the expiration of that 30-day 
period. For example, the Commission could issue an order stating that 
it requires more than 30 days to determine whether it should review a 
proposed penalty on its own motion. While we anticipate that the 
Commission will issue such orders rarely, in appropriate instances, the 
Commission retains the option of doing so. Such an order will not 
solicit answers, intervention or comments. If the Commission determines 
to review the notice of penalty, it will issue a subsequent order 
initiating review of the proposed penalty and establishing a filing 
deadline for any answers, intervention or comments. Should the 
Commission decide not to review the notice of penalty, the Commission 
will issue an order terminating the proceeding. The proposed penalty 
shall be affirmed by operation of law immediately upon the issuance of 
that order.
    8. We wish to make clear that in an application for review of a 
proposed penalty filed by NERC, an entity may seek review of the amount 
of the proposed penalty or its type (i.e., argue that a proposed 
monetary penalty should be a non-monetary penalty, for example) as well 
as of any determinations underlying the proposed

[[Page 21816]]

penalty, including whether a violation of a Commission-approved 
Reliability Standard occurred or whether there is a sufficient factual 
record to support any such determination.\18\ Likewise, if the 
Commission moves to review a proposed penalty, it may review the amount 
or type of the proposed penalty, as well as any determinations 
underlying it, such as the existence of one or more violations of a 
Commission-approved Reliability Standard.
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    \18\ See Order No. 672 at P 508 (allowing the Commission to 
remand a penalty to the ERO for additional fact-finding 
proceedings). Nevertheless, for example, it would not be 
appropriate, absent extraordinary circumstances, for an entity that 
applies for a review of a notice of penalty to contest a finding of 
violation included in it if that entity had admitted or not 
contested a finding of violation, as set forth in the record of 
proceedings the NERC submits with a notice of penalty. Similarly, we 
ordinarily would look with great disfavor on an entity's attempt in 
an application for review to contest a fact or matter if that entity 
stipulated to it, as described in the record of proceedings.
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    9. Section 215(e)(6) of the FPA states that a penalty imposed for a 
violation of a Reliability Standard ``shall bear a reasonable relation 
to the seriousness of the violation and shall take into consideration 
the efforts of [the registered entity] to remedy the violation in a 
timely manner.'' \19\ When reviewing a notice of penalty, whether 
pursuant to an application for review or on our own motion, we will 
conduct a de novo review of the record of the proceeding below to 
ascertain whether the record contains adequate evidence that the 
proposed penalty determination accords with this test. \20\ We observe 
in this regard that FPA section 215(e)(2) states that in any proceeding 
to review a notice of penalty, the Commission must provide notice and 
an opportunity for hearing that ``may consist solely of the record 
before the ERO and opportunity for the presentation of supporting 
reasons to affirm, modify, or set aside the penalty.'' \21\ As we 
stated in Order No. 672, based on this provision, we expect in most 
instances not to open the record set forth in or accompanying a notice 
of penalty to additional material from third parties.\22\
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    \19\ 16 U.S.C. 824o(e)(6) (Supp. V (2005)).
    \20\ See Order No. 672 at P 614 (de novo review is consistent 
with the practice of other administrative agencies that review 
sanctions imposed by their associated self-regulatory 
organizations). We concluded in the Delegation Agreement Order that 
a Regional Entity or NERC may not impose a penalty in an 
adjudication without concluding that the preponderance of the 
evidence supports the penalty. Delegation Agreement Order at P 146.
    \21\ 16 U.S.C. 824o(e)(2) (Supp. V (2005)).
    \22\ Order No. 672 at P 511. In this regard, we emphasize our 
agreement in the ERO Certification Order at P 491 that NERC affords 
appropriate deference in its procedures to the Regional Entities' 
role as reliability managers and their familiarity with operating 
conditions by prohibiting NERC's consideration on appeal of any fact 
that is not in the record compiled by the relevant Regional Entity.
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    However, the Commission retains the discretion in particular cases 
to permit additions to the record with respect to a notice of 
penalty.\23\
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    \23\ See 18 CFR 39.7(e)(2) (an applicant for Commission review 
of a penalty in a notice of penalty may support its explanation by 
providing information that is not included in the ERO's record) and 
39.7(e)(3) (when reviewing a notice of penalty, the Commission may 
``establish a hearing before an administrative law judge or initiate 
such further procedures as it determines to be appropriate''). 
However, in neither of these situations is the Commission required 
to admit into the record information or documents proffered by 
parties to the review proceeding. In particular, the Commission 
would look with disfavor on admitting into the record in a 
proceeding to review a notice of penalty documents or information 
that a party had an opportunity to move into the record before the 
Regional Entity, but failed to do so.
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    10. We believe that entities that are subject to Reliability 
Standards should have notice of the general criteria the Commission 
will use to determine whether it will review particular notice of 
penalty on its own motion. We will use the following principles in this 
matter. First, the Commission does not anticipate moving to review 
every notice of penalty that NERC files, or even most. While the 
Commission is required to review every notice of penalty for which a 
registered entity files an application for review, the Commission's 
limited resources would likely preclude review of all uncontested 
notices of penalty. Second, as described earlier, the Commission has 
approved NERC's CMEP as the framework for NERC's enforcement authority 
under section 215 of the FPA, as well as NERC's delegation of 
enforcement powers to Regional Entities through the Delegation 
Agreements. The Commission sees no general need to review each notice 
of penalty for which a Regional Entity has developed a record and which 
it has approved, and which NERC has reviewed for sufficiency and 
consistency. Third, the Commission recognizes that, on a continuing 
basis, Regional Entities and NERC retain an element of enforcement 
discretion similar to our own discretion in enforcement matters.\24\ 
Reviewing every uncontested notice of penalty on our own motion would 
be inconsistent with this recognition and would ultimately weaken the 
enforcement efforts of the Regional Entities and NERC.\25\
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    \24\ See Order No. 693 at P 225 (``The Commission agrees that, 
separate from our specific directive that all concerned focus their 
resources on the most serious violations during an initial period, 
the ERO and Regional Entities retain enforcement discretion as would 
any enforcement entity.'').
    \25\ Id. (observing that NERC's Sanction Guidelines, which set 
forth the principles under which NERC and the Regional Entities will 
determine penalties, provide flexibility as to establishing the 
appropriate penalty within the range of applicable penalties).
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    11. Nonetheless, because the Commission bears ultimate 
responsibility for the enforcement of Reliability Standards, we may 
review a notice of penalty even if the registered entity that is the 
subject of the notice of penalty does not file an application for 
review.\26\ In determining whether to review a notice of penalty (which 
will occur prior to receiving an application for review), we would look 
first to the apparent relative seriousness of the violation at issue in 
the notice of penalty. For example, we would evaluate the seriousness 
of a violation by the combination of violation risk factor and 
violation severity level that NERC has assigned and that we have 
approved for particular requirements of the Reliability Standards 
implicated in the notice of penalty.\27\ We also will analyze notices 
of penalty to ascertain the potential risk to the reliability of the 
Bulk-Power System, as well as any actual harm, presented by their 
particular fact patterns. The more serious a violation described in a 
notice of penalty appears to be, the more likely it is that we would 
review the proposed penalty. In addition, the Commission retains the 
authority to review notices of penalty on its own motion to ensure that 
penalties are applied in a reasonably consistent manner, or to improve 
compliance with Reliability Standards and thereby increase the 
reliability of the Bulk-Power System.\28\
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    \26\ It is possible that a registered entity will file an 
application for review of a notice of penalty after the Commission 
has issued an order stating that it will review the notice of 
penalty on its own motion. In that situation, the Commission will 
adhere to the procedural provisions of section 39.7(e)(4) and (e)(6) 
with respect to an application for review of a notice of penalty.
    \27\ Pursuant to section 4.1 of NERC's Sanction Guidelines, NERC 
and Regional Entities use the intersection of the violation risk 
factor and violation severity level in setting the initial range of 
the Base Penalty Amount that is calculated in the process of 
determining an appropriate penalty for a particular violation. See 
North American Electric Reliability Corp., 119 FERC ] 61,248, at P 
74 (2007). While the Commission has approved or directed revisions 
to violation risk factors for all requirements of Reliability 
Standards it has currently approved to apply nationwide, NERC's 
proposed violation severity levels for these standards are currently 
pending before the Commission in Docket No. RR08-4-000. Pending 
Commission review of this filing, as an interim measure when 
determining penalties, NERC and Regional Entities may use existing 
Levels of Non-Compliance assigned to particular standards to 
substitute for violation severity levels. Id. P 79.
    \28\ See Second Delegation Agreement Order at P 60 (The 
Commission's discretion to review penalty determinations on its own 
motion includes, but is broader than, ascertaining whether they 
clearly conflict with the goal of consistent national reliability 
enforcement or whether their revision is needed for oversight of 
Regional Entity compliance activities, citing Delegation Agreement 
Order at P 173).

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[[Page 21817]]

    12. Section 39.7(e)(3) of our regulations provides that neither an 
application for review of a notice of penalty nor the Commission's 
initiation of a review of a notice of penalty will operate as a stay of 
the proposed penalty unless the Commission otherwise orders, upon 
application by the subject of a notice of penalty or upon the 
Commission's own motion. Nevertheless, as a matter of policy, the 
Commission intends as a general matter to stay any proposed penalty 
under Commission review. Not doing so would require a user, owner or 
operator to pay a penalty that the Commission may later set aside or 
modify. To the extent that any proposed penalty is later affirmed by 
the Commission, the penalty amount must be paid with interest from the 
date of the stay.
    13. Pursuant to section 39.7(e)(5) of our regulations, in any 
proceeding to review a proposed penalty, the Commission, after public 
notice and opportunity for hearing, may by order affirm, set aside, or 
modify the proposed penalty, or remand the determination of the 
proposed penalty, or its form or amount, to the ERO for further 
proceedings. Any party to the proceeding may seek rehearing of the 
Commission's order, as described in Rule 713 of the Commission's Rules 
of Practice and Procedure.\29\
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    \29\ 18 CFR 385.713 (2007).
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III. Commission Review of Settlements of Reliability Penalties by 
Regional Entities or NERC

A. Order No. 672

    14. Order No. 672 stated the ERO should file, for informational 
purposes only, any settlement of an alleged violation regardless of 
whether the agreement contains an admission by the settling user, owner 
or operator. While settlements will be made public, Order No. 672 
provided that settlements would not be noticed for public comment; nor 
would they be subject to Commission review pursuant to section 39.7(e) 
of the Commission's regulations regarding Commission review of a notice 
of penalty.\30\
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    \30\ Order No. 672 at P 598. The Commission presumes that a 
settlement will require a registered entity that is a party to 
forego any right to file an application for Commission review of the 
settlement.
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B. Commission Determination

    15. Upon reconsideration based on our experience since Order No. 
672 issued, the Commission revises its policy stated in Order No. 672 
with regard to reviewing settlements of alleged violations. In 
modifying our policy regarding ERO and Regional Entity settlements, we 
note that the Commission may change its policy if it provides, as it 
does here, a reasoned basis for that change.\31\ The Commission 
believes that, on reflection, our statement in Order No. 672 is not in 
the public interest for several reasons. First, it is contrary to 
Commission policy regarding settlements in other contexts. For example, 
pursuant to Rule 602 of the Commission's Rules of Practice and 
Procedure, the Commission must review written offers of settlement 
filed in any proceeding pending before the Commission.\32\ Further, the 
Commission reviews settlements entered into by the Commission's Office 
of Enforcement.\33\ Second, after issuing Order No. 672, the Commission 
decided that the ERO should have authority on its own motion to reject 
settlements into which Regional Entities have entered.\34\
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    \31\ E.g., B&J Oil and Gas v. FERC, 353 F.3d 71 (D.C. Cir. 
2004).
    \32\ 18 CFR 385.602(g)(3), (h)(1)(i) (2007).
    \33\ See, eg., Statement of Administrative Policy Regarding the 
Process for Assessing Civil Penalties, 117 FERC ] 61,317, at P 2 
(2006) (noting that ``civil penalties often are negotiated as part 
of a stipulation and agreement resolving compliance issues'' and 
that ``[i]n such cases the civil penalty is imposed through a 
Commission order approving the negotiated agreement. * * *'') See 
also, e.g., In re Gexa Energy, LLC, 120 FERC ] 61,175 (2007); In re 
Cleco Power, LLC, 119 FERC ] 61,271 (2007).
    \34\ Delegation Agreement Order at P 107.
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    16. The Commission does not believe that it should afford 
settlements entered into by the ERO or a Regional Entity relating to an 
alleged or confirmed violation of Commission-approved mandatory 
Reliability Standards more deference than we would afford to those 
entered into by the Office of Enforcement or approved by the 
Commission's Administrative Law Judges. Nor should the Commission 
abstain from reviewing settlements approved by the ERO in the manner in 
which it has permitted the ERO to review Regional Entity settlements. 
Finally, we do not believe it reasonable to treat settlements as 
categorically different than other notices of penalty.
    17. Not allowing Commission review of a settlement would mean, for 
example, that an entity that does not contest a proposed penalty would 
nonetheless have its notice of penalty subject to review by the 
Commission, whereas an entity that initially contested the proposed 
penalty but subsequently settled with the Regional Entity would not 
have its settlement subject to review by the Commission. This 
distinction makes little sense and could actually increase litigation 
(in an effort to produce formal settlements) rather than reduce it. 
Therefore, any settlement entered into by the ERO or a Regional Entity 
after the date of this order will be subject to Commission review 
pursuant to section 39.7(e) of the Commission's regulations.
    18. As a final matter, we wish to make it clear that the Commission 
continues to encourage settlements by Regional Entities and NERC.\35\ 
Similar to the Commission's statement that it does not expect the ERO 
to reject Regional Entity settlements as a normal practice, the 
Commission expects that it will normally allow ERO or Regional Entity 
settlements to become effective.\36\
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    \35\ See ERO Certification Order at P 479; Delegation Agreement 
Order at P 107.
    \36\ Id.

    By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.

APPENDIX

FLOW CHART ILLUSTRATING NOTICE OF PENALTY PROCESSES

BILLING CODE 6717-01-P

[[Page 21818]]

[GRAPHIC] [TIFF OMITTED] TR23AP08.000

[FR Doc. E8-8745 Filed 4-22-08; 8:45 am]

BILLING CODE 6717-01-C
