Compliance with reliability standards has moved beyond the "check the box" phase to one of regulations with real deliverables and fines for noncompliance. Utilities that aren’t vigorously evaluating and refining their compliance procedures today may find NERC’s 2009 audit cycle much more challenging.
A significant concern for power companies in 2008 was compliance with the North American Electric Reliability Corp. (NERC) Reliability Standards, and this is an issue that will increase in importance in 2009 and coming years. Though NERC began nearly 40 years ago as an industry organization focused on improving electric power reliability, the organization’s responsibility and authority has increased over time, often after a major power disruption.
Following the 2003 Northeast blackout that resulted in the loss of power to nearly 6.5 million customers, the Federal Energy Regulatory Commission (FERC) was given the directive to create a national regulatory organization for electrical reliability. FERC, in turn, delegated to NERC the authority to enforce reliability standards and assess fines.
NERC Basics
The NERC reliability standards consist of a wide-ranging set of requirements, from technical controls on the quantity and quality of electricity supplied to the grid to administrative procedures for personnel and staffing. The 14 reliability standards each consist of multiple specific requirements, resulting in 94 mandatory and enforceable reliability standards — each of which has several audit items.
Compounding the breadth of the reliability standards is their relative newness — and potential financial impact. Despite its 40-year history, NERC has only had the authority to enforce reliability standards and assess fines for noncompliance since June 2007. The current audit cycle represents the first year that organizations face significant monetary fines for noncompliance, and though the initial fines have been relatively small, the maximum fines are one million dollars per violation, per day. In addition to the financial penalty, violations are publicly reported, representing potential damage to an organization’s reputation (Figure 1).
1. Pass your audit. The North American Electric Reliability Corp. reliability standards consist of a broad set of requirements, ranging from technical controls on the quantity and quality of electricity supplied to the grid to administrative procedures for personnel and staffing. The 14 standards each consist of multiple specific requirements, resulting in 94 mandatory reliability standards, each of which has several audit items, which a comprehensive compliance program
As this story was being written and the 2008 audit cycle came to a close, the power industry was breathing a collective sigh of relief. Although the 350 scheduled NERC audits were, by all accounts, thorough and represented a significant level of effort for the audited companies, the fines have been relatively few and far less expensive than the potential million dollar ceiling.
As of November 2008, 37 companies had been cited for compliance issues, and only two of those were ultimately fined, for a total of only $255,000. However, this should not indicate that NERC will not assess higher, and more numerous, fines in the future. Many industry observers believe that NERC has taken a more accommodating approach in this first audit cycle, preferring to warn utilities first and follow that warning up with increased observation and higher fines for noncompliance in the future.
One potential mitigating factor against higher, and more, fines in the future is the direction taken by FERC in a revision to its policy statement issued on October 16, 2008. Within that document, FERC states: "Achieving compliance, not assessing penalties, is the central goal of our enforcement efforts." The statement goes on to identify four factors that FERC will consider when assessing or reducing penalties: actions of senior management; effective preventative measures; prompt detection, cessation, and reporting; and remediation.
While at the time of writing this article NERC had not issued updated guidance specific to this revision, the four factors identified by FERC are pillars of any strong compliance program and should be considered part of a best practices approach to compliance. Organizations that commit to the creation of a strong and sustainable compliance program will not only be able to potentially reduce the cost of penalties, but they should also have far fewer violations over time.
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