First Major Penalty Imposed for Alleged NERC Reliability Standard Violation

While there have been numerous penalties and sanctions imposed for violations of the North American Electric Reliability Corporation's ("NERC") Reliability Standards since those standards became mandatory and enforceable on June 18, 2007, to date the financial burden imposed by those fines has not been overly significant. This all changed with the issuance on October 8, 2009 of an Order Approving Stipulation and Consent Agreement between the Federal Energy Regulatory Commission's Office of Enforcement ("FERC OE") and Florida Power and Light Company ("FPL") relating to a blackout that occurred in parts of Florida in February of 2008.  
 
FPL agreed to pay a civil penalty of $25 million, $10 million of which would be provided to the US Treasury, $10 million of which would be payable to NERC and $5 million of which, subject to prior FERC and NERC approval, could be spent on reliability enhancements beyond those required to comply with applicable Reliability Standards. The settlement indicates that the $25 million amount considers the severity of the event, but also acknowledges that FPL's actions were not intentional or fraudulent, and gives credit for FPL's exemplary cooperation with the investigation. FERC OE and NERC alleged violations of seven different categories of Reliability Standards, without identifying the standards with specificity; FPL did not admit that its actions were violations in agreeing to the Settlement. 
 
What a difference seventeen seconds makes. It took only that long for an electrical arc to wreak havoc on two-thirds of the state of Florida. The event was triggered by a series of innocuous events.  While work was being done to address a piece of equipment that had experienced a malfunction, a breaker tripped. A few days later, during testing, an engineer disabled the primary protection and breaker failure protection but did not inform appropriate parties, including the Load Dispatcher or the area's Reliability Coordinator, that this equipment had been disabled. The engineer then requested that the Load Dispatcher open the circuit switcher, which caused a fault and subsequent cascading events that led to an electrical outage affecting nearly 1 million customer accounts in Florida. 
 
NERC's Reliability Standards became mandatory and effective in large part in response to an earlier blackout: the Northeast blackout that occurred in August of 2003. Various different standards apply to entities that own or operate transmission facilities, generation facilities, buy and sell power or otherwise are deemed to have an effect on what is known as the Bulk Electric System. 
 
This may mark the beginning of a trend in which settlement proceeds partially will be paid to NERC directly, where they can be used for reliability-related activities, versus going in full to the US Treasury, where they are not earmarked for particular purposes. 
 
Commissioners Spitzer and Moeller filed concurring statements. The concurring commissioners agreed with the outcome but objected to the Order's failure to specify the standards at issue in light of the need to provide transparent information to an industry that needs to know best compliance practices and risks.