05/07/2012

FERC Staff Releases Contested NERC Financial Audit Report; NERC Disputes Findings, Criticizes Report’s “Lack of Balance”

Docket No. FA11-21-000

In a May 4, 2012, delegated order, the director of enforcement of the Federal Energy Regulatory Commission (FERC) issued a financial performance audit report prepared by agency staff criticizing North American Electric Reliability Corporation (NERC), the nation’s FERC-certified electric grid reliability watchdog. North American Electric Reliability Corp., Docket No. FA11-21-000 (May 4, 2012) (unpublished letter order) (May 4 Order). The audit, initiated on August 11, 2011, looked to NERC’s “budget formation, administration, and execution with a focus on costs and resources used to achieve program objectives.” May 4 Order: 1. Staff’s report identifies 11 findings and 42 audit recommendations on such issues as NERC’s oversight of regional reliability entity budgets, employee and board compensation, and adequacy of NERC staffing for its critical infrastructure protection (CIP) program. May 4 Order, 3-5. The audit report also questions whether NERC may be performing certain reliability functions outside the scope of its statutory authority under Section 215 of the Federal Power Act (FPA), 16 U.S.C. § 824o. May 4 Order, 3.

Responding to the audit report, NERC issued a stinging criticism, asserting that the report lacks balance, that the audit failed to focus on objective evaluation criteria, and that the report misreads NERC’s statutory authority. NERC’s press release indicates that while it conceptually agrees with many of the audit recommendations, and has sought to work with FERC to resolve outstanding issues FERC staff has declined to negotiate areas of disagreement, opting instead to take the matter to litigation. See NERC memo to FERC senior staff.

According to NERC’s audit response, principal areas of disagreement are these:

Focus: NERC states that the audit lacked appropriate focus and objective criteria insofar as it concentrated on “economy and efficiency” of NERC’s internal processes rather than on compliance with FERC regulations or orders. Therefore, NERC argues that the audit was inconsistent with generally accepted Government Auditing Standards.
Compensation: NERC asserts that FERC staff’s criticism of employee and board compensation is unsupported factually (NERC offers its compensation consultants’ study), and conflicts with authority prohibiting FERC (and regulatory agencies generally) from establishing utility compensation.
Statutory Focus: NERC states that FERC staff is wrong to assert that many of NERC’s activities depart from its statutory responsibility under FPA section 215. NERC cites staff’s criticism, e.g., of a conference held on cyber-security as an area not directly related to development or enforcement of standards, but nonetheless important to NERC’s mission.

NERC has 60 days within which to submit its plan for complying with uncontested recommendations in the audit report, and 30 days within which to notify FERC whether it will seek a hearing on contested matters. May 4 Order, 6-7. According to NERC’s press release, the organization is poised to take contested matters to a FERC Commission hearing.

In a separate statement on the audit report, Commissioner LaFleur asserts that issuance of the staff report absent a vote of the full commission was inconsistent with FERC regulations. In his separate statement, Commissioner Moeller commented that NERC’s objections to thestaff report are “substantial,” and highlighted the organization's right to seek review by the commission within 30 days.

Additional related documents:

For more information on this alert, please contact Jonathan D. Schneider or Jonathan P. Trotta.