Key Bridge, Washington, DC

On August 22, 2014, the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit"), in a unanimous decision, vacated and remanded to the Federal Energy Regulatory Commission ("FERC") a FERC order approving the North American Electric Reliability Corporation’s ("NERC") imposition of a monetary penalty against the Southwestern Power Administration ("Southwestern") for its violation of certain mandatory Reliability Standards.

Southwestern, a subdivision of the Department of Energy ("DOE"), is one of four federal Power Marketing Administrations, marketing low-cost hydroelectric power produced from various Army Corps of Engineers projects in the southwestern United States. On July 28, 2011, NERC imposed a $19,500 penalty on Southwestern for its violation of Reliability Standards related to cyber security and critical infrastructure. FERC upheld the penalty. Southwestern did not challenge NERC and FERC’s authority to find a Reliability Standard violation. Southwestern, DOE, and the Department of the Interior appealed NERC and FERC’s decision to impose a penalty for that violation to the D.C. Circuit.

Disagreeing with NERC and FERC, the D.C. Circuit found that neither NERC nor FERC have authority under section 215(e) of the Federal Power Act ("FPA") to impose monetary penalties on federal entities. The D.C. Circuit stated that the proceeding involved whether the FPA unambiguously and unequivocally waives the United States’ right of sovereign immunity to be free from the imposition of monetary penalties. When examined in this context, the D.C. Circuit held that section 215(e) does not include an express waiver of sovereign immunity; therefore, the court ruled neither NERC nor FERC have authority to enforce monetary penalties against federal agencies for the violation of Reliability Standards. It found that section 215(b) of the FPA grants NERC and FERC general authority to approve and enforce compliance with Reliability Standards. However, the D.C. Circuit stated that such enforcement mechanisms on federal agencies are limited to "non-monetary means . . . such as compliance orders or directives, enforcement audits, and the like."

By finding that NERC and FERC lack authority to impose monetary penalties on federal entities, purchasers of power sold by federal Power Marketing Administrations, including rural electric cooperatives and municipal utilities, will not have to bear the burden of these penalties in the form of increased prices. Additionally, the reliability of the bulk power system will continue to be maintained as NERC and FERC still retain non-monetary enforcement mechanisms to ensure federal agencies comply with Reliability Standards.

To view this decision, please click here.

Jeffrey C. Genzer and Kristen Connolly McCullough submitted briefs on behalf of the Mid-West Electric Consumers Association and the Southwestern Power Resources Association, arguing that NERC and FERC lacked authority to impose monetary penalties on federal entities.