FERC Approves $3.25 Million Civil Penalty in Southwest Blackout Case

On July 7, the Federal Energy Regulatory Commission (FERC) approved a stipulation and consent agreement between FERC's Office of Enforcement, the North American Electric Reliability Corporation (NERC) and Arizona Public Service Company (APS) resolving FERC and NERC's joint investigation into APS's involvement in the September 8, 2011 Southwest Blackout.  The Southwest Blackout was a system disturbance in the Pacific Southwest that affected transmission in Arizona, California and Mexico, and ultimately caused a complete blackout of San Diego.  FERC and NERC found that APS violated certain of the Transmission Operations (TOP) group of NERC Reliability Standards, and that these violations resulted in cascading outages in which 2.7 million customers, or approximately 5 million people, lost power for several hours.  FERC and NERC concluded that APS failed to prepare for this type of event by not performing a unique day-ahead study for September 8 and by not coordinating its day-ahead studies with neighboring transmission operators, including the Imperial Irrigation District and the California Independent System Operator.  APS has neither admitted nor denied the violations in the stipulation and consent agreement. 

The settlement includes a $3.25 million civil penalty, $2 million of which will be split evenly between the U.S. Treasury and NERC. APS must spend the other $1.25 million on reliability enhancement measures to improve reliability of the Western Interconnection that go above and beyond the mitigation measures necessary to bring APS into compliance, such as installing Phasor Measurement Units and purchasing a new capacitor bank for Western-Desert Southwest's Kofa substation.  APS is also required to take several additional steps to mitigate the violations identified in the investigation.

Significant civil penalties for violations of Reliability Standards are unusual: since 2007, only two other FERC/NERC joint investigations for violations of NERC Reliability Standards have yielded civil penalties exceeding $1 million; most civil penalties for violations of Reliability Standards have ranged between $50,000 and $350,000.  In 2011, FERC Enforcement and NERC jointly investigated PacifiCorp after an outage and found that PacifiCorp violated 15 NERC Reliability Standards; the subsequent settlement resulted in a $3,925,000 civil penalty.  In 2009, FERC Enforcement and NERC investigated Florida Power and Light Company (FPL) after a blackout and found a significant number of violations of the NERC Reliability Standards. The settlement that resulted required FPL to pay a $25 million penalty, which included $5 million for reliability enhancement measures above and beyond the necessary mitigation to bring FPL into compliance.

Although the civil penalty agreed to in the APS settlement is substantial for an enforcement case involving NERC Reliability Standards, it still pales in comparison with settlements including civil penalties related to alleged market manipulation, which have been as high as $450 million.