NERC Enforcement: A Legal Field Guide

Foreword

Foreword

This professional reference is part of the Legal Series published by Energy Compliance, Inc. in partnership with Stich Angell, P.A., for registered entities and the people who run their compliance and legal programs. NERC enforcement is procedurally a civil enforcement regime that registered entities frequently treat as a compliance process. The framing matters. The decisions made early in any enforcement matter bind the entity through every subsequent stage, and many of those decisions involve legal judgment that compliance teams are not trained to make alone. The cost of recognizing this late is significant, rarely visible at the moment, and largely avoidable with the right operating framework in place. Energy Compliance, Inc. partners with Stich Angell, P.A. to provide registered entities with integrated legal-compliance support across the full enforcement lifecycle. Rob Smith brings more than thirty years of operator and regulator-side compliance experience. Cara Passaro and the Stich Angell team bring civil litigation depth, appellate practice, and increasing focus on energy compliance defense. The combination is the structural alternative to the model in which compliance consulting and legal counsel operate as separate engagements that converge only when an enforcement matter has already arrived. These references are written for the compliance manager who has to brief the general counsel honestly. For the in-house attorney who needs to understand how NERC enforcement actually proceeds. For the senior leader who has been told that the enforcement matter is under control and suspects it is not. For the outside counsel who has been asked to advise on a NERC matter for the first time and needs a practitioner's view of the procedural reality. The references do not substitute for engaged counsel and they do not replace operational compliance judgment. They describe how the system actually works, in the voice we use in front of regulators and in the courtroom, so that registered entities can make the decisions in front of them with the information practitioners would want them to have. If the integrated legal-compliance approach we describe is what your entity needs, the back of this reference contains contact information. If not, the reference still belongs to you. Take what is useful, apply it well, and remember that the structural decisions made before an enforcement matter arrives are almost always worth more than the decisions made after.

— Cara C. Passaro and Rob Smith Stich Angell, P.A. · Energy Compliance, Inc.

EC-WP-800 NERC Enforcement: A Legal Field Guide

Why NERC Enforcement Looks Like Compliance and Behaves Like Civil Enforcement

Why NERC Enforcement Looks Like Compliance and Behaves Like Civil Enforcement

Registered entities treat NERC enforcement as a compliance process. The procedure is closer to civil enforcement, and the consequences track that procedure rather than the compliance framing.

NERC enforcement presents itself as compliance work. The terminology is compliance terminology. The personnel involved are compliance personnel. The artifacts produced look like compliance artifacts. That presentation is misleading. The procedural architecture of NERC enforcement is closer to a civil enforcement regime, and the legal consequences attach to the procedure rather than to the compliance framing. Consider the procedural elements that civil litigators recognize on sight. There is a triggering event. There is an investigation, sometimes formal and sometimes functionally formal even if not labeled as such. There is a factual record built through document production, witness interviews, and submitted statements. There is a charging instrument, in the form of a Notice of Possible Violation or Notice of Penalty. There is a negotiated resolution, in the form of a settlement, or an adjudicated outcome through the FERC enforcement process. Each step has procedural rights, evidentiary considerations, and strategic implications that compliance practice alone does not surface. The mismatch between framing and procedure produces predictable mistakes. Statements are made in informal conversations that become record evidence. Documents are produced in volume without privilege review. Self-Reports are drafted in compliance language that prejudices the entity's later settlement posture. Witness interviews are conducted internally without counsel present, producing testimony the entity later has to defend rather than develop. Each of these mistakes is invisible at the moment it happens and binding at the moment it surfaces. Treating NERC enforcement as the procedural regime it is, rather than the compliance presentation it wears, changes the entity's preparation. Counsel is engaged earlier. Privilege is protected from the outset. Statements are made deliberately. Documents are produced after review. Settlement posture is preserved through every interaction. Entities that adopt this posture experience a meaningfully different enforcement trajectory than entities that treat the process as compliance work that happens to involve regulators.

FROM THE PRACTICE NERC enforcement looks like compliance and behaves like civil enforcement. The procedure controls the consequences, not the framing. The mistakes registered entities make in enforcement matters are usually invisible at the moment they happen. Counsel sees them in real time. Treating enforcement as the procedural regime it is changes everything about how the entity prepares. The change is structural, not cosmetic.

The Procedural Architecture: From Self-Report to Settlement

The Procedural Architecture: From Self-Report to Settlement

The enforcement lifecycle has identifiable stages, each with distinct legal considerations. Mapping the stages in advance lets the entity prepare for the decisions each stage will require.

The NERC enforcement lifecycle has identifiable stages, even though the boundaries between them are sometimes blurred in practice. A potential violation is identified internally or externally. An assessment determines whether the entity will Self-Report or contest the characterization. A Self-Report is filed, or a Regional Entity issues a Notice of Possible Violation. The Regional Entity investigates, requesting documents and conducting interviews. The Regional Entity issues a Notice of Penalty if the matter proceeds. Settlement discussions occur, sometimes throughout and sometimes concentrated near the end. The matter resolves through settlement filed at FERC, or through adjudication if settlement does not occur. Each stage has its own legal considerations that a compliance-only response will not address. The Self-Report decision involves legal judgment about characterization, scope, evidentiary support, and the framing the entity wants in the record. The investigation stage involves document production decisions, privilege determinations, and witness preparation that compliance personnel cannot make alone. The Notice of Penalty stage requires legal analysis of the regulator's theory, factual disputes worth contesting, and the entity's settlement leverage. The settlement stage requires negotiation discipline, drafting precision, and an understanding of how the settlement will read in subsequent FERC review. Mapping the stages in advance is not a hypothetical exercise. The entity should have, before any enforcement matter arises, a written framework that identifies who is responsible for each stage decision, what counsel involvement looks like at each stage, and what documentation discipline applies. Entities that wait until enforcement arrives to think about these questions make the early decisions under pressure and without coordination, and the early decisions are the ones that bind everything after them. The compliance team retains primary responsibility throughout. Counsel does not displace compliance in the procedure. Counsel runs the legal layer that operates alongside compliance and ensures that the entity's legal position is preserved through each stage. This division of labor is more defensible to

FROM THE PRACTICE The enforcement lifecycle has identifiable stages, each with its own legal considerations. Mapping them in advance is the cheapest preparation available. Compliance retains primary responsibility throughout. Counsel runs the legal layer that operates alongside it. This is a division of labor, not a transfer of control. Entities that wait until enforcement arrives to think about these stages make the early decisions under pressure. The early decisions bind everything after them.

Evidentiary Posture in the NERC Process

Evidentiary Posture in the NERC Process

Evidence in NERC matters is generated, produced, and characterized at every stage. Each evidentiary decision affects what can be argued later.

Evidence in NERC enforcement is not only the documents the entity produces in response to a Regional Entity request. It includes every artifact the entity has created or maintained that could later be subpoenaed or produced. Procedure documents. Operating logs. Email correspondence. Internal investigation memoranda. Audit response documents. Settlement-related drafts. The evidentiary universe is much larger than the production universe, and the entity's posture toward each is different. The first evidentiary decision is what to create in the first place. Internal documents created during a compliance event will become evidence if the matter proceeds. A factual investigation memorandum drafted by compliance staff, without counsel direction, is discoverable and will be read by the Regional Entity if produced. The same memorandum, drafted at counsel's direction with the legal analysis incorporated, is generally privileged. The difference is structural and is decided at the moment the document is created, not at the moment of production. Most entities draft these documents the wrong way and discover the consequence months later. The second evidentiary decision is how to produce. Document productions in NERC matters can be voluminous and time-pressured. The temptation is to produce broadly to demonstrate cooperation. Broad production without privilege review surrenders work-product and attorney-client material that would otherwise be protected. Narrow production with documented privilege review preserves the entity's legal position without sacrificing cooperation. Counsel manages the production decisions. Compliance manages the document logistics. The roles are complementary and they should be defined before the production request arrives. The third evidentiary decision is how the entity characterizes its own facts in submissions. A Self-Report or response to an information request is a sworn or quasi-sworn submission that creates record evidence. The wording binds the entity through the rest of the matter. Counsel's involvement in drafting these submissions is not optional in any matter with material consequence, because the wording choices later become the framing the regulator and FERC use to evaluate everything that follows.

FROM THE PRACTICE Evidence is generated at every stage, not only produced at the production stage. The entity's posture toward creation is as important as its posture toward production. Investigation memoranda drafted without counsel direction are discoverable. The same memoranda drafted at counsel's direction are generally privileged. The difference is structural. Self-Reports and information-request responses are record evidence. The wording binds the entity through everything that follows. Counsel drafts. Compliance contributes facts.

The Privilege Question (Where It Applies and Where It Does Not)

The Privilege Question (Where It Applies and Where It Does Not)

) Attorney-client privilege and work-product protection apply in NERC matters but in narrower forms than registered entities often assume. The narrowness is the source of most privilege errors.

Privilege in NERC enforcement matters operates the way it operates in any civil enforcement regime, with some specific features that make routine assumptions risky. Attorney-client privilege protects confidential communications between counsel and the client made for the purpose of obtaining legal advice. Work-product protection covers materials prepared in anticipation of litigation or in connection with an actual or reasonably anticipated proceeding. Both protections exist. Both can be waived. Both are narrower than compliance teams often assume. The most common privilege error is the inclusive distribution. A communication initially privileged is forwarded broadly inside the entity, copied to consultants without engagement letters that establish privileged status, or shared with operations personnel as informational. Each broadening risks waiver. Privilege depends on confidentiality, and confidentiality depends on a controlled distribution. Entities that treat counsel emails as broadcast vehicles waive the privilege without realizing they have done so, and the waiver becomes binding when the matter reaches discovery. The second common error involves consultants and other non-attorney advisors. Compliance consultants may receive privileged communications without breaking privilege, but only if they are functioning as agents of counsel under an appropriate engagement structure. Without that structure, the consultant's involvement in the communication can defeat the privilege. The entity that engages a compliance consultant and a separate attorney often communicates with both in the same email, which the entity perceives as efficient. Courts and regulators may perceive the same email as a privilege waiver. The structure of the engagement and the framing of the communication both matter. The third error is the late privilege claim. Privilege must be asserted at the time of production, not retroactively after the regulator has read the document. Once produced without claim, the document is in the record. A privilege log, prepared during the production process and maintained through the matter, is the operational mechanism that protects the entity's privilege rights. Entities that produce first and think about privilege later find that thinking later is too late.

FROM THE PRACTICE Privilege in NERC matters is narrower than registered entities often assume. The narrowness is the source of most privilege errors. Inclusive distribution waives privilege by destroying the confidentiality that the privilege depends on. Treat counsel communications as a controlled distribution, always. Privilege must be asserted at the time of production. A privilege log is the operational mechanism. Late claims are routinely lost.

The Role of Counsel Across the Enforcement Lifecycle

The Role of Counsel Across the Enforcement Lifecycle

Counsel's role differs by stage. Defining the role at each stage produces a more effective engagement than treating counsel as a general resource called when needed.

Counsel's role in NERC enforcement is sometimes treated as binary. Either the matter is severe enough to engage outside counsel actively, or it is routine enough to handle internally with counsel as a backup resource. The binary framing produces predictable mistakes, because the early stages of every matter look routine and only later reveal which ones were not. The defensible approach is to define counsel's role at each stage in advance and engage at the appropriate level based on the stage rather than the perceived severity. At the potential-violation stage, counsel's role is consultative and structural. Counsel reviews the facts, advises on Self-Report posture, frames any internal investigation, and ensures privilege protection from the outset. The work is light in hours and heavy in leverage. Most entities under-engage at this stage and discover later that the early framing locked in choices that became expensive to change. At the investigation stage, counsel's role expands. Counsel directs the document production, leads or attends witness interviews, drafts or reviews any submissions to the Regional Entity, and maintains a privilege log. The hours grow because the stakes grow, and the work is what makes the difference between a clean record and a record that creates downstream problems. At the Notice of Penalty and settlement stages, counsel takes the lead. The legal theory of the regulator's case becomes the central question. The factual record is now closed for most purposes, and the legal analysis of that record drives every remaining decision. Counsel negotiates the settlement, drafts or reviews the settlement language, and manages the FERC submission. Compliance contributes facts and operational context. The legal strategy is counsel's domain. This division produces better settlements and cleaner FERC submissions than the alternative, which is compliance running the negotiation with counsel reviewing drafts.

FROM THE PRACTICE Counsel's role differs by stage. Defining the role at each stage in advance produces a more effective engagement than treating counsel as a backup resource. Most entities under-engage counsel at the potential-violation stage. The under-engagement is the source of choices that become expensive to change. At settlement, counsel leads and compliance contributes. This division produces better settlements than compliance running the negotiation with counsel reviewing drafts.

Common Legal Mistakes Registered Entities Make

Common Legal Mistakes Registered Entities Make

A small set of recurring legal mistakes accounts for a disproportionate share of avoidable consequences in NERC enforcement. Naming them lets entities avoid them.

A small set of recurring legal mistakes accounts for a disproportionate share of avoidable consequences in NERC enforcement matters. Naming them, even briefly, gives the entity a checklist that compliance can apply at the moment a potential matter arises. The mistakes are not exotic. They are the predictable consequence of treating enforcement as compliance and applying compliance procedures to legal questions. First, drafting the Self-Report in compliance language. The Self-Report is a quasi-sworn submission that becomes record evidence. Compliance language often emphasizes the corrective action, framed in operational terms, while underplaying or mischaracterizing the underlying facts. Counsel-reviewed Self-Reports preserve the entity's settlement posture by being precise about what happened, why, and what was done about it, in language that does not concede legal points the entity has not actually conceded. Second, conducting internal investigations without counsel direction. The investigation memoranda become discoverable. The witness interviews become testimony. Without counsel direction, the entity has produced a factual record that may not match the legal posture it later wants to take. Counsel-directed investigations create privileged work product, which the entity controls and uses to inform its legal strategy without exposing the work to discovery. Third, broad document production without privilege review. The cooperative posture of producing broadly is sometimes appropriate and sometimes a waiver problem. The decision is legal and should be made by counsel with full information about the matter, not by compliance staff trying to demonstrate cooperation under time pressure. Fourth, witness preparation without counsel involvement. Interviewees who have been through compliance training may not know how to participate in a witness interview that becomes testimony. Counsel preparation closes that gap. Fifth, settlement discussions conducted by compliance personnel without legal authority to commit. The mismatch produces either uncoordinated positions or revisions to apparent agreements, both of which damage the relationship with the Regional Entity counsel and complicate the eventual resolution.

FROM THE PRACTICE A small set of recurring legal mistakes accounts for most avoidable consequences in NERC enforcement. The mistakes are predictable. The fix is structural. Self-Reports drafted in compliance language without counsel review are the single most common error, and the most expensive at settlement. Internal investigations without counsel direction generate discoverable factual records. Counsel-directed investigations generate privileged work product that the entity controls.

When to Engage Counsel (and When Counsel Should Lead)

When to Engage Counsel (and When Counsel Should Lead)

) Counsel engagement should be triggered by structural criteria, not by perceived severity. Severity is hard to assess in real time and easier to assess in retrospect.

The question of when to engage counsel in a NERC matter is often answered by perceived severity. The matter looks small, so counsel is not engaged. The matter later turns out to have been larger than initially perceived, and the entity reconstructs early decisions counsel could have shaped. The reconstruction is rarely successful, because the early decisions made the record they are now trying to reframe. A more defensible framework engages counsel by structural triggers rather than by severity assessment. Counsel is engaged whenever a Self-Report is contemplated. Counsel is engaged whenever the Regional Entity requests information beyond a routine inquiry. Counsel is engaged whenever an internal investigation is initiated. Counsel is engaged whenever a Notice of Possible Violation is received. Counsel is engaged whenever an interview, formal or informal, is requested. Each of these triggers is observable. None requires the entity to have correctly assessed severity in advance. Counsel should lead, rather than support, in matters where the legal stakes have crossed certain thresholds. A Notice of Penalty has been issued. A potential penalty exceeds an internal threshold the entity has set in advance. The matter involves multiple Regional Entities or implicates multiple standards. The matter is likely to be cited as precedent or has industry visibility. The matter involves potential cybersecurity exposure that could implicate other regulators or law enforcement. In each of these cases, counsel runs the matter and compliance executes the operational work. The role flip is uncomfortable for compliance teams accustomed to ownership, and is the right structure when the matter has crossed into legal territory. The transition from counsel-supports to counsel-leads is not always clear in real time. The defensible operating posture is to engage counsel early enough that the transition is collaborative rather than abrupt. Entities that wait until counsel-leads is obvious have usually waited too long, and counsel arrives to inherit a record they would not have built. Engaging earlier preserves the option to lead later. Engaging later forecloses options that may have mattered.

FROM THE PRACTICE Engage counsel by structural triggers, not by severity assessment. Severity is hard to assess in real time and easier to assess in retrospect. Counsel leads when the legal stakes cross identifiable thresholds. The role flip is uncomfortable and is the right structure when the matter has moved into legal territory. Engaging earlier preserves the option to lead later. Engaging later forecloses options that may have mattered.

Building a Legal-Compliance Operating Framework

Building a Legal-Compliance Operating Framework

The operating framework that integrates legal and compliance is built before enforcement arrives. Building it after is more expensive and less effective.

Most registered entities have a compliance program. Most have access to counsel. Far fewer have an integrated operating framework that defines how the two functions interact across the enforcement lifecycle. The absence of that framework is what produces the predictable mistakes catalogued in the prior chapters. The presence of the framework is what allows enforcement matters to proceed with discipline. The framework defines, in writing, the structural triggers for counsel engagement, the division of responsibility at each stage of an enforcement matter, the privilege protocols for communications and documents, the engagement structure for any consultants involved in the matter, the document retention and production protocols, and the escalation path for legal decisions that exceed a defined threshold. None of this is exotic. All of it requires deliberate effort to articulate and to socialize across the compliance team and the legal function. The framework also defines the relationship between the entity and its outside counsel. Which firm handles NERC enforcement matters. Who at the firm is the named lead. What the engagement letter covers and excludes. How the firm coordinates with any other counsel the entity uses. How fees are structured and authorized. These are operational questions that benefit from being answered in calmer moments and become much harder to answer when an enforcement matter has already arrived. Entities that build the framework experience enforcement matters as procedurally manageable rather than as crises. The internal teams know what to do. The roles are clear. The decisions get made by the right people. The documentation is privileged where it should be and produced where it should be. The settlement posture is preserved. The matter resolves on terms that reflect the entity's actual exposure rather than terms inflated by the entity's avoidable mistakes. That outcome is the product of the framework. Building the framework is the work.

FROM THE PRACTICE An integrated legal-compliance operating framework is built before enforcement arrives. Building it after is more expensive and less effective. The framework defines structural triggers, division of responsibility, privilege protocols, document production protocols, and the escalation path for legal decisions. Entities with the framework experience enforcement as procedurally manageable. Entities without it experience the same matters as crises. The difference is the framework, not the matter.

About the Author

About the Author

Cara C. Passaro is Shareholder and Firm President at Stich Angell, P.A., where she has practiced civil trial and appellate law for more than two decades. She is licensed to practice in the state and federal courts of Minnesota and North Dakota and has been recognized as a Super Lawyer for her work in civil litigation and construction litigation defense. Cara's practice has historically focused on products liability, premises liability, transportation liability, and complex commercial litigation, with an emphasis on the defense of corporate clients in high-stakes matters across the Midwest. She has tried jury cases to verdict in Minnesota state court, argued matters at the Minnesota Court of Appeals, and managed appellate work through the Minnesota Supreme Court. In recent years, Cara and the Stich Angell team have extended the firm's civil litigation practice into energy compliance defense, working with registered entities and their compliance partners on NERC enforcement matters, Notice of Penalty response, settlement negotiations with Regional Entities, and the integrated legal-compliance frameworks that determine whether enforcement matters resolve as manageable procedural events or as multi-year exposures. Cara serves as the named legal author of the Energy Compliance, Inc. Legal Series and is the partner engagement lead for the Stich Angell side of the integrated practice.

About Stich Angell, P.A. Stich Angell, P.A. is a Minneapolis-based civil litigation firm founded in 1971. The firm represents businesses, individuals, and organizations across a broad range of civil practice areas, with particular depth in complex litigation, products liability, transportation liability, professional liability, insurance defense, construction litigation, and appellate practice. The firm's trial and appellate attorneys are recognized among the most experienced civil trial lawyers in the state, with extensive experience representing clients through trial verdict and appellate review. Although the firm is based in Minnesota, the attorneys represent clients in matters across the United States. Stich Angell has expanded the firm's civil litigation practice into energy compliance defense, partnering with Energy Compliance, Inc. to provide registered entities with integrated legal and compliance support across the NERC enforcement lifecycle. The combined practice brings civil litigation discipline, appellate strength, and senior regulatory experience to a category of matters that has historically lacked that combination. Stich Angell, P.A. is located at 3601 Minnesota Drive, Suite 450, Minneapolis, Minnesota 55435, and may be reached at (612) 333-6251 or at stichlaw.com.

About Energy Compliance, Inc.

About Energy Compliance, Inc.

Energy Compliance, Inc. is an independent consulting and advisory firm focused exclusively on electric reliability, cybersecurity reliability, and regulatory compliance for organizations connected to the North American Bulk Electric System. Our work supports registered entities, including Generator Owners and Operators, Transmission Owners and Operators, Reliability Coordinators, Balancing Authorities, and Distribution Providers, across NERC Reliability Standards, FERC orders, RTO/ISO market participation rules, Regional Entity oversight, and state regulatory frameworks. Energy Compliance partners with Stich Angell, P.A. for legal matters arising in the NERC enforcement lifecycle, including Notice of Penalty response, settlement negotiation, internal investigation under privilege, and the integrated legal-compliance operating frameworks that registered entities need before enforcement arrives. The integrated practice replaces the sequential model in which compliance and legal engage separately and converge only when a matter has already escalated. Engagements are led by a single senior practitioner on the compliance side and by a named partner on the legal side. We do not staff for billable hours. We staff for outcomes. Our deliverables are written to be operationally executable and audit-defensible, not to manufacture activity. Energy Compliance is not affiliated with, sponsored by, or endorsed by the North American Electric Reliability Corporation, the Federal Energy Regulatory Commission, or any Regional Entity.

Legal Series Services

Legal Series Services

The Legal Series supports registered entities across the full enforcement lifecycle. The work is structured for operational execution and legal defensibility. Every engagement is led by a named senior practitioner on the compliance side and by a named partner at Stich Angell on the legal side.

Integrated legal-compliance services include, but are not limited to:

• Notice of Penalty response strategy and execution
• Internal investigation conducted under privilege
• Document production and privilege log management
• Witness preparation for Regional Entity interviews
• Settlement negotiation with Regional Entity counsel
• Self-Report drafting and legal review
• FERC submission preparation and review
• Legal-compliance operating framework design
• Counsel-led after-action review and lessons integration

Each engagement is scoped to the entity's role, function, regulatory posture, and the procedural stage of the matter.

ENERGY COMPLIANCE LEGAL SERIES

Defensible Compliance. Disciplined Defense. Energy Compliance, Inc. and Stich Angell, P.A. partner to provide registered entities with integrated legal and compliance support across the NERC enforcement lifecycle, from Self-Report through Notice of Penalty through settlement at FERC.

ENFORCEMENT DEFENSE PRIVILEGE COUNSEL Notice of Penalty response and settlement Internal investigation and document production strategy. under privilege.

REGULATORY ADVISORY LEGAL-COMPLIANCE INTEGRATION FERC submission, Regional Entity counsel Operating frameworks built before enforcement engagement. arrives.

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