Notice of Penalty Response Strategy

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-801 Notice of Penalty Response Strategy

What a Notice of Penalty Actually Is (and Isn't)

What a Notice of Penalty Actually Is (and Isn't)

27;t) A Notice of Penalty is widely misread inside registered entities. Reading it correctly determines whether the response is strategic or reactive.

A Notice of Penalty is a procedural instrument. It is the Regional Entity's articulation of its theory of the violation, its proposed characterization, and its proposed sanction. It is not a final order. It is not a determination of facts that the entity cannot challenge. It is not a settlement, even though it sometimes reads like one. It is the opening of a structured negotiation that will conclude either in a negotiated resolution or in adjudication, and the entity's posture in the first weeks determines which of those tracks the matter follows and on what terms. The most common misreading is to treat the Notice as final. The compliance team reads the language, accepts the framing, and begins planning the mitigation. The legal team is brought in late, sometimes only when the settlement language is ready for signature. By that point, the factual record has been built on the regulator's framing, the entity has implicitly accepted the legal characterization by responding within it, and the negotiation room has narrowed to the size of the penalty rather than the structure of the matter. The defensible reading treats the Notice as the regulator's opening position. The legal team is engaged before any substantive response is drafted. The factual record is reviewed against the regulator's characterization, and any disputes are identified for later argument. The legal characterization is examined for elements that the entity can reasonably contest, and the contests are preserved through the response. The mitigation conversation is sequenced after the legal posture is established, not before. None of this implies adversarial conduct toward the regulator. All of it preserves the entity's ability to negotiate from a defensible posture. The reading also drives internal communication discipline. The Notice should not be discussed broadly inside the entity. The recipient circle is small and named. Communications about the Notice are routed through counsel. Documents responsive to the Notice are not generated until counsel has framed the production protocol. The discipline costs nothing and preserves the legal optionality the entity needs through the rest of the matter.

FROM THE PRACTICE A Notice of Penalty is the regulator's opening position, framed as a finding. Treating it as final is the most expensive misreading the entity can make. Internal communication about the Notice is disciplined and routed through counsel from the moment of receipt. Discipline costs nothing. Loss of discipline is rarely recoverable. The mitigation conversation is sequenced after the legal posture is established. Reversing the sequence concedes ground that the entity has not actually examined.

The First Forty-Eight Hours: Triage and Preservation

The First Forty-Eight Hours: Triage and Preservation

The triage in the first forty-eight hours has more leverage than anything done in the next six months. The triage is operational and legal at the same time.

The first forty-eight hours after receipt of a Notice of Penalty is the highest-leverage window in the entire matter. The triage that happens in this window determines the legal posture, the documentary record, the witness preparation, and the negotiation framework that will operate through the rest of the lifecycle. Most entities do not treat the first forty-eight hours with the discipline they require, and the missed opportunities are usually invisible until much later. The triage has three components, each conducted in parallel. The first is privilege establishment. Counsel issues a written engagement scope that establishes the matter, identifies the privileged communication channel, and defines the team that will work under privilege. Any consultants involved are brought in under appropriate engagement structures. The privilege protocol is communicated to every person who may touch the matter. This step is mechanical and is the foundation for everything that follows. The second component is document preservation. A litigation hold is issued in writing, identifying the categories of documents to be preserved, the personnel covered, and the time period. The hold is broad enough to capture all potentially relevant documents and specific enough to be operationally executable. The hold is acknowledged in writing by every recipient. Counsel maintains the hold log. The cost of an over-broad hold is small. The cost of a missed preservation is significant and sometimes case-determinative. The third component is factual triage. Counsel and a small named team conduct an initial review of the facts as the entity understands them, against the regulator's characterization in the Notice. The review identifies the disputes worth contesting, the facts that are conceded, the witnesses who will need to be interviewed, and the documents that will need to be reviewed. The output is a working memorandum, drafted under privilege, that frames the entity's response strategy. This document is the operating plan for the next several weeks of work.

FROM THE PRACTICE The first forty-eight hours have more leverage than anything done in the following six months. Most entities do not treat the window with the discipline it requires. Privilege establishment, document preservation, and factual triage happen in parallel. Each is mechanical. Skipping any one of them is rarely recoverable later. The output of the first forty-eight hours is a working memorandum, drafted under privilege, that frames the response strategy. That memorandum drives everything that follows.

Privilege Protection at the Outset

Privilege Protection at the Outset

Privilege is protected at the outset or it is lost. The protection is procedural, not theoretical.

Privilege protection in a Notice of Penalty matter is not a theoretical doctrine. It is a procedural discipline that is established at the outset of the matter and maintained through every communication and every document for the duration. The discipline is unforgiving. A single broad email distribution can waive privilege over a category of communications. A single consulting engagement structured outside the privilege framework can defeat the protection that would otherwise apply. The protection has to be designed and maintained, and the design starts on day one. The first protection is the establishment of a privileged communication channel. Counsel identifies the personnel who are inside the privilege circle. Communications inside the circle are protected. Communications outside it are not. The circle is small at the start and grows only by deliberate counsel decision. Email distribution lists used for normal compliance communication are not used for matter-related communication. The discipline is socialized to the team, in writing, with examples of what to do and what not to do. The second protection is the engagement structure for any consultants involved in the matter. Compliance consultants who advise the entity in normal operations may not automatically be inside the privilege circle for an enforcement matter. If their involvement in the matter is desired, counsel issues an engagement letter or addendum that establishes the consultant as an agent of counsel for the matter, with the appropriate confidentiality and work-product framing. Without that structure, the consultant's participation can defeat the privilege the entity assumes is protecting the work. The third protection is the document creation discipline. Memoranda generated during the matter are drafted at counsel's direction, marked as privileged, distributed only inside the privilege circle, and stored in a controlled location separate from the entity's normal document repositories. Voice and video communications about the matter follow the same discipline. The protections only work if they are operationalized at the moment of communication, not retroactively at the moment of production.

FROM THE PRACTICE Privilege is protected at the outset or it is lost. The retroactive privilege claim is not a strategy. Compliance consultants are not automatically inside the privilege circle for an enforcement matter. Counsel structures their involvement under appropriate engagement terms, or the privilege is at risk. Document creation discipline is operationalized at the moment of communication, not at the moment of production. The protection only works if it is procedural, not theoretical.

Building the Factual Record on Your Terms

Building the Factual Record on Your Terms

The factual record in a Notice of Penalty matter is built through the response. The entity that builds the record deliberately is in a different position than the entity that lets the record be built around it.

The factual record in a Notice of Penalty matter is built through the entity's responses to information requests, the productions of documents, the witness interviews, and the submissions to the Regional Entity. Each of those is a record-creating event. The entity can either build the record deliberately, with each event conducted under counsel direction, or let the record be built around it through ad hoc responses generated under time pressure. The first approach produces a defensible record. The second produces the record the entity later wishes had been built differently. Building the record deliberately starts with a written response strategy. Counsel articulates, in a privileged memorandum, the legal theory the entity will assert, the factual elements that support that theory, the disputes worth contesting, and the elements that will be conceded if necessary. The strategy is not static. It evolves as the matter develops. But it exists at the start of the matter and is updated rather than reinvented as the matter proceeds. Without the written strategy, every information request is answered in isolation, and the answers across requests do not add up to a coherent legal position. Document productions are made under counsel direction, on a defined production schedule, with a privilege log maintained in real time. The cooperative posture of producing what is requested is preserved. The discipline of producing only what is responsive, after privilege review, is preserved at the same time. These goals are not in tension. They are accomplished by counsel managing the production, not by compliance trying to balance speed and protection without legal authority. Witness interviews are conducted with counsel preparation. Even informal interviews requested by the Regional Entity rise to the level of testimony, and witness preparation is the difference between testimony that supports the entity's position and testimony that creates new problems. The preparation is professional, focused on the witness's actual recollection, and disciplined about what the witness will and will not address. Witnesses who appear without preparation often provide testimony the entity has to defend rather than develop. The defensible posture is to prepare every witness, every time.

FROM THE PRACTICE The factual record is built through the response. The entity that builds the record deliberately is in a different position than the entity that lets it be built around it. A written response strategy, drafted under privilege, drives every information request, every production, and every witness interaction. Without the strategy, the record drifts. Witness preparation is the difference between testimony that supports the entity and testimony that creates new problems. Prepare every witness, every time.

The Internal Investigation: Conducted Right

The Internal Investigation: Conducted Right

An internal investigation either produces privileged work product that supports the entity's strategy or produces discoverable evidence that undermines it. The structure of the investigation determines which one it produces.

Most Notice of Penalty matters involve an internal investigation. The investigation reconstructs what happened, identifies the operational and root causes, and produces the factual narrative that will inform the entity's response. The investigation is necessary. The question is whether it is conducted in a way that produces privileged work product supporting the entity's strategy or produces discoverable factual evidence that becomes part of the regulator's case. The structure of the investigation determines which one it produces. An investigation conducted under counsel direction, with the investigative work product framed as legal analysis prepared in connection with the enforcement matter, is generally privileged. The findings are the entity's. The reasoning is the entity's. The recommendations are the entity's. The entity decides what to share with the regulator and on what terms. An investigation conducted by compliance personnel without counsel direction, framed as a routine root cause analysis, is generally discoverable. The findings, the reasoning, and the recommendations are all in the regulator's hands if produced. The legal position the entity later wants to take has to be reconciled with whatever the investigation said, even if the investigation was prepared without legal framing in mind. The structural design of a privileged investigation is straightforward. Counsel directs the investigation in writing, identifies the investigators, defines the scope, and frames the deliverables as legal analysis. The investigators report to counsel, not to operations or to compliance. The interim work product is marked as privileged and distributed only inside the privilege circle. The final deliverable is a memorandum to counsel rather than a freestanding report. None of this is unusual in legal practice. It is uncommon in compliance practice, which is the source of the friction. The investigation should produce two distinct products. The privileged memorandum that informs the entity's legal strategy is one. The factual narrative that the entity may share with the regulator, framed deliberately by counsel for that purpose, is the other. The two are related and distinct. The privileged memorandum is broader and franker. The shared narrative is precise and considered. Producing both, and producing them separately, is the discipline that lets the entity learn from its own facts while

FROM THE PRACTICE An internal investigation either produces privileged work product or produces discoverable evidence. The structure determines which one it produces, before the work begins. Counsel-directed investigations report to counsel, are framed as legal analysis, and produce work product the entity controls. The structure is uncommon in compliance practice and standard in legal practice. The investigation produces two distinct products: the privileged memorandum that informs strategy, and the factual narrative shared with the regulator. Both, separately, by design.

Engaging Regional Entity Counsel: Posture and Tone

Engaging Regional Entity Counsel: Posture and Tone

Regional Entity counsel is opposing counsel in a structured negotiation. The relationship is professional and the negotiation is direct. Both at once.

Regional Entity counsel is opposing counsel for purposes of the Notice of Penalty matter. That framing is sometimes uncomfortable for compliance teams accustomed to a collaborative relationship with Regional Entity staff. The collaboration in normal operations is real, and the procedural posture in an enforcement matter is also real. The two are not in tension. The same Regional Entity professionals who collaborate productively in normal compliance work also represent the regulator's enforcement interests when an enforcement matter is open. Recognizing the role and responding to the role does not damage the relationship. Failing to recognize the role does. The professional posture is consistent. Communications are courteous. Deadlines are met. Information requests are answered substantively, within the production framework counsel has established. Witness interviews are conducted cooperatively, with counsel preparation. The Regional Entity counsel is treated as a counterparty whose role is understood and respected. The entity's representatives do not personalize the matter, do not display irritation when the regulator's position is unwelcome, and do not engage in tactical conduct designed to score points. This posture is professional and is also strategic, because Regional Entity counsel and the entity's counsel are likely to encounter each other in subsequent matters. The negotiation posture is direct. The entity's legal positions are stated clearly. Disputes are articulated with specificity. Settlement proposals are made with discipline and responded to with discipline. The negotiation does not dance around the substantive issues. It engages them. This directness is uncomfortable for entities accustomed to softer engagement, and it is the posture that produces credible settlements rather than performative ones. Regional Entity counsel respects directness because directness signals seriousness, and seriousness is what closes a matter on terms the entity can defend. The relationship is also a long-term relationship. The matter at hand will close. The entity will be back in front of the same Regional Entity in subsequent audit cycles. The counsel relationship the entity builds in this matter influences the counsel relationship in the next matter. Treating the current matter as the last

FROM THE PRACTICE Regional Entity counsel is opposing counsel for the matter and a long-term counterparty for the relationship. Both are real. Treating one without the other is the mistake. Professional posture and direct negotiation are not in tension. Professional posture lowers the temperature. Direct negotiation closes the matter on credible terms. The matter at hand will close. The relationship continues. Counsel that treats the current matter as the last interaction makes the next interaction harder.

Settlement Strategy and Timing

Settlement Strategy and Timing

Settlement timing matters as much as settlement substance. Posture in the first six weeks shapes the eventual offer.

Settlement strategy in a Notice of Penalty matter has two dimensions. The substance of the settlement, including the characterization, the penalty amount, and any non-monetary terms. And the timing of the settlement, including when the entity signals settlement interest, when the substantive negotiation starts, and when the resolution is finalized. Most entities focus on substance and treat timing as a function of process. The defensible posture treats timing as a strategic variable that affects the substance significantly. Early settlement signaling, before the entity has built its factual record and confirmed its legal positions, communicates that the entity is anxious to close the matter. Anxiety affects the offer. Late settlement signaling, after the matter has been pending for many months without progress, communicates that the entity is willing to extend the matter indefinitely. That posture also affects the offer. The defensible posture is to signal settlement readiness at the moment the entity has built its record and confirmed its positions, and to signal it through counsel's measured engagement with Regional Entity counsel rather than through process accommodation. The substantive settlement framework develops in stages. Early discussions identify the framework of resolution without committing to specifics. Mid-stage discussions narrow the substantive terms. Late-stage discussions finalize the language that will appear in the settlement agreement and the FERC submission. Each stage has its own discipline. Premature commitment to specific terms in early discussions forecloses options that mid-stage information may have suggested. Late-stage substantive disputes that should have been resolved earlier extend the matter unnecessarily. Counsel manages the staging. The settlement document itself is drafted with care. The recitals frame the facts in language the entity will live with through any subsequent matter. The penalty amount reflects the negotiation. The non-monetary terms, including any required mitigation actions and any compliance program commitments, are operationally executable. The release language is reviewed for scope. Each element of the document is examined against the entity's interests across multiple time horizons, not only against the immediate goal of closing the matter. The settlement is a public document that the entity

FROM THE PRACTICE Settlement timing matters as much as settlement substance. Anxious early signaling and indefinite extension both affect the offer. The defensible posture is to signal settlement readiness at the moment the entity has built its record and confirmed its positions. Earlier or later, the offer changes. The settlement document is a public document that the entity may need to address in future cycles. Drafting it well is the difference between a clean close and a recurring liability.

Lessons for the Next Cycle (and How Counsel Documents Them)

Lessons for the Next Cycle (and How Counsel Documents Them)

) Every Notice of Penalty contains lessons for the next cycle. Capturing them depends on counsel and compliance both treating the close as the start of the next preparation.

Every Notice of Penalty matter, regardless of how it resolves, produces lessons for the entity's next compliance cycle. The lessons are about the program design that allowed the violation, about the documentation that did or did not support the entity's position, about the witness preparation that did or did not survive, and about the legal-compliance integration that worked or failed under pressure. Capturing these lessons depends on counsel and compliance treating the close of the matter as the start of the next preparation rather than as a return to baseline. The lessons are documented in two places. A privileged after-action memorandum, drafted by counsel and shared inside the privilege circle, captures the legal lessons honestly. What the entity did right. What the entity did wrong. What the matter would have looked like under a different posture. What the entity will change for the next matter. This memorandum is candid because it is privileged. The candor produces the actionable information the entity needs to actually change behavior. A second document, drafted at a higher level and intended for broader distribution, captures the operational and program lessons. What the program will change. What the documentation discipline will look like. What the training updates are. What the cadence of internal review will become. This document is shareable inside the entity and informs the compliance program's evolution. It does not contain the legally sensitive analysis that the privileged memorandum holds, and it does not need to. The post-matter integration also involves a deliberate update of the legal-compliance operating framework described in EC-WP-800. The framework gets revised in light of what the matter taught. The structural triggers for counsel engagement may shift. The privilege protocols may tighten. The witness preparation discipline may expand. The document creation rules may change. The framework is not static. It evolves as the entity learns. Entities that build this learning loop into their post-matter discipline meaningfully outperform entities that close the matter and move on without integrating the lessons. The next Notice of Penalty, when it arrives, finds an entity better prepared than the previous one. That improvement is the actual return on the matter just closed.

FROM THE PRACTICE Every Notice of Penalty matter contains lessons for the next cycle. Capturing them depends on counsel and compliance treating the close as the start of the next preparation. The privileged after-action memorandum is candid because it is privileged. The candor produces the actionable information the entity needs to actually change behavior. The legal-compliance operating framework evolves with each matter. Entities that build this learning loop outperform those that close the matter and move on.

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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