Settlement Negotiation in NERC Enforcement

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-802 Settlement Negotiation in NERC Enforcement

The Settlement Window: When It Opens and What It Demands

The Settlement Window: When It Opens and What It Demands

The settlement window opens earlier than registered entities recognize. Treating the early period as preliminary rather than negotiated is the source of avoidable concessions.

The settlement window in a NERC enforcement matter does not open with a formal settlement proposal. It opens at the moment the Regional Entity begins assessing the matter. Every communication from that point forward is, in some sense, a settlement communication, because the regulator is forming the framing that will inform the eventual proposal. Registered entities that recognize this early and conduct themselves accordingly are negotiating from the start. Entities that treat the early period as preliminary discover later that the framing they did not contest in the early period has hardened into the regulator's settlement position. The window has identifiable phases even though the boundaries are sometimes informal. The pre-Notice phase, during which the regulator gathers information and forms the case. The Notice phase, during which the regulator articulates its theory in writing. The substantive negotiation phase, during which the parties exchange positions on penalty, characterization, and mitigation. The drafting phase, during which the language of the settlement document is finalized. The closure phase, during which the document is executed and submitted to FERC. Each phase has its own pace and its own decision points, and each requires the entity to be present and disciplined. What the window demands at each phase differs. The pre-Notice phase demands documentary discipline and careful framing of any submissions. The Notice phase demands measured response and identification of contestable elements. The substantive negotiation phase demands clear position-setting and willingness to engage on specifics. The drafting phase demands precision in language and patience for revisions. The closure phase demands attention to FERC submission requirements and the entity's internal sign-off architecture. Compressing these phases or treating them as procedural rather than substantive produces predictable losses. Counsel manages the window from the moment a potential matter arises. Compliance contributes facts, executes operationally, and supports the entity's internal coordination. The two functions operate in parallel through the entire window. The settlement that the entity wants at the end of the window is

FROM THE PRACTICE The settlement window opens earlier than registered entities recognize. Every communication is in some sense a settlement communication. The window has phases. Each phase has its own pace, its own decision points, and its own discipline. Treating any phase as preliminary concedes ground. The settlement at the end of the window is the product of choices the entity makes throughout it, not only the choices in the formal negotiation phase.

Reading the Regional Entity's Position

Reading the Regional Entity's Position

ion The regulator's actual position is rarely what its formal communications say it is. Reading the position requires interpretation, not transcription.

The Regional Entity's formal communications state a position. The regulator's actual position is something close to but not identical to the formal position, and reading the gap is one of the most consequential interpretive exercises in the matter. Entities that read the formal communications as the regulator's settled view miss the room available for negotiation. Entities that read past the formal communications, while remaining respectful of them, identify where movement is possible and where it is not. The signals are observable to counsel who has been through enforcement matters before. The penalty proposed in a Notice of Penalty is generally a starting figure rather than a final figure, and the framing language suggests how much room exists. The characterization language reveals how confident the regulator is in its theory; precise and specific characterization signals confidence, while broad and qualified characterization signals room for refinement. The mitigation requirements proposed reflect the regulator's risk perception of the underlying issue, and the perception can be shifted with credible information the regulator does not yet have. None of these readings are guaranteed accurate. All of them inform the negotiation strategy. The other source of position information is the conduct of Regional Entity counsel and staff during interactions with the entity. The regulator's posture in the kickoff meeting, the urgency or patience in scheduling subsequent interactions, the specificity of information requests, the willingness to engage on substantive disagreements, and the response to the entity's submissions all reveal how the regulator is calibrating the matter internally. Counsel attentive to these signals can adjust strategy in real time. Counsel that focuses only on the formal communications misses the calibration entirely. Reading the position is also iterative. The regulator's actual position evolves as the matter develops, in response to information the entity provides and arguments the entity makes. The position the regulator holds at week six may be meaningfully different from the position the regulator held at week one, and the negotiation strategy needs to update accordingly. Static reading of a moving position produces stale strategy. Dynamic reading lets the entity engage with the position the regulator actually holds at any given moment.

FROM THE PRACTICE The regulator's actual position is rarely what the formal communications say it is. Reading the position requires interpretation, not transcription. Penalty figures are starting figures. Characterization language reveals confidence. Mitigation proposals reflect risk perception. Each is a signal counsel can read. The regulator's position evolves as the matter develops. Static reading produces stale strategy. The entity needs to read continuously.

Posture: Cooperative, Direct, Disciplined

Posture: Cooperative, Direct, Disciplined

Three postures sound contradictory and operate together. Each one alone produces a worse outcome than the combination.

The professional posture in NERC settlement negotiation is a combination of three qualities that sound contradictory and operate together in practice. Cooperative, in the sense that the entity is responsive, courteous, and constructive. Direct, in the sense that the entity states its positions clearly, contests where contest is warranted, and does not hedge to avoid discomfort. Disciplined, in the sense that the entity adheres to its negotiation strategy across communications and avoids tactical drift in response to short-term pressure. Each quality alone produces a worse outcome than the combination. Cooperation without directness produces deference. The entity that is uniformly cooperative communicates that it will not contest the regulator's framing, and the regulator's framing then becomes the settled framing. The penalty, the characterization, and the mitigation requirements all anchor on the regulator's initial position. The entity has paid for its cooperative posture in the form of a settlement that reflects the regulator's view rather than the negotiated outcome of two informed parties. Directness without cooperation produces friction. The entity that contests every framing, disputes every characterization, and resists every information request communicates an adversarial posture that hardens the regulator's position rather than moving it. The regulator's counsel responds to the friction by escalating, and the matter that should have closed in eight weeks now extends to eight months. Directness without cooperation costs more than it gains. Discipline without flexibility produces brittleness. The entity that adheres mechanically to its initial strategy regardless of new information loses opportunities to settle on better terms when the regulator's actual position becomes clearer. Discipline means consistency in posture and approach, not rigidity in tactics. The strategy updates as information arrives. The posture remains constant. This combination is uncomfortable for entities accustomed to either pure deference or pure resistance, and is the posture that produces credible negotiations and clean settlements.

FROM THE PRACTICE Cooperative, direct, and disciplined sound contradictory and operate together. Each quality alone produces a worse outcome than the combination. Cooperation without directness produces deference and a settlement that reflects the regulator's view rather than the negotiated outcome. Discipline means consistency in posture and approach, not rigidity in tactics. The strategy updates as information arrives. The posture remains constant.

The Substance Negotiation: Penalty, Characterization, Mitigation

The Substance Negotiation: Penalty, Characterization, Mitigation

The substantive negotiation has three primary axes. They move at different rates and respond to different arguments. Treating them as one negotiation produces worse outcomes than treating them as three.

The substantive negotiation in a NERC settlement has three primary axes. The penalty amount. The characterization of the violation. The mitigation requirements. Each axis moves at a different rate, responds to different categories of argument, and has different significance for the entity's interests beyond the immediate matter. Entities that negotiate them together as a single bundle produce outcomes that reflect the regulator's preferences across all three. Entities that negotiate them as three separate exercises, sequenced strategically, produce outcomes that reflect the entity's priorities across all three. Penalty negotiation responds to factual mitigation, demonstrated remediation, comparative analysis with other published matters, and the entity's compliance history. Counsel develops the case for penalty reduction across each of these dimensions, with the strongest emphasis on the dimension most relevant to the matter. Penalty figures move when the regulator can be persuaded that the proposed figure is inconsistent with the relevant analytical anchors, not when the entity simply asserts it is too high. The persuasion requires preparation that compliance personnel cannot conduct alone. Characterization negotiation is often the most important and the most underweighted. The label the violation receives in the settlement document affects the entity's regulatory record, its exposure in subsequent matters, and its public posture. The difference between a violation characterized as a control failure and a violation characterized as a documentation gap is significant, even when the penalty amount is identical, because future audits, future enforcement matters, and future regulatory inquiries will read the prior characterization. Counsel negotiates characterization with attention to long-term consequences, not only the immediate matter. Mitigation negotiation requires balancing the regulator's need for assurance with the entity's need for operational executability. Mitigation requirements that exceed what the entity can credibly deliver create future exposure. Mitigation requirements that fall short of what the regulator considers

FROM THE PRACTICE The substance negotiation has three axes: penalty, characterization, mitigation. Each moves at a different rate and responds to different arguments. Characterization is often the most important and the most underweighted. The label affects the entity's record beyond the immediate matter. Mitigation language drafted in the settlement document becomes the entity's compliance obligation for years. Drafting well is the difference between closed and continuing.

The Drafting Negotiation: Recitals, Releases, Operating Terms

The Drafting Negotiation: Recitals, Releases, Operating Terms

The drafting of the settlement document is its own negotiation, distinct from the substantive negotiation that preceded it. Entities that conflate them lose ground in the drafting that the substance had won.

Once the substantive terms of a settlement are agreed, a separate negotiation begins over the language of the settlement document. The substance is now agreed in principle. The document operationalizes the agreement, and the operational language can move outcomes in either party's direction even when the underlying agreement is settled. Entities that treat the drafting as ministerial give up ground that careful drafting would have preserved. Entities that treat the drafting as its own negotiation produce documents that reflect the agreed substance accurately. The recital language frames the facts that the entity is acknowledging. The recital is not the place to relitigate the substance. It is the place to ensure the framing is precise, accurate, and not broader than the agreed scope. Loose recital language can become record evidence in subsequent matters, and the entity may discover years later that it has acknowledged facts it did not intend to acknowledge. Counsel reviews the recital line by line, with attention to scope, characterization, and any language that might be cited against the entity in future contexts. The release language defines what the settlement resolves and what it does not. Broad releases benefit the entity by closing potential future claims arising from the matter. Narrow releases benefit the regulator by preserving its ability to bring related future matters. The negotiation between these positions is real, and the resolution affects the entity's exposure beyond the immediate matter. Counsel negotiates release scope with the same discipline applied to the substantive penalty negotiation. The operating terms include any mitigation obligations, reporting requirements, periodic certifications, and compliance program commitments. Each is a future obligation the entity is undertaking. The drafting precision matters because the entity will be evaluated against the language for the duration of the obligation. Vague operating terms create disputes about compliance. Precise operating terms create defensible compliance. The drafting effort required to achieve precision is small compared to the cost of litigating ambiguity later.

FROM THE PRACTICE The drafting negotiation is distinct from the substance negotiation. Entities that conflate them lose ground the substance had won. Recital language can become record evidence in subsequent matters. Counsel reviews line by line for scope, characterization, and future-citation risk. Operating terms create future obligations. Precise drafting creates defensible compliance. Vague drafting creates future disputes.

Sequencing and Pacing the Negotiation

Sequencing and Pacing the Negotiation

Settlement timing affects substance. The sequence in which positions are exchanged compounds across the negotiation in ways the parties rarely revisit.

Settlement negotiations have a sequence. The opening positions are exchanged. Each side responds. The exchange continues across multiple rounds until convergence or impasse. The sequence is not neutral. Each move shapes the next, and early concessions or early commitments can foreclose options that later information would have supported. Counsel manages sequencing as a strategic variable, not as a procedural one. The first principle is that opening positions are not commitments. The entity's opening position should reflect the strongest defensible posture, not a midpoint between the entity's best and worst case. Opening at a midpoint anchors the negotiation at a midpoint. Opening at a defensible strong position creates room to move, and the movement is itself a tool for finding the actual settlement zone. The same logic applies to the regulator's opening position; counsel reads the regulator's opening as a starting point, not a settled view, and responds accordingly. The second principle is sequencing across substance, drafting, and timing. The substantive issues are typically resolved before drafting begins. Mixing substance and drafting in the same negotiation rounds confuses both. The drafting is a separate exercise that follows substantive agreement. The timing decisions, including when to signal settlement readiness and when to push for closure, are sequenced relative to the substantive and drafting progress, with counsel managing the calendar to support the strategy. The third principle is patience without inertia. Negotiations that move too quickly often resolve on the regulator's terms, because the entity has not had time to develop and present its strongest positions. Negotiations that move too slowly lose momentum, frustrate the regulator, and risk hardening into adjudication. The right pace is deliberate, with each round productive, each delay justified, and the overall trajectory toward closure visible to both sides. Counsel sets the pace and adjusts it as the negotiation develops.

FROM THE PRACTICE Opening positions are not commitments. Opening at a defensible strong position creates room to move. Opening at a midpoint anchors the negotiation at a midpoint. Substance, drafting, and timing are sequenced. Mixing them in the same negotiation rounds confuses both and produces worse outcomes. The right pace is deliberate. Too fast resolves on the regulator's terms. Too slow risks hardening into adjudication. Counsel sets the pace.

Internal Authority and Decision Architecture

Internal Authority and Decision Architecture

Counsel that has to consult upward mid-conversation loses leverage in real time. The internal authority structure should be defined before negotiation begins.

The internal authority that counsel carries into a settlement negotiation is observable to the regulator. Counsel that can commit the entity in the room is treated differently than counsel that has to take every substantive position back to the entity for approval. The difference is not theoretical. Regional Entity counsel calibrates its own posture to what it perceives about the entity's negotiating authority, and entities whose counsel must constantly defer up the chain often pay for the deferral in the form of less favorable terms. The entity should establish, before settlement negotiations begin, a defined authority structure. Counsel has authority to commit the entity within a defined range of penalty, characterization, and mitigation parameters. Movement outside that range requires entity approval, on a defined timeline, through a defined approval path. The structure should be operationally executable, meaning the approval process can complete within the response cadence the negotiation requires. Internal approval processes that take a week to address routine settlement movements are functionally a constraint on counsel's effectiveness. The authority structure also addresses who within the entity holds approval authority at each level. Routine movements may be approved by the chief compliance officer or general counsel. Material movements may require senior leadership. Settlement amounts above a defined threshold may require board involvement. Each threshold should be defined in advance, communicated to counsel, and operationally tested before the negotiation begins. The settlement matter is not the right time to discover that the entity's approval architecture takes longer than the negotiation cadence allows. The structure benefits both directions. Counsel knows what can be committed in the room and what requires deferral. The entity knows when its approval will be required and is positioned to respond quickly when needed. The regulator perceives a counterparty that is organized and decisive, which improves the negotiating dynamic. Entities that operate without this structure default to deferring everything, which is slower, less effective, and more expensive. The structure costs nothing to design and produces meaningful returns across every settlement matter.

FROM THE PRACTICE Counsel that has to consult upward mid-conversation loses leverage in real time. The regulator calibrates its posture to what it perceives about the entity's authority. The authority structure defines what counsel can commit, what requires approval, who approves, and on what timeline. All four, in writing, before negotiation. The settlement matter is not the right time to discover that the entity's approval architecture is slower than the negotiation cadence allows.

Closing the Matter and the FERC Submission

Closing the Matter and the FERC Submission

Closure is its own discipline. The FERC submission is the public artifact the entity will live with, and it is drafted with the same care as the negotiated terms.

Closing a NERC settlement matter is its own discipline, distinct from the negotiation that produced the settlement. The closure phase includes finalizing the executed document, preparing the FERC submission, addressing any FERC review comments, and completing the entity's internal documentation of the matter for retention purposes. Each step has its own requirements and its own discipline, and entities that treat closure as administrative miss the opportunity to ensure the public artifacts of the matter accurately reflect what the entity negotiated. The FERC submission is the public document the entity and the regulator file jointly to seek FERC approval of the settlement. The submission is read by FERC staff, by industry observers who track enforcement matters, by the entity's regulators in other contexts, and potentially by counterparties in subsequent matters. The submission language is drawn from the settlement document but may be edited for clarity, brevity, or context. Counsel reviews every word of the submission with attention to how the language will be read by all of those audiences, not only by FERC. The internal closure documentation includes the privileged after-action memorandum referenced in EC-WP-801, the operational lessons document for the compliance team, and the updates to the entity's compliance program that the matter has prompted. This documentation is the entity's own record of the matter, separate from the public record, and it is what allows the entity to learn from the matter and improve before the next one. Entities that close matters without this internal documentation lose the institutional learning that the matter produced. Finally, closure is the moment to update the entity's legal-compliance operating framework in light of what the matter taught. The framework described in EC-WP-800 is not static. Each enforcement matter produces evidence about what worked and what did not, and the framework is updated accordingly. Entities that close matters and revert to their prior operating posture lose the structural improvement opportunity. Entities that close matters by integrating the lessons into the framework arrive at the next matter better prepared than they were at this one. That improvement is the actual return on the matter just closed, and capturing it depends on treating closure as a deliberate phase rather than an administrative formality.

FROM THE PRACTICE Closure is its own discipline, distinct from the negotiation. The FERC submission is read by FERC, by industry observers, by future counterparties. Draft accordingly. Internal closure documentation captures the institutional learning the matter produced. Entities that close without it lose the lesson. Each enforcement matter improves the legal-compliance operating framework if the closure phase integrates what the matter taught. That improvement is the actual return on 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.

CONNECT WITH US