Regulatory Discretion Handout

5/11/2016
We plan to talk about this stuff:
• Who we are and what we do
Regulatory Discretion
The Decision Points of Regulatory Compliance
• Characterizing regulations and enforcement
• Enforcement decision making
• Regulatory risk differentiation
Jody McColman
Nathan Dore
Maine Public Utilities Commission
Maine Public Utilities Commission
Gas safety staff enforces minimum safety standards for hazardous materials pipelines.
Jody McColman – Staff Attorney
Nathan Dore – Gas Pipeline Safety Inspector
• Enjoyable and Marginally Humorous Exercise
Regulations and Enforcement
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Regulating Body
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Regulated Entity
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Enforcement Agent
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Regulatory Authority
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Title 49, Ch. 601 of the United States Code Title 35‐A of the Maine Revised Statutes
Title 49, Part 192 of the Code of Federal Regs.
Chapters 420 & 421 of Maine Public Utility Commission Rules Clear Regulations
International Organization for Standardization
How to Write Standards
“By being clear, concise and readable – but not simplistic – writers can avoid misinterpretation”
Prescriptive vs. performance based
Prescriptive regulations – specific, focused on procedure, little to no “wiggle” room.
Example: “The operator shall tighten all bolts to 80 foot‐pounds torque.”
Performance‐based regulations – generalized, focused on results, customizable
Example: “The operator shall adequately torque all bolted connections.”
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Clear Regulations
• MPUC Chapter 420 § 5(D)(3)(b)(1)
• Separation from Subsurface Structures
Where there is interference with other subsurface structures,
including other utilities, the pipe shall be laid at a clearance
distance of not less than twelve (12) inches away from such
structures unless adequate shielding is provided to protect the
gas pipeline and the other utility.
Clear Regulations
Clear Regulations
• MPUC Chapter 420 § 5(D)(3)(b)(1)
• MPUC Chapter 420 § 5(D)(3)(b)(1)
• Separation from Subsurface Structures
• Separation from Subsurface Structures
Where there is interference with other subsurface structures,
including other utilities, the pipe shall be laid at a clearance
distance of not less than twelve (12) inches away from such
structures unless adequate shielding is provided to protect the
gas pipeline and the other utility.
Where there is interference with other subsurface structures,
including other utilities, the pipe shall be laid at a clearance
distance of not less than twelve (12) inches away from such
structures unless adequate shielding is provided to protect the
gas pipeline and the other utility.
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Clear Regulations
• MPUC Chapter 420 § 5(D)(3)(b)(1)
• Separation from Subsurface Structures
Where there is interference with other subsurface structures,
including other utilities, the pipe shall be laid at a clearance
distance of not less than twelve (12) inches away from such
structures unless adequate shielding is provided to protect the
gas pipeline and the other utility.
Other Ambiguities
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Enforcement Action
• MPUC Chapter 420 § 8(B)
• Written Formal Notice of Probable Violation
After evidence of a probable violation is collected and the
violation report written, the operator will be notified of the
results of the on‐site evaluation and the provision of this chapter
the operator is apparently violating. The notice of probable
violation may include a proposed administrative penalty amount.
New methods
New technologies
Unique environments
Following regulations impossible / impracticable
Is there a better way?
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On‐site resolution of the violation
Verbal notification
Information request
Reminder communication (email)
Written warning letter
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Enforcement – what to consider
Enforcement – what to consider
• Statutory Considerations – does the rule allow for various enforcement methods or require consideration of certain information?
• Penalty considerations per state and federal law: • Letter v Spirit – Will attempts at letter compliance yield results with greater risk than alternatives? Did violation result in a dangerous situation or reflect a pattern of behavior?
• Effectiveness of Regulatory Actions as Deterrent – Will enforcement method solve the acute problem and incentivize this and other operators to prevent recurrence?
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Nature and gravity of offense
Degree of Company culpability
History of prior offenses
Company’s ability to pay
Good faith efforts to achieve compliance
Effect on Company’s ability to remain in business
Any such matters as justice may require
Enforcement – what to consider
• Burden on Industry – Where do costs of enforcement outweigh benefits to societal good? Does enforcement method still have intended effect?
• Consideration of Precedent – Does the violation reflect a pattern of behavior? How will the enforcement action affect future compliance activity and enforcement actions?
Enforcement – what to consider
• Communication of Positioning – Does enforcement wording unambiguously communicate the agency’s preferred result?
• Regulatory Capture – Has developing a working relationship with the same personnel in a tight industry unduly affected the enforcement strategy?
• Satisfies Oversight Requirements – Will the enforcement strategy meet the expectations of parties with oversight over the enforcement agency?
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Some effects of poor enforcement strategy
• Overly Aggressive
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Destroys working relationship
Disincentivizes communication
Degrades business environment
Spends enforcement resources inefficiently
Case Study 1
• Inspection of field‐applied epoxy coatings suggested improper application.
• Overly Passive
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Removes deterrent to violating
Dilutes impact of regulations
Can affect public perception of agency
Exposes industry to risk
Case Study 1
Case Study 1
• Operator’s contractor failed to follow coating manufacturer’s procedures – warning letter
• Met with operator on site to discuss issues.
• Issued warning letter requiring remediation prior to installation of the pipe.
• Considerations:
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Threat / Consequence
Cost to Company
Company’s history of compliance
Company’s good faith efforts to remediate issue
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Case Study 1
Case Study 2
• Result: Company removed improperly applied coatings and re‐coated pipe prior to installation, re‐trained personnel, enhanced inspection procedures.
• Propane companies in violation of cathodic protection requirement for copper lines
Case Study 2
Case Study 2
• Regulations provide an exception to cathodic protection for buried metallic lines
• MPUC currently enforces this regulation by requiring all operators to place cathodic protection on metallic below grade pipelines.
• Operators that applied for exception will still need to protect coated copper lines.
– §192.455(c) – an operator need not comply…if the operator can demonstrate…that a corrosive environment doesn’t exist (for copper)…but!
– §192.455(d) – notwithstanding the provisions of paragraph…(c), if a pipeline is coated, it must be cathodically protected…
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Application of Enforcement Authority
• Actual very thorough studies on this very subject have been performed. Regulatory Risk Differentiation
• Principle:
– Risk Assessment
By PKing82 ‐ In PowerPoint Previously published: None, CC BY‐SA 3.0, https://commons.wikimedia.org/w/index.php?curid=34735228
Risk Assessment
• Involves capture and tracking of violation data
– Frequency of violations
– Intensity of violations
– Absolute vs. relative values
Regulatory Risk Differentiation
• Principle:
– Variable Enforcement
• Frequency – Periodic or Continuous
• Deployment Mode – Proactive or Reactive
• Application of new information within historical context
By Stuart G Hamilton Own work, CC BY‐SA 3.0, https://commons.wikimed
ia.org/w/index.php?curid
=7699214
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Regulatory Risk Differentiation
• Considerations:
– Agency Resource Availability
– Agency Mandate
– Focus of Regulatory Administrators
Effective Enforcement Agency Goals
• Efficiency – in deployment of public resources and drafting of regulatory requirements
• Accuracy – in risk assessment, interpretation of regulations, and determination of penalties
• Consistency – in interpretation and application of regulations, and deployment of enforcement mechanisms
Regulatory Enforcement Agency Goals
Regulatory Enforcement Agency Goals
• Proactivity – including regular, reliable, available communication with industry and public regarding interpretation of regulations and intent of agency
• Accountability – to the public for protecting and achieving intent of regulations
• Credibility – with industry, public, and agency administration
• Independence – from acute political and industry interference, but responsive to public interest
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Enjoyable and mildly humorous exercise –
Choose Your Own Enforcement Posture!
A routine records inspection at Elsinore Natural Gas of Maine reveals that the Company’s procedure for the installation of the Mark 7 Fetzer Valve is incomplete. According to the valve’s manufacturer, Guildenstern Plastics, the three Duncan bolts on the valve must be tightened after installation; Elsinore's procedure does not contain this, admittedly obvious, requirement.
Do you:
Let this go given that it is unlikely that anyone would fail to tighten a bolt during installation?
or
Bring the omission to Elsinore’s attention?
Three years after the routine records inspection, a Mark 7 Fetzer valve installed near the Denmark Civic Center catastrophically fails. The failure results in a large gas leak causing gas to build up in the basement of the Civic Center, eventually building to an explosive gas air mixture which is ignited by a pilot light for one of the Center’s hot water heaters. The building explodes. Everyone attending a peace rally at the Civic Center – including the event’s host, the Dalai Lama – is killed in the explosion.
GO BACK
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As soon as you bring the issue to her attention, Elsinore’s Operations Manager incorporates the manufacturer’s Duncan bolt instructions into the Company’s procedures.
Do you:
Remind her to discuss the issue with others at Elsinore?
or
Require Elsinore to follow‐up by submitting a written plan to the MPUC?
or
Issue a NOPV for failure to follow manufacturer procedures and impose a $200,000 penalty?
GO BACK
The Operations manager discusses the issue with the Elsinore’s operations personnel, however the Company never develops a plan to address potential improperly installed Mark 7 Fetzer valves. Three years later, a Mark 7 Fetzer valve installed near the Denmark Civic Center catastrophically fails. The failure results in a large gas leak causing gas to build up in the basement of the Civic Center, eventually building to an explosive gas air mixture which is ignited by a pilot light for one of the Center’s hot water heaters. The building explodes. Several attendees of the peace rally are killed, and many others – including the event’s host, the Dalai Lama – are injured.
Elsinore grudgingly pays the $200,000 fine and increases its inspections of Fetzer valves, discovering the faulty valve at the Civic Center before catastrophe can strike the Dalai Lama. However, the relationship between Elsinore and the MPUC grows increasingly contentious. Elsinore is unwilling to “self‐report” even the most minor safety issues with its gas system. As a result, many potential safety issues go unreported and are not addressed. As Elsinore’s safety reputation diminishes, fewer customers purchase Elsinore’s services and Elsinore is forced to layoff workers, including safety inspection staff. The downward spiral continues. In addition, other gas operators become more and more trepidatious about engaging with the MPUC Gas Safety Staff.
GO BACK
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Elsinore submits a plan which consists of periodic review of the Company’s procedures to ensure compliance with equipment manufacturer instructions, as well as increased training of its construction employees. Two days after receiving Elsinore’s plan, a Fetzer valve fails during a pressure test of newly installed pipe. The installation occurred directly outside the MPUC office. The failure caused the Fetzer valve to launch thirty feet into the air, and crash through the sunroof of the MPUC Chairman’s 2001 Toyota Corolla.
Do you:
Order Elsinore to repair the valve at the MPUC office?
or
Issue an NOPV with a $10,000 fine for the faulty Fetzer valve?
or
Recommend that the Commission issue a Hazardous Facilities Order, shutting down Elsinore’s gas system until all 500 Fetzer
valves on the system are replaced?
Elsinore dutifully repairs the Fetzer valve in front of the MPUC office. The Company’s commitment to increased training and review of its construction procedures leads to safety improvements, and future construction is much more consistently in compliance with applicable safety standards. However, without a mandate regarding previously installed Fetzer valves, the valve near the Civic Center is missed, the building explodes, and, while no one attending the peace rally is killed, several people are injured, including the Dalai Lama, who is blinded in the explosion.
The MPUC heeds the recommendation of its Gas Safety Staff and issues a Hazardous Facility Order. The Order requires Elsinore to immediately terminate the provision of natural gas, and to purge its gas transmission and distribution system. Elsinore, unable bear the financial burden of the shutdown and repair directive, declares Chapter 7 bankruptcy and liquidates its assets. Elsinore’s customers, including schools, nursing homes, and churches, are left without a heating source, forcing many to convert to propane. Other gas operators, not wanting to suffer a similar fate as Elsinore, mitigate their risk by refusing to add new customers. The price of propane skyrockets given the increased demand. GO BACK
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Elsinore requests an informal conference, as is its right under Chapter 420 of the MPUC Rules, to discuss the conditions for addressing the Fetzer valve issue. GO BACK
GO BACK
During the conference, do you:
Insist that the entire system be shut down until all Fetzer
valves are replaced?
or
Try to develop a plan allowing for further investigation by Elsinore to determine the scope of the problem?
or
Agree to a program of reporting to the MPUC any leaks detected by the Company during routine leak surveys that may be associated with Fetzer valves?
Elsinore, in the course of doing a routine leak survey, discovers a small leak near the Civic Center. Pursuant to the Company’s agreement with the MPUC, Elsinore notifies the Gas Safety Staff, and investigates the leak as being potentially related to a poorly installed Fetzer valve. Elsinore discovers and replaces the faulty valve, thus saving the peace rally participants, and the Dalai Lama, from any inconvenience. However, the routine leak surveys do not bring every potentially problematic valve to the Company’s attention, and two years after the agreement, an explosion occurs at the Denmark Zoo. The explosion occurred at night in an administration building, so no animals or humans were harmed, but a portion of the zoo’s fence was destroyed, allowing the animals to roam free. Some are never recovered.
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Elsinore, frustrated with the intransigence of the Gas Safety Staff, walks out of the informal conference.
GO BACK
GO BACK
Do you:
Recommend that the Commission issue a Hazardous Facilities Order, shutting down Elsinore’s gas system until all 500 Fetzer valves on the system are replaced?
or
Recommend that the Commission open an investigation into the Fetzer Valve issue?
The MPUC heeds the advice of its Gas Safety Staff and opens an investigation. After a full adjudicatory proceeding taking nearly two years to complete, the MPUC and Elsinore reach an arrangement whereby Elsinore will, over time, inspect all 500 of the Company’s Fetzer valves and, if necessary, replace or repair any improperly installed or faulty valves. However, during the course of the proceeding, a faulty Fetzer valve leads to an explosion that destroys the Denmark Mannequin Works. The business never recovers and Maine’s mannequin manufacturing industry suffers a fatal blow.
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GO BACK
GO BACK
Elsinore excavates and inspects ten Fetzer valves. Of the ten valves, Elsinore discovers that three of them were improperly installed. Further, Elsinore discovers that all three of the faulty valves were installed by the same technician, Irwin Fletcher. Irwin was an employee of a contractor hired by Elsinore to do some of the construction of the system, and has since retired to Uruguay.
Do you:
Based on the 30% failure rate of Elsinore’s Fetzer valves, recommend that the MPUC issue a Hazardous Facilities Order, shutting down Elsinore’s system until all 500 valves are replaced?
or
Agree to a program whereby Elsinore replaces every valve installed by Irwin?
or
Attempt to reach an agreement with Elsinore whereby the Company agrees to inspect all of its Fetzer valves, and replaces or repairs any faulty valves?
Elsinore agrees to this approach, and, in relatively short order, replaces all 63 Fetzer valves installed by Irwin. However, the Fetzer valve near the Civic Center was installed by another employee, whose work was not a part of the original ten sampled valves. This valve is never inspected by Elsinore and eventually fails leading to the destruction of the Civic Center, and the injury of several peace rally participants. The Dalai Lama, while uninjured, is so distressed by the failure of regulators in Maine to ensure public safety that he becomes distant and loses his zest for life.
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GO BACK
Elsinore agrees to inspect all 500 of its Fetzer valves. The original NOPV contemplated only the one failed Fetzer
valve; however, the Gas Safety Staff, in recognition of the Company’s willingness to resolve the issue, and the cost to the Company to excavate, inspect, and, if necessary, replace the valves, agrees to no additional penalties or NOPVs related to Fetzer valves. In addition, the Gas Safety Staff and the Company agree to more frequent leak surveys of the Company’s system, and priority replacement of any leaking Fetzer valves. As a result, the Civic Center, Zoo, and Mannequin Works are all spared destruction, Elsinore remains in business, children and the elderly remain warm, and the Dalai Lama, on your deathbed, grants you total consciousness. So you have that going for you. Which is nice.
THE END
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