$15 Million Civil Penalty Assessed for Licensee Failure to Respond to FERC

In an April 15 order, the Federal Energy Regulatory Commission (FERC, or the Commission) imposed a historic $15 million civil penalty on the licensee for the Sanford, Secord, and Smallwood Dams in Michigan for failing to follow FERC orders and staff directives following the catastrophic failure of the Sanford Dam and non-jurisdictional Edenville Dam in May 2020. The dam failures and resultant flooding caused the evacuation of over 10,000 citizens and was estimated by the state of Michigan to have resulted in over $190 million in economic harm in the area. The civil penalty, which may be the largest ever assessed by the Commission under Section 31 of the Federal Power Act, will be subrogated to other claims in the licensee’s ongoing bankruptcy proceeding in order to ensure that imposition of the penalty does not negatively impact any potential financial recovery by victims of the dam failure and flooding.

FERC initially proposed the penalty in a December 9, 2020 order, wherein FERC directed the licensee to show cause why the Commission should not impose a $15 million penalty. According to FERC, the licensee did not contest the majority of the facts and allegations in the proposed penalty order. Instead, the licensee made two legal arguments in opposition to the penalty, both of which the Commission rejected in its April 15 order. First, the licensee argued that it did not have the ability to comply with FERC’s directives due to its inability to pay. The licensee claimed that the bank, which held a security interest in the insurance payout for the dam failures, as well as the bankruptcy court, would have prevented the licensee from expending money to come into compliance with its license. FERC, however, called this “pure speculation,” noting that the licensee did not actually request permission from either the bank or the bankruptcy court to direct funds toward compliance with its license obligations. The Commission went on to point out that inability to pay is not a defense to the obligation to comply with a license and that even if it were, it would be unpersuasive given that the licensee did not even muster a response to many of the FERC staff directives following the dam failure, describing this “real-time failure to address even the existence of its obligations” as “fatal.”

FERC also rejected the licensee’s argument that it was not responsible for completing the work ordered by the Commission because the properties had been condemned by the state of Michigan. The Commission pointed out that even though the condemnations were retroactively dated to June 2020, the licensee owned and controlled the projects until the condemnations were made effective by court orders in late December and thus had every opportunity to address the Commission’s demands. The licensee also argued that condemnation of the projects constituted “constructive abandonment and implied surrender” of the FERC license, but FERC called this claim unpersuasive as well, noting that as of the April 15 order, the licenses are still in place, and the licensee continues to be the FERC license holder.

The civil penalty imposed by FERC in the wake of the Michigan dam failures sends a strong message that the Commission will not tolerate a licensee’s failure to take steps to mitigate and remediate harm immediately after a major dam safety incident. While the licensee’s significant history of noncompliance with its license obligations was taken into consideration consistent with FERC regulations, the amount of the civil penalty was calculated based solely on the licensee’s repeated failure to respond to FERC orders to take specific actions to remediate the damage in the months since the dam failures occurred.

Commissioner Danly penned a short concurrence to the Commission’s order to make two points: (1) to underscore the Commission’s holding that the assessment of civil penalties should not prevent victims of the dam failures and flooding from…