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FERC Staff Finds Some Deficiencies in Proposed Reliability Rules

A preliminary assessment by FERC staff unveiled last Thursday identifies "numerous deficiencies" in proposed mandatory reliability standards submitted by the North American Electric Reliability Council (NERC).

While in many instances, NERC identified the same concerns in a filing made at FERC last month and has proposed a workplan to address them, in other instances, FERC staff has pinpointed potential deficiencies for which there is no proposed workplan in the petition.

Meanwhile, FERC Chairman Joseph Kelliher said at a press briefing at FERC headquarters in Washington, DC, that the "hope would be that we would issue proposed rules to establish reliability standards perhaps in September."

FERC earlier this year issued Order 672, a final rule on the certification of an electric reliability organization (ERO). NERC filed its application to be certified as the ERO in April. At the same time, NERC submitted a petition for Commission approval of 102 proposed reliability standards, which are the subject of the staff's preliminary assessment. The assessment is the product of a months-long review process the Commission initiated late last year.

FERC last week said that comments received on the staff's preliminary assessment will help the Commission frame a notice of proposed rulemaking it expects to issue later this year. The rulemaking will review the standards, which the Commission may approve, approve on an interim or conditional basis, or may remand to the ERO because they fail to meet the statutory requirements.

Undertaking this review process by way of a rulemaking will allow the Commission and staff to freely discuss concerns with Canadian and Mexican regulators, state officials, interested federal agencies, NERC, regional organizations, the industry, customers and other stakeholders, FERC said.

"The release of the staff preliminary assessment marks the next step in the transition from voluntary to mandatory reliability standards," said Rick Sergel, NERC CEO. "We look forward to working with the Commission and its staff, governmental authorities in Canada, and all industry stakeholders to identify the priorities, establish a timetable for putting a solid foundation of mandatory reliability standards in place promptly, and improve those standards over time."

The Commission may approve a proposed reliability standard if it determines the standard is just, reasonable, not unduly discriminatory or preferential, and in the public interest. In considering whether a standard meets the statutory criteria, the Commission must give "due weight" to the technical expertise of the ERO and regional entities organized on an interconnection-wide basis.

The staff's 100 page-plus assessment found that NERC's existing program of voluntary standards represents "a solid foundation on which to maintain and improve the nation's reliability." However, the report cites various "deficiencies" in the current NERC standards and invites comment.

In many instances, the deficiencies cited are among those identified by NERC and are the subject of a work plan NERC has proposed. In other cases, the staff cites deficiencies that are not part of NERC's proposed work plan, FERC noted.

Among the staff's concerns are the following:

Another staff concern noted in the preliminary assessment relates to undue negative impact on competition. The primary purpose of the assessment was to provide a technical reliability analysis of the proposed standards, rather than to identify those that could have an undue negative impact on competition. However, in certain instances, staff identified standards that could raise such concerns, such as the standards that govern the calculation of available transfer capability (ATC). FERC is considering the issues associated with ATC calculation in greater detail in Docket Nos. RM05-17-000 and RM05-25-000.

Kelliher elaborated on this topic at the press briefing. "One area where the Commission has identified there may be a negative impact on competition is in the way ATC is calculated and it's an issue that's come up in the context of OATT [open access transmission tariff] reform."

He said that if "you look at OATT reform, what does a transmission owner have to make available to third parties? It's available transfer capability. It's what isn't required for native load use. But the Commission has found in the course of its OATT reform efforts that there's really tremendous discretion on behalf of the transmission owners in ATC methodology."

When FERC began the OATT reform process, "I thought there were about six different methodologies that transmission owners could use to identify ATC and it turns out there's really more like fifty different methodologies, so there's incredible discretion." This is an issue "we've identified in the OATT reform context, it arises in reliability as well, and there are competitive implications."

But Kelliher doesn't think "there's a Hobson's choice between assuring reliability of the bulk power system and somehow promoting competition. I don't think we have to choose between the two. I think there's a way to set an ATC reliability standard that doesn't harm competition."

Meanwhile, FERC is seeking comment on the deficiencies noted in the preliminary assessment, "whether the standards containing such deficiencies meet the statutory criteria and, if not, the process by which the standards should be reformed," the staff assessment stated.

Order 672 provided guidance on the criteria the Commission will use in determining if proposed standards meet the statutory requirements. The guidance states that the proposed reliability standard must be designed to achieve a specified reliability objective, and be clear and unambiguous regarding what is required and who is required to comply.

For a standard to receive Commission approval, it need not reflect "best practice," but it cannot be a compromise based on the "lowest common denominator," the staff assessment noted. "Ultimately, the Commission believes that it has a responsibility to approve proposed standards that provide a reasonable assurance of bulk power system reliability," the staff assessment added.

Comments on the staff's preliminary assessment are sought by June 26. The Commission also will schedule a technical conference soon to further inform the Commission in framing the proposed rule. NERC must submit a response to the preliminary assessment.

Kelliher said at the press briefing that there are three things that have to be in place "before you really have a regime of sound enforcement of reliability standards. You need the ERO certified, and that should happen by January [2007]." FERC should "act well before January," he elaborated, while NERC has "indicated, from their point of view, they'll be operational in January" as the ERO.

The second item is putting reliability standards into place. "I won't rule out that we will have enforceable reliability standards approved by the Commission by January. I'm not going to promise that, but I wouldn't rule it out. It depends on how right we are when we issue our proposed rule."

The third factor relates to regional reliability entities. "We won't really know the answer to that one until we see them come into the Commission, because some of those delegation agreements may say, 'we intend to be operational on Date X.' They may all come in and say we intend to be operational in January of '07. We just really won't know until we get the individual regional delegation agreements."

The regulations adopted with Order 672 allow regional entities to propose reliability standards through the ERO and allow the ERO to delegate compliance monitoring and enforcement to regional entities. Each proposed reliability standard must be submitted by the ERO to the Commission for its approval. Only reliability standards approved by the Commission are enforceable under the new section 215 of the Federal Power Act.

"Staff agrees with NERC that a tremendous amount of work lies ahead 'to achieve technically excellent reliability standards' for the bulk power system in North America," the staff assessment stated. "In particular, staff is soliciting input from interested persons to help the Commission identify which standards deserve immediate industry attention and solutions, as well as suggestions for an appropriate plan for addressing the immediate and longer term improvements which are necessary."

The staff assessment outlines a goal of strengthening the reliability standards over the next five years to the point where bulk power system reliability is assured.

"One reason we went through this review, this constructive review, is we believe it's important to get reliability standards right from the very beginning," Kelliher said. "We're going through this transition. We're going from a long period of voluntary compliance with reliability standards to a period of enforcement of those reliability standards with some pretty stiff civil penalties associated with violations," the FERC chairman said. "We recognize that that is a difficult task and it will take some time to get all the standards right."

FERC is "also looking a few years down the road. We have a vision in five years, we will have stronger reliability standards than we have on day one. That what we're looking towards is a period of steady improvement in reliability standards over time and we will look to ratchet up those standards over time."

He noted that the preliminary assessment "identifies the need to improve standards in different respects, different categorical needs for improvement. We also recognize the challenge in making a lot of those changes in the next few months. So what we're trying to do is identify reliability standards that are really critical to assuring reliability of the bulk power system -- making sure that those are absolutely right -- and there might be further improvements that could be made to not just assure reliability, but to assure higher levels of reliability in the future."

Some of the improvements that the preliminary assessment identifies "perhaps those are areas where an individual standard might meet the statutory criteria, but it could be even stronger still and, if so, we could approve that standard now, but there's no reason why we wouldn't seek to strengthen it and ratchet it up over time," Kelliher said.

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