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FERC Finalizes Reliability Rulemaking, But Job's Not Done, Commissioners Note

February 6, 2006
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FERC last Thursday finalized landmark new rules on the certification of an electric reliability organization (ERO) and the procedures for the establishment, approval and enforcement of mandatory electric reliability standards. But Commissioners, at a special open meeting, underscored the point that their work is far from over, with consideration of an ERO application waiting in the wings. Over the long haul, FERC will work to ensure that reliability standards are effectively enforced.

FERC Chairman Joseph Kelliher noted that the Energy Policy Act of 2005 (EPAct 2005) gave the Commission "important new responsibilities to ensure that approved mandatory reliability standards are properly enforced. We will also ensure that reliability standards are properly enforced, including, where appropriate, through regional enforcement of such standards. The act allows for delegation of enforcement authority to regional entities that meet certain statutory tests. But, the Commission has ultimate responsibility to enforce reliability standards."

He emphasized "the importance of assuring effective enforcement of reliability standards. There has been a great deal of attention in recent months to working to get the right standards in place. That is half of the job. The other half is to make sure that reliability standards, once approved, are effectively enforced. Inconsistent and inconstant enforcement of even the most robust standards will not assure reliability."

FERC Commissioner Nora Brownell said that "today's rule is a great first step." At the same time, she said that "this is not the end. We will approve standards, but I hope we will continue to raise the bar and continue to improve standards that have more impact on our country, like cyber security, standards we have not yet anticipated."

Brownell went on to say that "we'll need to work on operator training and not do it on a haphazard basis. We'll need to be sure that the ERO is well staffed and well budgeted to achieve the goals that they have, which are enormously important."

Overall, "We've made great progress, but it doesn't stop today, and I hope the sense of urgency that we felt in getting this rule done will be reflected in comments and in the work at the ERO in their application and the regions, as we all rethink how we can do our job better."

FERC Commissioner Suedeen Kelly said that "we can look at Congress' directive that the country establish an electricity reliability organization as a sign, a signal, that the country has changed its perspective on how we view transmission."

She said that "today's issuance of this rule is a statement that the transmission system is different today" than it was more than one hundred years ago. "It is entirely linked together across our continent and we can't tolerate any weak links in the system." Kelly said that "all of us are dependent on the strength of that transmission chain across the country."

The Commission's new regulations spell out the process for certifying a single independent ERO to propose and enforce a new national regime of mandatory reliability standards subject to Commission review and oversight, as Congress mandated in the EPAct 2005.

"The Commission recognizes the critical need for an ERO that is effective in developing and enforcing mandatory reliability standards," FERC said in its final rule. "The Commission believes that, to achieve that goal, it is necessary to have a strong ERO that promotes excellence in the development and enforcement of reliability standards."

However, the rulemaking provides for regional variability and flexibility, Kelliher noted. "We had both continent-wide and regional reliability standards before enactment of the Energy Policy Act. I expect we will continue to have both continent-wide and regional reliability standards after issuance of our final rule," he said.

But Kelliher said that the final rule does not contemplate "retaining regional differences that reflect mere custom and practice, as opposed to real physical differences."

The regulations allow regional entities to propose reliability standards through the ERO and allow the ERO to delegate compliance monitoring and enforcement to regional entities. The delegation agreement is subject to Commission approval and periodic review.

Both the ERO and regional entities will be reviewed periodically to assure the statutory qualifying criteria are maintained on an ongoing basis. This will entail a self-assessment of performance three years after certification and every five years thereafter. Regional entities can recommend performance improvements for the ERO.

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. 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.

The ERO and regional entities must monitor compliance with the reliability standards. They may direct violators to comply with the standards and impose penalties for violations, subject to review by, and appeal to, the Commission. While the ERO is responsible for compliance and enforcement, the statute provides that the Commission can investigate compliance and impose penalties independently of the ERO.

The final rule addresses the ability of the ERO and regional entities to take remedial action other than penalties and requires the ERO and regional entities to have an audit program to ensure compliance. The final rule requires the ERO to promptly notify the Commission of any violation or alleged violation, and to propose penalty guidelines and a range of monetary and non-monetary penalties to be applied for reliability standard violations.

Any investigation of reliability standard violations will be non-public, unless the Commission authorizes a public investigation. However, once a penalty is imposed and the Commission is provided a "notice of penalty," or the matter is resolved through an admission or settlement, the Commission will make the matter public.

The final rule provides for ERO candidates to propose for Commission consideration a formula or method for funding that addresses cost allocation and cost responsibility, as well as a proposed revenue collection mechanism. While the Commission is open to any proposals shown to be fair and reasonable, funding based on net energy for load is one fair, reasonable and uncomplicated method that minimizes the potential for "double counting," the Commission said.

The North American Electric Reliability Council (NERC) plans to apply to FERC to become the ERO and in December posted to its website an initial working draft of an application tied to its plans to be certified as the ERO. The second draft of the ERO application was posted to NERC's website in late January.

The final rule also calls for the ERO to fund regional entities and approve their budgets under general oversight by the Commission. Periodic financial audits will ensure appropriate ERO-approved funding.

Kelliher said that once the rule is final, "our attention will turn to the application for ERO certification. It is critical that the ERO be a strong organization. A strong ERO will be one that maintains its independence, is adequately staffed to perform its important functions, and exercises careful oversight of the actions of regional entities."

He said that regional entities "will perform certain important functions pursuant to delegation agreements, including proposing reliability standards and undertaking enforcement action. However, the ERO must exercise close oversight in these areas to ensure that any proposed standards adequately maintain reliability and do not burden other regions, and that regional enforcement programs are of the highest quality."

Kelliher is "operating under the expectation that it is the Version 0 standards that will be proposed to the Commission for its consideration and review." Those reliability standards were developed by NERC.

"In anticipation of the filing of Version 0 standards, the Commission has been conducting a constructive review of existing reliability standards," Kelliher said. "We have been examining the existing Version 0 standards and the relationship of Version 0 standards to regional standards. We are prepared to begin our review of proposed reliability standards."

Kelliher "will make no promise that the reliability standards ultimately established by the Commission will never be violated. I can promise that, unlike in the past, if established reliability standards are violated, the violator will be subject to significant civil penalties."

In sum, the final regulations establish:

The final reliability rulemaking will take effect 30 days after publication in the Federal Register.

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