Rules Concerning Certification of the Electric Reliability Organization; and Procedures for the Establishment, Approval, and Enforcement of Electric Reliability Standards

Federal RegisterFeb 17, 2006

Ask Donna

What actually matters in this document.

Text

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 39

[Docket No. RM05-30-000; Order No. 672]

Rules Concerning Certification of the Electric Reliability Organization; and Procedures for the Establishment, Approval, and Enforcement of Electric Reliability Standards

Issued February 3, 2006.

AGENCY:

Federal Energy Regulatory Commission, DOE.

ACTION:

Final rule.

SUMMARY:

Pursuant to Subtitle A (Reliability Standards) of the Electricity Modernization Act of 2005, which is Title XII of the Energy Policy Act of 2005 (EPAct) and which added a new section 215 to the Federal Power Act (FPA), the Commission is amending its regulations to incorporate: Criteria that an entity must satisfy to qualify to be the Electric Reliability Organization (ERO) which the Commission will certify as the organization that will propose and enforce Reliability Standards for the Bulk-Power System in the United States, subject to Commission approval; procedures under which the ERO may propose new or modified Reliability Standards for Commission review; a process for timely resolution of any conflict between a Reliability Standard and a Commission-approved tariff or order; a process for resolution of an inconsistency between a state action and a Reliability Standard; regulations pertaining to the funding of the ERO; procedures governing an enforcement action by the ERO, a Regional Entity or the Commission; criteria under which the ERO may enter into an agreement to delegate authority to a Regional Entity for the purpose of proposing Reliability Standards to the ERO and enforcing Reliability Standards; regulations governing the issuance of periodic reliability reports by the ERO that assess the reliability and adequacy of the Bulk-Power System in North America; and procedures for the establishment of Regional Advisory Bodies that may provide advice to the Commission, the ERO or a Regional Entity on matters of governance, applicable Reliability Standards, the reasonableness of proposed fees within a region, and any other responsibilities requested by the Commission.

DATES:

This Final Rule will become effective March 20, 2006.

FOR FURTHER INFORMATION CONTACT:

William Longenecker (Technical Information), Office of Energy Markets and Reliability, Division or Policy Analysis and Rulemaking, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8570.

David Miller (Technical Information), Office of Energy Markets and Reliability, Division of Reliability, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6473.

Jonathan First (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8529.

Christy Walsh (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6523.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Background

III. Procedural Matters

IV. Discussion

A. Overview

B. Section-by-Section Discussion of the Final Rule

1. Definitions—Section 39.1

a. Terms Defined in the Statute

i. Bulk-Power System

ii. Reliable Operation

iii. Reliability Standard

iv. Transmission Organization

b. Additional Terms Commenters Seek To Define in the Final Rule

i. Physical Security Standards

ii. Regional Reliability Standard and Regional Variance

iii. User of the Bulk-Power System

iv. End User

(a) End User as a Retail Customer

(b) End User as a Customer That Uses the Bulk-Power System

2. Jurisdiction and Applicability—Section 39.2

a. Commission Jurisdiction

b. International Regulatory Coordination

3. Electric Reliability Organization Certification—Section 39.3

a. The Oversight Roles of the Commission and the ERO

i. Building on the Existing Reliability Framework

ii. Concerns About an Excessively Rigid Hierarchal Reliability Framework

b. Statutory Certification Criteria

i. Governance

ii. Other Statutory Criteria

c. Opportunity for Public Comment

d. Non-Statutory Criteria

i. Membership

(a) Open Membership

(b) Membership Fees

ii. Additional Non-Statutory Criteria

e. Simultaneous Certification in Canada and Mexico

f. Periodic Performance Assessments

4. Funding of the Electric Reliability Organization—Section 39.4

a. Budget and Business Plan

b. Funding for Statutory Activities

i. General Funding Matters

ii. Funding Apportionment

c. Role of the ERO in Funding the Regional Entities

i. ERO Responsibility for Regional Entity Funding

ii. Commission Oversight of Regional Entity Funding

d. Funding Consistency With the Bilateral Principles

e. Payment of Dues and Funding Transition Plan

f. Billing Mechanics

g. Other Funding Matters

5. Reliability Standards—Section 39.5

a. Reliability Standard Development by the ERO and Regional Entities

i. Reliability Standard Development by the ERO

ii. Due Process in Reliability Standard Development

iii. Regional Uniformity and Variation of a Standard

iv. Rebuttable Presumption for a Reliability Standard Proposed by an Interconnection-Wide Regional Entity

b. Reliability Standard Approval by the Commission

i. Commission Review

(a) Commission Review Process

(b) Legal Standard of Review of a Proposed Reliability Standard

ii. Due Weight to Technical Expertise of the ERO and a Regional Entity Organized on an Interconnection-Wide Basis

iii. Due Weight to the Technical Expertise of a Regional Entity Not Organized on an Interconnection-Wide Basis

iv. No Deference on Competition

(a) Linkage Between Reliability and Competition

(b) Definitions of Competition

c. Effective Date

d. Remand of a Proposed Reliability Standard

i. Remand

ii. International Coordination of Remands

iii. Deadline for Submitting a Revised Proposal for a Reliability Standard in Response to a Remand

e. Commission-Initiated Actions on a Reliability Standard

i. Commission Directive That the ERO Address a Specific Issue

ii. Review of an Approved Reliability Standard

iii. Commission Authority To Void a Reliability Standard

6. Conflict of a Reliability Standard With a Commission Order—Section 39.6

7. Enforcement of Reliability Standards—Section 39.7

a. General Comments on Enforcement

b. Compliance

i. Enforcement Audits of Compliance With Reliability Standards

ii. Reliability-Related Programs

iii. Remedial Action

c. Assessing a Penalty for a Violation

i. Procedures for Investigations and Penalty Assessments

ii. Due Process

iii. Notice

iv. Effective Date of Penalty and Commission Review of Penalties

(a) Effective Date and General Commission Review

(b) Automatic Commission Review of Certain Penalties

v. Answer to an Application for Review

d. Nonpublic Matters and CyberSecurity Procedures

i. Stage at Which an Investigation or Penalty Should Be Made Public

ii. Nonpublic Treatment of Certain Types of Proceedings

e. Commission-Ordered Compliance and Penalties

f. Penalties' Relation to the Seriousness of the Violation

i. Penalty Guidelines

ii. Non-Monetary Penalties

iii. Limits on Monetary Penalties

g. Reporting Violations and Alleged Violations

i. Procedures for Reporting Violations and Alleged Violations

ii. Confidentiality of Reports

h. Other Enforcement Issues

i. ERO and Regional Entity Appeals Processes

ii. Receipt and Use of Penalty Money

iii. RTO/ISO-Related Enforcement Issues

8. Delegation to a Regional Entity—Section 39.8

a. The Role of a Regional Entity and Its Relationship to the ERO

i. Authority Delegated to a Regional Entity

ii. Other Regional Entity Activities

b. Process and Criteria for Becoming a Regional Entity

c. Review of a Regional Entity Applicant

i. Review of a Regional Entity Organized on an Interconnection-Wide Basis

ii. Review of a Regional Entity Not Organized on an Interconnection-Wide Basis

d. Eligibility of an RTO or ISO To Become a Regional Entity

e. Delegation Agreements

f. Regional Entity Governance

g. Notice Requirement for Submission of Delegation Agreements

h. Uniform Processes Among Regional Entities

i. Commission Assignment of Enforcement Authority Directly to a Regional Entity

j. Performance Assessment of Regional Entities

9. Enforcement of Commission Rules and Orders—Section 39.9

a. Action Against the ERO or a Regional Entity

b. Audits of ERO and Regional Entity Criteria

c. Monetary Penalties

d. Penalizing an ERO or a Regional Entity Board Member

10. Changes in Electric Reliability Organization Rules and Regional Entity Rules—Section 39.10

11. Reliability Reports—Section 39.11

12. Inconsistency of a State Action and a Reliability Standard—Section 39.12

a. General Balance of Authority

b. Review of Allegedly Inconsistent State Actions

c. Concerns of Specific States

13. Regional Advisory Bodies—Section 39.13

V. Information Collection Statement

VI. Environmental Analysis

VII. Regulatory Flexibility Act Certification

VIII. Document Availability

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead Brownell, and Suedeen G. Kelly.

I. Introduction

1. Pursuant to Subtitle A (Reliability Standards) of the Electricity Modernization Act of 2005, which is Title XII of the Energy Policy Act of 2005 (EPAct)

and which added a new section 215 to the Federal Power Act (FPA), the Commission is amending its regulations to incorporate:

Pub. L. 109-58, Title XII, Subtitle A, 119 Stat. 594, 941 to be codified at 16 U.S.C. 824o (2000).

(1) Criteria that an entity must satisfy to qualify to be the Electric Reliability Organization (ERO), which the Commission will certify as the organization that will propose and enforce Reliability Standards for the Bulk-Power System

in the United States, subject to Commission approval;

Capitalized terms used in this Final Rule have the meanings specified in section IV.B.1 of the Preamble.

(2) Procedures under which the ERO may propose new or modified Reliability Standards for Commission review;

(3) A process for timely resolution of any conflict between a Reliability Standard and a Commission-approved tariff or order;

(4) A process for resolution of an inconsistency between a state action and a Reliability Standard;

(5) Regulations pertaining to the funding of the ERO;

(6) Procedures governing an enforcement action by the ERO, Regional Entity or the Commission;

(7) Criteria under which the ERO may enter into an agreement to delegate authority to a Regional Entity for the purpose of proposing Reliability Standards to the ERO and enforcing Reliability Standards;

(8) Regulations governing the issuance of periodic reliability reports by the ERO that assess the reliability and adequacy of the Bulk-Power System in North America; and

(9) Procedures for the establishment of Regional Advisory Bodies that may provide advice to the Commission, the ERO or a Regional Entity on matters of governance, applicable Reliability Standards, the reasonableness of proposed fees within a region, and any other responsibilities requested by the Commission.

2. The Commission believes incorporating this reliability rule into the Commission's regulations pursuant to the direction of Congress is an important step toward ensuring more reliable and secure electric utility service.

II. Background

3. On August 8, 2005, EPAct was enacted into law by President Bush. New section 215 of the FPA provides for a system of mandatory, enforceable Reliability Standards. Reliability Standards are to be developed by the ERO, subject to Commission review and approval. An approved Reliability Standard may be enforced by the ERO, subject to the Commission's review, or the Commission may initiate an investigation or imposition of a penalty. Below, we summarize the provisions of Subtitle A of the EPAct:

4. Section 215(a) (Definitions) defines relevant terms used in the Act.

5. Section 215(b) (Jurisdiction and Applicability) provides that, for purposes of approving Reliability Standards and enforcing compliance with such standards, the Commission shall have jurisdiction over the certified ERO, any Regional Entities, and all users, owners and operators of the Bulk-Power System, including but not limited to the public and governmental entities described in section 201(f) of the FPA.

Section 215(b)(2) requires the Commission to issue a Final Rule to implement the requirements of section 215 of the FPA no later than 180 days after the date of enactment.

Section 201(f) of the FPA, 16 U.S.C. 824(f), provides that “[n]o provision in this Part shall apply to, or be deemed to include, the United States, a state or any political subdivision of a State, an electric cooperative that receives financing under the Rural Electrification Act of 1936 (7 U.S.C. 901

et seq

.) or that sells less than 4,000,000 megawatt hours of electricity per year, or any agency, authority, or instrumentality of any one or more of the foregoing, or any corporation which is wholly owned, directly or indirectly, by any one or more of the foregoing, or any officer, agent, employee of any of the foregoing acting as such in the course of his official duty, unless such provision makes specific reference thereto.”

6. Section 215(c) (Certification) authorizes the Commission to certify a person as an ERO, provided that the applicant meets specified criteria.

7. Section 215(d) (Reliability Standards) provides the process for the ERO to propose a Reliability Standard, subject to Commission review and approval. This subsection also directs the Commission to adopt rules to establish a fair process for the

identification and timely resolution of any conflict between a Reliability Standard and any function, rule, order, tariff, rate schedule, or agreement accepted, approved, or ordered by the Commission applicable to a Transmission Organization.

8. Section 215(e) (Enforcement) authorizes the ERO, after notice and opportunity for hearing, to impose a penalty for a violation of a Reliability Standard, subject to review by the Commission. This section also provides for enforcement initiated by the Commission on its own motion. Section 215(e)(4) requires that the Commission issue regulations under which the ERO will be authorized to enter into an agreement to delegate authority to a qualified Regional Entity for the purpose of proposing Reliability Standards to the ERO and enforcing them. Further, subsection 215(e)(6) requires that any penalty imposed shall bear a reasonable relation to the seriousness of the violation and take into consideration timely remedial efforts.

9. Section 215(f) (Changes in Electric Reliability Organization Rules) requires Commission approval of any proposed ERO Rule or proposed Rule change.

10. Section 215(g) (Reliability Reports) requires that the ERO conduct periodic assessments of the reliability and adequacy of the North American Bulk-Power System.

11. Section 215(h) (Coordination With Canada and Mexico) urges the President to negotiate international agreements with the governments of Canada and Mexico to provide for effective compliance with Reliability Standards and the effectiveness of the ERO in the United States and Canada or Mexico.

12. Section 215(i) (Savings Provisions) states that the ERO shall have authority to develop and enforce compliance with Reliability Standards for only the Bulk-Power System and provides that section 215 of the FPA shall not be construed to preempt any authority of any state to take action to ensure the safety, adequacy, and reliability of electric service within that state, as long as such action is not inconsistent with any Reliability Standard. Section 215 also contains a provision relating specifically to reliability rules established by the State of New York.

13. Section 215(j) (Regional Advisory Bodies) requires the Commission to establish a Regional Advisory Body upon petition of at least two-thirds of the states within a region that have more than one-half of their electric load served within the region. A Regional Advisory Body may provide advice to the ERO, a Regional Entity or the Commission.

14. Section 215(k) (Application to Alaska and Hawaii) provides that section 215 of the FPA does not apply to Alaska or Hawaii.

15. The statute directs the Commission to issue a Final Rule to implement the requirements of section 215 no later than 180 days after enactment, or by February 5, 2006. On September 1, 2005 the Commission issued a Notice of Proposed Rulemaking (NOPR) that proposed regulations regarding certification of the ERO, development of Reliability Standards, enforcement of Reliability Standards, ERO delegation of authority to Regional Entities, ERO funding and other matters necessary to implement the statute.

Additional background information is provided in the NOPR, discussing the Commission's reliability-related activities and the development of voluntary reliability guidelines.

Rules Concerning Certification of the Electric Reliability Organization; and Procedures for the Establishment, Approval, and Enforcement of Electric Reliability Standards,

70 FR 53,117 (Sept. 7, 2005), FERC Stats. & Regs., Proposed Regulations ¶ 32,587 (Sept. 1, 2005).

III. Procedural Matters

16. The statute directs the Commission to issue a Final Rule to implement the requirements of section 215 of the FPA no later than 180 days after enactment, or by February 5, 2006. The Commission issued the NOPR on September 1, 2005. It required that comments be filed by October 7, 2005 to assist the Commission in meeting the statutory 180-day deadline. Several parties submitted late-filed comments. The Commission will accept these late-filed comments. A list of commenters appears in Appendix A.

17. Although the Commission did not request reply comments because of the relatively short statutory time frame for issuing a Final Rule, several commenters nonetheless submitted reply comments. The Commission will reject such reply comments. The Commission did not solicit reply comments and, therefore, accepting such comments from those who chose to submit them would be unfair to others.

18. The Commission held two technical conferences on this rulemaking. The first technical conference was held on November 19, 2005. Comments on the first technical conference were due by December 8, 2005. The technical conference was transcribed and is a part of the record in this docket.

19. The second technical conference was held on December 9, 2005. Comments on the second technical conference were due by December 23, 2005. The technical conference was transcribed and is a part of the record in this docket. A list of commenters for both technical conferences is in Appendix B.

IV. Discussion

A. Overview

20. On August 8, 2005, EPAct was enacted into law. New section 215 of the FPA provides for a system of mandatory, enforceable Reliability Standards. Under the new electric power reliability system enacted by the Congress, the United States will no longer rely on voluntary compliance by participants in the electric industry with industry reliability requirements for operating and planning the Bulk-Power System. Congress directed the development of mandatory, Commission-approved, enforceable electricity Reliability Standards.

21. The Commission will certify a single Electric Reliability Organization, the ERO, to oversee the reliability of the United States' portion of the interconnected North American Bulk-Power System, subject to Commission oversight. It will be responsible for developing and enforcing the mandatory Reliability Standards. The Reliability Standards will apply to all users, owners and operators of the Bulk-Power System. The Commission has the authority to approve all ERO actions, to order the ERO to carry out its responsibilities under these new statutory provisions, and also may independently enforce Reliability Standards.

22. The ERO must submit each proposed Reliability Standard to the Commission for approval. Only a Reliability Standard approved by the Commission is enforceable under section 215 of the FPA.

23. The ERO may delegate its enforcement responsibilities to a Regional Entity. Delegation is effective only after the Commission approves the delegation agreement. A Regional Entity may also propose a Reliability Standard to the ERO for submission to the Commission for approval. This Reliability Standard may be either for application to the entire interconnected Bulk-Power System or for application only within its own region.

24. The ERO or a Regional Entity must monitor compliance with the Reliability Standards. It may direct a user, owner or operator of the Bulk-Power System that violates a Reliability Standard to comply with the Reliability Standard. The ERO or Regional Entity may impose a penalty on a user, owner or operator for violating a Reliability Standard,

subject to review by, and appeal to, the Commission.

25. On September 1, 2005 the Commission issued a NOPR that proposed regulations regarding certification of the ERO, development of Reliability Standards, enforcement of Reliability Standards, delegation of authority to Regional Entities, ERO funding and other matters necessary to implement the statute.

26. Based on careful consideration of the comments submitted in response to the NOPR, the Commission adopts a Final Rule that generally follows the approach of the NOPR. We note that numerous commenters express support for the NOPR and believe that the proposed regulations establish the framework for an effective ERO, as intended by Congress.

See, e.g.,

Ameren, CEOB, Exelon, FRCC, NASUCA, NERC, NiSource and TAPS.

27. The Final Rule is generally limited to developing and implementing the processes and procedures that section 215 of the FPA directs the Commission to develop and undertake with regard to the formation and functions of the ERO and Regional Entities. Section 215(b) obligates all users, owners and operators of the Bulk-Power System to comply with Reliability Standards that become effective pursuant to the process set forth in the statute. The Commission recognizes the critical need for an ERO that is effective in developing and enforcing mandatory Reliability Standards.

28. The Commission believes that, to achieve this goal, it is necessary to have a strong ERO that promotes excellence in the development and enforcement of Reliability Standards. Accordingly, various provisions of the Final Rule are intended to set out the ERO's role and responsibilities with respect to the users, owners and operators of the Bulk-Power System. The Final Rule requires periodic review of the ERO and Regional Entities to ensure that the statutory qualifying criteria are maintained on an ongoing basis.

29. A mandatory Reliability Standard should not reflect the “lowest common denominator” in order to achieve a consensus among participants in the ERO's Reliability Standard development process. Thus, the Commission will carefully review each Reliability Standard submitted and, where appropriate, remand an inadequate Reliability Standard to ensure that it protects reliability, has no undue adverse effect on competition, and can be enforced in a clear and even-handed manner. Further, the Final Rule allows the Commission to set a deadline for the ERO to submit a proposed Reliability Standard to the Commission to ensure that the ERO will revise in a timely manner a proposed Reliability Standard that is not acceptable to the Commission. These provisions, as well, will strengthen the ERO and Regional Entities by providing mechanisms to achieve effective and fair Reliability Standards.

30. The major provisions of the Final Rule are as follows.

1. ERO Certification

31. The Final Rule provides that the Commission will, after notice and opportunity for comment, certify one applicant as the ERO. The Final Rule sets forth the criteria that an ERO applicant must satisfy to qualify as the ERO, including the ability to develop and enforce Reliability Standards.

The criteria stated in the Final Rule track the statutory criteria for ERO certification provided in section 215(c) of the FPA.

32. To ensure that the ERO complies with the certification criteria on an ongoing basis, the Final Rule requires the ERO to undergo a performance assessment three years after certification and every five years thereafter. The ERO must file a self-assessment with the Commission explaining how it satisfies the ERO requirements. Regional Entities, users, owners and operators of the Bulk-Power System, and other interested entities will have an opportunity to make recommendations for the improvement of the ERO. After receipt of the performance assessment, the Commission will establish a proceeding in which it will assess the performance of the ERO. The Commission will also allow opportunity for public comment. As a result of the performance assessment, the Commission will issue an order finding that the ERO meets the statutory and regulatory criteria or directing the ERO to comply or improve compliance with the statutory and regulatory criteria for the ERO. Subsequently, if the ERO fails to comply adequately with the Commission order, the Commission may institute a proceeding to enforce its order, including, if necessary and appropriate, a proceeding to consider decertification of the ERO.

33. The ERO submission must include an evaluation of the effectiveness of each Regional Entity. The Commission will, as part of its proceeding to assess the ERO's performance, assess the performance of each Regional Entity and issue an order addressing Regional Entity compliance. If a Regional Entity fails to comply adequately with the Commission order, the Commission may institute a proceeding to enforce its order, including, if necessary and appropriate, a proceeding to consider rescission of the Commission's approval of the Regional Entity's delegation agreement.

2. ERO and Regional Entity Funding

34. Section 215 of the FPA generally provides for Commission authorization of funding for statutory functions, such as the development of Reliability Standards and their enforcement, and monitoring the reliability of the Bulk-Power System. The Final Rule clarifies, however, that while the ERO or a Regional Entity is not necessarily precluded from pursuing other activities, it may not use Commission-authorized funding for such activities.

35. The Final Rule directs ERO candidates to propose a formula or method of funding addressing cost allocation and cost responsibility, along with a proposed mechanism for revenue collection for Commission consideration. The Final Rule finds that funding based on net energy for load is one fair, reasonable and uncomplicated method that minimizes the possibility of “double-counting.”

However, the Commission does not rule out other apportionment methods that can be shown to be just and reasonable.

Net Energy for Load means balancing authority area generation (less station use), plus energy received from other balancing authority areas, less energy delivered to balancing authority areas through interchange. It includes balancing authority area losses, but excludes energy required for storage at electric energy storage facilities, such as pumped storage.

36. As the primary entity responsible for the development and enforcement of Reliability Standards, the ERO should fund the Regional Entities as well as approve their budgets, under the Commission's general oversight. The Final Rule requires periodic financial audits to ensure that any ERO-approved funding is appropriately expended for delegated functions. It addresses concerns that a significant amount of the ERO's or a Regional Entity's total revenue from an alternative source could compromise the mission or independence of the ERO or a Regional Entity.

37. The Final Rule provides that the ERO should include line item budgets for the activities that it delegates to each Regional Entity. The Final Rule permits the ERO to request emergency funding on a demonstration of unforeseen and extraordinary circumstances. It also clarifies that Commission review and approval of ERO and Cross-Border Regional Entity funding mechanisms

will be limited to their application in the United States.

3. Reliability Standards

38. The Final Rule implements the new FPA provisions relating to mandatory and enforceable Reliability Standards to be developed by the ERO. It establishes the ERO as the only entity that can submit a proposed Reliability Standard to the Commission for approval.

39. The Final Rule determines that the ERO's Reliability Standard development process must provide for reasonable notice and opportunity for public comment, due process, openness and balance of interests. The Commission observes that an American National Standards Institute (ANSI)-accredited process is one reasonable means of satisfying these requirements.

40. The Commission may approve a proposed Reliability Standard (or modification to a Reliability Standard) if it determines that it is just, reasonable, not unduly discriminatory or preferential, and in the public interest. In its review, the Commission will give due weight to the technical expertise of the ERO or a Regional Entity organized on an Interconnection-wide basis with respect to a proposed Reliability Standard to be applicable within that Interconnection. However, the Commission will not defer to the ERO or a Regional Entity with respect to a Reliability Standard's effect on competition.

41. The Commission seeks as much uniformity as possible in the proposed Reliability Standards across the interconnected Bulk-Power System of the North American continent. The Final Rule permits a regional difference in a Reliability Standard, in particular for a regional difference that is more stringent than a continent-wide Reliability Standard, including a regional difference that addresses matters that the continent-wide Reliability Standard does not, and a regional difference necessitated by a physical difference in the Bulk-Power System. The Commission would generally find acceptable a proposed regional difference that satisfies the statutory and regulatory criteria for approval of a proposed Reliability Standard and that is more stringent than a continent-wide Reliability Standard.

The Commission notes that the Bulk-Power System includes interconnected portions of the United States, Canada and Mexico. However, this Final Rule only applies to that portion of the Bulk-Power System within the United States (excluding Alaska and Hawaii).

42. The statute requires the ERO to apply a rebuttable presumption to a proposal for a Reliability Standard from an Interconnection-wide Regional Entity to be applicable within its Interconnection. The Final Rule clarifies that this rebuttable presumption refers to the burden of proof. Thus, if the ERO does not find that the presumption for a proposed Reliability Standard is adequately rebutted, it must accept it as just, reasonable, not unduly discriminatory or preferential, and in the public interest, and submit it to the Commission for approval.

43. Section 215(d)(6) of the FPA requires the Commission's Final Rule to include “fair processes for the identification and timely resolution of any conflict between a Reliability Standard and any function, rule, order, tariff, rate schedule, or agreement accepted, approved, or ordered by the Commission applicable to a transmission organization.” Accordingly, the Final Rule provides a process for a user, owner or operator to notify the Commission of such possible conflicts for timely resolution by the Commission.

44. Further, the Commission interprets section 215 as generally permitting a state to take action, as long as such action is not inconsistent with a Reliability Standard. The Commission will consider the recommendation of a relevant state as well as the ERO and will require that a petition for determination of inconsistency be served on a relevant state agency.

4. Enforcement of Reliability Standards

45. The ERO is responsible under section 215(e) of the FPA for ensuring that all users, owners and operators of the Bulk-Power System comply with Reliability Standards. In addition, the statute provides that the Commission can, independent of the ERO, investigate compliance with a Reliability Standard and impose a penalty for a violation. The ERO may delegate its enforcement responsibilities to a Regional Entity. The Final Rule sets forth various elements of the enforcement process, including (1) the ERO and each Regional Entity is expected to have a compliance program that includes proactive enforcement audits to determine if users, owners and operators are complying with Reliability Standards; (2) the ERO and the appropriate Regional Entity will conduct investigations of alleged violations of Reliability Standards, and the ERO must inform the Commission promptly of these investigations and their disposition; and (3) the ERO or a Regional Entity may assess a penalty (non-monetary or monetary), subject to Commission review.

46. The Final Rule requires the ERO to develop an enforcement audit program. In addition, any Regional Entity that receives a delegation of enforcement function also should have an audit program. The Final Rule explains that there should be a single audit program applicable to both the ERO and Regional Entities unless there is a compelling reason for a difference between the ERO and a particular Regional Entity.

47. The Final Rule implements the enforcement provisions of section 215(e) of the FPA, which authorize the ERO to impose a penalty for a violation of a Reliability Standard, subject to Commission review. The enforcement provisions in section 39.7 of the Final Rule allow the ERO or a Regional Entity with delegated enforcement authority to impose a penalty on a user, owner or operator of the Bulk-Power System for a violation of a Reliability Standard. The ERO will retain oversight responsibility for enforcement authority that is delegated to a Regional Entity. To ensure consistency in the implementation of delegated enforcement authority, a Regional Entity must report periodically to the ERO on how it carries out its delegated enforcement authority. The Final Rule makes clear that the ERO and Regional Entities must establish uniform Rules that provide adequate due process to an alleged violator when the ERO or Regional Entity is determining whether to assess a penalty. The Final Rule concludes that, to provide adequate due process yet prevent duplicative and unnecessary expenses, there should be a single opportunity for internal appeal within the ERO or Regional Entity. Further, the Final Rule establishes expedited procedures for Commission review of a penalty, as required by EPAct.

48. The Final Rule discusses the ERO's and a Regional Entity's ability to take remedial action separate from its penalty authority. For example, the ERO or a Regional Entity may direct a user, owner or operator to come into compliance with a Reliability Standard.

49. The Final Rule requires the ERO to notify the Commission promptly of a self-reported violation or an investigation into a violation or alleged violation and its eventual disposition. This will allow the Commission to receive timely information on a violation or alleged violation of a Reliability Standard and determine whether Commission action is appropriate. The Final Rule requires the ERO to develop, and submit to the Commission for approval, penalty guidelines that identify a range of non-

monetary and monetary penalties to be applied by the ERO for determining the appropriate penalty for violation of a Reliability Standard. Regional Entities should adopt the ERO's penalty guidelines with change only as necessary to reflect regional differences in Reliability Standards.

50. The Final Rule finds that an investigation conducted by the ERO, a Regional Entity, or the Commission of a violation or an alleged violation of a Reliability Standard will be nonpublic unless the Commission authorizes a public investigation. However, once the ERO or a Regional Entity imposes a penalty and files the statutorily-required “notice of penalty” with the Commission, the Commission will publicly disclose the penalty. The Final Rule includes an exception to this public disclosure with respect to Cybersecurity Incidents and other matters that would jeopardize system security.

5. Delegation to a Regional Entity

51. Consistent with the statute, the Final Rule establishes criteria for the ERO to delegate authority to a Regional Entity to enforce Reliability Standards and to propose Reliability Standards to the ERO. It sets out the role of a Regional Entity in relationship to the ERO, concluding that the ERO holds the primary responsibility for enforcement of Reliability Standards and that any delegation of this responsibility to a Regional Entity is subject to ERO oversight.

52. The Commission explains the process and criteria for becoming a Regional Entity. The Final Rule relies on statutory criteria for evaluating a Regional Entity applicant. Each application will be evaluated on a case-by-case basis. The Final Rule establishes a rebuttable presumption afforded to a proposal for delegation to a Regional Entity organized on an Interconnection-wide basis. This rebuttable presumption is that such a proposed Regional Entity promotes the effective and efficient administration of Bulk-Power System reliability. The Final Rule adopts a periodic Regional Entity performance assessment process administered primarily by the ERO.

53. The Final Rule addresses the subject of uniformity among delegation agreements. It emphasizes the value of uniformity and requires the ERO applicant to submit a

pro forma

delegation agreement concurrently with its ERO application. The Final Rule allows a prospective Regional Entity to submit a delegation agreement directly to the Commission if good faith negotiations with the ERO fail. The Commission strongly urges a prospective Regional Entity to consider the use of alternative dispute resolution (ADR) to resolve any disputes over the terms of the delegation agreement. The Final Rule requires a prospective Regional Entity that submits a delegation agreement directly to the Commission to state whether ADR procedures were used and whether the Regional Entity believes that ADR under the Commission's supervision could successfully resolve the disputes regarding the terms of the delegation agreement. The Commission may, if appropriate, upon review, direct the ERO to enter into the delegation agreement with the Regional Entity.

54. The Final Rule clarifies that a Regional Entity should not directly submit a Regional Entity Rule or change to a Regional Entity Rule to the Commission because this is consistent with the role of the ERO overseeing the Regional Entities, as discussed below. The Final Rule directs the ERO to develop procedures and criteria by which a Regional Entity Rule or change to Regional Entity Rule will be judged by the ERO, and then be submitted to the Commission for approval.

55. The Final Rule provides for the establishment of Regional Advisory Bodies. It observes that it would generally be desirable to have a Regional Entity and a Regional Advisory Body cover the same region but does not require a Regional Advisory Body and a Regional Entity to have a common boundary. The Final Rule finds that section 215 of the FPA permits a Regional Advisory Body to form even if there is not yet a Regional Entity in a region, in part so that a Regional Advisory Body may advise the Commission and the ERO regarding the governance of a proposed Regional Entity.

6. Enforcement of Commission Rules and Orders

56. The Commission generally expects to work cooperatively with the ERO and Regional Entities to resolve issues that may arise. Nonetheless, the Final Rule clarifies the Commission's authority to take action against the ERO or a Regional Entity for non-compliance with section 215 of the FPA. The Final Rule provides that the Commission may take such action as is necessary and appropriate against the ERO or a Regional Entity to ensure compliance with a Reliability Standard or any Commission order affecting the ERO or a Regional Entity. The Commission may suspend or rescind the ERO's certification or a Regional Entity's delegated authority.

57. The Final Rule establishes the policy that, in general, the Commission oversees the ERO and the ERO oversees any approved Regional Entity. Consistent with this approach, the Final Rule provides that the Commission may periodically conduct a compliance audit to examine the ERO's compliance with the statutory and regulatory criteria for becoming the ERO and performance in enforcing Reliability Standards. The ERO must periodically audit each Regional Entity's compliance with relevant statutory and regulatory criteria for becoming a Regional Entity and performance in enforcing Reliability Standards and report the results to the Commission.

58. Although we would expect to use this provision only in extraordinary circumstances, the Final Rule allows the Commission to impose civil penalties on the ERO or a Regional Entity. The Final Rule does not provide for the assessment of a monetary penalty against a board member of the ERO or a Regional Entity.

59. The Final Rule is organized into 13 sections:

Section 39.1—Definitions,

Section 39.2—Jurisdiction and applicability,

Section 39.3—Electric Reliability Organization certification,

Section 39.4—Funding of the Electric Reliability Organization,

Section 39.5—Reliability Standards,

Section 39.6—Conflict of a Reliability Standard with a Commission order,

Section 39.7—Enforcement of Reliability Standards,

Section 39.8—Delegation to a Regional Entity,

Section 39.9—Enforcement of Commission rules and orders,

Section 39.10—Changes in Electric Reliability Organization Rules and Regional Entity Rules,

Section 39.11—Reliability reports,

Section 39.12—Review of state action, and

Section 39.13—Regional Advisory Bodies

B. Section-by-Section Discussion of the Final Rule

60. Below, the Commission discusses the regulations proposed in the NOPR, the comments received, and the Commission's conclusion. We note that, while the NOPR indicated that the rules would be set forth in Title 18, part 38 of the Code of Federal Regulations (CFR), the Final Rule codifies the rules in Title 18, part 39 of the CFR. To provide consistency and clarity in the discussion of proposed rules, comments and Commission conclusions, the Final Rule refers to part 39 or, when referring

to a particular section within part 39, section 39, throughout the discussion.

1. Definitions—Section 39.1

61. This section of the NOPR defined the relevant terms used in part 39 of the Commission's regulations, including the terms that are defined in the statute to provide a consistent meaning throughout the proposed rule. Comments relating to the proposed definitions are discussed below.

a. Terms Defined in the Statute

i. Bulk-Power System

62. The NOPR defined the term “Bulk-Power System” as set forth in section 215(a)(1) of the FPA:

Bulk-Power System

means facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof), and electric energy from generating facilities needed to maintain transmission system reliability. The term does not include facilities used in the local distribution of electric energy.

63. Several commenters seek clarification to narrow the interpretation of the term “Bulk-Power System.” National Grid asserts that the definition of “Bulk-Power System” is ambiguous as to whether it encompasses generation facilities and precisely which facilities are covered. National Grid recommends that the Commission clarify the term by adopting a functional interpretation rather than an arbitrary test based on a single attribute, such as voltage or facility capacity to identify facilities included as part of the Bulk-Power System. Hydro-Québec submits that the definition of “Bulk-Power System” should be interpreted narrowly, that is, jurisdiction on generating facilities should be strictly limited to that needed to maintain transmission system reliability, as ascertained by the ERO or the Regional Entity. NiSource, submits that the definition should exclude generating facilities and include the electric energy from those facilities only to the extent needed to maintain transmission system reliability. SoCalEd asserts that the Commission should include generators that receive transmission service pursuant to a wholesale distribution access tariff in its jurisdiction.

ii. Reliable Operation

64. The NOPR defined the term “Reliable Operation” as set forth in section 215(a)(4) of the FPA:

Reliable Operation

means operating the elements of the Bulk-Power System within equipment and electric system thermal, voltage, and stability limits so that instability, uncontrolled separation, or cascading failures of such system will not occur as a result of sudden disturbance, including a Cybersecurity Incident, or unanticipated failure of system elements.

65. Kansas City P&L is concerned that including the phrase “unanticipated failure of system elements” in the definition of “Reliable Operation” makes it too vague for development of efficient and workable Reliability Standards related to reliability planning criteria. It recommends that the Commission either delete the phrase or explain the meaning of the phrase.

iii. Reliability Standard

66. The NOPR defined the term “Reliability Standard” as set forth in section 215(a)(3) of the FPA:

Reliability Standard

means a requirement, approved by the Commission under the instant proposed regulation, to provide for Reliable Operation of the Bulk-Power System. The term includes requirements for the operation of existing Bulk-Power System facilities, including cybersecurity protection, and the design of planned additions or modifications to such facilities to the extent necessary to provide for Reliable Operation of the Bulk-Power System. The term does not include any requirement to enlarge such facilities or to construct new transmission capacity or generation capacity.

67. The Oklahoma Commission finds this definition reasonable because it does not encompass any requirement to enlarge or construct new transmission or generation capacity; however, it seeks clarification that a Commission-approved Reliability Standard will apply equally to both existing facilities and new facilities added in the future.

iv. Transmission Organization

68. The NOPR defined the term “Transmission Organization” as set forth in section 215(a)(6) of the FPA:

Transmission Organization

means a Regional Transmission Organization, Independent System Operator, independent transmission provider, or other Transmission Organization finally approved by the Commission for the operation of transmission facilities.

69. South Carolina E&G asks the Commission to clarify that the definition of “Transmission Organization” includes a non-independent Transmission Provider that maintains separation of functions pursuant to Standards of Conduct Order No. 2004.

Standards of Conduct for Transmission Providers,

Order No. 2004, FERC Stats. & Regs., Regulations Preambles ¶31,155 (2003),

order on reh'g.

Order No. 2004-A, III FERC Stats. & Regs. ¶31,161 (2004),

order on reh'g,

Order No. 2004-B, III FERC Stats & Regs. ¶31,166 (2004).

Commission Conclusion

70. We adopt the NOPR's definition of “Bulk-Power System,” “Reliable Operation,” “Reliability Standard,” and “Transmission Organization” because the definition of these terms originates in section 215 of the FPA.

However, we offer the following clarifications.

16 U.S.C. 824o(a) (2000).

71. With regard to generators, Congress included in the definition of Bulk-Power System “electric energy from generation facilities needed to maintain transmission system reliability.” If electric energy from a generating facility is needed to maintain a reliable transmission system, that facility is part of the Bulk-Power System with respect to the energy it generates that is needed to maintain reliability. We conclude that the precise scope of generators as facilities to which the Reliability Standards apply would be best considered in the context of our review of those Standards, taking into account the views of the ERO and others. Therefore, until we have proposed Reliability Standards before us, we will reserve further judgment on whether additional guidance on generators' status as Bulk-Power System facilities is appropriate or whether the decision of which generators are Bulk-Power System facilities should be made on a case-by-case basis.

72. With regard to the term “Reliable Operation,” we decline to generically interpret the meaning of the phrase “unanticipated failure of system elements” in advance of submission of proposed Reliability Standards requiring interpretation of the phrase or other specific instances where the issue and all of the relevant facts are presented to allow the Commission to make a proper determination.

73. With regard to the term “Reliability Standard,” we clarify that a Reliability Standard will equally apply to the existing Bulk-Power System and any future additions to the Bulk-Power System unless the Reliability Standard itself provides for an exception. Section 215 of the FPA makes no distinction between existing and new facilities.

74. With regard to the term “Transmission Organization,” we clarify that the transmission arm of a vertically integrated utility that is subject to the Commission's Standards of Conduct, absent any other relevant facts, would not be a Transmission Organization for purposes of FPA section 215(a)(6). Given that each of the examples of Transmission Organizations provided by Congress are independent of market participants, the Commission finds that

Congress intended that “Transmission Organization” be an entity approved by the Commission that is independent of market participants. However, in response to South Carolina E&G, any interested person that perceives a possible conflict between a Reliability Standard and a tariff may bring this to the Commission's attention.

b. Additional Terms Commenters Seek To Define in the Final Rule

75. Commenters suggest seven new terms to define in the Final Rule: “Competition,” “Physical Security Standard,” “Potential Violation,” “Regional Reliability Standard,” “Regional Variance,” “User of the Bulk-Power System” and “End User.”

We address issues pertaining to “Competition” and “Potential Violation” in section IV.B.5 and section IV.B.7 of the Preamble, Reliability Standards and Enforcement of Reliability Standards, respectively.

i. Physical Security Standards

76. NERC recommends adding the defined term “Physical Security Standard”:

Physical Security Standard

means a Reliability Standard adopted to safeguard personnel and prevent unauthorized access to critical equipment, systems, material, and information at critical facilities.

ii. Regional Reliability Standard and Regional Variance

77. NYSRC and the New York Companies recommend adding the defined term “regional reliability standard” to mean a Reliability Standard that is consistent with the generally applicable ERO Reliability Standard but is more specific or more stringent to meet the particular reliability needs of the region:

Regional Reliability Standard:

A Reliability Standard applicable within a particular region that is not inconsistent with, but may be more stringent, add detail to, or implement an ERO Reliability Standard, or may cover matters not covered by an ERO Reliability Standard.

78. While the New York Companies indicate that they would define term “regional variance” in the same manner, NYSRC would define this term separately, as follows:

Regional Variance:

An aspect of an ERO Reliability Standard that applies only within a given region. A Regional Variance may be used, for example, to exempt a particular region from all or a portion of an ERO Reliability Standard that does not apply to that region, or may establish different measures or performance criteria necessary to achieve reliability within that region.

iii. User of the Bulk-Power System

79. NERC proposes to add a definition for “user of the Bulk-Power System.” NERC asks that the Commission require every such user to register with the ERO. It considers a user to be a direct user that transacts business on the Bulk-Power System subject to Commission jurisdiction under section 215 of the FPA. It would exclude an end-use customer who receives electric energy indirectly from the Bulk-Power System. NERC proposes the definition:

User of the Bulk-Power System

means any entity that sells, purchases, or transmits electric power directly over the Bulk-Power System, or that maintains facilities or controls systems that are part of the Bulk-Power System, or that is a system operator. The term excludes customers that receive service at retail that do not otherwise sell, purchase, or transmit power over the Bulk-Power System or own, operate or maintain, control or operate facilities or systems that are part of the Bulk-Power System.

80. MidAmerican suggests that the Commission clarify that the use of local distribution in the term “Bulk-Power System” refers to the Commission's definition for local distribution as provided in Order No. 888 as the facilities that meet the seven factor test for distribution.

81. APPA states that it assumes that both the new ERO and the Commission will focus their reliability efforts on those entities with activities that substantially impact the Bulk-Power System, and that distribution-only entities will not be targeted because the Commission's jurisdiction under section 215 does not extend to local distribution activities. NRECA argues that status as a section 201(f) entity, ownership of distribution facilities, and even ownership of local transmission facilities should not be considered

ipso facto

to cause one to be deemed a “user, owner, or operator” of the Bulk-Power System for purposes of application of the Reliability Standards.

82. NRECA notes that a distribution cooperative serving customers entirely at retail and operating facilities at lower voltages might still be said to be a user of the Bulk-Power System to the extent that its electricity is delivered over higher-voltage facilities of its generation and transmission company or even the interconnected facilities of an investor-owned utility and/or a federal power marketing agency or large public power entity. However, NRECA states that this is not a meaningful basis for interpreting the Commission's jurisdiction of “user” since the same reasoning would apply to a large industrial customer or, ultimately, even a single residential customer.

83. Therefore, NRECA asks that the Commission interpret “user” as one that has an active role in, and some measure of control over the Bulk-Power System, and whose activities have the potential to directly disrupt the Bulk-Power System, such as an owner or operator of a high-voltage transmission facility, a large generator, or a control area operator. Users should not include those that have no active role in or control over the Bulk-Power System.

iv. End User

84. The NOPR solicited comments on whether the term “end user” should be defined for purposes of the ERO's equitable allocation of reasonable dues, fees and charges among end users.

The NOPR further inquired as to whether the term “end user” should be defined as a customer using net energy for load or in terms of those who directly or indirectly use the Bulk-Power System. The NOPR asked whether we should limit the term to an entity transmitting electric energy through the transmission facility of another, or should “end user” include a transmission facility owner or operator with a business that depends on the Reliable Operation of the interconnected Bulk-Power System.

NOPR at P 43.

85. Several commenters submit that it is critical that the Commission define “end user” to establish a fair funding mechanism for the ERO and Regional Entities. These commenters, however, do not agree on how to define “end user” or are uncertain as to how best to carry out their recommendations, since certain users of the Bulk-Power System may not be allowed by local regulators to assess rates to recover such costs.

(a) End User as a Retail Customer

86. A number of commenters

recommend defining the term “end user” as a customer represented by net energy for load,

i.e.

, an ultimate retail consumer. NASUCA submits that “end user” in section 215(c)(2)(B) of the FPA is intended to refer to a retail customer who actually uses the electricity that comes off the grid and, in this respect, is to be distinguished from a user, owner or operator of the Bulk-Power System that buys, sells, generates or transmits electricity at the wholesale bulk-power level and to whom the Reliability Standards directly apply. National Grid asserts that the plain language of the statute requires that “end user,” not wholesale or transmission customers, fund the ERO so that applying the term only to direct

users of the Bulk-Power System does not fit within the context of the statute.

See

e.g.

, NARUC, TAPS and PSE&G Companies.

87. A few commenters submit that “end user” should be defined in terms of a transmission provider that collects fees from customers and remits them to the ERO.

Detroit Edison claims that the most equitable means by which the ERO could recover its costs from all consumers would be a direct bill targeted to all load. Given that the Commission's jurisdictional reach is limited, that portion of the ERO's charges attributable to domestic entities and approved by the Commission through the budget process should be deemed a prudently incurred transmission expense allocable to all transmission owners subject to the Commission's jurisdiction. This expense should be recoverable from wholesale and retail customers to ensure that all consumers, either directly or indirectly, share in the costs of maintaining and enhancing a reliable transmission network.

See

e.g.

, Allegheny, Hydro One and Detroit Edison.

(b) End User as a Customer That Uses the Bulk-Power System

88. Several commenters, including BCTC and Old Dominion, recommend that the Commission include all users of the Bulk-Power System within the definition of the term “end user.” MidAmerican submits that, if the term “end user” is defined as a customer using net energy for load, it should be made clear that the intent is to capture the end-use load of all direct or indirect users of the transmission system that benefit from the reliability of the Bulk-Power System.

89. MISO contends that the term “end user” should be broadly defined in the Final Rule to include an entity that directly or indirectly uses the wholesale transmission grid so that any party receiving the benefits of Bulk-Power System reliability will bear the costs of promoting short-term reliability.

See also

AEP, Exelon, Entergy and NiSource.

90. NiSource and Entergy submit that the term should encompass independent system operators (ISOs), power marketers, qualifying facilities and all who directly or indirectly use the transmission systems and “drive system reliability.”

91. SERC recommends including customers with alternative sources of generation in the definition of “end user.” LADWP recommends that “end user” include all customer-owned distributed generation and merchant utility distributed generation, and that any entity with an obligation to serve should be assessed based on its end user responsibilities.

92. A number of commenters suggest an expansive definition of “end user” that would include all users, owners and operators of the Bulk-Power System.

93. EEI recommends that the Commission define “end user” for the purpose of equitable allocation of ERO dues, fees and charges. It asks that the term be defined in the context of reliability, not in the context of electricity. EEI argues that generators and transmitting utilities are “end users” of reliability because they receive the benefits of reliability, just as retail electricity purchasers do. EEI submits that “end user” should include any entity that buys or sells electric energy, or transmits electric energy as an owner, operator or user of the Bulk-Power System.

94. New York Companies recommends that “end user” be defined as an entity that injects energy into or withdraws energy from the grid, emphasizing that in areas of the country where deregulation has occurred, an entity that supplies power is different from an entity that withdraws power. It observes that entities responsible for paying the costs of an organization are more sensitive to the resource needs of that organization.

95. Wisconsin Electric asserts that the definition of “end user” should not encompass transmission owners or operators, or even end use customers of local distribution companies and marketers in retail access states, given the Commission's lack of jurisdiction over local distribution of energy.

Commission Conclusion

96. We decline to define all of these terms in this Final Rule without prejudice to the ERO proposing to define these terms as part of its certification application process or as part of a Reliability Standard. However, we offer the following clarifications.

97. In regard to the terms “regional Reliability Standard” and “regional variance,” we recognize that regional “differences”

of several sorts are possible as more fully discussed under section IV.B.5, Reliability Standards, of the Preamble. There we call on the ERO applicant to propose definitions of the various types of differences.

Throughout the Final Rule, we use the term regional differences to refer to any type or category of difference from a continent-wide Reliability Standard that applies on a regional basis.

See also

section IV.B.8 of the Preamble, Delegation to a Regional Entity.

98. In regard to “User of the Bulk-Power System,” we agree that a customer that receives electric service at retail and does not otherwise directly receive, sell, purchase, or transmit power over the Bulk-Power System or own, operate or maintain, control or operate facilities or systems that are part of the Bulk-Power System would not in general be considered to be a user of the Bulk-Power System.

99. We recognize that “User of the Bulk-Power System” is a critical jurisdictional term. However, at this time, we do not think it is appropriate to try and develop a specific definition. Generally, a person directly connected to the Bulk-Power System selling, purchasing, or transmitting electric energy over the Bulk-Power System is a User of the Bulk-Power System. With regard to NERC's proposed definition, we are concerned that a large industrial customer that receives electric energy directly from the Bulk-Power System may not be defined as a user of the Bulk-Power System, even though it may directly affect the reliability of the Bulk-Power System. We conclude that the precise scope of the term “User of the Bulk-Power System,” and thus the extent of persons subject to the Reliability Standards, would be best considered in the context of our review of those Standards, taking into account the views of the ERO and others. Therefore, until we have proposed Reliability Standards before us, we will reserve further judgment on whether a definition of “User of the Bulk-Power System” is appropriate or whether the decision of who is a “User of the Bulk-Power System” should be made on a case-by-case basis.

100. With regard to local distribution facilities, Congress specifically exempted “facilities used in the local distribution of energy” from the definition of Bulk-Power System, and, as such, the Commission's regulations do not subject such facilities to the ERO's or a Regional Entity's Rules or the Commission-approved mandatory Reliability Standards. As noted by NRECA, the owner or operator of a local distribution facility can be a user of the Bulk-Power System. If the owner or operator of a local distribution facility is a “user” of the Bulk-Power System, it must comply with all relevant Reliability Standards as a user.

Similarly, an owner or operator of a generating facility may be a user of the Bulk-Power System without that facility necessarily being a part of the Bulk-Power System.

101. We agree with commenters that there are good reasons to distinguish an “end user” from a “user, owner or

operator of the Bulk-Power System.” The latter phrase refers to an entity that must comply with the Reliability Standards, and perhaps also pay directly for the cost of the ERO. The term end user, is a term in common use in the electric power industry, which the Commission has used at times in its orders without a definition and no one has expressed any uncertainty about the meaning of the term. In general, it means a retail consumer of electricity. Therefore, we do not see a need to adopt a formal definition for “end user” here. If an ERO applicant believes additional definition is needed as part of its application for explaining its funding mechanism or for another reason, it may propose a definition at that time.

2. Jurisdiction and Applicability—Section 39.2

a. Commission Jurisdiction

102. This section discusses the Commission's jurisdiction under section 215 of the FPA and who must comply with this Final Rule. The NOPR explained that, consistent with section 215(b) of the FPA, for the purposes of approving and enforcing Reliability Standards established by the Commission in accordance with this new regulation, the Commission has jurisdiction over the ERO, any Regional Entities, and all users, owners and operators of the Bulk-Power System within the United States (other than Alaska and Hawaii) including, but not limited to, the entities described in section 201(f) of the FPA.

Comments

103. The Ohio Commission is concerned that a statement in the proposed rule may go beyond the powers delegated by Congress. It asserts that Congress indicated that the Commission would have jurisdiction over approval of the Reliability Standards established under the ERO, but went no further, neither regarding the Regional Entities nor the enforcement provisions.

104. NERC and EEI recommend that the regulations make clear that each user, owner or operator of the Bulk-Power System must comply with the Commission's regulations implementing the Act, with approved Reliability Standards, and with the Rules adopted by the ERO and Regional Entities. In addition, NERC and TAPS assert that the ERO and Regional Entities may need to obtain information or data from users, owners and operators of the Bulk-Power System to develop Reliability Standards and to ensure compliance with those Reliability Standards and, therefore, the Final Rule should require users, owners and operators of the Bulk-Power System to respond to such requests for data.

105. DOE states that the language of section 215 of the FPA gives the ultimate authority for the certification of the ERO and the enforcement of the Reliability Standards to the Commission. Therefore, DOE asserts that it is imperative that the Commission be able to direct the ERO to collect, validate, and preserve data related to reliability performance in such form as the Commission may require, and that the ERO be required to provide such information to the Commission upon request.

106. Exelon notes that not all entities subject to mandatory Reliability Standards currently report information through the regional reliability councils and to NERC. In its view, it is critical that all entities subject to ERO Rules be required to provide the Commission, the ERO, and the Regional Entities with data when requested. Therefore, Exelon suggests that the Final Rule include an additional section requiring all users, owners and operators of the Bulk-Power System to furnish the Commission, the ERO and the applicable Regional Entity with information requested in order to carry out their functions under this Final Rule.

107. Professor Robert Thomas raises the need for the Final Rule to establish procedures to ensure that the Commission has appropriate access to any relevant reliability data in a meaningful format. Professor Thomas suggests that, for the Commission to perform its oversight function, it must receive timely information in connection with any potential violation of a Reliability Standard. He recommends that the Commission have unfettered access to specific real-time and other system data.

108. EPSA requests that the Commission require the ERO and each Regional Entity to adopt procedures to prevent the unintended disclosure of any data they obtain. Further, it asks that, in instances when it is necessary to disclose such information, the Commission require the ERO and Regional Entities to establish procedures to protect such information from disclosure beyond what is necessary to protect the reliability of the Bulk-Power System.

109. NERC, TAPS, and Exelon state that the Final Rule should provide a mechanism for the ERO and Regional Entitles to learn the identity of each user, owner and operator of the Bulk-Power System to ensure that each such entity complies with Reliability Standards. NERC and Ontario IESO assert that the Final Rule should implement this identification process by requiring each user, owner, and operator of the Bulk-Power System to register with the ERO and the appropriate Regional Entity.

110. ELCON suggests that a requirement that all entities subject to enforcement under section 215(e) of the FPA register with the ERO for administrative purposes should not be confused with dues requirements or any concept of membership. However, FRCC suggests that all users of the Bulk-Power System should be required to register with the ERO and the appropriate Regional Entity for both cost recovery and enforcement purposes.

Commission Conclusion

111. Section 39.2 of the regulations codifies the jurisdiction conferred by statute. Congress specifically gave the Commission jurisdiction over Regional Entities and enforcement of compliance with section 215 of the FPA. Section 215(b) specifically states:

The Commission shall have jurisdiction, within the United States, over the ERO certified by the Commission * * *,

any regional entities

, and all users, owners and operators of the bulk-power system, including but not limited to the entities described in section 201(f), for purposes of approving reliability standards established under this section and

enforcing compliance

with this section. All users, owners and operators of the bulk-power system shall comply with reliability standards that take effect under this section. (emphasis added)

Thus, the Ohio Commission's concern that the proposed relationship between the Commission and a Regional Entity or the Commission's role in enforcement may go beyond the powers delegated to the Commission by Congress is unfounded.

112. The Commission notes that the proposed regulations in the NOPR did not specifically state that all users, owners and operators of the Bulk-Power System shall comply with Reliability Standards that take effect under part 39. NERC and EEI recommend that the Commission add such an explicit requirement in the regulations. Although all entities subject to the Commission's reliability jurisdiction under section 215 of the FPA are required to comply with regulations promulgated under that section without an explicit requirement to do so, we will grant NERC's and EEI's request to explicitly state in the regulations that all users, owners and operators must comply with the regulations under part 39.

113. Finally, NERC and EEI further request that the regulations require all

users, owners and operators to comply with ERO Rules and Regional Entities Rules. Congress gave the Commission jurisdiction over all users, owners and operators of the Bulk-Power System, for purposes of,

inter alia

, enforcing compliance with Reliability Standards. As defined by the proposed rule, the Rules of the ERO and Regional Entities are the bylaws, rules of procedure and other organizational rules and protocols of the ERO or a Regional Entity, respectively. These Rules should be developed to further the ERO's and Regional Entities' purpose—which is to improve Bulk-Power System reliability. The Commission concludes that it is appropriate for each user, owner and operator of the Bulk-Power System to be required to abide by any such Commission-approved Rules. Therefore, we will add a subsection (b) to section 39.2, stating:

(b) All entities subject to the Commission's reliability jurisdiction under section 39.2(a) shall comply with applicable Reliability Standards, the Commission's regulations, and applicable Electric Reliability Organization Rules and Regional Entity Rules made effective under this part.

114. The Commission agrees with commenters that, to fulfill its obligations under this Final Rule, the ERO or a Regional Entity will need access to certain data from users, owners and operators of the Bulk-Power System. Further, the Commission will need access to such information as is necessary to fulfill its oversight and enforcement roles under the statute. Section 39.2 of the regulations will include the following requirement:

(d) Each user, owner or operator of the Bulk-Power System within the United States (other than Alaska and Hawaii) shall provide the Commission, the Electric Reliability Organization and the applicable Regional Entity such information as is necessary to implement section 215 of the Federal Power Act as determined by the Commission and set out in the Rules of the Electric Reliability Organization and each applicable Regional Entity. The Electric Reliability Organization and each Regional Entity shall provide the Commission such information as is necessary to implement section 215 of the Federal Power Act.

115. We also agree with EPSA that the ERO and each Regional Entity must adopt confidentiality Rules to prevent the unintended disclosure of such information. However, because the Commission has not certified an ERO or seen the Rules that it and the Regional Entities will propose pertaining to data access and retention, the Commission will not address with specificity what such a confidentiality Rule would entail. Rather, the ERO must address ERO disclosure-related Rules in its application for certification. If such Rules do not apply to all Regional Entities, then each Regional Entity must address its disclosure Rules in the delegation agreements. The ERO or the Regional Entity should review a request for confidential treatment and make a determination if it is reasonable.

116. Although we agree with Professor Thomas that having procedures in place for the Commission to have such information in meaningful formats is useful, we will not address this issue in the Final Rule. The complexity of this issue and the need for substantive input from the ERO, Regional Entities, and the industry on what a meaningful format would be and the feasibility and costs of providing information in such a format would be more appropriately addressed outside the context of this rulemaking.

117. Several commenters assert that the Commission should provide a mechanism for the ERO and Regional Entities to identify all users, owners and operators of the Bulk-Power System. The Commission agrees and finds that a registration requirement, as suggested by NERC and the Ontario IESO, may help identify those entities subject to the Commission's reliability jurisdiction and the Reliability Standards and rules of the ERO or a Regional Entity. Therefore, the Final Rule includes a registration requirement at section 39.2, as follows:

(c) Each user, owner and operator of the Bulk-Power System within the United States (other than Alaska and Hawaii) shall register with the Electric Reliability Organization and the Regional Entity for each region within which it uses, owns or operates Bulk-Power System facilities, in such manner as prescribed in the Rules of the Electric Reliability Organization and each applicable Regional Entity.

If, in the registration process, there remains a question whether a specific user or other entity is subject to this rule, it or the ERO may request the Commission's guidance on the matter.

118. Because the Final Rule provides for mandatory funding of the ERO and those functions that it may delegate to the Regional Entities, there should be no fee for registering with the ERO or a Regional Entity. Further, registration does not commit a person to membership. Membership issues are discussed further below.

b. International Regulatory Coordination

119. The statute contemplates that the ERO will be subject to the jurisdiction of the United States, Canada, and possibly Mexico. This section discusses how the Commission reconciles its exclusive authority to regulate the ERO within the United States and the exclusive authority of regulators in other countries to regulate the ERO within their borders. On August 9, 2005, the Federal-Provincial-Territorial Electricity Working Group (FPT Group) in Canada and DOE jointly submitted to the Commission “Principles for an Electric Reliability Organization that Can Function on an International Basis” (bilateral principles) based on stakeholder dialogues. The NOPR asked for comment on these bilateral principles and whether they should be included in the Final Rule. Many of these principles are presented below. Comments and Commission conclusions on those topics are treated in the appropriate location. Here, we discuss the general comments on the principles.

Comments

120. Many commenters, including MRO and BCTC, state that the bilateral principles are essential because they provide a foundation to guide the operation of the ERO as an international organization.

NERC states that it supports the bilateral principles and will be guided by them in developing its rules of procedure and ERO application. NERC asserts that the bilateral principles are a sound basis on which NERC expects that the appropriate regulatory authorities in Canada will extend recognition to the ERO.

See also

Hydro-Québec, APPA, MRO, ELCON, Detroit Edison and Ontario IESO.

121. Several other commenters submit that the Commission's oversight of the ERO and Regional Entities should be informed by the bilateral principles. CEA sees the Commission working cooperatively with Canadian authorities in the establishment of the ERO and Regional Entities, the development and approval of Reliability Standards, and the operation of the ERO and the Regional Entities. MRO views Canadian support as essential. Hydro One urges consistency with applicable Canadian and Mexican regulatory principles. While Detroit Edison supports the bilateral principles, it submits that they fail to address how Reliability Standards will be interpreted by entities on each side of the border operating under disparate market rules. Detroit Edison is also concerned about whether the ERO, or its designated Cross-Border Regional Entity, will have the authority to enforce non-discriminatory Reliability Standards on all transmission users within its international footprint and define the terms used in those Reliability Standards, binding all

entities within its footprint to those definitions.

122. Commenters ask the Commission to explain how it intends to work with regulators in Canada to provide for effective enforcement across boarders given the limits of the respective jurisdictions.

Commenters also urge the Commission to explain how cross-border compliance and enforcement will work in these situations.

See

e.g.

, CEA, Hydro One and Detroit Edison.

123. American Transmission comments that the ERO cannot adjudicate differences between regulators with sovereign powers and cannot function effectively without the concerted efforts of all relevant regulators. Therefore regulators in the U.S. and Canada must develop their own coordination process, compatible with the bilateral principles, to achieve consensus prior to a remand or proposal to void a Reliability Standard and the enforcement appeals process. Further, American Transmission states that the specific jurisdiction of each regulator should be clear to all; no entity should be exposed to jeopardy from multiple jurisdictions for the same violation.

124. Northern Maine Entities ask how Canadian or Mexican utilities will be required to comply with Reliability Standards, the violation of which, by virtue of the Commission's approval of those Reliability Standards, will constitute a violation of the FPA. Northern Maine Entities are concerned that a user, owner or operator of the Bulk-Power System within the U.S. portion of a Cross-Border Regional Entity would be subject to mandatory compliance, while those in the Canadian or Mexican portion might operate under voluntary, unenforceable Reliability Standards. In addition, in the interests of consistency and fairness, Northern Maine Entities argues that the Commission's Final Rule should clarify that no Cross-Border Regional Entity may subject an entity within the United States to the jurisdiction of a foreign court.

125. On November 18, 2005, the Ambassador of Canada, the Honorable Frank McKenna, forwarded additional comments from the Canadian FPT Group on the international implications of the NOPR and the need for United States and Canadian reliability regulators to cooperate. The FPT Group reiterates several of the points made by numerous Canadian commenters and others that are addressed throughout this Final Rule. The FPT Group also emphasizes the need for continued cooperation among reliability regulators within the United States and Canada through the work of the United States-Canada Bilateral Electric Reliability Oversight Group (Bilateral Group) and other means on matters pertaining to certification of the ERO, approval of Cross-Border Regional Entities, remands of Reliability Standards, enforcement and imposition of penalties.

Commission Conclusion

126. We agree that for the ERO to be effective in maintaining Bulk-Power System reliability across national borders, it must be able to operate in an international arena. As American Transmission suggests, regulators in the U.S. and Canada should cooperate to help the ERO protect reliability in both countries. To this end, the Commission has worked with our partners in Canada to develop the Terms of Reference for the Bilateral Group, executed by the Commission, the U.S. Department of Energy, and the FPT Group on June 30, 2005 (the Terms of Reference).

Available at

http://www.ferc.gov/industries/electric/indus-act/reliability/06-30-05-agreement.pdf

127. Pursuant to the Terms of Reference, the Bilateral Group is intended to have an ongoing role in identifying issues related to international aspects of the reliability framework and identifying options for resolution of those issues. The Bilateral Group intends to consult on international aspects of reliability policies and reliability regulatory issues.

128. With respect to Northern Maine Entities' concern that entities within the United States may be subject to mandatory compliance, whereas entities in Canada and Mexico may still operate under voluntary standards, Northern Maine's concern is outside our jurisdiction to address. EPAct requires the ERO to seek recognition in Canada and Mexico and we will work with our counterparts in Canada and Mexico regarding cooperative development of mandatory Reliability Standards.

3. Electric Reliability Organization Certification—Section 39.3

129. Consistent with section 215(c) of the FPA, the NOPR proposed that any person may submit an application to the Commission for certification as the ERO within sixty (60) days following the issuance of the Final Rule. The Commission would then certify one applicant as the ERO, if the Commission determines that the applicant meets specified criteria set forth in the proposed regulations. An ERO applicant must demonstrate that it has the ability to develop and enforce Reliability Standards that provide for an adequate level of reliability of the Bulk-Power System. An ERO applicant must also document that it has established ERO Rules that assure its independence of the users, owners and operators of the Bulk-Power System. Such ERO Rules must further provide for allocation of reasonable dues, fees and charges among end users for all reliability activities, provide for fair and impartial procedures for enforcement of Reliability Standards, and provide reasonable notice and opportunity for comment, due process, openness, and balance of interests in developing Reliability Standards and otherwise exercising its duties.

130. The NOPR interpreted section 215(c) of the FPA to mean that the ERO must comply with the certification criteria on an ongoing basis, and that a violation of the certification criteria constitutes a violation of the FPA.

NOPR at P 38-39.

Comments

131. NERC and others support the proposed certification requirements as faithfully reflecting the requirements set forth in section 215 of the FPA. Several commenters address the oversight roles of the Commission and the ERO. Some commenters address statutory criteria for ERO certification, namely ERO governance. Others raise the procedural issue of whether the public would have an opportunity to comment on ERO applications. Commenters also address non-statutory ERO certification issues such as ERO membership, simultaneous certification in Canada and Mexico, and periodic recertification. Many commenters, in discussing the ERO certification criteria, note that their concerns apply to Regional Entity formation as well.

132. The Oklahoma Commission states that, while Congress expressed clear intent that “[t]he Commission shall issue a rule to implement the requirement of this section not later than 180 days after the date of enactment* * *,” Congress also expressed clear intent that due process and other rights be honored. Thus, it asserts that the Commission should regard some of the regulations in the Final Rule as interim “place-holders” and be prepared to add to, or review, the regulations after the Commission and the interested parties have an opportunity to determine how well they implement the due process requirements and other requirements of the statute.

a. The Oversight Roles of the Commission and the ERO

133. Many commenters recommend a strong ERO under the general oversight of the Commission.

They view the Commission primarily relying on the ERO to ensure that each Regional Entity is properly performing its responsibilities.

See

e.g.

, ELCON and NRECA.

134. Other commenters suggest more of a partnership relationship among the ERO, Regional Entities, the federal government and state governments. In this vein, for instance, Indianapolis P&L urges the Commission to be light-handed in its oversight of the ERO and provide it considerable flexibility to carry out its mission. In its view, the ERO should be a technically competent, fact-finding organization that will have the full confidence of stakeholders and be authoritative in and of itself.

135. Some commenters suggest that the Commission should carefully balance the need for a strong ERO with regional and state needs in the transition to enforceable Reliability Standards. EEI sees the need for a strong international ERO coupled with a significant role for Regional Entities. EEI supports the initial steps that NERC has taken to implement the changes necessary for certification as the ERO. In its view, timely recognition of NERC as the ERO and approval of initially proposed ERO Reliability Standards, on an interim basis if necessary, are critical steps in maintaining the reliability of the nation's Bulk-Power System.

i. Building on the Existing Reliability Framework

136. Some commenters suggest building upon the NERC/regional reliability council framework. Empire District Electric asserts that it is essential for the Commission to promulgate a comprehensive, well-thought-out transition and implementation plan for the business processes, requirements, and accountabilities of NERC, the ERO, the existing regional reliability councils, the existing Regional Transmission Organizations (RTOs), and North American Energy Standards Board (NAESB). The Commission should allow sufficient time for the transition from NERC to the ERO, transition of regional reliability councils to Regional Entities, and Regional Entity coordination with existing security coordinators. NARUC suggests that the Commission should build on and transition from the current reliability organizations to preserve efficiencies and reliability. Starting over would be non-productive, economically wasteful and, most importantly, would put system reliability at risk.

137. AEP maintains that timely recognition of NERC as the ERO, and the proposed ERO Reliability Standards with whatever modifications are required by the Commission, is a critical step in ensuring the reliability of the nation's Bulk-Power System. NPCC asserts that the statute recognizes that there will be a partnership between the federal government, the ERO, the Regional Entities, and the states in the development of continent-wide Reliability Standards and Reliability Standards to be effective only within a region. EEI submits that understanding and recognition of the critical reliability functions carried out at the regional level, and a smooth transition to the new statutory scheme whereby Regional Entities can propose regional Reliability Standards and carry out enforcement duties delegated to them by the ERO, are critical to ensuring reliability.

ii. Concerns About an Excessively Rigid Hierarchal Reliability Framework

138. Some commenters express concern about a new reliability bureaucracy. Alcoa, for instance, is concerned that the creation of a new bureaucracy has the potential to duplicate reliability costs and expenses already incurred by public utilities and consumers. PacifiCorp is concerned that the Final Rule could establish an excessively hierarchical and rigid ERO-Regional Entity framework that could needlessly complicate effective Reliability Standards development and compliance in Interconnection-wide regions. Similarly, NiSource asserts that, without some procedural clarification, the NOPR's multilayered and overlapping responsibilities of the ERO, Regional Entities and the Commission may lead to a cumbersome and overly complex process with overlapping or conflicting authority or duplicative efforts that cause confusion.

139. ELCON urges that the Final Rule preserve the intent of the law to eliminate the fragmented lines of authority that currently exist between NERC, regional reliability councils, RTOs and transmission owners. It further states that the Commission should resist any efforts to preserve outmoded, existing industry governance structures, relationships, and habits that prevent a world-class organization from emerging from the ERO certification process. NASUCA asks the Commission not to overlook the fact that the cost of the ERO, Regional Entities and Reliability Standards will ultimately be borne by consumers.

Commission Conclusion

140. The Commission finds that a strong ERO is critical to maintaining Bulk-Power System reliability. The ERO generally should be the point of contact between the Commission and the Regional Entities in carrying out reliability responsibilities pursuant to this Final Rule. Although we disagree with Indianapolis P&L that the Commission should necessarily be light-handed in its oversight of the ERO, we do recognize the need to be flexible in carrying out our regulatory oversight responsibilities.

141. In this Final Rule, the Commission gives the ERO guidance as to the content of its application and certain functions it must undertake, including its relationships with the Regional Entities. In certain areas, the Commission asks that the ERO applicant provide more detail regarding how it intends to perform its functions within the parameters set out in section 215 of the FPA and by the Commission.

142. The Commission understands the need for an orderly transition from the current approach of voluntary reliability standards under NERC and the regional reliability councils to the mandatory regime under the Commission's ultimate oversight through the ERO and Regional Entities. The Commission intends to provide industry participants adequate time to transition from the current system of voluntary reliability standards to mandatory Reliability Standards under the ERO. The Commission's process of certifying the ERO and approving Regional Entities and their delegation agreements and Reliability Standards will provide for public notice and comment to allow industry participants to weigh in on any potentially disruptive changes. If transition issues become a problem in the future, the Commission will address them at that time.

143. Several commenters express support for NERC as the ERO. The Commission will, however, not prejudge whether any specific entity should be certified as the ERO.

144. We agree with the Oklahoma Commission that the Commission may, at any time it sees a need, augment or modify its regulations. It may propose to do so in another NOPR or issue supplemental orders to provide interpretation or guidance on compliance or other matters. However, we regard the provisions of this Final Rule as more than a “place-holder.” The regulations contained in this Final Rule are not intended as a halfway step, but

as the permanent regulations concerning section 215 of the FPA, unless and until we determine that revision is required.

b. Statutory Certification Criteria

145. Section 215(c) of the FPA lays out certain statutory criteria that any ERO applicant must meet before being certified by the Commission. The Commission included these statutory criteria in the proposed regulations on certification. The comments on this section primarily address the issue of governance.

i. Governance

146. The NOPR proposed that an ERO candidate must demonstrate in a certification application that it has established Rules that assure its independence from the users, owners and operators of the Bulk-Power System, while assuring fair stakeholder representation in the selection of its directors and balanced decisionmaking in any ERO committee or subcommittee.

The NOPR asked for comment on whether the ERO certification criteria should specify that the number of board members representing each participating country in the ERO must be in rough proportion to total load and whether there should be an opportunity for each country to have an equitable number of members on an ERO committee based on total load.

NOPR at P 40.

Id.

at P 57.

Comments

147. Many commenters express concern and offer suggestions regarding the proper means to assure ERO independence and more balanced decisionmaking in terms of opportunities to be represented and more inclusive participation.

The California ISO maintains that independence from market participants and owners, users and operators of the Bulk-Power System should extend from the board level down to the staff level. NASUCA urges that, where a Regional Entity uses a stakeholder board, the concept of a balanced board cannot be accomplished without opportunity for adequate consumer representation. PG&E requests clarification as to how the ERO should achieve both fair stakeholder representation and the necessary expertise while maintaining its independence.

See,

e.g.

NASUCA, SMA, EPSA and PG&E.

148. With regard to balanced decisionmaking, many commenters express concern that the ERO provide for openness and inclusiveness, particularly with regard to representation on any stakeholders committee.

Some commenters, such as TAPS, specifically ask that the Final Rule provide guidance on the NOPR's requirement for balanced decisionmaking in any ERO committee or subordinate organizational structure. The California ISO states the stakeholder representation must be balanced on both an industry sector and geographic basis and that all distinct industry segments, including ISOs and RTOs, should have fair representation. NASUCA maintains that consumers should be fully represented on the stakeholders committee that advises the board and, where a Regional Entity establishes a stakeholder board, consumers must have direct representation on that board. Siemens states that equipment suppliers should also be allowed to participate and offer their expertise.

See, e.g.,

NRECA, SMA and California ISO.

149. Commenters discuss the need for Rules on fair voting. For example, ELCON suggests that a stakeholders committee should directly elect the members of the board, vote on bylaws and amendments to the bylaws, and vote on other governance issues. Others suggest that no two stakeholder sectors should be able to control the vote on any matter, no single sector should be able to defeat a matter, and no entity should be eligible to be a member of more than one sector in the board selection process and the Reliability Standard development process, or in any committee, subcommittee or other subordinate organizational structure.

See, e.g.,

NASUCA and TAPS.

150. Most commenters favor country representation requirements for the ERO board. Some comment that the ERO certification criteria should specify that the number of board members and committee members in the ERO and the Cross-Border Regional Entities should be in proportion to load of each participating country.

International Transmission states that Canadian board representation is important because of the interconnected nature of the Bulk-Power System and the need to minimize the likelihood that a Canadian regulatory body would find it necessary to remand a Commission-approved Reliability Standard to the ERO. The ERO must be seen as a forum for the expression of views and resolution of issues raised by Canadian users, owners and operators. APPA does not believe that the Final Rule should specify in detail the representation of each country on the ERO's board and committees but, rather, generally require that the ERO have appropriate international representation and allow the ERO to work out the details.

See, e.g.,

Alberta, NERC and the New York Companies.

151. Commenters, however, do not consistently favor mandatory country representation for ERO committees. For example, ERCOT states that, while the ERO board and standing committee levels should have appropriate country representation, such representation on ERO subcommittees should be optional, depending upon the nature of the issues that are addressed. BCTC suggests that national representation should be required on ERO subcommittees, but only to the extent that eligible candidates are put forward. Santee Cooper suggests that the emphasis should be more on the technical expertise of those who would populate the ERO's committees and other subordinate groups. Hydro-One advocates that there be periodic rotation of the Chair/Vice-Chair among each participating nation with maximum terms. Southern submits that a country representation requirement could prove problematic in practice and difficult to implement and manage in every ERO working group. In this regard, ELCON notes the recent experience of NERC and NAESB with under-populated segments.

Commission Conclusion

152. The Commission recognizes that there are many ways that an ERO could provide balanced governance and decisionmaking. The Commission will not mandate a specific approach to ERO governance but, rather, will allow an ERO candidate to develop a proposal to be provided in its application for certification. Consistent with the Final Rule, an ERO applicant's proposal must include ERO Rules that assure the ERO's independence from the users, owners and operators of the Bulk-Power System, while assuring stakeholder representation in the selection of its directors and balanced decisionmaking in any ERO committee or subordinate organizational structure.

153. Appropriate ERO Rules should include provisions specifying that, on a committee or other subordinate organizational structure, no two stakeholder sectors should be able to control the vote on any matter, no single sector should be able to defeat a matter, and no entity should be eligible to be a member of more than one sector in the board selection process,

unless the

ERO adequately explains why it cannot apply these principles.

Cf., Regional Transmission Organizations,

Order No. 2000, FERC Stats. & Regs., Regulations

Preambles July 1996-December 2000 ¶ 31,089 at 31,226, 31,074 (1999),

order on reh'g,

Order No. 2000-A, FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ¶ 31,092 (2000),

affirmed sub nom. Public Utility District No. 1 of Snohomish County, Washington

FERC,

272 F.3d 607 (DC Cir. 2001). (“Where there is a governing board with classes of market participants, we would expect that no one class would be allowed to veto a decision reached by the rest of the board and that no two classes could force through a decision that is opposed by the rest of the board”).

154. On the matter of country representation requirements, for the reasons discussed below, the Commission finds generally that it would be appropriate for country representation on the ERO board to be in rough proportion to the net energy for load of each participating country. We encourage ERO applicants to consider such a country representation requirement and explain any departure from this principle. We clarify that we are using the term “country” representation rather than “national” representation because we are not referring to representation by government officials but by persons associated with each participating country. Appropriate country representation on the board would assure that the ERO is truly international in addressing Bulk-Power System reliability. This is important given the interconnected nature of the Bulk-Power System. Further, appropriate country representation would assure that the ERO is aware of and considers the concerns of parties in each country participating in the ERO when addressing reliability matters.

155. With regard to ERO committees and subcommittees or other subordinate organizational structures, we encourage the ERO to allow equal opportunity for participation from each country to be on such committees. However, we decline to require that every committee have exact proportional representation. As noted by some commenters, technical expertise and other factors may be equally important in selecting committee members from a pool of volunteer candidates. For similar reasons, the Commission declines to require the ERO to adopt specific Rules for the selection of the committee Chair and Vice-Chair. That is a matter for those forming a proposed ERO to address in developing proposed ERO Rules.

ii. Other Statutory Criteria

156. The NOPR's proposal on certification requirement also specified other statutory criteria for ERO certification, such as a requirement that the ERO applicant must demonstrate that it has the ability to develop and enforce Reliability Standards that provide for an adequate level Bulk-Power System reliability. It also proposed that ERO Rules must allocate equitably reasonable dues, fees and charges among end users for all activities under this new reliability regulation. It further provided that ERO Rules are to be fair and impartial procedures for enforcement of Reliability Standards through the imposition of penalties, including limitations on activities, functions or operations, or other appropriate sanctions. In addition, it provided that such ERO Rules are to provide for reasonable notice and opportunity for public comment, due process, openness, and balance.

157. No comments were filed on the proposed text of these regulations. The Commission adopts the regulation text of the NOPR. However, further comments on the substance of these requirements are discussed below as follows: comments on dues, fees and charges of the ERO are discussed in section IV.B.4 of the Preamble, comments on the development of Reliability Standards are discussed in section IV.B.5 of the Preamble, and comments on the enforcement of Reliability Standards are discussed in section IV.B.7.

c. Opportunity for Public Comment

158. NiSource is concerned that there is no express provision in the proposed regulations to allow for public comment once an ERO candidate submits a certification application. They contend that the overall process would benefit if the Commission provided an opportunity to comment on whether the ERO applicants meet the certification criteria. Likewise, PG&E states that, although the selection of the ERO or a Regional Entity will affect users, owners and operators of the Bulk-Power System, neither the proposed section on certification nor the proposed section on delegation expressly allows for public comment.

Commission Conclusion

159. The Commission will provide notice and an opportunity for public comment when selecting the ERO or approving a Regional Entity delegation agreement and has written the Final Rule accordingly. This will allow interested persons an opportunity to voice their concerns and will assist the Commission in making an informed decision with respect to ERO certification and the delegation of ERO responsibilities to a Regional Entity. Accordingly, the Final Rule modifies the proposed regulations to provide for notice and an opportunity for comment selecting the ERO or approving a Regional Entity delegation agreement.

d. Non-statutory Criteria

160. Some commenters recommend the inclusion of other certification criteria, in addition to those set forth in the NOPR. The bulk of the commenters asking that the Commission address non-statutory criteria request that the Commission address the issue of membership.

i. Membership

161. The statute neither requires nor prohibits an ERO structure that allows persons to have membership in the ERO. Nor did the NOPR discuss whether the ERO should allow membership. Further, the NOPR asked for comment on whether membership in the ERO or a Regional Entity should be a condition for participation in either the ERO's Reliability Standard development process or that of a Regional Entity.

Numerous commenters discuss their concerns regarding the responsibilities and rights of any members, the openness of membership, and the level of membership fees.

NOPR at P 56.

(a) Open Membership

162. A few commenters, such as EPSA, urge the Commission to establish membership principles or require that the ERO be ANSI accredited. Numerous commenters insist that, if the ERO has members, that membership policies should allow for open membership so that limited membership does not become a barrier to participation in the ERO.

NRECA, for instance, notes that, early on, it had joined the broad coalition of industry participants to support EPAct based on an agreement that mandatory Reliability Standards should be drafted and enforced by a self-regulatory industry organization that would have access to the engineering expertise of all the stakeholders. ELCON asserts that the ERO should have an open door policy and, if a membership requirement is allowed, anyone wishing to be a member of the ERO should be allowed to become a member without any explicit or implied barriers to membership. NASUCA submits that consumer representatives should be entitled to full membership and voting rights. Ameren suggests that members should not be subject to any obligations

that place burdens on members' resources, such as mandatory participation in reliability audits.

See, e.g.,

ELCON, EPSA, NASUCA and NRECA.

163. APPA states that membership rights should be limited to participation in the development of internal ERO Rules and voting to select or approve slates of nominees to the ERO board.

See also

EPSA and MRO.

164. Most commenters made similar comments regarding the openness of Regional Entity membership. FRCC, however, asserts that, because Commission jurisdiction over Regional Entities is limited to their delegated authorities and functions, membership or other participation policies of Regional Entities are not related to delegated authorities and, thus, not subject to Commission jurisdiction.

(b) Membership Fees

165. Many commenters either oppose membership fees or recommend limiting them to nominal amounts, should the ERO allow membership. For example, EPSA contends that membership fees for joining or leaving a Regional Entity must not become a barrier to entry or exit. APPA contends that membership fees tend to discourage broad participation by Bulk-Power System users, especially the smaller entities, while generally raising minimal amounts of revenue and suggests that annual fees should be no more than $1,000 per year per organization. ELCON contends that charging end users additional fees or dues as a condition to membership in the ERO is discriminatory and contrary to the statutory mandate of equitable allocation of reasonable dues, fees and charges. It suggests that the Final Rule provide that fees must be non-discriminatory and not duplicate charges that end users are already assessed. Similarly, NASUCA advocates that consumers should not have to pay for the ERO twice—through rates and then again through membership fees or dues.

166. Many commenters recommend that, assuming the ERO establishes a structure that allows for membership, membership should not be a requirement to participate in the Reliability Standard development process.

For example, National Grid comments that membership must be open to satisfy the statutory requirement that the Reliability Standard development process allow for “public comment, due process, openness and balance of interests.”

See, e.g.,

NRECA, NERC, NE Pool Participants, Progress Energy, AEP, EEI, South Carolina E&G, SERC, TVA, Ontario IESO and Hydro-Québec.

167. Alcoa suggests that any entity that believes that its interests would be affected by a Reliability Standard should be allowed to participate. Several commenters assert that a membership requirement would be inconsistent with ANSI accreditation of the process.

PSEG Companies notes that ANSI processes have long been recognized as best for meeting the requirements of OMB Circular A-119, which sets forth the requirements for federal agencies to utilize consensus standards developed by industry stakeholders. The North Carolina Commission points out that, as a state commission, it could not become an ERO member.

See, e.g.,

AEP, NRECA and South Carolina E&G.

168. In contrast, Ameren and International Transmission comment that membership in the ERO should be a requirement of participation in the Reliability Standard development process. International Transmission suggests that the membership requirement should be coupled with fair and equitable membership Rules so that all entities should have an equitable influence on the Reliability Standard development process. New York Companies assert that ERO members should be the primary participants in developing a Reliability Standard, but that the process should be transparent so that all interested parties are aware of the proposed Reliability Standard under development, either directly or through a Regional Advisory Body.

169. Other commenters suggest that, while membership in the ERO should not be a condition for participation in Reliability Standard development, registered membership should be a necessary condition for the right to vote on a proposed Reliability Standard.

SMUD adds that members would benefit from advice offered by non-members participating in Reliability Standard development. SoCalEd states that only those entities directly and materially affected by the reliability of the Bulk-Power System should be allowed to vote on a Reliability Standard. Those who are not affected by a Reliability Standard should not be able to jeopardize the reliability of the system.

See, e.g.,

EEI, SMUD, American Transmission, Kansas City P&L, Southern and Xcel Energy.

Commission Conclusion

170. The Commission will neither require nor preclude a particular membership structure. Rather, the ERO applicant should determine whether membership is useful and appropriate in fulfilling its roles under EPAct and, if so, should submit any ERO Rules on membership to the Commission as part of its ERO application. If the ERO decides to create a membership structure, membership must be open to allow full and fair participation of all interested stakeholders through their representatives. Open membership is consistent with the statutory requirement that the ERO establish Rules that assure fair stakeholder representation in the selection of board members and balanced decisionmaking in any ERO committee or subordinate organizational structure.

See

section 215(c)(2)(C) of the FPA.

171. Moreover, we conclude that, if the ERO decides to establish a membership structure, the ERO may charge only a nominal fee as a condition of membership. First, the Commission is not persuaded that membership fees, nominal or otherwise, are necessary given that the Final Rule provides for mandatory funding of the ERO and those functions that it may delegate to a Regional Entity. Also, we share the concern of commenters that a membership fee should not become a limitation on participation in the ERO or a Regional Entity. To ensure that all interested stakeholders have an opportunity to participate, if the ERO chooses to charge a nominal membership fee, the ERO should have a Rule providing that it may waive the fee for good cause shown.

172. With regard to Reliability Standard development, we agree with the majority of commenters that principles of due process and openness, as set forth in section 215(c)(2)(D) of the FPA, dictate that membership must not be a condition for participating in Reliability Standard development, or for voting on the approval of a Reliability Standard. Section 215(c)(2)(D) requires that the ERO have Rules that provide for public comment and a balance of interests in developing a Reliability Standard, and membership should not thwart this requirement. Moreover, like SMUD, we believe that involving a wide range of viewpoints from interested parties benefits the Reliability Standard development process.

173. Finally, we find that the above discussion on ERO membership applies equally to membership in a Regional Entity. Each Regional Entity may determine whether membership is useful and appropriate in fulfilling its roles under EPAct and create Regional Entity Rules on membership. We reject

FRCC's argument that, because Commission jurisdiction over a Regional Entity is limited to its delegated authorities, membership policies of a Regional Entity are not subject to Commission jurisdiction. As discussed above, membership provisions can affect whether a Regional Entity meets statutory criteria, including openness, due process, balanced decisionmaking and equitable allocation of reasonable dues and fees. The Commission intends to review a proposed Regional Entity Rule on membership and determine whether it is consistent with statutory criteria, including those described above.

ii. Additional Non-Statutory Criteria

174. A number of commenters express concern regarding the technical and financial expertise of the ERO. For example, PG&E suggests that the Commission's regulations should ensure that the ERO will be knowledgeable to further ensure impartial and even-handed application of the Reliability Standards. To function effectively, the ERO must have a thorough understanding of the technical aspects of the industry, its financial requirements, and its applicable legal regulations, as well as of specific regional concerns. NiSource asks the Commission to clarify how it will assess an ERO or Regional Entity applicant's technical expertise when determining whether it has the ability to develop and enforce a Reliability Standard.

Commission Conclusion

175. It is critical that the ERO and each Regional Entity have adequate technical expertise. Pursuant to section 215(c)(1) of the FPA, an ERO applicant or a Regional Entity candidate must demonstrate in its application or request for approval of its delegation agreement that it has the ability to develop and enforce Reliability Standards for the Bulk-Power System. Accordingly, an ERO applicant or Regional Entity candidate must present evidence that it has, or has demonstrated access to, the necessary high level of technical expertise needed for carrying out these two functions. The applicant or candidate must present documented evidence that it has on staff, or has demonstrated experience in acquiring on a volunteer or other basis, the numbers of persons with the level of technical experience necessary to carry out the responsibilities of the ERO or a Regional Entity. The applicant or candidate must explain how it proposes to ensure appropriate kinds of technical, financial, and other expertise in the selection of board members, the recruitment of its staff, and the staffing of its committees and subordinate organizational structures. The ERO applicant must explain the extent to which it proposes to rely on the establishment of, and delegation to, Regional Entities to provide the numbers and levels of technical experts for carrying out its responsibilities.

176. Regarding the development of Reliability Standards, the ERO applicant or Regional Entity candidate must explain how it proposes to ensure the participation of technical experts in the initial development of a draft Reliability Standard for ERO stakeholder consideration. It must explain how the technical merit of a proposed Reliability Standard would be maintained in any balloting or board process for approval of a draft Reliability Standard for proposal to the Commission.

177. Especially important is that the applicant or candidate must demonstrate that it has, or has the demonstrated ability to acquire or assemble, the technical expertise necessary for the enforcement of all Reliability Standards. Specifically, it must show that it has, or has experience with acquiring on a volunteer or other basis, the number of persons with the level of technical experience necessary to audit the users, owners and operators of the Bulk-Power System for compliance with the Reliability Standards, to investigate questions or allegations of noncompliance, and to determine the appropriate remedy or penalty. The applicant or candidate must explain how it proposes to divide these various areas of responsibility among its board and committee members, its permanent staff, its organizational members if any, industry volunteers, and any consultants or subcontractors.

178. Further, an ERO applicant that satisfies the requirements for independent governance, balanced decisionmaking, and appropriate ERO Rules should be impartial and even-handed in the application of Reliability Standards. Accordingly, we find that there is no need to create additional certification criteria as suggested by PG&E. Similarly, NiSource and others may address the technical qualifications of any ERO applicant and the factors by which to consider such qualifications, when an ERO application is filed.

e. Simultaneous Certification in Canada and Mexico

179. The NOPR proposed that ERO Rules must specify the appropriate steps, after certification by the Commission as the ERO, to gain recognition in Canada and Mexico. The NOPR states that the ERO can operate effectively only if it meets the requirements of all relevant regulatory authorities.

NOPR at P 41.

Comments

180. Numerous commenters agree that the ERO must take steps to be recognized in Canada and Mexico. Some recommend that the Commission permit an ERO candidate to seek approval in Canada concurrent with approval in the United States. International Transmission suggests that recognition in Canada and Mexico should be a high priority of the ERO, once it is certified by the Commission. Detroit Edison comments that energy market disparities and related reliability concerns cannot be adequately addressed between the United States and Canada unless the ERO or its designated Cross-Border Regional Entity is required to have legal standing in Canada as the sole entity responsible for developing and enforcing Reliability Standards affecting reliability within its footprint.

181. Alberta submits that the establishment of an international ERO requires that an ERO applicant take appropriate steps to gain recognition in the relevant jurisdiction at the same time. APPA advocates that, although the statute requires the ERO to take steps to gain recognition in Canada and Mexico after it is certified by the Commission, the Commission should, nevertheless, allow an ERO applicant or a proposed Regional Entity to seek approval in Canada and Mexico at the same time it seeks certification from the Commission. Others, such as CEA and BCTC, state that the Commission should encourage an ERO applicant to work with Canadian authorities in advance of its application for Commission certification. They believe that, consistent with the bilateral principles, advance discussions would ensure that the ERO applicant's governance structure reflects Canadian concerns and identify potential areas of disagreement.

Commission Conclusion

182. Section 215 of the FPA and our proposed rule require ERO candidates to propose “appropriate steps” to gain recognition in Canada and Mexico after certification by the Commission. The Commission does not view this requirement as precluding ERO candidates from seeking simultaneous certification in the United States, Canada and Mexico. Therefore, an ERO candidate may, and is encouraged to, seek recognition in Canada and, if

appropriate, in Mexico, while pursuing Commission certification. Each ERO applicant or the certified ERO should keep the Commission informed about the status of its efforts to gain recognition in Canada or Mexico.

f. Periodic Performance Assessments

183. The certification regulations proposed in the NOPR would require the approved ERO to periodically submit an application to be recertified as the ERO.

The NOPR interpreted section 215 of the FPA as requiring the ERO to comply with the certification criteria on an ongoing basis, and that a violation of a certification criterion constitutes a violation of the FPA. The NOPR asked for comment regarding the appropriate cycle for periodic recertification and how far in advance the ERO should submit its application for recertification before its current certification period expires.

. at P 42.

Comments

184. Virtually all commenters that discuss this issue support the notion that the ERO and each Regional Entity must meet the statutory criteria on an ongoing basis. APPA asserts that periodic recertification may keep the ERO diligent in carrying out its duties, if the process is not too frequent or elaborate. PG&E agrees that periodic recertification is important to ensure that the ERO is properly performing its duties, but is concerned that the process not dominate the ERO's time. However, most commenters question the need for a periodic recertification process in addition to the various other accountability processes proposed in the NOPR.

Some note that there is no specific statutory requirement for periodic recertification.

Others submit that any periodic recertification process could become a distraction and lead to inefficiency within the ERO and Regional Entities, especially during the early years as these organizations grapple with a multitude of start-up matters.

Further, some assert that periodic recertification could cause uncertainty among the owners, users and operators of the Bulk-Power System when it appears that an existing reliability organization may be close to losing its certification.

NERC submits that certification should not automatically lapse at the end of a periodic recertification cycle, rather certification should remain in place until the Commission makes a recertification decision. MRO and NERC comment that the Commission should coordinate recertification proceedings with Canadian regulators or seek their concurrence. Others, including APPA and ELCON, suggest that the Commission defer the decision on whether to require periodic recertification until a later stage after it acts on applications for ERO certification.

E.g.

, Kansas City P&L, MidAmerican, FirstEnergy and MRO.

See

e.g.

, NRECA, MRO, Southern, SERC and FirstEnergy.

See

e.g.

, National Grid, AEP, Southern, SERC, and MRO.

See

e.g.

, APPA and LG&E Energy.

185. With regard to the timing of recertification, although NiSource suggests a recertification cycle once every three years, most commenters believe a longer cycle of five or six years would provide needed stability.

Commenters suggest a range from 180 days to two years for the submission of a recertification application.

See

e.g.

, Alcoa, the New York Companies, South Carolina E&G, NERC and TAPS.

Commission Conclusion

186. The Final Rule does not adopt the periodic recertification process as proposed in the NOPR. Instead, we are mandating a regular performance assessment that requires the ERO to affirmatively demonstrate to the Commission that it satisfies the statutory and regulatory criteria for an ERO and is not only maintaining but improving the quality of its activities and those of the Regional Entities to which it has delegated such activities.

Although the ERO must be accountable to the public, stakeholders, and the Commission for good performance, we agree with commenters that a periodic recertification process would tax the resources of the ERO and take the focus away from its primary function of ensuring the reliability of the Bulk-Power System. We believe that the performance assessment process that we are adopting will enhance the Commission's oversight of the ERO without the perceived destabilization of a periodic recertification requirement that implies the ERO may cease to exist unless it succeeds in a

de novo

certification application.

Accordingly, we are striking proposed 18 CFR 38.3(c) and 38.7(f) which read, respectively:

(c) The approved ERO is required to periodically submit an application to be recertified as the ERO, in accordance with any requirements the Commission issues in this regard.

(f) An approved Regional Entity shall be required to periodically submit an application to be re-approved as a regional Entity, in accordance with any requirements the Commission issues in this regard.

187. Pursuant to this new process at new section 39.3(c) of our regulations, the initial performance assessment will be required three years after ERO certification, and then every five years thereafter. New section 39.3(c) requires the ERO to affirmatively demonstrate that it satisfies on an ongoing basis the statutory criteria to qualify as an ERO. The Commission will review the periodic performance assessment and may require follow-up actions by the ERO to comply or improve compliance with the statutory and regulatory qualifications for the ERO, if the Commission determines that the ERO has not satisfied specific criteria. Moreover, the Commission views the performance assessment as an opportunity not only to demonstrate that the ERO has maintained, but also is improving, the quality of its activities and those of the Regional Entities to which the ERO has delegated such activities. The Commission expects the performance assessment to include regular and systematic measurement and reporting of the ERO's performance.

188. The ERO shall submit an assessment of its performance, after which the Commission will establish a proceeding with opportunity for public comment in which it will review the performance of the ERO. The ERO's assessment shall include: (1) An explanation of how it continues to satisfy the certification requirements; (2) recommendations by Regional Entities and other entities for improvement of the ERO's operations, activities, oversight and procedures, and the ERO's response; and (3) the ERO's evaluation of the effectiveness of each Regional Entity, recommendations for improvement of the Regional Entity's performance of delegated functions, and the Regional Entity's response to such evaluation and recommendations.

189. Regarding the first assessment item, the ERO should address its ability to develop and enforce Reliability Standards providing for an adequate level of reliability of the Bulk-Power System. The ERO should explain how effectively it enforced Reliability Standards, providing statistical information on its investigations, findings and assessments of penalties, on a regional and continent-wide basis. The ERO should also explain how it provided for fair and impartial procedures for enforcement of Reliability Standards and provided for openness, due process and balance of interests in developing Reliability Standards. The ERO should also address these matters as they pertain to the Regional Entities.

190. The burden will be on the ERO to conduct this assessment and affirmatively demonstrate that it satisfies the statutory criteria for the

ERO and the quality of its activities. As part of this process, the ERO must entertain, consider and respond to outside recommendations for improvement from the Regional Entities and the owners, users and operators of the Bulk-Power System. The ERO must also evaluate the effectiveness of the Regional Entities to which it has delegated some of its functions and suggest how the Regional Entities might improve their performance.

See

18 CFR 39.8, discussed

infra

191. As a result of its review of the performance assessment and public comments, the Commission will issue an order finding that the ERO meets the statutory and regulatory criteria or directing the ERO to comply with or improve compliance with the statutory and regulatory criteria for an ERO. Subsequently, if the ERO fails to comply adequately with the Commission order, the Commission may institute a proceeding to enforce its order as discussed below under Enforcement of Commission Rules and Orders, including, if necessary and appropriate, a proceeding to consider decertification of the ERO.

4. Funding of the Electric Reliability Organization—Section 39.4

192. In the NOPR, the Commission recognized that certainty regarding the funding of the ERO is essential for the stability and ultimate success of the organization, and accordingly, proposed a section of regulation text that provides requirements for funding and budget oversight of the ERO.

For discussion purposes in the Final Rule, we have grouped the funding related comments into several categories: Budget and business plan, funding for statutory activities, role of the ERO in funding Regional Entities, funding consistency with the bilateral principles, payment of dues and funding transition plan, billing mechanics, and other funding matters.

NOPR at P 99.

a. Budget and Business Plan

193. Subsections (a) and (b) of the proposed regulation on funding were intended to make the ERO accountable to the Commission for its budget for activities within the United States. They provided that the ERO must file a proposed annual budget and proposed annual funding request 130 days in advance of the beginning of each fiscal year. The Commission, after public notice and opportunity for comment, would issue an order accepting, rejecting, remanding or modifying the proposed ERO budget and business plan no later than sixty days before the beginning of the ERO's fiscal year.

Id.

Comments

194. Most commenters agree that the Commission should review the ERO's budget to ensure adequate funding.

Exelon suggests that the annual ERO funding requirement for budget purposes should include amounts for all activities that are deemed necessary to achieve the purposes of section 215 of the FPA including amounts for those activities delegated to the Regional Entities. EEI agrees that the Commission should have to approve the annual ERO budget, as proposed in the NOPR, but argues that the review should be limited to the development of Reliability Standards and enforcement functions and should not include any other activities the ERO may choose to undertake nor should it include the overall ERO business plan.

Southern states that the Commission should conduct a general review of the ERO's budget and business plan to ensure that the ERO is maintaining spending discipline and not overspending on some activities at the expense of other activities, and that the Commission should defer to the ERO on matters pertaining to the budget and business plan because the ERO will possess the expertise to make the right decisions.

See, e.g.,

Exelon, Indianapolis P&L, LG&E Energy and NERC.

EEI envisions the ERO developing an annual budget for its Reliability Standards and enforcement activities, including those activities delegated to the Regional Entities to ensure that overall funding adequately supports the delegated Regional Entity functions. Specific funding and budget arrangements would be included in the delegation agreement.

195. Others suggest tighter scrutiny over the budget out of concern that the new reliability program may lead to increased costs and, therefore, the Commission should ensure that any higher costs imposed on the electricity customers has a commensurate reliability benefit.

Ameren submits that a set of budget principles should be established for the ERO and Regional Entities. Indianapolis P&L states that the Final Rule should include a mechanism for stakeholders to provide input to ensure that the Commission has all the information it needs to make an informed decision on the ERO's budget. The Oklahoma Commission suggests that the notice and comment provisions for the ERO's annual funding request proposed in the NOPR also be applied to any funding request the ERO makes to the Commission outside of the annual budget process.

See, e.g.,

APPA, LG&E Energy and the New York Companies.

196. NERC asserts that the proposed regulations on funding be modified to provide for emergency funding to deal with extraordinary circumstances.

Commission Conclusion

197. The Commission generally adopts subsections (a) and (b) of the proposed regulation on funding as sections 39.4(a) and (b) with some additional specificity. We continue to believe that ERO funding certainty is essential for the stability and ultimate success of the organization and will review the ERO's budget and business plan to ensure that the ERO has adequate funding to carry out its responsibilities under section 215 of the FPA. We will not defer to the ERO on the budget or business plan as some suggest. However, we will not adopt budget principles in the Final Rule beyond the requirements specified in section 215(c)(2) of the FPA. We expect an ERO candidate to propose budget principles in its certification application and to consider the views of industry in developing its proposed budget and business plan.

198. Although our authority is limited to approving a business plan and budget as it pertains to statutory activities in the United States, the ERO must submit its business plan, entire budget, and organizational chart to the Commission, including those portions pertaining to activities in Canada and Mexico and any non-statutory activities. The complete business plan and the entire budget will inform the Commission as to what portion of the budget is expended upon the activities within the United States. Further they will provide the Commission with necessary information about any non-statutory activities, the source of their funding, and whether the pursuit of such activities presents a conflict of interest for the ERO. Additionally, section 39.4(c) of the regulation provides for further stakeholder participation through the Commission's public notice and comment procedures. This will provide additional opportunity for stakeholders to express their views so that the Commission can make an informed decision on the ERO's budget proposal and business plan. The same notice and opportunity for comment would apply to any funding request the ERO makes to the Commission outside of the annual budget process.

199. As requested by NERC, the Final Rule adds a new subsection 39.4(d) that allows the ERO to request emergency funding. The new provision states:

(d) On a demonstration of unforeseen and extraordinary circumstances requiring additional funds prior to the next Electric Reliability Organization fiscal year, the Electric Reliability Organization may file with the Commission for authorization to collect a special assessment. Such filing shall include supporting materials explaining the proposed collection in sufficient detail to justify the requested funding, including any departure from the approved funding formula or method. After notice and an opportunity for hearing, the Commission will approve, disapprove, remand or modify such request.

b. Funding for Statutory Activities

200. In the NOPR, the Commission indicated that paragraph (c) of the proposed section on funding intended to provide a Commission-approved mechanism for mandatory ERO funding in the United States.

However, rather than the Commission dictating a funding mechanism, the NOPR would have allowed an ERO applicant to propose a funding mechanism for Commission approval. Specifically, the proposed regulation stated that any person that submits an application for certification as the ERO must include a plan, formula and/or methodology for the allocation and assessment of ERO dues, fees and charges; and the certified ERO may subsequently file with the Commission a request to modify the plan, formula and/or methodology from time-to-time at the ERO's discretion. Comments related to funding responsibility are discussed here in four groups: (1) General matters; (2) funding apportionment; (3) role of the ERO in funding the Regional Entities; and (4) additional comments regarding funding consistency with the bilateral principles.

NOPR at P 100.

i. General Funding Matters

201. Some commenters state that the NOPR generally provides a workable funding process to ensure that reasonable ERO costs are fairly recovered.

Some comment that, while section 215 of the FPA authorizes the ERO and the Regional Entities to collect funds only for actions taken under the statute, they are not necessarily precluded from pursuing other matters.

APPA submits that the Commission must make clear that the ERO and Regional Entities can fund activities which are not related to their duties under section 215 of the FPA and allocate the costs of those activities on a basis that is appropriate for such activity. EPSA asks the Commission to ensure that any funding proposal is developed in consultation with all affected users, owners and operators of the Bulk-Power System. Detroit Edison and WECC submit that no Regional Entity should be required to subsidize the delegated functions of any other Regional Entity.

See,

e.g.

, EPSA, NERC and NiSource.

See,

e.g.

, APPA and NRECA.

Commission Conclusion

202. We find that section 215 of the FPA provides for federal authorization of funding limited to the development of Reliability Standards and their enforcement, and monitoring the reliability of the Bulk-Power System. However, the ERO or a Regional Entity is not precluded from pursuing other activities, funded from other sources. We agree with commenters that any funding proposal should be developed in consultation with the users, owners and operators of the Bulk-Power System and that no Regional Entity should subsidize the functions of another Regional Entity.

ii. Funding Apportionment

203. In the NOPR, the Commission noted that the responsibility for NERC funding is based largely on “net energy for load.” The cost of certain programs and tools that benefit only specific regions or parties would be assigned only to the beneficiaries of those programs or tools. In the NOPR, we indicated our belief that a funding method based on net energy for load meets the requirements of section 215(c)(3) of the FPA and is appropriate for the allocation and assessment of ERO dues, fees and charges.

NOPR at P 102.

Comments

204. Most commenters support use of a net energy for load-based funding apportionment for the ERO as well as the Regional Entity.

However, a few claim that this method will not apportion costs equitably and recommend other methods.

See, e.g.,

EPSA, PSE&G Companies, NASUCA, NARUC, NERC and Chelan County.

See, e.g.,

The New York Companies, International Transmission and Entergy.

205. PSE&G Companies states that the recovery of costs for the ERO and Regional Entities should be apportioned on the basis of net energy supplied to retail load because, as the ultimate beneficiaries of the reliability of the electric system, retail customers should bear the cost.

206. EPSA states that a net energy for load-based funding apportionment is appropriate because: (1) The statute requires funding by end-users; (2) net energy for load represents the aggregate annual energy consumption of end use customers in a particular region; and (3) since NERC currently uses this method, keeping it would avoid cost shifts. According to Chelan County, a net energy for load-based funding formula is consistent with the concept that load (rather than generation) should pay for reliability services that benefit end-users.

207. A benefit of the net energy for load approach is that it counts each kilowatt-hour of electric energy only once, and thus represents the fairest and most efficient method of allocating costs among end-users. Any other method may count energy more than once. A net energy for load approach that charges based on energy consumed avoids such “double counting.”

See, e.g.,

NASUCA and NRECA.

208. Michigan Electric states that there should be no free riders when it comes to system reliability but points out that the ultimate payers of the ERO's costs will be retail customers, since charges assessed to any other users will eventually be flowed through to retail customers as part of the delivered cost of electricity. As such, the Commission must ensure that ERO costs are allocated on an equitable basis among retail customers and prevent multiple assessments regardless of the upstream entities involved. FRCC submits that the NOPR's focus on different types of users of the Bulk-Power System may lead to two or more entities passing on such costs to the same customers.

209. The ISO/RTO Council argues that a transmission facility owner or operator should not be allocated a share of ERO costs, except to the extent that it also acts as a load-serving entity. Otherwise, an end user could pay twice for the reliability functions of the ERO and the Regional Entities once through charges assessed against an RTO, ISO, independent transmission company, or transmission function of a vertically integrated company, and a second time through an assessment against its load-serving entity. To avoid this potential double count, an end user should be assessed through its load-serving entity.

See, e.g.,

, Ohio Commission, ISO/RTO Council and Alcoa.

210. As an independent transmission owner, International Transmission expresses concern about a system that treats both a local utility using an independent transmission owner's system and the transmission owner itself as “beneficiaries” of reliability that need to be charged accordingly.

211. The New York Companies state that net energy for load, particularly in areas of the country where suppliers and load represent different

organizations, will not work, as it would allow suppliers and perhaps other organizations that are connected to the Bulk-Power System to avoid paying their fair share of ERO and Regional Entity membership fees.

212. As an alternative to net energy for load-based funding, International Transmission suggests that the ERO adopt the transmission MWh usage model that the Commission applies to assess annual dues from jurisdictional public utilities. However, MISO Transmission Owners oppose this because it would result in a disproportionate assessment against entities that belong to an RTO. Indianapolis P&L suggests apportioning the ERO funding responsibility through an assessment on: (1) Load-serving entities based on the number of their customers; (2) independent transmission companies based on their transmission line miles; and (3) independent power providers based on their sales volume.

Commission Conclusion

213. Commenters largely agree that a funding apportionment method based on net energy for load is appropriate. We find this funding method to be a fair and reasonable method that minimizes the possibility of “double-counting.” However, we will not codify any particular formula in our regulations because some adjustment in the formula may be needed in the future without the need to alter the rule. Therefore, we do not rule out any other apportionment method that can be shown to be fair and reasonable. Alternative funding apportionment methods suggested by a few commenters appear to garner limited support, can be more complex to implement, or raise the issue of double counting.

214. Section 39.4(a) of our regulations provides the ERO applicant the flexibility to propose a formula or method for the allocation and assessment of ERO costs to paying entities, as well as setting out member dues, fees and service charges. However, any funding proposal by an ERO applicant must ensure that costs are allocated equitably consistent with section 215(c)(2)(B) of the FPA. In addition, any funding proposal must ensure that cross-subsidization is minimized.

c. Role of the ERO in Funding the Regional Entities

215. The NOPR asked what, if any, responsibility or involvement the ERO should have regarding funding of Regional Entities.

In addition, the NOPR requested comments on whether the proposed regulations on funding and budget oversight for the ERO should be extended to the Regional Entities.

NOPR at P 84.

NOPR at P 103.

i. ERO Responsibility for Regional Entity Funding

216. Some commenters advocate ERO oversight of Regional Entity funding. NERC and Exelon submit that, since the ERO is ultimately responsible for the effective enforcement of Reliability Standards, it must have the authority to review and approve each Regional Entity's budget to ensure that each has the resources needed to meet its assigned responsibilities. The ERO must include each Regional Entity's budget in the ERO's annual funding submission to the Commission and other appropriate regulatory authorities. The supporting materials should be sufficient to allow the ERO to defend the Regional Entity budgets as part of its budget submittal to the Commission.

217. MRO suggests that the matter of funding the Regional Entities should be left to negotiation between the ERO and Regional Entities and detailed in the delegation agreements. SERC submits that the ERO should not distinguish between Interconnection-wide and other Regional Entities when it reviews a Regional Entity's budget and funding.

218. In contrast, WECC submits that the ERO should not substantively review the budget of an Interconnection-wide Regional Entity. Alternatively, if the ERO does review the budget, the Regional Entity should be entitled to a rebuttable presumption of reasonableness similar to that applicable to a proposed Interconnection-wide Reliability Standard. Otherwise, extensive ERO review would result in an inefficient and uncertain budget and funding process that would cause unnecessary delay. Further, extensive ERO review could create conflicts if WECC's international members do not recognize the ERO's authority to review the WECC budget.

See also

Western Governments.

219. Others comment that stakeholders and users, owners and operators of the Bulk-Power System in a Regional Entity should be solely responsible for Regional Entity funding decisions.

The New York Companies assert that it would not be appropriate, for example, for the ERO to have the ability to withhold funding for a Regional Entity because the ERO disagrees with a position the Regional Entity has taken with respect to a proposed Reliability Standard; however, Regional Entity funding should be subject to Commission oversight to ensure that costs across regions are comparable. PSEG Companies submits that the ERO's role should be limited to collecting the regional requests and filing them as a package together with the ERO request to the Commission.

See, e.g.,

LADWP and SoCalEd.

220. Some commenters submit that, in addition to approving each Regional Entity budget, if a Regional Entity is acting on behalf of the ERO and performing delegated enforcement tasks, the ERO should fund the Regional Entity for carrying out such delegated functions. The ERO, however, should not be responsible for funding any other functions that a Regional Entity performs.

Detroit Edison states that a Regional Entity should be permitted to collect funds from its members without Commission involvement.

221. Some commenters contemplate that the Regional Entities should fund the ERO. According to NiSource, currently NERC develops a budget and, based on a set of formulas, allocates its funding requirements among the ten regional reliability councils. NERC funding then becomes a line-item in each regional reliability council's budget. Each regional reliability council allocates its funding requirements among its members. NiSource says ERO funding should follow the same general format with the Regional Entities funded by the users of the system for which the Regional Entity is responsible. A portion of the ERO budget would then be allocated to and funded by each Regional Entity.

See, e.g.,

ELCON and Michigan Electric.

222. Hydro One points out that, ultimately, end-users will fund the ERO by remitting fees to the Regional Entity. PacifiCorp submits that the ERO should compensate a Regional Entity if it develops an operational tool for itself at its own cost, but other Regional Entities benefit from that tool.

223. The City of San Antonio indicates that ERCOT is a state-funded institution and any funding mechanism that the Commission decides for the ERO should not conflict with the Texas state statutory funding mechanism for ERCOT. It is concerned that, in the event ERCOT becomes a Regional Entity, a fee from the Regional Entity to fund the ERO would alter the Texas state statutory funding mechanism for ERCOT.

ii. Commission Oversight of Regional Entity Funding

224. While many commenters support extending the Commission's ERO funding regulations to the Regional Entities,

a few oppose this approach. Other commenters suggest extending the funding regulations to those functions that the ERO delegates to a Regional Entity or funding addressed in a delegation agreement.

NARUC and NERC comment that the regulations related to funding of Regional Entities should mirror those of the ERO to the extent practicable or should be specifically defined in the Regional Entity delegation agreement. Southern suggests that the ERO, not the Commission, should review each Regional Entity's proposed budget for delegated activities. PacifiCorp submits that each Regional Entity should be able to develop its own budget to reflect local needs, but the ERO should consolidate and submit all of the Regional Entity budgets as a joint filing to the Commission. The ERO should not be the entity with budget authority over an Interconnection-wide Regional Entity.

See, e.g.,

ERCOT, APPA, AEP, Exelon, NARUC, NERC FRCC and TAPS.

See, e.g.,

NPCC and EEI.

See, e.g.,

the City of Seattle.

225. FRCC asserts that a Regional Entity should be responsible for preparing its budget and providing support for it. Regional Entity budgets should be combined with the ERO budget for convenience in the submission of a complete, single annual reliability budget to the Commission; however, the ERO should not try to integrate the Regional Entity budgets with each other or the ERO's budget into a consolidated budget. Although some ERO review of the reasonableness of the Regional Entity budgets and their consistency with the ERO budget may be appropriate, unnecessary review and consolidation would not serve a useful purpose, and would only make the budgeting process unduly lengthy and burdensome.

226. In FRCC's view, the Commission's review of Regional Entity budgeting and funding process should be limited to the delegated functions carried out by a Regional Entity, as many of the other functions in which a Regional Entity may engage are not jurisdictional to the Commission.

Commission Conclusion

227. Since the ERO is the primary entity responsible under section 215 of the FPA for the development and enforcement of Reliability Standards, we find that the ERO should fund the Regional Entities as well as approve their budgets, under the Commission's oversight. The ultimate success of the ERO will depend on whether a Regional Entity has adequate funding to carry out its delegated responsibilities. The ERO must have oversight to ensure that Regional Entities are adequately funded to accomplish their delegated functions. This oversight, however, should be limited to the delegated activities that they perform pursuant to their delegation agreements. To implement this, we are including the following text at the end of subsection 39.4(b):

The annual Electric Reliability Organization budget shall include line item budgets for the activities of each Regional Entity that are delegated or assigned to each Regional Entity pursuant to section 39.8 of the Commission's regulations.

Accordingly, the ERO must exercise budgeting oversight over the Regional Entities.

228. Each Regional Entity must submit its complete business plan, entire budget and organizational chart to the ERO for it to submit to the Commission. The complete business plan and the entire budget will provide the Commission with necessary information about any non-statutory activities, the source of their funding, and whether the pursuit of such activities presents a conflict of interest for the Regional Entity. For a Cross-Border Regional Entity, this information will also inform the Commission as to what portion of the budget is expended upon activities within the United States.

229. Any funding that is approved and provided by the ERO to a Regional Entity would be limited to a Regional Entity's costs related to the delegated functions. The ERO must determine, at a minimum, whether each Regional Entity's proposed budget is adequate to carry out the functions delegated to it. While a Regional Entity will be able to perform other activities that do not conflict with its delegated functions, periodic financial audits will be required to ensure that any ERO-approved funding is appropriately expended for delegated functions. ERO candidates should propose a plan for the collection of sufficient funds for delegated activities in their application for certification. The ERO must make a recommendation to the Commission on this matter. A Regional Entity should arrange funds for its other activities on its own. Procedures for ERO review of a Regional Entity's budget should be addressed in the delegation agreement.

230. The Regional Entity is responsible for supporting its budget presentation to the ERO because it is responsible to the ERO for carrying out delegated ERO responsibilities, whether or not it spans an entire Interconnection. Therefore, we direct the ERO and each Regional Entity to ensure that the delegation agreement lists all the statutory activities that they intend the Regional Entity to undertake on behalf of the ERO.

d. Funding Consistency With the Bilateral Principles

231. In the NOPR, the Commission noted that the bilateral principles include several funding principles: (1) A principle specifying that net energy for load should be the primary basis upon which the costs of the ERO are assigned and that costs for one region or entity should be directly assigned to that region or entity; (2) a principle specifying that funding mechanisms, budget direction and budget levels should reflect consultations with appropriate stakeholders and authorities in each country; and (3) a principle specifying that the appropriate authorities in each country should be responsible for approving and ensuring cost recovery by the ERO and Regional Entities within their respective jurisdictions in a timely manner. The NOPR inquired as to whether the Final Rule should address such funding issues in detail or whether the ERO and Cross-Border Regional Entities should propose resolution of these matters at a later time.

NOPR at P 103.

Comments

232. There is strong support for following the bilateral principles on funding matters but not necessarily for incorporating them into the Final Rule.

Many commenters prefer that the

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.