The Electric Reliability Organization NERC’s Proposal for a Strong and Effective ERO FRCC System Operator Seminar Spring 2006

Canada NEB, Alberta, British Columbia, Manitoba, Ontario, New Brunswick, Nova Scotia, Quebec, and Saskatchewan Electric Reliability Organization United States Federal Energy Regulatory Commission Mexico Comision Reguladora de Energia Electric Reliability Organization Regional Entities FRCC Other ERO Members Bulk Electric System Owners, Operators, Users Reliability Standards Compliance Enforcement Reliability Assessment

ERO Application Process Energy Policy Act 2005 FERC Rulemaking Final ERO Rule ERO Rules of Procedure and Bylaws ERO Certification NERC Preparations Public Comment ERO Implementation Region Preparations Region Rules of Procedure and Bylaws ERO Application Delegation Agreement s Stakeholde r Inputs Pro Forma Delegation Agreement Compliance Order

ERO Application Timeline (approximate) 03/28/06 04/04/06 TBD 08/02/06 ~10/06 11/15/06 01/01/07 Board approves ERO application NERC files ERO application (U.S. & Can.) FERC conditionally names ERO Board approves 2007 ERO budget Regional delegation agreements complete Canadian regulators recognize ERO Regulators approve 2007 ERO budget NERC meets all ERO requirements ERO implementation

ERO Documents Corporate –Certificate of incorporation –Bylaws Rules of Procedure –Reliability Standards –Compliance Enforcement Org. registration and certification System personnel certification –Reliability Assessment and Improvement Readiness audits Adequacy assessments Benchmarking Training and education Situation awareness and security –Funding and Budgets –Regional Delegation Agreements Pro forma regional delegation agreement Existing Reliability Standards –104 Existing as of filing Transition plan

What’s Really, Really Important Strong and competent ERO Clear, consistent, enforceable, and technically sound reliability standards Consistent, firm compliance enforcement Effective relationships with regulators, regions and stakeholders Technical excellence Continuous reliability improvement Performance monitoring

ERO Membership Open and voluntary No membership fee ERO membership distinct from standards ballot body Members Committee –Provides Stakeholder input to the Board of Trustees

Member Committee Representatives Officers (Elected by committee) Regional Reliability Organizations (Region members elect) ChairmanERCOT (1) Vice ChairmanFRCC (1) Secretary (Non-voting)MRO (1) NPCC (1) Industry Sectors (Sector elections)RFC (1) Investor-Owned Utility (2)SERC (1) State/Municipal Utility (2)SPP (1) Cooperative Utility (2)WECC (1) Federal (2) Merchant Electricity Generator (2) Government Representatives Electricity Marketer (2)U.S. Federal (Non-voting) (2) Large End-Use Electricity Customer (2)Eastern/Texas Interconnection (1) Small End-Use Electricity Customer (2)Western Interconnection (1) Transmission-Dependent Utility (2) Canada Provincial (Non-voting) (1) ISO/RTO (2) Canada Federal (Non-voting) (1) Canada (Up to 4 additional as needed)

ERO Governance Maintain independent board –11 trustees (2 Canadian) Retain nominating committee of board –Chaired by trustee –Stakeholder representatives Board approves changes to certificate, bylaws, rules of procedure, regulatory filings Members Committee rights –Elect board members –Vote on changes to bylaws –Advise board –Call meeting of members

ERO Funding Funding for ERO and regional delegated functions allocated to load-serving entities –Bulk electric system users –Based on Net Energy for Load (NEL) Rationalize across balancing authorities, regions and countries ERO will fund regions for delegated functions –FRCC will have two budgets – one for ERO delegated functions and one for our other functions

Reliability Standards Retain ANSI-accredited process and Registered Ballot Body (RBB) Retain Standards Authorization Committee (SAC) elected by segments Revise standards process manual –Pro rata segment votes –Risk factors and compliance elements –Editorial changes for ERO File existing 104 standards –Key issue: enforceability Coordinate annual work plan with regulators Remands/directives through regular process

Regional Reliability Standards All reliability standards are ERO-approved standards –Regional criteria are not standards Regions may use ERO-approved procedure –Open, fair, inclusive, balanced and transparent –Regional standards meet criteria (next slide)  WHAT DOES THIS MEAN FOR FRCC ??? –Developed new FRCC procedure for standards development –Approved by the FRCC Board of Directors 3/2/06, will submit to NERC for approval –Now will have FRCC Regional Reliability Standards

Regional Standards Criteria Interconnection-wide regions, WECC and ERCOT (have rebuttable presumption of) –Fair and open process –No adverse reliability or commercial impact on other interconnections –No threat to public health, safety, welfare, or national security –No undue impact on competition within region Other regions, such as FRCC (burden of proof on region to show) –Fair and open standards development process –Justifiable difference for standard, e.g. physical difference –No adverse impact on reliability or competition within region or outside region

ERO Compliance Enforcement Strong ERO oversight of regional compliance programs Retain existing compliance disclosure principles (notice to NERC, placement on website, etc.) Responsibility for compliance applies to all bulk power system owners, operators, and users

Regional Compliance Program Essential Features Compliance program independence –Regional staff must make initial compliance determinations Monitor designated standards for all entities Timely reporting of all violations & mitigation plans No sub-delegation by the regional entity Adequate compliance resources ERO will audit regional entity program every 3 years Entities have single appeals process at NERC

Penalties and Sanctions (still under development) Matrix of base penalties –Risk factors: high, medium, low –Levels of non-compliance: low, moderate, high, severe Quantitative adjustment factors –Entity size –Repeat infractions and prior warnings –Time horizon Other qualitative factors for consideration, e.g.: –Self-reporting and self- correction –Quality of entity compliance program and overall performance –Deliberate violations Risk Level Noncompliance Severity Level Lower (Level 1) Moderate (Level 2) High (Level 3) Severe (Level 4) Lower$1,000$5,000$10,000$15,000 Medium$20,000$30,000$40,000$50,000 High$60,000$70,000$80,000$100,000 FERC statutory limit: $1,000,000 per day

ERO Organization Registration & Certification Regional Entities maintain list of responsible entities –All bulk electric system owners, operators and users –Registration by functional model entity Certify balancing authorities, transmission operators and reliability coordinators (currently expected) ERO program with responsibilities delegated to regions

Additional ERO Programs Reliability assessments Reliability readiness and improvement Training and education System personnel certification Situation awareness and infrastructure security Event analysis and benchmarking  Some of these programs may have different funding, still uncertain until FERC decides

Pro Forma Regional Delegation Agreement  VERY IMPORTANT TO FRCC !!!! General terms Interconnection-wide/non-interconnection-wide terms Delegated functions (region exhibits) –Standards development program –Compliance program –Organization registration and certification –Reliability assessment –Reliability readiness and improvement Consistency is desired by industry !!!

Business Planning and Budgets ERO annual budget process –Includes ERO functions –Regional budget due in June, ERO budget filed in August and approved by regulators in October ERO reviews regional budgets for delegated functions –FRCC will have two budgets – one for ERO delegated functions and one for our other functions Flexibility on funding collection methods Apply penalty funds first to marginal costs by NERC and region for compliance enforcement

ERO Transition Plan Naming of ERO and compliance order Form new corporation; transfer from current members Recognition in Canada Execution of delegation agreements Update standards manual Update standards and roadmap Plan for fill-in-the-blank regional standards 2007 budget and funding allocation Compliance enforcement program 2007 ERO reorganization and staffing adjustments