Protecting Grid Reliability The North American Electric Reliability Council (NERC) is changing to accommodate the forces of electric industry restructuring and increased competition in electricity markets. We expect to continue our reliability oversight role for the United States and Canada with an aggressive plan to transition NERC into the new North American Electric Reliability Organization (NAERO). NAERO will be an industry-led self-regulatory organization with the key objective of setting and enforcing compliance with reliability standards in a fair and non-discriminatory manner, while maintaining the competencies that have made NERC successful. NERC has also announced plans to become the single organization in North America to develop wholesale electric business practice standards. These two activities are fully consistent with the two main principles driving NERC’s transition: "independence" and "market solutions." As NERC becomes more attuned to the commercial environment, our successes will be measured not only by how reliable the grid remains, but how well we embrace and adopt market-based solutions to the host of challenges competition brings.

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NERC’s History Formed in 1968 as a VOLUNTARY organization to promote reliability of bulk power systems throughout North America Members are 10 Regional Councils Canadian utilities are members of three Regional Councils NERC sets reliability standards for the high voltage electric grids Standards MANDATORY but not ENFORCEABLE

Beginnings of Change Apr ‘96 – FERC Orders Open Access More players, more transactions: a 100-fold increase over last 5 years Transmission everywhere highly loaded Economic pressure to bend reliability rules Violations of rules going unpunished Reliability of grids at risk What has happened to the most reliable electric system in the World? In 1996, the Federal Energy Regulatory Commission decreed that transmission systems in the U.S. must be opened to competition. This landmark order fundamentally changed the industry. But I believe it’s a cop-out to say that competition itself has caused reliability problems. In fact, one could make a case that the marketplace has really reduced the incidents of reliability problems. Here are some of the changes you can measure. The magnitude of the number of transactions has changed. All facilities than can be used are being used. Summer price spikes are common – market prices are going to 100 times “normal” and maybe 200 times actual cost. 1999 summer’s constraints were in different places than 1998’s constraints, and 2000’s constraints were different than 1999.

Self-Regulated Reliability Org. Sufficient authority to enforce compliance. Recognition needed as a self-regulatory organization (SRO) by government bodies in Canada, the U.S. and Mexico. Authority to collect funds to support its SRO function. Use NASD as a model. The Panel recommended the creation of an international, industry self-regulatory reliability organization (SRO) that would have sufficient authority to set and enforce compliance with reliability rules, and to collect funds to support this function. In order for a private organization to be able to perform this kind of enforcement function, normally reserved for government, it needed recognition and a grant of authority from governments. The model the Panel used was the National Association of Securities Dealers, which sets and enforces compliance with standards in the securities industry under the oversight of the Securities & Exchange Commission.

Mission and Functions Develop and enforce reliability standards for high voltage grids in North America Assess and report on supply adequacy International scope and perspective Only organization with this responsibility for North America The mission and functions of the SRO will be to develop and enforce standards for the reliability of high voltage grids in North America, and assess and report on supply adequacy. The SRO will have an international scope and perspective, and work closely with governments in the U.S., Canada, and Mexico. It will be the only industry self-regulatory organization with this responsibility for North America.

Regional Relationships Regional organizations essential part of implementation and enforcement function. Strong positive working relations and shared responsibilities with regional organizations, including evolving ISOs and RTOs. Delegation agreements between NAERO and each regional organization. The SRO will depend significantly Regional Reliability Entities (RREs) to perform many of the compliance and enforcement functions. The SRO must develop and maintain strong positive working relations and shared responsibilities with the RREs, which will likely include Regional Transmission Organizations as they evolve. The SRO will enter into delegation agreements with each RRE, which will need to be approved by FERC and the appropriate government agencies in Canada.

Industry Participation & Excellence Voluntary participation by technical personnel is indispensable. Encourage voluntary efforts of the industry’s best technical experts. Ensure “balanced” representation on all NERC committees. Government regulators and other agencies encouraged to participate. One of the key features of the SRO model is the voluntary participation by technical personnel from the industry. The SRO will continue to encourage voluntary efforts of the industry’s best technical experts. Their expertise is essential. The SRO will have balanced representation on all its committees. Federal, Provincial and State government regulators and other agencies are also strongly encouraged to participate.

Public Participation Transparency, openness and accessibility essential to success. Maximize participation among members and the public. Board and Committee meetings open to the public. Minutes of all meetings made public. Independent review every 5 years. The SRO has as one of its basic tenets transparency, openness and accessibility. These attributes are absolutely essential to its success. Our goal is to maximize participation among members and the public. To this end, our Board and Committee meetings are open to the public, and the minutes of all meetings are posted on the NERC web site (www.nerc.com) Lastly, we will conduct an independent review of the organization every 5 years.

Operating Committee Develop Operating Standards 7:00 7:20 7:40 8:00 100 MW The North American electric system was once described as the most complicated machine ever devised by man. It truly is. But like all machines, it needs some operating instructions if it is to continue to work as designed. The Operating Committee develops standards to ensure that this “machine,” the interconnected grid systems on which we all depend, continues to be operated reliably. These are the “rules of the road” for reliable operations. Develop Operating Standards Ensure security or short-term reliability of interconnected transmission grids

The NERC Operating Manual serves as the common dictionary, encyclopedia, and book of rules, essentially the “Bible” for 21 security coordinators and 139 Control Areas. In addition to terms and definitions, history, procedures, training documents and references, the Manual is the home for the 10 Operating Policies. The URL on the screen is THE manual. Everyone has access. It’s electronic. www.nerc.com/~/oc/opermanl.html

Planning Committee Develop Planning Standards Ensure future reliability of interconnected transmission grids Assess and report on long-term adequacy As the electric system is expanded, we need rules to make sure that the new system will be able to be operated reliably. The Planning Committee develops standards that folks who plan future systems need to follow. These rules do not dictate WHAT needs to be built, but what tests the future system needs to be able to meet to assure that it can, in fact, be operated reliably after it is built.

Compliance Enforcement Program Separate and independent from Standing Committees Three key functions: Compliance review process Enforcement process (including a penalty structure) System Operator Certification Process The one feature that didn’t exist in the “old NERC” is our Compliance Enforcement function. The CEP is separate and independent from the stakeholders who comprise the Standing Committees and the Stakeholders Committee. The CEP is comprised of a: Compliance review process Enforcement process, and System Operator Certification Process

NERC Organization Board of Trustees Standing Committees Nine independent members NERC President Standing Committees Broad Sector representation Subcommittees Working Groups Task Forces Operating Committee Planning CIP Stakeholders Staff

Communications Network 3 RC 14 RC 1 RC

Defense Meteorological Satellite Program Images, BLACKOUT 2003 – August 14 ~ 4:15 PM EDT August 13 – 8:29 PM ~ 20 hours BEFORE August 14 – 8:14 PM ~ 4 hours AFTER Ottawa Detroit Toronto Montreal Boston New York City & Long Island Cleveland Buffalo Columbus Defense Meteorological Satellite Program Images, courtesy of the United States Air Force Weather Agency

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Legislation Needed in U.S. FERC jurisdiction over reliability in U.S. Designate new ERO to set and enforce reliability standards in the U.S. Approve delegation to regional entities Define role for States Coordination with RTOs Coordination with Canada and Mexico Antitrust protection In the U.S., legislation is needed to amend the Federal Power Act to give FERC jurisdiction over reliability, and to allow it to provide oversight to the SRO. The legislation that NERC has developed also provides for: Designation of an Electric Reliability Organization with authority to set and enforce compliance with reliability standards Delegation to regional entities A defined role for states Coordination with RTOs Coordination with Canada and Mexico Antitrust protections

International Arrangements Industry SRO develops standards to apply throughout North America Government role to approve standards, hear appeals International framework to assure coordination between U.S., Canada, and Mexico Avoid dominance by FERC One of the most unique features of NAERO is its international nature. Because our electricity grids span three countries, the SRO needs to develop standards that apply universally. The role of governments in this model is to approve the standards developed by the SRO and to serve in a backstop role to the SRO for enforcement. Having in place the necessary international framework will ensure that FERC does not dominate this process.

The Right Path = NAERO Legislation (U.S.) to provide grant of authority Similar grants from Canadian governments Industry SRO with an independent board can do the best job Emphasis on openness and due process Everyone plays by the same rules Send best people to do their best job So the bottom line is we need U.S. legislation to create the SRO. In Canada, the respective Provinces are already positioned to support the SRO framework. (NERC has worked actively with the Fed/Prov Reliability Working Group to assure that the necessary arrangements are in place.) Governed by governed by an independent board, with open and fair processes, NAERO will be in the best position to see that everyone plays by the same set of rules and that the reliability of our international grids is maintained.

Issues Ahead… Adequacy and Performance Coordination & Control Activities Infrastructure Security Monitoring, Assessing, & Enforcement Congestion Management Data Interchange Send best people to do their best job So the bottom line is we need U.S. legislation to create the SRO. In Canada, the respective Provinces are already positioned to support the SRO framework. (NERC has worked actively with the Fed/Prov Reliability Working Group to assure that the necessary arrangements are in place.) Governed by governed by an independent board, with open and fair processes, NAERO will be in the best position to see that everyone plays by the same set of rules and that the reliability of our international grids is maintained.