Mandatory Reliability Rules Implementing the Electric Reliability Organization David W. Hilt Vice President & Director of Compliance APPA Reliability Symposium January 10, 2007

U.S. Energy Policy Act of 2005 Reliability Legislation ● One industry self-regulatory ERO ● FERC oversight  Delegates authority to set and enforce mandatory standards to ERO  ERO delegates authority to regional entities ● Standards apply to all owners, operators and users of bulk power system ● Independent governance and Compliance Program

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

ERO Implementation – So Far ● Aug Energy Policy Act ● Feb FERC Implementing Rule ● April 2006 NERC Application ● April 2006 Standards Filing ● July 2006 ERO Certification ● Oct Compliance Filing ● Oct. 2006Standards NOPR ● Oct Budget Approval ● Nov. 2006Uniform Compliance Program ● Nov. 2006Regional Delegation Agreements ● Jan. 2007Standards NOPR Response

Compliance Program Design Program Design ● Modeled after other industry based self regulatory organizations ● Regional implementation  Regional entities monitor responsible entities ● NERC oversight role  Audit regional implementation  Measure regional compliance  Report to governmental and regulatory authorities (US, Canada and Mexico)

Compliance Enforcement Program The Program So Far ● Since its beginning in 1999  Monitor compliance with simulated enforcement actions (WECC exception)  Letters to non-compliant entities  Approximately 350 violations identified annually ● Non-compliance identified corrective actions taken ● Quarterly & Annual reports developed and posted at

Compliance Monitoring Methods Compliance Monitoring ● Periodic reporting ● Self-certification ● Exception reporting ● Investigations ● Random spot checking or audits ● Compliance audits ● Self Reporting

Compliance Monitoring and Enforcement Program ● Single audit program for rigorous audit activities ● Prompt reporting ● Confidentiality provisions ● ERO files summary reports to FERC ● ERO or region imposes fair penalties and sanctions ● Single appeals process

Penalties & Sanctions ● FERC Policy Statement on Enforcement  Issued October 20, 2005 (Docket No. PL ) ● Post Legislation Steering Committee  Penalties and Sanctions Task Group ● Other efforts underway  Relative risk of standard – BOT direction ● Other self-regulatory organizations  NASD  CBOE  NYSE

NERC Sanction Guidelines ERO Sanction Guidelines ● Comparable to levels of threat to reliability ● Promotes compliance with standards ● Rewards self-reporting & voluntary corrective actions ● Flexible to adapt to all relevant facts surrounding the violation ● Consistent application of guidelines ● Meets FERC policy statement

How Will Penalties Be Applied ● Penalties will be applied by the Regional Entity  Staff will determine initial penalty or sanction  Regions may reach a settlement – must be filed with FERC  Penalties may be appealed ● Once finalized NERC files “notice of penalty”  Penalties may be adjusted by FERC  Penalties become effective 31 days after filing  Remedial actions may be applied immediately to preserve reliability

Schedule for Implementation ● Approval of Standards  Penalties apply to some entities ● Standards NOPR Response  NERC proposed no actual penalties until January 1, 2008

Organization Registration Who Must Comply? ● Any entity responsible for any part of bulk electric system reliability  Historically defined as control areas and reliability coordinators ● Functional entities  Aligns reliability requirements with functional unbundling

Functional Responsibilities Reliability Coordinator Transmission Operator Generation Operator Balancing Authority Transmission Owner Generation Owner Distribution Provider Load Serving Entity Planning Authority Purchasing Selling Entity Regional Reliability Organization Reserve Sharing Group Transmission Planner Transmission Service Provider Resource Planner Registered In 2005

Owners, Operators, and Users ● Energy Policy Act:  All users, owners, and operators of the bulk-power system shall comply with reliability standards ● FERC Rule  All entities subject to the Commission’s reliability jurisdiction… (users, owners, and operators of the bulk- power system) shall comply with applicable Reliability Standards … ● Who are they?

Section I Owner, Operator, or User of the BPS Section III Smaller Entity De-selection Criteria Section II Functional Type Definitions Section IV Joint Action Agencies Registration Selection Criteria

Organization Registration ● Registration process  Entities may register directly  Regions or NERC may add to the registration list  Others may nominate for registration ● Entity may challenge being placed on the compliance registry  Must demonstrate why it is not a bulk power system owner, operator, or user

Entity Registration ● Non-binding Registration List  First draft complete and under review ● Registration completed once FERC approves NERC standards and rules on their applicability  Notices will be provided to entities being registered in the compliance registry

Next Steps ● Regions continue efforts to complete preliminary registration ● Criteria from “Statement of Compliance Registry Criteria (Revision 2)”  Posted on the NERC Web site

Functional Types Required to Register Function TypeAcronymFunction TypeAcronym Balancing AuthorityBAReliability CoordinatorRC Distribution ProviderDPReserve Sharing GroupRSG Generator OperatorGOPResource PlannerRP Generator OwnerGOTransmission OwnerTO Load-Serving EntityLSETransmission OperatorTOP Planning AuthorityPATransmission PlannerTP Purchasing-Selling EntityPSETransmission Service ProviderTSP

Exceptions to the Registration Criteria ● Certain functional Entities are allowed exceptions to the registration requirements  Load Serving Entities  Distribution Providers  Generator Owner/Operators  Transmission Owners ● Statement of Compliance Registration Criteria (Revision 2) contaians specific requirements

Load Serving Entity Exceptions ● The LSE  has a peak load that is < 25 MW or;  is NOT designated as the responsible entity for facilities that are part of a required UFLS or;  is NOT designated as the responsible entity for facilities that are part of a required UVLS.

Distribution Provider Exceptions ● The DP  is a system serving a peak load that is < 25 MW or;  is NOT designated as the responsible entity for facilities that are part of a required UFLS or UVLS;  is NOT designated as the responsible entity for facilities that are part of a required Special Protection System or Transmission Protection System.

Generator Owner/Operator Exceptions ● The GO/GOP is  an individual generating unit < 20 MVA or;  a generating plant/facility < 75 MVA or;  a generator, regardless of size, that is NOT a blackstart unit material to and designated as part of a TO entity’s restoration plan, or;  a generator, regardless of size, that is NOT material to the reliability of the bulk power system.

Transmission Owner Exceptions ● The TO  is an entity that DOES NOT own an integrated transmission element 100 kV and above, or lower voltage necessary to provide for the reliable operation; or  is an entity that DOES NOT own a transmission element below 100 kV on a critical facilities list that is defined by the regional entity/CBRE, or;  DOES NOT have Ownership of radial transmission facilities where NERC Reliability Standards are applicable (e.g. vegetation management, system protection maintenance and testing) are included in this definition.

Generic Exception ● An Entity will not be registered based on these criteria if effective control and responsibility for maintenance and operation of the designated function(s) has been transferred by acceptable contract to another entity, such as a load-serving entity, G&T cooperative or municipal joint action agency, etc.]

Joint Action Agencies & Members ● A JAA (or similar organization) may register as a Registered Entity on behalf of one or more its members. ● A member of a JAA may choose to register as a separate Registered Entity ● Both the JAA and its member may choose to register for the same function as a Registered Entity. JAAs and Members who register in one of the above manners must comply with Registered Entity Compliance Reporting Requirements of Statement of Compliance Registration Criteria (Revision 2)

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