NERC Compliance Program Overview FRCC 2007 Compliance Workshop April 4 and 11, 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 ● Aug. 2005: Energy Policy Act ● Feb. 2006: FERC Implementing Rule ● April 2006: NERC ERO Application Filing NERC Standards Filing ● July 2006: ERO Certification Order ● Oct. 2006: NERC Compliance Filing FERC Standards NOPR Budget Approval Order ● Nov. 2006Uniform Compliance Program Filing Regional Delegation Agreements Filed ● Jan. 2007Standards NOPR Comments Filings NERC Non-Governance Order ● Mar. 2007Order on Standards Response to January 18 FERC Order ● Apr. 2007Expected Order on Compliance Program and Delegation Agreements ● Summer 2007 – Mandatory Compliance

Standards Establish the Basis Elected Standards Committee Standards Requestors Standards Process Manager SAR & Standard Drafting Teams Ballot Pools Established by the Industry ANSI-accredited process

FERC Standards Final Rule ● Recent rule adopted 83 standards for enforcement in the U.S. by June 2007 ● Of those, direct improvements to 58 through the standards process ● Hold 24 as pending further information  Regional ‘fill-in-the-blank’ standards  Expect compliance as good utility practice ● Focus ERO and RE resources on most serious violations through December 31, 2007

Regional Entities

Regional Delegation Agreements ● Delegated functions  Compliance  Standards  Organization registration  Reliability assessment  Reliability readiness and improvement ● Regional consistency is key  Transparency  Predictability  Uniform outcomes

ERO Program Areas ● Standards ● Compliance ● Reliability Performance ● Reliability Readiness and Improvement ● Training and Education ● Situation Awareness & Infrastructure Security ● Members Forums

Funding ● Funding for ERO and regional delegated functions allocated to load-serving entities  Bulk power system users  Based on Net Energy for Load (NEL) ● ERO will fund regions for delegated functions ● Penalties offset costs  Funded regardless of penalty collections

Organization Registration and Compliance

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

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?

Organization Registration ● Creates a Compliance Registry  Identifies owners, operators, and users of the bulk power system  Separate from funding or membership ● Establishes scope of Compliance Monitoring Program  Notice of compliance responsibility  Opportunity to appeal

ERO Organization Registration ● Registration process  Entities may register directly  Regions or NERC may add to the registration list  Others may nominate those with material impact for registration  Entity may challenge placement in the compliance registry ● Challenge process  Entities must demonstrate they are not a bulk power system owner, operator, or user

Initial Regional Results Region Number of EntitiesTotal Functions ERCOT FRCC MRO74360 NPCC RFC SERC SPP WECC

Initial Results by Entity Type RCs BAsTOPs PAsTSPsRSGs RPsTPsTOs 414 DPs GOsGOPsPSEs 506 LSEs

Compliance Registration Timeline ● March 2 – Regions submit revised registration ● March 13 – NERC and regions complete review ● Late March – NERC provides notices ● April – NERC reviews and rules on objections ● May – NERC hears appeals ● Standards Approval – Provide registration information to regulators

Compliance Program Essential Features ● Strong ERO oversight of regional implementation ● Compliance program independence  Including independence of staff making compliance determinations ● Monitor designated standards for all entities ● Timely reporting of information and all violations ● Impose fair penalties and sanctions ● Uniform compliance programs ● Single process to contest finding and appeal decision

NERC Sanction Guidelines - Influences ● FERC Policy Statement on Enforcement  Issued October 20, 2005 (Docket No. PL ) ● Post Legislation Steering Committee  Penalties and Sanctions Task Group ● Standards Committee  Relative risk of standards - “Risk Factors” ● Other self-regulatory organizations  NASD  CBOE  NYSE

NERC Sanction Guidelines Meets FERC policy statement on enforcement Comparable to the seriousness of the violation on BPS reliability Promotes compliance with standards Filed with and approved by FERC ● Used by all regions to determine penalty or sanction ● Reward  unsolicited self-reporting, quality compliance programs, voluntary corrective actions, etc. ● Punish  repeat violation, evasion, inaction, unwarranted intentional violations (e.g., economic choice), etc. ● Provide flexibility to consider all relevant facts regarding the violation by the violator

How Will Sanctioning Be Carried Out? ● Regional Entities (RE) Staff  RE Staff determine and propose appropriate sanctioning for violation  Entity can contest in a regional hearing  Penalties may be appealed to NERC (and beyond to FERC and the courts…) ● Ongoing NERC review of REs’ sanctioning activities  Uniformity of application & outcomes ● NERC as ERO files “Notice of Penalty”  FERC accepts or adjusts penalty  Effective 31 days after filing ● Remedial actions may be applied immediately to preserve reliability

2006 NERC Compliance Monitoring & Enforcement Program- Preliminary Results

2006 Preliminary Program Results ● Compliance continues to improve %95.9%96.3% 96.7%

Most Violated NERC Standards in 2006 (confirmed and unconfirmed) Over 2/3 of all violations involve 6 standards ● Operating Personnel Credentials (PER-003)  66 violations; mostly small entities ● Transmission Protection System Maintenance and Testing (PRC-005)  30 violations- 27 not documentation ● Consistency with Regional UFLS Programs (PRC-007)  27 violations- 20 correct amount, trip points different ● Plans for Loss of Control Center Functionality (EOP-008)  24 violations ● Operating Personnel Training (PER-002)  16 violations ● UFLS Equipment Maintenance (PRC-008)  15 violations- 11 not documentation

Compliance Trends

Request of Regions ● Assess reliability impact to bulk power system for the aggregate of violations in close electrical and geographic areas ● Assess reliability impact to bulk power system for entities with multiple violations during the year.

Questions