Mark E. Hegerle Deputy Director, Reliability Office of Energy Markets & Reliability Federal Energy Regulatory Commission EUCI: Disaster Management and Cost Recovery New Orleans, LA June 6, 2006 Preparing for the Next Storm: EPAct 2005 & Reliability

The Impacts of Katrina and Rita Unique Destruction (scope and magnitude) Not Unique Frequency – hurricanes, etc. aren’t going away “Unnatural” disasters are also part of today’s unfortunate reality

FERC’s Response Temporarily waived rules to restore service and bring more natural gas to the Gulf area (EM06-5) Waived certain standards of conduct record-keeping requirements (RM01-10/EY06-6) Permitted Louisiana Municipal Gas Authority to waive penalties/fees/charges incurred as a result of the emergency (RP05-666) Granted permission to reroute natural gas shut in by the hurricanes (EM06-1) Relaxed rules and allowed electric utilities to take necessary steps to keep systems operating (EY05-14) Extended filing deadlines for Entergy (EY05-13) Maintained vigilant oversight of natural gas markets

Long-Term Needs: A Reliable Grid A reliable grid is better positioned to withstand and rebound from disasters The more robust the grid, the quicker the recovery EPAct 2005’s requirement for mandatory and enforceable reliability standards is critical to making this grid a reality

Implemention of EPAct 2005 The Final Rule implements the reliability provisions of EPAct in new Section 215 of the Federal Power Act. Congress directed the development of mandatory, Commission-approved, enforceable reliability standards. All users owners, and operators of the bulk power system must obey these mandatory reliability standards. FERC issued its reliability regulations on February 3rd. FERC established a process to certify an Electric Reliability Organization—the ERO. FERC’s regulations provide for reliability standards that are developed by industry and approved by FERC. The ERO may delegate its enforcement responsibilities to a regional entity.

International Coordination EPAct “urges” the President to negotiate agreements with Canada and Mexico to provide for both effective compliance with reliability standards and for the effectiveness of the ERO. The rule “encourages” the ERO candidate to seek recognition in Canada and Mexico while pursuing Commission certification. The rule directs the ERO candidate to propose an approach to international coordination of standards regarding remands and development. The rule acknowledges that the Commission will consider the time needed for Canadian and Mexican authorities to act when setting a remand deadline.

ERO Certification An ERO applicant must demonstrate that: –it has the experience and ability to develop and enforce reliability standards; –it has procedural rules that meet statutory and regulatory criteria, e.g., for fairness and impartiality in in governance, processes, enforcement practices, and assessment of fees.

Becoming a Regional Entity To become a regional entity with enforcement authority, a party must sign a delegation agreement with the ERO, and FERC must approve the agreement. Approval has statutory criteria. These are similar to criteria for ERO approval, plus special criteria regarding governance, effectiveness, and efficiency. The ERO and the Commission must “rebuttably presume” that a proposal from a party that spans an entire interconnection is effective and efficient. If good faith negotiations with the ERO fail, a party seeking to be a regional entity may submit a delegation agreement directly to the Commission.

Special Delegation Provisions In its application to be the ERO, the applicant must submit a “pro forma” delegation agreement with all the common core elements of all delegation agreements. The ERO must ensure that a regional entity’s program for enforcing reliability standards is—and remains—fair and effective. The Commission will assess the ERO’s oversight of a regional entity and may also oversee directly the regional entity’s conduct of its statutory functions. Since the delegation agreement must include the regional entity’s procedural rules, any change in these rules must be approved first by the ERO, then by FERC.

ERO & Regional Entity Funding In its application to FERC, the ERO must propose a detailed funding mechanism. Annually, the Commission will approve funding for the ERO’s statutory functions. This includes ERO funding for the statutory functions that the ERO delegates to the regional entities. The ERO will approve regional entity budgets for statutory activities and include these in its own budget. The ERO must submit to FERC for approval an annual business plan and budget for itself and regional entities. FERC will financially audit the ERO—and the ERO audit the regional entities—to ensure that this mandatory funding is used effectively for statutory functions.

Commission Orders to the ERO Commission may periodically audit the ERO to ensure its compliance with the statute, the regulations, and FERC orders. Normally, the ERO will audit regional entities. The Commission may order the ERO or a regional entity to fulfill its responsibilities under the reliability law. The Commission may take action against the ERO or regional entity for non-compliance with its orders. Actions may include remedial actions and improvement programs and, in the extreme, civil penalties, suspension of ERO certification, and decertification.

Reliability Standards The ERO must use a fair process to develop a reliability standard for proposal to the Commission. A reliability standard is not enforceable under the law until FERC approves it. FERC may approve a proposed reliability standard if it is just and reasonable, is not unduly discriminatory or preferential, and is in the public interest. FERC will give due weight to the technical expertise of the ERO—and of a regional entity that spans an entire interconnection if the reliability standard is proposed to apply just to that interconnection. FERC will not defer to the ERO or a regional entity, however, regarding a proposal’s effect on competition.

Regional Differences Our regulations permit regional differences in reliability standards—as the exception rather than the norm. A proposal for a difference first goes to the ERO. The ERO must “rebuttably presume” that a reliability standard proposed by an interconnection-wide regional entity meets the statutory criteria. If the ERO approves it, the regional difference becomes the ERO’s proposal to FERC. Commission will generally accept a regional difference if: –it is more stringent than the ERO standard, or –it is needed to accommodate a physical difference in the system A regional difference approved by FERC is an ERO reliability standard and is kept on file at the ERO.

States, Regions, and the ERO A state may act to ensure the safety, adequacy, or reliability of electric service provided the action is not inconsistent with a reliability standard. The regulations have a process for dealing with an alleged inconsistency. States in a region may have FERC establish a regional advisory body to advise the ERO, a regional entity, or FERC on standards, governance and other matters. FERC may defer to an interconnection-wide regional advisory body. FERC must establish such a body whenever it satisfies the conditions set out in the law: –Covers 2/3 of the region’s states (>½ state’s load in the region) –Governor appoints one member from each state

Enforcement The regulations require the ERO and each regional entity to have a program for ensuring compliance with the reliability standards by users, owners, and operators. Each program must provide for audits of compliance, actions to remedy poor compliance, and provisions to investigate alleged violations. Investigations must follow uniform procedures and provide due process. They are generally not public. The ERO must report violations promptly to FERC. A regional entity reports promptly through the ERO. The Commission has its own independent authority to take any of these and other enforcement actions.

Penalties The ERO or a regional entity may impose a penalty for a violation. It may be either non-monetary or monetary. The ERO must develop penalty guidelines and follow due process in applying them. There can be one appeal. The ERO will propose where. The ERO must file a notice of penalty at FERC. The alleged violator has 30 days to request Commission review of a violation allegation or of the penalty. Otherwise, the penalty goes into effect on the 31 st day without Commission action. FERC’s review of the allegation or penalty will be public unless disclosure would jeopardize system security.

Looking Ahead The new law is a success for the electric utility industry. It builds upon industry’s experience and expertise for developing and enforcing electric bulk power system reliability standards. On April 4, NERC filed its reliability standards and an application to apply for the ERO position. The Commission has announced it will conduct a review of the reliability standards by the rulemaking process. An initial staff report was released May 11, 2006