1. Proposed Reforms to the Standards of Conduct
18 CFR Part 358
Presentation by
Susan J. Court
Director, Office of Enforcement
Federal Energy Regulatory Commission
March 26, 2008

2. Where Are We?
On March 21, 2008, the Commission proposed a new (with elements of the old) approach to the Standards of Conduct, and issued a New NOPR to ensure adequate scope of notice. Standards of Conduct for Transmission Providers, RM ,122 FERC ¶ 61,263 (Mar. 21, 2008).
New NOPR would rescind existing Part 358 and replace it with an entirely new part.
Comments are due 45 days after publication in Federal Register (approximately mid-May).

3. How Did We Get Here – Chapter 1?
Order No. 497 (1988):
Applied to natural gas pipelines.
Required pipeline’s operating employees to function independently of its marketing affiliates’ operating employees.
Upheld in Tenneco Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992)(citing demonstrated record abuses by marketing affiliates).
Prompted the Commission to institute the enforcement hot line, 18 C.F.R. § 1b.21.
Order No. 889 (1996):
Applied to electric industry transmission providers.
Required employees engaged in transmission system operations to function independently of employees engaged in wholesale merchant functions.
Not appealed.

4. How Did We Get Here – Chapter 2
Order No (2003):
Combined electric and gas
Expanded scope of Standards to include energy affiliates, defined as:
Engaging in transmission transactions
Managing or controlling transmission capacity
Buying and selling gas or electric energy in markets
Engaging in financial transactions relating to sales or transmission
Reason for expansion to include energy affiliates:
Gas -- potential abuse from unbundling of sales from transportation
Electric -- potential abuse from proliferation of power marketers
Changed nature of “independent functioning” requirement:
Order Nos. 497 and 889 used employee functional approach (based on job function)
Order No switched to corporate functional approach (based on employer)
Reason for change to corporate functional approach:
Not all energy affiliates are jurisdictional
Commission feared shared responsibility could not be enforced

5. How Did We Get Here – Chapter 3?
National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831 (D.C. Cir. 2006)(overturning Order No as to gas requirements and finding no record evidence to support assertion of energy affiliate abuse).
Standards of Conduct for Transmission Providers, Order No. 690, 72 Fed. Reg (Jan. 19, 2007), FERC Stats. & Regs. ¶ 31,237, order on reh’g, Order No. 690-A, 72 Fed. Reg (Mar. 27, 2007), FERC Stats. & Regs. ¶ 31,243 (2007)(interim rule retaining retained corporate functional approach and concept of Energy Affiliates established in Order No. 2004).
Standards of Conduct for Transmission Providers, Notice of Proposed Rulemaking, 72 Fed. Reg (Jan. 29, 2007), FERC Stats. & Regs. ¶ 31,611 (2007).
Solicited solution to National Fuel concerns.
Considered emerging issues of integrated resource planning and competitive solicitation.
Did not alter approach to independent functioning requirement.
Generated 95 comments and 19 reply comments from state commissions, trade associations, public utilities, pipelines, other entities, and individuals.

6. Why Did Commission Consider a Revised Approach?
18 C.F.R. Part 358
Title 18 of the Code of Federal Regulations
Standards are complex and a challenge to understand, comply with, administer, and enforce.
Over-breadth of Standards has been cited as impeding efficient business operations.

7. New NOPR Guiding Philosophy

8. New NOPR Guiding Philosophy
Return to the core principles of Order Nos. 497 and 889
Recognize statutory prohibitions in FPA and NGA protect against undue discrimination
Confine the scope of the Standards to known abuses instead of potential abuses
Revamp Standards to enhance compliance and enforcement, and to increase transparency of transmission/affiliate interactions to aid in the detection of undue discrimination
Provide clarity by rewording and reorganizing the Standards
Avoid impeding business operations due to over-breadth of coverage
Eliminate concept of energy affiliates for electric as well as gas
In brief:
Return to an employee functional approach instead of a corporate functional approach
Strengthen no conduit rule by prohibiting both passing and receipt of transmission function information
Increase transparency so undue discrimination may be detected, corrected and sanctioned

9. Or…put another way

10. The Independent Functioning Rule – Basic Prohibition and Definitions
Basic Prohibition: Transmission function employees must function independently of marketing function employees.
Transmission function definitions:
“Transmission functions” are the conduct of transmission system operations and the planning, directing, organizing or carrying out of transmission-related operations, including the granting and denying of transmission service requests.
The definitions for “transmission function employee” and “transmission function information” key off core definition of “transmission functions.”
Marketing function definitions:
“Marketing functions” are the sale for resale in interstate commerce, or the submission of offers or bids to buy or sell natural gas or electric energy or capacity, demand response, virtual electric or gas supply or demand, or financial transmission rights in interstate commerce.
The definition for “marketing function employee” keys off core definition of “marketing functions.”

11. The Independent Functioning Rule -- Exceptions Carried Over From Existing Standards
Bundled retail sales (sales by POLRs added here in new NOPR)
Incidental purchases or sales of natural gas to operate interstate natural gas pipeline transmission facilities,
Sales of natural gas solely from the transmission provider’s own production,
Sales of natural gas solely from the transmission provider’s own gathering or processing facilities, and
Sales by an intrastate natural gas pipeline or local distribution company making an on-system sale.

12. The Independent Functioning Rule -- Elements of Reform and Permitted Interactions
Restricts marketing function employees to those actually engaged in marketing functions, rather than all employees of a marketing affiliate.
Eliminates need for concept of shared employees between the transmission provider and the marketing affiliate.
Eliminates obstacles to efficiency resulting from overbroad restrictions.
Encourages compliance by applying common sense approach.
Excepts supervisors unless they are actively and personally engaged in transmission or marketing activities.
Permitted interactions:
Transmission function employees and marketing function employees may exchange certain limited information:
Information regarding generation necessary to perform generation dispatch
Information necessary to maintain or restore operation of the transmission system
A contemporaneous record must be kept of any such exchanges, except in emergency circumstances, where the record can be made after the fact.

14. The No Conduit Rule
Current rule: Transmission function employees may not disclose information concerning the transmission system to marketing or energy affiliates.
Elements of reform:
All employees are prohibited from passing restricted information to marketing function employees.
Transmission provider is prohibited from using a conduit to pass restricted information to prohibited employees.
Marketing function employees are prohibited from receiving transmission function information.
Permitted interactions: The same interactions permitted under the independent functioning rule apply to the no conduit rule, namely:
Information regarding generation necessary to perform generation dispatch
Information necessary to maintain or restore operation of the transmission system

15. The Transparency Rule
Information can be taken out of no conduit rule by contemporaneously posting it on OASIS or Internet website.
Inadvertent disclosure of non-public information can be cured by posting it on OASIS or Internet website.
Contemporaneous record of permitted exchanges between transmission function employees and marketing function employees (or after the fact in the case of emergencies) must be made.
Posting of waiver notices, acts of discretion, and offers of discounts is retained.
Maintenance of waiver logs is retained.
Posting requirements can be temporarily suspended in emergencies.

16. Miscellaneous Provisions
Training requirements are strengthened to include annual training and certification of completion .
Chief Compliance Officer must be designated and name and contact information must be posted.
Transmission providers must be in full compliance when they commence transmission transactions or have a rate on file with the Commission.

17. Comparisons between the Various Rules and Proposals
Addendum
Comparisons between the Various Rules and Proposals

18. Comparisons Three comparisons may help to under-stand New NOPR:
Comparison of New NOPR to Order Nos and 690
Comparison of New NOPR to Order Nos. 497 and 889
Comparison of New NOPR to Initial NOPR

19. Comparison of New NOPR to Order Nos. 2004 and 690
This is the most important comparison as it implicates current law.
Accordingly, the New NOPR includes an appendix (Appendix B) making the comparison
Note: this appendix will not be published in Federal Register.
In brief, the major differences are:
return to an employee functional approach
eliminate concept of energy affiliates
eliminate concept of shared employees
strengthen no conduit rule
provide for information sharing in critical areas, subject to record keeping

20. Comparison of New NOPR to Order Nos. 497 and 889
Restores employee functional approach of older orders
Further clarifies scope of employees covered with its definition of marketing function employee
Provides for record keeping and employee training

21. Comparison of New NOPR to Initial NOPR
Returns to employee functional approach of Order Nos. 497 and 889
Limits marketing employee restrictions to buyers and sellers, rather than to all employees of affiliates
Eliminates need for shared employees between transmission provider and affiliates
Provides exception for long range planning
Expands definition of marketing to include virtual trading, demand response and financial transmission rights
Prohibits all employees from passing transmission information to marketing function employees
Prohibits marketing function employees from receiving transmission information

22. Major Differences Between New NOPR and Initial NOPR
Uses employee functional approach
Eliminates energy affiliates concept for electric as well as gas (unneeded under employee functional approach)
Requires contemporaneous record of exempted information exchanges between restricted employees
Accommodates long range planning whether state-mandated or not
Exempts POLR as part of bundled retail sales
Provides temporary exemption from public posting requirements in emergencies