1. The Electric Reliability Organization Mandatory Reliability Standards Gerry Cauley Vice President and Director of Standards

2. 2 United States Federal Energy Regulatory Commission Mexico Comision Reguladora de Energia Electric Reliability Organization Overview Electric Reliability Organization Regional Entities Other ERO Members Bulk Power System Owners, Operators, Users Reliability Standards Compliance Enforcement Reliability Assessment Government Oversight Canada NEB, Alberta, British Columbia, Manitoba, Ontario, New Brunswick, Nova Scotia, Quebec, and Saskatchewan

3. 3 President & CEO Rick Sergel Standards G Cauley Standards Dev. Standards Process Regional Standards NAESB Interface Compliance D Hilt Compliance Oversight Compliance Monitoring Enforcement Investigation Reporting Tracking Reliability Readiness G Adamski Performance Analysis D Nevius Future Adequacy Bench- marking Incident Analysis Training & Education M Sidor Personnel Certification Continuing Education Education & Information Exchange Situation Awareness S Johnson ESISAC Security Planning Reliability Tools Support Legal & Regulatory D Cook Finance & Accounting J Conner Human Resources J Morgan Member Forums D Benjamin IT L Constantini Admin. 69 FTE budgeted today to total 80 FTE in 2007 NERC Organization

4. 4 Funding ● Funding for ERO and regional delegated functions allocated to load-serving entities  Bulk electric system users  Based on Net Energy for Load (NEL) ● ERO will fund regions for delegated functions ● Use practical collection mechanisms

5. 5 Regional Delegation Agreements ● General terms for interconnection-wide and non-interconnection-wide ● Delegated functions (region exhibits)  Compliance  Standards  Organization registration and certification  Reliability assessment  Reliability readiness and improvement ● Key is consistency!!!

6. 6 ERO application and 102 V0 standards filed NERC certified as ERO ERO and regional budgets filed 16 new and 11 revised standards filed ERO certification compliance filing Standards NOPR FERC approves 2007 ERO/region budgets File regional delegation agreements File compliance elements, risk factors File standards work plan FERC approves ERO compliance filing FERC approves standards FERC approves delegation agreements Mandatory standards with financial penalties ERO Timeline 4/4/06 7/20/06 8/25/06 8/28/06 10/18/06 10/19/06 11/06 1/07 3/07 6/07

7. 7 ERO Standards Process ● ANSI-accredited process ● Registered ballot body (RBB) of stakeholders ● Elected standards committee ● Recent changes  Risk factors and compliance elements  Vote weight capped at 1% per entity (or person)  Split RRO/REs into 10 th segment  Remands/directives  Urgent and emergency actions  No automatic expiration of urgent/emergency actions

8. 8 Brief History of NERC Standards April 2005 April 2006 August 2006 October 2006 November 2006 December 2006 90 Version 0 standards go into effect 102 standards filed for approval 16 new/11 revised standards filed FERC issues standards NOPR 3 new/20 revised standards filed 3-year standards work plan filed 83 3 8 24 Pending – System Limits Standards Pending – Cyber Security Standards Proposed for Approval Pending further information “good utility practice”

9. 9 What Does the FERC NOPR Propose? ● Approve 83 standards for enforcement in the U.S. by June 2007 ● Of those, direct improvements to 62 through the standards process ● Hold 24 as pending further information  Regional ‘fill-in-the-blank’ standards  Expect compliance as good utility practice ● Suggest priorities

10. 10 Why NERC Believes It’s a Really Good NOPR ● Avoids reliability gap  Most important thing NERC does is mitigate, not penalize performance  Entity rights protected by due process and flexibility of NERC and regions to act fairly ● Gives due weight to technical expertise of industry and NERC  Refers improvements to open, balanced, inclusive stakeholder process  Avoids a remand

11. 11 Standards Approval Decision Options Proposed Approved Approve (21) Approve and direct revisions (62) Hold pending further information (24) Remand (0)

12. 12 BPS-BES Jurisdictional Issue Registration Debate of jurisdiction boundary and bulk power system vs. bulk electric system ERO will register each entity to be monitored for compliance and subject to ERO penalty: ● Registration is practical ● Gives up one penalty, one time ● Not helpful to determine the margins now

13. 13 What NERC Will Ask FERC to Do ● Direct all NOPR comments specific to standards go through NERC process  Put responsibility on ERO  Business plan, work plan, and results to date indicate we can deliver on high expectations ● Avoid framing directive to require a single solution, specific language, or metric ● Reconsider trial penalty period or at least recognize need for discretion ● We can remove RRO from standards ● We understand value of filing Functional Model; treat as reference only

14. 14 The Climb To Really Excellent Reliability Standards Camp ‘Version 0’

15. 15 Excellent Reliability Standards Who Shall do what? To what result or outcome? Under what conditions How? Prescribe elements Technical adequacy Clear, focused applicability Unambiguous requirements

16. 16 Standards Work Plan: Overview ● Filed 12/1/06 in U.S. and 12/7/06 in Canada ● Dynamic management tool  Communicate vision  Coordinate work  Measure progress ● 31 projects grouped by subject matter ● Aggressive but achievable schedule ● Detailed project descriptions listing ‘to dos’ ● More efficient use of drafting teams ● Integrates ‘fill-in-the-blank’ plan

17. 17 Representative Changes to Standards ● Concise title/purpose with a reliability value ● Applicability  More specific with regard to entity, facilities, and responsibilities  Changes from Functional Model, V3  Remove RRO (RE remains compliance monitor) ● Compliance elements  Measures; violation severity levels; risk factors; time horizons; etc.

18. 18 Violation Severity Levels ● Level 1: mostly compliant with minor exceptions ● Level 2: mostly compliant with significant exceptions ● Level 3: marginal performance or results ● Level 4: poor performance or results

19. 19 Other Improvements ● Review technical adequacy and performance metrics ● Address ‘fill-in-the-blank’ standards ● Reorganize, streamline standards ● Merge in organization certification standards ● References ● Variances

20. 20 Vision for Regional Standards NERC Reliability Standards Region A B C D E F G NERC Reliability Standards Regional Reliability Standards B A C E H D F G H Regional Criteria and Procedures Today ERO Vision: NERC & regional standards are - Consistent - Congruent - Complete - Excellent