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

2. 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, RM07-1- 000,122 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. 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. 4 How Did We Get Here – Chapter 2 Order No. 2004 (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. 2004 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. 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. 2004 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. 2427 (Jan. 19, 2007), FERC Stats. & Regs. ¶ 31,237, order on reh’g, Order No. 690-A, 72 Fed. Reg. 14235 (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. 3958 (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. 6 Why Did Commission Consider a Revised Approach? 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. 18 C.F.R. Part 358 Title 18 of the Code of Federal Regulations

7. 7 New NOPR Guiding Philosophy

8. 8 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. 9 Or…put another way

10. 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. 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. 12 The Independent Functioning Rule -- Elements of Reform and Permitted Interactions Elements of reform: 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.

13. 13

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

18. 18 Comparisons Three comparisons may help to under- stand New NOPR: Comparison of New NOPR to Order Nos. 2004 and 690 Comparison of New NOPR to Order Nos. 497 and 889 Comparison of New NOPR to Initial NOPR

19. 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. 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. 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. 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