1. “Overview of FERC-NERC-SERC” 2006 Transmission Customer Forum Marc Butts September 21, 2006 Marc Butts September 21, 2006

2.  How did we get here with NERC & SERC?  What is this Energy Policy Act all about?  How did we get here with the NERC standards?  What is this “registration thing” all about?  What are the penalties if I don’t comply? Topics:

3. What’s the history behind NERC & SERC?

4. NERC – North American Electric Reliability Council 1965 – Created after the Northeast Blackout 1968 – Formed by 12 regional and area organizations 1996 – Opens its Board and Committees to voting participation by all industry segments (IPPs & marketers) 1999 – Independent Board Created 2005 – EPAct mandates creation of an Electric Reliability Organization (ERO) 2006 – North American Electric Reliability “Corporation” 2006 – FERC approves NERC as the ERO

6. SERC – Southeastern Electric Reliability Council 1970 – Organizations in the Southeast combined to form SERC – 4 were original members of NERC 2003 – Established voluntary Compliance Enforcement Program 2006 – Changed it’s name to “SERC Reliability Corporation” and applied to become a Regional Entity under the ERO

7. SUB-REGIONS of SERC

8. - Companies grouped together to form Regions - Regions formed NERC and became the members - Regions delegated certain authority to NERC - NERC received it’s authority from the regions and relied on voluntary compliance with standards Company Region NERC Authority The way things were

9. FERC - EPAct mandated creation of an ERO and gave FERC oversight of the ERO with significant penalty authority - The ERO can delegate some authority to an approved Regional Entity (RE) - Companies can join a Regional Entity. However, companies must comply with NERC standards - NERC (the ERO) and standards are being reworked and refined - Regions are being reworked and refined to become Regional Entities Authority Where we are today Company Regional Entity NERC/ERO

10. Summary of What Has Changed Where NERC receives it’s authority from (“who’s the boss?”) Mandatory vs. Voluntary compliance Compliance will be integrated into our corporate structures just like other risk areas More requirements, documentation, and costs Increased coordination and cooperation will be necessary Significant penalties for non-compliance ($$$)

11. What Hasn’t Changed NERC’s need for technical expertise NERC’s standards development process The need for regional groups (SERC Reliability Corp.) Our stand on being in compliance with standards (our “culture of compliance”) Our proactive support and involvement with NERC (the ERO) and SERC

12. What is this Energy Policy Act all about?

13. Energy Policy Act of 2005 Signed into law by the President on August 8, 2005. Creates an ERO certified by FERC with authority to develop and enforce mandatory reliability standards, including authority to levy penalties for violations of standards. All users, owners, and operators of the bulk-power system must comply with the mandatory reliability standards.

14. Energy Policy Act of 2005 The ERO must submit each proposed new reliability standard or modification to an existing standard to FERC for approval. FERC may approve a reliability standard filed by the ERO or remand it to the ERO for further consideration. Only a reliability standard approved by FERC is enforceable by the ERO or a Regional Entity (RE). FERC must approve all penalties imposed by the ERO or Regional Entities.

15. Energy Policy Act of 2005 The ERO, with FERC approval, may delegate enforcement authority to a RE (SERC) if the RE is governed by an independent board, a balanced stakeholder board, or a combination of independent and balanced stakeholder board. A Regional Entity may propose reliability standards to the ERO.

16. ERO Certification Final Rule FERC issued a Notice of Proposed Rulemaking (NOPR) on September 1, 2005 with comments due by October 7, 2005. FERC issued a Final Rule on February 3, 2006.

17. NERC Application for ERO Certification Major Components of the Application Rules of Procedure Document (approx. 225 pages) Summary of NERC Approved Reliability Standards Preliminary Outline of Transition Roadmap for ERO Reliability Standards Pro Forma Regional Delegation Agreement

18. NERC Reliability Standards Filing NERC filed 102 reliability standards for FERC approval on April 4, 2006. FERC issued a staff assessment of the standards for public comment on May 11, 2006. FERC held a technical conference on July 6, 2006 to solicit additional public input on the filed standards.

19. NERC Application for ERO Certification FERC Order FERC issued an order on July 20, 2006 certifying NERC as the ERO. NERC must make a compliance filing by October 18, 2006 to modify certain documents and to provide additional justification for certain proposals. Compliance filing will be very substantial.

20. NERC Reliability Standards Filing NERC stated in the filing that certain standards lacked compliance measures and that these standards would be refiled in November. NERC also stated that certain standards currently require compliance by the RROs (rather than users, owners, and operators) and that a schedule for modification of these standards would be provided in November,

21. NERC Reliability Standards Filing FERC plans to issue a NOPR in September. Final Rule on the reliability standards filing is expected in the first quarter of 2007.

22. ERO Transition Timeline (Approx.) 7/6/06 7/20/06 08/02/06 8/25/06 9/8 11/8/06 11/08/06 11/1/06 12/06 1 st Q 07 7/1/07 Technical conference on standards FERC certifies NERC as the ERO Board approves 2007 ERO/region budgets NERC merges into new corporation NERC files ERO/region budgets Standards NOPR File regional delegation agreements File compliance elements, risk factors File plan for regional fill-in-blank standards FERC approve 2007 ERO/region budgets FERC approve ERO compliance filing FERC approve standards FERC approve delegation agreements ERO begins assessing monetary penalties

23. How did we get here with the NERC standards?

24. In the Beginning … NERC Operating Policy Manual –General Information –Control Area Criteria –Reliability Coordinator Standards of Conduct –Operating Policies –Appendixes –Training Documents –Data –References

25. In the Beginning … NERC Planning Standards –Foreword –Introduction –I. System Adequacy and Security –II. System Modeling Data Requirements –III. System Protection and Control –IV. System Restoration –References –Reliability Criteria Subcommittee

26. NERC Activities 2001 - Functional Model and Standards Taskforce –NERC passed several resolutions to approve a functional operating model, ensure the independence of the reliability coordinators, and initiated a transition to organization standards –NERC Operating Committee designed a model that defines the basic functions for reliable bulk electric system operation –NERC developed a series of new control area criteria, based on the Functional Model, which established the requirement for qualification as a NERC-certified control area –The Standards Task Force (STF) was established to redesign the process by which NERC standards are developed

27. Steps Toward Reliability Standards 2002 –Concern over physical and cyber security lead to formation of the Critical Infrastructure Protection Advisory Group –NERC implements a new reliability standards development process for the industry NERC/NAESB Coordination Organizational Certification Personnel Certification Reliability Coordinator Audits New Tools and Procedures –Standards Development Process is implemented under the Standards Authorization Committee ANSI approved standard process Well defined, but slow

28. Steps Toward Reliability Standards 2003 –First standard approved under new process (CIP) –18 new standards under development August 14, 2003 Northeast Blackout

29. Impacts of 8-14-03 Outage on Standards Development Joint U.S.-Canada Power System Outage Investigation –Interim recommendations –Final report NERC Activities –October 10, 2003 - Near-Term Actions to Assure Reliable Operations (Quick Action List) –Final Report Action Item List –Missing Standards Taskforce (added Vegetation Control + others) –Version 0 Reliability Standards

30. From Policies & Planning Standards to Reliability Standards Version Zero Taskforce –Operations Reviewed 9 Operating Polices, Appendixes and References Created 43 Version Zero Reliability Standards –Planning Reviewed existing Planning Standards, Measurements and Guides Created 47 Version Zero Reliability Standards –The basis for the current Reliability Standards

31. What is this “Registration Thing” all about?

32. Energy Bill Registration Requirements Each “ user, owner, and operator ” of the Bulk Power System registers with the ERO (now NERC) and respective Regional Entity (e.g.,SERC). NERC’s compliance registry identifies organizations responsible for reliability functions for each Regional Entity (RE). NERC’s registration process ensures: –no areas are lacking any entity to perform reliability function –there is no duplication of coverage or oversight of such coverage.

33. Balancing Authority Distribution Provider Generator Operator Generator Owner Load serving Entity Planning Authority Purchasing-Selling Entity Reliability Coordinator Regional Reliability Organization Resource Planner Transmission Operator Transmission Owner Transmission Planner Transmission Service Provider * Black functions were registered at the SCS level * Red functions were registered at the OPCO level * Not registered as an RRO SoCo Registered for 13 NERC functions

34. After registration, certain functions must become certified !! NERC Certification process begins for TOP, RC, and BA functions either late ’06 Or early ‘07 Southern begins gathering all documents for certification audit Southern will become certified!!

35. Responsibility Matrix The Reliability Standards approved to date have a total of 1,401 specific requirements and sub-requirements Responsibility for each of these is assigned to a Functional Entity, although many requirements have no matching Compliance Measures The next slides show you how to find the “Responsibility Matrix” for the Generator Owners

36. Click here

39. Standard Number Requirement NumberText of Requirement BABA DPDP GOGO GOPGOP IAIA LSELSE PAPA PSEPSE BAL-001-0R1.Each Balancing Authority shall operate such that, on a rolling 12-month basis, the average of the clock-minute averages of the Balancing Authority ’ s Area Control Error (ACE) divided by 10B (B is the clock-minute average of the Balancing Authority Area ’ s Frequency Bias) times the corresponding clock- minute averages of the Interconnection ’ s Frequency Error is less than a specific limit. This limit is a constant derived from a targeted frequency bound (separately calculated for each Interconnection) that is reviewed and set as necessary by the NERC Operating Committee. See Standard for Formula. BABA Once in the matrix, look for Responsibilities of the GO

40. VAR-002-1R4.The Generator Owner shall provide the following to its associated Transmission Operator and Transmission Planner within 30 calendar days of a request. GO VAR-002-1R4.1.For generator step-up transformers and auxiliary transformers with primary voltages equal to or greater than the generator terminal voltage: GO VAR-002-1R4.1.1.Tap settings. GO VAR-002-1R4.1.2.Available fixed tap ranges. GO VAR-002-1R4.1.3.Impedance data. GO VAR-002-1R4.1.4.The +/- voltage range with step-change in % for load-tap changing transformers. GO VAR-002-1R5.After consultation with the Transmission Operator regarding necessary step-up transformer tap changes, the Generator Owner shall ensure that transformer tap positions are changed according to the specifications provided by the Transmission Operator, unless such action would violate safety, an equipment rating, a regulatory requirement, or a statutory requirement. GO VAR-002-1R5.1. If the Generator Operator can ’ t comply with the Transmission Operator ’ s specifications, the Generator Operator shall notify the Transmission Operator and shall provide the technical justification. Examples of Responsibilities for Generators

41. What are the penalties if I don’t comply?

42. Compliance Audit Program FERC requires NERC and Regional Entity to develop a single audit process. Compliance audits are at least once every three years. FERC stresses uniformity among Regional Entity (RE) programs. –The compliance audit process among the Regional Entities are presumed uniform until there is an indication otherwise. The RE (e.g., SERC) compliance staff shall not be “ unduly influenced ” by the registered entities being audited. All audits will be conducted in accordance with generally accepted government auditing standards set forth in the Government Auditing Standards.

43. Penalty and Fine Process Penalties shall bear a reasonable relation to the seriousness of the violation and take into account efforts to remedy violation. Monetary and non-monetary penalties can be assessed. If monetary penalty is appropriate, 1 st Step is to calculate a Base Penalty Amount that will apply to each violation: –“ Reliability Risk Factor ” identifies the violation as a Low, Medium, or High impact on reliability of the BPS. – “ Violation Severity Level ” characterizes a measurement of the degree to which the standard was violated. FERC has directed NERC to increase the maximum penalty amount per day per violation for the Base Penalty Table from $200,000 to $ 1,000,000.FERC has directed NERC to increase the maximum penalty amount per day per violation for the Base Penalty Table from $200,000 to $ 1,000,000.

44. Please sit down before viewing the next slide! Don’t shoot the messenger!!!

45. Base Penalty Table Requirement Risk Level Noncompliance Severity Level Lower (Level 1) Moderate (Level 2) High (Level 3) Severe (Level 4) Lower$1,000$5,000$10,000$15,000 Medium$20,000$30,000$40,000$50,000 High$60,000$70,000$80,000$200,000

46. Penalty and Fine Process 2 nd Step is to apply Adjustment Factors to adjust the Base Penalty Amount to the particular circumstances of a violation.2 nd Step is to apply Adjustment Factors to adjust the Base Penalty Amount to the particular circumstances of a violation. FERC’s Enforcement Policy Statement will guide NERC on application of the Adjustment Factors:FERC’s Enforcement Policy Statement will guide NERC on application of the Adjustment Factors: –Assess violator’s “ commitment to compliance” –Takes into consideration the efforts of the user, owner, or operator to remedy the violation in a timely manner –Rewards the violator for “ mitigating factors ” (0 to -25%) –Punishes the violator for “ aggravating factors ” (0 to +50%)

47. Penalty and Fine Process Aggravating factors increase the sanction –Time horizon of standard – operations vs. long term (+ 0-50%) –Repetitive infractions (+ 10, 30, and 50% discrete steps) –Prior warnings (+ 25% initial; 50% multiple) –Lack of cooperation (+0-50%) Mitigating factors decrease the sanction –Prompt disclosure (- 0-25%) –Voluntary corrective measures (- 0-25%) –Substantial cooperation (- 0-25%)

48. Sanction Table — Ranges with Adjustment Factors Applied Requirement Risk Level Noncompliance Severity Level Lower (Level 1) Moderate (Level 2) High (Level 3) Severe (Level 4) Lower 0 - $7,0000 - $35,0000 - $70,0000 - $105,000 Medium0 -$140,000 $280,000 0 - $210,000 $420,000 0 - $280,000 $560,000 0 - $350,000 $700,000 High0 - $420,000 $840,000 0 - $490,000 $980,000 0 - $560,000 $1 million 0 - $700,000 $1 million

49. Budgeting NERC will collect fees from end users on a net energy for load basis; will be collected by the Load Serving Entity (LSE). Regional Entities (SERC) will perform the billing and collection of the end user fees from the LSE. Fees are to be collected to support: –Standard development –Enforcement –Registration and certification –Readiness audits –Situational awareness and infrastructure security

50. For more information… Marc Butts Office Phone: 205-257-4839 Email: mmbutts@southernco.com