Mark E. HegerleDeputy Director, Reliability

Office of Energy Markets & ReliabilityFederal Energy Regulatory Commission

EUCI: Disaster Management and Cost Recovery

New Orleans, LA June 6, 2006

Preparing for theNext 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 31st 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