# Presentation: 756946

## Preparing for the

**Mark E. Hegerle**
**Deputy Director, Reliability**
**Office of Energy Markets & Reliability**
**Federal Energy Regulatory Commission**
**EUCI: Disaster Management and Cost Recovery**
**New Orleans, LA  June 6, 2006**

- Next Storm:
- EPAct 2005 & Reliability** **

**Notes:**
Thank you for having me today.  I want to being by apologizing on behalf of Commissioner Brownell, who could not be here today.

I hope to make the nexus between disaster management and the need for mandatory and enforceable reliability standards.

## 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

**Notes:**
While I am a longtime FERC employee, I experienced the twin hurricanes from Capitol Hill, working for Senator Jim Talent of Missouri, who is a member of the Senate Energy and Natural Resources Committee.

I didn’t face the destruction first-hand like I suspect many of you have.  My connections were indirect at best.

Obviously there was much work in Washington to deliver aid, with mixed success, I suppose.  Certainly Senator Landrieu was tireless in her quest to get help for Louisiana.

My brother helped by running a shelter in Brookhaven, Mississippi and a cousin lost his home in the New Orleans suburbs and was forced to relocate to Houston.  Otherwise, I watched and prayed from afar like so many others.

Well, why are we here today?  Sadly, while Katrina and Rita were particularly damaging, hurricanes and other forms of destruction are a 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

**Notes:**
In the immediate aftermath of the hurricanes, FERC took a number of steps to assist in the quick restoration of gas pipeline and electricity service, from waiving rules on reporting to allowing the pipeline facility replacements to proceed without the typical pre-authorizations we require.

That list is on the slide.  But I want to take this time to join Chairman Kelliher in thanking those who made the heroic sacrifices to restore service at a tremendous cost to themselves and their families (read September 2, 2005 statement).

## 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

**Notes:**
The obvious question is what should we be doing to be ready the next time?

Washington proved last time that it did not have all of the answers, and I don’t pretend to think FERC has them all, either.

So much of the readiness must come from those local to the affected area.  But I believe there are some things we can do nationally to be better prepared.  Most specifically, I refer to last year’s mandate for a reliable electricity grid.

## 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.

**Notes:**
On August 8, 2005 President Bush signed the Energy Policy Act of 2005 into law, the first major change in our national energy policy since 1992.  EPAct was the starting gun for our sprint to enact rulemakings implementing this new law.  National, mandatory and enforceable reliability standards are the centerpiece of the Electricity  Title.  

It calls for the enactment of mandatory reliability standards for all users, owners, and operators of the bulk power system.  FERC was named as the government regulatory agency to oversee these standards.

FERC issued its regulatory text on February 3, amending the Federal Power Act by adding section 215.  This new section provides the regulatory text by which the Commission will certify and regulate the Electric Reliability Organization.  The ERO’s primary goals are to create reliability standards (subject to Commission approval), and to enforce the approved standards.

The ERO may delegate its enforcement responsibilities to Regional Entities.  In addition to enforcement duties, regional entities can also develop and propose reliability standards to the ERO.

## 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.

**Notes:**
These standards are a  bit tricky in that we can’t contain electricity at the borders, so the new law requires the ERO to coordinate with the governments of Canada, Mexico, and the United States.  

While FERC will urge the ERO to take the lead in coordinating corss-border, a Presidential agreement with Canada and Mexico will go a long way to provide for effective compliance with standards and for the effectiveness of the ERO.

Nevertheless, we encourage:

	1.  encourage the ERO candidate to seek recognition in Canada and Mexico while pursuing Commission certification.
	2.  direct the ERO candidate to propose an approach to international coordination of standards regarding remands and development.
	3.  acknowledge 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.

**Notes:**
In addition to unifying North America, the ERO will have to demonstrate its technical competence and establish procedural rules tha treat all entities fairly.  These include:
Assuring ERO independence, fair stakeholder representation in the selection of its directors, and balanced decision making
Allocating equitably reasonable dues, fees and charges
Providing fair and impartial procedures for enforcing reliability standards
Providing notice and opportunity for comment, due process, openness, and balance of interests in exercising its duties

## 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.

**Notes:**
Rather than vesting all reliability authority in a single entity, EPAct envisions regional reliability organizations that would be delegated substantial enforcement authority.  To become a regional entity with enforcement authority, a party must sign a delegation agreement that is subject to Commission approval.  The regional entity must:

	1.   A regional entity must be governed by:
		a.  An independent board
		b.  A balanced stakeholder board
		c.  A combination of an independent board and a balanced stakeholder board

	2.  It must have the ability to develop and enforce reliability standards that provide for an adequate level of reliability of the bulk power system and have established rules like the ERO to insure independence and fairness.
	3.  The agreement must promote effective and efficient administration of bulk power system reliability

The ERO and the Commission shall rebuttably presume that a proposal for a delegation agreement to a regional entity organized on an interconnection-wide basis promotes effective and efficient administration of the bulk power system.

If negotiations with the ERO fail, the regional entity candidate may appeal 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.

**Notes:**
While there could be several regional entities, EPAct and, therefore, the Commission envisions a strong ERO with local enforcement by the regional entities.

In most respects, they should funtion quite similarly to one another, with differences in regional reliability standards centered on physical or geographical differences.  For instance, I would anticipate some need for differences in rules related to the hydro-driven, geographically dispersed Pacific Northwest and the more fossil-fuel driven, tightly-knit Northeast.

All changes to RE rules will go through the ERO to keep the ERO the central focus of reliability regulation.

## 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.

**Notes:**
Obviously, the ERO and the regional entities will cost money to operate.  In keeping with the notion that there should be a strong ERO, the ERO will be tasked with receiving and auditing the regional entities’ budgets and will include them as part of its own budget proposal.  FERC will review and approve the comprehensive ERO budget.  

FERC will rely on the ERO to ensure that funding is used for statutory purposes.

## 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.

**Notes:**
It will be incumbent on FERC to oversee the ERO to make sure it is meeting its statutory obligations both efficiently and effectively.  So, in addition to financial audits, the Commission may periodically audit the ERO to ensure its compliance with the statute, regulations, and FERC orders.  Normally, the ERO will audit the regional entities.

The Commission can order the ERO or a regional entity to fulfill its responsibilities under the reliability law.  The Commission can take action against the ERO or regional entity for non-compliance with its orders.  Actions may include remedial actions and improvement programs, civil penalties, suspension or even 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.

**Notes:**
While we will oversee the ERO, neither FERC nor the ERO will dictate anything with respect to reliability standards.

The ERO must “provide for reasonable notice and opportunity for public comment, due process, openness, and balance of interests in developing reliability standards and otherwise exercising its duties”.  Reliability standards are not enforceable under the law until after the Commission approves them.

FERC may approve or remand a reliability standard on the basis that is/isn’t; just, reasonable, not unduly discriminatory or preferential, and in the public interest.  The Commission can “...upon its own motion or upon complaint, may order the ERO to submit to the Commission a proposed reliability standard or a modification to a reliability standard that addresses a specific matter if the Commission considers such a new or modified reliability standard appropriate to carry out this section.”

The Commission will give “due weight” to the technical expertise of the ERO and of a regional entity organized on an interconnection-wide basis (if the standard only applies that interconnection).  The Commission however, will not defer to the ERO or regional entity 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.

**Notes:**
As I mentioned earlier, FERC is looking for a strong ERO.  Nevertheless, EPAct and our implementing Order No. 672 recognize that there will be regional differences.  However, they are to be the exception not the rulew.  The ERO accepts/reviews the differences, approves and owns them, and then proposes them to FERC.  For those regional entities organized on an interconnection-wide basis, the ERO must rebuttably presume that a reliability standard meets the statutory criteria.

Generally, the Commission will accept regional variations if:

	1.  They are more stringent than the ERO standard
	2.  They are required due to a physical difference in the system

They are not to be “style preferences” – just because “we always did it that way” doesn’t mean differences should be written in to enforceable standards.  They will if there is a legitimate reason.  ERCOT is somewhat isolated.  It may need some different standards to recognize its limited ability to get help from its neighbors.

## 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 (>1⁄2 state’s load in the region)
- Governor appoints one member from each state

**Notes:**
Likewise, while these are national standards, the don’t preclude a state from acting to ensure the safety, adequacy, or reliability of electric service provided the action is not inconsistent with a reliability standard.  In addition, the states may have the Commission establish a regional advisory body to advise the ERO, the regional entity, and FERC on standards, governance or other matters.

FERC must establish a regional advisory body if:
	1.  It covers 2/3 of the region’s states (1/2 of the load in the region)
	2.  The Governors appoint 1 member from each state

An RAB doesn’t have veto power, but it does speak with more authority than a single 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.

**Notes:**
Now we come to the teeth of the rule: enforcement.  Much of the specifics will come from the ERO application, but the ERO and each regional entity must have a compliance and enforcement program.  The program must provide for audits, actions to correct poor performance, and provisions to investigate reliability violations.  Investigations are generally not public however, the results of the investigations are.  Alleged violations must be promptly reported to FERC by the ERO (regional entities report to the ERO).

While we expect most audits and investigations to be performed by the ERO and REs, the Commission retains the right to conduct independent enforcement actions.  I expect our involvement to be on more serious incidents.  I also expect that we will audit the ERO and REs more often at first to ensure that they have adequate and fair enforcement procedures and expertise in place.

## 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.

**Notes:**
Enforcement necessarily means the possibility of penalties.  The ERO or a regional entity may impose a penalty for a violation – monetary or non-monetary.  The ERO is to propose penalty guidelines to the Commission.  There is one appeal to the ERO before the filing is made with the Commission.

The alleged violator has 30 days to request Commission review of the filing.  If the Commission does not take action, the penalty goes into effect on the 31st day.

Important here is privacy – FERC, the ERO or RE will keep the investigation non-public until it concludes that a violation has occurred.  This will protect the innocent until proven guilty.

## 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

**Notes:**
The new law is a success that was a long time coming for the electric utility industry.  It build upon industry’s experience and expertise for developing and enforcing reliability standards for the bulk power industry.  On April 4, NERC filed its reliability standards and an application to apply for the ERO position.  Pursuant to this filing, the Commission announced on April 18th that it would conduct its review of the reliability standards by the rulemaking process, which began with the release of an initial staff report on May 11, 2006. 

Next will be a a ruling on NERC’s proposal to be the ERO, followed by filings of delegation agreements by prospective REs and, of course, a proposed then final rule on the reliability standards themselves.  We’ve come a long way, but have a lot more hard work to do until we are ready for the next storm.

Thank you for you kind attention.  I look forward to any questions.