Document ID: FERC-2013-0672-0001
Agency: ferc
Document Type: Rule
Title: Revisions to Electric Reliability Organization Definition of Bulk Electric System and Rules of Procedure
Posted Date: 2013-05-17T04:00Z

[Federal Register Volume 78, Number 96 (Friday, May 17, 2013)]
[Rules and Regulations]
[Pages 29209-29231]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11130]

[[Page 29209]]

Vol. 78

Friday,

No. 96

May 17, 2013

Part II

Department of Energy

-----------------------------------------------------------------------

Federal Energy Regulatory Commission

18 CFR Part 40

Revisions to Electric Reliability Organization Definition of Bulk 
Electric System and Rules of Procedure; Final Rule

  Federal Register / Vol. 78 , No. 96 / Friday, May 17, 2013 / Rules 
and Regulations  

[[Page 29210]]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 40

[Docket Nos. RM12-6-001 and RM12-7-001; Order No. 773-A]

Revisions to Electric Reliability Organization Definition of Bulk 
Electric System and Rules of Procedure

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing and clarification.

-----------------------------------------------------------------------

SUMMARY: The Commission denies rehearing in part, grants rehearing in 
part and otherwise reaffirms its determinations in Order No. 773. In 
addition, the Commission clarifies certain provisions of the Final 
Rule. Order No. 773 approved the modifications to the currently-
effective definition of ``bulk electric system'' developed by the North 
American Electric Reliability Corporation (NERC), the Commission-
certified Electric Reliability Organization. Order No. 773 also 
approved NERC's revisions to its Rules of Procedure, which create an 
exception process to add elements to, or remove elements from, the bulk 
electric system on a case-by-case basis and established a process 
pursuant to which an entity can seek a determination by the Commission 
whether facilities are ``used in local distribution'' as set forth in 
the Federal Power Act.

DATES: Effective Date: This rule will become effective May 17, 2013.

FOR FURTHER INFORMATION CONTACT: Susan Morris (Technical Information), 
Office of Electric Reliability, Division of Reliability Standards and 
Security, Federal Energy Regulatory Commission, 888 First Street NE., 
Washington, DC 20426, Telephone: (202) 502-6803.

Nicholas Snyder (Technical Information), Office of Energy Market 
Regulation, Division of Electric Power Regulation-Central, Federal 
Energy Regulatory Commission, 888 First Street NE., Washington, DC 
20426, Telephone: (202) 502-6408.
Robert Stroh (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street NE., Washington, 
DC 20426, Telephone: (202) 502-8473.

SUPPLEMENTARY INFORMATION:
Before Commissioners: Jon Wellinghoff, Chairman; Philip D. Moeller, 
John R. Norris, Cheryl A. LaFleur, and Tony Clark.

Order on Rehearing and Clarification (Issued April 18, 2013)

I. Introduction

    1. On December 20, 2012, the Commission issued a Final Rule (Order 
No. 773) approving modifications to the currently-effective definition 
of ``bulk electric system'' developed by the North American Electric 
Reliability Corporation (NERC), the Commission-certified Electric 
Reliability Organization (ERO).\1\ The Commission found that the 
modified definition of ``bulk electric system'' improves upon the 
currently-effective definition by establishing a bright-line threshold 
that includes all facilities operated at or above 100 kV and removing 
language that allows for broad regional discretion. The Commission also 
found that the revised definition provides improved clarity by 
identifying specific categories of facilities and configurations as 
inclusions and exclusions. The Commission also found that NERC's case-
by-case exception process to add elements to, and remove elements from, 
the definition of the bulk electric system adds transparency and 
uniformity to the determination of what constitutes the bulk electric 
system. The Final Rule found that, after notice and comment, the 
Commission can designate sub-100 kV facilities, or other facilities, as 
part of the bulk electric system. The Commission also established a 
process pursuant to which an entity can seek a determination by the 
Commission whether facilities are ``used in local distribution'' as set 
forth in the Federal Power Act (FPA).
---------------------------------------------------------------------------

    \1\ Revisions to Electric Reliability Organization Definition of 
Bulk Electric System and Rules of Procedure, Order No. 773, 141 FERC 
] 61,236 (2012).
---------------------------------------------------------------------------

    2. In this order, the Commission denies in part and grants in part 
the requests for rehearing and clarification of the Final Rule, as 
discussed below.

A. Background

1. Order Nos. 743 and 743-A
    3. On November 18, 2010, in Order No. 743, the Commission directed 
that NERC, through NERC's Reliability Standards Development Process, 
develop modifications to the currently-effective definition of the term 
``bulk electric system'' to ensure that the definition encompasses all 
facilities necessary for operating the interconnected transmission 
network.\2\ The Commission also directed NERC to address the 
Commission's technical and policy concerns. Among the Commission's 
concerns were inconsistencies in the application of the definition and 
a lack of oversight and exclusion of facilities from the bulk electric 
system required for the operation of the interconnected transmission 
network. In Order No. 743, the Commission concluded that the best way 
to address these concerns was to eliminate the Regional Entity 
discretion to define the bulk electric system without NERC or 
Commission review, maintain a bright-line threshold that includes all 
facilities operated at or above 100 kV except defined radial 
facilities, and adopt an exemption process and criteria for removing 
from the bulk electric system definition, those facilities that are not 
necessary for operating the interconnected transmission network. In 
Order No. 743, the Commission allowed NERC to ``propose a different 
solution that is as effective as, or superior to, the Commission's 
proposed approach in addressing the Commission's technical and other 
concerns so as to ensure that all necessary facilities are included 
within the scope of the definition.'' \3\ The Commission directed NERC 
to file the revised definition of bulk electric system and its process 
to exempt facilities from inclusion in the bulk electric system within 
one year of the effective date of the final rule.\4\
---------------------------------------------------------------------------

    \2\ Revision to Electric Reliability Organization Definition of 
Bulk Electric System, Order No. 743, 133 FERC ] 61,150, at P 16 
(2010), order on reh'g, Order No. 743-A, 134 FERC ] 61,210 (2011).
    \3\ Order No. 743, 133 FERC ] 61,150 at P 16.
    \4\ Id. P 113.
---------------------------------------------------------------------------

    4. In Order No. 743-A, the Commission reaffirmed its determinations 
in Order No. 743. In addition, the Commission clarified that the issue 
the Commission directed NERC to rectify was the discretion the Regional 
Entities have under the current definition to define the bulk electric 
system in their regions without any oversight from the Commission or 
NERC.\5\ The Commission also clarified that the 100 kV threshold was a 
``first step or proxy'' for determining which facilities should be 
included in the bulk electric system.\6\
---------------------------------------------------------------------------

    \5\ Order No. 743-A, 134 FERC ] 61,210 at P 11.
    \6\ Id. PP 40, 67, 102-103.
---------------------------------------------------------------------------

    5. The Commission further clarified that the statement in Order No. 
743, ``determining where the line between `transmission' and `local 
distribution' lies [hellip] should be part of the exemption process the 
ERO develops,'' was intended to grant discretion to NERC, as the entity 
with technical expertise, to develop criteria to determine how to 
differentiate between local distribution and transmission facilities in 
an objective, consistent, and transparent

[[Page 29211]]

manner.\7\ The Commission stated that the ``Seven Factor Test'' adopted 
in Order No. 888 could be relevant and possibly a logical starting 
point for determining which facilities are local distribution for 
reliability purposes.\8\ However, the Commission left it to NERC to 
determine if and how the Seven Factor Test should be considered in 
differentiating between local distribution and transmission facilities 
for purposes of determining whether a facility should be classified as 
part of the bulk electric system.\9\ Order No. 743-A re-emphasized that 
local distribution facilities are excluded from the definition of Bulk-
Power System and, therefore, must be excluded from the definition of 
bulk electric system.\10\ In Order No. 743-A, the Commission also 
stated that, ``although local distribution facilities are excluded from 
the definition, it still is necessary to determine which facilities are 
local distribution, and which are transmission. Whether facilities are 
used in local distribution will in certain instances raise a question 
of fact, which the Commission has jurisdiction to determine.'' \11\

---------------------------------------------------------------------------

    \7\ Id. P 68.
    \8\ Order No. 743-A, 134 FERC ] 61,210 at P 69. See Promoting 
Wholesale Competition Through Open Access Non-Discriminatory 
Transmission Services by Public Utilities; Recovery of Stranded 
Costs by Public Utilities and Transmitting Utilities, Order No. 888, 
FERC Stats. & Regs. ] 31,036, at 31,783-84 (1996), order on reh'g, 
Order No. 888-A, FERC Stats. & Regs. ] 31,048, order on reh'g, Order 
No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, Order No. 888-C, 
82 FERC ] 61,046 (1998), aff'd in relevant part sub nom. 
Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (DC 
Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002).
    \9\ Order No. 743-A, 134 FERC ] 61,210 at P 70.
    \10\ Id. PP 25, 58.
    \11\ Id. P 67.
---------------------------------------------------------------------------

2. Order No. 773
    6. On January 25, 2012, NERC submitted two petitions pursuant to 
the directives in Order No. 743: (1) NERC's proposed revision to the 
definition of ``bulk electric system'' which includes provisions to 
include and exclude facilities from the ``core'' definition (Docket No. 
RM12-6-000); and (2) revisions to NERC's Rules of Procedure to add a 
procedure (an exception process) to classify or de-classify an element 
as part of the ``bulk electric system'' (Docket No. RM12-7-000).\12\
---------------------------------------------------------------------------

    \12\ The Commission-approved core definition, inclusions and 
exclusions are included in Attachment A to this order on rehearing.
---------------------------------------------------------------------------

    7. On December 20, 2012, the Commission issued Order No. 773, a 
final rule approving NERC's modifications to the definition of ``bulk 
electric system'' and the exception process, in response to Order Nos. 
743 and 743-A. The Commission found that the revised definition of 
``bulk electric system'' establishes a bright-line threshold that 
includes all facilities operated at or above 100 kV and removed 
language from the prior definition that allows for broad regional 
discretion. Further, the Commission found that inclusions and 
exclusions in the definition that address typical system facilities and 
configurations such as generation and radial systems provide additional 
granularity that improves consistency and provides a practical means to 
determine the status of common system configurations.\13\
---------------------------------------------------------------------------

    \13\ Order No. 773, 141 FERC ] 61,236 at PP 2, 4, 38-40, 51.
---------------------------------------------------------------------------

    8. In the Final Rule, the Commission found that the modified 
definition is consistent, repeatable and verifiable and will provide 
clarity that will assist NERC and affected entities in implementing 
Reliability Standards. The Commission also found that NERC's proposal 
satisfies the directives of Order No. 743 to develop modifications to 
the currently-effective definition of bulk electric system to ensure 
that the definition encompasses all facilities necessary for operating 
an interconnected transmission network.
    9. The Commission also approved NERC's case-by-case exception 
process to add elements to, and remove elements from, the definition of 
the bulk electric system.\14\ In addition, the Final Rule established a 
process by which an entity can seek a determination by the Commission 
whether facilities are ``used in local distribution'' as set forth in 
the FPA on a case-by-case basis.\15\ The Commission also directed NERC 
to (1) implement the exclusions for radial systems (exclusion E1) and 
local networks (exclusion E3) so that they do not apply to tie-lines, 
i.e. generator interconnection facilities, for bulk electric system 
generators; and (2) modify the local network exclusion to remove the 
100 kV minimum operating voltage to allow systems that include one or 
more looped configurations connected below 100 kV to be eligible for 
the local network exclusion.\16\
---------------------------------------------------------------------------

    \14\ Order No. 773, 141 FERC ] 61,236 at PP 251-262.
    \15\ Order No. 773, 141 FERC ] 61,236 at PP 66-73.
    \16\ Order No. 773, 141 FERC ] 61,236 at PP 155, 164-169.
---------------------------------------------------------------------------

B. Requests for Rehearing

    10. The following entities filed timely requests for rehearing and/
or clarification of Order No. 773: NERC, American Public Power 
Association (APPA); American Wind Energy Association (AWEA); City of 
Holland, Michigan Board of Public Works (Holland); Dow Chemical Company 
(Dow); Electricity Consumers Resource Council (ELCON); National 
Association of Regulatory Utility Commissioners (NARUC); National Rural 
Electric Cooperative Association (NRECA); New York State Public Service 
Commission (NYPSC); Public Utility District No. 1 of Snohomish County, 
Washington (Snohomish); Transmission Access Policy Study Group (TAPS); 
and Utility Services, Inc. (Utility Services).\17\
---------------------------------------------------------------------------

    \17\ We find that Utility Services' rehearing request is 
deficient because it fails to include a Statement of Issues section 
separate from its arguments, as required by Rule 713 of the 
Commission's Rules of Practice and Procedure. 18 CFR 385.713(c)(2) 
(2012). Rule 713(c)(2) requires that a rehearing request include a 
separate section entitled ``Statement of Issues'' listing each issue 
presented to the Commission in a separately enumerated paragraph 
that includes representative Commission and court precedent on which 
the participant is relying. Under Rule 713, any issue not so listed 
will be deemed waived. See Revision of Rules of Practice and 
Procedure Regarding Issue Identification, Order No. 663, FERC Stats. 
& Regs. ] 31,193 (2005), order on reh'g, Order No. 663-A, FERC 
Stats. & Regs. ] 31,211 (2006). Accordingly, we dismiss Utility 
Services' rehearing request. However, we note that Utility Services' 
rehearing request raises issues similar to those addressed in other 
petitions in this proceeding.
---------------------------------------------------------------------------

    11. Exelon Corporation filed a response to the NERC request for 
clarification. The ITC Companies filed a motion for leave to answer and 
answer to the Holland rehearing request, and NERC filed a motion for 
leave to answer and answer in response to Exelon's response. Holland 
filed an answer to the answer of the ITC Companies, and Exelon filed a 
response to NERC's answer.

II. Discussion

A. Procedural Matters

    12. Rule 213(a)(2) of the Commission's Rules of Practice and 
Procedure, 18 CFR 213(a)(2) (2012), provides that answers are generally 
not permitted unless requested by the decisional authority. Rule 713(d) 
of the Commission's Rules of Practice and Procedure, 18 CFR 713(d) 
(2012), prohibits answers to requests for rehearing. Accordingly, we 
will reject the answers filed by the parties in this proceeding.

B. Challenges to Commission Approval of the Revised Bulk Electric 
System Definition and Use of a 100 kV Bright-Line Threshold

    13. NYPSC argues that the Commission's approval of the 100 kV 
bright-line threshold was arbitrary, capricious and unsupported by

[[Page 29212]]

substantial evidence because the record lacks a technical justification 
for using the 100 kV threshold. NYPSC adds that the Commission failed 
to demonstrate a sufficient technical justification that the bright-
line definition only encompasses facilities needed for the reliable 
operation of the Bulk-Power System. While NYPSC believes that the 
Commission's bright-line approach is designed to ensure consistency, 
NYPSC states the Commission cannot evade the jurisdictional limitations 
of the FPA to ensure consistency. NYPSC also argues that the Final Rule 
contains no factual basis for establishing 100 kV as the appropriate 
place to draw the line and contends that the Commission conceded that 
not all facilities operated at or above 100 kV are necessary for 
operating the interconnected transmission network.
    14. NARUC and NYPSC also argue that the definition encompasses 
facilities that are used for local distribution and are not necessary 
for operating an interconnected transmission network. NYPSC contends 
that, through studies and functional testing, the New York Independent 
System Operator, Inc. (NYISO) has developed a list of facilities that 
have the potential to cause cascading problems on the system as well as 
facilities that can have an impact on the Bulk-Power System but whose 
main function is to serve load. NYPSC claims that the Commission 
ignored this information in establishing a bright-line definition.
    15. NARUC argues that a 100 kV bright-line threshold sweeps into 
the bulk electric system elements that were previously classified as 
local distribution. According to NARUC, the Final Rule creates the 
possibility of entities having to engage in a costly analysis to seek 
an exception for facilities used in local distribution. NARUC states 
that neither the inclusions and exclusions in the definition, nor the 
exception process cure the jurisdictional overreach inherent in the 
bright-line rule set at 100 kV.
    16. Further, NYPSC argues that, even though the definition does not 
include facilities used for local distribution, the Commission 
``effectively acknowledged that such facilities would be placed under 
its jurisdiction by establishing an exception process whereby entities 
may seek to demonstrate that the facilities are not necessary for 
operating the interconnected transmission network, or are used in local 
distribution.''\18\ NYPSC argues that the Commission should not assume 
it has jurisdiction over facilities operated at 100 kV and above until 
an entity demonstrates that the Commission does not have jurisdiction. 
According to NARUC and NYPSC, the approach adopted in the Final Rule 
inappropriately shifts the legal and technical burdens on the 
jurisdictional issue to the entity applying for an exception.\19\ NYPSC 
adds that the Commission improperly dismissed NYPSC's evidence that 
there is a layer of ``area'' transmission facilities below the Bulk-
Power System and above distribution facilities that move energy within 
a utility service territory and toward load centers and only a small 
subset of these ``area'' facilities assists in maintaining the 
reliability of the Bulk-Power System.
---------------------------------------------------------------------------

    \18\ NYPSC Request for Rehearing and Clarification at 11 (citing 
Order No. 773, 141 FERC ] 61,236 at P 40). See also NARUC Request 
for Rehearing at 3-4.
    \19\ See, e.g., NYPSC Request for Rehearing and Clarification at 
11-12.
---------------------------------------------------------------------------

    17. NYPSC contends that the bright-line definition is inconsistent 
with the FPA's definition of the Bulk-Power System, which, according to 
NYPSC, recognizes that a functional test is needed to determine whether 
a facility is necessary for reliable operation. NYPSC claims that the 
Commission ignored a functional test for defining the Bulk-Power 
System, such as the one the Northeast Power Coordinating Council, Inc. 
(NPCC) has historically used to identify facilities having an adverse 
impact on the Bulk-Power System. NYPSC also argues that the Commission 
should not require utilities to upgrade facilities to comply with 
Commission-approved Reliability Standards where a timely request for an 
exception has been submitted and is still pending. NYPSC contends that 
compliance and the expenditure of ratepayer funds should not be 
required until after the Commission has made a final determination on 
the exception, which will ensure that the costs of compliance are not 
unnecessarily imposed upon ratepayers, and the Commission does not 
impermissibly exert jurisdiction.
Commission Determination
    18. We deny rehearing and affirm the findings in the Final Rule. As 
described below, petitioners have previously raised, and the Commission 
has addressed and rejected, the arguments with respect to the 
Commission's authority and technical justification for the 100 kV 
bright-line threshold and the functional test.
    19. In Order No. 743, the Commission found sufficient justification 
for the finding that the current definition allows broad regional 
discretion without ERO or Commission oversight, which has resulted in 
reliability issues and has failed to ensure that all facilities 
necessary for operation of the interconnected transmission network are 
covered by the Reliability Standards.\20\ The Commission found that
---------------------------------------------------------------------------

    \20\ Order No. 743, 133 FERC ] 61,150 at P 72.

many facilities operated at 100 kV and above have a significant 
effect on the overall functioning of the grid. The majority of 100 
kV and above facilities in the United States operate in parallel 
with other high voltage and extra high voltage facilities, 
interconnect significant amounts of generation sources and operate 
as part of a defined flow gate, which illustrates their parallel 
nature and therefore their necessity to the reliable operation of 
the interconnected transmission system.\21\
---------------------------------------------------------------------------

    \21\ Order No. 773, 141 FERC ] 61,236 at P 41 (citing Order No. 
743, 133 FERC ] 61,150 at P 73).

    The Commission also explained its concern with the application of 
the currently-effective definition by illustrating examples of wide-
scale cascading outages that NERC or the Commission did not have a 
chance to mitigate because the facilities were not considered part of 
the bulk electric system.\22\ As discussed in Order No. 743, the 
Commission found that failure of 100-200 kV facilities has caused 
cascading outages that would have been minimized or prevented if these 
facilities were operated in compliance with the NERC Reliability 
Standards.\23\
---------------------------------------------------------------------------

    \22\ Order No. 743, 133 FERC ] 61,150 at PP 72-96.
    \23\ Order No. 743, 133 FERC ] 61,150 at P 87.
---------------------------------------------------------------------------

    20. The Commission also noted that NERC already applies a general 
100 kV threshold, and all regions, with the exception of NPCC, also 
apply a 100 kV threshold.\24\ The Commission stated that the best way 
to address its concerns ``is to eliminate the regional discretion in 
the ERO's current definition, maintain the bright-line threshold that 
includes all facilities operated at or above 100 kV except defined 
radial facilities, and establish an exemption process and criteria for 
excluding facilities the ERO determines are not necessary for operating 
the interconnected transmission network.'' \25\ The Commission did not 
propose to change the existing threshold in the definition, but rather 
charged NERC with eliminating ``the ambiguity created by the current 
characterization of that threshold as a general guideline.'' \26\ In 
other words, while the Commission did

[[Page 29213]]

not mandate the 100 kV threshold, it directed NERC to develop a revised 
definition that addresses the inconsistency, lack of oversight and 
exclusion of facilities inherent in the current definition.\27\
---------------------------------------------------------------------------

    \24\ Order No. 743, 133 FERC ] 61,150 at P 56; Order No. 773, 
141 FERC ] 61,236 at P 42.
    \25\ Order No. 743, 133 FERC ] 61,150 at P 30.
    \26\ Id. (footnotes omitted).
    \27\ See Order No. 743-A, 134 FERC ] 61,210 at P 53.
---------------------------------------------------------------------------

    21. We disagree with NYPSC and NARUC that by establishing an 
exception process the Commission effectively acknowledged that local 
distribution facilities would be placed under its jurisdiction. As we 
explained in the Final Rule, the bright-line threshold would be a 
``first step or proxy'' in determining which facilities should be 
included in the bulk electric system. The Commission also explained 
that the ``definition, coupled with the exception process will ensure 
that facilities not necessary for the operation of the interconnected 
transmission network will be properly categorized.'' \28\ Thus, the 
exception process is not evidence that the ``core'' definition violates 
the FPA but instead is a means to ensure the application of the 
definition complies with the FPA.
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

    22. Further, as we explained in the Final Rule, the determination 
of whether an element or facility is ``used in local distribution,'' is 
a multi-step process that may require a jurisdictional analysis that is 
more appropriately performed by the Commission.\29\ The Commission 
stated:
---------------------------------------------------------------------------

    \29\ Order No. 773, 141 FERC ] 61,236 at P 69 (citations 
omitted).

application of the ``core'' definition and the four exclusions 
should serve to exclude most facilities used in local distribution 
from the bulk electric system. However, there may be certain 
circumstances that present a factual question as to whether a 
facility that remains in the bulk electric system after applying the 
``core'' definition and the four exclusions should nonetheless be 
excluded because it is used in local distribution. In such 
circumstances, which we expect will be infrequent, an entity must 
petition the Commission seeking a determination that the facility is 
used in local distribution. Such petitions should include 
information that will assist the Commission in making such 
determination, and notice of the petition must be provided to NERC 
and relevant Regional Entities.\30\
---------------------------------------------------------------------------

    \30\ Order No. 773, 141 FERC ] 61,236 at P 72 (citations 
omitted).

    In other words, if a facility is classified as part of the bulk 
electric system by application of the definition but should be excluded 
because it is a facility used in local distribution, an entity may 
apply to the Commission for a local distribution determination. Thus, 
because application of the 100 kV threshold is the first step in the 
process of determining whether an element is part of the bulk electric 
system, we reject the argument that the definition will sweep in all 
elements above 100 kV in a manner inconsistent with the Commission's 
jurisdiction.\31\
---------------------------------------------------------------------------

    \31\ Order No. 773, 141 FERC ] 61,236 at P 41.
---------------------------------------------------------------------------

    23. In sum, we deny rehearing and affirm that approval of the 100 
kV bright-line threshold was adequately supported with a technical 
justification. Petitioners raise arguments that the Commission has 
previously considered and rejected in this proceeding as well as 
previous Commission decisions with respect to the reasons for requiring 
revisions to the definition of bulk electric system. In all these 
cases, the Commission explained and justified the appropriateness of a 
100 kV threshold. Therefore, we reject the requests for rehearing on 
these issues.
    24. We also reject the argument that a functional test is a more 
appropriate manner to determine which facilities are part of the bulk 
electric system. In Order No. 743, the Commission concluded that a 
material impact or functional test excludes facilities ``without regard 
to whether they are necessary to operate the system, and instead seek 
to determine the impact of the loss of an element.'' \32\ The 
Commission also concluded that these tests are subjective and result in 
an inconsistent process that excludes facilities from the bulk electric 
system.\33\ In the NOPR comments in this proceeding, these same issues 
were raised, and in the Final Rule the Commission again rejected 
them.\34\ Further, as discussed in detail in the Final Rule, the 
Commission found that NERC's proposal adequately ensures that all 
facilities necessary for operating an interconnected electric energy 
transmission network are included under the bulk electric system. In 
the Final Rule, the Commission also relied on its finding in Order No. 
743 that
---------------------------------------------------------------------------

    \32\ Order No. 743, 133 FERC ] 61,150 at P 76.
    \33\ Order No. 743, 133 FERC ] 61,150, at PP 73-86.
    \34\ Order No. 773, 141 FERC ] 61,236 at P 41.

    ``[U]niform Reliability Standards, and uniform implementation, 
should be the goal and the practice, the rule rather than the 
exception, absent a showing that a regional variation is superior or 
necessary due to regional differences. Consistency is important as 
it sets a common bar for transmission planning, operation, and 
maintenance necessary to achieve reliable operation. . . . [W]e have 
found several reliability issues with allowing Regional Entities 
broad discretion without ERO or Commission oversight.''\35\
---------------------------------------------------------------------------

    \35\ Order No. 773, 141 FERC ] 61,236 at P 39 (citing Order No. 
743, 133 FERC ] 61,150, at P 82 (footnote omitted)). Order No. 743 
did not reject all material impact assessments but instead took 
issue with particular tests and outlined general problems with the 
material impact tests used to determine the extent of the bulk 
electric system. Order No. 743, 133 FERC ] 61,150 at PP 76-78; Order 
No. 743-A, 134 FERC ] 61,210 at PP 44-47. Indeed, the ERO had 
flexibility to develop alternative approaches, such as a functional 
test. However, the ERO, in applying its technical expertise, 
developed a revised definition that retained a 100 kV threshold.
---------------------------------------------------------------------------

    25. We also disagree with NYPSC's claim that the Commission ignored 
the NYPSC evidence of NYISO studies and functional testing. As NYPSC 
states, the NYISO data is the result of a functional test.\36\ While 
the Commission did not reject all material impact tests, the Commission 
took issue with particular tests and outlined general problems with the 
material impact tests used to date because they exclude facilities 
without regard to whether they are necessary to operate the 
interconnected transmission network. In addition, as explained above, 
failure of 100-200 kV facilities has caused cascading outages that 
would have been minimized or prevented if these facilities were 
operated in compliance with the NERC Reliability Standards. Further, in 
the Final Rule the Commission noted that NYPSC cited specific examples 
of facilities that should be excluded, but found that determinations 
for treatment for specific facilities were ``more appropriate for the 
exception process'' and were beyond the scope of this proceeding.\37\
---------------------------------------------------------------------------

    \36\ NYPSC Request for Rehearing at 10.
    \37\ Order No. 773, 141 FERC ] 61,236 at P 43.
---------------------------------------------------------------------------

    26. With regard to NYPSC's request for clarification about the need 
to upgrade facilities while an exception request is pending, in Order 
No. 743-A we agreed with petitioners ``that currently unregistered 
entities that may be required to seek an exemption for facilities under 
the revised bulk electric system definition will not be required to 
register and thereafter comply with Reliability Standards until a final 
decision is made to deny the application for exemption,'' stating that 
``entities should not be required to take costly steps to comply with 
the Reliability Standards prior to the ERO's initial determination on 
an exemption request.'' \38\ NERC's exception process is consistent 
with the approach in Order No. 743-A. According to NERC, elements that 
are newly-included in the bulk electric system due to the revised 
definition will only become subject to relevant Reliability Standards 
twenty-four months after the effective date of the revised 
definition.\39\ It is NERC's

[[Page 29214]]

expectation that during the twenty-four month transition period 
entities with newly-included elements will file exception requests and 
the Regional Entities and NERC will make determinations of the 
exception requests.\40\ This transition period is sufficient to obtain 
a NERC ruling and avoid any compliance costs.\41\ However, if an 
element that is already deemed part of the bulk electric system and 
subject to relevant Reliability Standards today is included by 
application of the revised definition of bulk electric system, but an 
entity seeks an exclusion exception of the element, the element will 
remain subject to the relevant Reliability Standards during the 
pendency of the exception process. Conversely, if an element is 
excluded from the bulk electric system by application of the revised 
definition, but a different entity with a reliability oversight 
obligation seeks to include the element in the exception process, the 
element will not be subject to Reliability Standards during the 
exception process. If NERC determines the element is needed for 
operation of the interconnected transmission network and thus part of 
the bulk electric system, the entity can propose an appropriate 
implementation plan for compliance.\42\
---------------------------------------------------------------------------

    \38\ See Order No. 743-A, 134 FERC ] 61,210 at PP 91, 93.
    \39\ NERC Petition at 34.
    \40\ See NERC BES Petition at 36.
    \41\ See Order No. 743-A, 134 FERC ] 61,210 at P 93. See also 
NERC BES Petition at 36.
    \42\ NERC ROP Petition, Att. 1 (``Proposed Appendix 5C to the 
Rules of Procedure, Procedure for Requesting and Receiving an 
Exception from the NERC Definition of Bulk Electric System, Section 
10.1'') at 16: ``In the case of an Element not included in the BES 
by application of the BES Definition but for which an Inclusion 
Exception is approved, the Owner shall submit a proposed 
implementation plan to the Regional Entity detailing the schedule 
for complying with any Reliability Standards applicable to the newly 
included Element. The Regional Entity and Owner shall confer to 
agree upon such schedule.''
---------------------------------------------------------------------------

C. Order No. 773 Directives Regarding the Revised Definition

    27. A number of entities request clarification and/or rehearing in 
connection with the Commission directives in the Final Rule. 
Specifically, they request clarification and/or rehearing of (1) the 
Commission decision for treatment of looped configurations connected 
below 100 kV and the corresponding directive to modify the local 
network exclusion (exclusion E3) to remove the 100 kV minimum operating 
voltage; and (2) the directive to implement the exclusions for radial 
systems (exclusion E1) and local networks (exclusion E3) so that they 
do not apply to tie-lines (generator interconnection facilities) for 
bulk electric system generators indentified in inclusion I2 (generating 
resources).\43\
---------------------------------------------------------------------------

    \43\ The phrase generator tie-line means the same as generator 
interconnection facility as used in the Notice of Proposed 
Rulemaking in Docket No. RM12-16-000. Generator Requirements at the 
Transmission Interface, 143 FERC ] 61,049 (2013).
---------------------------------------------------------------------------

1. Looped Configurations Connected below 100 kV and Removing the 100 kV 
Minimum in Exclusion E3
Order No. 773
    28. In the Final Rule, the Commission held that radial systems with 
elements operating at 100 kV or higher in a configuration that emanate 
from two or more points of connection cannot be deemed ``radial'' if 
the configuration remains contiguous through elements that are operated 
below 100 kV. The Commission held that such a configuration is a 
networked configuration and does not qualify for exclusion E1. The 
Commission included a depiction of this configuration, shown below, in 
the Final Rule as Figure 3.\44\ However, the Commission also found that 
the facilities below 100 kV may or may not be necessary for the 
operation of the interconnected transmission network, and this decision 
can be made case-by-case in the exception process.
---------------------------------------------------------------------------

    \44\ See Order No. 773, 141 FERC ] 61,236 at P 150.
    [GRAPHIC] [TIFF OMITTED] TR17MY13.000
    

[[Page 29215]]

Requests for Rehearing
    29. APPA, TAPS and ELCON argue that the Commission erred in holding 
that two radial lines at or above 100 kV connected by a sub-100 kV line 
are not eligible for exclusion E1.\45\ They argue that the Commission 
lacks authority to redraft standards, but claim that the Final Rule 
does so by reinterpreting the exclusion contrary to its language and 
NERC's interpretation. They claim that finding that exclusion E1 is 
inapplicable to such a configuration because the configuration is 
``networked'' and not a ``radial system'' is unreasonable and 
constitutes an impermissible change to the NERC-filed definition. APPA, 
TAPS and ELCON state that, if radial systems connected by a sub-100 kV 
loop had not been intended to be eligible for exclusion E1, then 
exclusion E3 would have been drafted to allow such configurations to be 
covered. They contend that the fact that exclusion E1 is intended to 
encompass radial lines at or above 100 kV that are connected below 100 
kV works in tandem with exclusion E3's limitation to facilities 100 kV 
and above and reinforces the conclusion that the Final Rule's 
interpretation of exclusion E1 is inconsistent with the language and 
structure of the definition. They also argue that the ruling on 
exclusion E1 and the corresponding directive to modify exclusion E3 
improperly substituted the Commission's own judgment for NERC's which, 
they claim, violates the FPA section 215(d)(2) requirement for the 
Commission to give due weight to the technical expertise of the ERO.
---------------------------------------------------------------------------

    \45\ See also Dow Request for Rehearing at 8-10.
---------------------------------------------------------------------------

    30. APPA, TAPS and ELCON contend that the Final Rule's 
identification of additional factors that NERC did not consider 
provides no support for second guessing the technical content of NERC's 
definition. APPA states that the exception process exists to consider 
other factors, such as the factors the Commission indicated that may be 
relevant in particular cases.\46\ According to APPA, TAPS and ELCON, 
NERC made a determination that loops below 100 kV generally do not 
impact the grid, but recognized that those that do are more 
appropriately handled through the exception process. They also argue 
that the Commission effectively changed the definition without giving 
NERC the opportunity to find an equally effective or superior solution 
to the Commission's concern.
---------------------------------------------------------------------------

    \46\ See Order No. 773, 141 FERC ] 61,236 at P 155 n.139.
---------------------------------------------------------------------------

    31. Further, TAPS and ELCON argue that the Commission should also 
reverse its directive to NERC to modify exclusion E3 to remove the 100 
kV minimum threshold. They contend that the need to change exclusion E3 
arises only if exclusion E1 is changed to foreclose exclusion of 
radials above 100 kV connected at lower voltages, resulting in the need 
for consideration of such configurations under exclusion E3. According 
to TAPS and ELCON, exclusion E3, as written, works well with the rest 
of the definition when exclusion E1 is construed as NERC intended. TAPS 
and ELCON state that, if the Commission is concerned that NERC's 
process is not adequately including radial facilities of 100 kV or more 
connected by sub-100 kV loops, the Commission should not revise 
exclusions E1 and E3 but should direct NERC to submit a report that 
provides information on how entities use this exclusion, similar to the 
Final Rule directive in connection with exclusion E3's 300 kV voltage 
ceiling.\47\
---------------------------------------------------------------------------

    \47\ TAPS and ELCON Request for Rehearing and Clarification at 6 
(citing Order No. 773, 141 FERC ] 61,236 at P 206).
---------------------------------------------------------------------------

    32. APPA claims that, by not allowing exclusion E1 to apply to sub-
100 kV loops between radial systems in conjunction with deletion of the 
100 kV floor in exclusion E3, the Commission directive will create a 
disincentive for distribution providers from connecting their 
distribution systems to the bulk electric system at multiple points at 
voltages greater than 100 kV. APPA also stated that distribution 
providers will be less likely to construct such distribution networks 
with built-in redundancy that provide multiple paths to provide 
continuous, high quality service, because of the concern that these 
distribution systems will be designated as bulk electric system 
elements.
    33. NERC seeks clarification of the Commission directive to revise 
exclusion E3. Specifically NERC requests clarification that it should 
remove the phrase ``or above 100 kV but'' in the first sentence of 
exclusion E3 as shown below.

    E3--Local networks (LN): A group of contiguous transmission 
Elements operated at or above 100 kV but less than 300 kV that 
distribute power to Load rather than transfer bulk power across the 
interconnected system. LN's emanate from multiple points of 
connection at 100 kV or higher to improve the level of service to 
retail customer Load and not to accommodate bulk power transfer 
across the interconnected system. The LN is characterized by all of 
the following:\48\
---------------------------------------------------------------------------

    \48\ NERC Request for Clarification at 4.

    NERC contends that the Commission's approach will entail the 
evaluation of significantly more facilities in applying exclusion E3 
and is administratively burdensome, NERC requests that the Commission 
clarify the basis and intent of this directive to allow NERC to 
implement this directive appropriately.\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

Commission Determination
    34. The Commission denies rehearing and upholds the Final Rule. The 
Commission disagrees that it failed to give due weight to NERC. As 
explained below, the Commission considered NERC's rationale, but after 
giving due weight found it unpersuasive.
    35. In the NOPR, the Commission agreed with NERC's proposal that 
radial systems only serving load and emanating from a single point of 
connection of 100 kV or higher should be excluded from the bulk 
electric system. However, we expressed concern ``that the exclusion 
could allow elements operating at 100 kV or higher in a configuration 
that emanates from two or more points of connection ``to be deemed 
``radial'' even though the configuration remains contiguous through 
elements that are operated below 100 kV.'' \50\ The Commission also 
requested comment on the appropriateness of examining elements below 
100 kV to determine if the configuration (shown in the figure above) 
meets exclusion E1, i.e., whether the figure depicts ``a system 
emanating from two points of connection at 230 kV and, therefore, the 
230 kV elements above the transformers to the points of connection to 
the two 230 kV lines would not be eligible for the exclusion E1 
notwithstanding the connection below 100 kV.'' \51\ In response to the 
NOPR, some commenters disagreed with the Commission's characterization 
that the configuration depicts a loop, claiming that it represents two 
separate radial systems, while other commenters agreed with the NOPR 
that the configuration does not meet the definition of a radial 
system.\52\ The Commission considered NERC's explanations, but in the 
Final Rule the Commission found that the configuration shown above is a 
networked configuration through a 69 kV loop and does not qualify for 
exclusion E1 because the load can be served by either 230 kV line.\53\
---------------------------------------------------------------------------

    \50\ Revisions to Electric Relibaility Organization Definition 
of Bulk Electric System and Rules of Procedure, Notice of Proposed 
Rulemaking (NOPR), 139 FERC ] 61,247 at P 81.
    \51\ Id.
    \52\ Order No. 773, 141 FERC ] 61,236 at P 154.
    \53\ Order No. 773, 141 FERC ] 61,236 at P 155.
---------------------------------------------------------------------------

    36. The Commission disagrees that this decision is contrary to the 
language of exclusion E1. Instead, our

[[Page 29216]]

interpretation of NERC's wording reasonably construes the ambiguity, if 
any, in exclusion E1. Even apart from NERC's wording of exclusion E1, 
it is difficult to envision any reasonable exclusion for radial lines 
that would cover the facilities in the configuration above. The looped 
systems have more than one path to the bulk electric system and, 
therefore, it is reasonable not to consider them ``radial'' in nature. 
Exclusion E1 provides a definition of ``radial system'' as ``[a] group 
of contiguous transmission Elements that emanates from a single point 
of connection of 100 kV or higher . . .'' (emphasis added).\54\ This 
definition of ``radial system'' only allows a single point of 
connection and does not limit operating voltage of the transmission 
elements connecting two such points to any minimum value. Therefore, 
``radial systems'' as defined in exclusion E1 includes elements that 
cover the entire range of operating voltages. It strikes us as 
unreasonable to characterize lines as radial by ignoring connecting 
facilities below 100 kV. Rather the reasonable approach is to find 
these lines to be non-radial and then consider whether they should be 
excluded as a local network or through the exception process. Further, 
as we noted previously, many facilities operated at 100 kV and above 
have a significant effect on the overall functioning of the grid. The 
majority of 100 kV and above facilities in the United States operate in 
parallel with other high voltage and extra high voltage facilities, 
interconnect significant amounts of generation sources and operate as 
part of a defined flow gate, which illustrates their parallel nature 
and therefore their necessity to the reliable operation of the 
interconnected transmission system. The Final Rule also noted that NERC 
emphasized that radial systems cannot have multiple connections at 100 
kV or higher.\55\ For these reasons, we believe it is important that 
these configurations be assessed for exclusion from the bulk electric 
system under the criteria in exclusion E3, to ensure that any excluded 
facilities do not contribute to the reliable operation of the 
interconnected system. Moreover, as noted in the Final Rule, the sub-
100 kV elements comprising radial systems and local networks will not 
be included in the bulk electric system, unless determined otherwise in 
the exception process.\56\
---------------------------------------------------------------------------

    \54\ Order No. 773, 141 FERC ] 61,236 at P 18.
    \55\ Order No. 773, 141 FERC ] 61,236 at P 42.
    \56\ Order No. 773, 141 FERC ] 61,236 at P 155. In the Final 
Rule the Commission states that it expects entities to identify and 
include sub-100 kV facilities necessary for the operation of the 
interconnected transmission network and found NERC's approach to 
include such facilities in the bulk electric system to be 
reasonable. Order No. 773, 141 FERC ] 61,236 at P 269. The 
Commission notes that the joint NERC and Commission staff report on 
the September 8, 2011, Arizona-Southern California blackout explains 
why facilities operating below 100 kV should not be ignored simply 
because the elements are below 100 kV. See Arizona-Southern 
California Outages on September 8, 2011--Causes and Recommendations 
at 96 (September 2011 Blackout Report), available at http://www.ferc.gov/legal/staff-reports/04-27-2012-ferc-nerc-report.pdf. 
There, facilities below 100 kV were a significant factor in a major 
blackout, but their significance was not fully or widely recognized 
until after the blackout.
---------------------------------------------------------------------------

    37. We also deny rehearing on TAPS' and ELCON's argument that the 
Commission's decision regarding exclusion E1 and the Final Rule 
directive to change the language in exclusion E3 (removing the 100 kV 
minimum operating threshold language) will no longer allow exclusions 
E1 and E3 to work together and will be administratively more 
burdensome. As we stated in the Final Rule, exclusion E3 as written 
applies to a local network that is contiguous and above 100 kV. Thus, 
the exclusion E3 language, as NERC initially proposed, did not apply to 
a configuration where the facilities in question are contiguous below 
100 kV.\57\ Removing the 100 kV minimum operating voltage in exclusion 
E3 allows networked configurations below 100 kV, that may not otherwise 
be eligible for exclusion E1, to be eligible for exclusion E3. This 
modification also makes the ``local network'' exclusion language 
consistent with language in exclusion E3 criterion (a), which limits 
generation on the local network and its underlying elements. As we 
stated in the Final Rule, the entire range of operating voltage 
elements must be examined when considering a local network.\58\
---------------------------------------------------------------------------

    \57\ Order No. 773, 141 FERC ] 61,236 at P 155.
    \58\ Id.
---------------------------------------------------------------------------

    38. In the Final Rule, the Commission concluded that removing the 
100 kV floor in exclusion E3 will decrease the burden for some entities 
that would have otherwise been included in the bulk electric system 
because these entities may now apply exclusion E3. This is because 
many, if not most, of the configurations in question may still be 
excluded through application of the modified exclusion E3.
    39. We disagree with TAPS's, ELCON's and APPA's contention that the 
Final Rule's identification of other possible factors to be considered 
does not support dismissing the technical content of NERC's definition. 
The Commission did not rely on these other factors as the basis for its 
decision.\59\ Instead, the Commission found that looped systems have 
more than one path to the bulk electric system. Therefore, the 
Commission concluded that it is reasonable not to consider them 
``radial'' in nature.\60\
---------------------------------------------------------------------------

    \59\ See Order No. 773, 141 FERC ] 61,236 at P 155 n.139.
    \60\ Id.
---------------------------------------------------------------------------

    40. With respect to NERC's request for clarification, we agree that 
removing the phrase ``or above 100 kV but'' from the definition of 
local networks in the first sentence of exclusion E3 is an appropriate 
way to meet the Commission's directive to remove the 100 kV minimum 
operating voltage in the local network definition. As we explained in 
the Final Rule, this modification, together with satisfying the 
criteria outlined in exclusion E3, will appropriately exclude local 
network configurations that are not necessary to the reliable operation 
of the interconnected transmission network.\61\
---------------------------------------------------------------------------

    \61\ Order No. 773, 141 FERC ] 61,236 at P 155.
---------------------------------------------------------------------------

    41. While APPA claims that the Commission directive to not allow 
exclusion E1 to apply to sub-100 kV loops will create a disincentive 
for distribution providers to connect their distribution systems to the 
bulk electric system, our result derives directly from NERC's own 
wording of exclusion E1. We cannot avoid the reasonable effect of these 
words based on an unsupported claim that concerns about jurisdiction 
will cause distribution providers to forgo the significant reliability 
benefits of an added connection.
    42. We do not agree with NERC that ``the Commission's approach will 
entail the evaluation of significantly more facilities in applying 
exclusion E3 and is administratively burdensome.'' Exclusion E3 is one 
part of the bright-line definition of bulk electric system, and all 
asset owners must apply the definition as a whole in order to determine 
whether their elements are part of the bulk electric system. As we 
stated in the Final Rule, exclusion E3 as proposed by NERC requires the 
local network to be contiguous and above 100 kV. Thus, the exclusion E3 
language, as NERC initially proposed, did not allow for the figure 
above to be eligible for the local network exclusion because it 
includes contiguous facilities below 100 kV and could have resulted in 
more exception process decisions.\62\ However, as we explained, 
removing the 100 kV minimum operating voltage in the local network 
definition allows networked configurations comprised of facilities 
ranging from below 100 kV to multiple connections at 100 kV and above 
to be candidates for exclusion E3. In other words, removing the 
language from exclusion E3 will relieve the burden of

[[Page 29217]]

addressing all configurations similar to the looped configuration 
described above in the exception process by first allowing entities 
that do not qualify for exclusion E1 to apply exclusion E3. We 
recognize that certain facilities that might have qualified for 
exclusion E1 as interpreted by NERC may now seek instead to qualify for 
exclusion E3 or, if unsuccessful there, may seek relief through the 
exception process. However, we expect that documenting a valid claim of 
exclusion E3 will not be particularly burdensome, consisting often of 
reviewing historic data or relying on information that entities already 
possess (such as the amount of generation connected to the facilities 
or whether the facilities contain a Flowgate or transfer path), not 
necessarily preparing new load flow studies or similar analyses, and 
retaining such records for possible future review by the Regional 
Entity. Also, certain entities that will not qualify even for exclusion 
E3 may seek relief under the exception process. While this possibility 
exists, we are not persuaded that there will be an inordinate number of 
such instances, particularly since commenters have not submitted 
estimates of the number of facilities affected by the entirety of our 
changes to NERC's proposal.
---------------------------------------------------------------------------

    \62\ Order No. 773, 141 FERC ] 61,236 at P 155.
---------------------------------------------------------------------------

    43. Thus, while we have carefully considered the concerns raised by 
petitioners, we are not persuaded that the Commission's directives in 
the Final Rule will result in a significant increase in administrative 
and compliance burdens. Further, we reiterate that elements that are 
newly-included in the bulk electric system due to the revised 
definition will only become subject to relevant Reliability Standards 
twenty-four months after the effective date of the revised 
definition.\63\ It is NERC's expectation that during the twenty-four 
month transition period entities will file exception requests and the 
Regional Entities and NERC will make determinations on the exception 
requests.\64\ We expect that this transition period will be sufficient 
for those few configurations that may need to seek an exception based 
on the Commission's determinations regarding exclusions E1 and E3 to 
obtain a NERC ruling and avoid any compliance costs.\65\ However, if an 
element that is already deemed part of the bulk electric system and 
subject to relevant Reliability Standards today is included by 
application of the revised definition of bulk electric system, but an 
entity seeks an exclusion exception of the element, the element will 
remain subject to the relevant Reliability Standards during the 
pendency of the exception process. Conversely, if an element is 
excluded from the bulk electric system by application of the revised 
definition, but a different entity with a reliability oversight 
obligation seeks to include the element in the exception process, the 
element will not be subject to Reliability Standards during the 
exception process. If NERC determines the element is needed for 
operation of the interconnected transmission network and thus part of 
the bulk electric system, the entity can propose an appropriate 
implementation plan for compliance.\66\
---------------------------------------------------------------------------

    \63\ NERC Petition at 34.
    \64\ See NERC BES Petition at 36.
    \65\ See Order No. 743-A, 134 FERC ] 61,210 at P 93. See also 
NERC BES Petition at 36.
    \66\ NERC ROP Petition, Att. 1 (``Proposed Appendix 5C to the 
Rules of Procedure, Procedure for Requesting and Receiving an 
Exception from the NERC Definition of Bulk Electric System, Section 
10.1'') at 16: ``In the case of an Element not included in the BES 
by application of the BES Definition but for which an Inclusion 
Exception is approved, the Owner shall submit a proposed 
implementation plan to the Regional Entity detailing the schedule 
for complying with any Reliability Standards applicable to the newly 
included Element. The Regional Entity and Owner shall confer to 
agree upon such schedule.''
---------------------------------------------------------------------------

    44. Notwithstanding the foregoing, we agree with petitioners that 
NERC has the flexibility to develop an equally effective and efficient 
alternative, provided that NERC addresses our concern to ensure 
elements at or above 100 kV in a looped configuration are not excluded 
from the bulk electric system under exclusion E1.\67\

---------------------------------------------------------------------------

    \67\ See Mandatory Reliability Standards for the Bulk-Power 
System, Order No. 693, FERC Stats. & Regs. ] 31,242, at P 186 order 
on reh'g, Order No. 693-A, 120 FERC ] 61,053 (2007).
---------------------------------------------------------------------------

2. Generator Interconnection Facilities Connected to Bulk Electric 
System Generators
Order No. 773
    45. In the Final Rule, the Commission directed NERC to implement 
exclusion E1 (radial systems) and exclusion E3 (local networks) so that 
they do not apply to generator interconnection facilities for bulk 
electric system generators identified in inclusion I2. The Commission 
stated that, if the generator is necessary for the operation of the 
interconnected transmission network, it is appropriate to have the 
generator interconnection facility operating at or above 100 kV that 
delivers the generation to the bulk electric system included as well. 
The Commission also stated that it is appropriate to have the bulk 
electric system contiguous, without facilities or elements ``stranded'' 
or ``cut-off'' from the remainder of the bulk electric system.\68\
---------------------------------------------------------------------------

    \68\ Order No. 773, 141 FERC ] 61,236 at PP 164-165, 214.
---------------------------------------------------------------------------

Requests for Rehearing
    46. NERC requests that the Commission clarify the directives to 
implement exclusions E1 and E3 so that they do not apply to generator 
interconnection facilities for bulk electric system generators 
identified in inclusion I2. NERC states that the Commission does not 
state whether ``implementation'' applies to Phase 1 or Phase 2 or how 
the implementation would be effectuated without a change to the 
definition of bulk electric system.\69\ Specifically, NERC requests 
that the Commission clarify how these directives should be reconciled 
with the plain language of the exclusions.
---------------------------------------------------------------------------

    \69\ NERC separated the development of the revised definition 
into two phases. Phase 1 culminated in the language of the proposed 
modified definition that is the primary subject of this Final Rule. 
Phase 2, which is ongoing, intends to focus on other industry 
concerns raised during Phase 1. Order No. 773, 141 FERC ] 61,236 at 
P 52 n.46.
---------------------------------------------------------------------------

    47. NERC opines that the Commission's use of the term ``tie-line'' 
is potentially confusing for stakeholders and claims that it could 
create additional complications with the implementation of the 
Commission's directive unless the Commission clarifies its use of this 
term. NERC also requests that the Commission reconcile the directives 
with the express language of the definition. NERC states that the 
Commission acknowledged in the Final Rule that exclusion E1 as written 
does not prevent the radial tie-line operating at or above 100 kV from 
the high side of the step-up transformer to the bulk electric system 
from being excluded.
    48. Similarly, NRECA requests that the Commission clarify that, 
when the Commission directed NERC to implement exclusion E1 it was not 
seeking to directly modify the definition or the exclusions with 
respect to generator tie-lines, but rather that it was directing that 
this issue be addressed in the Phase 2 process as required by FPA 
section 215(d)(4). NRECA states that the tie-line distinction is an 
important directive that must be evaluated under the Phase 2 process, 
and implemented only after the Commission rules on the further revision 
to the definition that is proposed by NERC at the conclusion of the 
Phase 2 process. NRECA states that NERC should be given an opportunity 
to address the Commission's concern and present a response for 
consideration as part of a rule emanating from the Phase 2 process. 
NRECA adds that such a directive is consistent with the

[[Page 29218]]

Commission's obligation to remand to the ERO any proposed Reliability 
Standard or a modification to a Reliability Standard that the 
Commission disapproves in whole or in part.
    49. APPA, TAPS and ELCON contend that the Commission's 
interpretation will prevent radial systems and local networks from 
qualifying for exclusions E1 and E3, respectively, if they connect to 
bulk electric system generators identified in inclusion I2 with gross 
nameplate ratings between 20 MVA and 75 MVA. They also argue that the 
Commission's directive fails to give due weight to NERC's expertise. 
APPA, TAPS and ELCON contend that the directive will force many more 
facilities into the exception process. They also argue that the 
Commission does not have the authority to direct NERC to implement the 
definition contrary to its plain meaning. Further, they contend that 
the Commission's concern is already being addressed in the Phase 2 
process. APPA, TAPS and ELCON state that, if the Commission determines 
it needs more information to address its concerns with respect to tie-
lines for bulk electric system generators identified in inclusion I2, 
it should direct NERC to submit a report regarding how entities utilize 
this exclusion.
Commission Determination
    50. We grant rehearing to the extent that, rather than direct NERC 
to implement exclusions E1 and E3 as described above, we direct NERC to 
modify the exclusions pursuant to FPA section 215(d)(5) to ensure that 
generator interconnection facilities at or above 100 kV connected to 
bulk electric system generators identified in inclusion I2 are not 
excluded from the bulk electric system. We find that the Phase 2 
standard development process is an appropriate means to address the 
Commission's concern. If NERC chooses to propose a different solution, 
it must demonstrate that its proposal is equally effective or efficient 
to ensure that generator interconnection facilities that connect 
generators included in the bulk electric system to the grid, and that 
are at or above 100 kV, are included in the bulk electric system and 
must support any alternate proposal with a technical analysis 
sufficient for the Commission to make an informed decision.
    51. We deny rehearing regarding arguments that the Commission did 
not give due weight to NERC's technical justification. As an initial 
matter, the Final Rule focused on a generator interconnection facility 
that connects the bulk electric system generator to the interconnected 
transmission network at a voltage of 100 kV or above.\70\ The language 
was accompanied by the following:
---------------------------------------------------------------------------

    \70\ Order No. 773, 141 FERC ] 61,236 at P 165.
    [GRAPHIC] [TIFF OMITTED] TR17MY13.001
    
    In the Final Rule, the Commission found that NERC's rationale did 
not support excluding generator interconnection facilities operated at 
or above 100 kV connecting bulk electric system generators to the bulk 
electric system.\72\ NERC based its proposal on the premise that a 
single point of failure causing the radial systems to separate from the 
bulk electric system results in a loss of a limited amount of 
generation that will not have an adverse impact on reliability. In the 
Final Rule, however, the Commission noted that there are other 
reliability concerns that NERC did not address. For example, the 
Commission noted that ``both the radial line emanating from a generator 
and the portion of the bulk electric system to which it is connected 
have protective relays that require coordination to prevent the lines 
from tripping. The generator needs to coordinate the protective relays 
with transmission operators, otherwise there may not be adequate 
information to prevent a fault on the radial line from causing 
cascading outages on the bulk electric system.'' \73\ The Commission 
also relied on the fact that an ``adverse reliability impact . . . is 
an extreme result that should not occur from the loss of a single tie-
line for any sized generator''

[[Page 29219]]

because a single event that results in an adverse reliability impact 
violates planning and operating criteria in Commission approved 
Reliability Standards.\74\ The Final Rule also explained that, in 
general, ``it is appropriate to have the bulk electric system 
contiguous,'' without facilities ``stranded'' or ``cut off.'' \75\ As 
shown in the diagram above, inclusion I2 (generator resources) includes 
the generator and the generator terminals through the high-side of the 
step-up transformer(s) connected at a voltage of 100 kV or above.\76\ 
However, NERC's interpretation of exclusion E1 would have excluded the 
230 kV generator interconnection facility from the high side of the 
step-up transformer to the interconnected transmission network. This 
would be inconsistent with the Commission's statement in the Final Rule 
that, if the generator is necessary for the operation of the 
interconnected transmission network, it is generally appropriate to 
include the generator interconnection facility radial tie-line 
operating at or above 100 kV that delivers the generation to the bulk 
electric system.\77\
---------------------------------------------------------------------------

    \71\ Order No. 773, the Commission included this diagram 
identified as ``Radial System with BES Generation.'' See Order No. 
773, 141 FERC ] 61,236 at PP 165.
    \72\ Order No. 773, 141 FERC ] 61,236 at PP 165-168.
    \73\ Order No. 773, 141 FERC ] 61,236 at P 166 and n.150 
(citing, Reliability Standards, TPL-002-0b and IRO-004-2).
    \74\ Id.
    \75\ Order No. 773, 141 FERC ] 61,236 at P 165.
    \76\ Order No. 773, 141 FERC ] 61,236 at P 85. Inclusion I2 
states ``Generating resource(s) with gross individual nameplate 
rating greater than 20 MVA or gross plant/facility aggregate 
nameplate rating greater than 75 MVA including the generator 
terminals through the high-side of the step-up transformer(s) 
connected at a voltage of 100 kV or above.''
    \77\ Order No. 773, 141 FERC ] 61,236 at P 167.
---------------------------------------------------------------------------

    52. We disagree with APPA that the directive to include 100 kV and 
above generator interconnection facilities connected to bulk electric 
system generators will result in making the owners of these qualifying 
100 kV and above generator interconnection facilities subject to the 
full range of transmission planner, transmission owner and transmission 
operator Reliability Standards and requirements. As we state above, in 
cases of generator interconnection facilities for bulk electric system 
generators where the generator owner also owns the generator 
interconnection facility, NERC has determined on a case-by-case basis 
which entities require registration as transmission owners/operators 
and identified sub-sets of applicable Reliability Standard requirements 
for these entities rather than automatically subjecting such generators 
to the full scope of standards applicable to transmission owners and 
operators.\78\
---------------------------------------------------------------------------

    \78\ In addition, in Docket No. RM12-16-000, NERC has submitted 
proposed revisions to certain Reliability Standards to assure that 
generator interconnection facilities are adequately covered rather 
than subjecting them to all of the requirements applicable to 
transmission owners and operators.
---------------------------------------------------------------------------

D. Arguments Regarding the Need to Modify the Inclusions and Exclusions

    53. In the NOPR, the Commission requested comment on certain 
aspects of NERC's petition to better understand the application of the 
specific inclusions and exclusions. NERC and other entities filed 
comments that assisted in our understanding of the parameters of the 
definition. In the Final Rule, in addition to the ``core'' definition, 
the Commission adopted many of these explanations and approved without 
modification most of the specific inclusions and exclusions, finding 
that they add clarity regarding which elements are part of the bulk 
electric system as compared to the existing definition.\79\ Several 
entities request rehearing of the approval of specific inclusions and 
exclusions that the Commission approved without modification. On 
rehearing, entities argue that the Commission erred by failing to 
direct NERC to (1) Eliminate inclusion I4 (dispersed power producing 
resources); (2) modify or eliminate the generator thresholds in 
exclusions E1 and E3; and (3) eliminate exclusion E3(b), the criterion 
that power cannot flow out of a local network in order to be eligible 
for exclusion from the bulk electric system.
---------------------------------------------------------------------------

    \79\ Order No. 773, 141 FERC ] 61,236 at P 39.
---------------------------------------------------------------------------

1. Inclusion I4 (Dispersed Power Producing Resources)
Order No. 773
    54. Inclusion I4 includes in the bulk electric system dispersed 
power producing resources with aggregate capacity greater than 75 MVA 
(gross aggregate nameplate rating). In the Final Rule, the Commission 
approved inclusion I4 finding that it provides useful granularity in 
the bulk electric system definition. The Commission also found that the 
language in inclusion I4 regarding the collector system language is 
consistent with language in the Registry Criteria, section III.c.2 and 
agreed that it is appropriate ``to expressly cover dispersed power 
producing resources utilizing a system designed primarily for 
aggregating capacity.'' \80\
---------------------------------------------------------------------------

    \80\ Order No. 773, 141 FERC ] 61,236 at P 112.
---------------------------------------------------------------------------

Requests for Rehearing
    55. AWEA states that the Commission did not base its approval of 
inclusion I4 on sufficient evidence to show inclusion I4 would result 
in any material reliability benefit. AWEA contends that neither the 
Final Rule nor the record demonstrate that the inclusion of dispersed 
generation resources would help protect the reliable operation of the 
interconnected transmission network. AWEA contends that all evidence in 
the record indicates that dispersed generation resources are unlikely 
to affect the reliability of the interconnected transmission network. 
AWEA argues that the Commission's decision ``to modify the definition 
regardless of the record on dispersed generation resources shows the 
Commission's decision was arbitrary and capricious . . . and not the 
result of reasoned decision-making.''\81\
---------------------------------------------------------------------------

    \81\ AWEA Request for Rehearing and Reconsideration at 3.
---------------------------------------------------------------------------

    56. AWEA argues that the electrical equipment at the point of 
interconnection with the bulk electric system is a more appropriate 
point for delineating between the bulk electric system and non-bulk 
electric system electrical components because the point of 
interconnection for a wind project comprised of more than 75 MVA of 
generation and operating at more than 100 kV is the only part of the 
wind project that could reasonably affect bulk electric system 
reliability.
    57. AWEA adds that the Commission erred in agreeing with NERC's 
suggestion to include individual dispersed generators and their 
collector systems in approving the modification because this inclusion 
was not based on evidence supported by the record. According to AWEA, 
the typical electrical layout of a wind plant will be aggregated onto 
an electrical string of the collector array that operates at voltages 
``well below'' 100kV, so losing a single electrical string or even 
multiple electrical strings will typically only result in the loss of a 
few dozen MWs of generation.\82\ AWEA also states the capacity value 
contribution that grid operators typically assume for wind projects for 
meeting peak electricity demand is less than 20% of the nameplate 
capacity of the wind project. AWEA maintains that such minimal impacts 
fall well below the 75 MVA threshold that inclusion I4 seeks to 
establish, as well as any reasonable threshold for determining which 
electrical components are likely to cause a reliability problem on the 
bulk electric system. Alternatively, AWEA states that if the Commission 
does not modify the definition as AWEA proposes it could recognize that 
all wind turbines installed in the United States are not subject to the 
modified definition.
---------------------------------------------------------------------------

    \82\ Id.

---------------------------------------------------------------------------

[[Page 29220]]

Commission Determination
    58. The Commission denies rehearing and confirms its finding that 
inclusion I4 provides useful granularity in the bulk electric system 
definition.
    59. The Commission's approval of the bulk electric system 
definition including inclusion I4 is adequately supported by the 
evidence in the record in this proceeding. In the Final Rule, the 
Commission agreed with NERC's statement that the purpose of this 
inclusion is to include variable generation (e.g., wind and solar 
resources).\83\ The Commission also agreed with NERC that, while such 
generation could be considered subsumed in inclusion I2 (because the 
gross aggregate nameplate rating of the power producing resources must 
be greater than 75 MVA), it is appropriate for clarity to add this 
separately-stated inclusion to expressly cover dispersed power 
producing resources using a system designed primarily for aggregating 
capacity.\84\
---------------------------------------------------------------------------

    \83\ Order No. 773, 141 FERC ] 61,236 at P 115. See also NERC 
BES Petition, Exhibit D, August 19, 2011 Consideration of Comments, 
at 416: ``Although dispersed power producing resources (wind, solar, 
etc.) can be intermittent suppliers of electrical generation to the 
interconnected transmission network, the [standard drafting team] 
has been made aware of geographical areas that depend on these types 
of generation resources for the reliable operation of the 
interconnected transmission network which has prompted the 
development of Inclusion I4. . . .'' See also NERC BES Petition, 
Exhibit D, ``Consideration of Comments on Second Draft of the 
Definition of the Bulk Electric System'' at 160: ``The [standard 
drafting team] disagrees with excluding dispersed power producing 
sources such as wind and solar from the BES definition. These 
resources comprise a significant share of the North American 
resource mix.''
    \84\ Order No. 773, 141 FERC ] 61,236 at P 115.
---------------------------------------------------------------------------

    60. The Commission further concluded that, although dispersed power 
producing resources (wind, solar, etc.) are typically variable 
suppliers of electrical generation to the interconnected transmission 
network, certain geographical areas depend on these generation 
resources for the reliable operation of the interconnected transmission 
network.\85\ In addition, having considered NERC's rationale for 
adopting inclusion I4 in its petition and NOPR comments, the Commission 
concluded that owners and operators of dispersed power producing 
resources that meet the 75 MVA gross aggregate nameplate rating 
threshold are, in some cases, already registered and have compliance 
responsibilities as generator owners and generator operators. The 
threshold of 75 MVA for plants is well established in the NERC 
Statement of Compliance Registry Criteria and consistently applicable 
to all generating facilities.\86\ Therefore, the Commission denies 
rehearing that it did not adequately support its approval of inclusion 
I4.
---------------------------------------------------------------------------

    \85\ Order No. 773, 141 FERC ] 61,236 at P 115. See also the 
ERCOT daily wind integration reports at: http://www.ercot.com/gridinfo/generation/windintegration/.
    \86\ Order No. 773, 141 FERC ] 61,236 at P 112.
---------------------------------------------------------------------------

2. Generator Thresholds in Exclusions E1 and E3
Order No. 773
    61. In its petition, NERC explained that conditions ``b'' and ``c'' 
of exclusion E1 allow some generation to be connected to a radial 
system while still qualifying for the radial systems exclusion 
(aggregate capacity less than or equal to 75 MVA). Similarly, with 
respect to exclusion E3, NERC explained that the purpose of local 
networks is to provide local distribution service, not to provide 
transfer capacity for the interconnected transmission network, thus 
some generation within a local network would be appropriate.\87\ NERC 
stated, that the maximum amount of generation allowed on the radial 
facility per exclusion E1 conditions ``b'' and ``c'' is consistent with 
the aggregate capacity threshold presently provided in the Registry 
Criteria for registration as a generator owner or generator operator 
(75 MVA gross nameplate rating). In the Final Rule, the Commission 
found NERC's explanations for limiting generation capacity reasonable 
because the amount of connected generation allowed by conditions ``b'' 
and ``c'' is intended to have limited benefit to the reliability of the 
interconnected transmission network and pose no reliability risk to the 
interconnected transmission network.\88\
---------------------------------------------------------------------------

    \87\ NERC Petition at 22.
    \88\ Order No. 773, 141 FERC ] 61,236 at PP 158, 164, 201, 207, 
209, 211, 216.
---------------------------------------------------------------------------

Requests for Rehearing
    62. Holland raises three arguments on rehearing. First, Holland 
states that the Commission should have revised the generator thresholds 
in exclusion E1 for radial systems and in exclusion E3 for local 
networks to ensure that they do not inappropriately include local 
distribution facilities. Second, Holland argues that the Commission 
failed to respond to Holland's alternative recommendation that the 
Commission modify the generation limits in exclusions E1 and E3 by 
basing the limit on net generation. Third, Holland argues that the 
Commission erred in its conclusion with respect to the meaning of 
``emanates from a single point of interconnection'' in exclusion E1.
    63. Holland states that it supports the exclusion of radial systems 
from the bulk electric system but that exclusion E1 will still capture 
facilities used in local distribution. Holland notes that in its NOPR 
comments, it recommended that the Commission revise exclusion E1 to 
remove the generation threshold from exclusion E1(c) but that the 
Commission failed to consider and respond to Holland's comments. 
Holland also argues that the Commission erred by (1) failing to state a 
factual basis upon which the Commission reached its decision not to 
exclude from the bulk electric system radial systems that also serve 
load and (2) citing no record evidence to support its rejection of 
Holland's comments. Holland maintains that the effect of approving 
exclusions E1 and E3 without the modification it proposed is that only 
those systems electrically isolated from the bulk electric system or 
those with no generation above the threshold size will meet the 
criteria for exclusion E1. Holland contends that the Commission's 
approval of the exclusion prejudges the outcome of the Seven Factor 
Test by arbitrarily approving criteria without having the results of 
any such test, or without having a specific context in which to apply 
the criteria.
    64. Similarly, Holland argues that the Commission erred by failing 
to remove or alter the generator thresholds from exclusion E3 local 
networks, and that approving exclusion E3 with the generator thresholds 
encroaches on facilities used in the local distribution of electric 
energy. Holland states that the Commission erred by not directing any 
changes to the connected generation limitation, and that the Commission 
erroneously relied on the fact that the generation limits were 
consistent with the NERC Registration Criteria. Holland argues that the 
Commission finding could make some local distribution facilities that 
do not meet exclusion E3 subject to Reliability Standards and 
Commission authority. According to Holland, the Commission must revise 
exclusion E3 regarding local networks to ensure that the definition 
does not conflict with the FPA section 215 prohibition against 
regulating facilities used in the local distribution of electric 
energy. Holland states that the Commission did not address how local 
networks with internal generation consumed internally differ from local 
distribution facilities with lesser amounts of or no generation, or how 
this interpretation is consistent with the Commission's determination 
that ``local distribution'' has a consistent meaning throughout the 
FPA. Holland also claims that, despite having decided to use the Seven 
Factor Test for local

[[Page 29221]]

distribution determinations, the Commission made factual determinations 
without any application of the Seven Factor Test.
    65. Further, Holland argues that the Commission failed to consider 
Holland's alternative comments that the Commission modify the 
generation limit in exclusion E3 by basing the limit on net generation. 
Holland contends that exclusion E3(a) arbitrarily ignores the 
development and practice of local networks operated by municipal 
utilities. Holland maintains that, historically, municipal utilities 
with internal generation installed to meet the municipality's 
distribution load sized the generation comparably to the local 
distribution load. Holland contends that the Commission disregarded 
that history and assumes that all internal generation, regardless of 
how remote, connects to and is exported to the bulk electric system. 
According to Holland, the Commission compounded its error by 
disregarding Holland's comments stating that local networks should be 
able to deliver power to the bulk electric system.
    66. Holland also contends that the Commission dismissed its comment 
that the Commission should interpret the phrase ``emanates from a 
single point of interconnection'' for radial systems to mean a single 
electrical point, such as a single bus or normally connected bus work 
within a substation, without citing any record evidence equating 
electrical points with physical locations.
Commission Determination
    67. The Commission denies rehearing on these issues raised by 
Holland. Pursuant to section 215(d)(2) of the FPA, the Commission gives 
due weight to the technical expertise of the ERO with respect to the 
content of a Reliability Standard or definition.\89\ In this instance, 
NERC explained that exclusion E1(c) addresses limited amounts of 
generation that are installed within a radial system and are intended 
to serve local load within that radial system.\90\ In the NOPR, the 
Commission requested comment about the delivery or injection of power 
from the radial systems described in these exclusions. NERC responded 
that, ``because of the limitation of the generation in exclusion E1(c), 
the power generated on the radial system would be delivered to the 
embedded load within the radial system and injected into the bulk 
electric system in very limited quantities . . .'' and ``subjecting the 
elements associated with this type of radial system to all the 
Reliability Standards has limited benefit to the reliability of the 
interconnected transmission network.'' \91\ Further, NERC found that 
``it is more appropriate to identify these elements through the `the 
applicability in specific standards where a reliability benefit can be 
identified.' '' \92\ Holland's arguments were directed to unlimited 
generation for radial systems and local networks, but the Commission 
found NERC's explanations for the limitations reasonable and approved 
this aspect of the exclusion.\93\ Removing the generator limitation or 
using net generation in excess of load would also be inconsistent with 
the bright-line concept and NERC's approach that the definition should 
be based on physical characteristics and not based on function. Also, 
the NERC standards drafting team concluded the following regarding 
generator size thresholds:
---------------------------------------------------------------------------

    \89\ 16 U.S.C. 824o(d)(2).
    \90\ Order No. 773, 141 FERC ] 61,236 at P 159.
    \91\ NOPR, 139 FERC ] 61,247 at P 160.
    \92\ Id. at P 161 (citing NERC's NOPR Comments at 21-22).
    \93\ Order No. 773, 141 FERC ] 61,236 at P 164.

    [t]he vast array of functional qualities of generation does not 
lend itself to a `bright-line' concept of identifying BES Elements. 
Therefore the SDT has opted for the size threshold designation of 
generating facilities and allows for use of the Exception Process 
for further analysis of the facility and potential exclusion from or 
inclusion to the BES.\94\
---------------------------------------------------------------------------

    \94\ NERC BES Petition, Exhibit D, August 19, 2011, 
Consideration of Comments at 439.

    68. Holland raised the same argument with respect to the generating 
limits in exclusion E3. NERC provided ample justification for its 
selection of generator thresholds. As NERC stated in its ``LN Technical 
Justification'' paper in Exhibit G of its petition, including a 
restriction on generation in a local network ``minimizes the 
contribution and influence the local network may have over the 
neighboring [e]lements of the [bulk electric system] by limiting both 
the magnitude and the function of the connected generation. NERC chose 
the threshold of 75 MVA to provide consistency with the criteria 
applied in the ERO's [Registry Criteria] regarding the registration for 
entities owning and operating generation plants in aggregate.'' \95\ In 
the Final Rule, the Commission found reasonable NERC's rationale for 
limiting both the magnitude and the function of a local network by 
limiting the amount of connected generation and that use of the 
generator thresholds was consistent with the existing thresholds in the 
Commission-approved NERC Registry Criteria.\96\ Thus, the Commission 
disagrees that it did not provide adequate explanation for rejecting 
Holland's NOPR arguments on this issue.
---------------------------------------------------------------------------

    \95\ NERC BES Petition, Exhibit G at 3.
    \96\ Order No. 773, 141 FERC ] 61,236 at P 216.
---------------------------------------------------------------------------

    69. Holland also argues that the Commission did not consider that 
exclusion E3 has the possibility of encompassing local distribution 
facilities. As stated in the Final Rule as well as elsewhere in this 
order on rehearing, determining whether a facility is part of the bulk 
electric system is a multi-step process and applying the definition is 
just one step in that process.\97\ If an entity believes its facility 
is a local distribution facility but after applying the definition and 
its exclusions the facility is not excluded, the entity may apply to 
the Commission to determine whether a facility is used for local 
distribution. The Commission disagrees, however, that it made factual 
determinations in the Final Rule without application of the Seven 
Factor Test, or arbitrarily adopted criteria that prejudge that test. 
The Commission approved NERC's bright-line approach to the definition, 
and the definition by itself is not intended to resolve all bulk 
electric system determinations. An entity's application of the 
definition as a whole, inclusive of the inclusions and exclusions, is 
the first step in determining whether the element is part of the bulk 
electric system and is a separate inquiry from the Commission's use of 
the factors in the Seven Factor Test in a local distribution 
determination. Further, as we stated in the Final Rule, the Commission 
will apply the factors in the Seven Factor Test, plus other factors, as 
the starting point for making local distribution determinations on a 
case-by-case basis.\98\ In sum, the Commission's approval of NERC's 
process establishes a process for determining whether a facility is 
part of the bulk electric system and is not making specific 
determination about particular facilities.
---------------------------------------------------------------------------

    \97\ Order No. 773, 141 FERC ] 61,236 at P 216.
    \98\ Order No. 773, 141 FERC ] 61,236 at P 71.
---------------------------------------------------------------------------

    70. Further, in the Final Rule, the Commission addressed Holland's 
argument about the meaning of ``emanates from a single point of 
connection.'' Specifically, in the Final Rule the Commission dismissed 
Holland's contention that the phrase can refer to multiple buses. The 
Commission noted that NERC, in the standard development process, 
considered the issue and concluded that radial systems ``cannot have 
multiple connections at 100 kV or higher. Networks that have multiple 
connections at 100 kV or

[[Page 29222]]

higher may qualify under exclusion E3.'' \99\
---------------------------------------------------------------------------

    \99\ Order No. 773, 141 FERC ] 61,236 at P 142 (citing NERC BES 
Petition, Exhibit E, ``Complete Development Record of the Proposed 
Revised Definition of `Bulk Electric System,' Consideration of 
Comments on Initial Ballot--Definition of BES,'' at 259).
---------------------------------------------------------------------------

3. Exclusion E3(b) and Power Flows
Order No. 773
    71. Exclusion E3 criterion (b) specifies that, to qualify for the 
local network exclusion, power can only flow into the local network and 
the local network does not transfer energy originating outside the 
local network for delivery through the local network. In its NOPR 
comments NERC elaborated by stating that, to be considered for 
exclusion pursuant to criterion (b), generation produced inside a local 
network cannot be transported to other markets outside the local 
network. NERC also stated that criterion (b) applies in both normal and 
emergency operating conditions. In the Final Rule the Commission found 
NERC's explanation reasonable and approved exclusion E3 criterion 
(b).\100\
---------------------------------------------------------------------------

    \100\ Order No. 773, 141 FERC ] 61,236 at P 228.
---------------------------------------------------------------------------

Requests for Rehearing
    72. Holland and Dow state that the Commission erred by not 
modifying exclusion E3 to allow it to apply even if some power flowed 
from the local network to the bulk electric system. Holland notes that 
the Commission's explanation that, if facilities are capable of 
supplying power when needed under any normal or emergency operating 
condition these facilities would forfeit their designation as local 
networks under exclusion E3, is premised incorrectly ``on a presumption 
that the facilities in question perform a transmission function, rather 
than a distribution function.'' \101\ Holland states that courts have 
held that the Commission does not have authority over facilities used 
in local distribution, not just over those facilities used solely in 
local distribution. Accordingly, Holland states that simply because the 
``facilities are capable of being called upon to support the bulk 
electric system, does not mean that is how those facilities are used in 
the normal course of business.'' \102\
---------------------------------------------------------------------------

    \101\ Holland Request for Rehearing at 16.
    \102\ Holland Request for Rehearing at 15-16 (citing Detroit 
Edison v. FERC, 334 F.3d 48, 54 (DC Cir. 2003)).
---------------------------------------------------------------------------

    73. Dow states that the Commission's resolution regarding the 
requirement that power may only flow into and not out of a local 
network requires clarification. Dow notes that, in its NOPR comments, 
it requested that the Commission clarify that exclusion E3(b) only 
prohibits energy originating outside the local network from being 
transferred through the network and into the bulk electric system, and 
does not prohibit energy generated by resources connected to the local 
network for delivery into the bulk electric system. Dow states this 
understanding is consistent with exclusion E3(a) allowing up to 75 MVA 
of non-retail generation to be attached to a local network. Dow 
maintains that it would not make sense to permit non-retail generation 
resources to be attached to local networks if output from such 
resources could not be delivered into the bulk electric system for 
purposes of making non-retail sales to downstream buyers. Dow asserts 
that, while the Commission suggested that the issue be addressed 
further in Phase 2, the Commission appears to have adopted an 
interpretation of the local network exclusion that is inconsistent with 
Dow's requested clarification. According to Dow, for the local network 
exclusion to be applicable, the Commission stated that ``generation 
produced inside a local network should not transport power to other 
markets outside the local network,'' but that the Commission indicated 
it could be addressed further in Phase 2. According to Dow, it is not 
clear whether and to what extent the Commission intended to resolve 
this issue in the Final Rule and, if it did, what additional issues 
would be eligible for further consideration in the Phase 2 process. Dow 
also requests that the Commission clarify which of Dow's concerns it 
can raise in the Phase 2 process.
    74. Snohomish agrees with the Commission's conclusion that the ``no 
outflow'' condition in exclusion E3 applies in both normal and 
emergency circumstances. However, Snohomish notes that, in the Phase 2 
process, NERC is examining the types of ``emergency'' that should be 
considered in examining the flow conditions in a local network. 
Snohomish requests that the Commission clarify that the appropriate, 
technically justified definition of ``emergency'' should be based upon 
the technical analysis now being performed as part of Phase 2 and that 
the Final Rule does not restrict the examination of this question. 
Snohomish also requests that the Commission clarify that, in Phase 2, 
NERC is free to develop a technically justified threshold for outflow 
that would not disqualify a local network under exclusion E3.
    75. In addition, while agreeing that historical records of power 
flow on a local network form an appropriate evidentiary basis for 
demonstrating that power only flows into a local network, Snohomish 
requests that the Commission clarify (1) that entities can establish 
power flows through more than just historical records and (2) a local 
network will remain eligible for exclusion if it contains temporary 
reversals of flows resulting from extreme and unlikely emergency 
conditions. Otherwise, according to Snohomish, local networks that rely 
on historical flow data could, if an unusual event happens causing a 
temporary outflow, suddenly become part of the bulk electric system.
Commission Determination
    76. We deny the requests for rehearing of Dow and Holland on the 
power flow issue. As part of its rationale for developing the local 
network exclusion, NERC explained that power always flows in the 
direction from the interconnected transmission network into the local 
network.\103\ NERC also explained that ``[l]ocal networks provide local 
electrical distribution service and are not planned, designed or 
operated to benefit or support the balance of the interconnected 
transmission network.'' \104\ Further, NERC explained that the 
reliability of the interconnected transmission network is not impacted 
by the existence or absence of a local network. Exclusion E3 will 
satisfy this principle because NERC crafted exclusion E3 to ensure 
reliability is not adversely impacted by the disconnection of the local 
network.\105\ NERC confirmed that, pursuant to criterion (b), exclusion 
E3 applies if generation produced inside a local network is not 
transported to other markets outside the local network. NERC stated 
that prohibitions on outbound power flow and transportation of power to 
other markets beyond the local network apply in all conditions, both 
normal and contingent, and will not exclude facilities which may 
contribute power flow into the bulk electric system under contingent or 
unusual circumstances. NERC's Local Network (LN) Technical Paper 
further explains these statements:
---------------------------------------------------------------------------

    \103\ NERC BES Petition at 22.
    \104\ Id.
    \105\ See Order No. 773, 141 FERC ] 61,236 at P 189.

    By restricting the flow direction to be exclusively into the 
network at its connection points to the BES and precluding the 
network from providing transmission wheeling service, this exclusion 
characteristic further ensures that the local network is providing 
only a distribution service, and is not contributing to, nor is 
necessary for, the

[[Page 29223]]

reliable operation of the interconnected electric transmission 
network.\106\
---------------------------------------------------------------------------

    \106\ NERC BES Petition, Exhibit G at 3.

    77. In approving exclusion E3, the Commission found NERC's 
explanations for the applicability of exclusion E3(b) to be 
reasonable.\107\ The Commission also agreed with NERC's explanation 
that, with respect to exclusion E3(b), generation produced inside a 
local network should not be transported to other markets outside the 
local network.\108\
---------------------------------------------------------------------------

    \107\ Order No. 773, 141 FERC ] 61,236 at P 193.
    \108\ Order No. 773, 141 FERC ] 61,236 at P 231.
---------------------------------------------------------------------------

    78. The Commission rejects Holland's contention that the 
Commission's finding is premised on a presumption that ``the facilities 
in question perform a transmission function.'' \109\ One of NERC's 
overarching principles in revising the definition was to establish a 
bright-line definition that will eliminate discretion in application of 
the revised definition, and the local network exclusion is consistent 
with that principle.\110\ If an entity applies the definition and the 
exclusions to an element and finds that the element is included by 
application of the definition of the bulk electric system, it may avail 
itself of the exception process for a determination that the element 
should be excluded from the bulk electric system or seek a 
determination from the Commission that the element is used in local 
distribution.
---------------------------------------------------------------------------

    \109\ Holland Request for Rehearing at 15.
    \110\ See, e.g., NERC BES Petition at 15.
---------------------------------------------------------------------------

    79. In its request for rehearing, Dow seeks clarification regarding 
what issues were resolved in the Final Rule and what it may raise in 
Phase 2. As stated above, NERC developed exclusion E3 with the bright-
line concept in mind and its conclusion that power may not be delivered 
from a local network to the bulk electric system. The Commission 
approved exclusion E3 with this understanding.\111\ Thus, if power 
flows out of a local network to the bulk electric system, it is not 
eligible for the exclusion, no matter the type of generation. However, 
we recognize that in crafting the revised definition to be responsive 
to Order No. 743, entities raised additional issues that, due to time 
constraints in meeting the compliance deadline set in Order No. 743, 
NERC postponed to Phase 2 in which it is focusing on other industry 
concerns raised during Phase 1. Thus, if Dow believes that a local 
network should be allowed to have some non-retail generation that 
delivers power to the bulk electric system, we believe that this issue 
is better suited for vetting through the NERC standard development 
process, including the Phase 2 process.\112\
---------------------------------------------------------------------------

    \111\ Order No. 773, 141 FERC ] 61,236 at PP 201, 205, 218, 228.
    \112\ Indeed, this issue is one that the NERC standard drafting 
team is considering in Phase 2. See the NERC Standard Authorization 
Request at 3: ``[d]etermine if there is a technical justification to 
support allowing power flow out of the local network under certain 
conditions. . . .'' Available at:http://www.nerc.com/docs/standards/sar/SAR_BES_Definition_Phase_2_final_071012_clean.pdf.
---------------------------------------------------------------------------

    80. With regard to the Snohomish request for clarification of 
additional terms in the Phase 2 process, the standard development 
process allows NERC to develop new or revised Reliability Standards or 
definitions to address any issues and the Final Rule does not restrict 
this process. NERC may propose changes to the bulk electric system 
definition with supporting technical justification for submission to 
the Commission.
    81. Snohomish requests that the Commission clarify that entities 
can establish power flows through more than just historical records. 
Snohomish also seeks clarification that a local network will remain 
eligible for exclusion if it contains temporary reversals of flows 
resulting from extreme conditions. We clarify that historical records 
are not the only basis for establishing power flows. However, we deny 
clarification that temporary reversals of flows should not disqualify a 
local network from being treated as a local network because, as written 
and presented to us in this proceeding, exclusion E3(b) does not permit 
power flows from the local network in any circumstances.\113\ 
Nevertheless, similar to our response to Dow above, Snohomish can raise 
its concerns through the NERC standards development process in Phase 2.
---------------------------------------------------------------------------

    \113\ See Order No. 773, 141 FERC ] 61,236 at P 228.
---------------------------------------------------------------------------

E. NERC Exception Process and Commission Local Distribution 
Determinations

Order No. 773
    82. In the Final Rule, the Commission approved NERC's exception 
process to add elements to, and remove elements from, the bulk electric 
system, on a case-by-case basis.\114\ However, the Commission 
determined that the Commission, rather than NERC, will determine on a 
case-by-case basis whether an element or facility is used in local 
distribution and will apply the conditions set forth in the Seven 
Factor Test.\115\
---------------------------------------------------------------------------

    \114\ Order No. 773, 141 FERC ] 61,236 at P 251 (citing Order 
No. 743, 133 FERC ] 61,150 at P 16).
    \115\ Order No. 773, 141 FERC ] 61,236 at P 252.
---------------------------------------------------------------------------

Requests for Rehearing

1. Jurisdictional and Due Process Issues
    83. A number of entities claim that, or are unsure of whether, the 
Commission has imposed duplicative processes (the NERC exception 
process and the Commission process for making local distribution 
determinations) for determining whether particular facilities are part 
of the bulk electric system.\116\ TAPS and ELCON question whether NERC 
would be bound by prior Commission determinations on local distribution 
and whether the Commission would reopen NERC determinations, and they 
request that on rehearing the Commission state that it will make local 
distribution determinations only in connection with review of NERC 
exception decisions. TAPS and ELCON state that the Commission should 
clarify that it will address local distribution issues if raised in 
connection with review of NERC exception determinations, so a full 
record can be developed through a single process. Alternatively, TAPS 
and ELCON request clarification (1) of how the Commission intends the 
process for making local distribution determinations to interact with 
the NERC exception process, especially when similar facts are at issue, 
and (2) that entities are not foreclosed from making all applicable 
arguments to NERC in the exception process.
---------------------------------------------------------------------------

    \116\ E.g., NRECA, TAPS, ELCON and NYPSC.
---------------------------------------------------------------------------

    84. NRECA states that the Commission's role as primary arbiter of a 
local distribution decision and its reliance on the Seven Factor Test 
raises ambiguity and must be clarified. NRECA questions whether the 
process runs concurrently with the NERC exception process and, if not, 
which process will be conducted first. NRECA also questions whether 
``an entity that is currently registered and seeks to remove itself 
from the registry based on the local distribution distinction, or, 
conversely, the ERO that desires to include an entity not currently on 
the registry based on the absence of local distribution facilities, 
would first have to engage a proceeding before the Commission. . . .'' 
\117\ NRECA states that a multi-tiered process will be expensive and 
unnecessarily time consuming for the Commission, NERC and the affected 
entities. NRECA further questions what rules and timeframe the 
Commission will use and whether the Commission considered the greater

[[Page 29224]]

expense of running two processes for small entities.
---------------------------------------------------------------------------

    \117\ NRECA Motion for Clarification, or in the Alternative, 
Request for Rehearing at 5-6.
---------------------------------------------------------------------------

    85. Holland argues that applying the definition and exception 
process unlawfully subjects facilities used in the local distribution 
of electric energy to NERC authority through the exception process 
before a determination is made on whether those facilities serve a 
local distribution function.\118\ Holland claims that the Final Rule is 
internally inconsistent because it directs entities to seek an 
exception from NERC before the Commission will apply the Seven Factor 
Test to determine whether the facilities are subject to regulation 
under the FPA. Holland states that the Commission must prohibit NERC 
from exercising any authority over any facilities while the owners and 
operators of such facilities petition the Commission for a 
determination that they are used in the local distribution of electric 
energy.
---------------------------------------------------------------------------

    \118\ For example, Holland argues that the limitations on 
exclusion E1 conditions (b) and (c) will still capture facilities 
used in local distribution and is tantamount to making a factual 
determination without any application of the Seven Factor Test.
---------------------------------------------------------------------------

    86. NYPSC contends that the exception process is an impermissible 
approach to exercising jurisdiction. NYPSC claims that, although the 
definition states that it ``does not include facilities used in the 
local distribution of electric energy,'' the Commission effectively 
acknowledged that such facilities would be placed under its 
jurisdiction by establishing a process whereby entities may seek to 
demonstrate that the facilities are not necessary for operating the 
interconnected transmission network, or are used in local distribution.
    87. NYPSC and NARUC claim that the Commission failed to provide 
adequate notice and comment regarding the decision to use the Seven 
Factor Test and the Commission's decision to itself make determinations 
of whether a facility is used in local distribution. They state the 
Final Rule is the first time the Commission established a process for 
petitioning for a local distribution determination and argue that the 
Commission has not substantiated its decision to apply the Seven Factor 
Test. NARUC states that the Commission should develop a full record to 
determine what criteria ``would be lawfully applied if the Commission 
were to make case-by-base local distribution determinations under 
section 215.'' \119\ NYPSC states that the Commission failed to comply 
with the Administrative Procedure Act (APA) requirement that agencies 
provide notice of a proposed rule and a meaningful opportunity for 
parties to comment.
---------------------------------------------------------------------------

    \119\ NARUC Request for Rehearing at 7.
---------------------------------------------------------------------------

Commission Determination
    88. The Commission denies rehearing on the issues related to the 
exception process and the Commission making local distribution 
determinations. The Commission believes that entities misconstrue the 
function of the NERC exception process and the Commission's local 
distribution determinations. Accordingly, we reiterate and expand on 
those functions below.
    89. As explained below, the two processes are separate, not 
concurrent and will be used for different determinations. In the Final 
Rule, the Commission found that ``NERC's case-by-case exceptions 
process is appropriate to determine the technical issue of whether 
facilities are part of the bulk electric system'' and that ``the 
jurisdictional question of whether facilities are used in local 
distribution should be decided by the Commission.''\120\
---------------------------------------------------------------------------

    \120\ Order No. 773, 141 FERC ] 61,236 at P 66.
---------------------------------------------------------------------------

    90. The Commission also stated that we expect that the ``core'' 
definition together with the exclusions ``should provide a reasonable 
means to accurately and consistently determine on a generic basis 
whether facilities are part of the bulk electric system.'' \121\ Also, 
the Commission explained that most local distribution facilities will 
be excluded by the 100 kV threshold or exclusion E3 without needing to 
seek a Commission jurisdictional determination. However, if after 
applying the definition and exclusions, an entity believes its facility 
is used in local distribution, it must petition the Commission for a 
determination, and the Commission will apply the factors in the Seven 
Factor Test, plus other factors, as the starting point for making local 
distribution determinations.\122\ This inquiry is a distinct process 
not made in connection with review of NERC exception process decisions. 
In response to NRECA's question regarding what process an entity or 
NERC would use with respect to a local distribution determination, as 
stated above, the Commission will decide all local distribution 
determinations.
---------------------------------------------------------------------------

    \121\ Order No. 773, 141 FERC ] 61,236 at P 67.
    \122\ Order No. 773, 141 FERC ] 61,236 at P 69.
---------------------------------------------------------------------------

    91. All inquiries that do not involve a question of whether a 
facility is used in local distribution (i.e., whether the facility is 
or is not part of the bulk electric system) are to be presented through 
the NERC exception process. In other words, if an entity believes its 
facilities are non-local distribution facilities but nevertheless are 
incorrectly included by application of the bulk electric system 
definition and its inclusions and exclusions, it should use the NERC 
exception process to determine whether the facilities in question 
should be excluded from the bulk electric system. In response to the 
questions about appeals to the Commission, as stated in the Final Rule, 
an entity may appeal a final NERC exceptions process decision to the 
Commission.\123\ In response to TAPS and ELCON's request, we clarify 
that, in the exception process, entities have the option of making all 
applicable arguments that a facility should not be included in the bulk 
electric system.
---------------------------------------------------------------------------

    \123\ Order No. 773, 141 FERC ] 61,236 at P 251.
---------------------------------------------------------------------------

    92. With regard to NRECA's question about the rules and timeframe 
the Commission will apply, as the Commission stated in the Final Rule, 
the Commission will assign local distribution inquiries ``RC'' dockets 
and the determinations will be public proceedings subject to notice and 
comment requirements which will allow NERC and interested parties to 
provide input on a petition. We decline to establish a specific 
timeframe within which we will act because such decisions will be based 
on the specific facts of each case.
    93. In response to Holland's arguments that the Commission 
improperly included or excluded local distribution facilities in the 
definition, the Commission notes that, although the bulk electric 
system definition excludes local distribution facilities, it still may 
be necessary to factually determine which facilities are used for local 
distribution or transmission.\124\ The Commission stated in the Final 
Rule that applying the definition and its exclusions is not necessarily 
the end of the inquiry, and the Commission ultimately determines 
whether facilities are used in local distribution and thus excluded 
from the bulk electric system.\125\ Thus, if an entity believes its 
facility is a local distribution facility but after applying the bulk 
electric system definition including inclusions and exclusions the 
facility is not excluded, the entity may apply to the Commission to 
determine whether the facility is used for local distribution. Thus, as 
explained above, the Final Rule contemplates two separate and distinct 
processes and does not direct entities to seek an exception from NERC 
before seeking a local distribution determination from the Commission.
---------------------------------------------------------------------------

    \124\ Order No. 743-A, 134 FERC ] 61,210 at P 67.
    \125\ Order No. 773, 141 FERC ] 61,236 at P 70.

---------------------------------------------------------------------------

[[Page 29225]]

    94. We disagree with Holland's argument that all facilities that 
NERC reviews through the exception process that the Commission later 
finds are used in local distribution will have been unlawfully 
regulated by NERC. NERC, in applying the bulk electric system 
definition and exception process, established an implementation period 
for newly identified elements in the bulk electric system before 
compliance enforcement is initiated. This should provide ample time for 
the affected entity to request a local distribution determination from 
the Commission before any compliance obligations are imposed.
    95. NYPSC and NARUC take issue with the Commission's decision to 
apply the factors set forth in the Seven Factor Test when determining 
whether a facility is used in local distribution. NYPSC and NARUC 
contend that the Commission deprived them of their due process rights 
and violated the APA because the Commission stated it will apply the 
Seven Factor Test without providing entities an opportunity to comment 
on the Commission's decision.\126\ As explained below, we deny 
rehearing on this issue.
---------------------------------------------------------------------------

    \126\ The APA requires agencies to give interested parties an 
opportunity for ``the submission and consideration of facts, 
arguments, offers of settlement, or proposals of adjustment when 
time, the nature of the proceeding, and the public interest permit . 
. . .'' 5 U.S.C. 554(c)(1) (2006).
---------------------------------------------------------------------------

    96. Due process requires certain procedural safeguards, including 
the requirement that a party affected by government action be given 
``notice reasonably calculated, under all the circumstances, to apprise 
interested parties of the pendency of the action,'' \127\ and also 
``the opportunity to be heard at a meaningful time and in a meaningful 
manner.'' \128\ However, circumstances vary and the sufficiency of the 
procedures supplied must be decided in light of the circumstances of 
each case.\129\ The Commission assesses due process claims case-by-case 
based on the totality of the circumstances.\130\ In this case, the 
Commission expressed its concerns with respect to treatment of local 
distribution facilities in Order Nos. 743 and 743-A and suggested that 
the Seven Factor Test could be relevant and a possible starting point 
for local distribution determinations.\131\ In addition, in the NOPR in 
this proceeding, the Commission expressed its concern with NERC's 
approach by requesting additional explanation from NERC on its proposal 
regarding how the exception process would handle local distribution 
facilities. These instances gave fair notice of the Commission's 
concerns and positions on this issue.
---------------------------------------------------------------------------

    \127\ Jones v. Flowers, 547 U.S. 220, 226 (2006) (citation and 
quotation omitted).
    \128\ Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (citations 
and quotation omitted).
    \129\ Id. 334 (``[D]ue process, unlike some legal rules, is not 
a technical conception with a fixed content unrelated to time, place 
and circumstances.'') (citation and quotation omitted).
    \130\ See Morrissey v. Brewer, 408 U.S. 471, 481 (1972) (``[D]ue 
process is flexible and calls for such procedural protections as the 
particular situation demands.'').
    \131\ Order No. 743, 133 FERC ] 61,150 at PP 37-38, Order No. 
743-A, 134 FERC ] 61,210 at PP 25, 55, 58, 67-72.
---------------------------------------------------------------------------

    97. Under these circumstances, an additional comment period on the 
local distribution determination is unnecessary. The Commission has 
wide discretion in selecting its procedures.\132\ The Commission thus 
rejects NYPSC's claim that the Commission's decision to determine 
whether facilities are used in local distribution on a case-by-case 
basis and apply the factors of the Seven Factor Test violated due 
process.
---------------------------------------------------------------------------

    \132\ Pacific Gas and Electric Co. v. FERC, 746 F.2d 1383, 1386 
(9th Cir. 1984) (``We must allow the [Commission] wide discretion in 
selecting its own procedures . . . and must defer to the 
[Commission] interpretation of its own rules, unless the 
interpretation is plainly erroneous.'') (citations omitted).
---------------------------------------------------------------------------

2. State Involvement in Local Distribution Determinations and the NERC 
Exception Process; Application of the Seven Factor Test
    98. NYPSC, NARUC, NRECA and APPA argue that the Commission did not 
explain how it will apply the Seven Factor Test or properly acknowledge 
state involvement in the local distribution process as contemplated by 
Order No. 888. NYPSC and NARUC request clarification or rehearing on 
whether, in adopting the Seven Factor Test, the Commission intended to 
apply the Order No. 888 finding that gives deference to state 
determinations as to which facilities are transmission and which are 
local distribution. NYPSC states that the Commission ``indicated in 
Order No. 888 that it would entertain proposals by public utilities, 
filed under section 205 of the Federal Power Act, containing 
classifications for transmission and local distribution facilities'' 
but required consultation with state regulatory authorities as a 
prerequisite to making such filings.\133\ NRECA maintains the Seven 
Factor Test should not be determinative in the context of section 215 
jurisdiction decisions because the test involves coordination with 
state regulators and proceedings involving the affected parties and 
wholesale and retail interests. NARUC and APPA contend that the 
Commission ignored the circumstances under which a local distribution 
test would be employed as described in Order No. 888.\134\ NARUC states 
that in Order No. 888, the Commission acknowledged that in making case-
by-case determinations concerning local distribution, it would ``take 
advantage of state regulatory authorities' knowledge and expertise 
concerning the facilities of the utilities that they regulate . . . 
defer[ring] to the recommendations by state regulatory authorities 
concerning where to draw the jurisdictional line under the Commission's 
technical test for local distribution facilities.''\135\ According to 
NARUC and APPA, rather than deferring to the state's expertise, as it 
did when it developed the Seven Factor Test, the Commission is 
relegating the states to commenter status.
---------------------------------------------------------------------------

    \133\ NYPSC Request for Rehearing at 5.
    \134\ Order No. 888, FERC Stats. & Regs. ] 31,036 at 31,783-84 
(1996).
    \135\ NARUC Request for Rehearing at 7 (citing Order No. 888, 
FERC Stats. & Regs. ] 31,036 (1996)).
---------------------------------------------------------------------------

    99. APPA, NARUC and NRECA express concern that use of the Seven 
Factor Test may not translate well into the reliability context. NRECA 
requests clarification that, because of the differences between FPA 
sections 201 and 215, the Commission will review significantly more 
than the Seven Factor Test components and will not apply the Seven 
Factor Test in the same manner it has in section 201 analyses.\136\ 
NRECA argues that section 215 states that NERC and the Commission lack 
reliability jurisdiction over facilities used in local distribution, 
which is a different inquiry from the one made in rate cases, where the 
``predominant use'' of the facilities may be of significance.\137\ 
NRECA claims it is also different from the determination made when 
evaluating the Commission's jurisdiction over a facility for purposes 
of sections 205 and 206 of the FPA. NRECA states that under those 
analyses, facilities used for both distribution and transmission are 
treated as Commission-jurisdictional transmission facilities. NRECA 
contrasts that with section 215 which states that any use of the 
facility for distribution removes it from NERC's and the Commission's 
reliability jurisdiction. APPA, NARUC and NRECA claim that, while some 
of the seven factors may apply, others seem less appropriate to 
consider when determining whether facilities are local distribution, 
and the Commission does not define the other factors it may use nor 
explain how its criteria will adequately differentiate between local 
distribution and transmission facilities. Similarly, TAPS and ELCON 
state that

[[Page 29226]]

several of the seven factors are very similar to components of the core 
definition and exclusions and to items on the ``Detailed Information to 
Support an Exception Request'' form. TAPS and ELCON thus contend that 
NERC's exception process analysis and the Commission's local 
distribution analysis will likely overlap each other.
---------------------------------------------------------------------------

    \136\ NRECA Request for Rehearing at 6.
    \137\ NRECA Request for Rehearing at 6.
---------------------------------------------------------------------------

    100. NYPSC, NARUC and APPA state that the NERC exception process 
does not explicitly provide for state involvement.\138\ NYPSC and NARUC 
believe that, because the states have a unique interest and 
jurisdictional role, the exceptions process must allow for direct state 
participation, including the right to submit comments and contribute to 
the development of the record prior to any preliminary or final 
determinations being made.
---------------------------------------------------------------------------

    \138\ APPA states that the Commission could consider forming a 
standing federal-state joint board, pursuant to section 209(a) of 
the FPA, to address local distribution determinations, given that 
its changes to exclusions E1 and E3 will substantially increase the 
need for and frequency of such determinations.
---------------------------------------------------------------------------

Commission Determination

    101. The Commission denies rehearing on these issues. In the Final 
Rule, the Commission acted consistent with legal precedent that the 
question of whether facilities are used in local distribution is a 
question of fact to be decided by the Commission.\139\ The Final Rule 
stated that the Commission would apply the factors in the Seven Factor 
Test, plus other factors as the starting point for making local 
distribution determinations.\140\ The Commission, however, did not 
adopt Order No. 888 for use in this process.
---------------------------------------------------------------------------

    \139\ See, e.g., California Pacific Electric Company, LLC, 133 
FERC ] 61,018, at n.59 (2010) (``The Supreme Court has determined 
that whether facilities are used in local distribution is a question 
of fact to be decided by the Commission'') (citing FPC v. Southern 
California Edison Co., 376 U.S. 205, 210 n.6 (1964)).
    \140\ Order No. 773, 141 FERC ] 61,236 at PP 69, 71.
---------------------------------------------------------------------------

    102. We disagree with arguments questioning the suitability of the 
factors in the Seven Factor Test for use in the reliability context or 
that some of the factors seem less appropriate to consider when 
determining whether facilities are used in local distribution. FPA 
sections 201(b)(1) and 215 both use the legal term ``local 
distribution.'' As we stated in the Final Rule, the determination 
whether an element or facility is ``used in local distribution,'' as 
the phrase is used in the FPA, requires a jurisdictional analysis and 
use of the factors in the Seven Factor Test, among others, ``comports 
with relevant legal precedent.'' \141\ Therefore, we are not persuaded 
that the factors in the Seven Factor Test are an unsuitable means to 
determine whether a facility is used in local distribution. The 
question of whether all the factors are relevant in each case is one 
for the Commission to determine in specific circumstances. With regard 
to NRECA's argument that NERC and the Commission lack reliability 
jurisdiction over dual use facilities, the Commission will address that 
issue when relevant to a specific case.
---------------------------------------------------------------------------

    \141\ See Order No. 773, 141 FERC ] 61,236 at P 69.
---------------------------------------------------------------------------

    103. We are not persuaded by the argument that the Commission needs 
to define at this time the additional factors it may use or explain how 
its criteria will adequately differentiate between local distribution 
and transmission facilities. The Final Rule stated that local 
distribution determinations are factual in nature and the Commission 
will make decisions on a case-by-case basis. We anticipate that 
applicants will take the seven factors into account and, to the extent 
other factors are relevant, they are free to raise them as part of 
their inquiry and the Commission will address them at that time. 
Further, we find that TAPS' and ELCON's contention that the similarity 
between the seven factors, the core definition and the Detailed 
Information Form will cause significant overlap between NERC's analysis 
of an exception request and the Commission's analysis of a request for 
a finding that a facility is used in local distribution is premature 
and speculative.
    104. With regard to state involvement in Commission local 
distribution determinations, the Final Rule only stated the Commission 
would apply the factors in the Seven Factor Test and did not adopt 
Order No 888 for use here.\142\ The Commission notes that state 
regulators are not excluded from involvement in a Commission proceeding 
involving a local distribution determination and will have the 
opportunity to participate in the local distribution determination 
process at the Commission. As part of that participation, they may 
support their position with evidence that a state commission determined 
that the facilities in question are local distribution facilities.
---------------------------------------------------------------------------

    \142\ Order No. 773, 141 FERC ] 61,236 at P 71.
---------------------------------------------------------------------------

    105. Similarly, with regard to state involvement in the exception 
process, we deny rehearing. Petitioners essentially repeat their 
arguments from the NOPR and we are not persuaded that our finding in 
the Final Rule was unreasonable. In the Final Rule, the Commission 
found that the exception process ``should be one based on the technical 
reliability issues of the specific case presented. . . . [A] procedure 
that encouraged or even invited multi-party filings would unduly 
complicate the process. . . . '' \143\ Nevertheless, to provide 
transparency and opportunity for participation, NERC's exception 
process provides that ``(1) detailed notice of any request would be 
provided to every Registered Entity with reliability oversight 
obligation for the Element subject to the Request and (2) general 
information about the request will be publicly posted,'' thereby 
allowing third parties including state regulators ``adequate 
opportunity to provide comments regarding the request without formally 
participating in the process.'' \144\
---------------------------------------------------------------------------

    \143\ Order No. 773, 141 FERC ] 61,236 at P 257.
    \144\ Order No. 773, 141 FERC ] 61,236 at P 257 citing NERC ROP 
Petition, Att. 9 (``The Development Process and Basis for the ROP 
Team's Recommended Provisions--How Stakeholder Comments were 
Considered and Addressed'') at 7.
---------------------------------------------------------------------------

F. Designation of Bulk Electric System Elements

    106. In the Final Rule, the Commission concluded that registered 
entities must inform the Regional Entity of any self-determination that 
an element is no longer part of the bulk electric system. We noted that 
section 501 of NERC's Rules of Procedure provides that each registered 
entity must notify its Regional Entity of any matters that affect the 
registered entities' responsibilities with respect to Reliability 
Standards. Section 501 also requires entities to inform the Regional 
Entity of any self-determination that an element is no longer part of 
the bulk electric system.\145\ We further stated that this requirement 
does not involve a justification of why the element is being excluded 
but rather as one that involves nothing more than notification.\146\ 
The Commission also concluded that it has the authority to designate an 
element as part of the bulk electric system pursuant to our authority 
set forth in sections 215(a)(1) and (b)(1) of the FPA.
---------------------------------------------------------------------------

    \145\ Order No. 773, 141 FERC ] 61,236 at P 317.
    \146\ Order No. 773, 141 FERC ] 61,236 at P 318.
---------------------------------------------------------------------------

    107. Entities request clarification and/or rehearing on three 
aspects of these determinations: (1) How must a registered entity 
inform a Regional Entity that it has excluded an element from the bulk 
electric system; (2) what process a Regional Entity must use to include 
a facility if it disagrees with a registered entity's declaration that 
a specific facility is not part of the bulk

[[Page 29227]]

electric system; and (3) if the Commission decides on its own to 
designate an element as part of the bulk electric system, it should 
consult state regulatory authorities.
1. Regional Entity Role
    108. Snohomish requests clarification, or in the alternative 
rehearing, with respect to several aspects of the process for removing 
specific elements from the bulk electric system. Snohomish notes that 
the Commission specifies that a registered entity may remove specific 
elements from the bulk electric system by simply notifying its Regional 
Entity, and Snohomish believes that notifying its Regional Entity by a 
simple written or electronic notification satisfies the notification 
requirement. Snohomish also states that the Final Rule does not explain 
what would occur if the Regional Entity disagrees with the registered 
entity's determination that an element is not part of the bulk electric 
system. Snohomish requests clarification that, in the absence of bad 
faith on the part of the registered entity providing a notification 
that an element is not a bulk electric system element, that element 
should not be treated as part of the bulk electric system unless and 
until a contrary determination is made by NERC. Snohomish states that 
this clarification will help ensure that registered entities clearly 
understand their reliability compliance obligations at a facility-by-
facility level, and that, if they apply the bulk electric system 
definition in good faith, they will not be subject to retroactive 
liability if that good faith determination is later successfully 
challenged by the Regional Entity and overturned by NERC.
    109. Snohomish also requests clarification that, in the event that 
a Regional Entity disagrees with a registered entity's determination 
that an element is not part of the bulk electric system, the Regional 
Entity must use the exception process to include the element. Snohomish 
asserts that this clarification will ensure that there is a well-
understood and consistent procedure for inclusion of elements in the 
bulk electric system. In the alternative, Snohomish states that the 
Commission should clarify that the existing appeals process in Appendix 
5A of the NERC Rules of Procedure, which Snohomish states ``provides 
for appeals only from entity registration decisions and from decisions 
regarding entity certification,'' should govern when the Regional 
Entity disagrees with a registered entity's designation of an element 
as not part of the bulk electric system.\147\
---------------------------------------------------------------------------

    \147\ Snohomish Request for Clarification, or in the 
Alternative, Petition for Rehearing at 5 (footnotes omitted).
---------------------------------------------------------------------------

Commission Determination
    110. The Commission agrees with Snohomish that, in the absence of 
bad faith, if a registered entity applies the bulk electric system 
definition and determines that an element no longer qualifies as part 
of the bulk electric system, upon notifying the appropriate Regional 
Entity that the element is no longer part of the bulk electric system 
the element should not be treated as part of the bulk electric system 
unless NERC makes a contrary determination in the exception process. If 
the Regional Entity disagrees with the classification of the element 
and believes the element is necessary for reliable operation, the 
Regional Entity should initiate an exception request to include the 
element in the bulk electric system. If NERC agrees with the Regional 
Entity and determines that the element should be included in the bulk 
electric system, the registered entity should not be subject to 
retroactive liability for the time period the element was not included 
in the bulk electric system.
2. Designation of Facilities
    111. APPA argues that, if the Commission decides on its own to 
designate an element as part of the bulk electric system, it should 
consult state regulatory authorities in this process and not simply 
relegate them to notice and opportunity for comment.\148\ Additionally, 
APPA states that ``a full evidentiary hearing, with opportunities for 
discovery and cross-examination, as opposed to a paper hearing may be 
required in such circumstances because of the fact-based nature of 
these issues, and because the Commission would be making precedent-
setting policy determinations that could affect many public utilities 
and registered entities.'' \149\ APPA requests that, consistent with 
the Commission's approval of NERC's implementation plan, the Commission 
clarify that entities subject to Commission-designated bulk electric 
system facility determinations will be given an appropriate amount of 
time to become compliant with reliability standards.
---------------------------------------------------------------------------

    \148\ APPA Request for Rehearing at 29.
    \149\ Id.
---------------------------------------------------------------------------

Commission Determination
    112. We deny rehearing with respect to the APPA's request that the 
Commission consult state regulatory authorities when the Commission 
elects to designate an element as part of the bulk electric system. We 
are not persuaded by APPA's justification for why the Commission should 
provide a greater role to state regulators than is already provided to 
all interested parties through notice and opportunity for comment. As 
we stated in the Final Rule, we expect that registered entities, 
Regional Entities, and NERC will proactively identify and include 
elements in the bulk electric system. However, if no other entity 
initiates the process to include in the bulk electric system an element 
necessary for the operation of the interconnected transmission network, 
the Commission has the authority to do so. If the Commission finds it 
necessary to initiate this authority, it would make a final 
determination after providing interested parties notice and opportunity 
for comment.\150\ For the same reasons stated above in connection with 
a state role in a local distribution determination and the exception 
process, we are not persuaded by APPA's argument that state regulators 
need additional process other than that already afforded to all 
interested parties provided notice and opportunity for comment. 
Accordingly, we deny APPA's request for rehearing on this matter.
---------------------------------------------------------------------------

    \150\ Order No. 773, 141 FERC ] 61,236 at P 285.
---------------------------------------------------------------------------

    113. In response to APPA's contention that a full evidentiary 
hearing is necessary when the Commission proposes to designate an 
element as part of the bulk electric system, the Commission will not 
require or preclude use of a full evidentiary hearing. The Commission 
will provide due process as required by the APA which in appropriate 
instances the Commission can accomplish through a paper hearing.
    114. In response to APPA's comments regarding the implementation 
schedule when the Commission determines an element should be part of 
the bulk electric system, we agree that an entity will have an 
appropriate amount of time to become compliant with applicable 
Reliability Standards.

G. Other Requested Clarifications

1. Meaning of ``Non-Retail Generation''
    115. Snohomish requests that the Commission provide clarification 
concerning the meaning of the term ``non-retail generation'' in 
exclusion E3. Snohomish requests that the Commission clarify that 
``non-retail generation'' includes both customer-owned, behind-the-
meter generation that is not resold on the Bulk-Power

[[Page 29228]]

System to wholesale purchasers and generation that a load-serving 
utility uses solely to provide power to its own customers and does not 
sell to other wholesale purchasers. Snohomish maintains that this 
result is consistent with FPA section 201(b)(1), which excludes 
generation facilities and facilities used for the intrastate sale of 
electric energy from the Commission's jurisdiction.
Commission Determination
    116. We decline to make the requested clarification. In the Final 
Rule several entities requested clarification of various terms 
including the term ``non-retail.'' The Commission found that the phrase 
was sufficiently clear.\151\ We reiterate our statement in the Final 
Rule that entities may pursue further clarification from NERC in an 
appropriate forum such as NERC's Phase 2 project.
---------------------------------------------------------------------------

    \151\ Order No. 773, 141 FERC ] 61,236 at P 215.
---------------------------------------------------------------------------

2. Effective Date
    117. Snohomish requests that the Commission clarify that the 
revised definition will become effective for NERC compliance purposes 
on July 1, 2013, and that the transition period discussed in the Final 
Rule will extend twenty-four months from that date.
Commission Determination
    118. The Commission grants Snohomish's clarification. NERC stated 
that the revised definition become effective on the first day of the 
second calendar quarter after receiving applicable regulatory approval, 
or, in those jurisdictions where no regulatory approval is required, on 
the first day of the second calendar quarter after its adoption by the 
NERC Board of Trustees. Order No. 773 was published in the Federal 
Register on January 4, 2013 with the Final Rule becoming effective 60 
days thereafter, or March 5, 2013. Thus, the first day of the second 
calendar quarter after March 5 is July 1, 2013.

H. Requests for Revised Information Collection Burden and Regulatory 
Flexibility Act Analysis

    119. In the Final Rule, the Commission stated that it did not need 
to reassess the reporting burden estimates and Regulatory Flexibility 
Act (RFA) certification. NARUC requests that the Commission clarify its 
RFA analysis in light of its decision to rule on jurisdictional 
questions and to direct NERC to not permit certain 100 kV and above 
facilities that are looped with sub-100 kV facilities to qualify for 
exclusion E1. NARUC maintains that the Commission modified the 
definition by changing language contained in exclusions E1 and E3, the 
net effect of which would be to increase the number of entities that 
might choose to use the exception process. Therefore, according to 
NARUC, it is likely that the Commission's actions will impose 
unjustified regulatory burdens and costs.
    120. NRECA also states that the public reporting burden and 
information collection requirement section of the Final Rule did not 
discuss additional costs associated with the Commission making local 
distribution determinations or entities having to apply for an 
exception as a result of the Commission's interpretation of exclusion 
E1. NRECA also states that the Commission erred by not modifying the 
RFA certification that the Final Rule will not have a significant 
economic impact on a substantial number of small entities. NRECA seeks 
clarification of the Final Rule because it believes that the 
jurisdiction determination process and the exclusion E1 directive will 
affect other small entities that were not identified previously, and 
the Commission must identify affected entities before it can certify 
the determination. NRECA states that the RFA requires that all effects 
of a rule on small entities must be considered, not just initial 
compliance costs or only the costs associated with small entities that 
identify, for the first time, facilities that are subject to the bulk 
electric system definition. NRECA requests that the Commission revisit 
the impact of the Final Rule on small entities, and thereafter clarify 
and provide greater detail with respect to its RFA certification.
    121. Similarly, APPA states that the Commission's modifications to 
the definition will substantially increase the public reporting burden, 
necessitating a new analysis. APPA argues that the Commission's changes 
to exclusions E1 and E3 would substantially increase the number of 
required studies and exception requests, which necessarily affect the 
associated paperwork burden estimates. Yet, according to APPA, the 
Commission has failed to reassess its burden calculations and adjust 
its estimates which will result in the imposition of unjustified 
regulatory burdens and costs.
    122. APPA also states that the Commission must reassess its RFA 
analysis to account for the Commission's changes to exclusions E1 and 
E3. According to APPA, many of the entities filing these requests might 
not currently be on the NERC Compliance Registry or might only be 
listed as distribution providers or load serving entities. In addition, 
APPA argues that the Commission estimate of 418 small entities is too 
low. APPA states that it alone has approximately 330 members on the 
NERC registry, about 290 of which fall within the definition of a small 
utility under the relevant Small Business Administration definition.
Commission Determination
    123. The Commission grants rehearing in part and denies rehearing 
in part. The Commission grants rehearing on the need to reassess the 
burden estimates relative to the Final Rule modifications regarding 
exclusions E1 and E3. In revising the information cost estimates, the 
Commission also included additional costs associated with the local 
distribution determinations. However, because the Commission grants 
rehearing on implementing exclusions E1 and E3 to instead direct NERC 
to modify the definition pursuant to FPA section 215(d)(5) in the Phase 
2 process, the Commission will address estimates in connection with 
that change after NERC submits its proposal.
1. Information Collection Statement
    124. In the Final Rule, the Commission estimated the reporting 
burden for entities to apply the revised bulk electric system 
definition to all elements to determine if those elements are included 
in the bulk electric system pursuant to the revised definition. The 
Commission also estimated the burden for entities' use of the exception 
process as well as the costs for Regional Entities and NERC to process 
exception requests. In addition, the Commission estimated the public 
reporting burden for entities to identify new elements under the 
revised bulk electric system definition.
    125. While the Commission is providing revised information 
collection estimates, we disagree with NARUC and APPA that the 
Commission's modifications to NERC's proposal will substantially 
increase the public reporting burden or will impose unjustified 
regulatory burdens and costs. None of the petitioners provide data to 
quantify or substantiate their claims. With regard to the alleged 
increase in case-specific exceptions applications, APPA cites to one 
large entity that claimed that it would have to file dozens of 
exception requests to have looped configurations excluded. However, we 
are not persuaded by APPA and others that the Commission's discussion 
of exclusion E1 (radial systems) pertaining to sub-100 kV

[[Page 29229]]

looped systems with multiple connections at 100 kV and above and the 
corresponding modification to exclusion E3 will result in a substantial 
increase in exception applications. Rather, as explained in the Final 
Rule, as well as this order on rehearing, the Commission directed NERC 
to develop a modification to exclusion E3 (local networks) that would 
eliminate the 100 kV ``floor'' to be eligible for the exclusion. As a 
result, by design, we anticipate that many entities with sub-100 kV 
looped configurations that are not eligible for exclusion E1 may avoid 
submitting an exception request and be eligible for the E3 exclusion as 
revised by the Final Rule. As explained elsewhere, an entity may apply 
the E3 exclusion without having to submit an application to NERC for a 
case-specific ruling.\152\
---------------------------------------------------------------------------

    \152\ See supra P 42.
---------------------------------------------------------------------------

    126. With regard to applications submitted to the Commission for 
local distribution determinations, we expect the number of local 
distribution determinations to be small.\153\ Petitioners have not 
provided information in their rehearing requests that persuade us to 
change our expectation. Thus, the Commission estimates that there will 
be approximately eight local distribution determinations per year.
---------------------------------------------------------------------------

    \153\ See Order No. 773, 141 FERC ] 61,236 at P 70.
---------------------------------------------------------------------------

    127. Although we believe that the burden estimates set forth in the 
Final Rule are generally sound, we nonetheless revise certain aspects 
to provide more accurate estimates. To account for the Final Rule 
directive for exclusions E1 and E3, the Commission has increased by 
five the number of engineering hours needed for ``System Review and 
List Creation'' for transmission owners. The Commission increased the 
number of engineering hours by three for the same review by 
distribution providers. System Review and List Creation corresponds to 
step 1 of NERC's proposed transition plan, which requires each U.S. 
asset owner to apply the revised bulk electric system definition to all 
elements to determine if those elements are included in the bulk 
electric system pursuant to the revised definition.\154\ The Commission 
added these hours to recognize the additional time needed for an entity 
that has a looped configuration operating below 100 kV with multiple 
connections at 100 kV and above that is not eligible for exclusion E1 
to analyze whether the configuration is eligible for exclusion E3.
---------------------------------------------------------------------------

    \154\ See NERC BES Petition at 38.
---------------------------------------------------------------------------

    128. In addition, the Commission is increasing the estimate of the 
number of exception requests in the first two years by approximately 
ten percent, from 260 per year to 285 requests per year. The original 
estimate of 260 requests per year considered all requests for 
exceptions, undifferentiated by whether the applicant's request is 
based on exclusions E1 and E3 or any other part of the definition. 
Here, we estimate an additional 25 exception requests that may be 
submitted by entities with looped configurations operating below 100 kV 
that, based on the Final Rule, do not qualify for the E1 radial system 
exclusion. However, as discussed above, we are not persuaded that a 
greater increase of exception requests is warranted because the 
directive that NERC modify the local network E3 exclusion by 
eliminating the 100 kV floor should allow many, if not most, of the 
entities that operate systems with a sub-100 kV loop to exclude those 
100 kV and above facilities that connect them to the interconnected 
transmission network (without an exception request) based on the E3 
exclusion (noting that the elements operating below 100 kV are already 
excluded from the bulk electric system by the core definition).
    129. The revised estimates are shown as follows:
---------------------------------------------------------------------------

    \155\ The ``entities'' listed in this table are describing a 
role an entity is registered for in the NERC registry. For example, 
a single entity may be registered as a transmission owner and 
generator owner. The total number of entities applicable to this 
rule is 1,522, based on the NERC registry. The total number of 
estimated roles is 1,730.
    \156\ From the total 1,730 estimated roles, we estimate an 
average of 285 requests per year in the first two years. See Order 
No. 773 at n. 225. Therefore, the estimated total number of hours 
per year for years 1 and 2, using an average of 285 requests per 
year, is 26,790 hours. We estimate 20 requests per year in year 3 
and ongoing.
    \157\ The Commission estimates 92 hours for a local distribution 
request comprised of 60 engineer hours, 8 record keeping hours and 
24 legal hours. For the local distribution burden category, the 
loaded (salary plus benefits) costs are: $60/hour for an engineer; 
$27/hour for recordkeeping; and $106/hour for legal. The breakdown 
of cost by item and year follows: (sum of hourly expense per request 
* number of local distribution determinations) = ((60 hrs * $60/hr) 
+ (8 hrs * $27/hr) + (24 hrs * $106/hr)) * 8 requests) = $50,880. 
Hourly costs are loaded (wage plus benefits) and are based on 
Commission staff study and industry data from the Bureau of Labor 
Statistics.

----------------------------------------------------------------------------------------------------------------
                                                           Number of
           Requirement            Number and type of     responses per     Average number of  Total burden hours
                                      entity\155\           entity        hours per response
                                  (1)...............  (2)...............  (3)...............  (1)*(2)*(3)
----------------------------------------------------------------------------------------------------------------
System Review and List Creation.  333 Transmission    1 response........  85 (engineer        28,305 Yr 1.
                                   Owners.                                 hours).
                                  843 Generator       1 response........  16 (engineer        13,488 Yr 1.
                                   Owners.                                 hours).
                                  554 Distribution    1 response........  27 (engineer        14,958 Yr 1.
                                   Providers.                              hours).
Exception Requests\156\.........  1,730 total         285 responses each  94 (60 engineer     26,790 hrs in Yrs
                                   Transmission        in Yrs 1 and 2      hrs, 32 record      1 and 2.
                                   Owners, Generator   (total for all      keeping hrs, 2
                                   Owners and          entities, i.e.,     legal hrs).
                                   Distribution        not per entity).
                                   Providers.
                                                      20 responses in Yr  94 (60 engineer     736 hrs in Yr 3
                                                       3 and ongoing       hrs, 32 record      and ongoing.
                                                       (total for all      keeping hrs, 2
                                                       entities, i.e.,     legal hrs).
                                                       not per entity).
Local Distribution                8 entities........  1 response........  92 (60 engineer     736 hrs.
 Determinations\157\.                                                      hrs, 8 record
                                                                           keeping hrs, 24
                                                                           legal hrs).
----------------------------------------------------------------------------------------------------------------

[[Page 29230]]

    Costs to Comply:
     Year 1: $13,841,400 ($367,400 increase from the initial 
estimate)
     Year 2: $10,436,340 ($167,780 increase from the initial 
estimate)
     Year 3 and ongoing: $4,310,800 ($50,704 increase from the 
initial estimate) \158\
---------------------------------------------------------------------------

    \158\ See NOPR, 139 FERC ] 61,247 at P 135 for the initial 
estimates. In the summary costs for years 1-3 displayed in the NOPR 
and final rule, due to a arithmetic error, the Years 1-3 cost 
estimates should have been $13,474,000, $10,268,560 and $4,259,920, 
respectively.
---------------------------------------------------------------------------

    For the burden categories above, the loaded (salary plus benefits) 
costs are: $60/hour for an engineer; $27/hour for recordkeeping; and 
$106/hour for legal. The revised breakdown of cost by item and year 
follows:
     System Review and List Creation (year 1 only): (28,305 hrs 
+ 13,488 hrs + 14,958 hrs) = 56,751 hrs * 60/hr = $3,405,060.
     Exception Requests (years 1 and 2): (sum of hourly expense 
per request * number of exception requests) = ((60 hrs * $60/hr) + (32 
hrs * $27/hr) + (2hrs * $106/hr)) * 285 requests) = $1,332,660.
     Local Distribution (each year): (sum of hourly expense per 
request * number of exception requests) = ((60 hrs * $60/hr) + (8 hrs * 
$27/hr) + (24 hrs * $106/hr)) * 8 requests) = $50,880.
    Title: FERC-725-J ``Definition of the Bulk Electric System''
    Action: Proposed Collection of Information
    OMB Control No: 1902-0259
    Respondents: Business or other for profit, and not for profit 
institutions.
    Frequency of Responses: On Occasion
    Necessity of the Information: The proposed revision to NERC's 
definition of the term bulk electric system, if adopted, would 
implement the Congressional mandate of the Energy Policy Act of 2005 to 
develop mandatory and enforceable Reliability Standards to better 
ensure the reliability of the nation's Bulk-Power System. Specifically, 
the proposal would ensure that certain facilities needed for the 
operation of the nation's bulk electric system are subject to mandatory 
and enforceable Reliability Standards.\159\
---------------------------------------------------------------------------

    \159\ For more information regarding the necessity of the 
information collected, disclosed or retained, see Revisions to 
Electric Reliability Organization Definition of Bulk Electric System 
and Rules of Procedure, Order No. 773, 141 FERC ] 61,236 (2012).
---------------------------------------------------------------------------

    Internal review: The Commission has reviewed the proposed 
definition and has assured itself, by means of its internal review, 
that there is specific, objective support for the burden estimate 
associated with the information requirements.
    130. Interested persons may obtain information on the reporting 
requirements by contacting the Federal Energy Regulatory Commission, 
Office of the Executive Director, 888 First Street NE., Washington, DC 
20426 [Attention: Ellen Brown, email: DataClearance@ferc.gov, phone: 
(202) 502-8663, fax: (202) 273-0873].
    131. For submitting comments concerning the collection of 
information and the associated burden estimate, please send your 
comments to the Office of Management and Budget, Office of Information 
and Regulatory Affairs, Washington, DC 20503 [Attention: Desk Officer 
for the Federal Energy Regulatory Commission, phone: (202) 395-4718, 
fax: (202) 395-7285]. For security reasons, comments to OMB should be 
submitted by email to: oira_submission@omb.eop.gov. Comments submitted 
to OMB should include Docket Number RM12-6 and OMB Control Number 1902-
0259.
2. Regulatory Flexibility Analysis
    132. The Commission grants rehearing in part, and denies rehearing 
in part, with regard to the impact of the Final Rule on small entities' 
applying for local distribution determinations at the Commission and 
the Final Rule directive regarding implementation of exclusions E1 and 
E3 for looped configurations. The Commission provides revised estimates 
below.
    133. In the NOPR, the Commission estimated that approximately 418 
of the 1,730 registered transmission owners, generator owners and 
distribution service providers may fall within the definition of small 
entities.\160\ The Commission estimated that, of the 418 small entities 
affected, 50 small entities within the NPCC region would have to comply 
with the rule. The Commission assumed that the rule would affect more 
small entities in the NPCC Region than those outside NPCC because there 
are more elements in NPCC that would be added to the bulk electric 
system based on the new definition than elsewhere. The Commission 
estimated the first year effect on small entities within the NPCC 
region to be $39,414.\161\ The Commission based this figure on 
information collection costs plus additional costs for compliance. The 
Commission estimated the average annual effect per small entity outside 
of NPCC will be less than for the entities within NPCC. The Commission 
concluded that there would not be a significant economic impact for 
small entities within or outside of NPCC because it should not 
represent a significant percentage of the operating budget. In Order 
No. 773, the Commission affirmed its analysis and certified that the 
Final Rule will not have a significant impact on a substantial number 
of small entities.\162\
---------------------------------------------------------------------------

    \160\ NOPR, 139 FERC ] 61,237 at P 138.
    \161\ NOPR, 139 FERC ] 61,237 at P 139.
    \162\ Order No. 773, 141 FERC ] 61,236 at P 338.
---------------------------------------------------------------------------

    134. While we affirm our certification that the Final Rule will not 
have a significant impact on a substantial number of small entities, we 
grant rehearing in part to adjust our estimates on the impact of the 
Final Rule on small entities. In particular, we adjust our initial 
estimate to recognize the approximately $6,360 cost incurred by a small 
entity that petitions the Commission for a local distribution 
determination. As stated above, the Commission estimates eight local 
distribution requests per year. The Commission does not believe that 
small entities will account for all local distribution requests, but 
even if they do, this estimate will not have a significant economic 
impact on a substantial number of small entities.
    135. We recognize that an entity may have some facilities that do 
not qualify for exclusions E1 or E3 as revised by the Final Rule and 
may choose to use the exception process. As stated above, the 
Commission estimates that the total number of entities with looped 
configurations that do not qualify for exclusions E1 or E3 who choose 
to use the exception process to be approximately 25, based on an 
approximately ten percent increase in the estimated number of exception 
requests (i.e., an estimated 260 requests revised to 285 requests) 
submitted during the first year after implementation. Of those, the 
Commission estimates that ten of the entities could be small entities, 
with the effect on those small entities to be $4,676 per entity. The 
Commission bases this figure on the result of the exception request 
calculation total above, $1,332,660, divided by the number of total 
estimated exception requests, 285, resulting in the cost per exception 
request equal to $4,676. We do not assume additional costs of 
compliance for these ten small entities requesting exceptions because 
looped systems connected at multiple connections of 100 kV and above 
are already part of the bulk electric system. If the elements remain in 
the bulk electric system as a result of the exception process, they 
will not be newly identified elements and thus the compliance costs 
associated with these elements are already accounted for in

[[Page 29231]]

other rulings approving Reliability Standards.\163\
---------------------------------------------------------------------------

    \163\ See, e.g., Order No 693, FERC Stats, & Regs. ]31,242 at PP 
1899-1907.
---------------------------------------------------------------------------

    136. Based on the above, as many as 18 small entities may 
experience an economic impact upwards of approximately $50,000 per 
year.\164\ The Commission does not consider 18 out of 418 small 
entities (4.3%) to be a substantial number of small entities. 
Accordingly, the Commission certifies that the Final Rule will not have 
a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \164\ This is based on a conservative assumption that the eight 
local distribution determination requests and the ten additional 
entities to use the exception process all are part of the NPCC 
region. Under this assumption, the total estimated annual cost per 
entity is $50,450 ($39,414 + $6,360 + $4,676).
---------------------------------------------------------------------------

    137. APPA argues that their members' burdens will change by virtue 
of being included on the NERC Compliance Registry. We disagree with 
APPA on this issue. First, it is important to understand that NERC 
registers entities, not facilities, in the NERC Compliance Registry. We 
do not expect that NERC's revised BES definition, as well as our 
determinations in the Final Rule and on rehearing, will have Compliance 
Registry implications for a significant number of entities. As we have 
indicated consistently throughout this proceeding, small entities in 
the NPCC region are most likely to be substantively impacted by the 
Final Rule, and we have previously recognized the costs of compliance 
for that sub-group of small entities. APPA has not provided any 
information to persuade us that NERC will register a significant number 
of small entities as a result of the Final Rule.
    138. APPA also argues that the Commission's estimate that a total 
of 418 small entities may be affected by the Final Rule is too low and 
that the Commission did not justify this estimate. We disagree with 
APPA on this matter. The Commission justified the estimate in the NOPR 
stating that we started with the Order No. 693 estimate that all the 
Reliability Standards approved in Order No. 693 would apply to 
approximately 682 small entities.\165\ The Commission concluded that 
the bulk electric system rulemaking would affect a smaller subset of 
the categories of registered entities and thus our estimate was lower 
in this proceeding than cited in Order 693.\166\ Therefore, we deny 
rehearing on this issue.
---------------------------------------------------------------------------

    \165\ NOPR, 139 FERC ]61,247 at P 139 n.156 (citing Order No 
693, FERC Stats, & Regs. ]31,242 at P 1940).
    \166\ Id.
---------------------------------------------------------------------------

III. Document Availability

    139. In addition to publishing the full text of this document in 
the Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5:00 
p.m. Eastern time) at 888 First Street NE., Room 2A, Washington, DC 
20426.
    140. From FERC's Home Page on the Internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    141. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from FERC Online Support at (202) 
502-6652 (toll free at 1-866-208-3676) or email at 
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at 
public.referenceroom@ferc.gov.

    By the Commission.
Kimberly D. Bose,
Secretary.

    Note: Attachment A will not appear in the Code of Federal 
Regulations.

ATTACHMENT A

Definition of Bulk Electric System

    Unless modified by the lists shown below, all Transmission 
Elements operated at 100 kV or higher and Real Power and Reactive 
Power resources connected at 100 kV or higher. This does not include 
facilities used in the local distribution of electric energy
    Inclusions:
    I1--Transformers with the primary terminal and at least one 
secondary terminal operated at 100 kV or higher unless excluded 
under Exclusion E1 or E3.
    I2--Generating resource(s) with gross individual nameplate 
rating greater than 20 MVA or gross plant/facility aggregate 
nameplate rating greater than 75 MVA including the generator 
terminals through the high-side of the step-up transformer(s) 
connected at a voltage of 100 kV or above.
    I3--Blackstart Resources identified in the Transmission 
Operator's restoration plan.
    I4--Dispersed power producing resources with aggregate capacity 
greater than 75 MVA (gross aggregate nameplate rating) utilizing a 
system designed primarily for aggregating capacity, connected at a 
common point at a voltage of 100 kV or above.
    I5--Static or dynamic devices (excluding generators) dedicated 
to supplying or absorbing Reactive Power that are connected at 100 
kV or higher, or through a dedicated transformer with a high-side 
voltage of 100 kV or higher, or through a transformer that is 
designated in Inclusion I1.
    Exclusions:
    E1--Radial systems: A group of contiguous transmission Elements 
that emanates from a single point of connection of 100 kV or higher 
and:
    (a) Only serves Load. Or,
    (b) Only includes generation resources, not identified in 
Inclusion I3, with an aggregate capacity less than or equal to 75 
MVA (gross nameplate rating). Or,
    (c) Where the radial system serves Load and includes generation 
resources, not identified in Inclusion I3, with an aggregate 
capacity of non-retail generation less than or equal to 75 MVA 
(gross nameplate rating).
    Note--A normally open switching device between radial systems, 
as depicted on prints or one-line diagrams for example, does not 
affect this exclusion.
    E2--A generating unit or multiple generating units on the 
customer's side of the retail meter that serve all or part of the 
retail Load with electric energy if: (i) the net capacity provided 
to the BES does not exceed 75 MVA, and (ii) standby, back-up, and 
maintenance power services are provided to the generating unit or 
multiple generating units or to the retail Load by a Balancing 
Authority, or provided pursuant to a binding obligation with a 
Generator Owner or Generator Operator, or under terms approved by 
the applicable regulatory authority.
    E3--Local networks (LN): A group of contiguous transmission 
Elements operated at or above 100 kV but less than 300 kV that 
distribute power to Load rather than transfer bulk-power across the 
interconnected system. LN's emanate from multiple points of 
connection at 100 kV or higher to improve the level of service to 
retail customer Load and not to accommodate bulk-power transfer 
across the interconnected system. The LN is characterized by all of 
the following:
    (a) Limits on connected generation: The LN and its underlying 
Elements do not include generation resources identified in Inclusion 
I3 and do not have an aggregate capacity of non-retail generation 
greater than 75 MVA (gross nameplate rating);
    (b) Power flows only into the LN and the LN does not transfer 
energy originating outside the LN for delivery through the LN; and
    (c) Not part of a Flowgate or transfer path: The LN does not 
contain a monitored Facility of a permanent Flowgate in the Eastern 
Interconnection, a major transfer path within the Western 
Interconnection, or a comparable monitored Facility in the ERCOT or 
Quebec Interconnections, and is not a monitored Facility included in 
an Interconnection Reliability Operating Limit (IROL).
    E4--Reactive Power devices owned and operated by the retail 
customer solely for its own use.
    Note--Elements may be included or excluded on a case-by-case 
basis through the Rules of Procedure exception process.
[FR Doc. 2013-11130 Filed 5-16-13; 8:45 am]
BILLING CODE 6717-01-P