Document ID: FERC-2006-0349-0001
Agency: ferc
Document Type: Rule
Title: Rules Concerning Certification of the Electric Reliability Organization; and Procedures for the Establishment, Approval, and Enforcement of Electric Reliability Standards
Posted Date: 2006-02-17T05:00Z

[Federal Register: February 17, 2006 (Volume 71, Number 33)]
[Rules and Regulations]               
[Page 8661-8744]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17fe06-20]                         

[[Page 8661]]

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Part II

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Part 39

Rules Concerning Certification of the Electric Reliability 
Organization; and Procedures for the Establishment, Approval, and 
Enforcement of Electric Reliability Standards; Final Rule

[[Page 8662]]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 39

[Docket No. RM05-30-000; Order No. 672]

 
Rules Concerning Certification of the Electric Reliability 
Organization; and Procedures for the Establishment, Approval, and 
Enforcement of Electric Reliability Standards

Issued February 3, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: Pursuant to Subtitle A (Reliability Standards) of the 
Electricity Modernization Act of 2005, which is Title XII of the Energy 
Policy Act of 2005 (EPAct) and which added a new section 215 to the 
Federal Power Act (FPA), the Commission is amending its regulations to 
incorporate: Criteria that an entity must satisfy to qualify to be the 
Electric Reliability Organization (ERO) which the Commission will 
certify as the organization that will propose and enforce Reliability 
Standards for the Bulk-Power System in the United States, subject to 
Commission approval; procedures under which the ERO may propose new or 
modified Reliability Standards for Commission review; a process for 
timely resolution of any conflict between a Reliability Standard and a 
Commission-approved tariff or order; a process for resolution of an 
inconsistency between a state action and a Reliability Standard; 
regulations pertaining to the funding of the ERO; procedures governing 
an enforcement action by the ERO, a Regional Entity or the Commission; 
criteria under which the ERO may enter into an agreement to delegate 
authority to a Regional Entity for the purpose of proposing Reliability 
Standards to the ERO and enforcing Reliability Standards; regulations 
governing the issuance of periodic reliability reports by the ERO that 
assess the reliability and adequacy of the Bulk-Power System in North 
America; and procedures for the establishment of Regional Advisory 
Bodies that may provide advice to the Commission, the ERO or a Regional 
Entity on matters of governance, applicable Reliability Standards, the 
reasonableness of proposed fees within a region, and any other 
responsibilities requested by the Commission.

DATES: This Final Rule will become effective March 20, 2006.

FOR FURTHER INFORMATION CONTACT:
William Longenecker (Technical Information), Office of Energy Markets 
and Reliability, Division or Policy Analysis and Rulemaking, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426, (202) 502-8570.
David Miller (Technical Information), Office of Energy Markets and 
Reliability, Division of Reliability, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
6473.
Jonathan First (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8529.
Christy Walsh (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6523.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
III. Procedural Matters
IV. Discussion
    A. Overview
    B. Section-by-Section Discussion of the Final Rule
    1. Definitions--Section 39.1
    a. Terms Defined in the Statute
    i. Bulk-Power System
    ii. Reliable Operation
    iii. Reliability Standard
    iv. Transmission Organization
    b. Additional Terms Commenters Seek To Define in the Final Rule
    i. Physical Security Standards
    ii. Regional Reliability Standard and Regional Variance
    iii. User of the Bulk-Power System
    iv. End User
    (a) End User as a Retail Customer
    (b) End User as a Customer That Uses the Bulk-Power System
    (c) Broader Definition of End User
    2. Jurisdiction and Applicability--Section 39.2
    a. Commission Jurisdiction
    b. International Regulatory Coordination
    3. Electric Reliability Organization Certification--Section 39.3
    a. The Oversight Roles of the Commission and the ERO
    i. Building on the Existing Reliability Framework
    ii. Concerns About an Excessively Rigid Hierarchal Reliability 
Framework
    b. Statutory Certification Criteria
    i. Governance
    ii. Other Statutory Criteria
    c. Opportunity for Public Comment
    d. Non-Statutory Criteria
    i. Membership
    (a) Open Membership
    (b) Membership Fees
    (c) Membership as a Requirement To Participate in the 
Reliability Standard Development Process
    ii. Additional Non-Statutory Criteria
    e. Simultaneous Certification in Canada and Mexico
    f. Periodic Performance Assessments
    4. Funding of the Electric Reliability Organization--Section 
39.4
    a. Budget and Business Plan
    b. Funding for Statutory Activities
    i. General Funding Matters
    ii. Funding Apportionment
    c. Role of the ERO in Funding the Regional Entities
    i. ERO Responsibility for Regional Entity Funding
    ii. Commission Oversight of Regional Entity Funding
    d. Funding Consistency With the Bilateral Principles
    e. Payment of Dues and Funding Transition Plan
    f. Billing Mechanics
    g. Other Funding Matters
    5. Reliability Standards--Section 39.5
    a. Reliability Standard Development by the ERO and Regional 
Entities
    i. Reliability Standard Development by the ERO
    ii. Due Process in Reliability Standard Development
    iii. Regional Uniformity and Variation of a Standard
    iv. Rebuttable Presumption for a Reliability Standard Proposed 
by an Interconnection-Wide Regional Entity
    b. Reliability Standard Approval by the Commission
    i. Commission Review
    (a) Commission Review Process
    (b) Legal Standard of Review of a Proposed Reliability Standard
    ii. Due Weight to Technical Expertise of the ERO and a Regional 
Entity Organized on an Interconnection-Wide Basis
    iii. Due Weight to the Technical Expertise of a Regional Entity 
Not Organized on an Interconnection-Wide Basis
    iv. No Deference on Competition
    (a) Linkage Between Reliability and Competition
    (b) Definitions of Competition
    (c) Commission Weighing of Competitive Effects
    c. Effective Date
    d. Remand of a Proposed Reliability Standard
    i. Remand
    ii. International Coordination of Remands
    iii. Deadline for Submitting a Revised Proposal for a 
Reliability Standard in Response to a Remand
    e. Commission-Initiated Actions on a Reliability Standard
    i. Commission Directive That the ERO Address a Specific Issue
    ii. Review of an Approved Reliability Standard
    iii. Commission Authority To Void a Reliability Standard
    6. Conflict of a Reliability Standard With a Commission Order--
Section 39.6
    7. Enforcement of Reliability Standards--Section 39.7
    a. General Comments on Enforcement
    b. Compliance
    i. Enforcement Audits of Compliance With Reliability Standards

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    ii. Reliability-Related Programs
    iii. Remedial Action
    c. Assessing a Penalty for a Violation
    i. Procedures for Investigations and Penalty Assessments
    ii. Due Process
    iii. Notice
    iv. Effective Date of Penalty and Commission Review of Penalties
    (a) Effective Date and General Commission Review
    (b) Automatic Commission Review of Certain Penalties
    v. Answer to an Application for Review
    d. Nonpublic Matters and CyberSecurity Procedures
    i. Stage at Which an Investigation or Penalty Should Be Made 
Public
    ii. Nonpublic Treatment of Certain Types of Proceedings
    e. Commission-Ordered Compliance and Penalties
    f. Penalties' Relation to the Seriousness of the Violation
    i. Penalty Guidelines
    ii. Non-Monetary Penalties
    iii. Limits on Monetary Penalties
    g. Reporting Violations and Alleged Violations
    i. Procedures for Reporting Violations and Alleged Violations
    ii. Confidentiality of Reports
    h. Other Enforcement Issues
    i. ERO and Regional Entity Appeals Processes
    ii. Receipt and Use of Penalty Money
    iii. RTO/ISO-Related Enforcement Issues
    8. Delegation to a Regional Entity--Section 39.8
    a. The Role of a Regional Entity and Its Relationship to the ERO
    i. Authority Delegated to a Regional Entity
    ii. Other Regional Entity Activities
    b. Process and Criteria for Becoming a Regional Entity
    c. Review of a Regional Entity Applicant
    i. Review of a Regional Entity Organized on an Interconnection-
Wide Basis
    ii. Review of a Regional Entity Not Organized on an 
Interconnection-Wide Basis
    d. Eligibility of an RTO or ISO To Become a Regional Entity
    e. Delegation Agreements
    f. Regional Entity Governance
    g. Notice Requirement for Submission of Delegation Agreements
    h. Uniform Processes Among Regional Entities
    i. Commission Assignment of Enforcement Authority Directly to a 
Regional Entity
    j. Performance Assessment of Regional Entities
    9. Enforcement of Commission Rules and Orders--Section 39.9
    a. Action Against the ERO or a Regional Entity
    b. Audits of ERO and Regional Entity Criteria
    c. Monetary Penalties
    d. Penalizing an ERO or a Regional Entity Board Member
    10. Changes in Electric Reliability Organization Rules and 
Regional Entity Rules--Section 39.10
    11. Reliability Reports--Section 39.11
    12. Inconsistency of a State Action and a Reliability Standard--
Section 39.12
    a. General Balance of Authority
    b. Review of Allegedly Inconsistent State Actions
    c. Concerns of Specific States
    13. Regional Advisory Bodies--Section 39.13
V. Information Collection Statement
VI. Environmental Analysis
VII. Regulatory Flexibility Act Certification
VIII. Document Availability

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly.

I. Introduction

    1. Pursuant to Subtitle A (Reliability Standards) of the 
Electricity Modernization Act of 2005, which is Title XII of the Energy 
Policy Act of 2005 (EPAct)\1\ and which added a new section 215 to the 
Federal Power Act (FPA), the Commission is amending its regulations to 
incorporate:
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    \1\ Pub. L. 109-58, Title XII, Subtitle A, 119 Stat. 594, 941 to 
be codified at 16 U.S.C. 824o (2000).
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    (1) Criteria that an entity must satisfy to qualify to be the 
Electric Reliability Organization (ERO), which the Commission will 
certify as the organization that will propose and enforce Reliability 
Standards for the Bulk-Power System \2\ in the United States, subject 
to Commission approval;
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    \2\ Capitalized terms used in this Final Rule have the meanings 
specified in section IV.B.1 of the Preamble.
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    (2) Procedures under which the ERO may propose new or modified 
Reliability Standards for Commission review;
    (3) A process for timely resolution of any conflict between a 
Reliability Standard and a Commission-approved tariff or order;
    (4) A process for resolution of an inconsistency between a state 
action and a Reliability Standard;
    (5) Regulations pertaining to the funding of the ERO;
    (6) Procedures governing an enforcement action by the ERO, Regional 
Entity or the Commission;
    (7) Criteria under which the ERO may enter into an agreement to 
delegate authority to a Regional Entity for the purpose of proposing 
Reliability Standards to the ERO and enforcing Reliability Standards;
    (8) Regulations governing the issuance of periodic reliability 
reports by the ERO that assess the reliability and adequacy of the 
Bulk-Power System in North America; and
    (9) Procedures for the establishment of Regional Advisory Bodies 
that may provide advice to the Commission, the ERO or a Regional Entity 
on matters of governance, applicable Reliability Standards, the 
reasonableness of proposed fees within a region, and any other 
responsibilities requested by the Commission.
    2. The Commission believes incorporating this reliability rule into 
the Commission's regulations pursuant to the direction of Congress is 
an important step toward ensuring more reliable and secure electric 
utility service.

II. Background

    3. On August 8, 2005, EPAct was enacted into law by President Bush. 
New section 215 of the FPA provides for a system of mandatory, 
enforceable Reliability Standards. Reliability Standards are to be 
developed by the ERO, subject to Commission review and approval. An 
approved Reliability Standard may be enforced by the ERO, subject to 
the Commission's review, or the Commission may initiate an 
investigation or imposition of a penalty. Below, we summarize the 
provisions of Subtitle A of the EPAct:
    4. Section 215(a) (Definitions) defines relevant terms used in the 
Act.
    5. Section 215(b) (Jurisdiction and Applicability) provides that, 
for purposes of approving Reliability Standards and enforcing 
compliance with such standards, the Commission shall have jurisdiction 
over the certified ERO, any Regional Entities, and all users, owners 
and operators of the Bulk-Power System, including but not limited to 
the public and governmental entities described in section 201(f) of the 
FPA.\3\ Section 215(b)(2) requires the Commission to issue a Final Rule 
to implement the requirements of section 215 of the FPA no later than 
180 days after the date of enactment.
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    \3\ Section 201(f) of the FPA, 16 U.S.C. 824(f), provides that 
``[n]o provision in this Part shall apply to, or be deemed to 
include, the United States, a state or any political subdivision of 
a State, an electric cooperative that receives financing under the 
Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.) or that 
sells less than 4,000,000 megawatt hours of electricity per year, or 
any agency, authority, or instrumentality of any one or more of the 
foregoing, or any corporation which is wholly owned, directly or 
indirectly, by any one or more of the foregoing, or any officer, 
agent, employee of any of the foregoing acting as such in the course 
of his official duty, unless such provision makes specific reference 
thereto.''
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    6. Section 215(c) (Certification) authorizes the Commission to 
certify a person as an ERO, provided that the applicant meets specified 
criteria.
    7. Section 215(d) (Reliability Standards) provides the process for 
the ERO to propose a Reliability Standard, subject to Commission review 
and approval. This subsection also directs the Commission to adopt 
rules to establish a fair process for the

[[Page 8664]]

identification and timely resolution of any conflict between a 
Reliability Standard and any function, rule, order, tariff, rate 
schedule, or agreement accepted, approved, or ordered by the Commission 
applicable to a Transmission Organization.
    8. Section 215(e) (Enforcement) authorizes the ERO, after notice 
and opportunity for hearing, to impose a penalty for a violation of a 
Reliability Standard, subject to review by the Commission. This section 
also provides for enforcement initiated by the Commission on its own 
motion. Section 215(e)(4) requires that the Commission issue 
regulations under which the ERO will be authorized to enter into an 
agreement to delegate authority to a qualified Regional Entity for the 
purpose of proposing Reliability Standards to the ERO and enforcing 
them. Further, subsection 215(e)(6) requires that any penalty imposed 
shall bear a reasonable relation to the seriousness of the violation 
and take into consideration timely remedial efforts.
    9. Section 215(f) (Changes in Electric Reliability Organization 
Rules) requires Commission approval of any proposed ERO Rule or 
proposed Rule change.
    10. Section 215(g) (Reliability Reports) requires that the ERO 
conduct periodic assessments of the reliability and adequacy of the 
North American Bulk-Power System.
    11. Section 215(h) (Coordination With Canada and Mexico) urges the 
President to negotiate international agreements with the governments of 
Canada and Mexico to provide for effective compliance with Reliability 
Standards and the effectiveness of the ERO in the United States and 
Canada or Mexico.
    12. Section 215(i) (Savings Provisions) states that the ERO shall 
have authority to develop and enforce compliance with Reliability 
Standards for only the Bulk-Power System and provides that section 215 
of the FPA shall not be construed to preempt any authority of any state 
to take action to ensure the safety, adequacy, and reliability of 
electric service within that state, as long as such action is not 
inconsistent with any Reliability Standard. Section 215 also contains a 
provision relating specifically to reliability rules established by the 
State of New York.
    13. Section 215(j) (Regional Advisory Bodies) requires the 
Commission to establish a Regional Advisory Body upon petition of at 
least two-thirds of the states within a region that have more than one-
half of their electric load served within the region. A Regional 
Advisory Body may provide advice to the ERO, a Regional Entity or the 
Commission.
    14. Section 215(k) (Application to Alaska and Hawaii) provides that 
section 215 of the FPA does not apply to Alaska or Hawaii.
    15. The statute directs the Commission to issue a Final Rule to 
implement the requirements of section 215 no later than 180 days after 
enactment, or by February 5, 2006. On September 1, 2005 the Commission 
issued a Notice of Proposed Rulemaking (NOPR) that proposed regulations 
regarding certification of the ERO, development of Reliability 
Standards, enforcement of Reliability Standards, ERO delegation of 
authority to Regional Entities, ERO funding and other matters necessary 
to implement the statute.\4\
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    \4\ Additional background information is provided in the NOPR, 
discussing the Commission's reliability-related activities and the 
development of voluntary reliability guidelines. Rules Concerning 
Certification of the Electric Reliability Organization; and 
Procedures for the Establishment, Approval, and Enforcement of 
Electric Reliability Standards, 70 FR 53,117 (Sept. 7, 2005), FERC 
Stats. & Regs., Proposed Regulations ] 32,587 (Sept. 1, 2005).
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III. Procedural Matters

    16. The statute directs the Commission to issue a Final Rule to 
implement the requirements of section 215 of the FPA no later than 180 
days after enactment, or by February 5, 2006. The Commission issued the 
NOPR on September 1, 2005. It required that comments be filed by 
October 7, 2005 to assist the Commission in meeting the statutory 180-
day deadline. Several parties submitted late-filed comments. The 
Commission will accept these late-filed comments. A list of commenters 
appears in Appendix A.
    17. Although the Commission did not request reply comments because 
of the relatively short statutory time frame for issuing a Final Rule, 
several commenters nonetheless submitted reply comments. The Commission 
will reject such reply comments. The Commission did not solicit reply 
comments and, therefore, accepting such comments from those who chose 
to submit them would be unfair to others.
    18. The Commission held two technical conferences on this 
rulemaking. The first technical conference was held on November 19, 
2005. Comments on the first technical conference were due by December 
8, 2005. The technical conference was transcribed and is a part of the 
record in this docket.
    19. The second technical conference was held on December 9, 2005. 
Comments on the second technical conference were due by December 23, 
2005. The technical conference was transcribed and is a part of the 
record in this docket. A list of commenters for both technical 
conferences is in Appendix B.

IV. Discussion

A. Overview

    20. On August 8, 2005, EPAct was enacted into law. New section 215 
of the FPA provides for a system of mandatory, enforceable Reliability 
Standards. Under the new electric power reliability system enacted by 
the Congress, the United States will no longer rely on voluntary 
compliance by participants in the electric industry with industry 
reliability requirements for operating and planning the Bulk-Power 
System. Congress directed the development of mandatory, Commission-
approved, enforceable electricity Reliability Standards.
    21. The Commission will certify a single Electric Reliability 
Organization, the ERO, to oversee the reliability of the United States' 
portion of the interconnected North American Bulk-Power System, subject 
to Commission oversight. It will be responsible for developing and 
enforcing the mandatory Reliability Standards. The Reliability 
Standards will apply to all users, owners and operators of the Bulk-
Power System. The Commission has the authority to approve all ERO 
actions, to order the ERO to carry out its responsibilities under these 
new statutory provisions, and also may independently enforce 
Reliability Standards.
    22. The ERO must submit each proposed Reliability Standard to the 
Commission for approval. Only a Reliability Standard approved by the 
Commission is enforceable under section 215 of the FPA.
    23. The ERO may delegate its enforcement responsibilities to a 
Regional Entity. Delegation is effective only after the Commission 
approves the delegation agreement. A Regional Entity may also propose a 
Reliability Standard to the ERO for submission to the Commission for 
approval. This Reliability Standard may be either for application to 
the entire interconnected Bulk-Power System or for application only 
within its own region.
    24. The ERO or a Regional Entity must monitor compliance with the 
Reliability Standards. It may direct a user, owner or operator of the 
Bulk-Power System that violates a Reliability Standard to comply with 
the Reliability Standard. The ERO or Regional Entity may impose a 
penalty on a user, owner or operator for violating a Reliability 
Standard,

[[Page 8665]]

subject to review by, and appeal to, the Commission.
    25. On September 1, 2005 the Commission issued a NOPR that proposed 
regulations regarding certification of the ERO, development of 
Reliability Standards, enforcement of Reliability Standards, delegation 
of authority to Regional Entities, ERO funding and other matters 
necessary to implement the statute.
    26. Based on careful consideration of the comments submitted in 
response to the NOPR, the Commission adopts a Final Rule that generally 
follows the approach of the NOPR. We note that numerous commenters 
express support for the NOPR and believe that the proposed regulations 
establish the framework for an effective ERO, as intended by 
Congress.\5\
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    \5\ See, e.g., Ameren, CEOB, Exelon, FRCC, NASUCA, NERC, 
NiSource and TAPS.
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    27. The Final Rule is generally limited to developing and 
implementing the processes and procedures that section 215 of the FPA 
directs the Commission to develop and undertake with regard to the 
formation and functions of the ERO and Regional Entities. Section 
215(b) obligates all users, owners and operators of the Bulk-Power 
System to comply with Reliability Standards that become effective 
pursuant to the process set forth in the statute. The Commission 
recognizes the critical need for an ERO that is effective in developing 
and enforcing mandatory Reliability Standards.
    28. The Commission believes that, to achieve this goal, it is 
necessary to have a strong ERO that promotes excellence in the 
development and enforcement of Reliability Standards. Accordingly, 
various provisions of the Final Rule are intended to set out the ERO's 
role and responsibilities with respect to the users, owners and 
operators of the Bulk-Power System. The Final Rule requires periodic 
review of the ERO and Regional Entities to ensure that the statutory 
qualifying criteria are maintained on an ongoing basis.
    29. A mandatory Reliability Standard should not reflect the 
``lowest common denominator'' in order to achieve a consensus among 
participants in the ERO's Reliability Standard development process. 
Thus, the Commission will carefully review each Reliability Standard 
submitted and, where appropriate, remand an inadequate Reliability 
Standard to ensure that it protects reliability, has no undue adverse 
effect on competition, and can be enforced in a clear and even-handed 
manner. Further, the Final Rule allows the Commission to set a deadline 
for the ERO to submit a proposed Reliability Standard to the Commission 
to ensure that the ERO will revise in a timely manner a proposed 
Reliability Standard that is not acceptable to the Commission. These 
provisions, as well, will strengthen the ERO and Regional Entities by 
providing mechanisms to achieve effective and fair Reliability 
Standards.
    30. The major provisions of the Final Rule are as follows.
1. ERO Certification
    31. The Final Rule provides that the Commission will, after notice 
and opportunity for comment, certify one applicant as the ERO. The 
Final Rule sets forth the criteria that an ERO applicant must satisfy 
to qualify as the ERO, including the ability to develop and enforce 
Reliability Standards.\6\
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    \6\ The criteria stated in the Final Rule track the statutory 
criteria for ERO certification provided in section 215(c) of the 
FPA.
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    32. To ensure that the ERO complies with the certification criteria 
on an ongoing basis, the Final Rule requires the ERO to undergo a 
performance assessment three years after certification and every five 
years thereafter. The ERO must file a self-assessment with the 
Commission explaining how it satisfies the ERO requirements. Regional 
Entities, users, owners and operators of the Bulk-Power System, and 
other interested entities will have an opportunity to make 
recommendations for the improvement of the ERO. After receipt of the 
performance assessment, the Commission will establish a proceeding in 
which it will assess the performance of the ERO. The Commission will 
also allow opportunity for public comment. As a result of the 
performance assessment, the Commission will issue an order finding that 
the ERO meets the statutory and regulatory criteria or directing the 
ERO to comply or improve compliance with the statutory and regulatory 
criteria for the ERO. Subsequently, if the ERO fails to comply 
adequately with the Commission order, the Commission may institute a 
proceeding to enforce its order, including, if necessary and 
appropriate, a proceeding to consider decertification of the ERO.
    33. The ERO submission must include an evaluation of the 
effectiveness of each Regional Entity. The Commission will, as part of 
its proceeding to assess the ERO's performance, assess the performance 
of each Regional Entity and issue an order addressing Regional Entity 
compliance. If a Regional Entity fails to comply adequately with the 
Commission order, the Commission may institute a proceeding to enforce 
its order, including, if necessary and appropriate, a proceeding to 
consider rescission of the Commission's approval of the Regional 
Entity's delegation agreement.
2. ERO and Regional Entity Funding
    34. Section 215 of the FPA generally provides for Commission 
authorization of funding for statutory functions, such as the 
development of Reliability Standards and their enforcement, and 
monitoring the reliability of the Bulk-Power System. The Final Rule 
clarifies, however, that while the ERO or a Regional Entity is not 
necessarily precluded from pursuing other activities, it may not use 
Commission-authorized funding for such activities.
    35. The Final Rule directs ERO candidates to propose a formula or 
method of funding addressing cost allocation and cost responsibility, 
along with a proposed mechanism for revenue collection for Commission 
consideration. The Final Rule finds that funding based on net energy 
for load is one fair, reasonable and uncomplicated method that 
minimizes the possibility of ``double-counting.'' \7\ However, the 
Commission does not rule out other apportionment methods that can be 
shown to be just and reasonable.
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    \7\ Net Energy for Load means balancing authority area 
generation (less station use), plus energy received from other 
balancing authority areas, less energy delivered to balancing 
authority areas through interchange. It includes balancing authority 
area losses, but excludes energy required for storage at electric 
energy storage facilities, such as pumped storage.
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    36. As the primary entity responsible for the development and 
enforcement of Reliability Standards, the ERO should fund the Regional 
Entities as well as approve their budgets, under the Commission's 
general oversight. The Final Rule requires periodic financial audits to 
ensure that any ERO-approved funding is appropriately expended for 
delegated functions. It addresses concerns that a significant amount of 
the ERO's or a Regional Entity's total revenue from an alternative 
source could compromise the mission or independence of the ERO or a 
Regional Entity.
    37. The Final Rule provides that the ERO should include line item 
budgets for the activities that it delegates to each Regional Entity. 
The Final Rule permits the ERO to request emergency funding on a 
demonstration of unforeseen and extraordinary circumstances. It also 
clarifies that Commission review and approval of ERO and Cross-Border 
Regional Entity funding mechanisms

[[Page 8666]]

will be limited to their application in the United States.
3. Reliability Standards
    38. The Final Rule implements the new FPA provisions relating to 
mandatory and enforceable Reliability Standards to be developed by the 
ERO. It establishes the ERO as the only entity that can submit a 
proposed Reliability Standard to the Commission for approval.
    39. The Final Rule determines that the ERO's Reliability Standard 
development process must provide for reasonable notice and opportunity 
for public comment, due process, openness and balance of interests. The 
Commission observes that an American National Standards Institute 
(ANSI)-accredited process is one reasonable means of satisfying these 
requirements.
    40. The Commission may approve a proposed Reliability Standard (or 
modification to a Reliability Standard) if it determines that it is 
just, reasonable, not unduly discriminatory or preferential, and in the 
public interest. In its review, the Commission will give due weight to 
the technical expertise of the ERO or a Regional Entity organized on an 
Interconnection-wide basis with respect to a proposed Reliability 
Standard to be applicable within that Interconnection. However, the 
Commission will not defer to the ERO or a Regional Entity with respect 
to a Reliability Standard's effect on competition.
    41. The Commission seeks as much uniformity as possible in the 
proposed Reliability Standards across the interconnected Bulk-Power 
System of the North American continent. The Final Rule permits a 
regional difference in a Reliability Standard, in particular for a 
regional difference that is more stringent than a continent-wide 
Reliability Standard, including a regional difference that addresses 
matters that the continent-wide Reliability Standard does not, and a 
regional difference necessitated by a physical difference in the Bulk-
Power System. The Commission would generally find acceptable a proposed 
regional difference that satisfies the statutory and regulatory 
criteria for approval of a proposed Reliability Standard and that is 
more stringent than a continent-wide Reliability Standard.\8\
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    \8\ The Commission notes that the Bulk-Power System includes 
interconnected portions of the United States, Canada and Mexico. 
However, this Final Rule only applies to that portion of the Bulk-
Power System within the United States (excluding Alaska and Hawaii).
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    42. The statute requires the ERO to apply a rebuttable presumption 
to a proposal for a Reliability Standard from an Interconnection-wide 
Regional Entity to be applicable within its Interconnection. The Final 
Rule clarifies that this rebuttable presumption refers to the burden of 
proof. Thus, if the ERO does not find that the presumption for a 
proposed Reliability Standard is adequately rebutted, it must accept it 
as just, reasonable, not unduly discriminatory or preferential, and in 
the public interest, and submit it to the Commission for approval.
    43. Section 215(d)(6) of the FPA requires the Commission's Final 
Rule to include ``fair processes for the identification and timely 
resolution of any conflict between a Reliability Standard and any 
function, rule, order, tariff, rate schedule, or agreement accepted, 
approved, or ordered by the Commission applicable to a transmission 
organization.'' Accordingly, the Final Rule provides a process for a 
user, owner or operator to notify the Commission of such possible 
conflicts for timely resolution by the Commission.
    44. Further, the Commission interprets section 215 as generally 
permitting a state to take action, as long as such action is not 
inconsistent with a Reliability Standard. The Commission will consider 
the recommendation of a relevant state as well as the ERO and will 
require that a petition for determination of inconsistency be served on 
a relevant state agency.
4. Enforcement of Reliability Standards
    45. The ERO is responsible under section 215(e) of the FPA for 
ensuring that all users, owners and operators of the Bulk-Power System 
comply with Reliability Standards. In addition, the statute provides 
that the Commission can, independent of the ERO, investigate compliance 
with a Reliability Standard and impose a penalty for a violation. The 
ERO may delegate its enforcement responsibilities to a Regional Entity. 
The Final Rule sets forth various elements of the enforcement process, 
including (1) the ERO and each Regional Entity is expected to have a 
compliance program that includes proactive enforcement audits to 
determine if users, owners and operators are complying with Reliability 
Standards; (2) the ERO and the appropriate Regional Entity will conduct 
investigations of alleged violations of Reliability Standards, and the 
ERO must inform the Commission promptly of these investigations and 
their disposition; and (3) the ERO or a Regional Entity may assess a 
penalty (non-monetary or monetary), subject to Commission review.
    46. The Final Rule requires the ERO to develop an enforcement audit 
program. In addition, any Regional Entity that receives a delegation of 
enforcement function also should have an audit program. The Final Rule 
explains that there should be a single audit program applicable to both 
the ERO and Regional Entities unless there is a compelling reason for a 
difference between the ERO and a particular Regional Entity.
    47. The Final Rule implements the enforcement provisions of section 
215(e) of the FPA, which authorize the ERO to impose a penalty for a 
violation of a Reliability Standard, subject to Commission review. The 
enforcement provisions in section 39.7 of the Final Rule allow the ERO 
or a Regional Entity with delegated enforcement authority to impose a 
penalty on a user, owner or operator of the Bulk-Power System for a 
violation of a Reliability Standard. The ERO will retain oversight 
responsibility for enforcement authority that is delegated to a 
Regional Entity. To ensure consistency in the implementation of 
delegated enforcement authority, a Regional Entity must report 
periodically to the ERO on how it carries out its delegated enforcement 
authority. The Final Rule makes clear that the ERO and Regional 
Entities must establish uniform Rules that provide adequate due process 
to an alleged violator when the ERO or Regional Entity is determining 
whether to assess a penalty. The Final Rule concludes that, to provide 
adequate due process yet prevent duplicative and unnecessary expenses, 
there should be a single opportunity for internal appeal within the ERO 
or Regional Entity. Further, the Final Rule establishes expedited 
procedures for Commission review of a penalty, as required by EPAct.
    48. The Final Rule discusses the ERO's and a Regional Entity's 
ability to take remedial action separate from its penalty authority. 
For example, the ERO or a Regional Entity may direct a user, owner or 
operator to come into compliance with a Reliability Standard.
    49. The Final Rule requires the ERO to notify the Commission 
promptly of a self-reported violation or an investigation into a 
violation or alleged violation and its eventual disposition. This will 
allow the Commission to receive timely information on a violation or 
alleged violation of a Reliability Standard and determine whether 
Commission action is appropriate. The Final Rule requires the ERO to 
develop, and submit to the Commission for approval, penalty guidelines 
that identify a range of non-

[[Page 8667]]

monetary and monetary penalties to be applied by the ERO for 
determining the appropriate penalty for violation of a Reliability 
Standard. Regional Entities should adopt the ERO's penalty guidelines 
with change only as necessary to reflect regional differences in 
Reliability Standards.
    50. The Final Rule finds that an investigation conducted by the 
ERO, a Regional Entity, or the Commission of a violation or an alleged 
violation of a Reliability Standard will be nonpublic unless the 
Commission authorizes a public investigation. However, once the ERO or 
a Regional Entity imposes a penalty and files the statutorily-required 
``notice of penalty'' with the Commission, the Commission will publicly 
disclose the penalty. The Final Rule includes an exception to this 
public disclosure with respect to Cybersecurity Incidents and other 
matters that would jeopardize system security.
5. Delegation to a Regional Entity
    51. Consistent with the statute, the Final Rule establishes 
criteria for the ERO to delegate authority to a Regional Entity to 
enforce Reliability Standards and to propose Reliability Standards to 
the ERO. It sets out the role of a Regional Entity in relationship to 
the ERO, concluding that the ERO holds the primary responsibility for 
enforcement of Reliability Standards and that any delegation of this 
responsibility to a Regional Entity is subject to ERO oversight.
    52. The Commission explains the process and criteria for becoming a 
Regional Entity. The Final Rule relies on statutory criteria for 
evaluating a Regional Entity applicant. Each application will be 
evaluated on a case-by-case basis. The Final Rule establishes a 
rebuttable presumption afforded to a proposal for delegation to a 
Regional Entity organized on an Interconnection-wide basis. This 
rebuttable presumption is that such a proposed Regional Entity promotes 
the effective and efficient administration of Bulk-Power System 
reliability. The Final Rule adopts a periodic Regional Entity 
performance assessment process administered primarily by the ERO.
    53. The Final Rule addresses the subject of uniformity among 
delegation agreements. It emphasizes the value of uniformity and 
requires the ERO applicant to submit a pro forma delegation agreement 
concurrently with its ERO application. The Final Rule allows a 
prospective Regional Entity to submit a delegation agreement directly 
to the Commission if good faith negotiations with the ERO fail. The 
Commission strongly urges a prospective Regional Entity to consider the 
use of alternative dispute resolution (ADR) to resolve any disputes 
over the terms of the delegation agreement. The Final Rule requires a 
prospective Regional Entity that submits a delegation agreement 
directly to the Commission to state whether ADR procedures were used 
and whether the Regional Entity believes that ADR under the 
Commission's supervision could successfully resolve the disputes 
regarding the terms of the delegation agreement. The Commission may, if 
appropriate, upon review, direct the ERO to enter into the delegation 
agreement with the Regional Entity.
    54. The Final Rule clarifies that a Regional Entity should not 
directly submit a Regional Entity Rule or change to a Regional Entity 
Rule to the Commission because this is consistent with the role of the 
ERO overseeing the Regional Entities, as discussed below. The Final 
Rule directs the ERO to develop procedures and criteria by which a 
Regional Entity Rule or change to Regional Entity Rule will be judged 
by the ERO, and then be submitted to the Commission for approval.
    55. The Final Rule provides for the establishment of Regional 
Advisory Bodies. It observes that it would generally be desirable to 
have a Regional Entity and a Regional Advisory Body cover the same 
region but does not require a Regional Advisory Body and a Regional 
Entity to have a common boundary. The Final Rule finds that section 215 
of the FPA permits a Regional Advisory Body to form even if there is 
not yet a Regional Entity in a region, in part so that a Regional 
Advisory Body may advise the Commission and the ERO regarding the 
governance of a proposed Regional Entity.
6. Enforcement of Commission Rules and Orders
    56. The Commission generally expects to work cooperatively with the 
ERO and Regional Entities to resolve issues that may arise. 
Nonetheless, the Final Rule clarifies the Commission's authority to 
take action against the ERO or a Regional Entity for non-compliance 
with section 215 of the FPA. The Final Rule provides that the 
Commission may take such action as is necessary and appropriate against 
the ERO or a Regional Entity to ensure compliance with a Reliability 
Standard or any Commission order affecting the ERO or a Regional 
Entity. The Commission may suspend or rescind the ERO's certification 
or a Regional Entity's delegated authority.
    57. The Final Rule establishes the policy that, in general, the 
Commission oversees the ERO and the ERO oversees any approved Regional 
Entity. Consistent with this approach, the Final Rule provides that the 
Commission may periodically conduct a compliance audit to examine the 
ERO's compliance with the statutory and regulatory criteria for 
becoming the ERO and performance in enforcing Reliability Standards. 
The ERO must periodically audit each Regional Entity's compliance with 
relevant statutory and regulatory criteria for becoming a Regional 
Entity and performance in enforcing Reliability Standards and report 
the results to the Commission.
    58. Although we would expect to use this provision only in 
extraordinary circumstances, the Final Rule allows the Commission to 
impose civil penalties on the ERO or a Regional Entity. The Final Rule 
does not provide for the assessment of a monetary penalty against a 
board member of the ERO or a Regional Entity.
    59. The Final Rule is organized into 13 sections:

Section 39.1--Definitions,
Section 39.2--Jurisdiction and applicability,
Section 39.3--Electric Reliability Organization certification,
Section 39.4--Funding of the Electric Reliability Organization,
Section 39.5--Reliability Standards,
Section 39.6--Conflict of a Reliability Standard with a Commission 
order,
Section 39.7--Enforcement of Reliability Standards,
Section 39.8--Delegation to a Regional Entity,
Section 39.9--Enforcement of Commission rules and orders,
Section 39.10--Changes in Electric Reliability Organization Rules and 
Regional Entity Rules,
Section 39.11--Reliability reports,
Section 39.12--Review of state action, and
Section 39.13--Regional Advisory Bodies

B. Section-by-Section Discussion of the Final Rule

    60. Below, the Commission discusses the regulations proposed in the 
NOPR, the comments received, and the Commission's conclusion. We note 
that, while the NOPR indicated that the rules would be set forth in 
Title 18, part 38 of the Code of Federal Regulations (CFR), the Final 
Rule codifies the rules in Title 18, part 39 of the CFR. To provide 
consistency and clarity in the discussion of proposed rules, comments 
and Commission conclusions, the Final Rule refers to part 39 or, when 
referring

[[Page 8668]]

to a particular section within part 39, section 39, throughout the 
discussion.
1. Definitions--Section 39.1
    61. This section of the NOPR defined the relevant terms used in 
part 39 of the Commission's regulations, including the terms that are 
defined in the statute to provide a consistent meaning throughout the 
proposed rule. Comments relating to the proposed definitions are 
discussed below.
a. Terms Defined in the Statute
i. Bulk-Power System
    62. The NOPR defined the term ``Bulk-Power System'' as set forth in 
section 215(a)(1) of the FPA:

    Bulk-Power System means facilities and control systems necessary 
for operating an interconnected electric energy transmission network 
(or any portion thereof), and electric energy from generating 
facilities needed to maintain transmission system reliability. The 
term does not include facilities used in the local distribution of 
electric energy.

    63. Several commenters seek clarification to narrow the 
interpretation of the term ``Bulk-Power System.'' National Grid asserts 
that the definition of ``Bulk-Power System'' is ambiguous as to whether 
it encompasses generation facilities and precisely which facilities are 
covered. National Grid recommends that the Commission clarify the term 
by adopting a functional interpretation rather than an arbitrary test 
based on a single attribute, such as voltage or facility capacity to 
identify facilities included as part of the Bulk-Power System. Hydro-
Qu[eacute]bec submits that the definition of ``Bulk-Power System'' 
should be interpreted narrowly, that is, jurisdiction on generating 
facilities should be strictly limited to that needed to maintain 
transmission system reliability, as ascertained by the ERO or the 
Regional Entity. NiSource, submits that the definition should exclude 
generating facilities and include the electric energy from those 
facilities only to the extent needed to maintain transmission system 
reliability. SoCalEd asserts that the Commission should include 
generators that receive transmission service pursuant to a wholesale 
distribution access tariff in its jurisdiction.
ii. Reliable Operation
    64. The NOPR defined the term ``Reliable Operation'' as set forth 
in section 215(a)(4) of the FPA:

    Reliable Operation means operating the elements of the Bulk-
Power System within equipment and electric system thermal, voltage, 
and stability limits so that instability, uncontrolled separation, 
or cascading failures of such system will not occur as a result of 
sudden disturbance, including a Cybersecurity Incident, or 
unanticipated failure of system elements.

    65. Kansas City P&L is concerned that including the phrase 
``unanticipated failure of system elements'' in the definition of 
``Reliable Operation'' makes it too vague for development of efficient 
and workable Reliability Standards related to reliability planning 
criteria. It recommends that the Commission either delete the phrase or 
explain the meaning of the phrase.
iii. Reliability Standard
    66. The NOPR defined the term ``Reliability Standard'' as set forth 
in section 215(a)(3) of the FPA:

    Reliability Standard means a requirement, approved by the 
Commission under the instant proposed regulation, to provide for 
Reliable Operation of the Bulk-Power System. The term includes 
requirements for the operation of existing Bulk-Power System 
facilities, including cybersecurity protection, and the design of 
planned additions or modifications to such facilities to the extent 
necessary to provide for Reliable Operation of the Bulk-Power 
System. The term does not include any requirement to enlarge such 
facilities or to construct new transmission capacity or generation 
capacity.

    67. The Oklahoma Commission finds this definition reasonable 
because it does not encompass any requirement to enlarge or construct 
new transmission or generation capacity; however, it seeks 
clarification that a Commission-approved Reliability Standard will 
apply equally to both existing facilities and new facilities added in 
the future.
iv. Transmission Organization
    68. The NOPR defined the term ``Transmission Organization'' as set 
forth in section 215(a)(6) of the FPA:

    Transmission Organization means a Regional Transmission 
Organization, Independent System Operator, independent transmission 
provider, or other Transmission Organization finally approved by the 
Commission for the operation of transmission facilities.

    69. South Carolina E&G asks the Commission to clarify that the 
definition of ``Transmission Organization'' includes a non-independent 
Transmission Provider that maintains separation of functions pursuant 
to Standards of Conduct Order No. 2004.\9\
---------------------------------------------------------------------------

    \9\ Standards of Conduct for Transmission Providers, Order No. 
2004, FERC Stats. & Regs., Regulations Preambles ]31,155 (2003), 
order on reh'g. Order No. 2004-A, III FERC Stats. & Regs. ]31,161 
(2004), order on reh'g, Order No. 2004-B, III FERC Stats & Regs. 
]31,166 (2004).
---------------------------------------------------------------------------

Commission Conclusion

    70. We adopt the NOPR's definition of ``Bulk-Power System,'' 
``Reliable Operation,'' ``Reliability Standard,'' and ``Transmission 
Organization'' because the definition of these terms originates in 
section 215 of the FPA.\10\ However, we offer the following 
clarifications.
---------------------------------------------------------------------------

    \10\ 16 U.S.C. 824o(a) (2000).
---------------------------------------------------------------------------

    71. With regard to generators, Congress included in the definition 
of Bulk-Power System ``electric energy from generation facilities 
needed to maintain transmission system reliability.'' If electric 
energy from a generating facility is needed to maintain a reliable 
transmission system, that facility is part of the Bulk-Power System 
with respect to the energy it generates that is needed to maintain 
reliability. We conclude that the precise scope of generators as 
facilities to which the Reliability Standards apply would be best 
considered in the context of our review of those Standards, taking into 
account the views of the ERO and others. Therefore, until we have 
proposed Reliability Standards before us, we will reserve further 
judgment on whether additional guidance on generators' status as Bulk-
Power System facilities is appropriate or whether the decision of which 
generators are Bulk-Power System facilities should be made on a case-
by-case basis.
    72. With regard to the term ``Reliable Operation,'' we decline to 
generically interpret the meaning of the phrase ``unanticipated failure 
of system elements'' in advance of submission of proposed Reliability 
Standards requiring interpretation of the phrase or other specific 
instances where the issue and all of the relevant facts are presented 
to allow the Commission to make a proper determination.
    73. With regard to the term ``Reliability Standard,'' we clarify 
that a Reliability Standard will equally apply to the existing Bulk-
Power System and any future additions to the Bulk-Power System unless 
the Reliability Standard itself provides for an exception. Section 215 
of the FPA makes no distinction between existing and new facilities.
    74. With regard to the term ``Transmission Organization,'' we 
clarify that the transmission arm of a vertically integrated utility 
that is subject to the Commission's Standards of Conduct, absent any 
other relevant facts, would not be a Transmission Organization for 
purposes of FPA section 215(a)(6). Given that each of the examples of 
Transmission Organizations provided by Congress are independent of 
market participants, the Commission finds that

[[Page 8669]]

Congress intended that ``Transmission Organization'' be an entity 
approved by the Commission that is independent of market participants. 
However, in response to South Carolina E&G, any interested person that 
perceives a possible conflict between a Reliability Standard and a 
tariff may bring this to the Commission's attention.
b. Additional Terms Commenters Seek To Define in the Final Rule
    75. Commenters suggest seven new terms to define in the Final Rule: 
``Competition,'' ``Physical Security Standard,'' ``Potential 
Violation,'' ``Regional Reliability Standard,'' ``Regional Variance,'' 
``User of the Bulk-Power System'' and ``End User.''\11\
---------------------------------------------------------------------------

    \11\ We address issues pertaining to ``Competition'' and 
``Potential Violation'' in section IV.B.5 and section IV.B.7 of the 
Preamble, Reliability Standards and Enforcement of Reliability 
Standards, respectively.
---------------------------------------------------------------------------

i. Physical Security Standards
    76. NERC recommends adding the defined term ``Physical Security 
Standard'':

    Physical Security Standard means a Reliability Standard adopted 
to safeguard personnel and prevent unauthorized access to critical 
equipment, systems, material, and information at critical 
facilities.
ii. Regional Reliability Standard and Regional Variance
    77. NYSRC and the New York Companies recommend adding the defined 
term ``regional reliability standard'' to mean a Reliability Standard 
that is consistent with the generally applicable ERO Reliability 
Standard but is more specific or more stringent to meet the particular 
reliability needs of the region:

    Regional Reliability Standard: A Reliability Standard applicable 
within a particular region that is not inconsistent with, but may be 
more stringent, add detail to, or implement an ERO Reliability 
Standard, or may cover matters not covered by an ERO Reliability 
Standard.

    78. While the New York Companies indicate that they would define 
term ``regional variance'' in the same manner, NYSRC would define this 
term separately, as follows:

    Regional Variance: An aspect of an ERO Reliability Standard that 
applies only within a given region. A Regional Variance may be used, 
for example, to exempt a particular region from all or a portion of 
an ERO Reliability Standard that does not apply to that region, or 
may establish different measures or performance criteria necessary 
to achieve reliability within that region.
iii. User of the Bulk-Power System
    79. NERC proposes to add a definition for ``user of the Bulk-Power 
System.'' NERC asks that the Commission require every such user to 
register with the ERO. It considers a user to be a direct user that 
transacts business on the Bulk-Power System subject to Commission 
jurisdiction under section 215 of the FPA. It would exclude an end-use 
customer who receives electric energy indirectly from the Bulk-Power 
System. NERC proposes the definition:

    User of the Bulk-Power System means any entity that sells, 
purchases, or transmits electric power directly over the Bulk-Power 
System, or that maintains facilities or controls systems that are 
part of the Bulk-Power System, or that is a system operator. The 
term excludes customers that receive service at retail that do not 
otherwise sell, purchase, or transmit power over the Bulk-Power 
System or own, operate or maintain, control or operate facilities or 
systems that are part of the Bulk-Power System.

    80. MidAmerican suggests that the Commission clarify that the use 
of local distribution in the term ``Bulk-Power System'' refers to the 
Commission's definition for local distribution as provided in Order No. 
888 as the facilities that meet the seven factor test for distribution.
    81. APPA states that it assumes that both the new ERO and the 
Commission will focus their reliability efforts on those entities with 
activities that substantially impact the Bulk-Power System, and that 
distribution-only entities will not be targeted because the 
Commission's jurisdiction under section 215 does not extend to local 
distribution activities. NRECA argues that status as a section 201(f) 
entity, ownership of distribution facilities, and even ownership of 
local transmission facilities should not be considered ipso facto to 
cause one to be deemed a ``user, owner, or operator'' of the Bulk-Power 
System for purposes of application of the Reliability Standards.
    82. NRECA notes that a distribution cooperative serving customers 
entirely at retail and operating facilities at lower voltages might 
still be said to be a user of the Bulk-Power System to the extent that 
its electricity is delivered over higher-voltage facilities of its 
generation and transmission company or even the interconnected 
facilities of an investor-owned utility and/or a federal power 
marketing agency or large public power entity. However, NRECA states 
that this is not a meaningful basis for interpreting the Commission's 
jurisdiction of ``user'' since the same reasoning would apply to a 
large industrial customer or, ultimately, even a single residential 
customer.
    83. Therefore, NRECA asks that the Commission interpret ``user'' as 
one that has an active role in, and some measure of control over the 
Bulk-Power System, and whose activities have the potential to directly 
disrupt the Bulk-Power System, such as an owner or operator of a high-
voltage transmission facility, a large generator, or a control area 
operator. Users should not include those that have no active role in or 
control over the Bulk-Power System.
iv. End User
    84. The NOPR solicited comments on whether the term ``end user'' 
should be defined for purposes of the ERO's equitable allocation of 
reasonable dues, fees and charges among end users.\12\ The NOPR further 
inquired as to whether the term ``end user'' should be defined as a 
customer using net energy for load or in terms of those who directly or 
indirectly use the Bulk-Power System. The NOPR asked whether we should 
limit the term to an entity transmitting electric energy through the 
transmission facility of another, or should ``end user'' include a 
transmission facility owner or operator with a business that depends on 
the Reliable Operation of the interconnected Bulk-Power System.
---------------------------------------------------------------------------

    \12\ NOPR at P 43.
---------------------------------------------------------------------------

    85. Several commenters submit that it is critical that the 
Commission define ``end user'' to establish a fair funding mechanism 
for the ERO and Regional Entities. These commenters, however, do not 
agree on how to define ``end user'' or are uncertain as to how best to 
carry out their recommendations, since certain users of the Bulk-Power 
System may not be allowed by local regulators to assess rates to 
recover such costs.
(a) End User as a Retail Customer
    86. A number of commenters \13\ recommend defining the term ``end 
user'' as a customer represented by net energy for load, i.e., an 
ultimate retail consumer. NASUCA submits that ``end user'' in section 
215(c)(2)(B) of the FPA is intended to refer to a retail customer who 
actually uses the electricity that comes off the grid and, in this 
respect, is to be distinguished from a user, owner or operator of the 
Bulk-Power System that buys, sells, generates or transmits electricity 
at the wholesale bulk-power level and to whom the Reliability Standards 
directly apply. National Grid asserts that the plain language of the 
statute requires that ``end user,'' not wholesale or transmission 
customers, fund the ERO so that applying the term only to direct

[[Page 8670]]

users of the Bulk-Power System does not fit within the context of the 
statute.
---------------------------------------------------------------------------

    \13\ See, e.g., NARUC, TAPS and PSE&G Companies.
---------------------------------------------------------------------------

    87. A few commenters submit that ``end user'' should be defined in 
terms of a transmission provider that collects fees from customers and 
remits them to the ERO.\14\ Detroit Edison claims that the most 
equitable means by which the ERO could recover its costs from all 
consumers would be a direct bill targeted to all load. Given that the 
Commission's jurisdictional reach is limited, that portion of the ERO's 
charges attributable to domestic entities and approved by the 
Commission through the budget process should be deemed a prudently 
incurred transmission expense allocable to all transmission owners 
subject to the Commission's jurisdiction. This expense should be 
recoverable from wholesale and retail customers to ensure that all 
consumers, either directly or indirectly, share in the costs of 
maintaining and enhancing a reliable transmission network.
---------------------------------------------------------------------------

    \14\ See, e.g., Allegheny, Hydro One and Detroit Edison.
---------------------------------------------------------------------------

(b) End User as a Customer That Uses the Bulk-Power System
    88. Several commenters, including BCTC and Old Dominion, recommend 
that the Commission include all users of the Bulk-Power System within 
the definition of the term ``end user.'' MidAmerican submits that, if 
the term ``end user'' is defined as a customer using net energy for 
load, it should be made clear that the intent is to capture the end-use 
load of all direct or indirect users of the transmission system that 
benefit from the reliability of the Bulk-Power System.
    89. MISO contends that the term ``end user'' should be broadly 
defined in the Final Rule to include an entity that directly or 
indirectly uses the wholesale transmission grid so that any party 
receiving the benefits of Bulk-Power System reliability will bear the 
costs of promoting short-term reliability.\15\
---------------------------------------------------------------------------

    \15\ See also AEP, Exelon, Entergy and NiSource.
---------------------------------------------------------------------------

    90. NiSource and Entergy submit that the term should encompass 
independent system operators (ISOs), power marketers, qualifying 
facilities and all who directly or indirectly use the transmission 
systems and ``drive system reliability.''
    91. SERC recommends including customers with alternative sources of 
generation in the definition of ``end user.'' LADWP recommends that 
``end user'' include all customer-owned distributed generation and 
merchant utility distributed generation, and that any entity with an 
obligation to serve should be assessed based on its end user 
responsibilities.
(c) Broader Definition of End User
    92. A number of commenters suggest an expansive definition of ``end 
user'' that would include all users, owners and operators of the Bulk-
Power System.
    93. EEI recommends that the Commission define ``end user'' for the 
purpose of equitable allocation of ERO dues, fees and charges. It asks 
that the term be defined in the context of reliability, not in the 
context of electricity. EEI argues that generators and transmitting 
utilities are ``end users'' of reliability because they receive the 
benefits of reliability, just as retail electricity purchasers do. EEI 
submits that ``end user'' should include any entity that buys or sells 
electric energy, or transmits electric energy as an owner, operator or 
user of the Bulk-Power System.
    94. New York Companies recommends that ``end user'' be defined as 
an entity that injects energy into or withdraws energy from the grid, 
emphasizing that in areas of the country where deregulation has 
occurred, an entity that supplies power is different from an entity 
that withdraws power. It observes that entities responsible for paying 
the costs of an organization are more sensitive to the resource needs 
of that organization.
    95. Wisconsin Electric asserts that the definition of ``end user'' 
should not encompass transmission owners or operators, or even end use 
customers of local distribution companies and marketers in retail 
access states, given the Commission's lack of jurisdiction over local 
distribution of energy.

Commission Conclusion

    96. We decline to define all of these terms in this Final Rule 
without prejudice to the ERO proposing to define these terms as part of 
its certification application process or as part of a Reliability 
Standard. However, we offer the following clarifications.
    97. In regard to the terms ``regional Reliability Standard'' and 
``regional variance,'' we recognize that regional ``differences'' \16\ 
of several sorts are possible as more fully discussed under section 
IV.B.5, Reliability Standards, of the Preamble. There we call on the 
ERO applicant to propose definitions of the various types of 
differences.\17\
---------------------------------------------------------------------------

    \16\ Throughout the Final Rule, we use the term regional 
differences to refer to any type or category of difference from a 
continent-wide Reliability Standard that applies on a regional 
basis.
    \17\ See also section IV.B.8 of the Preamble, Delegation to a 
Regional Entity.
---------------------------------------------------------------------------

    98. In regard to ``User of the Bulk-Power System,'' we agree that a 
customer that receives electric service at retail and does not 
otherwise directly receive, sell, purchase, or transmit power over the 
Bulk-Power System or own, operate or maintain, control or operate 
facilities or systems that are part of the Bulk-Power System would not 
in general be considered to be a user of the Bulk-Power System.
    99. We recognize that ``User of the Bulk-Power System'' is a 
critical jurisdictional term. However, at this time, we do not think it 
is appropriate to try and develop a specific definition. Generally, a 
person directly connected to the Bulk-Power System selling, purchasing, 
or transmitting electric energy over the Bulk-Power System is a User of 
the Bulk-Power System. With regard to NERC's proposed definition, we 
are concerned that a large industrial customer that receives electric 
energy directly from the Bulk-Power System may not be defined as a user 
of the Bulk-Power System, even though it may directly affect the 
reliability of the Bulk-Power System. We conclude that the precise 
scope of the term ``User of the Bulk-Power System,'' and thus the 
extent of persons subject to the Reliability Standards, would be best 
considered in the context of our review of those Standards, taking into 
account the views of the ERO and others. Therefore, until we have 
proposed Reliability Standards before us, we will reserve further 
judgment on whether a definition of ``User of the Bulk-Power System'' 
is appropriate or whether the decision of who is a ``User of the Bulk-
Power System'' should be made on a case-by-case basis.
    100. With regard to local distribution facilities, Congress 
specifically exempted ``facilities used in the local distribution of 
energy'' from the definition of Bulk-Power System, and, as such, the 
Commission's regulations do not subject such facilities to the ERO's or 
a Regional Entity's Rules or the Commission-approved mandatory 
Reliability Standards. As noted by NRECA, the owner or operator of a 
local distribution facility can be a user of the Bulk-Power System. If 
the owner or operator of a local distribution facility is a ``user'' of 
the Bulk-Power System, it must comply with all relevant Reliability 
Standards as a user.\18\
---------------------------------------------------------------------------

    \18\ Similarly, an owner or operator of a generating facility 
may be a user of the Bulk-Power System without that facility 
necessarily being a part of the Bulk-Power System.
---------------------------------------------------------------------------

    101. We agree with commenters that there are good reasons to 
distinguish an ``end user'' from a ``user, owner or

[[Page 8671]]

operator of the Bulk-Power System.'' The latter phrase refers to an 
entity that must comply with the Reliability Standards, and perhaps 
also pay directly for the cost of the ERO. The term end user, is a term 
in common use in the electric power industry, which the Commission has 
used at times in its orders without a definition and no one has 
expressed any uncertainty about the meaning of the term. In general, it 
means a retail consumer of electricity. Therefore, we do not see a need 
to adopt a formal definition for ``end user'' here. If an ERO applicant 
believes additional definition is needed as part of its application for 
explaining its funding mechanism or for another reason, it may propose 
a definition at that time.
2. Jurisdiction and Applicability--Section 39.2
a. Commission Jurisdiction
    102. This section discusses the Commission's jurisdiction under 
section 215 of the FPA and who must comply with this Final Rule. The 
NOPR explained that, consistent with section 215(b) of the FPA, for the 
purposes of approving and enforcing Reliability Standards established 
by the Commission in accordance with this new regulation, the 
Commission has jurisdiction over the ERO, any Regional Entities, and 
all users, owners and operators of the Bulk-Power System within the 
United States (other than Alaska and Hawaii) including, but not limited 
to, the entities described in section 201(f) of the FPA.

Comments

    103. The Ohio Commission is concerned that a statement in the 
proposed rule may go beyond the powers delegated by Congress. It 
asserts that Congress indicated that the Commission would have 
jurisdiction over approval of the Reliability Standards established 
under the ERO, but went no further, neither regarding the Regional 
Entities nor the enforcement provisions.
    104. NERC and EEI recommend that the regulations make clear that 
each user, owner or operator of the Bulk-Power System must comply with 
the Commission's regulations implementing the Act, with approved 
Reliability Standards, and with the Rules adopted by the ERO and 
Regional Entities. In addition, NERC and TAPS assert that the ERO and 
Regional Entities may need to obtain information or data from users, 
owners and operators of the Bulk-Power System to develop Reliability 
Standards and to ensure compliance with those Reliability Standards 
and, therefore, the Final Rule should require users, owners and 
operators of the Bulk-Power System to respond to such requests for 
data.
    105. DOE states that the language of section 215 of the FPA gives 
the ultimate authority for the certification of the ERO and the 
enforcement of the Reliability Standards to the Commission. Therefore, 
DOE asserts that it is imperative that the Commission be able to direct 
the ERO to collect, validate, and preserve data related to reliability 
performance in such form as the Commission may require, and that the 
ERO be required to provide such information to the Commission upon 
request.
    106. Exelon notes that not all entities subject to mandatory 
Reliability Standards currently report information through the regional 
reliability councils and to NERC. In its view, it is critical that all 
entities subject to ERO Rules be required to provide the Commission, 
the ERO, and the Regional Entities with data when requested. Therefore, 
Exelon suggests that the Final Rule include an additional section 
requiring all users, owners and operators of the Bulk-Power System to 
furnish the Commission, the ERO and the applicable Regional Entity with 
information requested in order to carry out their functions under this 
Final Rule.
    107. Professor Robert Thomas raises the need for the Final Rule to 
establish procedures to ensure that the Commission has appropriate 
access to any relevant reliability data in a meaningful format. 
Professor Thomas suggests that, for the Commission to perform its 
oversight function, it must receive timely information in connection 
with any potential violation of a Reliability Standard. He recommends 
that the Commission have unfettered access to specific real-time and 
other system data.
    108. EPSA requests that the Commission require the ERO and each 
Regional Entity to adopt procedures to prevent the unintended 
disclosure of any data they obtain. Further, it asks that, in instances 
when it is necessary to disclose such information, the Commission 
require the ERO and Regional Entities to establish procedures to 
protect such information from disclosure beyond what is necessary to 
protect the reliability of the Bulk-Power System.
    109. NERC, TAPS, and Exelon state that the Final Rule should 
provide a mechanism for the ERO and Regional Entitles to learn the 
identity of each user, owner and operator of the Bulk-Power System to 
ensure that each such entity complies with Reliability Standards. NERC 
and Ontario IESO assert that the Final Rule should implement this 
identification process by requiring each user, owner, and operator of 
the Bulk-Power System to register with the ERO and the appropriate 
Regional Entity.
    110. ELCON suggests that a requirement that all entities subject to 
enforcement under section 215(e) of the FPA register with the ERO for 
administrative purposes should not be confused with dues requirements 
or any concept of membership. However, FRCC suggests that all users of 
the Bulk-Power System should be required to register with the ERO and 
the appropriate Regional Entity for both cost recovery and enforcement 
purposes.

Commission Conclusion

    111. Section 39.2 of the regulations codifies the jurisdiction 
conferred by statute. Congress specifically gave the Commission 
jurisdiction over Regional Entities and enforcement of compliance with 
section 215 of the FPA. Section 215(b) specifically states:

    The Commission shall have jurisdiction, within the United 
States, over the ERO certified by the Commission * * *, any regional 
entities, and all users, owners and operators of the bulk-power 
system, including but not limited to the entities described in 
section 201(f), for purposes of approving reliability standards 
established under this section and enforcing compliance with this 
section. All users, owners and operators of the bulk-power system 
shall comply with reliability standards that take effect under this 
section. (emphasis added)

Thus, the Ohio Commission's concern that the proposed relationship 
between the Commission and a Regional Entity or the Commission's role 
in enforcement may go beyond the powers delegated to the Commission by 
Congress is unfounded.
    112. The Commission notes that the proposed regulations in the NOPR 
did not specifically state that all users, owners and operators of the 
Bulk-Power System shall comply with Reliability Standards that take 
effect under part 39. NERC and EEI recommend that the Commission add 
such an explicit requirement in the regulations. Although all entities 
subject to the Commission's reliability jurisdiction under section 215 
of the FPA are required to comply with regulations promulgated under 
that section without an explicit requirement to do so, we will grant 
NERC's and EEI's request to explicitly state in the regulations that 
all users, owners and operators must comply with the regulations under 
part 39.
    113. Finally, NERC and EEI further request that the regulations 
require all

[[Page 8672]]

users, owners and operators to comply with ERO Rules and Regional 
Entities Rules. Congress gave the Commission jurisdiction over all 
users, owners and operators of the Bulk-Power System, for purposes of, 
inter alia, enforcing compliance with Reliability Standards. As defined 
by the proposed rule, the Rules of the ERO and Regional Entities are 
the bylaws, rules of procedure and other organizational rules and 
protocols of the ERO or a Regional Entity, respectively. These Rules 
should be developed to further the ERO's and Regional Entities' 
purpose--which is to improve Bulk-Power System reliability. The 
Commission concludes that it is appropriate for each user, owner and 
operator of the Bulk-Power System to be required to abide by any such 
Commission-approved Rules. Therefore, we will add a subsection (b) to 
section 39.2, stating:

    (b) All entities subject to the Commission's reliability 
jurisdiction under section 39.2(a) shall comply with applicable 
Reliability Standards, the Commission's regulations, and applicable 
Electric Reliability Organization Rules and Regional Entity Rules 
made effective under this part.

    114. The Commission agrees with commenters that, to fulfill its 
obligations under this Final Rule, the ERO or a Regional Entity will 
need access to certain data from users, owners and operators of the 
Bulk-Power System. Further, the Commission will need access to such 
information as is necessary to fulfill its oversight and enforcement 
roles under the statute. Section 39.2 of the regulations will include 
the following requirement:

    (d) Each user, owner or operator of the Bulk-Power System within 
the United States (other than Alaska and Hawaii) shall provide the 
Commission, the Electric Reliability Organization and the applicable 
Regional Entity such information as is necessary to implement 
section 215 of the Federal Power Act as determined by the Commission 
and set out in the Rules of the Electric Reliability Organization 
and each applicable Regional Entity. The Electric Reliability 
Organization and each Regional Entity shall provide the Commission 
such information as is necessary to implement section 215 of the 
Federal Power Act.

    115. We also agree with EPSA that the ERO and each Regional Entity 
must adopt confidentiality Rules to prevent the unintended disclosure 
of such information. However, because the Commission has not certified 
an ERO or seen the Rules that it and the Regional Entities will propose 
pertaining to data access and retention, the Commission will not 
address with specificity what such a confidentiality Rule would entail. 
Rather, the ERO must address ERO disclosure-related Rules in its 
application for certification. If such Rules do not apply to all 
Regional Entities, then each Regional Entity must address its 
disclosure Rules in the delegation agreements. The ERO or the Regional 
Entity should review a request for confidential treatment and make a 
determination if it is reasonable.
    116. Although we agree with Professor Thomas that having procedures 
in place for the Commission to have such information in meaningful 
formats is useful, we will not address this issue in the Final Rule. 
The complexity of this issue and the need for substantive input from 
the ERO, Regional Entities, and the industry on what a meaningful 
format would be and the feasibility and costs of providing information 
in such a format would be more appropriately addressed outside the 
context of this rulemaking.
    117. Several commenters assert that the Commission should provide a 
mechanism for the ERO and Regional Entities to identify all users, 
owners and operators of the Bulk-Power System. The Commission agrees 
and finds that a registration requirement, as suggested by NERC and the 
Ontario IESO, may help identify those entities subject to the 
Commission's reliability jurisdiction and the Reliability Standards and 
rules of the ERO or a Regional Entity. Therefore, the Final Rule 
includes a registration requirement at section 39.2, as follows:

    (c) Each user, owner and operator of the Bulk-Power System 
within the United States (other than Alaska and Hawaii) shall 
register with the Electric Reliability Organization and the Regional 
Entity for each region within which it uses, owns or operates Bulk-
Power System facilities, in such manner as prescribed in the Rules 
of the Electric Reliability Organization and each applicable 
Regional Entity.

If, in the registration process, there remains a question whether a 
specific user or other entity is subject to this rule, it or the ERO 
may request the Commission's guidance on the matter.
    118. Because the Final Rule provides for mandatory funding of the 
ERO and those functions that it may delegate to the Regional Entities, 
there should be no fee for registering with the ERO or a Regional 
Entity. Further, registration does not commit a person to membership. 
Membership issues are discussed further below.
b. International Regulatory Coordination
    119. The statute contemplates that the ERO will be subject to the 
jurisdiction of the United States, Canada, and possibly Mexico. This 
section discusses how the Commission reconciles its exclusive authority 
to regulate the ERO within the United States and the exclusive 
authority of regulators in other countries to regulate the ERO within 
their borders. On August 9, 2005, the Federal-Provincial-Territorial 
Electricity Working Group (FPT Group) in Canada and DOE jointly 
submitted to the Commission ``Principles for an Electric Reliability 
Organization that Can Function on an International Basis'' (bilateral 
principles) based on stakeholder dialogues. The NOPR asked for comment 
on these bilateral principles and whether they should be included in 
the Final Rule. Many of these principles are presented below. Comments 
and Commission conclusions on those topics are treated in the 
appropriate location. Here, we discuss the general comments on the 
principles.

Comments

    120. Many commenters, including MRO and BCTC, state that the 
bilateral principles are essential because they provide a foundation to 
guide the operation of the ERO as an international organization.\19\ 
NERC states that it supports the bilateral principles and will be 
guided by them in developing its rules of procedure and ERO 
application. NERC asserts that the bilateral principles are a sound 
basis on which NERC expects that the appropriate regulatory authorities 
in Canada will extend recognition to the ERO.
---------------------------------------------------------------------------

    \19\ See also Hydro-Qu[eacute]bec, APPA, MRO, ELCON, Detroit 
Edison and Ontario IESO.
---------------------------------------------------------------------------

    121. Several other commenters submit that the Commission's 
oversight of the ERO and Regional Entities should be informed by the 
bilateral principles. CEA sees the Commission working cooperatively 
with Canadian authorities in the establishment of the ERO and Regional 
Entities, the development and approval of Reliability Standards, and 
the operation of the ERO and the Regional Entities. MRO views Canadian 
support as essential. Hydro One urges consistency with applicable 
Canadian and Mexican regulatory principles. While Detroit Edison 
supports the bilateral principles, it submits that they fail to address 
how Reliability Standards will be interpreted by entities on each side 
of the border operating under disparate market rules. Detroit Edison is 
also concerned about whether the ERO, or its designated Cross-Border 
Regional Entity, will have the authority to enforce non-discriminatory 
Reliability Standards on all transmission users within its 
international footprint and define the terms used in those Reliability 
Standards, binding all

[[Page 8673]]

entities within its footprint to those definitions.
    122. Commenters ask the Commission to explain how it intends to 
work with regulators in Canada to provide for effective enforcement 
across boarders given the limits of the respective jurisdictions.\20\ 
Commenters also urge the Commission to explain how cross-border 
compliance and enforcement will work in these situations.
---------------------------------------------------------------------------

    \20\ See, e.g., CEA, Hydro One and Detroit Edison.
---------------------------------------------------------------------------

    123. American Transmission comments that the ERO cannot adjudicate 
differences between regulators with sovereign powers and cannot 
function effectively without the concerted efforts of all relevant 
regulators. Therefore regulators in the U.S. and Canada must develop 
their own coordination process, compatible with the bilateral 
principles, to achieve consensus prior to a remand or proposal to void 
a Reliability Standard and the enforcement appeals process. Further, 
American Transmission states that the specific jurisdiction of each 
regulator should be clear to all; no entity should be exposed to 
jeopardy from multiple jurisdictions for the same violation.
    124. Northern Maine Entities ask how Canadian or Mexican utilities 
will be required to comply with Reliability Standards, the violation of 
which, by virtue of the Commission's approval of those Reliability 
Standards, will constitute a violation of the FPA. Northern Maine 
Entities are concerned that a user, owner or operator of the Bulk-Power 
System within the U.S. portion of a Cross-Border Regional Entity would 
be subject to mandatory compliance, while those in the Canadian or 
Mexican portion might operate under voluntary, unenforceable 
Reliability Standards. In addition, in the interests of consistency and 
fairness, Northern Maine Entities argues that the Commission's Final 
Rule should clarify that no Cross-Border Regional Entity may subject an 
entity within the United States to the jurisdiction of a foreign court.
    125. On November 18, 2005, the Ambassador of Canada, the Honorable 
Frank McKenna, forwarded additional comments from the Canadian FPT 
Group on the international implications of the NOPR and the need for 
United States and Canadian reliability regulators to cooperate. The FPT 
Group reiterates several of the points made by numerous Canadian 
commenters and others that are addressed throughout this Final Rule. 
The FPT Group also emphasizes the need for continued cooperation among 
reliability regulators within the United States and Canada through the 
work of the United States-Canada Bilateral Electric Reliability 
Oversight Group (Bilateral Group) and other means on matters pertaining 
to certification of the ERO, approval of Cross-Border Regional 
Entities, remands of Reliability Standards, enforcement and imposition 
of penalties.

Commission Conclusion

    126. We agree that for the ERO to be effective in maintaining Bulk-
Power System reliability across national borders, it must be able to 
operate in an international arena. As American Transmission suggests, 
regulators in the U.S. and Canada should cooperate to help the ERO 
protect reliability in both countries. To this end, the Commission has 
worked with our partners in Canada to develop the Terms of Reference 
for the Bilateral Group, executed by the Commission, the U.S. 
Department of Energy, and the FPT Group on June 30, 2005 (the Terms of 
Reference).\21\
---------------------------------------------------------------------------

    \21\ Available at http://www.ferc.gov/industries/electric/indus-act/reliability/06-30-05-agreement.pdf_____________________________________-

    127. Pursuant to the Terms of Reference, the Bilateral Group is 
intended to have an ongoing role in identifying issues related to 
international aspects of the reliability framework and identifying 
options for resolution of those issues. The Bilateral Group intends to 
consult on international aspects of reliability policies and 
reliability regulatory issues.
    128. With respect to Northern Maine Entities' concern that entities 
within the United States may be subject to mandatory compliance, 
whereas entities in Canada and Mexico may still operate under voluntary 
standards, Northern Maine's concern is outside our jurisdiction to 
address. EPAct requires the ERO to seek recognition in Canada and 
Mexico and we will work with our counterparts in Canada and Mexico 
regarding cooperative development of mandatory Reliability Standards.
3. Electric Reliability Organization Certification--Section 39.3
    129. Consistent with section 215(c) of the FPA, the NOPR proposed 
that any person may submit an application to the Commission for 
certification as the ERO within sixty (60) days following the issuance 
of the Final Rule. The Commission would then certify one applicant as 
the ERO, if the Commission determines that the applicant meets 
specified criteria set forth in the proposed regulations. An ERO 
applicant must demonstrate that it has the ability to develop and 
enforce Reliability Standards that provide for an adequate level of 
reliability of the Bulk-Power System. An ERO applicant must also 
document that it has established ERO Rules that assure its independence 
of the users, owners and operators of the Bulk-Power System. Such ERO 
Rules must further provide for allocation of reasonable dues, fees and 
charges among end users for all reliability activities, provide for 
fair and impartial procedures for enforcement of Reliability Standards, 
and provide reasonable notice and opportunity for comment, due process, 
openness, and balance of interests in developing Reliability Standards 
and otherwise exercising its duties.
    130. The NOPR interpreted section 215(c) of the FPA to mean that 
the ERO must comply with the certification criteria on an ongoing 
basis, and that a violation of the certification criteria constitutes a 
violation of the FPA.\22\
---------------------------------------------------------------------------

    \22\ NOPR at P 38-39.
---------------------------------------------------------------------------

Comments

    131. NERC and others support the proposed certification 
requirements as faithfully reflecting the requirements set forth in 
section 215 of the FPA. Several commenters address the oversight roles 
of the Commission and the ERO. Some commenters address statutory 
criteria for ERO certification, namely ERO governance. Others raise the 
procedural issue of whether the public would have an opportunity to 
comment on ERO applications. Commenters also address non-statutory ERO 
certification issues such as ERO membership, simultaneous certification 
in Canada and Mexico, and periodic recertification. Many commenters, in 
discussing the ERO certification criteria, note that their concerns 
apply to Regional Entity formation as well.
    132. The Oklahoma Commission states that, while Congress expressed 
clear intent that ``[t]he Commission shall issue a rule to implement 
the requirement of this section not later than 180 days after the date 
of enactment* * *,'' Congress also expressed clear intent that due 
process and other rights be honored. Thus, it asserts that the 
Commission should regard some of the regulations in the Final Rule as 
interim ``place-holders'' and be prepared to add to, or review, the 
regulations after the Commission and the interested parties have an 
opportunity to determine how well they implement the due process 
requirements and other requirements of the statute.

[[Page 8674]]

a. The Oversight Roles of the Commission and the ERO
    133. Many commenters recommend a strong ERO under the general 
oversight of the Commission.\23\ They view the Commission primarily 
relying on the ERO to ensure that each Regional Entity is properly 
performing its responsibilities.
---------------------------------------------------------------------------

    \23\ See, e.g., ELCON and NRECA.
---------------------------------------------------------------------------

    134. Other commenters suggest more of a partnership relationship 
among the ERO, Regional Entities, the federal government and state 
governments. In this vein, for instance, Indianapolis P&L urges the 
Commission to be light-handed in its oversight of the ERO and provide 
it considerable flexibility to carry out its mission. In its view, the 
ERO should be a technically competent, fact-finding organization that 
will have the full confidence of stakeholders and be authoritative in 
and of itself.
    135. Some commenters suggest that the Commission should carefully 
balance the need for a strong ERO with regional and state needs in the 
transition to enforceable Reliability Standards. EEI sees the need for 
a strong international ERO coupled with a significant role for Regional 
Entities. EEI supports the initial steps that NERC has taken to 
implement the changes necessary for certification as the ERO. In its 
view, timely recognition of NERC as the ERO and approval of initially 
proposed ERO Reliability Standards, on an interim basis if necessary, 
are critical steps in maintaining the reliability of the nation's Bulk-
Power System.
i. Building on the Existing Reliability Framework
    136. Some commenters suggest building upon the NERC/regional 
reliability council framework. Empire District Electric asserts that it 
is essential for the Commission to promulgate a comprehensive, well-
thought-out transition and implementation plan for the business 
processes, requirements, and accountabilities of NERC, the ERO, the 
existing regional reliability councils, the existing Regional 
Transmission Organizations (RTOs), and North American Energy Standards 
Board (NAESB). The Commission should allow sufficient time for the 
transition from NERC to the ERO, transition of regional reliability 
councils to Regional Entities, and Regional Entity coordination with 
existing security coordinators. NARUC suggests that the Commission 
should build on and transition from the current reliability 
organizations to preserve efficiencies and reliability. Starting over 
would be non-productive, economically wasteful and, most importantly, 
would put system reliability at risk.
    137. AEP maintains that timely recognition of NERC as the ERO, and 
the proposed ERO Reliability Standards with whatever modifications are 
required by the Commission, is a critical step in ensuring the 
reliability of the nation's Bulk-Power System. NPCC asserts that the 
statute recognizes that there will be a partnership between the federal 
government, the ERO, the Regional Entities, and the states in the 
development of continent-wide Reliability Standards and Reliability 
Standards to be effective only within a region. EEI submits that 
understanding and recognition of the critical reliability functions 
carried out at the regional level, and a smooth transition to the new 
statutory scheme whereby Regional Entities can propose regional 
Reliability Standards and carry out enforcement duties delegated to 
them by the ERO, are critical to ensuring reliability.
ii. Concerns About an Excessively Rigid Hierarchal Reliability 
Framework
    138. Some commenters express concern about a new reliability 
bureaucracy. Alcoa, for instance, is concerned that the creation of a 
new bureaucracy has the potential to duplicate reliability costs and 
expenses already incurred by public utilities and consumers. PacifiCorp 
is concerned that the Final Rule could establish an excessively 
hierarchical and rigid ERO-Regional Entity framework that could 
needlessly complicate effective Reliability Standards development and 
compliance in Interconnection-wide regions. Similarly, NiSource asserts 
that, without some procedural clarification, the NOPR's multilayered 
and overlapping responsibilities of the ERO, Regional Entities and the 
Commission may lead to a cumbersome and overly complex process with 
overlapping or conflicting authority or duplicative efforts that cause 
confusion.
    139. ELCON urges that the Final Rule preserve the intent of the law 
to eliminate the fragmented lines of authority that currently exist 
between NERC, regional reliability councils, RTOs and transmission 
owners. It further states that the Commission should resist any efforts 
to preserve outmoded, existing industry governance structures, 
relationships, and habits that prevent a world-class organization from 
emerging from the ERO certification process. NASUCA asks the Commission 
not to overlook the fact that the cost of the ERO, Regional Entities 
and Reliability Standards will ultimately be borne by consumers.

Commission Conclusion

    140. The Commission finds that a strong ERO is critical to 
maintaining Bulk-Power System reliability. The ERO generally should be 
the point of contact between the Commission and the Regional Entities 
in carrying out reliability responsibilities pursuant to this Final 
Rule. Although we disagree with Indianapolis P&L that the Commission 
should necessarily be light-handed in its oversight of the ERO, we do 
recognize the need to be flexible in carrying out our regulatory 
oversight responsibilities.
    141. In this Final Rule, the Commission gives the ERO guidance as 
to the content of its application and certain functions it must 
undertake, including its relationships with the Regional Entities. In 
certain areas, the Commission asks that the ERO applicant provide more 
detail regarding how it intends to perform its functions within the 
parameters set out in section 215 of the FPA and by the Commission.
    142. The Commission understands the need for an orderly transition 
from the current approach of voluntary reliability standards under NERC 
and the regional reliability councils to the mandatory regime under the 
Commission's ultimate oversight through the ERO and Regional Entities. 
The Commission intends to provide industry participants adequate time 
to transition from the current system of voluntary reliability 
standards to mandatory Reliability Standards under the ERO. The 
Commission's process of certifying the ERO and approving Regional 
Entities and their delegation agreements and Reliability Standards will 
provide for public notice and comment to allow industry participants to 
weigh in on any potentially disruptive changes. If transition issues 
become a problem in the future, the Commission will address them at 
that time.
    143. Several commenters express support for NERC as the ERO. The 
Commission will, however, not prejudge whether any specific entity 
should be certified as the ERO.
    144. We agree with the Oklahoma Commission that the Commission may, 
at any time it sees a need, augment or modify its regulations. It may 
propose to do so in another NOPR or issue supplemental orders to 
provide interpretation or guidance on compliance or other matters. 
However, we regard the provisions of this Final Rule as more than a 
``place-holder.'' The regulations contained in this Final Rule are not 
intended as a halfway step, but

[[Page 8675]]

as the permanent regulations concerning section 215 of the FPA, unless 
and until we determine that revision is required.
b. Statutory Certification Criteria
    145. Section 215(c) of the FPA lays out certain statutory criteria 
that any ERO applicant must meet before being certified by the 
Commission. The Commission included these statutory criteria in the 
proposed regulations on certification. The comments on this section 
primarily address the issue of governance.
i. Governance
    146. The NOPR proposed that an ERO candidate must demonstrate in a 
certification application that it has established Rules that assure its 
independence from the users, owners and operators of the Bulk-Power 
System, while assuring fair stakeholder representation in the selection 
of its directors and balanced decisionmaking in any ERO committee or 
subcommittee.\24\ The NOPR asked for comment on whether the ERO 
certification criteria should specify that the number of board members 
representing each participating country in the ERO must be in rough 
proportion to total load and whether there should be an opportunity for 
each country to have an equitable number of members on an ERO committee 
based on total load.\25\
---------------------------------------------------------------------------

    \24\ NOPR at P 40.
    \25\ Id. at P 57.
---------------------------------------------------------------------------

Comments
    147. Many commenters express concern and offer suggestions 
regarding the proper means to assure ERO independence and more balanced 
decisionmaking in terms of opportunities to be represented and more 
inclusive participation.\26\ The California ISO maintains that 
independence from market participants and owners, users and operators 
of the Bulk-Power System should extend from the board level down to the 
staff level. NASUCA urges that, where a Regional Entity uses a 
stakeholder board, the concept of a balanced board cannot be 
accomplished without opportunity for adequate consumer representation. 
PG&E requests clarification as to how the ERO should achieve both fair 
stakeholder representation and the necessary expertise while 
maintaining its independence.
---------------------------------------------------------------------------

    \26\ See, e.g. NASUCA, SMA, EPSA and PG&E.
---------------------------------------------------------------------------

    148. With regard to balanced decisionmaking, many commenters 
express concern that the ERO provide for openness and inclusiveness, 
particularly with regard to representation on any stakeholders 
committee.\27\ Some commenters, such as TAPS, specifically ask that the 
Final Rule provide guidance on the NOPR's requirement for balanced 
decisionmaking in any ERO committee or subordinate organizational 
structure. The California ISO states the stakeholder representation 
must be balanced on both an industry sector and geographic basis and 
that all distinct industry segments, including ISOs and RTOs, should 
have fair representation. NASUCA maintains that consumers should be 
fully represented on the stakeholders committee that advises the board 
and, where a Regional Entity establishes a stakeholder board, consumers 
must have direct representation on that board. Siemens states that 
equipment suppliers should also be allowed to participate and offer 
their expertise.
---------------------------------------------------------------------------

    \27\ See, e.g., NRECA, SMA and California ISO.
---------------------------------------------------------------------------

    149. Commenters discuss the need for Rules on fair voting. For 
example, ELCON suggests that a stakeholders committee should directly 
elect the members of the board, vote on bylaws and amendments to the 
bylaws, and vote on other governance issues. Others suggest that no two 
stakeholder sectors should be able to control the vote on any matter, 
no single sector should be able to defeat a matter, and no entity 
should be eligible to be a member of more than one sector in the board 
selection process and the Reliability Standard development process, or 
in any committee, subcommittee or other subordinate organizational 
structure.\28\
---------------------------------------------------------------------------

    \28\ See, e.g., NASUCA and TAPS.
---------------------------------------------------------------------------

    150. Most commenters favor country representation requirements for 
the ERO board. Some comment that the ERO certification criteria should 
specify that the number of board members and committee members in the 
ERO and the Cross-Border Regional Entities should be in proportion to 
load of each participating country.\29\ International Transmission 
states that Canadian board representation is important because of the 
interconnected nature of the Bulk-Power System and the need to minimize 
the likelihood that a Canadian regulatory body would find it necessary 
to remand a Commission-approved Reliability Standard to the ERO. The 
ERO must be seen as a forum for the expression of views and resolution 
of issues raised by Canadian users, owners and operators. APPA does not 
believe that the Final Rule should specify in detail the representation 
of each country on the ERO's board and committees but, rather, 
generally require that the ERO have appropriate international 
representation and allow the ERO to work out the details.
---------------------------------------------------------------------------

    \29\ See, e.g., Alberta, NERC and the New York Companies.
---------------------------------------------------------------------------

    151. Commenters, however, do not consistently favor mandatory 
country representation for ERO committees. For example, ERCOT states 
that, while the ERO board and standing committee levels should have 
appropriate country representation, such representation on ERO 
subcommittees should be optional, depending upon the nature of the 
issues that are addressed. BCTC suggests that national representation 
should be required on ERO subcommittees, but only to the extent that 
eligible candidates are put forward. Santee Cooper suggests that the 
emphasis should be more on the technical expertise of those who would 
populate the ERO's committees and other subordinate groups. Hydro-One 
advocates that there be periodic rotation of the Chair/Vice-Chair among 
each participating nation with maximum terms. Southern submits that a 
country representation requirement could prove problematic in practice 
and difficult to implement and manage in every ERO working group. In 
this regard, ELCON notes the recent experience of NERC and NAESB with 
under-populated segments.

Commission Conclusion

    152. The Commission recognizes that there are many ways that an ERO 
could provide balanced governance and decisionmaking. The Commission 
will not mandate a specific approach to ERO governance but, rather, 
will allow an ERO candidate to develop a proposal to be provided in its 
application for certification. Consistent with the Final Rule, an ERO 
applicant's proposal must include ERO Rules that assure the ERO's 
independence from the users, owners and operators of the Bulk-Power 
System, while assuring stakeholder representation in the selection of 
its directors and balanced decisionmaking in any ERO committee or 
subordinate organizational structure.
    153. Appropriate ERO Rules should include provisions specifying 
that, on a committee or other subordinate organizational structure, no 
two stakeholder sectors should be able to control the vote on any 
matter, no single sector should be able to defeat a matter, and no 
entity should be eligible to be a member of more than one sector in the 
board selection process,\30\ unless the

[[Page 8676]]

ERO adequately explains why it cannot apply these principles.
---------------------------------------------------------------------------

    \30\ Cf., Regional Transmission Organizations, Order No. 2000, 
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ] 
31,089 at 31,226, 31,074 (1999), order on reh'g, Order No. 2000-A, 
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ] 
31,092 (2000), affirmed sub nom. Public Utility District No. 1 of 
Snohomish County, Washington v. FERC, 272 F.3d 607 (DC Cir. 2001). 
(``Where there is a governing board with classes of market 
participants, we would expect that no one class would be allowed to 
veto a decision reached by the rest of the board and that no two 
classes could force through a decision that is opposed by the rest 
of the board'').
---------------------------------------------------------------------------

    154. On the matter of country representation requirements, for the 
reasons discussed below, the Commission finds generally that it would 
be appropriate for country representation on the ERO board to be in 
rough proportion to the net energy for load of each participating 
country. We encourage ERO applicants to consider such a country 
representation requirement and explain any departure from this 
principle. We clarify that we are using the term ``country'' 
representation rather than ``national'' representation because we are 
not referring to representation by government officials but by persons 
associated with each participating country. Appropriate country 
representation on the board would assure that the ERO is truly 
international in addressing Bulk-Power System reliability. This is 
important given the interconnected nature of the Bulk-Power System. 
Further, appropriate country representation would assure that the ERO 
is aware of and considers the concerns of parties in each country 
participating in the ERO when addressing reliability matters.
    155. With regard to ERO committees and subcommittees or other 
subordinate organizational structures, we encourage the ERO to allow 
equal opportunity for participation from each country to be on such 
committees. However, we decline to require that every committee have 
exact proportional representation. As noted by some commenters, 
technical expertise and other factors may be equally important in 
selecting committee members from a pool of volunteer candidates. For 
similar reasons, the Commission declines to require the ERO to adopt 
specific Rules for the selection of the committee Chair and Vice-Chair. 
That is a matter for those forming a proposed ERO to address in 
developing proposed ERO Rules.
ii. Other Statutory Criteria
    156. The NOPR's proposal on certification requirement also 
specified other statutory criteria for ERO certification, such as a 
requirement that the ERO applicant must demonstrate that it has the 
ability to develop and enforce Reliability Standards that provide for 
an adequate level Bulk-Power System reliability. It also proposed that 
ERO Rules must allocate equitably reasonable dues, fees and charges 
among end users for all activities under this new reliability 
regulation. It further provided that ERO Rules are to be fair and 
impartial procedures for enforcement of Reliability Standards through 
the imposition of penalties, including limitations on activities, 
functions or operations, or other appropriate sanctions. In addition, 
it provided that such ERO Rules are to provide for reasonable notice 
and opportunity for public comment, due process, openness, and balance.
    157. No comments were filed on the proposed text of these 
regulations. The Commission adopts the regulation text of the NOPR. 
However, further comments on the substance of these requirements are 
discussed below as follows: comments on dues, fees and charges of the 
ERO are discussed in section IV.B.4 of the Preamble, comments on the 
development of Reliability Standards are discussed in section IV.B.5 of 
the Preamble, and comments on the enforcement of Reliability Standards 
are discussed in section IV.B.7.
c. Opportunity for Public Comment
    158. NiSource is concerned that there is no express provision in 
the proposed regulations to allow for public comment once an ERO 
candidate submits a certification application. They contend that the 
overall process would benefit if the Commission provided an opportunity 
to comment on whether the ERO applicants meet the certification 
criteria. Likewise, PG&E states that, although the selection of the ERO 
or a Regional Entity will affect users, owners and operators of the 
Bulk-Power System, neither the proposed section on certification nor 
the proposed section on delegation expressly allows for public comment.

Commission Conclusion

    159. The Commission will provide notice and an opportunity for 
public comment when selecting the ERO or approving a Regional Entity 
delegation agreement and has written the Final Rule accordingly. This 
will allow interested persons an opportunity to voice their concerns 
and will assist the Commission in making an informed decision with 
respect to ERO certification and the delegation of ERO responsibilities 
to a Regional Entity. Accordingly, the Final Rule modifies the proposed 
regulations to provide for notice and an opportunity for comment 
selecting the ERO or approving a Regional Entity delegation agreement.
d. Non-statutory Criteria
    160. Some commenters recommend the inclusion of other certification 
criteria, in addition to those set forth in the NOPR. The bulk of the 
commenters asking that the Commission address non-statutory criteria 
request that the Commission address the issue of membership.
i. Membership
    161. The statute neither requires nor prohibits an ERO structure 
that allows persons to have membership in the ERO. Nor did the NOPR 
discuss whether the ERO should allow membership. Further, the NOPR 
asked for comment on whether membership in the ERO or a Regional Entity 
should be a condition for participation in either the ERO's Reliability 
Standard development process or that of a Regional Entity.\31\ Numerous 
commenters discuss their concerns regarding the responsibilities and 
rights of any members, the openness of membership, and the level of 
membership fees.
---------------------------------------------------------------------------

    \31\ NOPR at P 56.
---------------------------------------------------------------------------

(a) Open Membership
    162. A few commenters, such as EPSA, urge the Commission to 
establish membership principles or require that the ERO be ANSI 
accredited. Numerous commenters insist that, if the ERO has members, 
that membership policies should allow for open membership so that 
limited membership does not become a barrier to participation in the 
ERO.\32\ NRECA, for instance, notes that, early on, it had joined the 
broad coalition of industry participants to support EPAct based on an 
agreement that mandatory Reliability Standards should be drafted and 
enforced by a self-regulatory industry organization that would have 
access to the engineering expertise of all the stakeholders. ELCON 
asserts that the ERO should have an open door policy and, if a 
membership requirement is allowed, anyone wishing to be a member of the 
ERO should be allowed to become a member without any explicit or 
implied barriers to membership. NASUCA submits that consumer 
representatives should be entitled to full membership and voting 
rights. Ameren suggests that members should not be subject to any 
obligations

[[Page 8677]]

that place burdens on members' resources, such as mandatory 
participation in reliability audits.
---------------------------------------------------------------------------

    \32\ See, e.g., ELCON, EPSA, NASUCA and NRECA.
---------------------------------------------------------------------------

    163. APPA states that membership rights should be limited to 
participation in the development of internal ERO Rules and voting to 
select or approve slates of nominees to the ERO board.\33\
---------------------------------------------------------------------------

    \33\ See also EPSA and MRO.
---------------------------------------------------------------------------

    164. Most commenters made similar comments regarding the openness 
of Regional Entity membership. FRCC, however, asserts that, because 
Commission jurisdiction over Regional Entities is limited to their 
delegated authorities and functions, membership or other participation 
policies of Regional Entities are not related to delegated authorities 
and, thus, not subject to Commission jurisdiction.
(b) Membership Fees
    165. Many commenters either oppose membership fees or recommend 
limiting them to nominal amounts, should the ERO allow membership. For 
example, EPSA contends that membership fees for joining or leaving a 
Regional Entity must not become a barrier to entry or exit. APPA 
contends that membership fees tend to discourage broad participation by 
Bulk-Power System users, especially the smaller entities, while 
generally raising minimal amounts of revenue and suggests that annual 
fees should be no more than $1,000 per year per organization. ELCON 
contends that charging end users additional fees or dues as a condition 
to membership in the ERO is discriminatory and contrary to the 
statutory mandate of equitable allocation of reasonable dues, fees and 
charges. It suggests that the Final Rule provide that fees must be non-
discriminatory and not duplicate charges that end users are already 
assessed. Similarly, NASUCA advocates that consumers should not have to 
pay for the ERO twice--through rates and then again through membership 
fees or dues.
(c) Membership as a Requirement To Participate in the Reliability 
Standard Development Process
    166. Many commenters recommend that, assuming the ERO establishes a 
structure that allows for membership, membership should not be a 
requirement to participate in the Reliability Standard development 
process.\34\ For example, National Grid comments that membership must 
be open to satisfy the statutory requirement that the Reliability 
Standard development process allow for ``public comment, due process, 
openness and balance of interests.''
---------------------------------------------------------------------------

    \34\ See, e.g., NRECA, NERC, NE Pool Participants, Progress 
Energy, AEP, EEI, South Carolina E&G, SERC, TVA, Ontario IESO and 
Hydro-Qu[eacute]bec.
---------------------------------------------------------------------------

    167. Alcoa suggests that any entity that believes that its 
interests would be affected by a Reliability Standard should be allowed 
to participate. Several commenters assert that a membership requirement 
would be inconsistent with ANSI accreditation of the process.\35\ PSEG 
Companies notes that ANSI processes have long been recognized as best 
for meeting the requirements of OMB Circular A-119, which sets forth 
the requirements for federal agencies to utilize consensus standards 
developed by industry stakeholders. The North Carolina Commission 
points out that, as a state commission, it could not become an ERO 
member.
---------------------------------------------------------------------------

    \35\ See, e.g., AEP, NRECA and South Carolina E&G.
---------------------------------------------------------------------------

    168. In contrast, Ameren and International Transmission comment 
that membership in the ERO should be a requirement of participation in 
the Reliability Standard development process. International 
Transmission suggests that the membership requirement should be coupled 
with fair and equitable membership Rules so that all entities should 
have an equitable influence on the Reliability Standard development 
process. New York Companies assert that ERO members should be the 
primary participants in developing a Reliability Standard, but that the 
process should be transparent so that all interested parties are aware 
of the proposed Reliability Standard under development, either directly 
or through a Regional Advisory Body.
    169. Other commenters suggest that, while membership in the ERO 
should not be a condition for participation in Reliability Standard 
development, registered membership should be a necessary condition for 
the right to vote on a proposed Reliability Standard.\36\ SMUD adds 
that members would benefit from advice offered by non-members 
participating in Reliability Standard development. SoCalEd states that 
only those entities directly and materially affected by the reliability 
of the Bulk-Power System should be allowed to vote on a Reliability 
Standard. Those who are not affected by a Reliability Standard should 
not be able to jeopardize the reliability of the system.
---------------------------------------------------------------------------

    \36\ See, e.g., EEI, SMUD, American Transmission, Kansas City 
P&L, Southern and Xcel Energy.
---------------------------------------------------------------------------

Commission Conclusion

    170. The Commission will neither require nor preclude a particular 
membership structure. Rather, the ERO applicant should determine 
whether membership is useful and appropriate in fulfilling its roles 
under EPAct and, if so, should submit any ERO Rules on membership to 
the Commission as part of its ERO application. If the ERO decides to 
create a membership structure, membership must be open to allow full 
and fair participation of all interested stakeholders through their 
representatives. Open membership is consistent with the statutory 
requirement that the ERO establish Rules that assure fair stakeholder 
representation in the selection of board members and balanced 
decisionmaking in any ERO committee or subordinate organizational 
structure.\37\
---------------------------------------------------------------------------

    \37\ See section 215(c)(2)(C) of the FPA.
---------------------------------------------------------------------------

    171. Moreover, we conclude that, if the ERO decides to establish a 
membership structure, the ERO may charge only a nominal fee as a 
condition of membership. First, the Commission is not persuaded that 
membership fees, nominal or otherwise, are necessary given that the 
Final Rule provides for mandatory funding of the ERO and those 
functions that it may delegate to a Regional Entity. Also, we share the 
concern of commenters that a membership fee should not become a 
limitation on participation in the ERO or a Regional Entity. To ensure 
that all interested stakeholders have an opportunity to participate, if 
the ERO chooses to charge a nominal membership fee, the ERO should have 
a Rule providing that it may waive the fee for good cause shown.
    172. With regard to Reliability Standard development, we agree with 
the majority of commenters that principles of due process and openness, 
as set forth in section 215(c)(2)(D) of the FPA, dictate that 
membership must not be a condition for participating in Reliability 
Standard development, or for voting on the approval of a Reliability 
Standard. Section 215(c)(2)(D) requires that the ERO have Rules that 
provide for public comment and a balance of interests in developing a 
Reliability Standard, and membership should not thwart this 
requirement. Moreover, like SMUD, we believe that involving a wide 
range of viewpoints from interested parties benefits the Reliability 
Standard development process.
    173. Finally, we find that the above discussion on ERO membership 
applies equally to membership in a Regional Entity. Each Regional 
Entity may determine whether membership is useful and appropriate in 
fulfilling its roles under EPAct and create Regional Entity Rules on 
membership. We reject

[[Page 8678]]

FRCC's argument that, because Commission jurisdiction over a Regional 
Entity is limited to its delegated authorities, membership policies of 
a Regional Entity are not subject to Commission jurisdiction. As 
discussed above, membership provisions can affect whether a Regional 
Entity meets statutory criteria, including openness, due process, 
balanced decisionmaking and equitable allocation of reasonable dues and 
fees. The Commission intends to review a proposed Regional Entity Rule 
on membership and determine whether it is consistent with statutory 
criteria, including those described above.
ii. Additional Non-Statutory Criteria
    174. A number of commenters express concern regarding the technical 
and financial expertise of the ERO. For example, PG&E suggests that the 
Commission's regulations should ensure that the ERO will be 
knowledgeable to further ensure impartial and even-handed application 
of the Reliability Standards. To function effectively, the ERO must 
have a thorough understanding of the technical aspects of the industry, 
its financial requirements, and its applicable legal regulations, as 
well as of specific regional concerns. NiSource asks the Commission to 
clarify how it will assess an ERO or Regional Entity applicant's 
technical expertise when determining whether it has the ability to 
develop and enforce a Reliability Standard.

Commission Conclusion

    175. It is critical that the ERO and each Regional Entity have 
adequate technical expertise. Pursuant to section 215(c)(1) of the FPA, 
an ERO applicant or a Regional Entity candidate must demonstrate in its 
application or request for approval of its delegation agreement that it 
has the ability to develop and enforce Reliability Standards for the 
Bulk-Power System. Accordingly, an ERO applicant or Regional Entity 
candidate must present evidence that it has, or has demonstrated access 
to, the necessary high level of technical expertise needed for carrying 
out these two functions. The applicant or candidate must present 
documented evidence that it has on staff, or has demonstrated 
experience in acquiring on a volunteer or other basis, the numbers of 
persons with the level of technical experience necessary to carry out 
the responsibilities of the ERO or a Regional Entity. The applicant or 
candidate must explain how it proposes to ensure appropriate kinds of 
technical, financial, and other expertise in the selection of board 
members, the recruitment of its staff, and the staffing of its 
committees and subordinate organizational structures. The ERO applicant 
must explain the extent to which it proposes to rely on the 
establishment of, and delegation to, Regional Entities to provide the 
numbers and levels of technical experts for carrying out its 
responsibilities.
    176. Regarding the development of Reliability Standards, the ERO 
applicant or Regional Entity candidate must explain how it proposes to 
ensure the participation of technical experts in the initial 
development of a draft Reliability Standard for ERO stakeholder 
consideration. It must explain how the technical merit of a proposed 
Reliability Standard would be maintained in any balloting or board 
process for approval of a draft Reliability Standard for proposal to 
the Commission.
    177. Especially important is that the applicant or candidate must 
demonstrate that it has, or has the demonstrated ability to acquire or 
assemble, the technical expertise necessary for the enforcement of all 
Reliability Standards. Specifically, it must show that it has, or has 
experience with acquiring on a volunteer or other basis, the number of 
persons with the level of technical experience necessary to audit the 
users, owners and operators of the Bulk-Power System for compliance 
with the Reliability Standards, to investigate questions or allegations 
of noncompliance, and to determine the appropriate remedy or penalty. 
The applicant or candidate must explain how it proposes to divide these 
various areas of responsibility among its board and committee members, 
its permanent staff, its organizational members if any, industry 
volunteers, and any consultants or subcontractors.
    178. Further, an ERO applicant that satisfies the requirements for 
independent governance, balanced decisionmaking, and appropriate ERO 
Rules should be impartial and even-handed in the application of 
Reliability Standards. Accordingly, we find that there is no need to 
create additional certification criteria as suggested by PG&E. 
Similarly, NiSource and others may address the technical qualifications 
of any ERO applicant and the factors by which to consider such 
qualifications, when an ERO application is filed.
e. Simultaneous Certification in Canada and Mexico
    179. The NOPR proposed that ERO Rules must specify the appropriate 
steps, after certification by the Commission as the ERO, to gain 
recognition in Canada and Mexico. The NOPR states that the ERO can 
operate effectively only if it meets the requirements of all relevant 
regulatory authorities.\38\
---------------------------------------------------------------------------

    \38\ NOPR at P 41.
---------------------------------------------------------------------------

Comments

    180. Numerous commenters agree that the ERO must take steps to be 
recognized in Canada and Mexico. Some recommend that the Commission 
permit an ERO candidate to seek approval in Canada concurrent with 
approval in the United States. International Transmission suggests that 
recognition in Canada and Mexico should be a high priority of the ERO, 
once it is certified by the Commission. Detroit Edison comments that 
energy market disparities and related reliability concerns cannot be 
adequately addressed between the United States and Canada unless the 
ERO or its designated Cross-Border Regional Entity is required to have 
legal standing in Canada as the sole entity responsible for developing 
and enforcing Reliability Standards affecting reliability within its 
footprint.
    181. Alberta submits that the establishment of an international ERO 
requires that an ERO applicant take appropriate steps to gain 
recognition in the relevant jurisdiction at the same time. APPA 
advocates that, although the statute requires the ERO to take steps to 
gain recognition in Canada and Mexico after it is certified by the 
Commission, the Commission should, nevertheless, allow an ERO applicant 
or a proposed Regional Entity to seek approval in Canada and Mexico at 
the same time it seeks certification from the Commission. Others, such 
as CEA and BCTC, state that the Commission should encourage an ERO 
applicant to work with Canadian authorities in advance of its 
application for Commission certification. They believe that, consistent 
with the bilateral principles, advance discussions would ensure that 
the ERO applicant's governance structure reflects Canadian concerns and 
identify potential areas of disagreement.

Commission Conclusion

    182. Section 215 of the FPA and our proposed rule require ERO 
candidates to propose ``appropriate steps'' to gain recognition in 
Canada and Mexico after certification by the Commission. The Commission 
does not view this requirement as precluding ERO candidates from 
seeking simultaneous certification in the United States, Canada and 
Mexico. Therefore, an ERO candidate may, and is encouraged to, seek 
recognition in Canada and, if

[[Page 8679]]

appropriate, in Mexico, while pursuing Commission certification. Each 
ERO applicant or the certified ERO should keep the Commission informed 
about the status of its efforts to gain recognition in Canada or 
Mexico.
f. Periodic Performance Assessments
    183. The certification regulations proposed in the NOPR would 
require the approved ERO to periodically submit an application to be 
recertified as the ERO.\39\ The NOPR interpreted section 215 of the FPA 
as requiring the ERO to comply with the certification criteria on an 
ongoing basis, and that a violation of a certification criterion 
constitutes a violation of the FPA. The NOPR asked for comment 
regarding the appropriate cycle for periodic recertification and how 
far in advance the ERO should submit its application for 
recertification before its current certification period expires.
---------------------------------------------------------------------------

    \39\ Id. at P 42.
---------------------------------------------------------------------------

Comments

    184. Virtually all commenters that discuss this issue support the 
notion that the ERO and each Regional Entity must meet the statutory 
criteria on an ongoing basis. APPA asserts that periodic 
recertification may keep the ERO diligent in carrying out its duties, 
if the process is not too frequent or elaborate. PG&E agrees that 
periodic recertification is important to ensure that the ERO is 
properly performing its duties, but is concerned that the process not 
dominate the ERO's time. However, most commenters question the need for 
a periodic recertification process in addition to the various other 
accountability processes proposed in the NOPR.\40\ Some note that there 
is no specific statutory requirement for periodic recertification.\41\ 
Others submit that any periodic recertification process could become a 
distraction and lead to inefficiency within the ERO and Regional 
Entities, especially during the early years as these organizations 
grapple with a multitude of start-up matters.\42\ Further, some assert 
that periodic recertification could cause uncertainty among the owners, 
users and operators of the Bulk-Power System when it appears that an 
existing reliability organization may be close to losing its 
certification.\43\ NERC submits that certification should not 
automatically lapse at the end of a periodic recertification cycle, 
rather certification should remain in place until the Commission makes 
a recertification decision. MRO and NERC comment that the Commission 
should coordinate recertification proceedings with Canadian regulators 
or seek their concurrence. Others, including APPA and ELCON, suggest 
that the Commission defer the decision on whether to require periodic 
recertification until a later stage after it acts on applications for 
ERO certification.
---------------------------------------------------------------------------

    \40\ E.g., Kansas City P&L, MidAmerican, FirstEnergy and MRO.
    \41\ See, e.g., NRECA, MRO, Southern, SERC and FirstEnergy.
    \42\ See, e.g., National Grid, AEP, Southern, SERC, and MRO.
    \43\ See, e.g., APPA and LG&E Energy.
---------------------------------------------------------------------------

    185. With regard to the timing of recertification, although 
NiSource suggests a recertification cycle once every three years, most 
commenters believe a longer cycle of five or six years would provide 
needed stability.\44\ Commenters suggest a range from 180 days to two 
years for the submission of a recertification application.
---------------------------------------------------------------------------

    \44\ See, e.g., Alcoa, the New York Companies, South Carolina 
E&G, NERC and TAPS.
---------------------------------------------------------------------------

Commission Conclusion

    186. The Final Rule does not adopt the periodic recertification 
process as proposed in the NOPR. Instead, we are mandating a regular 
performance assessment that requires the ERO to affirmatively 
demonstrate to the Commission that it satisfies the statutory and 
regulatory criteria for an ERO and is not only maintaining but 
improving the quality of its activities and those of the Regional 
Entities to which it has delegated such activities.\45\ Although the 
ERO must be accountable to the public, stakeholders, and the Commission 
for good performance, we agree with commenters that a periodic 
recertification process would tax the resources of the ERO and take the 
focus away from its primary function of ensuring the reliability of the 
Bulk-Power System. We believe that the performance assessment process 
that we are adopting will enhance the Commission's oversight of the ERO 
without the perceived destabilization of a periodic recertification 
requirement that implies the ERO may cease to exist unless it succeeds 
in a de novo certification application.
---------------------------------------------------------------------------

    \45\ Accordingly, we are striking proposed 18 CFR 38.3(c) and 
38.7(f) which read, respectively:
    (c) The approved ERO is required to periodically submit an 
application to be recertified as the ERO, in accordance with any 
requirements the Commission issues in this regard.
    (f) An approved Regional Entity shall be required to 
periodically submit an application to be re-approved as a regional 
Entity, in accordance with any requirements the Commission issues in 
this regard.
---------------------------------------------------------------------------

    187. Pursuant to this new process at new section 39.3(c) of our 
regulations, the initial performance assessment will be required three 
years after ERO certification, and then every five years thereafter. 
New section 39.3(c) requires the ERO to affirmatively demonstrate that 
it satisfies on an ongoing basis the statutory criteria to qualify as 
an ERO. The Commission will review the periodic performance assessment 
and may require follow-up actions by the ERO to comply or improve 
compliance with the statutory and regulatory qualifications for the 
ERO, if the Commission determines that the ERO has not satisfied 
specific criteria. Moreover, the Commission views the performance 
assessment as an opportunity not only to demonstrate that the ERO has 
maintained, but also is improving, the quality of its activities and 
those of the Regional Entities to which the ERO has delegated such 
activities. The Commission expects the performance assessment to 
include regular and systematic measurement and reporting of the ERO's 
performance.
    188. The ERO shall submit an assessment of its performance, after 
which the Commission will establish a proceeding with opportunity for 
public comment in which it will review the performance of the ERO. The 
ERO's assessment shall include: (1) An explanation of how it continues 
to satisfy the certification requirements; (2) recommendations by 
Regional Entities and other entities for improvement of the ERO's 
operations, activities, oversight and procedures, and the ERO's 
response; and (3) the ERO's evaluation of the effectiveness of each 
Regional Entity, recommendations for improvement of the Regional 
Entity's performance of delegated functions, and the Regional Entity's 
response to such evaluation and recommendations.
    189. Regarding the first assessment item, the ERO should address 
its ability to develop and enforce Reliability Standards providing for 
an adequate level of reliability of the Bulk-Power System. The ERO 
should explain how effectively it enforced Reliability Standards, 
providing statistical information on its investigations, findings and 
assessments of penalties, on a regional and continent-wide basis. The 
ERO should also explain how it provided for fair and impartial 
procedures for enforcement of Reliability Standards and provided for 
openness, due process and balance of interests in developing 
Reliability Standards. The ERO should also address these matters as 
they pertain to the Regional Entities.
    190. The burden will be on the ERO to conduct this assessment and 
affirmatively demonstrate that it satisfies the statutory criteria for 
the

[[Page 8680]]

ERO and the quality of its activities. As part of this process, the ERO 
must entertain, consider and respond to outside recommendations for 
improvement from the Regional Entities and the owners, users and 
operators of the Bulk-Power System. The ERO must also evaluate the 
effectiveness of the Regional Entities to which it has delegated some 
of its functions and suggest how the Regional Entities might improve 
their performance.\46\
---------------------------------------------------------------------------

    \46\ See 18 CFR 39.8, discussed infra.
---------------------------------------------------------------------------

    191. As a result of its review of the performance assessment and 
public comments, the Commission will issue an order finding that the 
ERO meets the statutory and regulatory criteria or directing the ERO to 
comply with or improve compliance with the statutory and regulatory 
criteria for an ERO. Subsequently, if the ERO fails to comply 
adequately with the Commission order, the Commission may institute a 
proceeding to enforce its order as discussed below under Enforcement of 
Commission Rules and Orders, including, if necessary and appropriate, a 
proceeding to consider decertification of the ERO.
4. Funding of the Electric Reliability Organization--Section 39.4
    192. In the NOPR, the Commission recognized that certainty 
regarding the funding of the ERO is essential for the stability and 
ultimate success of the organization, and accordingly, proposed a 
section of regulation text that provides requirements for funding and 
budget oversight of the ERO.\47\ For discussion purposes in the Final 
Rule, we have grouped the funding related comments into several 
categories: Budget and business plan, funding for statutory activities, 
role of the ERO in funding Regional Entities, funding consistency with 
the bilateral principles, payment of dues and funding transition plan, 
billing mechanics, and other funding matters.
---------------------------------------------------------------------------

    \47\ NOPR at P 99.
---------------------------------------------------------------------------

a. Budget and Business Plan
    193. Subsections (a) and (b) of the proposed regulation on funding 
were intended to make the ERO accountable to the Commission for its 
budget for activities within the United States. They provided that the 
ERO must file a proposed annual budget and proposed annual funding 
request 130 days in advance of the beginning of each fiscal year. The 
Commission, after public notice and opportunity for comment, would 
issue an order accepting, rejecting, remanding or modifying the 
proposed ERO budget and business plan no later than sixty days before 
the beginning of the ERO's fiscal year.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

Comments
    194. Most commenters agree that the Commission should review the 
ERO's budget to ensure adequate funding.\49\ Exelon suggests that the 
annual ERO funding requirement for budget purposes should include 
amounts for all activities that are deemed necessary to achieve the 
purposes of section 215 of the FPA including amounts for those 
activities delegated to the Regional Entities. EEI agrees that the 
Commission should have to approve the annual ERO budget, as proposed in 
the NOPR, but argues that the review should be limited to the 
development of Reliability Standards and enforcement functions and 
should not include any other activities the ERO may choose to undertake 
nor should it include the overall ERO business plan.\50\ Southern 
states that the Commission should conduct a general review of the ERO's 
budget and business plan to ensure that the ERO is maintaining spending 
discipline and not overspending on some activities at the expense of 
other activities, and that the Commission should defer to the ERO on 
matters pertaining to the budget and business plan because the ERO will 
possess the expertise to make the right decisions.
---------------------------------------------------------------------------

    \49\ See, e.g., Exelon, Indianapolis P&L, LG&E Energy and NERC.
    \50\ EEI envisions the ERO developing an annual budget for its 
Reliability Standards and enforcement activities, including those 
activities delegated to the Regional Entities to ensure that overall 
funding adequately supports the delegated Regional Entity functions. 
Specific funding and budget arrangements would be included in the 
delegation agreement.
---------------------------------------------------------------------------

    195. Others suggest tighter scrutiny over the budget out of concern 
that the new reliability program may lead to increased costs and, 
therefore, the Commission should ensure that any higher costs imposed 
on the electricity customers has a commensurate reliability 
benefit.\51\ Ameren submits that a set of budget principles should be 
established for the ERO and Regional Entities. Indianapolis P&L states 
that the Final Rule should include a mechanism for stakeholders to 
provide input to ensure that the Commission has all the information it 
needs to make an informed decision on the ERO's budget. The Oklahoma 
Commission suggests that the notice and comment provisions for the 
ERO's annual funding request proposed in the NOPR also be applied to 
any funding request the ERO makes to the Commission outside of the 
annual budget process.
---------------------------------------------------------------------------

    \51\ See, e.g., APPA, LG&E Energy and the New York Companies.
---------------------------------------------------------------------------

    196. NERC asserts that the proposed regulations on funding be 
modified to provide for emergency funding to deal with extraordinary 
circumstances.

Commission Conclusion

    197. The Commission generally adopts subsections (a) and (b) of the 
proposed regulation on funding as sections 39.4(a) and (b) with some 
additional specificity. We continue to believe that ERO funding 
certainty is essential for the stability and ultimate success of the 
organization and will review the ERO's budget and business plan to 
ensure that the ERO has adequate funding to carry out its 
responsibilities under section 215 of the FPA. We will not defer to the 
ERO on the budget or business plan as some suggest. However, we will 
not adopt budget principles in the Final Rule beyond the requirements 
specified in section 215(c)(2) of the FPA. We expect an ERO candidate 
to propose budget principles in its certification application and to 
consider the views of industry in developing its proposed budget and 
business plan.
    198. Although our authority is limited to approving a business plan 
and budget as it pertains to statutory activities in the United States, 
the ERO must submit its business plan, entire budget, and 
organizational chart to the Commission, including those portions 
pertaining to activities in Canada and Mexico and any non-statutory 
activities. The complete business plan and the entire budget will 
inform the Commission as to what portion of the budget is expended upon 
the activities within the United States. Further they will provide the 
Commission with necessary information about any non-statutory 
activities, the source of their funding, and whether the pursuit of 
such activities presents a conflict of interest for the ERO. 
Additionally, section 39.4(c) of the regulation provides for further 
stakeholder participation through the Commission's public notice and 
comment procedures. This will provide additional opportunity for 
stakeholders to express their views so that the Commission can make an 
informed decision on the ERO's budget proposal and business plan. The 
same notice and opportunity for comment would apply to any funding 
request the ERO makes to the Commission outside of the annual budget 
process.
    199. As requested by NERC, the Final Rule adds a new subsection 
39.4(d) that allows the ERO to request emergency funding. The new 
provision states:

[[Page 8681]]

    (d) On a demonstration of unforeseen and extraordinary 
circumstances requiring additional funds prior to the next Electric 
Reliability Organization fiscal year, the Electric Reliability 
Organization may file with the Commission for authorization to 
collect a special assessment. Such filing shall include supporting 
materials explaining the proposed collection in sufficient detail to 
justify the requested funding, including any departure from the 
approved funding formula or method. After notice and an opportunity 
for hearing, the Commission will approve, disapprove, remand or 
modify such request.
b. Funding for Statutory Activities
    200. In the NOPR, the Commission indicated that paragraph (c) of 
the proposed section on funding intended to provide a Commission-
approved mechanism for mandatory ERO funding in the United States.\52\ 
However, rather than the Commission dictating a funding mechanism, the 
NOPR would have allowed an ERO applicant to propose a funding mechanism 
for Commission approval. Specifically, the proposed regulation stated 
that any person that submits an application for certification as the 
ERO must include a plan, formula and/or methodology for the allocation 
and assessment of ERO dues, fees and charges; and the certified ERO may 
subsequently file with the Commission a request to modify the plan, 
formula and/or methodology from time-to-time at the ERO's discretion. 
Comments related to funding responsibility are discussed here in four 
groups: (1) General matters; (2) funding apportionment; (3) role of the 
ERO in funding the Regional Entities; and (4) additional comments 
regarding funding consistency with the bilateral principles.
---------------------------------------------------------------------------

    \52\ NOPR at P 100.
---------------------------------------------------------------------------

i. General Funding Matters
    201. Some commenters state that the NOPR generally provides a 
workable funding process to ensure that reasonable ERO costs are fairly 
recovered.\53\ Some comment that, while section 215 of the FPA 
authorizes the ERO and the Regional Entities to collect funds only for 
actions taken under the statute, they are not necessarily precluded 
from pursuing other matters.\54\ APPA submits that the Commission must 
make clear that the ERO and Regional Entities can fund activities which 
are not related to their duties under section 215 of the FPA and 
allocate the costs of those activities on a basis that is appropriate 
for such activity. EPSA asks the Commission to ensure that any funding 
proposal is developed in consultation with all affected users, owners 
and operators of the Bulk-Power System. Detroit Edison and WECC submit 
that no Regional Entity should be required to subsidize the delegated 
functions of any other Regional Entity.
---------------------------------------------------------------------------

    \53\ See, e.g., EPSA, NERC and NiSource.
    \54\ See, e.g., APPA and NRECA.
---------------------------------------------------------------------------

Commission Conclusion

    202. We find that section 215 of the FPA provides for federal 
authorization of funding limited to the development of Reliability 
Standards and their enforcement, and monitoring the reliability of the 
Bulk-Power System. However, the ERO or a Regional Entity is not 
precluded from pursuing other activities, funded from other sources. We 
agree with commenters that any funding proposal should be developed in 
consultation with the users, owners and operators of the Bulk-Power 
System and that no Regional Entity should subsidize the functions of 
another Regional Entity.
ii. Funding Apportionment
    203. In the NOPR, the Commission noted that the responsibility for 
NERC funding is based largely on ``net energy for load.'' The cost of 
certain programs and tools that benefit only specific regions or 
parties would be assigned only to the beneficiaries of those programs 
or tools. In the NOPR, we indicated our belief that a funding method 
based on net energy for load meets the requirements of section 
215(c)(3) of the FPA and is appropriate for the allocation and 
assessment of ERO dues, fees and charges.\55\
---------------------------------------------------------------------------

    \55\ NOPR at P 102.
---------------------------------------------------------------------------

Comments

    204. Most commenters support use of a net energy for load-based 
funding apportionment for the ERO as well as the Regional Entity.\56\ 
However, a few claim that this method will not apportion costs 
equitably and recommend other methods.\57\
---------------------------------------------------------------------------

    \56\ See, e.g., EPSA, PSE&G Companies, NASUCA, NARUC, NERC and 
Chelan County.
    \57\ See, e.g., The New York Companies, International 
Transmission and Entergy.
---------------------------------------------------------------------------

    205. PSE&G Companies states that the recovery of costs for the ERO 
and Regional Entities should be apportioned on the basis of net energy 
supplied to retail load because, as the ultimate beneficiaries of the 
reliability of the electric system, retail customers should bear the 
cost.
    206. EPSA states that a net energy for load-based funding 
apportionment is appropriate because: (1) The statute requires funding 
by end-users; (2) net energy for load represents the aggregate annual 
energy consumption of end use customers in a particular region; and (3) 
since NERC currently uses this method, keeping it would avoid cost 
shifts. According to Chelan County, a net energy for load-based funding 
formula is consistent with the concept that load (rather than 
generation) should pay for reliability services that benefit end-users.
    207. A benefit of the net energy for load approach is that it 
counts each kilowatt-hour of electric energy only once, and thus 
represents the fairest and most efficient method of allocating costs 
among end-users. Any other method may count energy more than once. A 
net energy for load approach that charges based on energy consumed 
avoids such ``double counting.'' \58\
---------------------------------------------------------------------------

    \58\ See, e.g., NASUCA and NRECA.
---------------------------------------------------------------------------

    208. Michigan Electric states that there should be no free riders 
when it comes to system reliability but points out that the ultimate 
payers of the ERO's costs will be retail customers, since charges 
assessed to any other users will eventually be flowed through to retail 
customers as part of the delivered cost of electricity. As such, the 
Commission must ensure that ERO costs are allocated on an equitable 
basis among retail customers and prevent multiple assessments 
regardless of the upstream entities involved. FRCC submits that the 
NOPR's focus on different types of users of the Bulk-Power System may 
lead to two or more entities passing on such costs to the same 
customers.
    209. The ISO/RTO Council argues that a transmission facility owner 
or operator should not be allocated a share of ERO costs, except to the 
extent that it also acts as a load-serving entity. Otherwise, an end 
user could pay twice for the reliability functions of the ERO and the 
Regional Entities once through charges assessed against an RTO, ISO, 
independent transmission company, or transmission function of a 
vertically integrated company, and a second time through an assessment 
against its load-serving entity. To avoid this potential double count, 
an end user should be assessed through its load-serving entity.\59\
---------------------------------------------------------------------------

    \59\ See, e.g.,, Ohio Commission, ISO/RTO Council and Alcoa.
---------------------------------------------------------------------------

    210. As an independent transmission owner, International 
Transmission expresses concern about a system that treats both a local 
utility using an independent transmission owner's system and the 
transmission owner itself as ``beneficiaries'' of reliability that need 
to be charged accordingly.
    211. The New York Companies state that net energy for load, 
particularly in areas of the country where suppliers and load represent 
different

[[Page 8682]]

organizations, will not work, as it would allow suppliers and perhaps 
other organizations that are connected to the Bulk-Power System to 
avoid paying their fair share of ERO and Regional Entity membership 
fees.
    212. As an alternative to net energy for load-based funding, 
International Transmission suggests that the ERO adopt the transmission 
MWh usage model that the Commission applies to assess annual dues from 
jurisdictional public utilities. However, MISO Transmission Owners 
oppose this because it would result in a disproportionate assessment 
against entities that belong to an RTO. Indianapolis P&L suggests 
apportioning the ERO funding responsibility through an assessment on: 
(1) Load-serving entities based on the number of their customers; (2) 
independent transmission companies based on their transmission line 
miles; and (3) independent power providers based on their sales volume.

Commission Conclusion

    213. Commenters largely agree that a funding apportionment method 
based on net energy for load is appropriate. We find this funding 
method to be a fair and reasonable method that minimizes the 
possibility of ``double-counting.'' However, we will not codify any 
particular formula in our regulations because some adjustment in the 
formula may be needed in the future without the need to alter the rule. 
Therefore, we do not rule out any other apportionment method that can 
be shown to be fair and reasonable. Alternative funding apportionment 
methods suggested by a few commenters appear to garner limited support, 
can be more complex to implement, or raise the issue of double 
counting.
    214. Section 39.4(a) of our regulations provides the ERO applicant 
the flexibility to propose a formula or method for the allocation and 
assessment of ERO costs to paying entities, as well as setting out 
member dues, fees and service charges. However, any funding proposal by 
an ERO applicant must ensure that costs are allocated equitably 
consistent with section 215(c)(2)(B) of the FPA. In addition, any 
funding proposal must ensure that cross-subsidization is minimized.
c. Role of the ERO in Funding the Regional Entities
    215. The NOPR asked what, if any, responsibility or involvement the 
ERO should have regarding funding of Regional Entities.\60\ In 
addition, the NOPR requested comments on whether the proposed 
regulations on funding and budget oversight for the ERO should be 
extended to the Regional Entities.\61\
---------------------------------------------------------------------------

    \60\ NOPR at P 84.
    \61\ NOPR at P 103.
---------------------------------------------------------------------------

i. ERO Responsibility for Regional Entity Funding
    216. Some commenters advocate ERO oversight of Regional Entity 
funding. NERC and Exelon submit that, since the ERO is ultimately 
responsible for the effective enforcement of Reliability Standards, it 
must have the authority to review and approve each Regional Entity's 
budget to ensure that each has the resources needed to meet its 
assigned responsibilities. The ERO must include each Regional Entity's 
budget in the ERO's annual funding submission to the Commission and 
other appropriate regulatory authorities. The supporting materials 
should be sufficient to allow the ERO to defend the Regional Entity 
budgets as part of its budget submittal to the Commission.
    217. MRO suggests that the matter of funding the Regional Entities 
should be left to negotiation between the ERO and Regional Entities and 
detailed in the delegation agreements. SERC submits that the ERO should 
not distinguish between Interconnection-wide and other Regional 
Entities when it reviews a Regional Entity's budget and funding.
    218. In contrast, WECC submits that the ERO should not 
substantively review the budget of an Interconnection-wide Regional 
Entity. Alternatively, if the ERO does review the budget, the Regional 
Entity should be entitled to a rebuttable presumption of reasonableness 
similar to that applicable to a proposed Interconnection-wide 
Reliability Standard. Otherwise, extensive ERO review would result in 
an inefficient and uncertain budget and funding process that would 
cause unnecessary delay. Further, extensive ERO review could create 
conflicts if WECC's international members do not recognize the ERO's 
authority to review the WECC budget.\62\
---------------------------------------------------------------------------

    \62\ See also Western Governments.
---------------------------------------------------------------------------

    219. Others comment that stakeholders and users, owners and 
operators of the Bulk-Power System in a Regional Entity should be 
solely responsible for Regional Entity funding decisions.\63\ The New 
York Companies assert that it would not be appropriate, for example, 
for the ERO to have the ability to withhold funding for a Regional 
Entity because the ERO disagrees with a position the Regional Entity 
has taken with respect to a proposed Reliability Standard; however, 
Regional Entity funding should be subject to Commission oversight to 
ensure that costs across regions are comparable. PSEG Companies submits 
that the ERO's role should be limited to collecting the regional 
requests and filing them as a package together with the ERO request to 
the Commission.
---------------------------------------------------------------------------

    \63\ See, e.g., LADWP and SoCalEd.
---------------------------------------------------------------------------

    220. Some commenters submit that, in addition to approving each 
Regional Entity budget, if a Regional Entity is acting on behalf of the 
ERO and performing delegated enforcement tasks, the ERO should fund the 
Regional Entity for carrying out such delegated functions. The ERO, 
however, should not be responsible for funding any other functions that 
a Regional Entity performs.\64\ Detroit Edison states that a Regional 
Entity should be permitted to collect funds from its members without 
Commission involvement.
    221. Some commenters contemplate that the Regional Entities should 
fund the ERO. According to NiSource, currently NERC develops a budget 
and, based on a set of formulas, allocates its funding requirements 
among the ten regional reliability councils. NERC funding then becomes 
a line-item in each regional reliability council's budget. Each 
regional reliability council allocates its funding requirements among 
its members. NiSource says ERO funding should follow the same general 
format with the Regional Entities funded by the users of the system for 
which the Regional Entity is responsible. A portion of the ERO budget 
would then be allocated to and funded by each Regional Entity.
---------------------------------------------------------------------------

    \64\ See, e.g., ELCON and Michigan Electric.
---------------------------------------------------------------------------

    222. Hydro One points out that, ultimately, end-users will fund the 
ERO by remitting fees to the Regional Entity. PacifiCorp submits that 
the ERO should compensate a Regional Entity if it develops an 
operational tool for itself at its own cost, but other Regional 
Entities benefit from that tool.
    223. The City of San Antonio indicates that ERCOT is a state-funded 
institution and any funding mechanism that the Commission decides for 
the ERO should not conflict with the Texas state statutory funding 
mechanism for ERCOT. It is concerned that, in the event ERCOT becomes a 
Regional Entity, a fee from the Regional Entity to fund the ERO would 
alter the Texas state statutory funding mechanism for ERCOT.

[[Page 8683]]

ii. Commission Oversight of Regional Entity Funding
    224. While many commenters support extending the Commission's ERO 
funding regulations to the Regional Entities,\65\ a few oppose this 
approach. Other commenters suggest extending the funding regulations to 
those functions that the ERO delegates to a Regional Entity or funding 
addressed in a delegation agreement.\66\ NARUC and NERC comment that 
the regulations related to funding of Regional Entities should mirror 
those of the ERO to the extent practicable or should be specifically 
defined in the Regional Entity delegation agreement. Southern suggests 
that the ERO, not the Commission, should review each Regional Entity's 
proposed budget for delegated activities. PacifiCorp submits that each 
Regional Entity should be able to develop its own budget to reflect 
local needs, but the ERO should consolidate and submit all of the 
Regional Entity budgets as a joint filing to the Commission. The ERO 
should not be the entity with budget authority over an Interconnection-
wide Regional Entity.\67\
---------------------------------------------------------------------------

    \65\ See, e.g., ERCOT, APPA, AEP, Exelon, NARUC, NERC FRCC and 
TAPS.
    \66\ See, e.g., NPCC and EEI.
    \67\ See, e.g., the City of Seattle.
---------------------------------------------------------------------------

    225. FRCC asserts that a Regional Entity should be responsible for 
preparing its budget and providing support for it. Regional Entity 
budgets should be combined with the ERO budget for convenience in the 
submission of a complete, single annual reliability budget to the 
Commission; however, the ERO should not try to integrate the Regional 
Entity budgets with each other or the ERO's budget into a consolidated 
budget. Although some ERO review of the reasonableness of the Regional 
Entity budgets and their consistency with the ERO budget may be 
appropriate, unnecessary review and consolidation would not serve a 
useful purpose, and would only make the budgeting process unduly 
lengthy and burdensome.
    226. In FRCC's view, the Commission's review of Regional Entity 
budgeting and funding process should be limited to the delegated 
functions carried out by a Regional Entity, as many of the other 
functions in which a Regional Entity may engage are not jurisdictional 
to the Commission.

Commission Conclusion

    227. Since the ERO is the primary entity responsible under section 
215 of the FPA for the development and enforcement of Reliability 
Standards, we find that the ERO should fund the Regional Entities as 
well as approve their budgets, under the Commission's oversight. The 
ultimate success of the ERO will depend on whether a Regional Entity 
has adequate funding to carry out its delegated responsibilities. The 
ERO must have oversight to ensure that Regional Entities are adequately 
funded to accomplish their delegated functions. This oversight, 
however, should be limited to the delegated activities that they 
perform pursuant to their delegation agreements. To implement this, we 
are including the following text at the end of subsection 39.4(b):

    The annual Electric Reliability Organization budget shall 
include line item budgets for the activities of each Regional Entity 
that are delegated or assigned to each Regional Entity pursuant to 
section 39.8 of the Commission's regulations.

Accordingly, the ERO must exercise budgeting oversight over the 
Regional Entities.
    228. Each Regional Entity must submit its complete business plan, 
entire budget and organizational chart to the ERO for it to submit to 
the Commission. The complete business plan and the entire budget will 
provide the Commission with necessary information about any non-
statutory activities, the source of their funding, and whether the 
pursuit of such activities presents a conflict of interest for the 
Regional Entity. For a Cross-Border Regional Entity, this information 
will also inform the Commission as to what portion of the budget is 
expended upon activities within the United States.
    229. Any funding that is approved and provided by the ERO to a 
Regional Entity would be limited to a Regional Entity's costs related 
to the delegated functions. The ERO must determine, at a minimum, 
whether each Regional Entity's proposed budget is adequate to carry out 
the functions delegated to it. While a Regional Entity will be able to 
perform other activities that do not conflict with its delegated 
functions, periodic financial audits will be required to ensure that 
any ERO-approved funding is appropriately expended for delegated 
functions. ERO candidates should propose a plan for the collection of 
sufficient funds for delegated activities in their application for 
certification. The ERO must make a recommendation to the Commission on 
this matter. A Regional Entity should arrange funds for its other 
activities on its own. Procedures for ERO review of a Regional Entity's 
budget should be addressed in the delegation agreement.
    230. The Regional Entity is responsible for supporting its budget 
presentation to the ERO because it is responsible to the ERO for 
carrying out delegated ERO responsibilities, whether or not it spans an 
entire Interconnection. Therefore, we direct the ERO and each Regional 
Entity to ensure that the delegation agreement lists all the statutory 
activities that they intend the Regional Entity to undertake on behalf 
of the ERO.
d. Funding Consistency With the Bilateral Principles
    231. In the NOPR, the Commission noted that the bilateral 
principles include several funding principles: (1) A principle 
specifying that net energy for load should be the primary basis upon 
which the costs of the ERO are assigned and that costs for one region 
or entity should be directly assigned to that region or entity; (2) a 
principle specifying that funding mechanisms, budget direction and 
budget levels should reflect consultations with appropriate 
stakeholders and authorities in each country; and (3) a principle 
specifying that the appropriate authorities in each country should be 
responsible for approving and ensuring cost recovery by the ERO and 
Regional Entities within their respective jurisdictions in a timely 
manner. The NOPR inquired as to whether the Final Rule should address 
such funding issues in detail or whether the ERO and Cross-Border 
Regional Entities should propose resolution of these matters at a later 
time.\68\
---------------------------------------------------------------------------

    \68\ NOPR at P 103.
---------------------------------------------------------------------------

Comments

    232. There is strong support for following the bilateral principles 
on funding matters but not necessarily for incorporating them into the 
Final Rule.\69\ Many commenters prefer that the ERO and Cross-Border 
Regional Entities develop their own international funding proposals. 
APPA notes that it participated in the development of the bilateral 
principles and would have no objection to the Commission including 
these principles, such as net energy for load-based funding, in the 
Commission's Final Rule. ERCOT maintains that the Final Rule should 
specify that the costs of the ERO should be assigned to the 
participating nations on a net energy for load basis; however, costs 
incurred by the ERO for operational tools such as NERC's current 
Interchange Distribution Calculator should be assigned only to those 
regions utilizing the tool. In the case of expenses incurred by a 
Cross-

[[Page 8684]]

Border Regional Entity, the Commission should approve the share of 
expenses incurred within the United States, while the relevant Canadian 
and Mexican authorities should decide whether to approve the expenses 
assigned to parties within its borders. Other commenters also submit 
that it is appropriate for the ERO and Regional Entities to propose 
such funding mechanisms in their applications for certification or 
delegation agreement approval in consultation with appropriate 
regulatory authorities in other countries in accord with the bilateral 
principles.\70\
---------------------------------------------------------------------------

    \69\ See, e.g., AEP, APPA, Alberta, ELCON, NERC and Ontario 
IESO.
    \70\ See, e.g., NERC and Ontario IESO.
---------------------------------------------------------------------------

    233. MRO comments that the Commission should allow the ERO and the 
Cross-Border Regional Entities to address such international funding-
related details in a manner that best suits each individual situation. 
Others contend that the Final Rule should not specify a detailed 
funding mechanism, in part because Canadian regulators also have to 
approve the mechanism for their jurisdictions.\71\ Funding mechanisms, 
budget direction and budget level should be allowed to reflect ERO 
consultation with stakeholders and the appropriate authorities in each 
country, as the recovery of costs in Canada related to the ERO and 
Cross-Border Regional Entities must be determined by the various 
jurisdictions in Canada.\72\ Since regulatory authorities have 
different views on how costs should be recovered within their 
jurisdiction, the Final Rule should not include a provision specifying 
what other jurisdictions should do.\73\
---------------------------------------------------------------------------

    \71\ See, e.g., Nova Scotia, Santee Cooper and NPCC.
    \72\ See, e.g., Alberta.
    \73\ See, e.g., NARUC and NERC.
---------------------------------------------------------------------------

Commission Conclusion

    234. We agree with commenters that the bilateral principles provide 
a good starting point for funding guidelines in the continental North 
American context. We also agree with the need to provide the ERO 
candidates and Cross-Border Regional Entities with enough flexibility 
to develop funding details with the appropriate regulators of all the 
participating nations. Our review and approval of ERO and Cross-Border 
Regional Entity funding mechanisms will be limited to their application 
in the United States. However, as explained above, we expect that the 
ERO or a Cross-Border Regional Entity will submit to the Commission and 
other appropriate regulators its entire business plan for the whole 
organization, its entire budget, its full funding mechanism, and budget 
allocation. Complete funding information is necessary so that 
regulators can assess the appropriateness of cost share and benefits 
share for each country or region.
e. Payment of Dues and Funding Transition Plan
    235. The NOPR proposed that all entities within the Commission's 
``reliability'' jurisdiction, as set forth in section 215(b) of the 
FPA, must pay the ERO's assessment of dues, fees and charges in a 
timely manner.\74\ The NOPR also provided that any person who submits 
an application for certification as the ERO may include a plan for a 
transitional funding mechanism that would allow it, if certified as the 
ERO, to continue existing operations without interruption as it 
transitions from one funding method to another.\75\ The proposed 
maximum duration of any proposed transitional funding mechanism would 
not exceed eighteen (18) months from the date of certification.
---------------------------------------------------------------------------

    \74\ NOPR at P 100.
    \75\ Id. at P 101.
---------------------------------------------------------------------------

Comments

    236. NERC agrees that certainty regarding the funding of the ERO is 
essential for the stability and ultimate success of the organization in 
carrying out its mission, particularly since the ERO is expected to be 
nonprofit. Commenters generally agree on the need for a funding 
transition plan. For example, Exelon supports a strong and stable 
funding source to support the reliability efforts to be carried out by 
the ERO. MRO asserts that the optimal time to achieve certainty of 
funding for the ERO is during the certification process.

Commission Conclusion

    237. No commenter objects to our proposal that entities within our 
jurisdiction must pay the ERO's assessment of dues, fees and charges in 
a timely manner. Such timely payment is necessary for the continuity of 
ERO activities and a reasonable requirement of those who benefit from 
Bulk-Power System reliability. Accordingly, in section 39.4(e) of the 
Final Rule, we adopt the substance of the proposed regulation text 
requiring jurisdictional entities to pay the ERO's assessment of dues, 
fees and charges in a timely manner. In section 39.4(f), we adopt, with 
minor non-substantive revision, the proposed regulation regarding 
transitional funding as to provide funding certainty during a period 
when the industry transitions from a voluntary organization to an 
organization for mandatory compliance with enforceable Reliability 
Standards.
f. Billing Mechanics
    238. In the NOPR, the Commission noted that section 215 of the FPA 
does not contain any specific requirements regarding the revenue 
collection for the ERO, other than specifying that the Commission may 
certify an ERO if it determines that such ERO, inter alia, has 
established Rules that allocate equitably reasonable dues, fees, and 
other charges among end-users.\76\
---------------------------------------------------------------------------

    \76\ Id. at P 99.
---------------------------------------------------------------------------

Comments

    239. Some commenters state that, with a few modifications, the 
current method of funding NERC and the regional reliability councils 
should be carried over to the funding of the ERO and the Regional 
Entities; however, in a change from current practice, all users of the 
Bulk-Power System should be directly allocated a share of a Regional 
Entity's costs, not just the Regional Entity members.\77\ It is 
unnecessary for the ERO and Regional Entities to be financed directly 
by retail load and/or the entities that serve such load (such as 
distribution cooperatives), since NERC and the regional reliability 
councils are generally not funded in this manner today. Making such a 
change would be administratively disruptive. South Carolina E&G states 
that the ERO and a Regional Entity should jointly ensure that the fees 
assessed to end-users will fund their activities.
---------------------------------------------------------------------------

    \77\ See, e.g., NiSource, Exelon, Entergy and MidAmerican.
---------------------------------------------------------------------------

    240. Allegheny expresses concern that the cost of operating and 
maintaining the ERO will be a non-discretionary cost over which 
industry participants will have no control. Consequently, ERO costs 
should fall on retail consumers. The cost of operating the ERO will be 
like a tax, yet neither the ERO nor the Commission has the ability to 
levy a direct charge for ERO costs on an individual end user. The task 
before the Commission and the ERO will be to design a mechanism that 
allows ERO costs to be charged in an equitable manner to those entities 
over which the Commission has jurisdiction and can be passed on by 
local distribution companies to an end user. However, a distribution 
company may be subject to a retail rate moratorium and the Commission 
cannot provide a clear and unequivocal determination of preemption that 
will enable a distribution company to recover ERO costs from its retail 
ratepayers.

[[Page 8685]]

    241. NASUCA and ELCON recommend that the ERO funding mechanism 
should be submitted to the Commission in the form of a tariff to be 
formally approved. ELCON asks that such a net energy for load-based 
tariff be levied on Balancing Authorities. Certain commenters caution 
that the development of a funding mechanism should recognize the 
possibility of trapped costs when there is a lag between cost 
incurrence and the reflection of such costs in the rates of 
transmission owners.\78\ The Commission should seek an alternative such 
as an automatic trackers or true-up mechanism to minimize the risk of 
trapped costs. The Commission should confirm that transmission owners 
will be permitted to recover ERO costs that they are assessed and avoid 
adopting any funding mechanism that requires transmission owners to 
assess charges on the ERO's behalf where other transmission owners have 
relinquished their wholesale billing function due to RTO/ISO 
membership. In this regard, Michigan Electric suggests that the 
Commission not adopt a mechanism that requires ``Balancing Entities'' 
as currently defined by NERC to perform such a billing function.
---------------------------------------------------------------------------

    \78\ See Michigan Electric and International Transmission. 
Michigan Transmission supports inclusion of a formula-based process 
as one of the alternatives the ERO may propose as part of its 
funding mechanism.
---------------------------------------------------------------------------

Commission Conclusion

    242. The issue of billing mechanics associated with the collection 
of funds refers to who receives invoices from the ERO or Regional 
Entity and who collects the monies from end users. Billing mechanics 
may depend on funding responsibility, for example, whether net energy 
for load is adopted and whether generators, large industrial customers, 
and others are billed directly by the ERO or if all invoices go only to 
balancing entities (control areas) or only to all load serving 
entities. Accordingly, cost allocation and cost responsibility 
questions should be addressed first by the ERO and submitted together 
with a proposal for revenue collection for Commission approval. A 
candidate ERO's certification application should provide at least 
enough detail for the Commission to assess the general plan. 
Accordingly, we direct the ERO applicant to present a detailed proposal 
for billing mechanics in its application.
g. Other Funding Matters
    243. NASUCA recommends requiring the ERO and Regional Entities to 
use the Uniform System of Accounts for reasons of consistency.
    244. NiSource submits that once the Commission approves a 
mechanism, it should limit the frequency of modifications in the 
approved mechanism. CREPC suggests that the regulations should require 
that any Regional Entity that spans an entire Interconnection must file 
its proposed budget with its Regional Advisory Body at the same time it 
files with the Commission and the ERO, and further require that the ERO 
must file its proposed budget with the all of the Regional Advisory 
Bodies at the same time it files with the Commission.
    245. CREPC also recommends that the Commission require each 
Regional Entity to fund the relevant Regional Advisory Body.

Commission Conclusion

    246. With regard to NASUCA's suggestion, we find that consistency 
of financial responsibility between the ERO and a Regional Entity is 
desirable. However, we decline to decide in this Final Rule that the 
Uniform System of Accounts designed for public utilities is best for 
these non-utility entities. Rather, we will allow the ERO flexibility 
to develop a reasonable and consistent system of accounts, with a level 
of detail and record keeping comparable to the Uniform System of 
Accounts and sufficient to allow the Commission to compare each 
Commission-approved ERO fiscal year budget with the actual results at 
the ERO and Regional Entity level. The pro forma delegation agreement 
must specify that a Regional Entity must also follow the ERO's 
prescribed system of accounts.
    247. With respect to NiSource's comment, we expect that requests to 
modify the approved funding mechanism will be infrequent because such 
change may be controversial and disrupt the ERO's ongoing funding.
    248. We find that it is not necessary to provide in our regulations 
funding of a Regional Advisory Body. Such bodies are voluntary 
organizations with members to be appointed by the Governor of each 
participating state or province. Each Regional Advisory Body is 
responsible for developing its own funding means.
5. Reliability Standards--Section 39.5
    249. Consistent with section 215(d) of the FPA, the proposed 
regulations directed the ERO to file a proposed Reliability Standard or 
modification to a Reliability Standard with the Commission for review. 
The Commission may approve a proposed Reliability Standard or 
modification to a Reliability Standard if it determines that the 
Reliability Standard is just, reasonable, not unduly discriminatory or 
preferential, and in the public interest. In its review, the Commission 
will give due weight to the technical expertise of the ERO or a 
Regional Entity organized on an Interconnection-wide basis with respect 
to a Reliability Standard to be applicable within that Interconnection, 
except that the Commission may not defer to the ERO or a Regional 
Entity with respect to the effect of a Reliability Standard on 
competition.
    250. The NOPR provided that the Commission shall remand a 
Reliability Standard that it disapproves in whole or in part and, when 
remanding, may set a deadline by which the ERO must submit a proposed 
revision to the Reliability Standard. The proposed rule stated that the 
Commission may direct the ERO to submit a proposed Reliability Standard 
that addresses a specific matter. Further, the Commission may remand a 
previously-approved Reliability Standard if it determines that it does 
not satisfy the legal standard of review.
a. Reliability Standard Development by the ERO and Regional Entities
i. Reliability Standard Development by the ERO
    251. The regulations proposed in the NOPR directed the ERO to 
consider and develop Reliability Standards and modifications to 
Reliability Standards, applicable to the entire Bulk-Power System or to 
a particular region or Interconnection.
    252. Though the comments on this section address a broad range of 
issues, many focus on the proper scope of the subject matter of the 
Reliability Standards, the role of the ERO and others in Reliability 
Standard development. For example, NRECA emphasizes that any 
Reliability Standard developed by the ERO must be limited to addressing 
reliability issues; the Commission must not use its new authority to 
impose economic regulation on a nonpublic utility.
    253. The ISO/RTO Council comments that Reliability Standards 
developed by the ERO should reflect the ``what'' not the ``how'' of 
reliability. By this they mean that the ERO's role should be to develop 
a Reliability Standard specifying ``what'' is necessary to preserve 
reliability and impose a penalty for violation of such a Reliability 
Standard, whereas ``how'' such a Reliability Standard is implemented 
should be left to others, such as control area operators and system 
planners. Reliability Standards should apply equally well in areas with

[[Page 8686]]

organized markets and those without organized markets.
    254. The Missouri Commission suggests that, although neither the 
ERO nor the Commission has been granted authority to order the 
construction of new generation or transmission capacity, the ERO should 
develop and the Commission should approve voluntary planning 
standards--a traditional function of NERC and the regional reliability 
councils. These voluntary planning standards could then be enforced by 
the states. Trexco encourages the Commission to put a greater emphasis 
on long-term plans because an emphasis on day-to-day operations could 
increase future risk to the grid. Further, Reliability Standards should 
provide incentives for enhancement of transmission capacity.
    255. International Transmission comments that the ERO should 
establish and implement strong Reliability Standards that do not 
reflect the lowest common denominator. Strong Reliability Standards 
would also highlight the need to expand transmission infrastructure and 
promote the deployment of advanced grid technologies.
    256. LADWP states that Reliability Standards should be clear, 
unambiguous, practicable, but sufficiently flexible to allow the system 
operator discretion in dealing with an emergency condition. Reliability 
Standards that are overly prescriptive or too rigid would inhibit, 
rather than facilitate, an operator's ability to respond rapidly in an 
emergency. For example, under extreme conditions such as an earthquake, 
there may be an occasion when a system operator may have to permit, 
momentarily, a frequency level lower than that allowed by a Reliability 
Standard to avoid tripping generating units and in turn avoid a 
blackout. In addition, the Final Rule and Reliability Standards should 
specify the roles of, and the actions to be taken by, the ERO and a 
Regional Entity in the event of an emergency. After the emergency has 
passed, the ERO Rules and Regional Entity Rules should allow for 
stakeholder review of the actions taken and of the Reliability 
Standards themselves.
    257. WECC asks the Commission to revise the proposed regulation to 
clarify that a Regional Entity has the right to consider and develop 
Reliability Standards or modifications. WECC asserts that this right is 
absolutely clear from section 215(e)(4) of the FPA where the 
legislative language requires the Commission to ``issue regulations 
authorizing the ERO to enter into an agreement to delegate authority to 
a regional entity for the purpose of proposing reliability standards to 
the ERO.'' Such a right is only implied in the NOPR. WECC asks that the 
Final Rule make this explicit by adding the following text at the end 
of the first sentence of paragraph (a) of the Commission's proposed 
regulations on Reliability Standards: ``Regional Entities may also 
consider and develop Reliability Standards or modifications to 
Reliability Standards to be applicable to the entire Bulk-Power System 
or a particular region or Interconnection for submission to the ERO for 
approval (subject to applicable presumptions) as ERO-proposed 
standards.'' WECC argues that the addition of this sentence would avoid 
any ambiguity regarding a Regional Entity's right to propose a 
Reliability Standard and would provide proper context to the 
Commission's regulations in subsections (b)(2) and (d) of the 
Commission's proposed regulations on Reliability Standards.

Commission Conclusion

    258. The Commission adopts the substance of the proposed 
regulation. Any proposed Reliability Standard development process must 
ensure that any Reliability Standard is technically sound and the 
technical specifications proposed would achieve a valuable reliability 
goal. The process must also: (1) Be open and fair; (2) appropriately 
balance the interests of stakeholders; (3) include steps to evaluate 
the effect of the proposed Reliability Standard on competition; (4) 
meet the requirements of due process; and (5) not unnecessarily delay 
development of the proposed Reliability Standard.
    259. We agree with NRECA that the Reliability Standards should not 
be used to impose economic regulation on entities that are not 
jurisdictional to the Commission for their rates, terms and conditions. 
However, each user, owner and operator of the Bulk-Power System will be 
expected to comply with Reliability Standards. Pursuant to section 1241 
of EPAct,\79\ the Commission will allow recovery of all costs prudently 
incurred to comply with the Reliability Standards.
---------------------------------------------------------------------------

    \79\ We note that section 1241 of EPAct (Transmission 
Infrastructure Investment) adds a new section 219 to the FPA which 
mandates that not later than one year after enactment of section 
219, the Commission establish, by rule, incentive-based (including 
performance-based) rate treatments for the transmission of electric 
energy in interstate commerce by public utilities for the purpose of 
benefiting consumers by ensuring reliability and reducing the cost 
of delivered power by reducing transmission congestion.
---------------------------------------------------------------------------

    260. While we are sympathetic to ISO/RTO Council's suggestion that, 
in general, a Reliability Standard should address the ``what'' and not 
the ``how'' of reliability and that the actual implementation of a 
Reliability Standard should be left to entities such as control area 
operators and system planners, in certain limited situations there may 
be a good reason to leave implementation practices out of a Reliability 
Standard. In other situations, however, the ``how'' may be inextricably 
linked to the Reliability Standard and may need to be specified by the 
ERO to ensure the enforcement of the Reliability Standard. For some 
Reliability Standards, leaving out implementation features could: (1) 
Sacrifice necessary uniformity in implementation of the Reliability 
Standard; (2) create uncertainty for the entity that has to follow the 
Reliability Standard; (3) make enforcement difficult; and (4) increase 
the complexity of the Commission's oversight and review process. 
Accordingly, we leave it to the ERO to develop proposed Reliability 
Standards that appropriately balance reliability principles and 
implementation features.
    261. In response to the Missouri Commission's comment regarding 
planning standards, we do not believe it is possible or desirable to 
try to develop generic guidelines on planning roles in this proceeding.
    262. We agree with LADWP that the Reliability Standards should be 
clear, unambiguous, practicable, and must also address emergency 
conditions. However, specifying the roles and actions to be taken by 
the ERO and the Regional Entity in the event of an emergency, including 
the post-review of the operator actions, is outside the scope of this 
proceeding. We expect the ERO to develop proposed Reliability Standards 
and these may address the roles of various entities in an emergency.
    263. In response to WECC, we clarify that a Regional Entity may 
consider and propose a Reliability Standard or modification for its 
region or the continent-wide Bulk-Power System to the ERO.
ii. Due Process in Reliability Standard Development
    264. Consistent with the statute, the NOPR proposed that an ERO 
applicant must have established ERO Rules \80\ that provide reasonable 
notice and opportunity for public comment, due process, openness, and 
balance of interests in developing a proposed

[[Page 8687]]

Reliability Standard, and otherwise exercising ERO duties.\81\
---------------------------------------------------------------------------

    \80\ As noted in the NOPR, the ERO Rules include the bylaws, 
rules of procedure and other organizational rules and protocols of 
the ERO, and are distinguishable from the ERO's Reliability 
Standards. NOPR at P 30.
    \81\ Id. at P 41.
---------------------------------------------------------------------------

Comments

    265. EEI states that the ERO must develop a Reliability Standard 
using a process that meets the statutory requirements for due process, 
openness and balance of interests. TAPS, EEI, and others commenters 
suggest that ANSI accreditation is one way to satisfy the openness 
requirement. Some favor ANSI accreditation, and one urges that ANSI 
certification should be prima facie evidence that the ERO's Reliability 
Standard development process meets the requirement that the ERO 
establish Rules that provide reasonable notice and opportunity for 
public comment, due process, openness, and balance of interests in 
developing Reliability Standards, and otherwise exercising its duties, 
and note that an ANSI-accredited process does not require participants 
to be members.\82\ NRECA recommends that the Final Rule expressly 
codify that the ERO must have ANSI accreditation for its Reliability 
Standard development process.
---------------------------------------------------------------------------

    \82\ See, e.g., EEI, APPA, EPSA, South Carolina E&G and SERC.
---------------------------------------------------------------------------

    266. EEI suggests that an ANSI-certified process is one means to 
satisfy the statutory requirements, but does not rule out the 
possibility of a different ``rigorous process.'' Massachusetts 
Commission and other commenters strongly urge that the ERO be required 
to use the ANSI-certified Reliability Standard development process 
currently used by NERC. Indianapolis P&L notes that this is important 
for maintaining technical best practices. South Carolina E&G states 
that ANSI certification would ensure openness, consensus, and due 
process.
    267. With regard to openness in the Reliability Standard 
development process, some commenters favor NERC's present nine 
representative stakeholder sectors and registered ballot body process 
as a workable template to follow.\83\
---------------------------------------------------------------------------

    \83\ See, e.g., SMA and ELCON.
---------------------------------------------------------------------------

Commission Conclusion

    268. As noted above, the Final Rule adopts the NOPR's requirement 
that an ERO application must include ERO Rules that provide for 
reasonable notice and opportunity for public comment, due process, 
openness, and balance of interests in developing a Reliability Standard 
and otherwise exercising its duties. The ERO should propose such a 
process in its certification application in accordance with section 
39.3(b)(2)(iv).
    269. Although we are not requiring that the ERO adopt an ANSI-
certified approach to meet all of the requirements of section 39.3, we 
find that ANSI-accreditation is one reasonable means of doing so. We 
agree with EEI that a process like the ANSI-certified process would 
ensure openness and balance the interests of stakeholders. However, we 
are concerned about the time it may take to develop a Reliability 
Standard under the ANSI-certified process. The ERO applicant should 
address in its application the timetable for developing a proposed 
Reliability Standard under an ANSI-certified or other process, 
including the timetable for developing a proposed Reliability Standard 
that is urgently needed. Moreover, the ERO applicant should also 
propose a process for modifying or replacing a Reliability Standard 
(even if interim in nature) in the event that the Commission orders the 
ERO to modify a Reliability Standard.
    270. Regardless of the method proposed by an ERO candidate to 
ensure due process, openness, and balance of interests in developing a 
Reliability Standard and otherwise exercising its duties, the ERO 
application must describe how the ERO applicant would provide for fair 
representation of all views in its process for developing a proposed 
Reliability Standard.
iii. Regional Uniformity and Variation of a Standard
    271. In the NOPR, the Commission proposed that there should be 
uniformity of Reliability Standards among regions unless a difference 
is necessary for reliability. The Commission proposed in paragraph 46 
of the NOPR that there should be a greater level of uniformity among 
regional Reliability Standards for Regional Entities not organized on 
an Interconnection-wide basis. The NOPR proposes an interpretation of 
the FPA that any regional Reliability Standard proposed to the ERO by a 
Regional Entity would, upon approval by the Commission, become a 
variance of an ERO Reliability Standard, not a Regional Entity 
Reliability Standard.\84\
---------------------------------------------------------------------------

    \84\ NOPR at P 80.
---------------------------------------------------------------------------

    272. In responding to the NOPR, commenters and participants in the 
Commission's technical conferences on Electric Reliability Standards 
refer to various types of regional difference. For example, some 
commenters refer to a regional difference as a Reliability Standard 
that is essentially the same as a continent-wide Reliability Standard 
but is more stringent. Others refer to an aspect of a continent-wide 
Reliability Standard that is applicable only in one region or a group 
of regions, such as a difference that exempts a particular region from 
some aspect of a Reliability Standard. Others refer to a difference 
that permits a region to fulfill some component of the Reliability 
Standard in an alternate manner. There is also a part of a continent-
wide Reliability Standard that contains a measure or performance 
criterion that is left blank in the Reliability Standard for each 
region to fill in. Some commenters distinguish two other types of 
regional difference, a Reliability Standard for a region or group of 
regions on a matter for which there is no comparable continent-wide 
Reliability Standard and or an addition to a continent-wide Reliability 
Standard for a region or group of regions for which there is no 
comparable continent-wide Reliability Standard addition. There may be 
others. \85\
---------------------------------------------------------------------------

    \85\ Some participants in our technical conferences also 
mentioned an ``entity variance,'' referring to a difference in some 
aspect of a Reliability Standard that would apply to a particular 
entity that is smaller than a region, such as an RTO or ISO.
---------------------------------------------------------------------------

    273. In this Final Rule, we do not attempt to distinguish or rule 
separately on these various types of regional difference but refer to 
them generally as regional differences.\86\
---------------------------------------------------------------------------

    \86\ We note that some commenters call for greater flexibility 
for a regional requirement that is not itself a Reliability Standard 
but is a region's specification of how to comply with a continent-
wide Reliability Standard within the region. Some refer to this as a 
``regional criterion.'' Our discussion below of requirements 
regarding uniformity and regional differences does not necessarily 
apply to such ``regional criteria'' that a region may seek to make 
mandatory under section 215 of the FPA.
---------------------------------------------------------------------------

    274. It is not clear in every comment which type of regional 
difference is being referred to, but where we believed the meaning is 
clear we used the terminology above in summarizing comments.

Comments

    275. Commenters offer a range of views on the need for uniformity 
of Reliability Standards among regions and the need for regional 
differences. Many commenters cite the benefits of uniform continent-
wide Reliability Standards. Others assert that Reliability Standards 
should be tailored to reflect each region's unique characteristics. 
Others, however, see a middle ground, explaining that continent-wide 
Reliability Standards could be supplemented by regional differences.
    276. Xcel Energy believes that a single uniform set of North 
American Reliability Standards, without regional differences, should be 
the goal. Alcoa comments that the Commission should

[[Page 8688]]

view regional variances with skepticism.
    277. EPSA comments that lack of uniformity in Reliability Standards 
creates the potential for conflicts, thus increasing the cost of 
electricity to consumers. In supporting regional uniformity, Hydro One 
observes that the liberalization of energy markets in recent years has 
been accompanied by a proliferation of new entities. The coordination 
of reliability and commercial interests of these entities is becoming 
complex and conflicting and has resulted in inconsistent roles and 
responsibilities.
    278. Western Governments and others comment that, because there are 
physical, economic, and institutional differences between the Western 
Interconnection and the Eastern Interconnection, Reliability Standards 
should not be standardized for the entire North American continent \87\ 
Western Governments adds that, because decisions are best made by those 
closest to the issues and who bear the consequences of the decisions, 
the Commission should defer to the Western Interconnection in setting 
and enforcing Reliability Standards. The California Commission adds 
that WECC, in collaboration with other regional organizations, has a 
great deal of experience, and has already demonstrated much success at 
assuring grid reliability in the Western United States.
---------------------------------------------------------------------------

    \87\ See, e.g., California Commission, City of Seattle, CREPC 
and New York ISO.
---------------------------------------------------------------------------

    279. Many commenters support the need for a high level of 
uniformity of Reliability Standards for Regional Entities within one 
Interconnection. International Transmission, for example, states that 
there should be fewer regional differences for regions within the same 
Interconnection.
    280. Favoring the opportunity for regional differences, NPCC and 
NYSRC recommend that the Commission not force on the regions a ``one-
size-fits-all'' approach that ignores unique regional needs and 
concerns.\88\ Such an approach, they argue, would eventually degrade 
reliability in eastern Canada and the northeastern portion of the 
United States. NYSRC notes that EPAct does not require conformity but, 
rather, anticipates that a Regional Entity may propose a regional 
Reliability Standard applicable within its region. PSNM-TNPC is 
concerned that a focus on uniformity of Reliability Standards would 
result in an abrupt transition for market participants, which would 
have a negative impact on grid investment and introduce significant 
uncertainty into transmission planning efforts.
---------------------------------------------------------------------------

    \88\ See also ISO/RTO Council, NARUC, New York ISO and PSNM-
TNPC.
---------------------------------------------------------------------------

    281. ISO New England comments that regional differences in the 
Bulk-Power System exist for historical reasons; and because there are 
such differences, uniform continent-wide Reliability Standards may not 
be appropriate in all instances.
    282. Several commenters, such as the California ISO, support a 
regional variance that for a regional Reliability Standard that is more 
stringent than the one developed by the ERO. FirstEnergy favors 
regional differences, while also supporting a single set of Reliability 
Standards proposed by the ERO and approved by the Commission. It 
believes in standardization to the greatest extent possible, but would 
make an exception if a proposed regional difference is found by the 
ERO: (1) To be reasonable and not unduly discriminatory; (2) to be more 
stringent than an ERO Reliability Standard; and (3) would result in no 
harm to reliability in any other region. Similarly, the ISO/RTO Council 
asserts that a regional difference, especially a more stringent 
regional requirement, should be allowed where clearly justified to 
support specific, identifiable regional needs.
    283. Dominion asserts that there should be no requirement for a 
transmission owner to change to a Regional Entity's Reliability 
Standards, principles, or guidelines, or to move to a new set of 
Reliability Standards, in order to conform to all current Reliability 
Standards of other NERC regions within an RTO. Such a requirement would 
be very expensive and would require rebuilding the transmission system 
without providing appreciable improvements in the reliability of the 
system. Dominion recommends that the Commission permit a grandfathering 
arrangement so that changes from one Regional Entity to another do not 
have the effect of causing a transmission owner to rebuild the existing 
transmission system. Dominion urges the Commission to maintain this 
flexibility since it is not detrimental to reliability.
    284. Further, Dominion asserts that where a transmission owner's 
system extends across more than one Regional Entity, the Commission 
should not prescribe the Regional Entity's Reliability Standards with 
which the transmission owner must comply. It argues that such 
transmission owners have made their transmission facilities conform to 
different Reliability Standards, either geographically or over time, as 
set by existing regional reliability councils. Changing design and 
maintenance standards now to meet the Reliability Standards of a single 
Regional Entity would be difficult and costly.
    285. NERC, SERC and Cinergy suggest that regional criteria 
represent a middle layer between enforceable Reliability Standards and 
the operating and planning protocols of each entity. These, they argue, 
should not require Commission approval and would not be enforceable 
under section 215 of the FPA. Cinergy asserts that any operating Rule 
that is to be enforceable should be considered a de facto Reliability 
Standard, submitted back to the ERO for review, and submitted to the 
Commission for approval.
    286. NERC notes several conditions that could result in regional 
differences: (1) A proposed ERO Reliability Standard may conflict with 
a regional practice, such as a Commission-approved protocol in an RTO 
tariff; (2) an ERO Reliability Standard may require a Regional Entity 
to define regional criteria and procedures necessary to implement the 
Reliability Standard; and (3) a region may already have a more 
stringent requirement than the continent-wide Reliability Standard to 
meet the needs of the electric system within a particular area.
    287. Michigan Electric states that the Commission should articulate 
clear policies with respect to the various types of regional 
differences, including which differences are permitted, how such 
differences would be developed, and the process that should be used by 
the ERO to review a regional difference proposed by a Regional Entity.
    288. Many commenters, such as AEP, Ameren, AWEA, ELCON, EPSA, 
Exelon, FRCC, and International Transmission, as well as NERC, support 
the Commission's proposal that any enforceable regional difference be 
incorporated into the set of ERO Reliability Standards.
    289. Other commenters, however, disagree with the Commission's 
proposal that any regional difference be part of the ERO Reliability 
Standards. The California Board and SoCalEd argue that the Commission's 
interpretation of section 215(d)(3) is incorrect. While the California 
Board agrees that EPAct creates a process for the proposal and approval 
of a regional Reliability Standard, it sees nothing in EPAct to suggest 
than an Interconnection-wide Reliability Standard may not be considered 
a Regional Entity Reliability Standard.

Commission Conclusion

    290. The Commission believes that uniformity of Reliability 
Standards

[[Page 8689]]

should be the goal and the practice, the rule rather than the 
exception. Greater uniformity will encourage best practices, thereby 
enhancing reliability and benefiting consumers and the economy. 
Congress envisioned greater uniformity in adopting section 215 and a 
broad cross-section of the industry supports this goal. At our November 
18, 2005 technical conference, Michael Morris, the Chairman and CEO of 
American Electric Power, Inc., testifying on behalf of EEI, stated 
that: ``The regional differences should be few * * * and the 
enforcement latitude should be small.'' Tr. at 77:25-78:1 (Nov. 18, 
2005). His fellow panelists, representing various sectors of the 
industry, agreed with his remarks.
    291. The goal of greater uniformity does not, however, mean that 
regional differences cannot exist. We agree with WECC, NPCC, and others 
that section 215 of the FPA provides for exceptions from continent-wide 
uniformity in a Reliability Standard. Accordingly, we provide guidance 
on the criteria for considering such exceptions. As a general matter, 
we will accept the following two types of regional differences, 
provided they are otherwise just, reasonable, not unduly discriminatory 
or preferential and in the public interest, as required under the 
statute: (1) A regional difference that is more stringent than the 
continent-wide Reliability Standard, including a regional difference 
that addresses matters that the continent-wide Reliability Standard 
does not; and (2) a regional Reliability Standard that is necessitated 
by a physical difference in the Bulk-Power System.
    292. We also recognize that greater uniformity cannot be achieved 
overnight. For example, a significant number of current regional 
standards have been developed on topics for which there is no 
continent-wide standard, but rather only a NERC directive that the 
regions develop a particular standard. Over time, we would expect that 
the regional differences produced under this framework will decline and 
a set of best practices will develop. We would expect that any ERO 
applicant will propose a process by which regional differences in this 
and other areas can be refined into a set of best practices over time. 
This is particularly important for the Reliability Standards that apply 
to regions within an Interconnection. Although we encourage the 
development of continent-wide best practices, we recognize that greater 
diversity may be appropriate as between the Interconnections than 
within them.
    293. In response to PSNM-TNPC's concern that an abrupt transition 
to uniform Reliability Standards would negatively affect grid 
investment and transmission planning efforts, PSNM-TNPC has presented 
no convincing argument that this effect would occur. We expect that 
more uniformity of requirements could foster new investment. We agree, 
however, that those proposing uniform Reliability Standards should take 
into account the cost and time needed to achieve uniformity.
    294. The Commission does not establish here a generic 
grandfathering arrangement that would exempt any user, owner or 
operator from having to comply with any change in a Reliability 
Standard or a change resulting from a move to another Regional Entity. 
A user, owner or operator must follow the Reliability Standards of the 
ERO and the Regional Entity within which it is located. The expected 
level of uniformity of continent-wide Reliability Standards and of 
Reliability Standards within an Interconnection should protect any 
owner or operator that moves from one Regional Entity to another from 
incurring a large cost.
    295. Until a proposed regional difference is filed by the ERO with 
the Commission and approved by the Commission, any ERO-developed and 
Commission-approved continent-wide Reliability Standard is in effect 
and enforceable. No regional difference is enforceable under section 
215 of the FPA until it is filed by the ERO with the Commission and 
approved by the Commission.
    296. Any regional difference shall be considered part of the ERO's 
set of Reliability Standards. A regional difference that is proposed to 
the Commission by the ERO and approved by the Commission is an ERO 
Reliability Standard, not a Regional Entity Reliability Standard in the 
sense that California Board suggests.
    297. In response to the Western Governments and the California 
Commission, while the Commission cannot simply defer to the members of 
the Western Interconnection in regard to the establishment of regional 
Reliability Standards for the West, we recognize that there may be 
justifiable differences in a Reliability Standard based on physical 
differences in the electrical systems. In addition, we respect the 
rebuttable presumption afforded by section 215 of the FPA to a proposal 
for a Reliability Standard from a Regional Entity organized on an 
Interconnection-wide basis, as discussed below.
iv. Rebuttable Presumption for a Reliability Standard Proposed by an 
Interconnection-Wide Regional Entity
    298. The proposed rule would require the ERO to rebuttably presume 
that a proposed Reliability Standard or a modification to a Reliability 
Standard to be applicable on an Interconnection-wide basis is just, 
reasonable, not unduly discriminatory or preferential, and in the 
public interest if it is proposed by a Regional Entity organized on an 
Interconnection-wide basis.

Comments

    299. The ISO/RTO Council remarks that the rebuttable presumption is 
only an evidentiary presumption, not a requirement to accept any 
proposal. While complying with basic due process requirements, the ERO 
has a duty to collect information on the advantages and disadvantages 
of any proposed Reliability Standard. It states, however, that if after 
completing its due diligence, the ERO has not found any information 
rebutting the presumption, the ERO would accept the proposal.
    300. WECC and WestConnect ask the Commission to clarify the scope 
of the ERO's authority in reviewing a Reliability Standard proposed by 
an Interconnection-wide Regional Entity. Both recommend that the ERO be 
required to give substantial weight to the statutory presumption and 
deem it rebutted only in the most unusual circumstances based upon 
clear, convincing, and documented evidence. To accomplish this, WECC 
proposes a modification to the proposed regulation stating that, absent 
a showing based upon clear and convincing evidence rebutting the 
presumption, the ERO must promptly forward to the Commission a proposed 
Reliability Standard entitled to a rebuttable presumption. Further, the 
Regional Entity entitled to the rebuttable presumption should have an 
opportunity to respond to any evidence allegedly rebutting the 
presumption as well as an opportunity to appeal a decision not to 
forward a proposed Reliability Standard entitled to a rebuttable 
presumption to the Commission.

Commission Conclusion

    301. We clarify that the rebuttable presumption in section 39.5(b) 
refers to the burden of proof before the ERO. Any person objecting to 
the proposed Reliability Standard before the ERO would have the burden 
of demonstrating to the ERO that a Reliability Standard proposed by an 
Interconnection-wide Regional Entity

[[Page 8690]]

does not satisfy the ERO criteria for approval and is therefore not 
entitled to any presumption. The opportunity for the Regional Entity to 
respond to a rebuttal should be set out in the ERO Rules, as discussed 
above under due process. If the ERO does not find that the presumption 
is adequately rebutted, it must accept the proposed Reliability 
Standard from a Regional Entity organized on an Interconnection-wide 
basis to be just, reasonable, not unduly discriminatory or 
preferential, and in the public interest and must submit such a 
proposed Reliability Standard to the Commission for approval.
b. Reliability Standard Approval by the Commission
i. Commission Review
(a) Commission Review Process
    302. The proposed regulations on Reliability Standards provided 
that the Commission may approve a proposed Reliability Standard by rule 
or order. The NOPR states that the Commission anticipates that it will 
provide notice and opportunity for hearing of any proposed Reliability 
Standard or modification to a Reliability Standard.

Comments

    303. The few comments on this section generally recommend certain 
refinements to the process outlined in the NOPR. LADWP, however, 
suggests that greater detail and precision is required in the Final 
Rule.
    304. NERC generally supports the open process for considering a 
proposed Reliability Standard described in the NOPR, including the 
Commission's plan to provide interested parties opportunity to comment 
on a proposed Reliability Standard. NERC believes that, because of the 
technical nature of a Reliability Standard, a paper hearing would 
provide adequate opportunity for interested parties to explain their 
position. Southern recommends that the Commission clarify that a 
proceeding regarding a proposed Reliability Standard would generally be 
a paper hearing, not a trial-type adjudication.
    305. LADWP asserts that the Commission's statement in the NOPR that 
it ``generally anticipates'' that it will provide notice and 
opportunity for hearing of any proposed Reliability Standard is 
antithetical to the concept of due process in the FPA and the 
Administrative Procedure Act (APA).\89\ NiSource also emphasizes the 
need for notice and public comment.
---------------------------------------------------------------------------

    \89\ 5 U.S.C. Subchapter II (2005).
---------------------------------------------------------------------------

    306. FirstEnergy recommends that the Commission adopt an expedited 
review process for any proposed Reliability Standard developed through 
an ANSI-accredited process. A Commission hearing is unnecessary for a 
Reliability Standard that was already subject to an open stakeholder 
process. Ontario IESO and Progress Energy add that any perception that 
the Commission's review process allows new debate on a proposed 
Reliability Standard would weaken participants' commitment to the ERO's 
process.

Commission Conclusion

    307. In response to the comments of NERC and Southern, although the 
Commission agrees that it is likely that most proposed Reliability 
Standards would be decided on a paper hearing, we will not eliminate 
the possibility of setting a proposed Reliability Standard for a trial-
type hearing before an Administrative Law Judge, if appropriate.
    308. With regard to the comments of NiSource and LADWP, we note 
that section 215(c)(2)(D) of the FPA specifically requires the ERO to 
provide for reasonable notice and opportunity for public comment in 
developing a Reliability Standard. In contrast, section 215 does not 
specifically require that the Commission provide notice and an 
opportunity for public comment when reviewing a Reliability Standard 
proposed by the ERO. We will, however, provide notice and opportunity 
for public comment except in extraordinary circumstances. We note that 
section 215 of the FPA provides for an ERO Reliability Standard 
development process open to the participation of affected entities and 
do not want to encourage these entities to bypass that process in 
anticipation of raising concerns only with the Commission. Except in 
extraordinary circumstances, we expect persons commenting to the 
Commission about a proposed Reliability Standard to explain how they 
presented their views of the proposed Reliability Standard in the ERO 
or Regional Entity process and the result.
    309. FirstEnergy asks the Commission to develop an expedited review 
process for all proposed Reliability Standards. While it may be 
appropriate to expedite the process for a particular proposed 
Reliability Standard, we will not establish a special expedited process 
at the Commission for all proposed Reliability Standards in the Final 
Rule. The Commission may choose to have, or the ERO or others may 
petition for, an expedited review of a particular proposed Reliability 
Standard which may include waiver of our normal procedure for notice 
and an opportunity for comment.
(b) Legal Standard of Review of a Proposed Reliability Standard
    310. The Commission asked for comments on how the legal standard of 
review, i.e., whether a proposed Reliability Standard is ``just, 
reasonable, not unduly discriminatory or preferential, and in the 
public interest,'' should be applied to review of a proposed 
Reliability Standard.\90\
---------------------------------------------------------------------------

    \90\ NOPR at P 55.
---------------------------------------------------------------------------

Comments

    311. Comments vary on how the Commission should apply the standard 
of review. Some commenters offer a general principle while others 
suggest multi-part tests. Some commenters recommend that the Commission 
presume that a proposed Reliability Standard vetted through an ANSI-
certified process meets the standard of review.
    312. EEI states that the Commission should remain flexible in 
applying the statutory standard of review to a proposed Reliability 
Standard. According to EEI, a Reliability Standard should be based on 
technical and operational factors, and not vary with facility 
ownership. SMA and Oklahoma Commission suggest that the ERO should have 
the burden of demonstrating that a proposed Reliability Standard 
satisfies the statute's legal standard.
    313. Some commenters offer an overarching principle. For example, 
Southern and SERC suggest that, to satisfy the legal standard of 
review, a proposed Reliability Standard should promote the reliability 
of the Bulk-Power System. NYSRC remarks that the Commission should 
apply a general rule, such as, ``reasonably necessary to maintain an 
adequate level of reliability of the bulk power system.''
    314. Other commenters offer separate analysis for the three 
elements of the standard of review ``just and reasonable,'' ``undue 
discrimination'' and ``public interest.'' For example, APPA recommends 
that the Commission consider whether a proposed Reliability Standard is 
fair, whether it unjustifiably discriminates in its application among 
users of the Bulk-Power System and whether it furthers the public good. 
FRCC states that the proposed Reliability Standard must also not tilt 
the playing field in favor of a particular competitor or group of 
competitors. Alcoa and ERCOT suggest that the Commission should weigh 
the reliability benefits provided by a Reliability Standard with the 
overall cost or impact of compliance.

[[Page 8691]]

    315. FRCC recommends that, for the Commission to find a proposed 
Reliability Standard to be just and reasonable, the ERO must 
demonstrate that its proposal is reasonably necessary to achieve a 
legitimate reliability objective and not unduly expensive or burdensome 
relative to the benefits of the objective. FRCC suggests that the ERO 
should have to include with its submission an analysis of the costs, 
risks and benefits of each proposed Reliability Standard to add 
economic rigor to the Reliability Standard development process. For the 
Commission to find a proposed Reliability Standard to be not unduly 
discriminatory, no entity or group of entities should be required to 
bear costs that are disproportionate to the efficient costs of 
achieving reliability. EEI states that if the Commission finds that a 
proposed Reliability Standard may have an unduly discriminatory impact 
that is unrelated to technical or operational requirements, it should 
remand the proposed Reliability Standard to the ERO to determine 
whether the same level of reliability can be achieved in a non-
discriminatory way.
    316. NRECA proposes that the Commission determine whether (1) a 
proposed Reliability Standard would accomplish its intended effect in 
an efficient and effective manner (just and reasonable); (2) entities 
that are similarly situated receive similar or comparable treatment, 
and appropriate differences are recognized for entities that are not 
similarly situated (not unduly discriminatory); and (3) the reliability 
benefits are achieved in a manner that does not undermine, but may 
further, other legitimate objectives (public interest). Further, the 
Commission should ensure that a proposed Reliability Standard does not 
unnecessarily burden small utilities that minimally impact reliability.
    317. Alcoa comments that a proposed Reliability Standard should 
meet the following additional criteria: (1) The proposal is grounded in 
sound transmission engineering principles; (2) its requirements are 
clearly and unambiguously stated; and (3) it is not unduly burdensome 
or beneficial with respect to any particular class of operators, 
stakeholders, or end users.
    318. The ISO/RTO Council identifies numerous factors for the 
Commission to consider, including: (1) Is the particular proposed 
Reliability Standard the best way to define and measure the intended 
reliability objective and has the ERO evaluated the consequential 
impacts of the Reliability Standard? (2) Have any conflicts between the 
proposed Reliability Standard and approved tariffs been resolved? (3) 
Will entities be able to implement the proposed Reliability Standard in 
a relatively uniform manner? and (4) Is the proposed Reliability 
Standard capable of being implemented and enforced in other affected 
countries as well as the United States?
    319. Numerous commenters ask that the Commission defer to the 
technical expertise of the industry if a proposed Reliability Standard 
is developed through an ANSI-certified (or other open and fair) 
stakeholder process.\91\ They explain that an ANSI-certified process 
will have important attributes, including due process, openness, and 
balance, and will result in the most technically sound Reliability 
Standards. Some of these commenters \92\ recommend that the Commission 
establish a rebuttable presumption that a Reliability Standard 
developed through an ANSI-accredited process satisfies the legal 
standard.

Commission Conclusion

    320. We find informative the recommendations of commenters on 
criteria for reviewing a proposed Reliability Standard, particularly on 
how to apply the legal standard of review, ``just, reasonable, not 
unduly discriminatory or preferential, and in the public interest.'' 
Although we will not adopt every test that commenters propose, we do 
provide here general guidance regarding how the Commission will review 
a proposed Reliability Standard.
    321. The proposed Reliability Standard must address a reliability 
concern that falls within the requirements of section 215 of the FPA. 
That is, it must provide for the reliable operation of Bulk-Power 
System facilities. It may not extend beyond reliable operation of such 
facilities or apply to other facilities. Such facilities include all 
those necessary for operating an interconnected electric energy 
transmission network, or any portion of that network, including control 
systems. The proposed Reliability Standard may apply to any design of 
planned additions or modifications of such facilities that is necessary 
to provide for reliable operation. It may also apply to Cybersecurity 
protection.
---------------------------------------------------------------------------

    \91\ See, e.g., AEP, NARUC, NERC, Northeast Utilities, Progress 
Energy, PSEG Companies, Santee Cooper, SoCalEd, TVA and Ontario 
IESO.
    \92\ See, e.g., NERC, Santee Cooper and SoCalEd.
---------------------------------------------------------------------------

    322. The proposed Reliability Standard may impose a requirement on 
any user, owner, or operator of such facilities, but not on others.
    323. In considering whether a proposed Reliability Standard is just 
and reasonable, we will consider the following general factors, as well 
as other factors that are appropriate for the particular Reliability 
Standard proposed.
    324. The proposed Reliability Standard must be designed to achieve 
a specified reliability goal and must contain a technically sound means 
to achieve this goal. Although any person may propose a topic for a 
Reliability Standard to the ERO, in the ERO's process, the specific 
proposed Reliability Standard should be developed initially by persons 
within the electric power industry and community with a high level of 
technical expertise and be based on sound technical and engineering 
criteria. It should be based on actual data and lessons learned from 
past operating incidents, where appropriate. The process for ERO 
approval of a proposed Reliability Standard should be fair and open to 
all interested persons.
    325. The proposed Reliability Standard should be clear and 
unambiguous regarding what is required and who is required to comply. 
Users, owners, and operators of the Bulk-Power System must know what 
they are required to do to maintain reliability.
    326. The possible consequences, including range of possible 
penalties, for violating a proposed Reliability Standard should be 
clear and understandable by those who must comply.
    327. There should be a clear criterion or measure of whether an 
entity is in compliance with a proposed Reliability Standard. It should 
contain or be accompanied by an objective measure of compliance so that 
it can be enforced and so that enforcement can be applied in a 
consistent and non-preferential manner.
    328. The proposed Reliability Standard does not necessarily have to 
reflect the optimal method, or ``best practice,'' for achieving its 
reliability goal without regard to implementation cost or historical 
regional infrastructure design. It should however achieve its 
reliability goal effectively and efficiently.
    329. The proposed Reliability Standard must not simply reflect a 
compromise in the ERO's Reliability Standard development process based 
on the least effective North American practice--the so-called ``lowest 
common denominator''--if such practice does not adequately protect 
Bulk-Power System reliability. Although the Commission will give due 
weight to the technical expertise of the ERO, we will not hesitate to 
remand a proposed

[[Page 8692]]

Reliability Standard if we are convinced it is not adequate to protect 
reliability.
    330. A proposed Reliability Standard may take into account the size 
of the entity that must comply with the Reliability Standard and the 
cost to those entities of implementing the proposed Reliability 
Standard. However, the ERO should not propose a ``lowest common 
denominator'' Reliability Standard that would achieve less than 
excellence in operating system reliability solely to protect against 
reasonable expenses for supporting this vital national infrastructure. 
For example, a small owner or operator of the Bulk Power-System must 
bear the cost of complying with each Reliability Standard that applies 
to it.
    331. A proposed Reliability Standard should be designed to apply 
throughout the interconnected North American Bulk-Power System, to the 
maximum extent this is achievable with a single Reliability Standard. 
The proposed Reliability Standard should not be based on a single 
geographic or regional model but should take into account geographic 
variations in grid characteristics, terrain, weather, and other such 
factors; it should also take into account regional variations in the 
organizational and corporate structures of transmission owners and 
operators, variations in generation fuel type and ownership patterns, 
and regional variations in market design if these affect the proposed 
Reliability Standard.
    332. As directed by section 215 of the FPA, the Commission itself 
will give special attention to the effect of a proposed Reliability 
Standard on competition. The ERO should attempt to develop a proposed 
Reliability Standard that has no undue negative effect on competition. 
Among other possible considerations, a proposed Reliability Standard 
should not unreasonably restrict available transmission capability on 
the Bulk-Power System beyond any restriction necessary for reliability 
and should not limit use of the Bulk-Power System in an unduly 
preferential manner. It should not create an undue advantage for one 
competitor over another.
    333. In considering whether a proposed Reliability Standard is just 
and reasonable, the Commission will consider also the timetable for 
implementation of the new requirements, including how the proposal 
balances any urgency in the need to implement it against the 
reasonableness of the time allowed for those who must comply to develop 
the necessary procedures, software, facilities, staffing or other 
relevant capability.
    334. Further, in considering whether a proposed Reliability 
Standard meets the legal standard of review, we will entertain comments 
about whether the ERO implemented its Commission-approved Reliability 
Standard development process for the development of the particular 
proposed Reliability Standard in a proper manner, especially whether 
the process was open and fair. However, we caution that we will not be 
sympathetic to arguments by interested parties that choose, for 
whatever reason, not to participate in the ERO's Reliability Standard 
development process if it is conducted in good faith in accordance with 
the procedures approved by the Commission.
    335. Finally, we understand that at times development of a proposed 
Reliability Standard may require that a particular reliability goal 
must be balanced against other vital public interests, such as 
environmental, social and other goals. We expect the ERO to explain any 
such balancing in its application for approval of a proposed 
Reliability Standard.
    336. In addition to the factors above, in considering a Reliability 
Standard originally developed by a Regional Entity for application only 
within its own region, the Commission will consider other appropriate 
factors in determining if the proposed Reliability Standard is just and 
reasonable, not unduly discriminatory or preferential, and in the 
public interest. These include, but are not necessarily limited to, 
whether a regional difference is necessary or appropriate to maintain 
reliability and whether such a regional difference would affect 
reliable operation in another region. The ERO should also examine such 
factors in its consideration of such a regional proposal.
    337. In applying the legal standard to review of a proposed 
Reliability Standard, the Commission will consider the general factors 
above. The ERO should explain in its application for approval of a 
proposed Reliability Standard how well the proposal meets these factors 
and explain how the Reliability Standard balances conflicting factors, 
if any. The Commission may consider any other factors it deems 
appropriate for determining if the proposed Reliability Standard is 
just and reasonable, not unduly discriminatory or preferential, and in 
the public interest. The ERO applicant may, if it chooses, propose 
other such general factors in its ERO application and may propose 
additional specific factors for consideration with a particular 
proposed Reliability Standard.
    338. We reject the notion that we should presume that a proposed 
Reliability Standard developed through an ANSI-certified process 
automatically satisfies the statutory standard of review. In this 
regard, we agree with EEI and others that the development of a 
Reliability Standard through the ERO's stakeholder process is no 
guarantee that a proposed Reliability Standard does not have a 
discriminatory impact or negative effect on competition even if the 
proposal meets its technical or operational objective.
ii. Due Weight to Technical Expertise of the ERO and a Regional Entity 
Organized on an Interconnection-Wide Basis
    339. Consistent with the statute, the NOPR proposed that the 
Commission shall give due weight to the technical expertise of the ERO 
or a Regional Entity organized on an Interconnection-wide basis.

Comments

    340. NERC comments that the Commission is correct in recognizing 
that due weight should be given to the technical content of a 
Reliability Standard proposed by the ERO or a Regional Entity organized 
on an Interconnection-wide basis. However, the ISO/RTO Council and 
others question what it means to give such ``due weight.'' PacifiCorp 
and APPA suggest that providing ``due weight'' means that the 
Commission will rebuttably presume that a Reliability Standard proposed 
by an Interconnection-wide Regional Entity is just, reasonable, not 
unduly discriminatory or preferential, and in the public interest. 
PacifiCorp asks the Commission to clarify that it will approve such a 
proposed Reliability Standard in the absence of a specific finding that 
it would detrimentally affect competition to a substantial degree. APPA 
believes that the requirement that the ERO rebuttably presume the 
justness and reasonableness of an Interconnection-wide Regional 
Entity's proposal implies that the Commission must give the same 
rebuttable presumption.
    341. The ISO/RTO Council, in contrast, comments that EPAct does not 
direct the Commission to afford either the ERO or any Regional Entity 
the benefit of any presumption that a proposed Reliability Standard is 
just and reasonable. It is concerned that the ERO not become an 
automatic pass-through mechanism for all Reliability Standards proposed 
by any Regional

[[Page 8693]]

Entity organized on an Interconnection-wide basis.
    342. The Oklahoma Commission asks that the Commission not interpret 
the statutory grant of deference as a shift in the burden of proof; 
instead, the entity with the expertise should provide support for its 
proposal. Similarly, SMA suggests that the entity submitting a proposed 
Reliability Standard should have the burden of proof, just as the 
filing party has the burden of proof in an FPA section 205 or section 
206 proceeding.
    343. NiSource requests clarification of the extent to which the 
Commission will give due weight to the technical expertise of a 
Regional Entity organized on an Interconnection-wide basis. Section 
38.4(b)(1) of the proposed regulation makes clear that the Commission 
will give deference to the ERO for both a new and a modified proposed 
Reliability Standard. For a Regional Entity, however, proposed section 
38.4(b)(2) refers to deference ``with respect to a Reliability 
Standard.'' NiSource assumes the Commission intends to apply that 
deference to both a new and a modified proposed Reliability Standard, 
but requests clarification on that point.

Commission Conclusion

    344. The Commission adopts the provisions on due weight as proposed 
in the NOPR. The Commission will give due weight to the ERO and a 
Regional Entity organized on an Interconnection-wide basis with respect 
to their technical expertise.
    345. We do not agree that giving due weight means a rebuttable 
presumption that the Reliability Standard meets the statutory 
requirement of being just, reasonable, not unduly discriminatory or 
preferential, and in the public interest. Rather, we agree with the 
Oklahoma Commission and SMA that the ERO must justify to the Commission 
its contention that the proposed Reliability Standard or proposed 
modification to a Reliability Standard is just, reasonable, not unduly 
discriminatory or preferential, and in the public interest.
    346. Regarding the request for clarification by NiSource, we 
confirm that we will give due weight to the technical expertise of a 
Regional Entity organized on an Interconnection-wide basis with respect 
to either a proposed Reliability Standard modification or a new 
proposed Reliability Standard. The Final Rule reflects this in section 
39.5(c)(2).
iii. Due Weight to the Technical Expertise of a Regional Entity Not 
Organized on an Interconnection-Wide Basis
    347. The Commission interpreted sections 215(d)(2) and (3) of the 
FPA as not requiring the Commission to accord any additional weight to 
the technical expertise of a Regional Entity not organized on an 
Interconnection-wide basis and not creating a rebuttable presumption 
with regard to the reasonableness of a Reliability Standard proposed by 
the ERO or proposed to it by such a Regional Entity for ERO 
consideration.\93\
---------------------------------------------------------------------------

    \93\ NOPR at P 46.
---------------------------------------------------------------------------

Comments

    348. Many commenters suggest that the Commission should also give 
due weight to the technical expertise of a Regional Entity not 
organized on an Interconnection-wide basis.\94\ They note that, while 
the Commission is not required to give such due weight, nothing in 
section 215 precludes the Commission from doing so in appropriate 
circumstances. MidAmerican suggests that the Commission give 
appropriate deference to the technical expertise of a Regional Entity 
that represents a significant portion of the Eastern Interconnection 
without being an Interconnection-wide organization. In a similar vein, 
Northeast Utilities asserts that the extension of deference by Congress 
to an Interconnection-wide Regional Entity should not be read as a 
directive that a Regional Entity that is smaller in scope is entitled 
to no deference at all. Rather, the Commission should recognize that 
certain organizations that are not Interconnection-wide have a long 
history of developing more stringent standards for regions that seek 
more reliable service or have unique local circumstances.
---------------------------------------------------------------------------

    \94\ See, e.g., Ameren, California ISO, Diaryland, MidAmerican, 
MISO Owners, NE Pool Participants, New York Companies, NiSource, 
NYSRC, New York ISO and TANC.
---------------------------------------------------------------------------

    349. According to the New York Companies, the Commission's 
interpretation that only an Interconnection-wide Regional Entity is 
statutorily entitled to due weight would result in two classes of 
Regional Entities and would disadvantage Regional Entities that are in 
a large, complex Interconnection where regional technical expertise is 
valuable. NYSRC and Dairyland contend that the Commission should 
provide due deference to all Regional Entities since they must satisfy 
the certification criteria applicable to the ERO.
    350. FRCC and Southern comment that a Reliability Standard proposed 
by a Regional Entity not organized on an Interconnection-wide basis 
must be approved by the ERO. Further, EPAct requires the Commission to 
give due weight to the ERO's determinations. Therefore, when reviewing 
such a proposed Reliability Standard, the Commission must give due 
weight to the underlying technical determinations made by the ERO 
because the proposal will have undergone ERO review and approval.

Commission Conclusion

    351. The statute provides that in the case of a Reliability 
Standard proposed by a Regional Entity organized on an Interconnection-
wide basis the Commission should give due weight to the technical 
expertise of that Regional Entity. The statute does not provide for 
similar treatment for a Regional Entity that is not organized on an 
Interconnection-wide basis. However, as a practical matter, the 
Commission will give appropriate weight to the expertise of any 
Regional Entity, and in all cases a proposed Reliability Standard must 
be supported by the record. As stated above, the statute also provides 
for a ``rebuttable presumption'' by the ERO that a proposed Reliability 
Standard from an Interconnection-wide Regional Entity is just and 
reasonable but does not provide for similar treatment for a Regional 
Entity that is not organized on an Interconnection-wide basis. 
Accordingly, no such presumption shall apply for Regional Entities that 
are not organized on an Interconnection-wide basis.
iv. No Deference on Competition
    352. Consistent with the statute, the proposed regulations provided 
that the Commission shall not defer to the ERO or a Regional Entity 
with respect to the effect of a proposed Reliability Standard on 
competition. The NOPR asked how the Commission should define 
competition in this context and asked for examples of the effects of a 
Reliability Standard on competition.\95\
---------------------------------------------------------------------------

    \95\ NOPR at P 48.
---------------------------------------------------------------------------

Comments

    353. Commenters explain that reliability and competition are 
intrinsically linked. They provide several examples of the possible 
effects of a Reliability Standard on competition. Commenters provide 
varying definitions of competition. Substantive comments on this 
section are grouped into three categories: (a) Linkage between 
reliability and

[[Page 8694]]

competition; (b) definition of competition; and (c) Commission weighing 
of competitive effects.
(a) Linkage Between Reliability and Competition
    354. Many commenters emphasize the close link between reliability 
and competition.\96\ EEI and Entergy remark that it is difficult to 
define a Reliability Standard that has no impact on competition. The 
ISO/RTO Council explains that a Reliability Standard can adversely 
impact competition either by creating a preference for one market 
participant over another (by defining the limits within which market 
participants compete) or by driving an outcome that eliminates the 
ability of the market to respond to reliability needs with market-
oriented solutions.
---------------------------------------------------------------------------

    \96\ See. e.g., AEP, Ameren, Exelon, National Grid, NERC, Santee 
Cooper and SPP.
---------------------------------------------------------------------------

    355. NERC notes that it currently uses five market-reliability 
interface principles in developing a Reliability Standard: (1) The 
planning and operation of bulk electric systems shall recognize that 
reliability is an essential requirement of a robust economy; (2) a 
Reliability Standard shall not give any market participant an unfair 
competitive advantage; (3) a Reliability Standard shall neither mandate 
nor prohibit any specific market structure; (4) a Reliability Standard 
shall not preclude market solutions to achieving compliance with that 
Reliability Standard; and (5) a Reliability Standard shall not require 
the public disclosure of commercially sensitive information.
    356. Commenters identify numerous examples of the effects a 
Reliability Standard may have on competition. EEI, SPP and others 
identify the transmission loading relief curtailment practice as an 
example of a Reliability Standard that affects competition. SPP states 
that there are a number of market-based solutions to relieving 
congestion but each has different results in reliability and market 
outcomes. EEI also identifies as examples line rating methodologies, 
generator testing requirements and calculation of available transfer 
capability.
    357. TAPS identifies the treatment of inadvertent exchange and 
energy imbalance as a Reliability Standard that has an effect on 
competition. Inadvertent interchange between control areas may be 
returned in kind, while non-control area utilities are subject to 
unduly burdensome penalties for energy imbalances outside a narrowly 
defined range.
    358. CenterPoint comments that the link between reliability and 
competition is exemplified by a Reliability Standard mandating the 
provision of reactive power by generating units connected to the grid. 
While necessary for reliable operation of the grid, generators could 
argue that such a Reliability Standard is anticompetitive because it 
may not allow them to supply as many megawatts to the grid as they 
would be able to supply absent the Reliability Standard or would 
otherwise reduce the generators' operating margins.
    359. SoCalEd identifies reliability-must-run (RMR) generation and 
local area reliability service (LARS) as examples of Reliability 
Standards that can affect competition. SoCalEd states that the 
designation of generators as RMR and LARS generation can result in 
market power for these resources, to the detriment of the wholesale 
market and customers.
(b) Definitions of Competition
    360. While commenters suggest varying definitions of 
``competition,'' many focus on multiple sellers serving a market. For 
example, EPSA states that, fundamentally, competition means the rivalry 
among multiple businesses to supply potential customers with a 
particular product or service within a given market. Generally, a 
Reliability Standard that would influence anyone's opportunity to 
compete, or to benefit from such competition, can be said to affect 
competition, although the significance of the impact will vary. EPSA 
states that the Commission should also consider whether a proposed 
Reliability Standard would increase operating costs, reduce available 
transmission capacity, deter flexible operations, ensure timely access 
to information, or deter new entry.
    361. SPP and AEP would define ``competition'' as a business 
environment in which more than one supplier can potentially serve a 
market with like products and services and the customer has the ability 
to choose the supplier that best serves its needs. APPA describes 
competition as the ``availability or price of transmission service or 
bulk power supplies to a user or class of users of the bulk power 
system.''
    362. NARUC suggests defining ``competition'' for the evaluation of 
a proposed Reliability Standard as ``commercial activities within the 
electric industry that are limited in some way by the physical 
limitations of the bulk power system.''
    363. Exelon quotes an American Heritage Dictionary definition of 
competition but also adds the following electricity-market-specific 
characteristics: (1) Many suppliers accessing the transmission system 
to market diverse products to customers; (2) available information 
about access and cost that allows market participants to identify and 
allocate commercial risks; (3) efficient physical market structures and 
operations that provide a strong platform for the development of 
financial markets; (4) minimized market entry and exit costs; (5) all 
interested parties are permitted to invest in and create new 
infrastructure; and (6) a marketplace free from undue discriminatory 
treatment.
    364. American Transmission and others focus on whether the impact 
of a Reliability Standard on market participants would result in undue 
discrimination. ELCON states the effect of a Reliability Standard on 
competition lies in the ability of a market participant to use the 
Reliability Standard to influence the price of a transaction or 
discriminate against a competitor, or to give preferential treatment to 
one class of market participants. Entergy recommends that the 
Commission focus its reviews on ensuring that the proposed Reliability 
Standard does not have an unduly discriminatory impact on a particular 
class of customers.
    365. The New York Companies suggest that competition be defined as 
the existence of ``effective'' competition. For example, if a specific 
Reliability Standard requires the provision of a service that only a 
few entities can provide, the Reliability Standard should consider 
whether there are any barriers to the provision of that service in a 
competitive manner. If so, the Commission must determine if this 
service should be provided on a cost-of-service basis rather than on a 
competitive basis.
    366. AWEA recommends that the Commission apply the classical 
criteria of ``perfect'' competition. Thus, any Reliability Standard 
that reduces the number of buyers or sellers, creates barriers to entry 
or exit, reduces the information available to the market, or increases 
transaction costs should be deemed to harm competition. Such harm to 
competition must be weighed against the reliability benefits--except 
for discrimination which must not be balanced against other factors.
    367. Other commenters, such as Ameren, FRCC and MidAmerican, state 
that the Commission should evaluate the effect of a proposed 
Reliability Standard on competition on a case-by-case basis. Ameren 
suggests that the Commission decide for each proposed Reliability 
Standard whether it would effect competition in an unreasonable way.

[[Page 8695]]

    368. TAPS notes that competition takes place not only through 
prices, but also through the quality of service. The Commission must 
consider the competitive impact of a Reliability Standard in the 
context of retail and wholesale markets, as well as in the context of 
other jurisdictional tariffs, rate schedules, rules and policies, and 
business practices.
    369. Kansas City P&L states that Reliability Standards should be 
based on the physical limitations and operational parameters of the 
Bulk-Power System for reliable, stable operation. Rules, regulations 
and policy that determine the market actions necessary to conduct 
business, including promoting competition, should follow the framework 
and structures created by the Reliability Standards, not vice-versa.
(c) Commission Weighing of Competitive Effects
    370. Commenters offer various prescriptions regarding how the 
Commission should weigh competitive effects when reviewing a proposed 
Reliability Standard. Ohio Commission and others emphasize that system 
reliability is paramount and should not be compromised. International 
Transmission comments that Reliability Standards are not a barrier to 
competition but, rather, support competition since reliability is the 
basis on which competitive markets are built. Thus, incidental effects 
on competition cannot be allowed to overrule the need for strong 
Reliability Standards.
    371. National Grid comments that the Commission's assessment of the 
competitive effects of a proposed Reliability Standard should involve a 
traditional balancing of various factors, and the Commission should 
approve a proposed Reliability Standard that meets a reliability need 
as long as it would not unduly harm competition.
    372. Old Dominion comments that the Commission should prefer 
Reliability Standards that promote competition, while rejecting or 
correcting Reliability Standards that harm competition. NRECA comments 
that, rather than reject a proposed Reliability Standard out of concern 
for the effect it may have on competition, it is more appropriate for 
the Commission to change market rules under FPA section 206. It is 
easier for entities to adapt to a new Reliability Standard than it is 
for the Commission to compensate consumers for the enormous economic 
disruption caused by a widespread outage on the Bulk-Power System.
    373. MISO comments that the Commission should ensure that 
Reliability Standards are compatible with competitive energy markets. 
However, SERC and TVA are concerned that reliability not be made 
secondary to the promotion of competitive markets. SoCalEd and National 
Grid similarly note that effects on competition in non-formal, 
bilateral markets must be considered, and any evaluation of effects on 
competition should not be limited to an assessment of organized 
electricity markets under RTOs or ISOs.
    374. CenterPoint asserts that it is appropriate and in the public 
interest for Reliability Standards to affect competition in certain 
instances. It states that the Commission and the ERO cannot 
unreasonably discriminate among competitors, but it is reasonable and 
in the public interest, and consistent with the intent of EPAct, to 
establish Reliability Standards that afford an advantage to competitors 
that enhance the reliability of the grid over competitors that do not.
    375. NARUC and others note that NERC's existing standards 
development process works to minimize the impact of Reliability 
Standards on competition by working closely with NAESB, which 
establishes business practice standards. Others, such as MidAmerican 
and PSEG Companies, recommend that the Commission use the processes 
developed jointly by NERC and NAESB as an appropriate indication of the 
demarcation between the reliability and commercial aspects of the Bulk-
Power System.

Commission Conclusion

    376. While it is clear that reliability and competition may be 
intrinsically linked at times, the Commission declines to adopt a 
generic test to balance reliability and competition concerns in the 
absence of specific facts. We will evaluate the effects of a proposed 
Reliability Standard on competition on a case-by-case basis.
    377. Although comments on how to define competition have been 
informative, we conclude that no such definition is necessary in the 
Final Rule. No single definition appears sufficient to cover all the 
relevant bases for evaluating a proposed Reliability Standard's effect 
on competition.
    378. In approving a Reliability Standard, we will ensure that it 
does not have the implicit effect of either favoring or thwarting 
either bilateral or organized markets. At the same time, we will also 
ensure that a proposed Reliability Standard does not unduly favor 
either individual participants or certain classes of participants, as 
required by the statute. Accordingly, we will balance any conflict 
between a proposed Reliability Standard and competition on a case-by-
case basis.
c. Effective Date
    379. The proposed regulations provided that an approved Reliability 
Standard or a modification to a Reliability Standard shall take effect 
``as approved by the Commission.''
    380. MidAmerican asks that the Commission revise the provision to 
state that a Reliability Standard shall take effect ``when approved by 
the Commission.''

Commission Conclusion

    381. We decline to make the requested change because, in accepting 
a Reliability Standard, the Commission may find it necessary to phase-
in certain requirements due to the costs and difficulties of 
implementation, or because a sudden changeover could have a negative 
impact on reliability. Therefore, we decline to change the Final Rule 
from ``as'' to ``when.''
d. Remand of a Proposed Reliability Standard
    382. The FPA authorizes the Commission to remand a proposed 
Reliability Standard to the ERO if it determines that it does not meet 
the legal standard of review. The NOPR attempted to better define the 
precise nature of this remand authority, as well as the requirements 
for international coordination of remand, and for setting deadlines on 
remand.
i. Remand
    383. Consistent with the statute, the NOPR proposed that the 
Commission would remand to the ERO for further consideration a proposed 
Reliability Standard or proposed modification to a Reliability Standard 
that the Commission disapproves in whole or in part.

Comments

    384. NERC comments that, while it supports the proposed remand 
provision, the Commission is not authorized to rewrite the rejected 
Reliability Standard. Rather, the ERO should be able to apply its 
technical expertise to all phases of the drafting of a proposed 
Reliability Standard.
    385. IEEE recommends that, when remanding a proposed Reliability 
Standard or a proposed modification to an existing Reliability 
Standard, the Commission make clear any technical objections that it 
has with the proposal so that its concerns may be properly addressed on 
remand.
    386. South Carolina E&G and Southern ask the Commission to clarify

[[Page 8696]]

that the ERO, when deliberating on a remanded Reliability Standard, 
must allow affected parties to fully participate through an ANSI-
certified stakeholder process.
    387. Old Dominion states that the Commission should not only be 
able to remand a proposed Reliability Standard but also be allowed to 
reject it. However, the Commission should only reject or remand a 
proposed Reliability Standard if an interim Reliability Standard is in 
place, or if the proposed Reliability Standard does not address a vital 
reliability concern. It states that, where the Commission rejects or 
remands a proposed Reliability Standard, it should do so with specific 
direction for a revised or alternative Reliability Standard to be 
proposed within a reasonable time.
    388. SERC, TVA, and Santee Cooper recommend that the Commission not 
remand a Reliability Standard absent a clear showing of a failure of 
the ERO's Reliability Standard approval process because a Reliability 
Standard proposed by the ERO will have already been through due process 
with open participation by all stakeholders.
    389. Hydro-Qu[eacute]bec comments that the Commission should remand 
a Reliability Standard to the ERO only if the ERO is the only entity 
permitted to propose a Reliability Standard to the Commission. However, 
if a Regional Entity may submit a proposed Reliability Standard 
directly to the Commission, the Commission should remand the proposal 
to the Regional Entity.

Commission Conclusion

    390. The Commission adopts the substance of the NOPR's provisions 
on remand of a proposed Reliability Standard. We will either accept or 
remand a proposed Reliability Standard. If we remand a proposed 
Reliability Standard or a proposed modification to a Reliability 
Standard, we intend to specify our concerns so that the ERO can address 
them. We disagree with SERC and others that the Commission should not 
remand a proposed Reliability Standard or a proposed modification to a 
Reliability Standard absent a clear showing of a failure of the ERO's 
Reliability Standard development process. Because the Commission has a 
responsibility to ensure that a proposed Reliability Standard or 
modification to a Reliability Standard is just, reasonable, not unduly 
discriminatory or preferential, and in the public interest--as well as 
assess its effects on competition--we will not so limit our ability to 
remand.
    391. Old Dominion does not explain the meaning of a ``rejected'' 
Reliability Standard or the difference between remand and rejection. We 
assume Old Dominion refers to a proposed Reliability Standard that we 
find to be wholly inappropriate. In the unlikely event of such a 
rejection, the Commission would provide any specific direction 
necessary to ensure that reliability is protected.
    392. Hydro-Qu[eacute]bec's concern is moot because a Regional 
Entity cannot submit a Reliability Standard directly to the Commission.
ii. International Coordination of Remands
    393. The NOPR asked for comment on whether the Final Rule should 
specify a process for notifying all relevant regulatory authorities 
when a proposed Reliability Standard is remanded to ensure that all 
concerns of such regulatory authorities are addressed prior to 
resubmission of the Reliability Standard.\97\ The NOPR also asked 
commenters to discuss the implications of the remand by an authority in 
Canada of a Reliability Standard that has been approved by the 
Commission.
---------------------------------------------------------------------------

    \97\ NOPR at P 57.
---------------------------------------------------------------------------

Comments

    394. All commenters agree that international coordination on remand 
of a Reliability Standard is extremely important. They differ on 
whether the Commission should address such coordination in the Final 
Rule or whether this issue is better addressed at the time the ERO 
files its application. As a third option, some Canadian commenters 
suggest that coordination between Canadian and United States 
jurisdictions is more properly the subject of an international 
agreement directly between the respective regulatory authorities. 
Further, commenters differ on whether an approved Reliability Standard 
should go into effect if an authority in another country remands the 
Reliability Standard.
    395. BCTC, SoCalEd, and PSEG Companies believe that the Final Rule 
should require the ERO to notify all relevant regulatory authorities 
when a proposed Reliability Standard has been remanded by any one of 
them. Alcoa states that the Commission should specify a process for the 
resolution of conflicts between the Commission and Canadian 
authorities. Hydro-Qu[eacute]bec recommends that the Final Rule 
establish only general principles for coordination because overly 
prescriptive directives could jeopardize the ERO's ability to harmonize 
Reliability Standards across international borders.
    396. In contrast, EEI and NERC state that the Final Rule should not 
specify a process by which the ERO must coordinate among the relevant 
regulatory authorities but, rather, an ERO applicant should propose an 
approach in its ERO application. APPA states that the ERO should be 
free to negotiate procedures and substantive rules with Canadian and 
Mexican authorities based on their own statutory requirements. Ontario 
IESO states that international coordination is best addressed by an 
agreement between authorities.
    397. Some commenters express views on whether a Reliability 
Standard approved by the Commission but remanded by Canadian 
authorities should be enforceable in the United States. EEI states 
that, in such a scenario, the Commission should ensure that there is no 
gap in its application within the United States while Canadian concerns 
are being addressed by the ERO. Alberta and the ISO/RTO Council comment 
that a remand in one jurisdiction should not necessarily negate 
enforcement of a Reliability Standard in another. However, the remand 
of a proposed Reliability Standard by the Commission will require the 
ERO to revisit it and address the concern of all relevant authorities. 
Similarly, Ameren and FRCC do not believe that a Canadian remand would 
bind the Commission.
    398. National Grid and MRO take the opposite view and state that a 
proposed Reliability Standard should not become effective until all 
affected countries have approved it. National Grid comments that, 
without explicit coordination among regulatory officials of all 
affected countries, a proposed Reliability Standard could be accepted 
in one jurisdiction but remanded in another, which could lead to the 
untenable situation of having different Reliability Standards apply to 
different parts of the same grid. The interconnected grid cannot be 
operated or used in accordance with multiple, inconsistent Reliability 
Standards.
    399. Commenters support international coordination not only at the 
remand stage, but also stress that consultation among authorities in 
the Reliability Standard development process will reduce the likelihood 
of a remand in one country but not the other.\98\ The ISO/RTO Council 
comments that preventing conflicts

[[Page 8697]]

between jurisdictions should be an integral, high-priority element of 
the procedures and stakeholder processes employed by the ERO and Cross-
Border Regional Entities in developing a proposed Reliability Standard. 
When first evaluating a proposed Reliability Standard, the Commission 
should consider whether the ERO has determined that all other affected 
jurisdictions can implement the Reliability Standard. Hydro-
Qu[eacute]bec emphasizes the importance of integrating Canadian 
perspectives into the ERO's Reliability Standard development process.
---------------------------------------------------------------------------

    \98\ See, e.g., BCTC, CEA, ISO/RTO Council, MRO and National 
Grid.
---------------------------------------------------------------------------

Commission Conclusion

    400. The ERO will be an international organization that must seek 
recognition in Canada and Mexico. Thus, we agree with commenters that 
international coordination is important to the Reliable Operation of 
the Bulk-Power System. Therefore, we direct the ERO applicant to 
propose in its certification application an approach for international 
coordination regarding the remand, as well as the initial development, 
of a Reliability Standard that will apply in each relevant country.
iii. Deadline for Submitting a Revised Proposal for a Reliability 
Standard in Response to a Remand
    401. The NOPR proposed that the Commission, when remanding a 
proposed Reliability Standard, may state a deadline by which the ERO 
must resubmit the proposed Reliability Standard with revisions that 
address the reasons for the remand.\99\ The NOPR stated that the 
failure to meet such a deadline would constitute a violation of the 
FPA.
---------------------------------------------------------------------------

    \99\ NOPR at P 53.
---------------------------------------------------------------------------

Comments

    402. While a few commenters agree that the Commission is authorized 
to set a deadline, most caution that strict enforcement of deadlines 
either will interfere with international coordination or violate the 
requirement for openness and balance of interests in the ERO's 
Reliability Standard development process.
    403. NARUC and the Ohio Commission comment that, while imposing a 
deadline for resubmitting a remanded Reliability Standard may be within 
the scope of the Commission's authority, the Commission should exercise 
caution in using that authority so as not to interfere with the ERO's 
Reliability Standard development process.\100\ NARUC states that the 
integrity of the existing process rests on balanced stakeholder input, 
which in turn depends on notice and opportunity for comment.
---------------------------------------------------------------------------

    \100\ See also APPA, MidAmerican, South Carolina E&G and Xcel 
Energy.
---------------------------------------------------------------------------

    404. APPA comments that it may be appropriate for the Commission to 
set a deadline for resubmission of a proposed Reliability Standard but 
expresses concern that the deadline must be reasonable. South Carolina 
E&G recommends that the Commission should allow a minimum of six 
months. NiSource urges flexibility in setting deadlines.
    405. CEA and Alberta comment that the remand provision is a key 
factor in allowing the ERO to function on an international basis, and 
imposing a deadline for consideration of a remanded Reliability 
Standard could compromise the ERO's ability to coordinate with the 
various jurisdictional authorities. By allowing the industry-based 
organization to work with its regulatory agencies, the remand process 
is intended to ensure that no one regulatory body can impose a 
Reliability Standard outside of its jurisdiction.
    406. MRO contends that a failure by the ERO or a Regional Entity to 
meet a Commission deadline should not be considered a violation of the 
FPA. MRO believes that the Commission's authorities to decertify the 
ERO and revoke a Regional Entity's delegation agreement are more 
appropriate for ensuring that Commission-imposed deadlines are met. 
Also, because the ERO and Regional Entities will most likely be 
organized as nonprofit organizations, monetary penalties will have to 
be passed along to those entities subject to the Reliability Standards.
    407. MidAmerican states that the Commission should not impose a 
penalty for failure to meet a deadline if the ERO demonstrates good 
faith progress and provides a reasonable schedule for completion.

Commission Conclusion

    408. Timely attention to the reliability needs of the Bulk-Power 
System requires that the Commission have appropriate procedural tools 
to guide the ERO through a timely Reliability Standard remand process. 
Such procedural tools, while not specified in detail in new section 215 
of the FPA, are both necessary and fully consistent with the 
authorities expressly granted to the Commission by statute. The Final 
Rule contains Commission authority to set a deadline on remand at 
section 39.5(g). Any necessary deadline will be established in a 
reasonable manner taking into consideration the complexity of the 
issue.
    409. The Commission recognizes the benefit of coordination with 
relevant Canadian and Mexican authorities on remand, including 
consideration of a deadline. Accordingly, if we remand an ERO-proposed 
Reliability Standard, we will consider the time needed for Canadian and 
Mexican authorities to act also.
    410. We appreciate APPA's comment about the reasonableness of a 
deadline; we will consider the time needed for a proposed revision to 
go through the ERO's process as well as any need to have an enforceable 
Reliability Standard in a timely manner. The ERO applicant should 
specifically propose an accelerated process for addressing a 
Reliability Standard that has been remanded with a specific 
deadline.\101\
---------------------------------------------------------------------------

    \101\ For example, NERC's existing ANSI-certified process 
incorporates an ``urgent action'' procedure, which allows an interim 
reliability standard to be developed more quickly.
---------------------------------------------------------------------------

    411. We disagree with MRO and reaffirm our interpretation that a 
failure to meet a Commission-imposed deadline would be considered a 
violation of the FPA. The ability to set a deadline derives from the 
Commission's authority to remand a proposed Reliability Standard 
together with our authority under section 215(e)(5) to take such action 
as is necessary or appropriate against the ERO or a Regional Entity to 
ensure compliance with any Commission order affecting the ERO or a 
Regional Entity.
    412. As to the recommendation of MidAmerican that the Commission 
defer imposing a penalty while the ERO or Regional Entity is making a 
good-faith effort, we repeat that we will be flexible and reasonable in 
setting deadlines. However, should we determine that a deadline is 
necessary and the ERO fails to comply with the deadline we have 
established, we reserve the authority to impose a penalty according to 
the FPA.
e. Commission-Initiated Actions on a Reliability Standard
i. Commission Directive That the ERO Address a Specific Issue
    413. The NOPR proposed that the Commission may, upon its own motion 
or a complaint, order the ERO to submit a proposed Reliability Standard 
or a proposed modification to a Reliability Standard that addresses a 
specific matter if the Commission considers such a new or modified 
Reliability

[[Page 8698]]

Standard appropriate to carry out section 215 of the FPA.

Comments

    414. EEI comments that, while the Commission may determine that a 
particular reliability issue should be addressed by the development of 
a Reliability Standard, it should use the ERO's Reliability Standard 
development process to implement its determination.
    415. Santa Clara recommends that the Final Rule expressly include a 
clear, fair and meaningful petition process that would enable any 
interested person to petition the Commission or the ERO to add or 
revise a Reliability Standard. The ERO and the Commission would retain 
the discretion whether or not to accept an outside party's request for 
the adoption of a new or revised Reliability Standard.

Commission Conclusion

    416. Section 39.5(f) of the Final Rule accommodates these two 
comments. First, the Commission's authority to order the ERO to address 
a particular reliability topic is not in conflict with other provisions 
of the Final Rule that assign the responsibility for developing a 
proposed Reliability Standard to the ERO.
    417. Second, section 39.5(f) of the Final Rule authorizes the 
Commission to act on its own motion or upon ``a complaint.'' The 
Commission may direct the ERO to propose a new Reliability Standard in 
response to a complaint. The ERO, as the entity responsible for the 
development of Reliability Standards, should normally be approached 
first with a request to initiate a new Reliability Standard to address 
a particular issue. As we discuss above, the ERO's Reliability Standard 
development process must be open to public participation.
ii. Review of an Approved Reliability Standard
    418. The NOPR proposed that the Commission, upon its own motion or 
complaint, may review a previously-approved Reliability Standard and 
order the ERO to modify it if it no longer satisfies the statutory 
standard of review.\102\
---------------------------------------------------------------------------

    \102\ While the proposed regulation allows a remand to the ERO, 
the NOPR, at P 52, states that the Commission may remand the 
Reliability Standard to the ERO or the relevant Regional Entity.
---------------------------------------------------------------------------

Comments

    419. NERC comments that, while the NOPR would allow the Commission 
to direct either the ERO or a Regional Entity to modify a Reliability 
Standard, the Commission should direct only the ERO because the ERO is 
the only entity that directly submits a proposed Reliability Standard 
to the Commission for approval. Further, EPAct does not provide for a 
request for modification to a Regional Entity.
    420. APPA comments that the Commission must send a previously-
approved Reliability Standard to the ERO and the Commission cannot 
change the Reliability Standard. It states that, in reviewing a 
previously-approved Reliability Standard, the burden of proof must rest 
on the party seeking to change or overturn the Reliability Standard. 
Also, after a previously-approved Reliability Standard is sent for 
modification, it should remain enforceable until the replacement is 
approved and in effect--unless the Commission determines that Bulk-
Power System reliability is better served by not having and enforcing 
the Reliability Standard.
    421. Similarly, Xcel Energy recommends that when ordering a 
modification of a previously-approved Reliability Standard, to avoid a 
period with no Reliability Standard in place, the Commission should 
grant a grace period for the ERO to propose a modification to the 
Reliability Standard. During that period, the original unmodified 
Reliability Standard would be in effect.
    422. LADWP states that the Commission should order the ERO to 
submit a modification only after notice and opportunity for hearing, 
and after having found that the Reliability Standard is unjust, 
unreasonable or unduly discriminatory and not in the public interest.

Commission Conclusion

    423. The Commission adopts the proposal that the Commission may 
review a previously-approved Reliability Standard and order the ERO to 
modify it if it no longer satisfies the statutory standard of review as 
proposed. We agree with NERC that the Commission should order only the 
ERO to modify a Reliability Standard because the ERO is the only entity 
that may directly submit a proposed Reliability Standard to the 
Commission for approval. There is no change needed in the text of the 
proposed regulations because they provided that the Commission may 
order only the ERO to modify a Reliability Standard.
    424. We agree with APPA that the Commission cannot change the 
Reliability Standard and must send the Reliability Standard to the ERO 
for modification.
    425. Regarding the comments of APPA and Xcel Energy that the 
existing Reliability Standard should remain enforceable until a 
replacement is approved, we agree. However, in the rare case of a 
Reliability Standard that is causing harm to the Bulk-Power System we 
expect all interested persons to cooperate in a process to correct the 
approved Reliability Standard as soon as possible.
    426. We reject the proposition of LADWP that special procedures 
must apply to the action of the Commission on its own motion.
iii. Commission Authority To Void a Reliability Standard
    427. The Commission asked for comments on whether it has authority 
to void a previously-approved Reliability Standard and, if so, whether 
it is beneficial to have such a provision in the Commission's 
regulations.\103\
---------------------------------------------------------------------------

    \103\ NOPR at P 54.
---------------------------------------------------------------------------

Comments

    428. Most commenters caution the Commission against claiming the 
authority to void a previously approved Reliability Standard, claiming 
that: (1) It is not permitted by section 215 of the FPA; (2) it is 
antithetical to the ANSI stakeholder process; and (3) the relationship 
between individual Reliability Standards is complex so that voiding one 
Reliability Standard could result in unwanted gaps or conflicts with 
the remaining Reliability Standards. Other commenters favor the 
proposal and argue that the authority to void a Reliability Standard is 
a natural extension of the authorities defined in section 215 of the 
FPA.
    429. NARUC and LADWP do not believe that section 215 of the FPA 
grants the Commission authority to void a Reliability Standard, in 
whole or in part, whether new or previously accepted.\104\ Section 215 
of the FPA authorizes the Commission to approve or remand a proposed 
Reliability Standard. If the Commission takes issue with an existing 
approved Reliability Standard, it should direct the ERO to modify the 
Reliability Standard through its Reliability Standard development 
process, as provided by statute. Voiding a Reliability Standard would 
extend beyond the Commission's statutory authority and would be 
contrary to the approach in section 215. APPA also argues that the 
Commission lacks the authority to void a previously approved 
Reliability Standard, with the possible exception of those found to 
have a

[[Page 8699]]

substantial negative impact on competition.
---------------------------------------------------------------------------

    \104\ See also FRCC, MRO, NRECA, Ohio Commission and Southern 
Companies.
---------------------------------------------------------------------------

    430. Progress Energy and others caution the Commission against 
voiding a previously approved Reliability Standard that has been 
developed through an ANSI-approved process, which is open, balanced, 
and adheres to due process principles.\105\ The Commission should not 
void a Reliability Standard simply because it does not measure up to 
the Commission's technical or administrative desires. Instead, the 
Commission should direct the ERO to modify the Reliability Standard 
through its Reliability Standard development process.
---------------------------------------------------------------------------

    \105\ See also MidAmerican, Santee Cooper, SERC, TVA and South 
Carolina E&G.
---------------------------------------------------------------------------

    431. CEA, NARUC and the New York Commission claim that the 
relationships and dependencies between Reliability Standards are 
complex. If the Commission were to void a previously accepted 
Reliability Standard, the result might interfere with the 
implementation or enforcement of other Reliability Standards. All 
individual Reliability Standards are parts of a complex whole designed 
to maximize overall reliability.
    432. A number of commenters claim that voiding a Reliability 
Standard would leave a gap in an area of reliability where the ERO or 
Regional Entity determined that a Reliability Standard is 
required.\106\ Some add that such a gap could result in operational 
conflicts between international jurisdictions. International 
Transmission adds that a change to the Reliability Standards may affect 
tariffs and contracts. They recommend, as an appropriate alternative, 
that the Commission remand an approved Reliability Standard for further 
development in an ANSI-accredited process. Ameren adds that changing a 
previously approved Reliability Standard can have serious competitive 
implications and should only be done for compelling reasons. Hydro-
Qu[eacute]bec recommends that the authority to void an approved 
Reliability Standard be restricted to exceptional situations because 
the ERO will have to fulfill both Canadian and American mandates.
---------------------------------------------------------------------------

    \106\ See, e.g., BCTC, NERC, Ontario IESO, TAPS and South 
Carolina E&G.
---------------------------------------------------------------------------

    433. Other commenters believe that the Commission has the legal 
authority to void a Reliability Standard.\107\ Ameren and SoCalEd 
believe that the Commission, based on its authority to direct the ERO 
to modify a Reliability Standard, also has the authority to void an 
approved Reliability Standard. SoCalEd states that the Commission 
should set guidelines in its regulations and establish a process for 
voiding a Reliability Standard.
---------------------------------------------------------------------------

    \107\ See, e.g., Ameren, EPSA, ERCOT, Old Dominion, PacifiCorp 
and SoCalEd.
---------------------------------------------------------------------------

    434. NiSource states that it is unclear whether the Commission may 
void a previously-approved Reliability Standard based on a finding that 
it no longer meets the legal standard of review. When tariff provisions 
are found to be unjust or unreasonable, they are generally allowed to 
remain in effect pending the filing and approval of revised tariff 
provisions. While NiSource agrees with the Commission's unstated 
concern that unjust and unreasonable standards should be removed, when 
and how that happens requires a careful balancing. The Commission 
should analyze whether the Reliability Standard is so unjust, 
unreasonable or discriminatory that the Bulk-Power System is better off 
without it or whether system reliability requires that the Reliability 
Standard remain in effect pending its replacement. NiSource proposes 
that if a Reliability Standard is found to be unjust, unreasonable or 
discriminatory but remains in place pending its replacement, then no 
penalties should be imposed for violations of that Reliability Standard 
during that period.

Commission Conclusion

    435. The Commission does not adopt a provision in the regulations 
for the Commission to void an approved Reliability Standard. If in the 
future, a situation arises in which it may be appropriate to remove 
immediately an existing Reliability Standard that is determined to do 
more harm than good, we may consider at that time whether to void a 
previously-approved Reliability Standard.
6. Conflict of a Reliability Standard With a Commission Order--Section 
39.6
    436. Section 215(d)(6) of the FPA requires that the Commission's 
Final Rule include ``fair processes for the identification and timely 
resolution of any conflict between a reliability standard and any 
function, rule, order, tariff, rate schedule, or agreement accepted, 
approved, or ordered by the Commission applicable to a transmission 
organization.'' Consistent with this requirement, the Commission 
proposed regulations which provided such processes, such as for a 
Transmission Organization expeditiously to notify the Commission, the 
ERO and the relevant Regional Entity of a conflict between a 
Reliability Standard and the Transmission Organization's Commission-
approved function, rule, order, tariff, rate schedule, or 
agreement.\108\ The proposed section sets a 60-day deadline, subject to 
Commission waiver, for the Commission to act on a notification of a 
potential conflict.
---------------------------------------------------------------------------

    \108\ NOPR at P 87-90.
---------------------------------------------------------------------------

    437. In the NOPR, the Commission asked for examples of situations 
or areas of concern in which commenters believe that a conflict between 
a Reliability Standard and a Transmission Organization function, rule, 
order, tariff, rate schedule, or agreement exists or may arise.\109\
---------------------------------------------------------------------------

    \109\ Id. at P 91.
---------------------------------------------------------------------------

Comments

    438. The ISO/RTO Council and NERC believe that potential conflicts 
could be identified and resolved in an open Reliability Standard 
development process. Similarly, EEI suggests that the Commission 
require a Transmission Organization to raise any concern regarding a 
potential conflict during the Reliability Standard development process 
as a condition precedent to a Transmission Organization invoking the 
Commission's proposed process for resolving Reliability Standard-
related conflicts.
    439. American Transmission asserts that there may be situations 
where a new or modified Reliability Standard affects the economic terms 
of a tariff. It suggests that, in such a situation, the Commission 
would either have to change the economic terms of the tariff or change 
the Reliability Standard's application to ensure a just and reasonable, 
and nondiscriminatory result. In contrast, International Transmission 
asserts that, because the Commission's first concern should be 
reliability, when a Reliability Standard is in conflict with a tariff, 
the tariff should be revised, not the Reliability Standard.
    440. FirstEnergy argues that the proposed conflict resolution 
process should extend to a pre-Order No. 888 grandfathered agreement of 
a member of an RTO. It contends that the phrase ``applicable to any 
transmission organization,'' as used in section 215(d)(6) of the FPA, 
should be interpreted to include any requirement that affects the 
transmission or generation facilities of an entity that is a member of 
the transmission organization, regardless whether the Transmission 
Organization is a party to the agreement.
    441. Commenters ask the Commission to include procedures for other 
circumstances that may arise. Oklahoma Commission asks the Commission 
to establish a process for responding to an

[[Page 8700]]

emergency situation in which a lapse in Bulk-Power System reliability 
results from an entity having to deal with conflicting authorities. 
International Transmission suggests that the Commission establish an 
expedited process for tariff changes required because of a conflict 
with a Reliability Standard. Furthermore, it states that a tariff 
revision that is required due to a conflict with a Reliability Standard 
should not open the remainder of the entity's tariff to review. 
FirstEnergy suggests that the Commission and the ERO provide a process 
for resolving a conflict between a Reliability Standard and any other 
regulatory or contractual obligation of a Bulk-Power System user.
    442. The Texas Commission supports the proposed process to address 
a potential conflict between a Reliability Standard and a Commission-
approved tariff. It contends, however, that ERCOT would not be subject 
to the proposed provision since ERCOT's market rules are not approved 
by the Commission.
    443. In response to the Commission's inquiry, a few commenters 
offer examples of conflicts. NERC states that, aside from specific 
variances that are included in NERC's current version ``0'' reliability 
standards, it is not aware of any conflict between its current 
standards and a Transmission Organization tariff. The ISO/RTO Council 
comments that, in the past, conflicts have arisen between market rules 
and NERC's reliability requirements for transmission loading relief 
procedures, tagging rules, and the requirement for reliability-based 
ancillary services such as voltage support.

Commission Conclusion

    444. As discussed below, the Final Rule adopts the substance of the 
proposed regulations on conflicts with a Reliability Standard as 
section 39.6. We agree with commenters that a potential conflict 
between a Reliability Standard under development and a Transmission 
Organization function, rule, order, tariff, rate schedule, or agreement 
accepted, approved, or ordered by the Commission should be identified 
and addressed during the ERO's Reliability Standard development 
process. Although we encourage parties to follow EEI's proposal that a 
Transmission Organization should have to raise a concern regarding a 
potential conflict during the Reliability Standard development process, 
we will not require it in this Final Rule. Such a condition would 
preclude a Transmission Organization from invoking the procedure if a 
potential conflict is first recognized after a Reliability Standard has 
been approved. EEI's proposal would also preclude a Transmission 
Organization from notifying the Commission pursuant to section 39.6 in 
a situation where the Transmission Organization finds that a new or 
modified tariff potentially conflicts with an existing Reliability 
Standard.
    445. While we agree with International Transmission regarding the 
paramount importance of maintaining Bulk-Power System reliability, we 
do not agree that every conflict between a Reliability Standard and a 
Transmission Organization tariff must be resolved by changing the 
tariff. A modification of a Reliability Standard to resolve a conflict 
may be accomplished without necessarily compromising Bulk-Power System 
reliability. We will decide on a case-by-case basis the appropriate 
manner of resolving such a conflict.
    446. With regard to FirstEnergy's comment, we reserve judgment on 
whether the process prescribed in section 39.6 should extend to an RTO 
member's pre-Order No. 888 grandfathered agreements. The Commission 
understands the phrase ``applicable to any transmission organization,'' 
as used in section 215(d)(6) of the FPA, to limit the provision to a 
Transmission Organization function, rule, order, tariff, rate schedule, 
or agreement, thus not applying to the resolution of a potential 
conflict with agreements to which the Transmission Organization is not 
a party or other non-Transmission Organization agreements or tariffs 
via the process prescribed in section 39.6. The Commission recognizes 
that pre-Order No. 888 grandfathered agreements can be complex, and for 
that reason, we are not making a generic determination at this time. We 
will, however, consider on a case-by-case basis whether the conflict 
resolution process, as prescribed in section 39.6, should be extended 
to an RTO's member's pre-Order No. 888 grandfathered agreements when an 
actual conflict is identified.
    447. With regard to the Oklahoma Commission's and International 
Transmission's comments, we do not establish here a separate generic 
procedure to expedite resolving a potential conflict between a 
Reliability Standard and a Transmission Organization tariff. A 
Transmission Organization may request expedited treatment of a filing, 
however, and the Commission will consider such a request on a case-by-
case basis. We agree with International Transmission that a proceeding 
to resolve a potential conflict should not normally address tariff 
issues unrelated to the potential conflict. However, the Commission 
recognizes that it is possible that a reliability-related change to a 
Transmission Organization's tariff may upset a negotiated balance 
within the tariff. In those instances, the Commission may allow tariff 
issues unrelated to the potential conflict to be resolved.\110\
---------------------------------------------------------------------------

    \110\ See also Expedited Tariff Revisions for Regional 
Transmission Organizations and Independent System Operators, 111 
FERC ] 61,009 (2005).
---------------------------------------------------------------------------

    448. With regard to the Texas Commission's comments, we agree that 
section 39.6 applies only to a potential conflict between a Reliability 
Standard and a Commission-approved tariff, precluding its use for the 
resolution of a potential conflict involving tariffs, market rules, 
etc. that are not subject to Commission approval.\111\
---------------------------------------------------------------------------

    \111\ See, infra, section IV.B.12, State Actions.
---------------------------------------------------------------------------

    449. With regard to FirstEnergy's suggestion that the Commission 
and the ERO provide a process for resolving a conflict between a 
Reliability Standard and any other regulatory or contractual obligation 
of a Bulk-Power System user, such a process is outside the scope of 
this proceeding. However, this decision does not preclude a 
Transmission Organization from identifying a potential conflict during 
the Reliability Standard development process or at other times and 
taking steps to seek resolution of the matter before the appropriate 
regulatory authority. Nor does this prejudice the rights under other 
provisions of the FPA of any user, owner or operator of the Bulk-Power 
System to notify the Commission about a conflict between a Reliability 
Standard and any function, rule, order, tariff, rate schedule, or 
agreement ordered or approved by the Commission.
7. Enforcement of Reliability Standards--Section 39.7
    450. The proposed section in the NOPR on Enforcement of Reliability 
Standards addressed compliance and enforcement issues.\112\ The 
proposal would implement the enforcement provisions of section 215(e) 
of the FPA, which authorize the ERO to impose a penalty for a violation 
of a Reliability Standard, subject to an opportunity for Commission 
review. The term ``penalty'' as used throughout the NOPR included both 
monetary and non-monetary penalties, unless specifically stated 
otherwise.\113\
---------------------------------------------------------------------------

    \112\ NOPR at P 58-62.
    \113\ We also include both monetary and non-monetary penalties 
in the term ``penalty'' throughout the Final Rule, unless 
specifically stated otherwise.

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

[[Page 8701]]

    451. Consistent with the statute, the proposed enforcement 
regulations would allow the ERO or a Regional Entity with delegated 
enforcement authority to impose a penalty on a user, owner or operator 
of the Bulk-Power System for a violation of a Reliability Standard.
    452. The NOPR provided that a penalty imposed by an ERO or a 
Regional Entity may not take effect until the 31st day after a notice 
of the penalty is filed with the Commission. The NOPR proposed that 
either the ERO or a Regional Entity may file such a notice with the 
Commission. The alleged violator, or the Commission on its own motion, 
may seek review of the penalty within 30 days after the notice is filed 
with the Commission.
    453. The following discussion generally follows the stages of the 
enforcement process, first addressing compliance matters such as 
enforcement audits, voluntary compliance programs and compliance 
directives. Next, we address investigations by the ERO or a Regional 
Entity, including matters such as due process, followed by a discussion 
of various aspects regarding the imposition of penalties, such as 
appropriate non-monetary penalties, limits on monetary penalties and 
the need for the ERO to develop penalty guidelines. The Final Rule then 
discusses ERO reports of alleged violations and Commission review of 
penalties imposed by the ERO or a Regional Entity, including matters 
related to the nonpublic treatment of investigations and Commission 
proceedings. Finally, the issue of appeals and other enforcement-
related matters are discussed.
a. General Comments on Enforcement
    454. Several commenters emphasize that penalties and sanctions may 
not necessarily improve compliance or reliability and are concerned 
that entities may simply view a penalty as a cost of doing business if 
it is set too low or imposed so often that it is viewed as 
unavoidable.\114\ They propose that the Final Rule explicitly recognize 
that the goal of a penalty is to create an incentive for compliance. 
They urge the Commission to monitor the effectiveness of penalties and 
revise or revoke an ineffective penalty.
---------------------------------------------------------------------------

    \114\ See, e.g., Ohio Commission, International Transmission and 
Michigan Electric.
---------------------------------------------------------------------------

Commission Conclusion

    455. The Commission concurs that the fundamental goal of mandatory, 
enforceable Reliability Standards and related enforcement programs is 
to promote behavior that supports and improves Bulk-Power System 
reliability. A monetary penalty must be assessed and structured in such 
a way that a user, owner or operator of the Bulk-Power System does not 
consider its imposition as simply an economic choice or a cost of doing 
business. Further, a non-monetary penalty should be structured to 
encourage or require compliance and improve reliability by regulating 
the behavior of the entity subject to the penalty. In its oversight 
role, the Commission plans to monitor the effectiveness of enforcement 
penalties, both monetary and non-monetary.
b. Compliance
    456. The term ``enforcement'' in the context of this Final Rule 
includes both pro-active compliance efforts by the ERO or a Regional 
Entity as well as after-the-fact investigations and imposition of 
penalties. The ERO and Regional Entities are expected to have a 
compliance program for ongoing monitoring of user, owner and operator 
compliance with Reliability Standards. Compliance activities such as 
enforcement audits, best-practices programs and remedial action are 
discussed below.
i. Enforcement Audits of Compliance With Reliability Standards
    457. The NOPR asked whether the proposed rule should specify any 
enforcement audit requirements to be included in the ERO certification 
requirements and the Regional Entity delegation requirements.

Comments

    458. Numerous commenters state that they support the bilateral 
principles on the subject of enforcement audits \115\ and would support 
the inclusion of such audit requirements in the Commission's Final 
Rule.\116\ Santee Cooper and SERC comment that the Final Rule should 
specify an enforcement audit process ``hierarchy'' under which the 
Commission audits the ERO; the ERO audits the Regional Entities, and 
the Regional Entities audit entities responsible for compliance with 
Reliability Standards.
---------------------------------------------------------------------------

    \115\ NOPR at P 71 (enforcement question 8). The bilateral 
principles, at 3, provide that: (1) The ERO and Regional Entities 
should conduct rigorous audits to ensure both the capability to 
comply and actual compliance with Reliability Standards; (2) audits 
should meet relevant auditing standards; (3) the ERO should take 
steps to ensure that auditors are properly trained; and (4) the same 
audit standards apply to all audits conducted by the ERO and 
Regional Entities.
    \116\ See, e.g., AEP, Ameren, CEA, ELCON, ERCOT, FRCC, MRO, 
NERC, New York Companies, SERC, SoCalEd, South Carolina E&G and TVA.
---------------------------------------------------------------------------

    459. Some commenters add that the Commission should allow an ERO or 
Regional Entity candidate to propose enforcement-related auditing 
procedures in a certification application and delegation agreement, 
respectively.\117\ NERC recommends the inclusion of a requirement that 
the ERO develop and approve enforcement audit requirements in the 
Regional Entity delegation agreements. NERC states that it expects both 
the certification and readiness audit programs to include general audit 
criteria. Similarly, the New York Companies suggest that the Final Rule 
require that compliance with Reliability Standards be audited, but not 
specify in detail how the audits are to be performed. Kansas City P&L 
comments that the Final Rule should include criteria for the auditors 
of the ERO or a Regional Entity but that the ERO should have discretion 
with respect to the particulars of enforcement audit requirements.
---------------------------------------------------------------------------

    \117\ See, e.g., AEP, EEI, International Transmission, Southern 
and SoCalEd.
---------------------------------------------------------------------------

    460. CEA and Alberta state that uniform enforcement auditing 
standards should be required in the ERO's certification application to 
ensure that the ERO has the necessary tools in place to maintain a 
reliable transmission grid. In addition, Alberta suggests that the ERO 
should rebuttably presume that enforcement audits conducted by WECC, as 
a Regional Entity organized on an Interconnection-wide basis, follow 
consistent procedures for rigorous auditing. Further, Alberta states 
that the Commission should permit WECC to have compliance monitoring 
and enforcement procedures that do not necessarily conform to other 
regions.
    461. EEI states that a comprehensive enforcement audit program is 
the first line of prevention and explains that the ERO and Regional 
Entities should have flexibility in tailoring audits for different 
circumstances. EEI suggests that the Commission consider requiring the 
ERO to use a certified audit program, to be included in an ERO 
application or Regional Entity delegation agreement, which is subject 
to independent audit by relevant regulatory authorities. Likewise, PSEG 
Companies recommend that the Commission allow the ERO and Regional 
Entities, through their stakeholder processes, to determine the best 
approach to enforcement audits.
    462. APPA supports the implementation of audit standards but 
suggests that, initially, they be provisional in nature to allow 
flexibility

[[Page 8702]]

in adjusting audit standards based on hands-on experience and regional 
differences determined during the initial audits.

Commission Conclusion

    463. The Commission agrees with the commenters that support the 
need for rigorous enforcement audits of users, owners and operators of 
the Bulk-Power System by well-trained auditors applying consistent 
audit standards. The Commission finds that an effective enforcement 
audit program is a necessary component of the requirement that the 
certified ERO have the ability to develop and enforce Reliability 
Standards, set forth in section 215(c)(1) of the FPA. Any Regional 
Entity that receives a delegation of enforcement functions also must 
have in place an audit program. Accordingly, the Final Rule includes a 
new section 39.7(a) that requires the ERO and Regional Entities to 
``develop an audit program that provides for rigorous audits of 
compliance with Reliability Standards by users, owners and operators of 
the Bulk-Power System.''
    464. The ERO shall submit the initial enforcement audit program, as 
well as any significant change, to the Commission for review and 
approval. We intend the enforcement audit program to be a single 
program applicable to both the ERO and Regional Entities unless there 
is a compelling reason for a difference between the ERO and a 
particular Regional Entity. Such programs must not vary significantly 
from region to region unless good cause is shown for such differences.
ii. Reliability-Related Programs
    465. The NOPR asked a series of related questions regarding whether 
the Commission and/or the ERO should adopt features of the Nuclear 
Regulatory Commission's (NRC) and the Institute of Nuclear Power 
Operations' (INPO) reliability-related programs, such as the NRC Action 
Matrix and nuclear power plant assessment program, and the INPO 
information sharing network, equipment failure database and monitoring 
of performance indicators.\118\
---------------------------------------------------------------------------

    \118\ NOPR at P 72-73.
---------------------------------------------------------------------------

Comments
    466. Some commenters favor the ERO developing a program similar to 
those utilized in the nuclear industry.\119\ Xcel Energy and others 
express concern that some or all of the nuclear industry programs are 
either inapplicable to electric transmission or unnecessarily 
duplicative of existing programs. EEI, Entergy and others comment that 
it is premature to establish a watchlist or other INPO-type features 
and the Commission should first get experience with the ERO process 
before such decisions are made. A number of commenters urge that, to 
the extent that any such program is developed, it should be developed 
by the ERO on a voluntary basis without a Commission mandate.\120\
---------------------------------------------------------------------------

    \119\ See, e.g., APPA, NASUCA, Southern and SERC (supporting 
development of a reliability ``watchlist''); AEP, American 
Transmission, EEI, Kansas City P&L and TVA (supportring development 
of an ``INPO-type best practices'' program).
    \120\ See, e.g., Progress Energy, Santee Cooper and South 
Carolina E&G.
---------------------------------------------------------------------------

Commission Conclusion

    467. We understand that the performance-oriented, results-driven 
aspects of such programs would serve as useful models for the ERO and 
the electric industry. For example, ``best practices,'' as applied in 
the nuclear industry, are the basis of the INPO program for evaluation 
of a nuclear generating plant. The best practices program focuses on 
the plant meeting performance objectives based on the industry's best 
practices for excellence in the operation of a nuclear generating 
plant. Similarly, aspects of INPO's other core reliability-related 
programs, which include, for example, personnel training and 
accreditation, events analysis and information sharing, and proactive 
assistance for generating plants that have indications of declining 
performance, have enabled the nuclear industry to improve all facets of 
nuclear plant operations. Such models may have application for the ERO 
and electric industry reliability.
    468. The Commission believes that programs of the NRC and INPO such 
as an action matrix, compliance watch-list or ``best practices'' 
program would enhance Bulk-Power System reliability. Such programs 
would be most effective if developed by the ERO and approved by the 
Commission. We agree with EEI and others that it is appropriate to 
first establish the ERO and then use its Commission-approved procedures 
to develop such programs. The Commission will require the certified ERO 
to make a compliance filing no later than one year from the date of 
certification proposing reliability enhancement programs that would 
improve Bulk-Power System reliability, along with a program 
implementation schedule. The ERO may propose such a reliability 
enhancement program earlier than one year from certification.
iii. Remedial Action
    469.The NOPR did not directly discuss the authority of the ERO or a 
Regional Entity to take ``remedial'' action, with the goal of bringing 
a noncompliant entity back into compliance. Nonetheless, a number of 
commenters discuss the ERO's and a Regional Entity's need to take 
remedial action, distinct from a non-monetary penalty.
    470. To place these comments in context, we first discuss generally 
remedies and non-monetary penalties. If an entity violates a legal 
requirement, one remedy is to place the violator into compliance 
prospectively. Ending a violation or preventing future violations does 
not penalize the violator but instead seeks to return it to 
compliance.\121\ A directive to stop a violation, i.e., a compliance 
directive, is one type of remedy. Staff training may be another type of 
remedy. In contrast, a penalty is imposed to punish a violator. 
Penalties may be monetary, such as a civil penalty or a fine, or non-
monetary. As appropriate here, a non-monetary penalty may include 
limitations on activities, functions, or operations, or other 
appropriate sanctions.\122\
---------------------------------------------------------------------------

    \121\ Cf. U.S. v. Telluride Co., 146 F.3d 1241 (10th Cir. 1998) 
(For purpose of determining whether the statute of limitations in 28 
U.S.C. 2462 for penalty assessments applied, injunctive relief was 
not a penalty.)
    \122\ FPA section 215(c)(2)(C).
---------------------------------------------------------------------------

Comments

    471. A number of commenters state that, generally, remedial action 
should focus first on bringing an entity back into compliance.\123\ For 
example, American Transmission comments that the ``penalty'' structure 
should provide first for mitigation of the violation, second for 
correction of behavior and third for punishment for behavior. EEI 
suggests that compliance actions may be very effective in assuring 
future compliance with Reliability Standards, and that compliance 
efforts should precede monetary penalties.
---------------------------------------------------------------------------

    \123\ See, e.g., American Transmission, EEI, Hydro One, NYISO 
and TAPS.
---------------------------------------------------------------------------

    472. TAPS emphasizes that only a penalty, and not a compliance 
directive, should be subject to the 31-day waiting period set forth in 
section 215(e)(2) of the FPA. APPA also comments that the ERO should 
have the authority to issue directives to cease and desist from a 
violation, which APPA views as different from a non-monetary penalty.
    473. NERC comments that the ERO should be able to take action 
outside of the penalty process to bring an entity into compliance with 
a Reliability

[[Page 8703]]

Standard. NERC mentions several examples of such action, including 
directing the development of a remediation plan, increased auditing of 
an entity displaying marginal performance, increasing training 
requirements to correct an operating problem, or sending a letter to an 
industry CEO to draw executive attention to a problem relating to the 
CEO's company.
    474. Commenters differ on whether certain actions by the ERO or a 
Regional Entity would constitute a non-monetary penalty versus a 
compliance or remedial action. For example, when responding to the 
NOPR's request for comments on appropriate types of non-monetary 
penalties, some commenters identified the following actions by the ERO 
or a Regional Entity as a type of non-monetary penalty: Disclosure of a 
confirmed violation; informing an industry CEO of a noncompliance 
matter; and notifying a regulatory authority of an entity's 
noncompliance.\124\ Other commenters, however, characterized these 
actions as remedial.\125\
---------------------------------------------------------------------------

    \124\ See, e.g., MRO, Progress Energy, Santee Cooper, SERC and 
TVA.
    \125\ See, e.g., APPA and TAPS.
---------------------------------------------------------------------------

Commission Conclusion

    475. We agree with commenters that the ERO or a Regional Entity may 
take certain actions with the intent of bringing an entity into 
compliance with a Reliability Standard rather than to penalize the 
entity for its noncompliance. As discussed above, the Commission 
concludes there is a distinction between a remedial action versus a 
non-monetary penalty. The ERO or a Regional Entity may take remedial 
action to bring a user, owner or operator of the Bulk-Power System into 
compliance with a Reliability Standard. One example of a remedial 
action is a compliance directive. The ERO or Regional Entity may 
conclude, based on the evidence available to it, that an entity is 
violating a Reliability Standard and may issue a compliance directive 
to the entity that it stop its violation and come into compliance with 
the Reliability Standard. A compliance directive may establish a 
timetable for compliance.
    476. We agree with TAPS that a compliance directive differs from a 
penalty. An ERO or Regional Entity compliance directive is a directive 
that a user, owner or operator comply with a Reliability Standard. A 
compliance directive is a remedial action, not a penalty, and thus does 
not have to satisfy the 31-day waiting period (related to the 
imposition of a penalty) to take effect. The ERO or Regional Entity 
must inform the Commission of any compliance directive pursuant to 
section 39.7(b).
    477. Likewise, the ERO or a Regional Entity may take other remedial 
actions without having to satisfy the 31-day waiting period that 
applies to a penalty. For example, if the ERO or Regional Entity 
conclude, based on the evidence available to it, that an entity is 
violating a Reliability Standard, it may take remedial actions such as 
informing an industry CEO of a violation of a Reliability Standard, 
notifying a relevant regulatory authority, directing a user, owner or 
operator to develop and comply with a remediation plan, and imposition 
of increased auditing or additional training requirements. Further, 
pending completion of its investigation, the ERO or a Regional Entity 
may informally notify an entity, orally or in writing, that the entity 
appears to be violating a Reliability Standard and request that the 
entity stop that activity or otherwise return to compliance with the 
Reliability Standard. The ERO or Regional Entity must inform the 
Commission of any remedial actions pursuant to section 39.7(b).
    478. We agree with commenters that, as a general matter, ERO or 
Regional Entity action should bring a user, owner or operator into 
compliance. Moreover, penalties, both non-monetary as well as monetary, 
can be imposed by the ERO or a Regional Entity either in conjunction 
with, or after, action to bring an entity into compliance. The proper 
approach may vary in a particular situation depending on the severity 
of the violation, the frequency of noncompliance, whether the 
noncompliance was deliberate and other relevant considerations. When 
determining the appropriate penalty for violation of a Reliability 
Standard, the ERO or a Regional Entity may take into account a user's, 
owner's or operator's failure to meet a deadline for compliance or 
other provisions of a compliance directive. Further, if the ERO or 
Regional Entity has not acted to require remedial action to bring a 
user, owner or operator into compliance, has not imposed a penalty, or 
has ordered remedial action but not imposed a penalty, and the 
Commission concludes that remedial action or a penalty is appropriate, 
the Commission on its own motion may take appropriate action.
    479. We direct the ERO to specify in its application these and 
other types of remedial actions that may be undertaken without invoking 
the waiting period required for monetary and non-monetary penalties to 
be imposed. We will allow the ERO and Regional Entities to further 
clarify the distinction between a remedial action and a non-monetary 
penalty in the ERO certification application, penalty guidelines 
(discussed later), or delegation agreement.
c. Assessing a Penalty for a Violation
i. Procedures for Investigations and Penalty Assessments
    480. The NOPR proposed that the ERO or a Regional Entity may impose 
a penalty on a user, owner or operator of the Bulk-Power System for a 
violation of a Reliability Standard if the ERO or the Regional Entity, 
after public notice and opportunity for hearing, finds that the user, 
owner or operator has violated a Reliability Standard and files notice 
and the record of the ERO's or the Regional Entity's proceeding with 
the Commission.\126\
---------------------------------------------------------------------------

    \126\ NOPR at P 58.
---------------------------------------------------------------------------

Comments

    481. NiSource asks that the Commission clarify how the existence of 
a violation will be brought to the attention of the ERO or a Regional 
Entity. Further, it suggests that, because an investigation might be 
initiated by the ERO, a Regional Entity or the Commission, the NOPR 
leaves open the possibility of forum shopping or duplicative 
proceedings. NiSource requests clarification of the process by which 
these entities will inform each other of enforcement investigations to 
prevent the possibility of multiple proceedings addressing the same 
violation.
    482. FirstEnergy suggests that the Commission establish a three-
year statute of limitations for a violation of a Reliability Standard. 
It contends that a longer period would be needlessly burdensome and not 
relevant to maintaining current system reliability. Further, a three-
year limitation would be consistent with NERC's current data retention 
policy.
    483. Alcoa comments that only the ERO should have the authority to 
levy penalties and that the enforcement role of Regional Entities 
should be limited to developing a factual record relating to the 
imposition of a penalty.
    484. Hydro-Qu[eacute]bec suggests that the Final Rule clarify that 
the ERO or a Regional Entity will have enforcement authority in a 
Canadian province only to the extent that the provincial government or 
its regulatory agency decides to delegate enforcement authority to the 
ERO or a Regional Entity.

[[Page 8704]]

Commission Conclusion

    485. As to NiSource's comment, the ERO or a Regional Entity may 
become aware of a violation through compliance monitoring, periodic 
audits or self-reporting by the non-compliant entity, among other 
means. The Commission agrees that the ERO, Regional Entities and the 
Commission should generally avoid multiple investigations involving the 
same violation. There may be situations in which it would be 
appropriate to have concurrent investigations but we expect any such 
occasions to be rare. In those situations we would coordinate efforts 
with the ERO or any relevant Regional Entity. The requirement in 
section 39.7(b) of the Final Rule that the ERO and Regional Entities 
have procedures to report an alleged violation to the Commission early 
on in the enforcement process should help prevent inadvertent multiple 
investigations involving the same violation. We reserve the right to 
initiate our own investigation on a matter already under investigation 
by the ERO or a Regional Entity and, if appropriate, direct the ERO or 
Regional Entity to refer the matter to us.\127\ We do not believe 
another communication process is needed.
---------------------------------------------------------------------------

    \127\ December 9, 2005 Technical Conference Tr. at 169-70 
(remarks of John Polise, Assistant Chief Counsel for Markets of the 
Securities and Exchange Commission's Division of Enforcement).
---------------------------------------------------------------------------

    486. As discussed later with regard to Delegation to a Regional 
Entity, the ERO will retain oversight responsibility for enforcement 
authority that is delegated to a Regional Entity. Further, the ERO is 
ultimately responsible for how a Regional Entity conducts 
investigations. We expect the ERO to set up a uniform process for 
implementing its enforcement authority to be carried out by a Regional 
Entity. To ensure that each Regional Entity implements the enforcement 
program in a consistent manner, we will require each Regional Entity to 
file a periodic report with the ERO on its enforcement investigations 
(i.e., identifying its investigations and their dispositions) in a 
manner to be determined by the ERO in its certification application. 
This report differs from the periodic summary reports on violations 
required pursuant to section 39.7(b)(5) in that the report on 
investigations will specify how a Regional Entity carries out its 
delegated enforcement authority, rather than identifying the violations 
themselves. Because it is primarily responsible for enforcement of 
Reliability Standards, the ERO maintains the right to initiate its own 
investigation on a matter under investigation by a Regional Entity, 
and, if appropriate, direct the Regional Entity to refer the matter to 
the ERO.
    487. Section 215(e) of the FPA does not create a temporal limit on 
when an investigation that may culminate in a penalty may be initiated. 
The general statute of limitations for a civil penalty, 28 U.S.C. 2462, 
imposes a five-year limitation period on any ``action, suit, or 
proceeding for the enforcement of any civil fine, penalty, or 
forfeiture, pecuniary or otherwise.'' We will exercise prosecutorial 
discretion in determining whether to pursue an alleged violation based 
on all the facts presented, including the time elapsed since the 
violation is alleged to have occurred, and will adhere to the five-year 
statute of limitations when we seek a civil penalty.\128\
---------------------------------------------------------------------------

    \128\ Prohibition of Energy Market Manipulation, Order No. 670, 
III FERC Stats. & Regs. ] ------ at P 62-63 (January 19, 2006).
---------------------------------------------------------------------------

    488. The Commission adopts the substance of the proposed regulation 
that authorizes the ERO or a Regional Entity to impose a penalty after 
finding that a user, owner or operator violated a Reliability 
Standard.\129\ The Commission rejects Alcoa's suggestion that only the 
ERO should have authority to levy a penalty subject to Commission 
approval. Section 215(e)(4) of the FPA provides that the ERO may 
delegate its authority to enforce a Reliability Standard to a Regional 
Entity. The ability to impose a penalty is one aspect of enforcement. 
Thus, the ERO's statutory authority to delegate enforcement functions 
to a Regional Entity includes the delegation of authority to impose a 
penalty on a user, owner or operator of the Bulk-Power System.
---------------------------------------------------------------------------

    \129\ As discussed later under the topic of ``Confidentiality of 
Reports,'' the Final Rule revises the proposed regulation, 
eliminating the requirement that the ERO or a Regional Entity 
provide ``public'' notice of determining whether to impose a 
penalty. The revised provision at section 39.7(c) requires that an 
alleged violator receive notice and an opportunity for hearing.
---------------------------------------------------------------------------

    489. With regard to Hydro-Qu[eacute]bec's comment, the Commission 
finds that enforcement authority under section 215(e) of the FPA 
applies only to violations that occur within the United States. The 
enforcement authority of the ERO or a Regional Entity in Canada is 
outside the scope of this proceeding.
ii. Due Process
    490. A number of commenters express concern about whether the ERO 
and Regional Entities will have adequate procedures to ensure due 
process in considering whether to impose a penalty. For example, 
PacifiCorp, New York Companies, and LADWP emphasize that due process 
for parties subject to penalties must be clearly defined for each stage 
of the penalty process, including protection for alleged violators. EEI 
states that the Commission must ensure that the ERO and Regional 
Entities include in their respective applications and agreements a set 
of compliance processes that meet due process requirements. PG&E asks 
the Commission to clarify that a notice of violation should provide 
complete information to which the alleged violator can respond.
    491. Some commenters, such as WECC, ask the Commission to clarify 
that the ERO and Regional Entities must propose specific Rules ensuring 
that any imposition of a penalty is subject to due process. Others, 
such as Northern Maine Entities, ask that the Commission, rather than 
the ERO and Regional Entities, prescribe the general procedures in this 
context.
    492. FirstEnergy comments that the ERO should develop standardized 
enforcement processes providing for uniformity across regions except in 
discrete circumstances so that a user, owner or operator of the Bulk-
Power System is not subject to different enforcement procedures, fines 
or other sanctions simply because of geographic location.
    493. APPA notes that there is currently little detail regarding the 
procedures that the ERO and Regional Entities will use to assess 
penalties and, therefore, suggests that the Commission revise the 
proposed regulations to provide that ``the specific procedures to be 
used will be ordered in the context of each proceeding.''

Commission Conclusion

    494.The Commission agrees with the commenters that the ERO and 
Regional Entities must have procedures to ensure due process when 
considering whether to impose a penalty. We interpret section 
215(c)(2)(C) of the FPA, which requires the ERO to have established 
Rules that, inter alia, ``provide fair and impartial procedures for 
enforcement of reliability standards * * *,'' as requiring due process 
in enforcement proceedings.\130\ Accordingly, the Commission expects an 
ERO candidate to develop procedures to ensure due process and submit 
the procedures for Commission review with its ERO certification 
application.
---------------------------------------------------------------------------

    \130\ Pursuant to section 215(e)(4) of the FPA, Regional 
Entitites must also establish fair and impartial enforcement 
procedures.
---------------------------------------------------------------------------

    495. Likewise, procedures to ensure due process should be included 
in any delegation agreement submitted for Commission review. We agree 
that there

[[Page 8705]]

should be uniformity among the ERO and Regional Entities regarding due 
process elements such as adequacy of notice and opportunity to present 
facts and arguments at a hearing before an impartial adjudicator. These 
general due process requirements should be identified in the pro forma 
delegation agreement either explicitly or by reference to the ERO 
Rules.
iii. Notice
    496. The NOPR proposed that the ERO or a Regional Entity must 
include specified information in any notice of an enforcement 
action.\131\
---------------------------------------------------------------------------

    \131\ NOPR at P 59.
---------------------------------------------------------------------------

Comments

    497. NiSource asks the Commission to revise the proposed regulation 
to clarify that both proposed sections (a)(2) and (c) of the proposed 
enforcement regulations refer to the same notice that the ERO must file 
with the Commission following a finding that an entity violated a 
Reliability Standard.

Commission Conclusion

    498. The Final Rule adopts the substance of the proposed notice 
requirement with some minor changes for purposes of clarification. In 
response to NiSource, the Final Rule revises the text of the proposed 
regulations to consistently use the term ``notice of penalty'' when 
referring to the notice the ERO must file with the Commission following 
imposition of a penalty.
iv. Effective Date of Penalty and Commission Review of Penalties
    499. The NOPR proposed that a penalty imposed by the ERO or a 
Regional Entity may take effect not earlier than the 31st day after the 
ERO files with the Commission a notice of penalty and the record of the 
proceeding.\132\ Such penalty would be subject to review by the 
Commission, either on its own motion or upon application by the entity 
that is the subject of the penalty filed within 30 days after the date 
such notice is filed with Commission. An application to the Commission 
for review, or the initiation of review by the Commission on its own 
motion, would not operate as a stay of such penalty unless the 
Commission otherwise orders. In any proceeding to review a penalty, the 
Commission, after public notice and opportunity for hearing, would by 
order affirm, set aside or modify the penalty and, if appropriate, 
remand to the ERO for further proceedings.
---------------------------------------------------------------------------

    \132\ Id. at P 60.
---------------------------------------------------------------------------

(a) Effective Date and General Commission Review
    500. TAPS notes language in the proposed enforcement regulations 
that would allow a Regional Entity to interact directly with the 
Commission. TAPS believes that this approach is inconsistent with 
sections 215(e)(1) and (2) of the FPA, which authorize the ERO to 
impose penalties, the ERO to file notice of a penalty with the 
Commission, and the Commission to remand an action to the ERO. 
According to TAPS, any imposition of a penalty should go through the 
ERO to ensure consistency and prevent the undermining of its authority. 
Likewise, PG&E contends that the proposal that a Regional Entity may 
file a notice of penalty with the Commission to start the 30-day window 
for seeking Commission review precludes any meaningful opportunity to 
appeal to the ERO a penalty imposed by a Regional Entity. PG&E suggests 
that, if the Commission allows an appeal of a Regional Entity action to 
the ERO, the Commission should delete the language allowing a Regional 
Entity to file a notice with the Commission.
    501. PG&E also requests that, to avoid a situation where the ERO or 
a Regional Entity imposes a penalty only to have the Commission reverse 
the decision on review, the Final Rule should modify the proposed 
regulation to allow for an automatic stay of a penalty once a 
Commission review is initiated.
    502. Ameren suggests that the Commission clarify the types of 
further proceedings that it contemplates should it remand a penalty to 
the ERO.
    503. The Oklahoma Commission suggests that the Final Rule include a 
process for a state commission, through its own concurrent 
jurisdictional authority, to intervene and participate in an 
investigation, ``penalty imposition,'' and Commission review of a 
penalty (including those involving a Cybersecurity Incident) to the 
extent a state commission deems necessary to fulfill its ratemaking or 
other authorities. It notes the Commission's current rules that allow 
state commissions to intervene in proceedings before the Commission.
    504. NERC asks the Commission to reconsider the proposed notice and 
opportunity for comment on a notice of penalty filed with the 
Commission. NERC states that the Commission does not currently allow 
the public to participate in enforcement proceedings. Further, for 
purposes of clarification, NERC proposes modifying the first sentence 
of proposed section 38.5(d)(4) to include the phrase ``[a]n applicant 
for review of a penalty shall file * * *.''

Commission Conclusion

    505. The Final Rule adopts, with some non-substantive changes, the 
proposed regulations regarding the effective date of a penalty and 
Commission review of a penalty. The Commission may review a penalty, 
but only on its own motion or upon application by the entity that is 
subject of the penalty.
    506. We agree with the commenters who suggest that only the ERO 
should file with the Commission a notice of penalty. A Regional Entity 
that determines, after due process, to impose a penalty, must submit a 
notice to the ERO, which may then submit the notice of penalty to the 
Commission. Likewise, a Commission remand of any penalty-review 
proceeding pursuant to section 39.7(e)(5) is a remand to the ERO 
regardless of the entity that would impose the penalty. Accordingly, 
the Final Rule modifies the proposed regulation text at section 39.7(c) 
to provide that the ERO must file the notice of penalty with the 
Commission.
    507. We reject PG&E's suggestion to modify the proposed regulation 
by including an automatic stay of a penalty once Commission review is 
initiated. Section 215(e)(2) of the FPA requires that an ``application 
to the Commission for review, or the initiation of review by the 
Commission on its own motion, shall not operate as a stay of such 
penalty unless the Commission otherwise orders * * *.'' Our regulations 
at section 39.7(e)(3) provide the opportunity for a stay on a case-by-
case basis (either as a result of a motion by the alleged violator or 
an order by the Commission). We see no need to order an automatic stay 
in the Final Rule for review of all penalties.
    508. Ameren asks for clarification regarding the types of further 
proceedings the Commission contemplates if a penalty is remanded to the 
ERO pursuant to section 39.7(e)(5). Without limiting ourselves in 
addressing a specific circumstance, we believe that a remand to the ERO 
for additional fact-finding proceedings may be appropriate. For 
example, we may determine that additional fact-finding is necessary 
regarding an alleged violation, or support for a penalty imposed, and 
conclude that the ERO is best situated to engage initially in such 
fact-finding.
    509. With regard to the Oklahoma Commission's comments, we agree 
that a state commission generally may intervene in a Commission 
proceeding for review of a penalty imposed by the ERO or a Regional 
Entity. To address

[[Page 8706]]

these comments, we distinguish between an investigation pursuant to 
part 1b of our regulations and an adjudicatory proceeding arising out 
of such an investigation. Under Part 1b, the Commission and its staff 
treats as nonpublic any enforcement investigation and any information 
and documents obtained during such investigation except to the extent 
that the Commission directs or authorizes the public disclosure of the 
investigation.\133\ There are no parties in a part 1b enforcement 
investigation, and no person may intervene or participate as a matter 
of right in such an investigation.\134\ However, if a Part 1b 
enforcement investigation leads to an on-the-record proceeding in which 
the existence of a violation and any appropriate sanction for it are at 
issue, interventions in that proceeding are governed by Rule 214 of our 
Rules of Practice and Procedure.\135\ In this respect, a proceeding in 
which the Commission reviews a penalty assessment by a Regional Entity 
or the ERO is no different from an on-the-record proceeding resulting 
from a Part 1b investigation or a formal complaint filed with the 
Commission in which a complainant alleges the existence of a violation 
and requests that the Commission assess a penalty for it.
---------------------------------------------------------------------------

    \133\ 18 CFR 1b.9(2005). Pursuant to this regulation, public 
disclosure of investigative information or documents also may occur 
during the course of an adjudicative proceeding or when required 
under the Freedom of Information Act.
    \134\ 18 CFR 1b.11. part 1b enforcement investigations differ as 
a general matter from ``investigations'' the Commission initiates 
pursuant to section 206 of the FPA. Section 206 investigations are 
public on-the-record proceedings in which interventions may occur; 
part 1b investigations generally are nonpublic and may be initiated 
by the Commission or its staff.
    \135\ 18 CFR 385.214.
---------------------------------------------------------------------------

    510. We view inquiries conducted by the ERO or a Regional Entity 
into alleged violations or self-reported violations as well as ERO or a 
Regional Entity monitoring and enforcement audit activities to 
determine whether violations are occurring to be akin to our staff's 
Part 1b investigations. As a result, we conclude that these activities 
generally should be nonpublic and that there should be no right to 
intervene in them.
    511. Moreover, we will not require that a state commission have a 
right to intervene in any ERO or Regional Entity investigation or 
imposition of a penalty. If the ERO or a Regional Entity wishes to 
conduct a public investigation, enforcement audit or permit 
interventions when determining whether to impose a penalty, the ERO or 
the Regional Entity must receive advance authorization from the 
Commission. Consistent with further discussion below, ERO or Regional 
Entity investigations, enforcement audits and penalty actions must be 
nonpublic if they involve a Cybersecurity Incident or would jeopardize 
Bulk-Power System security if disclosed publicly. Further, while we are 
allowing interventions and comments by third parties in a proceeding 
for review of a penalty imposed by the ERO or a Regional Entity, we 
expect in most instances not to open the record to additional material 
from third parties that was not in the record compiled by the ERO or 
the Regional Entity.\136\
---------------------------------------------------------------------------

    \136\ See 16 U.S.C. 824(o)(e)(2) (providing that a hearing for 
Commission review of a penalty imposed by the ERO ``may consist 
solely of the record before the ERO and opportunity for the 
presentation of supporting reasons to affirm, modify, or set aside 
the penality.'')
---------------------------------------------------------------------------

    512. However, we reject NERC's suggestion that we eliminate the 
notice and opportunity to comment in a Commission proceeding to review 
a penalty. As explained above, while our rules generally require that a 
Part 1b investigation be nonpublic, the Commission issues public notice 
of filings made with it and interventions are allowed pursuant to the 
requirements in Rule 214 in on-the-record adjudicatory proceedings 
relating to violations and penalties. Other than with respect to a 
Commission proceeding that relates to a Cybersecurity Incident or that 
would jeopardize Bulk-Power System security if made public, commenters 
have not provided any compelling reason that the Commission's review of 
the assessment of penalties pursuant to section 215 of the FPA should 
differ in this respect from other, similar proceedings.
    513. We clarify the first sentence of section 39.7(e)(2), based on 
NERC's proposal and further revised based on our concerns, to state: 
``An applicant filing an application for review shall comply with the 
requirements for filings in proceedings before the Commission.''
(b) Automatic Commission Review of Certain Penalties
    514. The Commission asked for comment on whether it should 
determine by rule that certain categories of penalties should be 
automatically subject to Commission review.\137\
---------------------------------------------------------------------------

    \137\ NOPR at P 71 (enforcement question 5).
---------------------------------------------------------------------------

Comments

    515. Most commenters oppose this proposal, explaining that the 
entity against which the penalty is assessed should decide whether to 
appeal a penalty and, to do otherwise, would increase costs to 
participants and administrative burdens.\138\ Similarly, NERC comments 
that there is no need for automatic review where there is no contest. 
It also notes that the Commission has the authority to review any 
particular case.
---------------------------------------------------------------------------

    \138\ See, e.g., AEP, Ameren, APPA, EEI, FRCC, LADWP, MRO, NERC, 
New York Companies, Progress Energy, SERC, SoCalEd, South Carolina 
E&G, TVA and WECC.
---------------------------------------------------------------------------

    516. A few commenters support automatic Commission review in 
limited situations. ERCOT and PG&E state that a penalty above a 
threshold dollar amount should automatically trigger Commission review. 
PG&E states that automatic review would promote fairness and 
consistency among Regional Entities with regard to high penalties. 
NiSource proposes that a monetary penalty falling within the top 25 
percent of a penalty range or guideline and a non-monetary penalty that 
is in effect for 60 days or longer should trigger automatic Commission 
review. APPA comments that the Commission may want to revisit this 
issue in the periodic ERO recertification proceeding.

Commission Conclusion

    517. The Commission is not adopting an automatic review provision. 
We agree with the vast majority of commenters that there is no need for 
automatic review of certain penalties. The Commission retains the 
option to review a penalty on a case-by-case basis if an entity against 
which a penalty is assessed fails to appeal the penalty before the 
Commission.
v. Answer to an Application for Review
    518. The NOPR provided that, unless the Commission orders 
otherwise, answers, interventions and comments to an application for 
review of a penalty must be filed within twenty (20) calendar days 
after the application is submitted.
    519. APPA suggests that the Commission revise this section to 
require that answers, interventions and comments to an application for 
review of penalty be filed within twenty days of notice to the public, 
as opposed to the currently proposed ``within twenty days after the 
application is filed.''

Commission Conclusion

    520. We do not adopt APPA's recommendation. The NOPR's proposal, as 
reflected in section 39.7(e)(4) of the Final Rule, is consistent with 
the statute's requirement that the Commission develop expedited 
procedures for review of penalties. The

[[Page 8707]]

Commission has discretion to change the deadline in specific 
proceedings if it determines that more time for responses is 
appropriate.
d. Nonpublic Matters and CyberSecurity Procedures
    521. The proposed rule would establish a limited exception to the 
public notice requirement and allow nonpublic proceedings before the 
Commission for matters that involve a Cybersecurity Incident, unless 
the Commission determines on a case-by-case basis that such protection 
is not necessary.\139\ The alleged violator would be given timely 
notice and an opportunity for a nonpublic hearing. The Commission 
sought comment on (1) whether the proposal provides sufficient due 
process and (2) the identification of other specific events that should 
be subject to nonpublic hearing procedures.
---------------------------------------------------------------------------

    \139\ NOPR at P 62.
---------------------------------------------------------------------------

Comments

    522. A number of commenters state that the Commission's proposal 
provides sufficient due process.\140\ South Carolina E&G, NiSource and 
others comment that a nonpublic hearing in which the alleged violator 
can be heard coupled with a right to appeal provide sufficient due 
process.
---------------------------------------------------------------------------

    \140\ See, e.g., ERCOT, NERC, NiSource, Progress Energy, Santee 
Cooper and FRCC.
---------------------------------------------------------------------------

    523. EEI and others suggest that, in addition to actions involving 
a Cybersecurity Incident, all other proceedings should be nonpublic if 
they involve an unconfirmed violation, i.e., when there has not been an 
admission of a violation or a determination by the ERO or a Regional 
Entity that a violation occurred.\141\ The commenters explain that this 
practice is appropriate because most investigations or proceedings 
regarding reliability matters are likely to involve confidential or 
sensitive information that should be shared only with investigators. In 
particular, an investigation or proceeding regarding physical assets 
that make up the Bulk-Power System may involve sensitive information 
and may include critical energy infrastructure information (CEII). 
Further, public disclosure of an alleged violation can damage a 
utility's reputation and its relationship with customers and regulators 
and cause financial impacts. Thus, these commenters assert that a 
nonpublic proceeding is appropriate because an entity should not suffer 
any adverse consequences from an allegation that an entity violated a 
Reliability Standard until due process has been completed.
---------------------------------------------------------------------------

    \141\ See also Ameren, National Grid, NiSource,, WestConnect and 
Xcel Energy.
---------------------------------------------------------------------------

    524. National Grid adds that EPAct, which elsewhere specifically 
requires ``public'' notice, speaks only of ``notice and opportunity for 
hearing'' in section 215, suggesting that only the alleged violator is 
entitled to notice.
    525. Some commenters suggest that there should be no public 
dissemination of any information involving a Cybersecurity Incident or 
an incident that compromises physical security or exposes a single 
point of weakness of a specific user, owner or operator of the Bulk-
Power System (even after a violation is confirmed) because it is 
possible that system security and reliability would be further 
jeopardized if potential vulnerabilities are publicly identified.\142\
---------------------------------------------------------------------------

    \142\ See, e.g., Ontario IESO, Progress Energy, Sante Cooper, 
SERC and TVA.
---------------------------------------------------------------------------

    526. Other commenters support the provision to make a Cybersecurity 
Incident proceeding nonpublic but do not advocate any further extension 
of nonpublic proceedings.\143\ AEP explains that, while public 
disclosure of noncompliance is proper in most cases, public disclosure 
in the area of cybersecurity allows for easier access and intrusion by 
cyber terrorists and would not be in the public interest.
---------------------------------------------------------------------------

    \143\ See, e.g., AEP, ELCON, IPL, LADWP, Ohio Commission, PSEG 
Companies, Siemens, South Carolina E&G, Southern and WECC.
---------------------------------------------------------------------------

    527. Indianapolis P&L suggests that the Final Rule allow an entity 
involved in the appeal process to make an independent showing that 
information is security sensitive. ELCON states that an event should 
not qualify for a nonpublic hearing unless there is compelling evidence 
that this would be in the public interest.
    528. APPA questions whether the proposed procedures ensure due 
process, stating that the presumption in proceedings before the 
Commission should be in favor of proceeding publicly, unless the 
Commission determines for good cause shown that a proceeding should be 
closed. Thus, while respecting national security concerns, APPA 
advocates handling confidentiality issues on a case-by-case basis to 
maintain transparency when possible. APPA believes that transparency is 
important because industry participants have the right to know how the 
Commission is applying a Reliability Standard in a particular case and 
transparency would foster industry confidence that the reliability 
regime is being fairly administered. Siemens notes that, without 
mandated reporting of Cybersecurity Incidents, good metrics cannot be 
developed to assess cybersecurity threats and countermeasures.
    529. TAPS cautions that nonpublic procedures for cybersecurity 
enforcement are inconsistent with due process and threaten core 
principles, such as the right to a speedy and public trial, underlying 
the nation's administrative and judicial processes. According to TAPS, 
the public has an interest in knowing that a Cybersecurity Incident 
occurred at a particular facility or with the involvement of a 
particular contractor. TAPS states that it is not seeking public 
disclosure of information that endangers national security, but is 
concerned that an across-the-board ban on public disclosure goes too 
far.
    530. NASUCA supports maintaining confidentiality of the details of 
a Cybersecurity Incident and violation, but believes that the identity 
of the violator and the fact that a violation occurred should be 
publicly disclosed. NRECA asks the Commission to explain why the CEII 
procedures are not adequate for cybersecurity violations. NRECA remarks 
that, alternatively, if CEII protections are inadequate for 
cybersecurity, they may be inadequate for other purposes as well and 
that such protections may need to be changed generally.
    531. Cinergy is concerned about the need to maintain the 
confidentiality of commercially sensitive data during a penalty 
proceeding. In particular, it suggests that the Commission establish a 
requirement to notify third parties before their data is submitted in 
an action and allow any party or third party whose data is submitted in 
a penalty proceeding to request confidential treatment of data.

Commission Conclusion

    532. Our conclusion addresses separately two related issues raised 
by commenters: At what stage an investigation or penalty should be 
nonpublic, and what types of events should receive nonpublic treatment.
i. Stage at Which an Investigation or Penalty Should Be Made Public
    533. The Commission recognizes that it is generally desirable for 
investigations relating to a violation or an alleged violation to be 
nonpublic. As noted by commenters, public disclosure of an 
investigation may affect the reputation of an alleged violator, which 
in turn could have significant financial ramifications. Further, a 
nonpublic investigation would make less likely the possible public 
disclosure of information relating to a system vulnerability. We also 
note that a

[[Page 8708]]

violator or an alleged violator is more likely to cooperate in a 
nonpublic investigation. As previously discussed, pursuant to section 
39.7(b)(4) of the Final Rule, an investigation conducted by the ERO or 
a Regional Entity of a violation or an alleged violation of a 
Reliability Standard will be nonpublic unless the Commission authorizes 
a public investigation. This approach is consistent with our part 1b 
rules relating to investigations that, as discussed above, require 
nonpublic investigations except to the extent the Commission publicly 
discloses the existence of an investigation or investigative 
information.\144\
---------------------------------------------------------------------------

    \144\ 18 CFR part 1b.
---------------------------------------------------------------------------

    534. Accordingly, the Final Rule revises the proposed regulations 
to eliminate the requirement that the ERO or a Regional Entity provide 
``public'' notice when determining whether to impose a penalty. As 
revised, the ERO or a Regional Entity will conduct a nonpublic 
investigation or penalty action unless otherwise authorized by the 
Commission. For example, there may be circumstances in which a public 
investigation may be appropriate or a particular entity may prefer the 
openness of a public forum. We direct any ERO applicant to submit ERO 
Rules with an ERO certification application, and Regional Entity Rules 
with a delegation agreement, that require nonpublic investigations and 
confidentiality of material obtained during an investigation unless 
otherwise authorized by the Commission.
    535. Moreover, if the ERO or a Regional Entity determines that a 
user, owner, or operator has violated a Reliability Standard and 
imposes a penalty, the ERO must file a notice of penalty with the 
Commission pursuant to section 215(e)(1) of the FPA. The Commission 
will publicly disclose the filing of such a notice, except as discussed 
below with respect to Cybersecurity issues and other matters that would 
jeopardize Bulk-Power System security if publicly disclosed. Except for 
these issues, an application for review and also the related proceeding 
at the Commission will be made public. Participants in a public 
enforcement proceeding conducted at the Commission will have the 
opportunity to seek confidential treatment of materials and a 
protective order pursuant to our Rules of Practice and Procedure.
    536. While recognizing the role of nonpublic investigations, we 
also encourage entities to disclose violations voluntarily early in the 
enforcement process. We believe that voluntary disclosure would benefit 
the public, for example, in understanding the cause of a disruption in 
electric service. Other industry members would benefit if they 
understand sooner the causes of such a disruption, how the user, owner 
or operator of the Bulk-Power System acted and the results of these 
actions.
    537. Finally, regarding Cinergy's concern about protecting third-
party data, third-party data may well be relevant to a determination 
whether to impose a penalty. However, we will not attempt to set out 
here a complete set of criteria for disclosure or non-disclosure. 
Instead, we will consider the nature and relevance of the data on a 
case-by-case basis.
ii. Nonpublic Treatment of Certain Types of Proceedings
    538. As explained in the NOPR, and confirmed by numerous 
commenters, a proceeding involving a Cybersecurity Incident requires 
additional protection because it is possible that Bulk-Power System 
security and reliability would be further jeopardized by the public 
dissemination of information involving incidents that compromise the 
cybersecurity system of a specific user, owner or operator of the Bulk-
Power System.\145\ For example, even publicly identifying which entity 
has a system vulnerable to a ``cyber attack'' could jeopardize system 
security, allowing persons seeking to do harm to focus on a particular 
entity in the Bulk-Power System. While the Commission recognizes the 
benefit of transparency in Commission proceedings, as discussed by APPA 
and TAPS, the benefits of transparency are overridden in the limited 
situation of cases in which such transparency would jeopardize Bulk-
Power System security.
---------------------------------------------------------------------------

    \145\ NOPR at P 62.
---------------------------------------------------------------------------

    539. The Commission may establish a nonpublic proceeding if public 
disclosure would jeopardize system security. We find that, in the 
balance, Commission authority to establish a nonpublic proceeding if 
necessary and lawful, including but not limited to, a proceeding 
involving a Cybersecurity Incident, serves an important public interest 
that outweighs the competing goals of openness and transparency.
    540. Commenters identify a number of categories of incidents or 
types of facilities that they believe should be subject to a nonpublic 
hearing at the Commission. We are concerned, however, that this 
prescriptive approach would result in an overly inclusive requirement 
for nonpublic proceedings even if they are not necessary or, 
conversely, an overly narrow requirement that would make public a 
proceeding that is deserving of nonpublic treatment. Thus, section 
39.7(e)(7) of the Final Rule allows the Commission to determine on a 
case-by-case basis whether a particular Commission proceeding to review 
an enforcement penalty for violation of a Reliability Standard can and 
should be nonpublic.
e. Commission-Ordered Compliance and Penalties
    541. The NOPR provided that, on its own motion or upon complaint, 
the Commission may order compliance with a Reliability Standard and may 
impose a penalty against a user, owner or operator of the Bulk-Power 
System, if the Commission finds, after notice and opportunity for 
hearing, that the user, owner or operator has engaged or is about to 
engage in any acts or practices that constitute or will constitute a 
violation of a Reliability Standard.\146\
---------------------------------------------------------------------------

    \146\ NOPR at P 65.
---------------------------------------------------------------------------

    542. Related to this provision, the NOPR asked if the Commission 
should clarify that, in a situation where an entity is about to engage 
in an act that will constitute a violation of a Reliability Standard, 
Commission action should be in the form of a compliance order with the 
goal of preventing the violation from occurring; and further clarify 
that an entity that has engaged in an actual violation may be subject 
to both penalties and a compliance order.\147\ The NOPR also asked 
whether there are situations that may warrant a penalty where an entity 
is about to engage in activity that would violate a Reliability 
Standard but the activity was ultimately averted.
---------------------------------------------------------------------------

    \147\ NOPR at P 71 (enforcement question 10).
---------------------------------------------------------------------------

Comments

    543. Many commenters favor the issuance of a compliance order as 
the appropriate response to an entity that is about to engage in 
activity that would violate a Reliability Standard.\148\ However, some 
believe that a compliance order is unnecessary, overly-prescriptive or 
simply adds an additional layer of bureaucracy.\149\ Further, most 
commenters believe that, in a situation where an entity is about to 
engage in activity that would violate a Reliability Standard but the 
activity is ultimately averted, imposing a monetary penalty is not 
justified and raises serious due process issues.\150\ A few

[[Page 8709]]

commenters suggest that monetary penalties may be warranted in extreme 
situations that, for example, involve intentional acts or reckless 
misconduct that endanger system reliability.
---------------------------------------------------------------------------

    \148\ See, e.g., Ameren, EEI, EPSA, International Transmission, 
NERC, NRECA, NYISO, Progress Energy, South Carolina E&G and 
Southern.
    \149\ See, e.g., Cinergy and Portland GE.
    \150\ See, e.g., AEP, Ameren, EEI, ERCOT, Kansas City P&L, NERC, 
New York Companies, Santee Cooper, SERC, SoCalEd, South Carolina 
E&G, Southern and TVA.
---------------------------------------------------------------------------

Commission Conclusion

    544. In section 39.7(f) of the Final Rule, the Commission adopts 
the proposal in the NOPR that the Commission may order compliance with 
a Reliability Standard and may impose a penalty on a user, owner or 
operator of the Bulk-Power System. We confirm that, in a situation that 
is brought to our attention where an entity is about to engage in an 
act that would constitute a violation of a Reliability Standard, our 
action would typically be in the form of a compliance order. If an 
entity fails to comply with the compliance order, we could seek 
enforcement through an action for injunctive relief in the appropriate 
court.
    545. We believe that, in most circumstances, a monetary penalty 
would not be appropriate where a violation is imminent but ultimately 
averted.\151\ Nonetheless, we will not limit our options in responding 
to an extraordinary circumstance. The Commission does not state as a 
matter of policy that it will never impose a monetary penalty in a 
situation where an entity is about to violate a Reliability Standard. 
Likewise, we will not limit our options with regard to imposing an 
appropriate non-monetary penalty where an entity is about to engage in 
an action that would violate a Reliability Standard but the activity is 
ultimately averted.
---------------------------------------------------------------------------

    \151\ See section 215(e)(3) of the FPA.
---------------------------------------------------------------------------

    546. The Final Rule does not preclude the ERO or a Regional Entity 
that is aware of an entity that is about to engage in an act or 
practice that would result in noncompliance from notifying the entity 
by issuing a compliance directive. If, after receiving such a 
directive, the entity does not take appropriate action to avert a 
violation of a Reliability Standard, the ERO or Regional Entity could 
file a petition with the Commission to issue a Commission compliance 
order. The Commission would review such a petition on an expedited 
basis. Alternatively, if the ERO or a Regional Entity determines that 
an entity's imminent action or inaction could jeopardize Bulk-Power 
System reliability, the ERO or Regional Entity may seek immediate 
injunctive relief in an appropriate court.
f. Penalties' Relation to the Seriousness of the Violation
    547. The NOPR provided that any penalty imposed for the violation 
of a Reliability Standard shall bear a reasonable relation to the 
seriousness of the violation and shall take into consideration efforts 
of such user, owner or operator of the Bulk-Power System to remedy the 
violation in a timely manner.\152\ The proposal stated that penalties 
should not be limited to monetary penalties and may include limitations 
on activities, functions, operations, or other appropriate sanctions, 
including the establishment of a reliability watch list composed of 
major or frequent violators.
---------------------------------------------------------------------------

    \152\ NOPR at P 76.
---------------------------------------------------------------------------

Comments

    548. International Transmission and Michigan Electric ask for 
clarification that the phrase ``seriousness of the violation'' is 
intended to correlate the magnitude of the penalty with the actual or 
potential impact of a violation.
    549. EPSA asks for clarification on whether the phrase 
``limitations on activities, functions [or] operations,'' is intended 
to bar users, owners or operators from engaging in transactions or 
operating their facilities for an indefinite period of time. EPSA 
states that, while suspension of operations may be necessary to address 
immediate reliability concerns, suspension could also adversely affect 
reliability. Also, if a limitation on activity is intended to deprive 
the violator of the fruits of its violation, EPSA contends that a 
monetary penalty should provide a sufficient sanction.
    550. Ameren seeks clarification of the term ``major violators'' 
that may be placed on a reliability watch list.

Commission Conclusion

    551. Section 39.7(g) of the Final Rule adopts the NOPR proposal 
that a penalty must bear a reasonable relation to the seriousness of 
the violation. While the actual or potential effect of a violation is 
certainly one consideration in determining the seriousness of the 
violation, it is not the only consideration, in contrast to the 
suggestions of International Transmission and Michigan Electric. For 
example, a violation by an entity with a weak compliance program may 
merit a larger penalty than a violation by an entity with a strong 
compliance program.\153\ All users, owners and operators of the Bulk-
Power System should have in place strong programs to ensure compliance 
with ERO and Regional Entity Reliability Standards.
---------------------------------------------------------------------------

    \153\ Enforcement of Statutes, Orders, Rules, and Regulations, 
113 FERC ] 61,068 at P 22-23 (2005) (identifying internal compliance 
as a factor the Commission will take into account when determining a 
civil penalty).
---------------------------------------------------------------------------

    552. With regard to EPSA's request for clarification, a non-
monetary penalty involving a limitation on activities, functions or 
operations may include, but is not limited to, a ban on engaging in 
certain transactions or limiting the operation of facilities. The 
duration of the ban would normally be for the period needed to 
implement the necessary corrective action, whether installation of 
required equipment or completion of personnel training.
    553. Regarding Ameren's request for clarification of the term 
``major violators'' that may be placed on a reliability watch list, we 
clarify that the term includes users, owners or operators that have 
either committed one or more serious violations or have a history of 
frequent, albeit less serious violations.
i. Penalty Guidelines
    554. The Commission asked in the NOPR whether it should approve a 
penalty range or guidelines before the ERO can levy a penalty or 
sanction for any violation, and, if so, whether the penalty range or 
guidelines for a violation should be submitted for Commission approval 
at the same time that the corresponding Reliability Standard is 
submitted to the Commission for approval.\154\
---------------------------------------------------------------------------

    \154\ NOPR at P 71 (enforcement question 2).
---------------------------------------------------------------------------

Comments

    555. Virtually all commenters on this issue agree that the 
Commission should approve a penalty range or guidelines that include a 
schedule of non-monetary and monetary penalties of increasing 
severity.\155\ They contend that basic due process requires that a 
regulated entity must know both the legal standard to which its action 
must conform as well as the corresponding penalty before that entity 
can be penalized for noncompliance. Commenters, however, differ on 
whether the ERO should develop and submit penalty guidelines concurrent 
with or separate from the Reliability Standard development process.
---------------------------------------------------------------------------

    \155\ See, e.g., APPA, EEI, ERCOT, FirstEnergy, FRCC, Hydro One, 
Kansas City P&L, LADWP, Michigan Electric, MRO, New York Companies, 
NEPOOL Participants, NERC, NiSource, NRECA, Ohio Commission, Ontario 
IESO, PacifiCorp, PSNM-TNPC, Southern, and Xcel Energy. Conversely, 
commenters consistently oppose a single penalty approach in response 
to the NOPR's question on uniform penalties, NOPR at P 71 
(enforcement question 3).
---------------------------------------------------------------------------

    556. Numerous commenters suggest that the Reliability Standard 
development process should not require

[[Page 8710]]

that each Reliability Standard have its own range or guidelines for 
penalties.\156\ Rather, these commenters assert that the ERO should 
develop, for Commission review, an enforcement policy that separates 
approval of penalty guidelines from approval of each Reliability 
Standard. These commenters suggest that, at the time a Reliability 
Standard is filed with the Commission for approval, the ERO should 
indicate what part of the overall sanctioning guidelines and penalty 
ranges would apply to the particular Reliability Standard. While some 
commenters urge uniformity and suggest that Regional Entity delegation 
agreements include a provision requiring use of the ERO penalty 
guidelines, TANC suggests that, to reflect unique regional conditions, 
each Regional Entity should develop its own proposal for penalty 
guidelines to be submitted to the ERO. PacifiCorp comments that penalty 
guidelines should be developed jointly by the ERO and Regional Entities 
to provide a balance of uniformity and regional experience. It also 
suggests periodic review of guidelines to ensure that the program is 
having the desired effect, with an opportunity for needed adjustments.
---------------------------------------------------------------------------

    \156\ See, e.g., AEP, APPA, TVA, EEI, FRCC, Michigan Electric, 
NERC, Progress Energy, Santee Cooper, South Carolina E&G, SERC and 
Xcel Energy.
---------------------------------------------------------------------------

    557. Other commenters support a set range of monetary and non-
monetary penalties for each Reliability Standard that is submitted to 
the Commission for approval at the same time as the Reliability 
Standard is submitted.\157\ These commenters assert that, to ensure 
that a penalty bears a reasonable relation to the violation, the 
penalty guideline must be not be arbitrarily developed in isolation 
from the development of the Reliability Standard.
---------------------------------------------------------------------------

    \157\ See, e.g., Ameren, American Transmission, British 
Columbia, Cinergy, FirstEnergy, MRO, NEPOOL Participants, NiSource, 
PG&E and SMUD.
---------------------------------------------------------------------------

    558. WECC and Entergy ask that the Commission not mandate any 
particular approach to penalties but, rather, allow the ERO and each 
Regional Entity to propose standardized penalties or penalty guidelines 
as part of its enforcement program. SoCalEd suggests that WECC's 
Reliability Management System (RMS) could serve as model for 
establishing a graduated schedule of non-monetary and monetary 
penalties.
    559. South Carolina E&G comments that penalties should not be 
imposed on an entity for failure to meet standards that are contrary to 
or are in violation of local, state or federal statutes or 
jurisdictional requirements.
    560. APPA comments that the Commission should afford the ERO and 
Regional Entities latitude to impose higher monetary penalties on 
violations by larger entities than by smaller entities. For example, 
according to APPA, the ERO may impose a higher monetary penalty on a 
regional coordinator or large balancing authority responsible for 
operation of a large portion of an Interconnection than a smaller 
balancing authority or transmission owner.

Commission Conclusion

    561. The Commission concludes that penalty guidelines, developed by 
the ERO and approved by the Commission, would provide a predictable, 
uniform and rational approach to the imposition of penalties.\158\ Such 
guidelines would help ensure that a penalty bears a reasonable relation 
to the seriousness of the violation, as required by section 215(e)(6) 
of the FPA. Accordingly, the Final Rule revises the proposed regulation 
text to create a new section 39.7(g)(2) that requires the ERO to 
develop, and submit to the Commission for approval, penalty guidelines 
that identify a range of non-monetary and monetary penalties to be 
applied by the ERO or a Regional Entity for determining the appropriate 
penalty for the violation of a Reliability Standard. We agree with the 
commenters that urge consistency in the imposition of penalties by the 
ERO and Regional Entities. Accordingly, Regional Entities should adopt 
the ERO's penalty guidelines, with changes or supplements only as 
necessary to reflect regional differences in a Reliability Standard. 
Any such changes by a Regional Entity must be approved by the ERO and 
the ERO must submit them to the Commission for approval.
---------------------------------------------------------------------------

    \158\ Our Policy Statement on Enforcement articulates factors 
the Commission considers when determining an appropriate penalty. 
See Enforcement of Statutes, Orders, Rules, and Regulations, 113 
FERC ] 61,068. The ERO should look to our Policy Statement on 
Enforcement for guidance in developing certain enforcement penalty 
policies. For example, our policies on internal compliance, self-
reporting and cooperation, id. at P 22-27, may assist the ERO in 
formulating its enforcement penalty policies.
---------------------------------------------------------------------------

    562. The ERO may propose for Commission review one set of penalty 
guidelines for all Reliability Standards, with the flexibility to 
propose a unique penalty for a particular Reliability Standard, if 
necessary. The Commission must approve the proposed penalty guidelines 
prior to the ERO's use of the guidelines to impose a penalty for the 
violation of a Reliability Standard.
    563. With regard to South Carolina E&G's comment, we do not 
preclude the imposition of a penalty if an entity is in noncompliance 
with a Reliability Standard that is inconsistent with a state or local 
statute or regulation. We also note that South Carolina E&G has not 
provided any examples of when such a conflict would exist and we would 
expect any such conflicts to be rare. In our December 9, 2005 technical 
conference, the state representatives testified that standards or 
regulations adopted at the state level are complementary to, or more 
stringent than, continent-wide or regional Reliability Standards, not 
less stringent or in conflict with them.\159\
---------------------------------------------------------------------------

    \159\ December 9, 2005 Technical Conference, Tr. at 95.
---------------------------------------------------------------------------

    564. We agree with APPA that the relative size of an entity or its 
financial ability is a factor that the ERO or a Regional Entity may 
consider when developing penalty guidelines or determining an 
appropriate penalty in a particular case.
ii. Non-Monetary Penalties
    565. The NOPR requested comments regarding what types of non-
monetary penalties, if any, are appropriate.\160\
---------------------------------------------------------------------------

    \160\ NOPR at P 71 (enforcement question 6).
---------------------------------------------------------------------------

Comments

    566. Most commenters suggest that non-monetary penalties are 
appropriate and that such sanctions may include: Imposing a limit on 
activities, functions and operations; turning over operation of a 
facility to a third party; prohibiting an entity from engaging in a 
certain type of transaction; requiring an entity to carry additional 
operating reserves for a certain period of time; increasing training 
requirements; and a disconnection order for persistent violators.\161\
---------------------------------------------------------------------------

    \161\ See, e.g., EEI, ERCOT, Hydro-Qu[eacute]bec, Kansas City 
P&L, NERC, New York Companies, and Ontario IESO.
---------------------------------------------------------------------------

    567. While some commenters recommend suspending or revoking 
appropriate organizational certification,\162\ PG&E believes that this 
sanction may be appropriate for other industries regulated by a self-
regulatory organization, but is inappropriate in the utility industry.
---------------------------------------------------------------------------

    \162\ See, e.g., Ameren, International Transmission, MRO and 
WECC.
---------------------------------------------------------------------------

    568. SMUD suggests that the ERO have flexibility in imposing non-
monetary penalties, so long as the penalty is proportionate to the 
violation and is tied to the nature of the conduct to be discouraged. 
APPA notes that section 215(e)(6) of the FPA requires that any penalty 
must bear a reasonable relationship to the seriousness of the

[[Page 8711]]

violation and take into consideration timely remedial efforts.
    569. Progress and SERC suggest that, generally, Regional Entities 
should administer non-monetary penalties, which should apply to 
``administrative'' violations such as failure to produce documentation 
required by a Reliability Standard. In contrast, Alcoa comments that 
only the Commission should impose non-monetary penalties.

Commission Conclusion

    570. Section 215 of the FPA contemplates the imposition of both 
non-monetary and monetary penalties. Section 215(c)(2)(C) of the FPA 
provides that the ERO certified by the Commission must have ERO Rules 
that, inter alia, provide fair and impartial procedures for enforcement 
of Reliability Standards ``including limitations on activities, 
functions, or operations, or other appropriate sanctions.''
    571. While commenters identify an array of possible non-monetary 
penalties, the Commission is not formally adopting or rejecting any 
particular suggestion here. The appropriate penalty for a particular 
violation should be determined on a case-by-case basis, based on the 
circumstances and consistent with the penalty guidelines proposed by 
the ERO and approved by the Commission pursuant to section 39.7(g)(2) 
of the Final Rule. These guidelines should include monetary and non-
monetary penalties.
iii. Limits on Monetary Penalties
    572. In the NOPR, the Commission interpreted section 316A of the 
FPA,\163\ as amended by EPAct, as establishing a limit on a monetary 
penalty for a violation of a Reliability Standard that may be imposed 
by the ERO, Regional Entities and the Commission.\164\ The Commission 
asked for comment on this interpretation.
---------------------------------------------------------------------------

    \163\ 16 U.S.C. 825o-1.
    \164\ NOPR at P 71 (enforcement question 4).
---------------------------------------------------------------------------

Comments

    573. Most commenters agree that the $1 million per day, per 
violation cap set forth in section 316A of the FPA applies to any FPA-
related violation, whether the monetary penalty is levied by the 
Commission, the ERO, or a Regional Entity.\165\ TAPS states that, 
although it is not clear whether the statutory cap applies to the ERO, 
the Commission would be prudent to apply the cap to all monetary 
penalties, while reserving for future judgment the question of the 
ERO's authority to exceed the $1 million/day limit if it is 
insufficient to deter violations.
---------------------------------------------------------------------------

    \165\ See, e.g., AEP, Alcoa, Ameren, APPA, EEI, FRCC, MISO 
Transmission Owners, MRO, NERC, NRECA, PG&E, Progress Energy and 
Xeel Energy.
---------------------------------------------------------------------------

    574. Some comment that, in addition to the statutory cap, the ERO 
should develop, for regulatory approval, a limit on the monetary 
penalty for violation of a particular Reliability Standard. NERC 
suggests that such a limit should balance two factors: (1) That a 
penalty should not negatively affect the ability of an entity to 
maintain reliability and (2) that a penalty must be sufficient to 
assure that the entity responsible to maintain reliability does not 
make an economic choice to violate a Reliability Standard. Ameren 
comments that such a limit would benefit consumers because the risk of 
an open-ended penalty would be passed to consumers in the form of 
higher costs.

Commission Conclusion

    575. The Commission confirms its interpretation that section 316A 
of the FPA establishes a limit on a monetary penalty for a violation of 
a Reliability Standard that may be imposed by the Commission, the ERO, 
or a Regional Entity pursuant to FPA section 215. The ERO, when 
developing penalty guidelines, may propose an appropriate range of 
monetary penalties for violation of each Reliability Standard that is 
up to the cap for general civil penalties under part II of the FPA in 
light of factors relating to a particular Reliability Standard. The 
ERO's penalty guidelines, including any limits, will be subject to 
Commission approval.
g. Reporting Violations and Alleged Violations
i. Procedures for Reporting Violations and Alleged Violations
    576. The NOPR proposed that the ERO and all Regional Entities must 
have procedures to notify the Commission of all violations and alleged 
violations of Reliability Standards concurrent with the time that the 
ERO or Regional Entity first notifies the user, owner or operator of 
the violation or alleged violation.\166\
---------------------------------------------------------------------------

    \166\ NOPR at P 71 (enforcement question 11).
---------------------------------------------------------------------------

Comments

    577. NiSource asks the Commission to clarify the meaning of 
``potential violation.'' EPSA and the Oklahoma Commission suggest that 
any entity identified as having allegedly violated a Reliability 
Standard be notified immediately of any enforcement investigation.
    578. Cinergy comments that it is possible that a violation may 
relate to improper documentation or a missed reporting deadline set 
forth in a Reliability Standard. Thus, in reporting a violation or 
alleged violation to the Commission, a significant incident of 
noncompliance worthy of Commission attention may get ``lost in the 
shuffle.'' Cinergy, therefore, recommends that the Commission either 
require reporting only of those violations that have a material impact 
on reliability or classify the violations and have less urgent 
violations reported in a quarterly report.
    579. NiSource asks the Commission to clarify that the ERO and 
Regional Entities must report to the Commission when an enforcement 
proceeding is closed without a penalty to ``clear'' the record on the 
alleged violation.
    580. Several state commissions ask that affected state commissions 
receive notice of a violation or alleged violation simultaneously with 
the Commission.\167\ The Missouri Commission adds that a state 
commission should receive access to confidential information relating 
to a reliability event affecting its state or an entity serving load in 
its state.
---------------------------------------------------------------------------

    \167\ See, e.g., Missouri Commission, North Carolina Commission, 
Ohio Commission and Oklahoma Commission.
---------------------------------------------------------------------------

Commission Conclusion

    581. The Commission adopts the substance of the proposed reporting 
requirement in section 39.7(b) of the Final Rule. Several commenters 
request clarification of the proposed reporting requirement. First, the 
NOPR referred to a ``potential violation.'' This term creates an 
ambiguity between an alleged past violation and future action that 
would be a violation. The Final Rule uses the term ``alleged 
violation'' in its place.
    582. Further, as explained earlier in the discussion of due process 
issues, an entity alleged to have violated a Reliability Standard is 
entitled to timely notice of any such allegation. The regulation, 
however, does not specify a time for the ERO or a Regional Entity to 
provide such notice. Rather, the proposed provision required that the 
ERO or Regional Entity report a violation or alleged violation to the 
Commission concurrent with the alleged violator receiving notice. 
Consistent with our view of the ERO's lead role in the enforcement 
process, we amend this provision to provide that the ERO must promptly 
notify the Commission of a self-reported violation or an investigation 
into a violation or alleged violation.
    583. This notification provision is intended as a mechanism to 
provide the Commission promptly with limited

[[Page 8712]]

information, as described in the proposed regulation, to enable the 
Commission to understand the general nature of a violation or an 
alleged violation and identify a contact person who can furnish its 
status to the Commission. The Commission requires prompt information 
regarding all violations and alleged violations of a Reliability 
Standard, not the delayed notification proposed by Cinergy. The 
requirement is to report both ``violations'' and ``alleged 
violations.''
    584. We reject Cinergy's suggestion that the Commission either 
require only the reporting of violations that have a material impact on 
reliability or classify violations and allow the reporting of ``less 
urgent'' violations on a quarterly basis. While we recognize that 
violations of Reliability Standards may vary in degree of immediate 
impact on system reliability, classifying violations as ``less urgent'' 
is ultimately subjective. Thus, for example, a seeming ``less urgent'' 
violation that is significant in the context of a specific occurrence 
may not be reported if we were to adopt Cinergy's proposal. Classifying 
some violations as less significant would also send the wrong signal to 
users, owner and operators of the Bulk-Power System. If experience 
proves the proposed reporting system to be inefficient or unnecessary, 
we can revisit this matter in the future.
    585. With regard to NiSource's request for clarification, we agree 
that the ERO and Regional Entities should report to the Commission the 
disposition of each violation or alleged violation. Accordingly, 
section 39.7(b) of the Final Rule requires that, after the ERO submits 
a report of a violation or alleged violation, it must subsequently 
inform the Commission of the disposition of the matter. The ERO 
applicant should propose a process for periodically reporting to the 
Commission the disposition of violations and alleged violations on a 
quarterly basis.
    586. As discussed above, a state commission generally will have an 
opportunity to intervene in an adjudicatory proceeding before the 
Commission, including a Commission review of a penalty imposed by the 
ERO or a Regional Entity. Further, we will require the ERO and Regional 
Entities to notify a Regional Entity and Regional Advisory Body of all 
violations that have been determined to have occurred within its region 
at the conclusion of the appeals process. However, we are not requiring 
here that a state commission receive notice of an alleged violation of 
a Reliability Standard or receive access to confidential information 
when the ERO or a Regional Entity considers whether to impose a 
penalty. As discussed below, the Commission will treat a report of an 
alleged violation as nonpublic information, and a general rule 
providing a state commission access to nonpublic information would be 
contrary to the Commission's rules for treatment of investigative 
information.
    587. The NOPR proposed, in the provisions on Reliability Reports, a 
requirement that the ERO and Regional Entities must report on their 
enforcement actions and associated penalties to the Commission and 
others. The Final Rule adopts this proposal with modifications in the 
section on Enforcement of Reliability Standards as new subsection 
39.7(b)(5). The modifications make clear that the ERO is to report, and 
the Regional Entities are to report through the ERO, on violations of 
Reliability Standards and summary analyses of such violations as the 
Commission will from time to time direct, and limit this reporting to 
the Commission.
ii. Confidentiality of Reports
    588. The NOPR, referring specifically to the proposed reporting of 
violations and potential, i.e. alleged, violations, asked for comment 
regarding what confidentiality protections may be needed.\168\
---------------------------------------------------------------------------

    \168\ NOPR at P 71 (enforcement question 11).
---------------------------------------------------------------------------

Comments

    589. Numerous commenters urge the Commission to take adequate steps 
to ensure that the notification of an alleged violation is made to the 
Commission in a nonpublic manner and that the nonpublic nature of the 
notification is maintained until the appeals process is exhausted.\169\ 
Some propose that, to achieve this, the Commission revise the proposed 
regulations by eliminating the requirement that the ERO and Regional 
Entities notify the Commission of an alleged violation.\170\ Others 
propose that the Commission modify the Final Rule to state that 
information submitted to the Commission regarding an alleged violation 
must be kept confidential until the violation is ``confirmed,'' meaning 
until the appeals process has been completed.\171\ These commenters 
posit that an alleged violation that is found not to be an actual 
violation through the appeals process should not be disclosed to the 
public.
---------------------------------------------------------------------------

    \169\ See, e.g., Allegheny, APPA, EEI, ERCOT, MRO, National 
Grid, NERC, NiSource, Progress Energy, PSEG Companies, SERC, 
SoCalEd, TVA and Xcel Energy.
    \170\ See, e.g., AEP, Entergy, NERC, Progress Energy, Santee 
Cooper and SERC.
    \171\ See e.g., APPA, EEI, Kansas City P&L, LADWP, TVA and WECC.
---------------------------------------------------------------------------

    590. NERC explains that the disclosure of a potential violation 
with the alleged violator's identity could have significant and 
possibly irreversible negative impacts for the entity, even if it is 
ultimately found to have been in compliance. Further, faced with such 
disclosure, entities may be unwilling to cooperate with ERO and 
Regional Entity investigators. NERC states that a potential violation 
should be reported to the Commission only if the Commission ensures 
that the report will remain nonpublic to protect the identity of the 
entity involved until due process is complete. NERC asserts that a 
violation relating to information designated as CEII must remain 
confidential even when a violation is confirmed.
    591. NERC adds that, if the Commission requires the reporting of 
potential violations, the rules should define a ``potential violation'' 
as occurring ``when the ERO or Regional Entity has performed a 
preliminary investigation and is prepared to formally charge an entity 
with a violation of a Reliability Standard.'' NERC notes that this 
would add an additional stage to the compliance process, establishing a 
formal ``charging'' process.
    592. South Carolina E&G states that confidentiality provisions 
similar to those in part 1b of the Commission's regulations are needed 
to assure no unnecessary public disclosure of an enforcement 
investigation. Alcoa, ELCON and others state that protections similar 
to that afforded other Commission investigations are appropriate for 
reliability-related investigations. ELCON comments that a claim of 
confidentiality should not be used to hide a business practice that 
harms reliability or competition.
    593. EEI opposes public disclosure unless and until a violation is 
confirmed. It states that, consistent with the procedures of other 
self-regulatory organizations, it supports an approach in which the ERO 
immediately notifies the Commission that a compliance investigation has 
commenced (including the entities involved and general nature of the 
alleged violation), while deferring the submission of a detailed report 
until the investigation is completed. EEI is concerned that alternative 
approaches may have a chilling effect on the reporting of compliance 
information and the self-reporting of violations.
    594. Others, such as FRCC and New York Companies, advocate that the 
identity of an entity subject to an investigation should be kept

[[Page 8713]]

confidential during a proceeding below the Commission level. The 
commenters posit that a Commission proceeding, however, should be 
conducted on the basis of a public record, with suitable protections, 
e.g., for confidential, proprietary or critical infrastructure 
information.
    595. TAPS states that confidentiality should be required for 
alleged violations, but confirmed violations should be made public, in 
accordance with NERC's Guidelines for Reporting and Disclosure and the 
Bilateral Principles. Apparently defining ``confirmed violation'' at an 
earlier stage than the final appeal, TAPS would require public notice 
of violations contested at the ERO level. Similarly, NASUCA comments 
that a confirmed violation, regardless of the severity, should be 
publicly disclosed--including a report to the relevant state regulatory 
authorities--immediately upon the finding of a violation by the ERO or 
a Regional Entity.

Commission Conclusion

    596. The Commission finds that a report of an alleged violation 
pursuant to section 39.7(b) should receive nonpublic treatment. As 
noted by commenters, and similar to our reasoning above with respect to 
a nonpublic investigation by the ERO or a Regional Entity, public 
disclosure that the ERO or a Regional Entity is investigating an 
entity's violation or alleged violation of a Reliability Standard could 
cause unwarranted damage to the entity's reputation, with resulting 
financial repercussion. Further, public disclosure of an investigation 
into a violation or an alleged violation could chill an entity's 
cooperation with the investigator. The Commission will not make such 
information public unless the Commission decides to initiate a public 
investigation, issue a public compliance order or initiate a public 
proceeding to impose a penalty, or is required by statute or 
regulation, as in the situation where the Commission or a court 
determines that information must be provided pursuant to a request for 
information pursuant to the Freedom of Information Act (FOIA).\172\
---------------------------------------------------------------------------

    \172\ 5 U.S.C. 552 (2000). We note that FOIA does not require 
the public disclosure of records or information compiled for law 
enforcement purposes if, for example, disclosure could reasonably be 
expected to interfere with enforcement proceedings, would deprive a 
person of a right to a fair trial or an impartial adjudication or 
could reasonably be expected to constitute an unwarranted invasion 
of personal privacy. See 5 U.S.C. 552(b)(7).
---------------------------------------------------------------------------

    597. We reject the suggestions that the Commission eliminate the 
proposed reporting requirement altogether or have the ERO create a 
``formal charging'' process. The nonpublic treatment of such reports 
should ensure that an inquiry will remain nonpublic and the subject of 
the inquiry will not be damaged. Accordingly, the Final Rule inserts 
section 39.7(b)(4) that states how an ERO report of an alleged 
violation will receive nonpublic treatment by the Commission.
    598. However, a violation determined, for example, by a finding of 
the ERO or a Regional Entity, self-reporting or an admission in a 
settlement, generally will be made public after the matter is filed 
with the Commission as a notice of penalty or resolved by an admission 
that the user, owner, or operator of the Bulk-Power System violated a 
Reliability Standard or a settlement or other negotiated disposition. 
Further, pursuant to section 39.7(b)(4) of the Final Rule, the ERO 
should file, for informational purposes only, any settlement of an 
alleged violation regardless of whether the agreement contains an 
admission by the settling user, owner or operator. Settlements will be 
made public. This is consistent with our own procedures in which 
enforcement settlements are made public. Settlements will not be 
noticed for public comment; nor will they be subject to Commission 
review pursuant to section 39.7(e) regarding Commission review of a 
notice of penalty.
    599. Further, the Final Rule deletes from the proposed regulations 
the requirement that reports of violations and alleged violations be 
filed electronically with the Commission. The Commission will review 
the reporting procedures proposed by the ERO and Regional Entities 
before determining the appropriate filing procedures at the Commission.
h. Other Enforcement Issues
i. ERO and Regional Entity Appeals Processes
    600. The NOPR asked for comments on the appropriate appeals 
process, if any, of an ERO or Regional Entity decision to impose a 
penalty, whether it would be appropriate for the ERO and Regional 
Entities to adopt processes similar to self-regulatory organizations, 
and whether internal appeals within the ERO or a Regional Entity should 
be permitted before appeal to the Commission.\173\
---------------------------------------------------------------------------

    \173\ NOPR at P 71 (enforcement question 1).
---------------------------------------------------------------------------

Comments
    601. A number of commenters agree that various self-regulatory 
organization models provide an appropriate basis for an appeals 
process.\174\ However, commenters vary regarding the proper number of 
appeals and who should hear such appeals. Commenters consistently 
emphasize the need for fair, independent, non-discriminatory and well-
defined due process procedures for appeals.\175\
---------------------------------------------------------------------------

    \174\ See, e.g., EPSA, FRCC, NERC, NiSource and SoCalEd.
    \175\ See, e.g., Alcoa, EEI, EPSA, MISO Transmission Owners, 
NERC and PacifiCorp.
---------------------------------------------------------------------------

    602. Some commenters advocate, for a penalty imposed by a Regional 
Entity, a first appeal within the relevant Regional Entity, with 
additional appeals to the ERO and the Commission or other appropriate 
authority in Canada or Mexico; \176\ and for a penalty imposed by the 
ERO, a first appeal within the ERO.\177\ TAPS notes that a first appeal 
within the Regional Entity would allow review by those with the most 
knowledge about the regional system, and a further opportunity for 
appeal to the ERO would ensure consistency of interpretation and 
enforcement of ERO Reliability Standards. Entergy believes this process 
would help to ensure resolution of penalties before they reach the 
Commission, strengthen the ERO's role, and develop a clear factual 
record if Commission review is necessary.
---------------------------------------------------------------------------

    \176\ See, e.g., Ameren, American Transmission, British 
Columbia, ERCOT, Entergy, Hydro-Qu[eacute]bec, MRO, NERC, Southern, 
TAPS and Xcel.
    \177\ See, e.g., American Transmission, ERCOT, Michigan 
Electric, NERC and Southern.
---------------------------------------------------------------------------

    603. MRO believes that the ERO working with the Regional Entities 
should decide on an appropriate appeals process at the ERO level. MRO 
and AEP advocate that the ERO, through delegation agreements, establish 
consistent principles for the investigations and imposition of 
penalties of all Regional Entities. MRO supports appeals at both the 
Regional Entity and ERO levels, but asks that the enforcement process 
not become an endless series of appeals.
    604. TVA and others comment that, for non-monetary penalties 
imposed by a Regional Entity, neither the ERO nor the Commission should 
participate in the appeals process. Ontario IESO suggests that a 
penalty imposed by either a Regional Entity or the ERO should be 
appealed to the ERO, with a further appeal to the Commission or 
appropriate Canadian authority.\178\ Ontario IESO states that ERO 
appellate review is essential to ensure consistency within and across 
regions and to reflect industry consensus.
---------------------------------------------------------------------------

    \178\ See also APPA, Kansas City P&L, LADWP and Michigan 
Electric.
---------------------------------------------------------------------------

    605. CREPC comments that an appeal of a penalty imposed by an

[[Page 8714]]

Interconnection-wide Regional Entity should be made directly to the 
Commission or the appropriate Canadian authority and not ``filtered'' 
through the ERO. WECC comments that, if the Commission allows an appeal 
at the ERO level, such review should be subject to a rebuttable 
presumption of validity of the Regional Entity's findings.
    606. Emphasizing that the appeals process should minimize 
duplicative proceedings that add costs and delay, the MISO Transmission 
Owners propose that the Commission create a limited, informal process 
at the ERO and Regional Entity levels to aid in the development of the 
record that is submitted to the Commission. Further, the process should 
allow parties to go directly to the Commission and designate the 
Commission as the decisionmaker. Likewise, the ISO/RTO Council and 
Northern Maine Entities support a direct appeal to the Commission once 
the ERO or Regional Entity issues a decision.
    607. A number of commenters discuss various details of how appeals 
should be conducted. For example, FRCC comments that, while appeals 
should be heard by ``disinterested parties,'' such parties must have 
relevant experience and expertise. Further, FRCC states that, given the 
importance of compliance with Reliability Standards, an appeal to the 
Regional Entity or ERO should not act as a stay on the effectiveness of 
a penalty. EEI and FRCC suggest that Regional Entities should make 
provision for alternative dispute resolution. Alcoa, NRECA and LADWP 
comment that appeals to the Commission should be reviewed de novo, with 
full due process and ultimately judicial review.
    608. International Transmission and Michigan Electric believe that 
some level of review at the ERO/Regional Entity level is appropriate, 
and that any such appeal process should be completed in an efficient 
and timely manner. Further, the ERO should be required to propose a 
specific process and timeline in its application for certification. 
PSEG Companies believes that the ERO and Regional Entities, through 
stakeholder processes, should determine the best approach to appeals 
and file the consensus position and the record with the Commission. 
Ameren believes that the Final Rule should require an expedited 
response period for the ERO and Regional Entities to respond to an 
appeal.
    609. BCTC supports internal appeals at both the Regional Entity and 
ERO level, believing that resolving matters before an appeal to a 
regulatory body is more efficient. Further, given the international 
nature of the ERO and some Regional Entities, resolution at the ERO or 
Regional Entity level could provide more consistency in decisions. The 
Nova Scotia Board comments that appeals affecting Canadian entities 
would ultimately be appealed to the applicable Canadian authority. MRO 
states that, for actions taken against Canadian entities, the ERO could 
file a notice with the Commission for informational purposes.

Commission Conclusion

    610. The Commission finds that an appeals process at the ERO or 
Regional Entity level is appropriate.\179\ Such an internal appeal will 
assist in ensuring internal consistency in the imposition of penalties 
by the ERO or the Regional Entity.
---------------------------------------------------------------------------

    \179\ NOPR at P 70.
---------------------------------------------------------------------------

    611. However, the Commission shares the concern of MRO and other 
commenters that having both an ERO and a Regional Entity appeals 
process for a penalty imposed by a Regional Entity could result in a 
drawn-out series of sequential appeals. An overall process that allows 
for multiple appeals could result in duplication that would delay a 
final decision and unnecessarily increase the costs of those involved 
in a penalty action. Thus, we find that there should be a single appeal 
at either the ERO or the Regional Entity. The ERO applicant must 
propose in its application for certification for approval by the 
Commission whether the appeal of a penalty imposed by a Regional Entity 
should be at the ERO or Regional Entity level. An entity that is the 
subject of a penalty may not elect to bypass the appeals process 
established by the ERO and seek immediate Commission review without the 
approval of the ERO.
    612. We agree with the commenters regarding the need for fair, 
independent, non-discriminatory and well-defined procedures for 
appeals. Such procedures are consistent with the statutory requirements 
that the ERO and Regional Entities have fair and impartial procedures 
for enforcement of Reliability Standards.\180\ However, rather than the 
Commission prescribing the internal appeals procedures, we will allow 
an ERO applicant to develop procedures and submit them to the 
Commission for approval with an ERO certification application.
---------------------------------------------------------------------------

    \180\ See sections 215(c)(2)(C) and (e)(4)(B) of the FPA.
---------------------------------------------------------------------------

    613. As discussed earlier, regardless of whether the single appeal 
is at the ERO or the Regional Entity level, the ERO is responsible for 
filing a notice of penalty with the Commission. Thus, we reject the 
suggestion that an appeal of a penalty imposed by a Regional Entity 
organized on an Interconnection-wide basis should be filed directly 
with the Commission, bypassing the ERO.
    614. With regard to the comment of Alcoa and LADWP, we agree that 
Commission review of a penalty imposed by the ERO or a Regional Entity 
would be de novo. This standard is consistent with the practice of the 
review by other regulatory agencies of sanctions imposed by their 
associated self-regulatory organizations.\181\
---------------------------------------------------------------------------

    \181\ For example, the Securities and Exchange Commission 
conducts de novo review of sanctions imposed by its SRO, the NASD: 
``[a]ny final disciplinary sanction imposed by the [NASD] is subject 
to full and independent review by the Securities and Exchange 
Commission as to the facts as well as the law.'' Otto v. SEC, 253 
F.3d 960, 964 (7th Cir. 2001), cert. denied, 534 U.S. 1021 (2001).
---------------------------------------------------------------------------

ii. Receipt and Use of Penalty Money
    615. The NOPR asked for comments regarding who should receive, and 
what should be done with monies collected as monetary penalties.\182\
---------------------------------------------------------------------------

    \182\ NOPR at P 71 (enforcement question 7).
---------------------------------------------------------------------------

Comments

    616. Most commenters believe that the ERO and Regional Entities 
should be able to make use of penalty monies. They differ, however, on 
how the ERO or a Regional Entity should use the money. Many suggest 
penalty monies be used to defray the cost of enforcement programs. 
Others believe it is more appropriate to apply the monies against the 
ERO's or Regional Entity's general operating budget. A few commenters 
prefer that penalty monies not be used by the ERO or Regional Entities 
but, rather, sent to the U.S. Treasury or relevant Canadian authority.
    617. NERC comments that the ERO should receive all monies collected 
as monetary penalties for violations of ERO Reliability Standards in 
the United States. Under NERC's proposal, the ERO would first use the 
revenues to cover the incremental costs incurred by the ERO and 
Regional Entities in investigating a specific violation or alleged 
violation, including the costs of monitoring and verifying corrective 
actions and determining that the violation is satisfactorily resolved. 
According to NERC, the ERO should be authorized to disburse penalty 
monies to a Regional Entity that incurs an incremental cost associated 
with the particular violation. NERC suggests that any money remaining 
after such disbursements should be returned to the general operating 
fund of the ERO for the current year and noted as additional surplus at 
the year-end true up with the

[[Page 8715]]

ERO budget. If a Reliability Standard is applicable only within a 
region, such as an Interconnection-wide standard, the Regional Entity 
should collect the penalty monies directly using procedures similar to 
those of the ERO.\183\
---------------------------------------------------------------------------

    \183\ AEP, EEI, EPSA, FRCC, MRO, Ohio Commission, Progress 
Energy, SMUD and TAPS also support the use of penalty monies to 
defray the costs of the ERO and Regional Entity enforcement 
programs.
---------------------------------------------------------------------------

    618. Many commenters \184\ state that using the monies in this 
manner would not present a conflict of interest, noting that the 
Commission and other regulatory authorities would have an annual review 
of the use of such monies and that, by including a true-up each year, 
the ERO would not benefit financially from the imposition of monetary 
penalties. FRCC further notes that the Commission would have the 
opportunity to approve any proposed penalty guidelines and any penalty 
actually imposed.
---------------------------------------------------------------------------

    \184\ See, e.g., NERC, FRCC, TAPS, SERC and SoCalEd.
---------------------------------------------------------------------------

    619. TAPS notes that crediting penalty monies to reduce costs borne 
by those in compliance is consistent with Commission precedent.\185\ 
According to SERC, such use of penalty monies would not create an 
appearance of impropriety if compliance and audit programs are 
``sufficiently independent'' and the compliance process includes a 
robust appeals process. SoCalEd comments that such use of penalty 
monies to fund enforcement programs would not create an appearance of 
impropriety provided that stakeholders play a role in developing both 
the Reliability Standards and associated penalties. SoCalEd states that 
such a process was used in developing WECC's Reliability Management 
System and has resulted in the non-subjective application of penalties 
for violations. Santee Cooper adds that, to avoid an appearance of 
impropriety, penalty monies collected by the ERO should be 
redistributed among all Regional Entities.
---------------------------------------------------------------------------

    \185\ Citing, e.g., Carolina Power & Light Co., 103 FERC ] 
61,209 at P 25 (2002).
---------------------------------------------------------------------------

    620. APPA suggests that monetary penalties should be credited on a 
net energy for load basis against the ERO's annual budget. While such 
revenues could be used to defray the cost of enforcement activities, 
some APPA members are concerned that penalty amounts may be set to 
raise sufficient revenues to offset the costs of the ERO's or Regional 
Entities' enforcement programs. APPA states that, if the Commission 
allows the use of penalty monies to defray the cost of enforcement 
programs, the Commission should take steps to ensure that penalty 
amounts are not based on revenue needs.
    621. In contrast, a number of commenters \186\ assert that penalty 
monies should not be used to support ERO or Regional Entity enforcement 
activities. Some express concern that this could result in the use of 
enforcement activities for revenue production.\187\ NEPOOL Participants 
believe that penalty monies should be used to reduce ERO and Regional 
Entity costs that would otherwise be passed on to end use 
customers.\188\
---------------------------------------------------------------------------

    \186\ See, e.g., Alcoa, Ameren, ERCOT, FirstEnergy, NEPOOL 
Participants, New York Companies, Ni Source and Santee Cooper.
    \187\ See, e.g., ISO/RTO Council, New York Companies and 
PacifiCorp.
    \188\ See also ELCON, pacifiCorp, Santee Cooper, Southern. New 
York Companies agree with such an approach and suggest that the 
violator not receive any benefit from a reduction in cost.
---------------------------------------------------------------------------

    622. TVA states that the ERO and Regional Entities should have 
discretion in determining the allocation and use of penalty monies. It 
suggests that penalty monies be used to create reliability-related 
educational and training programs. ERCOT suggests that penalty monies 
be used to fund research, for example, to develop better operating and 
analysis tools for the industry.
    623. A few commenters suggest that any use of penalty monies by the 
ERO would have the potential appearance of impropriety. For example, 
International Transmission prefers allocating penalty monies to rebuild 
transmission facilities damaged by natural disasters. American 
Transmission and Michigan Electric state that penalty monies should go 
to the treasury of the regulator's government to eliminate any 
appearance of impropriety. Hydro One proposes that penalty monies 
assessed should be paid directly to the appropriate state or province 
for the benefit of the ratepayers.
    624. TAPS suggests that, consistent with the practice of self-
regulatory organizations, all or a portion of penalty monies may be 
used for restitution in cases where a violation of a Reliability 
Standard adversely affects identifiable and discrete victims. TAPS 
states that the Commission could include restitution in its 
interpretation of ``appropriate sanctions'' in section 215(c)(2) of the 
FPA. Similarly, Missouri Commission proposes that penalty monies be 
distributed to injured transmission customers or, if no specific harm 
is identified, to law-abiding transmission customers.
    625. The Nova Scotia Board comments that the question of whether 
monies collected from Canadian participants should flow to the ERO or 
Regional Entity or remain in the jurisdiction should be considered. 
Hydro-Qu[eacute]bec states that, in Canada, monetary penalties will be 
collected and used in accordance with arrangements between the ERO and 
Canadian authority. Ontario IESO recommends its current practice of 
using penalty monies to fund reliability-related educational programs 
or reducing the IESO's administration charge, so that the monies 
benefit end users in the region.

Commission Conclusion

    626. The Commission believes that it is appropriate for the entity 
investigating an alleged violation and imposing a penalty to receive 
any penalty monies that result from that investigation.
    627. The Commission, however, sees a disadvantage in directing that 
penalty monies offset a specific program, such as a compliance or 
enforcement program, as pointed out by many commenters. Rather, for an 
ERO or Regional Entity investigation, we find that the entity 
conducting the investigation must receive the penalty monies as an 
offset against its next year's budget for implementing FPA section 215. 
With this approach, the monies represent a savings to those consumers 
responsible ultimately for paying the costs of the ERO or Regional 
Entity.
    628. An ERO candidate must describe in its certification 
application its proposed mechanism regarding this offset. The ERO 
candidate should explain how it would account for the receipt of 
penalty monies, the allocation of penalty monies resulting from any 
possible joint ERO/Regional Entity investigation, and other factors 
that would help the Commission to understand fully how the offset would 
operate. A delegation agreement must also contain the mechanism for the 
Regional Entity's offset. The ERO may propose a common method for all 
Regional Entities in any proffered pro forma delegation agreement.
    629. For a Commission-initiated investigation, or one initiated on 
complaint to the Commission, any penalty monies must be directed to the 
U.S. Treasury.
iii. RTO/ISO-Related Enforcement Issues
    630. Commenters raise several issues relating to the enforcement of 
the Commission's reliability-related regulations to RTOs and ISOs. For 
example, a number of commenters express concern regarding the 
application of a penalty to an RTO or

[[Page 8716]]

ISO. NYISO comments that RTOs and ISOs, as not-for-profit, thinly 
capitalized entities, have virtually no ability to pay financial 
sanctions out of their own resources.\189\ Thus, NYISO contends that 
only a non-monetary penalty is appropriate for deterring or punishing a 
violation by an RTO or ISO. If a monetary penalty is imposed, the 
Commission should allow the pass-through of the monies because 
otherwise the RTO or ISO would face insolvency. It also suggests that 
the Commission discourage the ERO and Regional Entities from adopting 
Rules that penalize an RTO or ISO for a control area violation that is 
caused by a market participant and that the RTO or ISO is unable to 
prevent.
---------------------------------------------------------------------------

    \189\ See also Alcoa, Kentucky Commission and National Grid.
---------------------------------------------------------------------------

    631. PG&E suggests that members of an RTO or ISO would ultimately 
bear the burden of any monetary penalty, and the Commission should 
therefore allow dues-paying members of such an RTO or ISO subject to a 
monetary penalty to request Commission review of the monetary penalty.
    632. NYISO recommends that the Commission establish confidentiality 
rules that would prohibit a stakeholder board member of a Regional 
Entity from having access to market information obtained during a 
Regional Entity investigation that involves RTO or ISO markets. 
Alternatively, NYISO asks that, if a stakeholder board member of a 
Regional Entity is allowed access to such market information, the 
Commission establish strict confidentiality protections to ensure that 
a stakeholder board member does not make inappropriate use of sensitive 
RTO or ISO market data.
    633. The City of Santa Clara questions whether the imposition of a 
penalty on an RTO would have any deterrent effect since it has no 
capital of its own and is strictly a ``pass-through'' entity. It 
comments that a better system of accountability is necessary to ensure 
that any penalty for misconduct is meaningful and effective for that 
entity. The City of Santa Clara questions whether the Commission, as 
the principal advocate of RTOs, can objectively impose sanctions on an 
RTO and asks that the Commission develop safeguards that minimize this 
conflict.

Commission Conclusion

    634. While we recognize that RTOs and ISOs have some unique 
characteristics, we do not believe a generic exemption from any type of 
penalty is appropriate for any entity, including an RTO or ISO. The ERO 
or Regional Entity determining whether to impose a penalty on an RTO or 
ISO may consider the entity's unique characteristics, as well as the 
nature of the violation, in determining an appropriate and effective 
sanction.\190\
---------------------------------------------------------------------------

    \190\ See Enforcement of Statutes, Orders, Rules, and 
Regulations, 113 FERC ] 61,068 at P 20.
---------------------------------------------------------------------------

    635. Further, we do not decide generically whether an RTO or ISO 
may pass a monetary penalty through to its members or customers. We 
will consider such an issue on a case-by-case basis. We find no merit 
in PG&E's suggestion that a dues-paying member of an RTO or ISO on 
which a penalty has been imposed be permitted to seek Commission review 
of a penalty. The FPA does not contemplate allowing a third-party to 
seek review of a penalty.\191\ Moreover, PG&E does not provide a 
justification that is unique to RTOs and ISOs (for example, municipal 
entities and cooperatives that may be subject to monetary penalties may 
have similar concerns). Nor has PG&E provided any reason for us to 
believe that the RTO or ISO will not have sufficient incentive to 
defend its actions and seek review if appropriate.
---------------------------------------------------------------------------

    \191\ Section 215(e)(2) of the FPA provides that a penalty 
``shall be subject to review by the Commission, on its own motion or 
upon application by the user, owner or operator that is the subject 
of the penalty * * *.''
---------------------------------------------------------------------------

    636. With regard to NYISO's concern that RTOs and ISOs should not 
be penalized for control area violations that are caused by market 
participants and which RTOs and ISOs have no ability to prevent, we 
agree generally that entities should not be punished for violations 
that are not within their control. However, we will not make a generic 
ruling on this issue for all RTOs and ISOs. Rather, NYISO should raise 
these concerns with the ERO's or a Regional Entity's stakeholder 
process if it believes that a proposed Reliability Standard would make 
an RTO or ISO responsible for an action or occurrence outside its 
control.
    637. NYISO's concerns about limits on access by a Regional Entity's 
stakeholder board to market information obtained during an 
investigation should be addressed by a Regional Entity when developing 
its bylaws or Regional Entity Rules.
    638. The City of Santa Clara's comments on the Commission's 
objectivity to impose a sanction on an RTO is unfounded and lacks 
support.
8. Delegation to a Regional Entity--Section 39.8
    639. Consistent with section 215(e)(4) of the FPA, the NOPR 
proposed that the ERO may enter into an agreement to delegate authority 
to a Regional Entity for the purpose of proposing to the ERO and 
enforcing Reliability Standards. Under the new system of mandatory 
Reliability Standards to be developed by the ERO, Regional Entities 
will, after entering into a Commission-approved delegation agreement, 
fulfill certain functions currently performed by the regional 
reliability councils.
    640. The statute allows the ERO to delegate authority to a Regional 
Entity if: (1) The Regional Entity is governed by an independent board, 
a balanced stakeholder board, or a combination of the two; (2) the 
Regional Entity otherwise satisfies the criteria required for 
certification of the ERO; and (3) the agreement promotes effective and 
efficient management of the Bulk-Power System.
    641. The NOPR sought comment on numerous aspects of the delegation 
of authority to a Regional Entity, including the role of a Regional 
Entity in relationship to the ERO, the criteria for becoming a Regional 
Entity, and the criteria for evaluating a Regional Entity applicant. 
The NOPR also asked whether a delegation agreement should be 
standardized and what degree of uniformity should be required for 
Regional Entity processes and governance.
a. The Role of a Regional Entity and Its Relationship to the ERO
    642. Consistent with section 215(a)(7) of the FPA, which defines a 
Regional Entity as an entity having enforcement authority pursuant to 
section 215(e)(4) of the FPA, the NOPR interpreted the statute to mean 
that the only delegated authority a Regional Entity would possess would 
be the authority to enforce Reliability Standards approved by the 
Commission in a specific region.\192\ The NOPR recognized that a 
Regional Entity may also propose a Reliability Standard to the ERO 
that, if ultimately approved by the Commission, would become an 
enforceable standard under the FPA. A Regional Entity may also propose 
a Reliability Standard to the ERO that would be applicable in a 
specific region. The NOPR requested comment on what the role of a 
Regional Entity should be in relationship to the ERO.\193\ The NOPR 
also asked what, if any, additional authority a Regional Entity should 
be allowed beyond enforcement and proposal of Reliability 
Standards.\194\
---------------------------------------------------------------------------

    \192\ NOPR at P 80.
    \193\ Id. at P 84 (delegation question 2).
    \194\ Id. at P 84 (delegation question 3).

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

[[Page 8717]]

Comments

    643. Commenters differ on the appropriate role of a Regional Entity 
in relationship to the ERO. Many commenters emphasize the importance of 
a strong ERO at the top of the reliability hierarchy, while others 
endorse a relationship similar to the historical arrangement between 
NERC and the regional reliability councils. The majority of commenters 
support the Commission's interpretation of the statute that the 
authority delegated to a Regional Entity should be limited to 
enforcement and the proposal of Reliability Standards to the ERO.
    644. Several commenters contend that Reliability Standards should 
be developed and enforced on a top-down basis, with the Regional Entity 
the subordinate partner in the ERO-Regional Entity relationship.\195\ 
These commenters describe a linear relationship between the Commission, 
the ERO and a Regional Entity, with the Regional Entity held 
accountable through the delegation agreement to the ERO for its 
delegated responsibilities. Michigan Electric suggests that the 
Regional Entity should be in the position of a subcontractor to the ERO 
for purposes of enforcement.
---------------------------------------------------------------------------

    \195\ See, e.g., Alcoa, APPA, ELCON, Michigan Electric, NERC and 
TAPS.
---------------------------------------------------------------------------

    645. In contrast, other commenters support a strong regional 
organization similar to the existing relationship between NERC and the 
regional reliability councils.\196\ They point to the vital role 
regional reliability councils have played in the development and 
enforcement of regionally-specific reliability criteria. NARUC contends 
that regional reliability council enforcement of compliance has worked 
effectively and cannot be duplicated at the continent-wide level. The 
Ohio Commission asserts that the Commission should adopt a rebuttable 
presumption that the existing structure is an appropriate starting 
point, while others go so far as to say that the ERO and the Commission 
should defer to decisions made by an Interconnection-wide Regional 
Entity with regard to delegated responsibilities.\197\
---------------------------------------------------------------------------

    \196\ See, e.g., IEEE, NPCC and TANC.
    \197\ See, e.g., CREPC and Alberta.
---------------------------------------------------------------------------

    646. Some commenters advocate a relationship of equals between the 
ERO and a Regional Entity. For example, EEI suggests that a partnership 
between the Regional Entity and the ERO is appropriate because the 
broad range of reliability-related activities to be conducted by a 
Regional Entity are an essential part of the system by which 
reliability is maintained. Other commenters contend that the statute 
recognizes an Interconnection-wide Regional Entity as an equal partner 
in proposing Reliability Standards.\198\
---------------------------------------------------------------------------

    \198\ See, e.g., California Board and NPCC.
---------------------------------------------------------------------------

i. Authority Delegated to a Regional Entity
    647. The majority of commenters agree with the Commission's 
interpretation that the ERO may delegate authority to a Regional Entity 
under the statute, and would limit a Regional Entity's authority to 
proposing and enforcing Reliability Standards.\199\ These commenters 
emphasize that the role of a Regional Entity should be well defined and 
limited to the functions specified in the statute.
---------------------------------------------------------------------------

    \199\ See, e.g., AWEA, ERCOT, Exelon, International 
Transmission, LADWP, NiSource, Ontario IESO, PSEG Companies and 
SoCalEd.
---------------------------------------------------------------------------

    648. Other commenters, such as PacifiCorp and NYSRC, believe that 
the Commission's interpretation of the role of a Regional Entity is too 
narrow. NYSRC contends that a Regional Entity's authority to develop 
and propose a Reliability Standard applicable to its region is no less 
important than its authority to enforce a Reliability Standard.
    649. A few commenters argue that a Regional Entity should enforce, 
but not propose, Reliability Standards.\200\ MISO asserts that a 
Regional Entity that does not encompass an entire Interconnection may 
develop a Reliability Standard that conflicts with the Reliability 
Standard of another Regional Entity within the same Interconnection. 
NiSource would limit a Regional Entity's authority to enforce a 
Reliability Standard to the specific Interconnection to which the 
Regional Reliability Standard applies.
---------------------------------------------------------------------------

    \200\ See, e.g., Ameren, AWEA and MISO.
---------------------------------------------------------------------------

    650. Alcoa asserts that a Regional Entity should not undertake 
enforcement at all, but act only as a fact gatherer for the ERO.
    651. The Oklahoma Commission comments that the statute is silent on 
which entity has ultimate responsibility for proposing and enforcing 
Reliability Standards and encourages the Commission to weigh this 
decision carefully.
ii. Other Regional Entity Activities
    652. A number of commenters advocate permitting a Regional Entity 
to undertake functions that, although not explicitly delegated by the 
ERO, provide a beneficial service to the region, such as coordination 
of planning and operations, resource adequacy, maintaining databases, 
and transaction tagging services.\201\ Some of these functions may 
support reliability, such as assessing reliability adequacy and 
performance, collecting and analyzing information, and educating market 
participants on reliability data. National Grid notes that NPCC 
establishes and maintains planning and resource adequacy criteria to 
require that the Bulk-Power System be designed for a regional loss of 
load expectation of no more than once in ten years, and asserts that, 
if the Commission were to prohibit Regional Entities from performing 
functions that complement the ERO's Reliability Standards, Bulk-Power 
System reliability could be undermined.
---------------------------------------------------------------------------

    \201\ See, e.g., APPA, EEI, FRCC, Hydro One, National Grid, NERC 
and WECC.
---------------------------------------------------------------------------

    653. Other commenters, such as AEP and Exelon, would limit the role 
of a Regional Entity to functions explicitly delegated in the statute. 
Exelon emphasizes that there is no right to a delegation of authority 
beyond that which is clearly articulated in the statute.

Commission Conclusion

    654. The Commission concludes that a strong ERO with primary 
responsibility for performing all reliability functions is the 
preferred model for ensuring Bulk-Power System reliability. We believe 
that having primary authority reside in the ERO is essential in 
establishing a continent-wide self-regulating reliability organization. 
It provides for an appropriate level of uniformity in Reliability 
Standard development and enforcement policies. Section 215(e)(4) of the 
FPA authorizes the ERO to delegate authority to a Regional Entity for 
the purpose of proposing Reliability Standards to the ERO and enforcing 
Reliability Standards. The statute assumes a strong ERO, which 
generally will be responsible for all enforcement activities unless and 
until the ERO delegates its authority. Thus, the ERO retains 
responsibility to ensure that a Regional Entity implements its 
enforcement program in a consistent manner and will require a Regional 
Entity to file periodic reports on enforcement investigations, as 
specified in the Final Rule's provisions on Enforcement of Reliability 
Standards. We require the ERO to formally review a regional Reliability 
Standard proposed by a Regional Entity. Only the ERO may submit a 
proposed Reliability Standard to the Commission.
    655. The Commission disagrees with commenters who suggest that a 
Regional Entity should not be allowed to propose a Reliability 
Standard. Although

[[Page 8718]]

anyone, including a Regional Entity, may propose a Reliability Standard 
to the ERO for its consideration, section 215(e)(4) of the FPA requires 
the Commission to authorize the ERO to enter into a delegation 
agreement for the purpose of, inter alia, proposing Reliability 
Standards. Therefore, we affirm our statement in the NOPR that a 
Regional Entity may propose a Reliability Standard to the ERO.
    656. While the ERO may not delegate other statutory functions to a 
Regional Entity, the Commission will not prohibit a Regional Entity 
from performing other reliability-related functions in service to its 
region. As commenters indicate, regional reliability councils currently 
perform a number of functions beyond the proposal and enforcement of 
Reliability Standards. A Regional Entity may conduct such activities, 
provided that they do not conflict or interfere with the performance of 
a delegated function, which we view as the primary mission of a 
Regional Entity.
    657. Further, any additional activity must not compromise the 
oversight role or the independence of the Regional Entity. The activity 
itself must not present a conflict of interest with the Regional 
Entity's reliability oversight role of transmission operators. Further, 
the funding for the activity must not be of such a significant amount 
or from such a source as to compromise the independence of the Regional 
Entity. Other activities not explicitly authorized under section 215 of 
the FPA may not be funded through the ERO.
b. Process and Criteria for Becoming a Regional Entity
    658. Section 215(e)(4) of the FPA requires the Commission to issue 
regulations authorizing the ERO to enter into an agreement to delegate 
authority to a Regional Entity by filing a delegation agreement with 
the Commission. The filing must include a detailed statement 
demonstrating that: (1) The Regional Entity is governed by an 
independent board, a balanced stakeholder board, or a combination 
thereof; (2) the Regional Entity otherwise satisfies the certification 
provisions of section 215(e)(4) of the FPA; and (3) the agreement 
promotes effective and efficient administration of Bulk-Power System 
reliability. The statute also requires the Commission and the ERO to 
rebuttably presume that a proposal for a delegation to a Regional 
Entity organized on an Interconnection-wide basis promotes effective 
and efficient administration of Bulk-Power System reliability and 
should be approved.
    659. Further, the NOPR sought comment on whether the Commission or 
the ERO should set the criteria by which a Regional Entity application 
\202\ to the ERO should be reviewed.\203\ The NOPR also asked what 
criteria should be used to determine whether an applicant is eligible 
to become a Regional Entity. Further, the NOPR asked whether the 
Commission should prescribe a size, scope, or configuration requirement 
for a Regional Entity and, if so, what it should be.\204\
---------------------------------------------------------------------------

    \202\ By application, the Commission means the ERO delegation 
process specified in proposed 18 CFR 38.7.
    \203\ NOPR at P 84 (delegation question 9).
    \204\ Id. (delegation question 1).
---------------------------------------------------------------------------

Comments

    660. The Texas Commission asks the Commission to be more specific 
as to how Regional Entities are established and approved. It suggests 
that the Commission should consider an application process similar to 
the one described in the NOPR for the ERO.
    661. As to the criteria for becoming a Regional Entity, commenters 
are divided on who should set the criteria by which a Regional Entity 
will be evaluated. A number of commenters suggest that the Commission 
should set the criteria by which a Regional Entity application is 
reviewed because the Commission is ultimately responsible for approving 
all delegations of authority from the ERO to a Regional Entity.\205\ 
Other commenters respond that the ERO should develop the criteria by 
which a Regional Entity application is reviewed, noting that each 
Regional Entity's delegation agreement will be subject to Commission 
approval.\206\
---------------------------------------------------------------------------

    \205\ See, e.g., Alcoa, California ISO, EEI, PSEG Companies and 
Ontario IESO.
    \206\ See, e.g., ERCOT, LADWP, SERC and South Carolina E&G.
---------------------------------------------------------------------------

    662. The majority of commenters ask the Commission not to prescribe 
a size, scope and configuration requirement, arguing that the 
Commission should decide the appropriateness of a Regional Entity's 
size, scope or configuration on a case-by-case basis.\207\ These 
commenters suggest that the Commission should provide flexibility in 
allowing a Regional Entity candidate to demonstrate that it meets the 
standards of section 215(e)(4) of the statute, explaining that Regional 
Entity configuration is less important than consistency in enforcement 
of ERO Reliability Standards across an Interconnection. Hydro-
Qu[eacute]bec emphasizes that the Commission should work together with 
the appropriate Canadian authorities on a case-by-case basis to 
determine whether an applicant should be a Regional Entity. Several 
commenters believe the Commission should prescribe the size, scope and 
configuration of a Regional Entity.\208\ Most of these commenters 
contend that a Regional Entity should be Interconnection-wide. AWEA 
explains that industry participants are currently burdened by facing 
different Reliability Standards in each regional reliability council 
and notes that clear and consistent Reliability Standards across the 
continent would allow wind turbine manufacturers to produce turbines at 
a much lower cost to customers.
---------------------------------------------------------------------------

    \207\ See, e.g., APPA, City of Seattle, EEI, FRCC, Hydro-
Qu[eacute]bec, ISO New England, ISO/RTO Council, NiSource, NYSRC, 
PacifiCorp, SMUD, TAPS and Xcel.
    \208\ See, e.g., Alcoa, Ameren, AWEA, BCTC and CREPC.
---------------------------------------------------------------------------

    663. A number of commenters emphasize the importance of preserving 
the benefits of the regional reliability councils and argue that 
deference should be given to applications from existing regional 
reliability councils.\209\ For example, South Carolina E&G advocates 
that the regional reliability councils should become Regional Entities 
and asserts that the ``essential weakness of the current system lies in 
its voluntariness, not in the number of reliability councils.'' \210\
---------------------------------------------------------------------------

    \209\ See, e.g., Cinergy, ERCOT, Hydro One, MISO Owners, NPCC, 
Ohio Commission, South Carolina E&G and TVA.
    \210\ South Carolina E&G at 6.
---------------------------------------------------------------------------

    664. TVA submits that there should be a rebuttable presumption that 
regional reliability councils are the appropriate starting point for 
Regional Entities.\211\ It notes the importance of establishing 
Regional Entities in a cost-effective manner and suggests that the 
Commission should require evidence of problems before making changes to 
the current regime.
---------------------------------------------------------------------------

    \211\ See also Cinergy and Ohio Commission.
---------------------------------------------------------------------------

    665. To the contrary, ELCON admonishes the Commission against 
preserving the ``outmoded, existing industry governance structures, 
relationships, and habits'' in setting requirements for a Regional 
Entity.\212\ In a similar vein, EPSA urges the Commission to avoid the 
``status quo quilt of decentralized, disparate entities.'' \213\
---------------------------------------------------------------------------

    \212\ ELCON at 3.
    \213\ EPSA at 12.
---------------------------------------------------------------------------

    666. A number of commenters suggest specific criteria for 
evaluating a Regional Entity applicant.\214\ They cite a number of 
factors, including governance, staff expertise, balance and diversity 
of interests in the Reliability Standard development process,

[[Page 8719]]

sufficiency of resources and support systems, security of finances, and 
track record with reliability issues. Some commenters also suggest that 
the Commission consider whether a Regional Entity has demonstrated that 
it has received approval from ANSI as a standards-setting organization, 
which would help to ensure that a Regional Entity's Reliability 
Standard development process is fair, open, balanced and 
inclusive.\215\
---------------------------------------------------------------------------

    \214\ See, e.g., APPA, Hydro One, MISO, Missouri Commission and 
NERC.
    \215\ See, e.g., APPA and EPSA.
---------------------------------------------------------------------------

    667. NERC points to the criteria in the bilateral principles, which 
call for a Regional Entity with a size or scope that facilitates cross-
border trade and has boundaries that encompass the boundaries of other 
transmission organizations.
    668. A few commenters recommend other criteria. For example, the 
Missouri Commission suggests that there should be no more than two 
Regional Entities per state; a Regional Entity should include a multi-
state geographic area that encompasses the major electric markets for a 
region; or the region should be electrically connected with respect to 
scope. Some commenters, such as NERC and NPCC, point to the benefits of 
a Regional Entity with boundaries that encompass the boundaries of an 
RTO or ISO to avoid the creation of new seams. In this regard, MISO 
suggests that the entire geographic region of an RTO should be within 
the scope of one Regional Entity.
    669. Some commenters suggest that, rather than prescribing size, 
scope and configuration requirements, the Commission should focus on 
the criteria prescribed in the legislation.\216\ National Grid submits 
that the Commission's analysis should follow the statutory criteria for 
a Regional Entity. International Transmission agrees, arguing that 
additional requirements are unnecessary since the statute and proposed 
regulations already provide that an Interconnection-wide Regional 
Entity will be accorded certain deference with regard to Reliability 
Standards proposed to be implemented on an Interconnection-wide basis.
---------------------------------------------------------------------------

    \216\ See, e.g., APPA, International Transmission and National 
Grid.
---------------------------------------------------------------------------

Commission Conclusion

    670. The Final Rule adopts the criteria set out in section 
215(e)(4) of the statute. Regional Entity applicants must enter into a 
delegation agreement with the ERO. The ERO should evaluate the Regional 
Entity applicant according to the statutory and regulatory criteria. 
Once the ERO has signed a delegation agreement with a Regional Entity, 
the ERO will submit it to the Commission for approval.
    671. The Commission agrees with those commenters who argue that the 
statute provides adequate criteria for Regional Entities. The 
Commission does not set criteria in the Final Rule for a Regional 
Entity's size, scope and configuration, but will evaluate each Regional 
Entity application on a case-by-case basis. Any change in the size, 
scope or configuration of a Regional Entity would constitute an 
amendment to the delegation agreement, and any amendment would be 
subject to review by the ERO and approval by the Commission. Section 
215(e)(4) of the FPA requires a Regional Entity to have an independent 
board, a balanced stakeholder board or a combination of the two; 
satisfy the same requirements as the ERO; and demonstrate that the 
proposed delegation agreement promotes effective and efficient 
administration of Bulk-Power System reliability. We do not provide 
guidance in this Final Rule as to what constitutes ``effective and 
efficient administration.'' We believe it more appropriate to address 
the issue in the context of the particular facts and circumstances 
presented by an individual proposed delegation agreement. Further, the 
Commission prefers that the ERO make the initial assessment of each 
Regional Entity applicant, and present its case to the Commission. The 
Commission will conduct the final assessment.
    672. The statute requires, and we adopt here, a rebuttable 
presumption that a proposal for delegation to a Regional Entity 
organized on an Interconnection-wide basis promotes effective and 
efficient administration of Bulk-Power System reliability and should be 
approved, as discussed further below.
    673. As a general matter, the ERO will initially assess whether a 
regional reliability council may become a Regional Entity, subject to 
Commission approval. When this issue comes before the Commission, it 
will consider a delegation agreement between the ERO and an existing 
regional reliability council in light of whether the application 
demonstrates compliance with the criteria to qualify as a Regional 
Entity. The Commission may consider reconfiguration or consolidation if 
a specific problem is raised in the approval process, or subsequently 
if inadequate scope or configuration or other factors hamper the 
performance of delegated responsibilities of a Regional Entity or fail 
to promote effective and efficient administration of the Bulk-Power 
System.
c. Review of a Regional Entity Applicant
    674. As noted above, EPAct provides criteria to be met by a 
Regional Entity applicant, including the rebuttable presumption that a 
proposal for a delegation to a Regional Entity organized on an 
Interconnection-wide basis promotes effective and efficient 
administration of Bulk-Power System reliability.
i. Review of a Regional Entity Organized on an Interconnection-Wide 
Basis
    675. The California ISO contends that section 215 of the FPA 
accords an Interconnection-wide Regional Entity only a rebuttable 
presumption that it satisfies one of the statutory criteria required 
for approval, effective and efficient administration of the Bulk-Power 
System.

Commission Conclusion

    676. We agree with the California ISO's comment that the rebuttable 
presumption that the proposed delegation agreement be approved applies 
only to one of the statutory criteria. The Commission concludes that 
the most reasonable interpretation of the provision is that the 
rebuttable presumption applies only to the effective and efficient 
administration of the Bulk-Power System criterion. However, parties are 
free to intervene and make the case that a delegation agreement should 
not be approved if it fails to satisfy this, or any of the other 
statutory or regulatory criteria.
ii. Review of a Regional Entity Not Organized on an Interconnection-
Wide Basis
    677. The NOPR asked whether a higher standard of review should 
apply to a proposed Regional Entity that is not organized on an 
Interconnection-wide basis, given that section 215(e)(4) of the FPA 
requires that the ERO and the Commission must rebuttably presume that a 
proposal for a Regional Entity organized on an Interconnection-wide 
basis promotes effective and efficient administration of Bulk-Power 
System reliability, and if so, what the higher standard of review 
should specify. The NOPR also asked whether a Regional Entity not 
organized on an Interconnection-wide basis should have the burden to 
demonstrate that it has the appropriate regional scope and 
configuration to promote effective and efficient administration of 
Bulk-Power System reliability.\217\
---------------------------------------------------------------------------

    \217\ NOPR at P 84 (delegation question 9).

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

[[Page 8720]]

Comments

    678. Several commenters support a higher standard of review for a 
Regional Entity that is not organized on an Interconnection-wide basis. 
Numerous other commenters do not see a need to distinguish Regional 
Entity criteria according to whether or not a Regional Entity is 
Interconnection-wide.
    679. Several commenters support a higher standard of review for a 
Regional Entity that is not Interconnection-wide.\218\ For example, 
CREPC asserts that the Commission should clearly separate the 
authorities and responsibilities of a Regional Entity that oversees an 
entire Interconnection from those that only oversee a portion.
---------------------------------------------------------------------------

    \218\ See, e.g., Ameren, AWEA, CREPC, EEI and NiSource.
---------------------------------------------------------------------------

    680. Many other commenters see no reason to differentiate Regional 
Entity criteria according to whether or not the Regional Entity is 
organized on an Interconnection-wide basis.\219\ FRCC submits that the 
Commission should not set a standard of review beyond that in EPAct 
because the Act does not require a higher standard of review for the 
approval of a Regional Entity that is not organized on an 
Interconnection-wide basis. Rather, it establishes a procedural 
requirement for the burden of going forward with evidence and argument 
on whether the delegation standard has been met. MISO Owners argue that 
the Commission should refrain from setting a higher standard of review 
because there is no real difference between Interconnection-wide 
reliability organizations and today's Eastern Interconnection 
organizations in terms of technical expertise. Dairyland adds that a 
Regional Entity not organized on an Interconnection-wide basis should 
get the same deference as one organized on an Interconnection-wide 
basis if it can demonstrate the knowledge and technical expertise to 
warrant deference, and is structured to operate independently from 
members, market participants, and system operators. However, a Regional 
Entity that is not a part of a larger Interconnection may need more 
extensive coordination specificity requirements.
---------------------------------------------------------------------------

    \219\ See, e.g., California ISO, FRCC, MISO Owners, National 
Grid, NYSRC and Ontario IESO.
---------------------------------------------------------------------------

    681. The California ISO asserts that the statute does not require a 
higher substantive standard of review for a Regional Entity not formed 
on an Interconnection-wide basis.
    682. Other commenters argue that the Commission must give due 
consideration to entities that are less than Interconnection-wide. SERC 
asserts that there is a longstanding historical precedent for smaller 
regions with legitimate local reliability concerns that would not be 
adequately addressed by a larger, more encompassing region.
    683. Commenters offer a number of suggestions on criteria for a 
higher standard of review. Numerous commenters recommend that Regional 
Entity qualifications should be based on the EPAct principle of 
effective and efficient administration of Bulk-Power System 
reliability, emphasizing that the statute already provides this 
criterion.\220\ Commenters encourage the Commission to afford 
appropriate weight to the technical expertise of a proposed Regional 
Entity that is less than Interconnection-wide.\221\
---------------------------------------------------------------------------

    \220\ See, e.g., AEP, Alberta, APPA, EEI, FRCC, LADWP, National 
Grid, PacifiCorp and Xcel Energy.
    \221\ See, e.g., CREPC, ISO New England and LG&E Energy.
---------------------------------------------------------------------------

    684. EPSA recommends that Regional Entity approval be based on the 
existence of consistent and uniform Reliability Standards and 
procedures. It contends that uniformity is particularly important in 
cases where several Regional Entities exist within an Interconnection.

Commission Conclusion

    685. The Commission concludes that a Regional Entity that is not 
Interconnection-wide must meet the same criteria as one organized on an 
Interconnection-wide basis. However, it has the burden to demonstrate 
effective and efficient administration of Bulk-Power System 
reliability, since no rebuttable presumption applies for this 
criterion. Accordingly, the Commission expects a proposed delegation to 
a Regional Entity not organized on an Interconnection-wide basis to 
affirmatively demonstrate that such delegation meets all the statutory 
criteria and in particular would promote ``effective and efficient 
administration of Bulk-Power System reliability.'' We note that an 
Interconnection-wide Regional Entity offers the greatest potential for 
effective reliability without seams.
    686. The Commission disagrees with commenters suggesting that we 
establish a generic distinction in our regulations between the 
authorities and responsibilities of an Interconnection-wide Regional 
Entity and one that is less than Interconnection-wide. Once approved, 
any Regional Entity will be delegated the authorities and 
responsibilities articulated in its own Commission-approved delegation 
agreement.
d. Eligibility of an RTO or ISO To Become a Regional Entity
    687. The NOPR asked whether an RTO or ISO should be permitted to 
become a Regional Entity.\222\ It noted that the bilateral principles 
provide that an RTO or ISO should not become a Regional Entity, and 
that a Regional Entity should be distinct from an operator of the 
system, such as an RTO or ISO.
---------------------------------------------------------------------------

    \222\ NOPR at P 71 (enforcement question 9).
---------------------------------------------------------------------------

Comments

    688. Several commenters ask the Commission not to preclude 
generically an RTO or ISO from becoming a Regional Entity, but rather 
allow them to present arguments and plans to address any necessary 
separation requirements.\223\ They note that the statute does not 
specifically preclude an RTO or ISO from serving as a Regional Entity 
and assert that the Commission should not rely solely on the bilateral 
principles as a basis for such preclusion. Alcoa points out that having 
a separate RTO/ISO and Regional Entity could lead to duplicative 
efforts and higher costs for consumers.
---------------------------------------------------------------------------

    \223\ See, e.g., Alcoa, Empire District Electric, Hydro-
Qu[eacute]bec, Kansas City P&L, Missouri Commission and Ontario 
IESO.
---------------------------------------------------------------------------

    689. The California ISO contends that an RTO or ISO is well-
positioned to serve as a Regional Entity because it must satisfy 
independence requirements, has the necessary expertise and knowledge of 
regional conditions, already has reliability obligations under Order 
No. 888, is of sufficient size and scope to serve as a Regional Entity, 
and has Commission-approved enforcement programs. It further contends 
that an RTO or ISO could satisfy the concerns expressed in the 
bilateral principles through functional separation of compliance units 
that would be autonomous of ISO/RTO management. Alternatively, the ERO 
could be made responsible for monitoring the compliance of an RTO or 
ISO that serves as a Regional Entity.
    690. Some commenters, including ERCOT and SPP, argue that it is 
appropriate for an ISO or RTO to be a Regional Entity under certain 
conditions. SPP cites its success in operating as a combined RTO and 
regional reliability council and notes the efficiencies of a combined 
organization. SPP claims that its structure satisfies the independence 
requirement for a Regional Entity, explaining that the sole function of 
its compliance monitoring staff is to comply with Reliability 
Standards. SPP compliance staff does not participate in enforcement 
audits of

[[Page 8721]]

the SPP system operator and three independent directors adjudicate the 
assessment of penalties to SPP participants. The Ontario IESO similarly 
notes that it serves as a system operator and oversees compliance with 
Reliability Standards, with its enforcement unit insulated from the 
rest of the organization. It claims that its process has been 
effective, noting that compliance enforcement involves technical 
matters that only the system operator fully understands.
    691. ERCOT and others assert that ERCOT should be able to maintain 
its ISO and Regional Entity functions within the same organization. 
They explain that Texas state law grants the Texas Commission authority 
to adopt and enforce reliability rules. The Texas Commission has 
delegated this authority to ERCOT, subject to its oversight. ERCOT is 
uniquely situated because it has no AC interconnections to neighboring 
control areas, it has a compliance office that is functionally 
separated from the ISO organization, and the Texas Commission answers 
directly to the state legislature on Bulk-Power System reliability.
    692. Many commenters admonish the Commission against allowing a 
combined system operator/Regional Entity.\224\ NRECA notes, ``There is 
already ample concern that RTOs and related entities have become too 
overstaffed, too large, and too unaccountable to the public. Endowing 
RTOs with additional powers and duties can only exacerbate these 
problems at this time.'' \225\
---------------------------------------------------------------------------

    \224\ See, e.g., Alberta, BCTC, CEA, Ohio Commission, Old 
Dominion, PG&E, NRECA, SMUD, Southern and TVA.
    \225\ NRECA at 33.
---------------------------------------------------------------------------

    693. Many commenters, such as New York Companies, express the 
concern that an RTO's or ISO's operational duties would conflict with 
the Regional Entity role of enforcing Reliability Standards. 
Commenters, such as Alberta and SMUD, contend that since an RTO or ISO 
will have to comply with Reliability Standards in its role as a 
transmission operator, balancing authority and security coordinator, 
such an entity should not also act as a Regional Entity. They argue 
that it is not appropriate for a Regional Entity to exercise its 
enforcement authority against itself. APPA and Old Dominion comment 
that functional separation and behavioral criteria will not suffice 
should an RTO or ISO seek to act as a Regional Entity. Despite any 
devices used to address the independence issue, industry participants 
may still lack confidence that a Regional Entity is competent to 
discipline its Bulk-Power System operations function. SMUD adds that 
functional separation would require a new layer of enforcement that 
would impose additional costs on market participants.
    694. EPSA suggests that an RTO seeking to qualify as a Regional 
Entity must satisfy a heavy burden, including complete detachment of 
the enforcement function from RTO operations. It suggests that other 
criteria to consider in determining whether an RTO meets this heavy 
burden include detailed, written procedures for the separation of 
functions; a determination of whether a delegation is limited to ERO 
functions that do not require the RTO to serve as the reliability 
compliance monitor for itself; and periodic audits that provide 
independent verification that an RTO is performing its dual roles 
properly.
    695. Hydro-Qu[eacute]bec suggests that an RTO or an ISO may be a 
Regional Entity if it can demonstrate its independence from the 
enforcement authority in the region. MRO contends that the Commission 
should prohibit an RTO or ISO from becoming a Regional Entity unless 
such a requirement conflicts with a state or provincial mandate, as is 
the case with ERCOT.
    696. CEA and Hydro Qu[eacute]bec express concern about the 
implications for Canadian companies of having a combined system 
operator/Regional Entity. They warn that allowing an RTO or an ISO to 
become a Regional Entity should not be used to force Canadian utilities 
to become members of an RTO or ISO. Further, CEA comments that allowing 
an RTO or ISO to become a Regional Entity could serve as a disincentive 
for Cross-Border Regional Entities to the extent Canadian utilities may 
be unable or unwilling to transfer operational authority to an RTO or 
ISO.

Commission Conclusion

    697. The Commission considers the matter of whether a combined 
system operator/Regional Entity is able to engage in both separate 
system operations and enforcement as distinct from the matter of 
whether the boundaries of an RTO or ISO correspond to the boundaries of 
a Regional Entity. The Commission recognizes the potential benefits of 
having the same boundaries for an RTO/ISO and a Regional Entity.
    698. The Commission is concerned, however, that an RTO or ISO may 
have an inherent conflict of interest if it is also a Regional Entity 
itself. The same institution would operate the Bulk-Power System and be 
responsible for overseeing its own compliance with Reliability 
Standards. The comments received reinforce the Commission's opinion 
that such self-enforcement is extremely difficult to carry out 
satisfactorily. A system operator/Regional Entity in a single 
corporation--absent a very strong separation between the oversight and 
operations functions--should not oversee its own compliance with 
Reliability Standards.
    699. We will not in the Final Rule prohibit an entity from making 
its case for adequate separation. However, an RTO or ISO that lies in 
whole or in part in the United States and applies to become a Regional 
Entity will have a heavy burden to show that it meets the statutory 
criterion that it be independent of the operators of the Bulk-Power 
System in its region.\226\
---------------------------------------------------------------------------

    \226\ The Commission acknowledges the existence of two such 
combined entities in the United States today. Although commenters 
note that an operating entity in Canada may enforce reliability 
rules against itself, we know of no case where such an entity seeks 
to become a Regional Entity. In any event, how such matters are 
decided in Canada is outside our jurisdiction.
---------------------------------------------------------------------------

    700. A combined system operator/regional reliability council 
currently in operation may seek Regional Entity status but, to qualify 
as a Regional Entity, it must demonstrate a strong separation plan with 
sufficient protections. The separation plan must show full independence 
between the enforcement/Reliability Standard development and the 
transmission operations. If a combined system operator/Regional Entity 
cannot demonstrate adequate separation, it will not be approved.
e. Delegation Agreements
    701. Paragraphs (b) and (c) of the NOPR's proposed section on 
delegation provided that the ERO must file a delegation agreement with 
the Commission for approval and that the delegation agreement shall not 
be effective until it is approved by the Commission.
    702. The NOPR asked whether the ERO should be required to submit a 
standardized form of delegation agreement concurrently with the ERO 
application that would delineate a uniform relationship between the ERO 
and all Regional Entities. Alternatively, should all of a delegation 
agreement be tailored to the individual needs and circumstances of each 
region and the ERO? \227\
---------------------------------------------------------------------------

    \227\ NOPR at 84 (delegation question 4).
---------------------------------------------------------------------------

    703. The NOPR also asked what guidelines, measures or criteria to 
apply in determining whether a delegation agreement promotes effective 
and efficient administration of Bulk-Power

[[Page 8722]]

System reliability. If the primary function of a Regional Entity is 
enforcement of Reliability Standards, in what ways will Regional 
Entities bring effective and efficient administration in the 
enforcement function? \228\
---------------------------------------------------------------------------

    \228\ Id. (delegation question 11).
---------------------------------------------------------------------------

Comments

    704. Most commenters on delegation agreements support some sort of 
standardized delegation agreement, while others assert the need for an 
individualized delegation agreement for each Regional Entity. A number 
of commenters support a pro forma delegation agreement, which would 
define certain standardized criteria to be consistent across all 
Regional Entities.
    705. Commenters, such as EPSA and FirstEnergy, emphasize the 
importance of uniformity with respect to enforcement of Reliability 
Standards, and for processes and procedures implemented by all Regional 
Entities. EPSA notes that standardization can facilitate transactions 
across regions, cut costs and avoid litigation. EPSA asserts that 
variations in Regional Entity delegation agreements should be rare, and 
thus it should be possible to standardize major elements of the 
delegation agreement.
    706. A number of commenters would not standardize the delegation 
agreement, instead asserting that a Regional Entity must have the 
flexibility to develop an individual delegation agreement.\229\ Many of 
these commenters believe the Commission should allow entities 
considerable latitude to negotiate these agreements, and should not 
create a disincentive to innovation.
---------------------------------------------------------------------------

    \229\ See, e.g., Alberta, BCTC, City of Seattle, ISO/RTO 
Council, Kansas City P&L, PacifiCorp and TANC.
---------------------------------------------------------------------------

    707. CEA and Hydro-Qu[eacute]bec prefer individualized delegation 
agreements because a uniform delegation agreement may not reflect the 
differing authorities of a Cross-Border Regional Entity.
    708. A number of commenters assert that Regional Entity delegation 
agreements need to be flexible enough to accommodate regional 
differences.\230\ Progress Energy submits that the delegation agreement 
should specify a uniform relationship between the ERO and Regional 
Entity but should also provide enough flexibility to allow for the 
individual needs and circumstances of each region. APPA asserts that 
additional terms and conditions addressing the unique circumstances of 
a region could be spelled out in addenda to the pro forma delegation 
agreement.
---------------------------------------------------------------------------

    \230\ See, e.g., Ameren, APPA, Progress Energy, SERC and 
Southern.
---------------------------------------------------------------------------

    709. ERCOT and WECC suggest that the delegation of authority to a 
Regional Entity that is organized on an Interconnection-wide basis 
should be allowed more flexibility than one for a Regional Entity that 
is less than Interconnection-wide. They assert that the Commission 
should allow the ERO and an Interconnection-wide Regional Entity to 
negotiate an individual delegation agreement that reflects its unique 
system needs and give it broader responsibility for readiness audits 
and assessments of reliability in its region.
    710. Numerous commenters favor a pro forma agreement, to be 
submitted concurrently with the ERO application, to maximize 
consistency among Regional Entity delegation agreements.\231\ The ERO 
would identify specifically how each region meets the qualification 
criteria and would include the Rules of procedure used within the 
region for delegated functions.
---------------------------------------------------------------------------

    \231\ See, e.g., AEP, EEI, Hydro One, International 
Transmission, NERC, NPCC, SoCalEd, TVA and Xcel Energy.
---------------------------------------------------------------------------

    711. International Transmission and Michigan Electric are concerned 
that delegations to Regional Entities create opportunities for the 
development or enforcement of Reliability Standards to vary by region. 
They assert that undue influence by individual stakeholders or 
stakeholder sectors, the Regional Entities themselves, or even the 
Commission could compromise grid reliability, and argue that a 
prerequisite to any delegation of authority to a Regional Entity should 
be a finding that the ERO is fully independent with respect to its 
review and that any specific delegation of authority does not undermine 
such independence.

Commission Conclusion

    712. As most commenters observe, there is value to consistency 
among the delegation agreements of Regional Entities. Industry 
participants should be able to conduct business in the same way from 
one Regional Entity to the next. Some standardization of the delegation 
agreement will facilitate uniformity in ERO-Regional Entity 
relationships, Regional Entity processes, accountability and 
enforcement of Reliability Standards. It may also help to minimize 
seams between regions. The Commission concludes that the ERO should 
submit a pro forma delegation agreement. This is a delegation agreement 
with core elements to be uniformly applied to all Regional Entities. 
The ERO applicant must submit the pro forma delegation agreement 
concurrently with the ERO application. Addenda to the delegation 
agreement can address regional differences and unique system needs for 
each Regional Entity, including any need to address differing 
authorities of Cross-Border Regional Entities.
    713. The Commission sees no need to make a finding that the ERO is 
fully independent as part of the delegation of authority to Regional 
Entities, as suggested by International Transmission and Michigan 
Electric. The Commission will evaluate such criteria during the ERO 
certification process.
f. Regional Entity Governance
    714. The NOPR asked to what extent the ERO, when delegating 
responsibility to a Regional Entity, should require uniform processes 
with regard to governance, among other things.
    715. The NOPR also asked whether the delegation criteria for a 
Cross-Border Regional Entity should specify that each country 
represented in the region should have the opportunity to have members 
from the country on the board of the Cross-Border Regional Entity in 
numbers that reflect the country's approximate percentage of net energy 
for load in that region, similar to that provided in the bilateral 
principles.\232\
---------------------------------------------------------------------------

    \232\ NOPR at P 84-88 (delegation question 8).
---------------------------------------------------------------------------

Comments

    716. A number of commenters emphasize the importance of governance 
and request additional guidance from the Commission on how a Regional 
Entity would be governed. MISO asserts that the NOPR does not contain 
sufficient detail to ensure that a Regional Entity is properly 
structured and not dominated by any particular industry sector. TAPS 
asks for guidance on the statutory requirement for balanced stakeholder 
or hybrid boards at the Regional Entity level and public meeting 
requirements. It also requests that the Commission spell out the 
meaning of the ``balance'' requirement, consistent with Order Nos. 888 
and 2000 and the bilateral principles.
    717. EPSA emphasizes that a Regional Entity must be independent and 
notes the difficulty of achieving true independence with a stakeholder 
board and a committee process that is staffed primarily by employees of 
grid operators or market participants. EPSA encourages the Commission 
to require boards that properly balance the interests of all users, 
owners and operators of the Bulk-Power System.
    718. Commenters stress the importance of a Regional Entity 
developing a fair system of sector

[[Page 8723]]

representation and voting as a requirement for approval of a delegation 
agreement. ELCON advocates that the Commission require NERC's 
governance structure for a Regional Entity which organizes stakeholders 
into nine representative industry sectors. It asserts that end users 
should be permitted to participate in the affairs of a Regional Entity 
on an equal and non-discriminatory basis to meet statutory objectives, 
and observes that a membership requirement can be a barrier to 
participation.
    719. NASUCA submits that consumer representatives should be 
entitled to membership and voting rights in any Regional Entity that is 
delegated ERO functions. Consumers should be fully represented on the 
stakeholder committees that advise the board of any Regional Entity 
that has an independent board.
    720. The California ISO requests that the Commission confirm that 
its new board selection process satisfies the independence requirement 
under section 215(e)(4)(B) of the FPA and the proposed regulations in 
the event it seeks to become a Regional Entity.
    721. NPCC asserts that a delegation agreement should not prescribe 
a Regional Entity's governance beyond the requirement that it fairly 
represent the composition of its region.
    722. While some commenters support a requirement that the number of 
board members of a Cross-Border Regional Entity must be in proportion 
to net energy for load for each participating country, other commenters 
argue that the Commission should not dictate such a structure for a 
Cross-Border Regional Entity's board.
    723. Alberta, BCTC, Hydro One, and Hydro Qu[eacute]bec believe that 
the delegation criteria for a Cross-Border Regional Entity should 
specify that each country should be allowed membership based on net 
energy for load in each region. PSEG Companies agrees, but adds that 
the number of representatives should be roughly proportional to load 
and not less than one.
    724. Ontario IESO recommends specifying a minimum number of 
Canadian board seats for Cross-Border Regional Entities, rounded up 
from the proportion of net energy for load.
    725. WECC strongly endorses the notion that international members 
should have assured representation on a Cross-Boarder Regional Entity's 
board, but expresses concern about requiring a Regional Entity to have 
a governing board based strictly on net energy for load. WECC's current 
bylaws do not require that representation be based strictly on the net 
energy for load proportion. WECC explains that its board is composed of 
a delicate balance of combined stakeholder and nonaffiliated members 
and asserts that the Final Rule should permit delegation to a Cross-
Border Regional Entity in a manner that will accommodate current WECC 
bylaws.
    726. APPA argues that the Commission should not specify the details 
of a Cross-Border Regional Entity's board membership in the Final Rule 
to allow flexibility in the structure of a Regional Entity's board as 
intended in the statute. Instead, it suggests that the Commission could 
state in the preamble to the Final Rule that it would accept a division 
of representation on a Cross-Border Regional Entity's board based on 
net energy for load in each country.

Commission Conclusion

    727. Section 215(e)(4)(A) of the statute provides criteria for the 
governance of a Regional Entity. As noted above, the statute directs 
the Commission to issue regulations authorizing the ERO to enter into a 
delegation agreement between the ERO and a Regional Entity if, inter 
alia, the Regional Entity is governed by an independent board, a 
balanced stakeholder board, or a combination of the two. The statute 
provides no further guidance on Regional Entity governance. The 
Commission observes that there may be more than one acceptable approach 
for a Regional Entity to establish a balanced or combination board. The 
Commission does not give further guidance regarding the statutory 
criteria for Regional Entity governance here. Instead we will interpret 
the statutory criteria in light of the facts presented in each Regional 
Entity's proposed delegation agreement. It is premature for the 
Commission to make a finding on any particular Regional Entity 
governance at this time.
    728. As explained above, just as the Commission requires an ERO 
candidate to demonstrate in its application for certification how it 
will establish Rules that ensure its independence from the users, 
owners and operators of the Bulk-Power System, while assuring 
stakeholder representation in the selection of its directors and 
balanced decisionmaking in any ERO committee or subordinate 
organizational structure, we also adopt this requirement to demonstrate 
these factors in each Regional Entity delegation agreement. The 
Commission agrees that appropriate Regional Entity Rules should include 
a provision specifying that no two industry sectors should control any 
decision and no single segment should be able to veto any matter, 
unless the ERO adequately explains why it cannot apply these 
principles.
    729. We note that the ERO may seek recognition for a Cross-Border 
Regional Entity applicant in Canada and Mexico, in accordance with the 
relevant requirements of the Canadian and Mexican authorities. We see 
no reason to differ for a Cross-Border Regional Entity regarding our 
conclusion above not to further interpret the statutory Regional Entity 
governance criteria.
g. Notice Requirement for Submission of Delegation Agreements
    730. NiSource comments that the NOPR was silent as to the process 
the Commission will use to approve the ERO's proposed delegation of 
authority to a Regional Entity. Although the proposed regulations would 
require the ERO to file with the Commission a delegation agreement, the 
NOPR did not propose a notice requirement or provision for public 
comment or protest regarding the filing. NiSource requests 
clarification that any proposed delegation agreement or Regional Entity 
Rule will be subject to notice and public comment.
    731. PG&E requests that the Commission modify the proposed 
regulations to include explicitly the opportunity for public notice and 
comment on an application to become the ERO and a proposed delegation 
agreement between the ERO and a Regional Entity.

Commission Conclusion

    732. The Commission will provide notice and opportunity for comment 
on an ERO application and a proposed delegation agreement. Interested 
persons will have an opportunity to express their concerns about the 
application or agreement. The Commission will consider all 
interventions and comments in making an informed decision on whether to 
accept a delegation agreement.\233\
---------------------------------------------------------------------------

    \233\ Notice and comment procedures are to be under Rule 210 of 
the Commision's rules of practice and procedure. 18 CFR 385.210.
---------------------------------------------------------------------------

h. Uniform Processes Among Regional Entities
    733. The NOPR asked about the extent to which the ERO, when 
delegating responsibility to Regional Entities, should require uniform 
processes in matters including, but not limited to, governance, 
collection of dues and fees, compliance monitoring, and enforcement 
action procedures.\234\
---------------------------------------------------------------------------

    \234\ NOPR at P 84 (delegation question 5).

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[[Page 8724]]

Comments

    734. Comments on this matter largely overlap the comments discussed 
above under Delegation Agreement and Governance. A number of commenters 
support a standardized process across Regional Entities. \235\ These 
commenters emphasize the need for uniformity in processes, especially 
those relating to governance, collection of dues and fees, compliance 
monitoring and enforcement proceedings, and hearing procedures. 
Commenters, including EEI and NERC, note that NERC and the industry are 
preparing a proposed pro forma delegation agreement that should specify 
the necessary uniform processes within the Regional Entities.
---------------------------------------------------------------------------

    \235\ See, e.g., EEI, ELCON, FRCC, EPSA, NERC and NiSource.
---------------------------------------------------------------------------

    735. EPSA argues that the ERO should require, and the Commission 
should condition Regional Entity approval on, the establishment of 
consistent and uniform standards and procedures. NiSource and PSEG 
Companies stress the importance of consistency for stakeholders that do 
business in multiple regions.
    736. Other commenters do not believe absolute standardization is 
necessary.\236\ Rather, they argue, the responsibilities delineated in 
the relationship between the ERO and Regional Entities should have a 
common look and feel, but standardization should not be overly 
prescriptive. First Energy submits that the Commission should allow 
flexibility in the implementation of uniformity, such as for self-
assessment programs and the development of best practices.
---------------------------------------------------------------------------

    \236\ See, e.g., Ameren, Progress Energy, Santee Cooper, SERC 
and SoCalEd.
---------------------------------------------------------------------------

Commission Conclusion

    737. As noted above under the Delegation Agreements and Governance, 
the Commission will review the pro forma delegation agreement when it 
is filed by the ERO applicant. The pro forma delegation agreement must 
propose which regional processes should be standardized. The Commission 
believes that regional processes should be uniform unless regional 
facts, other than custom, require a difference.
i. Commission Assignment of Enforcement Authority Directly to a 
Regional Entity
    738. The NOPR proposed that, if a prospective Regional Entity 
seeking to enter into a delegation agreement with the ERO is unable to 
reach agreement with the ERO within 180 days, and the entity can 
demonstrate that continued negotiations would not likely result in a 
delegation agreement within a reasonable period of time, such entity 
may apply to the Commission directly for authority to enforce 
Reliability Standards within a region.\237\
---------------------------------------------------------------------------

    \237\ NOPR at P 83.
---------------------------------------------------------------------------

Comments

    739. Among the commenters on assignment of enforcement authority 
directly to a Regional Entity, Hydro-Qu[eacute]bec expresses general 
support for the Commission's proposal to allow a Regional Entity to 
apply directly to the Commission for enforcement authority if a 
delegation agreement cannot be reached within 180 days. EPSA emphasizes 
that the entity making such a direct application to the Commission must 
demonstrate that its dealings with the ERO were conducted in good faith 
and with the goal of minimizing areas in dispute.
    740. The ISO/RTO Council notes that the Commission does not explain 
or justify the proposed requirement that a prospective Regional Entity 
wait 180 days after proposing a delegation agreement to the ERO before 
seeking Commission action and questions why such a waiting period is 
necessary. It recommends deleting the words ``within 180 days'' from 
proposed section 38.7(e).
    741. APPA questions whether the statute clearly authorizes the 
Commission to determine the terms and conditions of a delegation 
agreement over the objection of the ERO. A preferable approach might be 
for the Commission to offer to mediate any dispute over the terms of a 
delegation agreement between the ERO and a prospective Regional Entity.

Commission Conclusion

    742. The Commission concludes that a prospective Regional Entity 
may submit a delegation agreement directly to the Commission if good 
faith negotiations with the ERO fail. The Commission strongly 
encourages the parties prior to this submission to consider the use of 
ADR \238\ to resolve any disputes over the terms of the delegation 
agreement. Thus, a prospective Regional Entity that submits a 
delegation agreement directly to the Commission must state: (i) Whether 
the Commission's Dispute Resolution Service (DRS) was used, or why the 
DRS was not used and (ii) whether the Regional Entity believes that ADR 
under the Commission's supervision could successfully resolve the 
disputes regarding the terms of the delegation agreement. We therefore 
affirm our statement in the NOPR that a Regional Entity applicant may 
apply to the Commission directly for authority to enforce Reliability 
Standards within a region if it is unable to reach agreement with the 
ERO within 180 days and can demonstrate that continued negotiations 
would not likely result in a delegation agreement within a reasonable 
period of time. The Commission will provide notice of such an 
application and an opportunity for all interested persons, including 
the ERO, to comment.
---------------------------------------------------------------------------

    \238\ Alternative dispute resolution encompasses a variety of 
dispute resolution mechanism including mediation, early neutral 
evaluation and settlement judge procedures. It always involves the 
use of a third party neutral to help the parties find mutually 
acceptable solutions to their disputes. Unassisted negotiation 
between parties should not be confused with ADR. To discuss 
appropriate ADR options, the parties should contact the Dispute 
Resolution toll free at 1-877-337-2237 (local number: 202-502-8702), 
or by e-mail at: ferc.adr@ferc.gov.
---------------------------------------------------------------------------

    743. A minimum time for negotiations is necessary to prevent a 
prospective Regional Entity from merely going through the formality of 
seeking an ERO delegation before bypassing the ERO and asking the 
Commission to intervene. This practice would not be consistent with our 
intent to have a strong ERO. The Commission emphasizes that direct 
application to the Commission by a prospective Regional Entity should 
be considered an option only after other means for reaching agreement 
with the ERO have been exhausted. The Final Rule does not preclude 
mediation, but there is no need to impose such a requirement at this 
time. Mediation may be considered on a case-by-case basis. We disagree 
with APPA that the statute does not permit the Commission to direct the 
ERO to enter into the delegation agreement with the Regional Entity. 
Section 215(e)(4) permits the Commission to assign the ERO's authority 
to enforce Reliability Standards directly to a Regional Entity.
j. Performance Assessment of Regional Entities
    744. Paragraph (f) of the proposed section on delegation required a 
Regional Entity approved by the Commission to periodically submit to 
the Commission an application to be approved as a Regional Entity.\239\ 
The NOPR also sought comment on what would constitute a reasonable 
length of time for such periodic re-approval to be effective.\240\
---------------------------------------------------------------------------

    \239\ Id.
    \240\ Id. at P 84 (delegation question 10).
---------------------------------------------------------------------------

Comments

    745. Many commenters generally support a re-approval process for a 
Regional Entity. While several commenters support the Commission's

[[Page 8725]]

suggestion of a five-year re-approval, others offer alternative 
suggestions on an appropriate time frame.
    746. A number of commenters support a re-approval process for 
Regional Entities.\241\ Cinergy argues that, absent such a requirement, 
the delegation approval process would be a one-time evaluation, after 
which the Regional Entity would lack accountability. SMUD suggests that 
the Commission should consider a periodic review of Regional Entities 
on a staggered basis to reduce the strain on ERO or Commission 
resources that could result from simultaneous reviews. Several 
commenters suggest that any Regional Entity re-approval process should 
follow the same timetable as ERO recertification.\242\
---------------------------------------------------------------------------

    \241\ See, e.g., Alcoa, Cinergy, NERC and SMUD.
    \242\ See, e.g., APPA, International Transmission, SERC, South 
Carolina E&G and TVA.
---------------------------------------------------------------------------

    747. Commenters suggest several alternative time frames for review, 
varying from two to six years. Some commenters suggest regional 
delegation agreements should be subject to review every six years.\243\ 
A number of commenters suggest a five-year review cycle for a Regional 
Entity delegation agreement.\244\
---------------------------------------------------------------------------

    \243\ See, e.g., APPA, NERC and TAPS.
    \244\ See, e.g., Alcoa, PSEG, SoCalEd, South Carolina E&G and 
TVA.
---------------------------------------------------------------------------

    748. APPA and EPSA recommend that the ERO should be involved in the 
review of a Regional Entity delegation agreement that is submitted to 
the Commission for re-approval by providing input on the merits of re-
approval for each Regional Entity and submitting the delegation 
agreement for re-approval. Other commenters suggest that resubmission 
of the delegation agreement is unnecessary unless a change has taken 
place.\245\
---------------------------------------------------------------------------

    \245\ See, e.g., Alcoa, PSEG and TVA.
---------------------------------------------------------------------------

    749. Several commenters recommend requiring the Regional Entity to 
apply for re-approval in advance of the end of its term, with some 
commenters suggesting six months, and others a year in advance.\246\ 
EPSA also suggests that a Regional Entity consult with the ERO in 
advance about its performance and need for changes in the delegation 
agreement and provide notice to the Commission one year before the end 
of its term. NERC advises that the Commission's approval should not 
expire automatically at the end of a term, but should continue until 
the Commission completes its periodic review of the Regional Entity 
performance and its delegation agreement.
---------------------------------------------------------------------------

    \246\ See, e.g., EPSA, PSEG, South Carolina E&G and TVA.
---------------------------------------------------------------------------

    750. CEA and NERC suggest that the Commission coordinate with the 
appropriate regulatory authorities in Canada prior to denying re-
approval of a Regional Entity. Any unilateral action taken by the 
Commission would be inconsistent with the goal of establishing a 
cooperative cross-border approach.
    751. Numerous commenters argue that the Commission should not 
require a re-approval process.\247\ SERC asserts that a requirement for 
periodic re-approval is not contained in the legislation and argues 
that a re-approval process would divert significant resources from a 
Regional Entity's primary purpose of proposing and enforcing 
Reliability Standards. Instead, a ``decertification'' process should be 
adopted that would be applied by the Commission at the request of the 
ERO if the Regional Entity fails to meets its requirements for 
remaining a Regional Entity.
---------------------------------------------------------------------------

    \247\ See, e.g., ERCOT, FirstEnergy, FRCC, NPCC, NRECA, Ontario 
IESO, Progress Energy, SERC and Southern.
---------------------------------------------------------------------------

    752. FirstEnergy and FRCC argue that the Commission should 
decertify the ERO or a Regional Entity only as a last resort. 
FirstEnergy remarks that such an action ``would be equivalent to the 
death penalty for the ERO or Regional Entity and would cause 
significant logistical problems'' in transitioning to a new Regional 
Entity.\248\
---------------------------------------------------------------------------

    \248\ FirstEnergy at 5.
---------------------------------------------------------------------------

    753. ERCOT argues that instead of re-approval, the ERO should 
perform periodic audits of each Regional Entity, consistent with the 
Commission's proposal for the ERO.

Commission Conclusion

    754. The Commission is persuaded by commenters that a Commission 
re-approval process could disrupt the work of the Regional Entities. 
The Commission does not adopt the proposed re-approval process as 
described in proposed section 38.7(f) of the NOPR. However, we adopt 
instead a periodic performance assessment process that requires a 
Regional Entity to affirmatively demonstrate to the ERO that it 
satisfies statutory criteria for the responsibilities it has been 
delegated. Section 39.3(c)(1)(iii) of the Final Rule requires that the 
ERO, as an element of the ERO performance assessment process, evaluate 
the effectiveness of each Regional Entity. The ERO must assess each 
Regional Entity's ability to develop and enforce Reliability Standards 
and provide for an adequate level of Bulk-Power System reliability. The 
ERO should explain how effectively each Regional Entity enforces 
Reliability Standards, providing statistical information on its 
investigations, findings and assessments of penalties. The ERO should 
also explain how each Regional Entity provides for fair and impartial 
procedures for enforcement of Reliability Standards and provides for 
openness, due process and balance of interests in developing 
Reliability Standards. The ERO's performance assessment of each 
Regional Entity must be presented to the Commission as part of the 
ERO's own periodic performance assessment filing.
    755. As noted earlier in the ERO certification discussion, the 
Commission will allow for public comment on the ERO's performance 
assessment filing, including the performance assessment of each 
Regional Entity. In this proceeding, the Commission will issue an order 
finding that the ERO meets the statutory and regulatory criteria or 
directing the ERO to comply or improve its compliance with the 
statutory and regulatory criteria for the ERO. This order will also 
include similar findings of compliance or directives to ensure that the 
Regional Entities comply or improve compliance with the statutory and 
regulatory criteria. Subsequently, if a Regional Entity fails to comply 
adequately with the Commission order, the Commission may institute a 
proceeding to enforce its order as discussed below under Enforcement of 
Commission Rules and Orders, including, if necessary and appropriate, a 
proceeding to consider rescission of approval of the Regional Entity's 
delegation agreement.
    756. Outside of the periodic assessment process, any interested 
person who is dissatisfied with a Regional Entity's performance of its 
delegated functions may file a complaint with the ERO, concurrently 
informing the Commission of the complaint. If the ERO cannot resolve 
the complaint in a timely manner, the complainant may request that the 
Commission resolve the dispute.
9. Enforcement of Commission Rules and Orders--Section 39.9
    757. Consistent with section 215(e)(5) of the FPA, the NOPR 
proposed that the Commission may take action as necessary and 
appropriate against the ERO or a Regional Entity ``to ensure compliance 
with a reliability standard or any Commission order affecting the ERO 
or a Regional Entity.'' The NOPR proposed that, upon notice and 
opportunity for hearing, the Commission may suspend or rescind the

[[Page 8726]]

ERO's certification or a Regional Entity's delegated authority. 
Further, the NOPR proposed that the Commission will periodically audit 
and review the ERO's and each Regional Entity's compliance with the 
statutory and regulatory criteria for certification and delegation of 
functions.
a. Action Against the ERO or a Regional Entity
    758. The proposed regulations provided that the Commission may take 
such action as is necessary and appropriate against the ERO or a 
Regional Entity to ensure compliance with a Reliability Standard or any 
Commission order affecting the ERO or a Regional Entity.\249\ Possible 
actions include the suspension or rescission of authority or the 
imposition of civil penalties under the FPA.
---------------------------------------------------------------------------

    \249\ NOPR at P 74.
---------------------------------------------------------------------------

Comments

    759. NRECA comments that Congress envisioned a cooperative, rather 
than a contentious, process and urges that the Commission, the ERO and 
Regional Entities work together to resolve any tensions that may 
emerge. APPA and LG&E Energy ask that the Final Rule identify specific 
causes for decertification.
    760. Entergy states that the Commission should establish levels of 
ERO and Regional Entity non-compliance that would gradually lead to 
suspension or decertification since decertification as a first step 
would leave a large void and create unnecessary uncertainty for members 
of the organization. NERC suggests that, to prevent an unintended lapse 
in authority to set and enforce Reliability Standards, if the 
Commission decides to decertify the ERO, the ERO should remain in place 
until a successor is certified.

Commission Conclusion

    761. While the Commission has the authority to take action against 
the ERO or a Regional Entity for non-compliance with section 215 of the 
FPA or rules or responsibilities thereunder, we would resort to 
assessing a monetary penalty only in extraordinary circumstances, and 
would consider decertification only as a last resort after all other 
attempts to resolve a significant compliance matter have failed. 
However, in a situation of deliberate non-compliance with a Commission 
order, we would not hesitate to impose an appropriate penalty.
    762. The Commission would ensure that there is no gap in carrying 
out the requirements of section 215. The Commission would not permit 
any decertification to become effective until such time as the 
Commission itself, or another entity, were prepared to step in and 
implement the reliability functions of the decertified entity.
    763. With regard to Entergy's comment, the Commission will 
determine the appropriate penalty for ERO or Regional Entity non-
compliance on a case-by-case basis.\250\ We do not establish here the 
levels of non-compliance suggested by Entergy.
---------------------------------------------------------------------------

    \250\ Enforcement of Statutes, Orders, Rules, and Regulations, 
113 FERC ] 61,068 at P 17-20.
---------------------------------------------------------------------------

    764. The Commission is revising the text of the Final Rule to 
replace the phrase ``rescission of the Commission's grant of 
certification to the Electric Reliability Organization,'' with the 
phrase ``decertification of the Electric Reliability Organization.'' 
This revision will provide consistency in terminology throughout the 
Final Rule.
    765. Further, the proposed regulation, which tracks the statutory 
text, provides that the Commission may take such action as is necessary 
and appropriate against the ERO or a Regional Entity ``to ensure 
compliance with a Reliability Standard * * *.'' Although, taken 
literally, this implies that the ERO or a Regional Entity may be in 
non-compliance with a Reliability Standard, this is not the correct 
interpretation because a Reliability Standard is applicable only to a 
user, owner, or operator of the Bulk-Power System, from which the ERO 
and each Regional Entity must maintain independence. This phrase means 
that the Commission can take appropriate action against the ERO or a 
Regional Entity when it has failed in its responsibility to assure that 
owners, users and operators of the Bulk-Power System are complying with 
a Reliability Standard. We also would take appropriate action, for 
example, if the ERO or a Regional Entity fails to comply with a 
Commission order requiring that a Reliability Standard be developed or 
modified as necessary to maintain reliability.
b. Audits of ERO and Regional Entity Criteria
    766. The NOPR provided that the Commission would periodically audit 
and review the ERO's and Regional Entities' compliance with the 
statutory and regulatory criteria for certification and delegation of 
functions, respectively. The Commission requested comment on what 
mechanism of review and methods of oversight should be used to assure 
the Commission that the ERO or a Regional Entity is meeting its 
responsibilities for monitoring compliance with the Reliability 
Standards.\251\
---------------------------------------------------------------------------

    \251\ NOPR at P 76.
---------------------------------------------------------------------------

    767. Numerous commenters agree that the ERO and Regional Entities 
should be audited for compliance on a regular basis.\252\ Santa Clara 
suggests that the Commission perform such audits at least annually to 
prevent inadequacies in the ERO's performance from going unaddressed 
for too long. ERCOT suggests that the Commission periodically audit the 
ERO with Regional Entity representatives on the audit team, and the ERO 
periodically audit Regional Entities with Commission staff represented 
on the audit team.
---------------------------------------------------------------------------

    \252\ See, e.g, APPA, CREPC, EEI, ELCON, ERCOT, FRCC, MRO, NERC, 
Santa Clara, Santee Cooper, Southern, TVA and Xcel Energy.
---------------------------------------------------------------------------

    768. A number of commenters urge that independent auditors perform 
the enforcement audits. NERC and Southern recommend that independent 
enforcement audits of the ERO occur once every three years, and that 
the ERO should audit each Regional Entity at least once every three 
years and report the results to the Commission. The enforcement audit 
process used by the ERO to audit Regional Entities and the audit 
results should be included in the independent audit of the ERO.\253\ 
The Missouri Commission suggests the creation of an independent, INPO-
type entity to assess the performance of the ERO and Regional Entities 
and believes that this approach provides more continuity and efficiency 
than Commission staff performing this function.
---------------------------------------------------------------------------

    \253\ MRO states that the Commission should rely on an 
independent assessment ``similar to Statement of Auditing Standards 
No. 70 review,'' explaining that ``The SAS No. 70 audit or service 
auditor's examination is widely recognized because it represents 
that a service organization has been through an in-depth audit of 
their control activities * * *.'' MRO at 25.
---------------------------------------------------------------------------

    769. CREPC comments that the relevant Regional Advisory Body should 
be invited to participate in the periodic enforcement audit and review 
of the ERO and Regional Entities.
    770. A number of commenters suggest additional mechanisms to ensure 
ERO and Regional Entity compliance. Ameren, APPA and NiSource suggest 
that the Commission monitor ERO and Regional Entity performance by 
requiring that they submit periodic reports. APPA also proposes the use 
of industry surveys to determine the effectiveness of the ERO and 
Regional Entities. PacifiCorp suggests that the required submission of 
annual working plans and budgets by the ERO and Regional Entities can 
be tools to assess

[[Page 8727]]

effectiveness. Likewise, Ontario IESO recommends an annual performance 
filing by the ERO and each Regional Entity, including actual 
accomplishments relative to the annual workplans. Xcel Energy suggests 
that the Commission request performance metrics from the ERO and 
Regional Entities that demonstrate their ability to monitor compliance 
with Reliability Standards.
    771. Ameren suggests that the Commission should maintain a hotline 
so that ``internal and external employees'' of the ERO or a Regional 
Entity can confidentially report failures by a reliability organization 
to adequately monitor behavior. FRCC states that the Commission has 
oversight based on its authority to respond to complaints that the ERO 
or a Regional Entity has violated a statutory or regulatory obligation. 
NiSource requests clarification on whether users, owners or operators 
of the Bulk-Power System may petition the Commission, by complaint or 
some other method, to initiate an investigation into the activities of 
the ERO or a Regional Entity, and states that such right is crucial to 
ensure that the ERO and Regional Entities enforce Reliability Standards 
in a uniform, non-discriminatory manner.

Commission Conclusion

    772. The Final Rule establishes that, in general, the Commission 
oversees the ERO and the ERO oversees any approved Regional Entity. 
Consistent with this approach, the Final Rule retains the substance of 
the NOPR's proposal that the Commission may periodically audit the 
ERO's performance of its functions.
    773. We contemplate that a compliance audit of the ERO would 
typically involve an examination of the ERO's ongoing compliance with 
statutory and regulatory criteria for certification and its performance 
in carrying out its responsibility to oversee the compliance with and 
enforcement of Reliability Standards. The Commission, however, 
maintains the flexibility to determine the applicable scope of a 
particular audit. The Final Rule eliminates the proposed periodic 
Commission compliance audit of each Regional Entity. Instead, we 
require the ERO periodically to audit each Regional Entity's ongoing 
compliance with relevant statutory and regulatory criteria and 
performance in enforcing Reliability Standards and report the results 
to the Commission. A Commission audit of the ERO may include a review 
of the adequacy of the ERO's audits of Regional Entities. Moreover, the 
Commission retains the authority to participate in any ERO compliance 
audit of a Regional Entity or conduct its own compliance audit in 
response to particular circumstances that may warrant Commission 
participation or intervention.
    774. We point out that a Commission compliance audit of the ERO is 
not the same as the Commission's five-year performance assessment of 
the ERO, discussed above under Certification. The compliance audit is a 
means for the Commission frequently to ensure that the ERO is doing its 
job. The compliance audit examines the ERO's ongoing compliance with 
the statutory and regulatory criteria to qualify as an ERO and also its 
actual enforcement of Reliability Standards. The Commission would 
initiate a compliance audit, and the Commission will determine if the 
ERO is in compliance with the statutory and regulatory criteria or is 
somehow inadequate in enforcing Reliability Standards. The periodic 
performance assessment, on the other hand, is different. Although it 
will examine at a minimum the ERO's ongoing compliance with the 
statutory and regulatory criteria to qualify as an ERO, it will consist 
of a much broader examination of how well the ERO is carrying out all 
its responsibilities and how it may improve its performance of these 
responsibilities. These include not only the ERO's compliance 
investigations and penalty-setting responsibilities, but also its 
development of Reliability Standards, its ERO Rules and its 
relationships with the Regional Entities. While the compliance audit 
focuses on examining any deficiencies in ERO compliance, especially for 
investigations and penalty setting, the performance assessment is 
intended to examine opportunities for the ERO to improve. Further, the 
performance assessment is initiated when the ERO files with the 
Commission an assessment of its own performance in these areas, and is 
followed by a Commission examination of this performance assessment, 
with opportunity for public comment.
    775. The Commission does not decide in the Final Rule the 
appropriate audit cycle or the need for independent auditors but will 
exercise its discretion to set or revise its audit program or policies 
as necessary.
    776. Given that no Regional Advisory Body exists today, it is 
premature for us to address, as suggested by CREPC, whether a relevant 
Regional Advisory Body should be allowed to participate in Commission 
compliance audits.
    777. A number of commenters suggest various reporting requirements 
to enhance our oversight of the ERO. As discussed in different sections 
of the Final Rule, the Commission requires the ERO to report to the 
Commission on various aspects of its operations, including an annual 
budget and business plan,\254\ reliability assessments, and penalties 
imposed.
---------------------------------------------------------------------------

    \254\ See 18 CFR 39.4 (Funding of the Electric Reliability 
Organization).
---------------------------------------------------------------------------

    778. With regard to NiSource's requested clarification, third 
parties would have the opportunity to petition the Commission to 
initiate an investigation either formally through the filing of a 
complaint, as suggested by FRCC, or informally by contacting the 
Commission's Enforcement Hotline, as suggested by Ameren. The 
Enforcement Hotline provides a confidential means for a market 
participant, or an employee of a reliability organization, to bring to 
the Commission allegations that the ERO or a Regional Entity has not 
fulfilled its statutory, regulatory or delegated responsibilities. 
While third parties have the opportunity to bring a compliance matter 
to the Commission's attention, they do not have a right to initiate a 
Commission investigation, as suggested by NiSource. Rather, the 
Commission retains prosecutorial discretion to decide whether to pursue 
a particular matter.
c. Monetary Penalties
    779. In the NOPR, the Commission asked whether the ERO or a 
Regional Entity should be able to recover any monetary penalties levied 
directly by the Commission against the ERO or a Regional Entity for 
violation of section 215 of the FPA, or any Commission regulation or 
order, through dues, fees, or other charges.\255\
---------------------------------------------------------------------------

    \255\ NOPR at P 77.
---------------------------------------------------------------------------

Comments

    780. Numerous commenters oppose the assessment of a monetary 
penalty against the ERO or a Regional Entity.\256\ They claim that, 
because the ERO and any Regional Entity will be not-for-profit entities 
that must pass through costs, subjecting them to penalties would really 
penalize the end users that would ultimately bear the costs. Further, 
given the other tools available to the Commission, including 
decertification, commenters argue that it should be unnecessary to 
resort to monetary penalties to bring the ERO into compliance. TAPS 
suggests that the

[[Page 8728]]

Commission should delete the reference to civil penalties.
---------------------------------------------------------------------------

    \256\ See, e.g., Alberta, APPA, CEA, Entergy, Exelon, Hydro-
Qu[eacute]bec, NERC, New York Companies, Ohio Commission, PG&E, 
PSNM-TNPC, TAPS and TVA.
---------------------------------------------------------------------------

    781. Some commenters question the Commission's legal authority to 
impose penalties against the ERO or Regional Entities.\257\ NRECA 
comments that, while the NOPR tracks section 215(e)(5) of the FPA, the 
Commission's authority to impose penalties in section 215(e)(3) is 
limited to users, owners or operators of the Bulk-Power System and does 
not include the ERO or a Regional Entity. NRECA cautions that, 
consistent with the axiom that penalties be strictly construed, the 
Commission should proceed with judicious restraint in this area.
---------------------------------------------------------------------------

    \257\ See, e.g., CEA, Progress Energy, SERC, Southern, and TAPS.
---------------------------------------------------------------------------

    782. AEP and others respond that, as a not-for-profit entity, the 
ERO or a Regional Entity would have no alternative but to seek recovery 
from those that are responsible for its funding. Allegheny states that, 
in the unlikely case that the ERO or a Regional Entity is a for-profit 
organization that is allowed to recover a return on investment, the 
entity should bear the risk of such penalties as part of its incentive 
to earn a reasonable return. ELCON comments that the ERO or a Regional 
Entity should not be allowed to recover a penalty through dues, fees or 
other charges because allowing the recovery of costs negates the 
penalty. It states that the only meaningful penalty is the risk of 
decertification or bankruptcy.
    783. CEA, Hydro-Qu[eacute]bec and Ontario IESO explain that the 
imposition of a penalty against the international ERO or a Cross-Border 
Regional Entity would have extra-jurisdictional implications. For 
example, a monetary penalty imposed by the Commission on a Cross-Border 
Regional Entity would be paid in part by one or more Canadian utilities 
and, accordingly, Canadian ratepayers. CEA states that it would be 
inappropriate for the Commission to assess a penalty that would be 
borne by entities that are not Commission-jurisdictional.
    784. EEI submits that, while the Commission may impose a monetary 
penalty on the ERO or a Regional Entity, it should do so only as a 
drastic action. According to EEI, if a monetary penalty is imposed, the 
ERO or Regional Entity should apply for cost recovery with the 
Commission. EEI states that, in light of the likely organizational 
structures of the ERO and Regional Entities, it is difficult to 
envision how penalties would not ultimately be passed through to the 
end users.

Commission Conclusion

    785. The Commission believes that, in most circumstances, 
compliance audits, compliance plans and additional reporting 
requirements, with the ultimate possibility of decertification, should 
be effective in ensuring ERO and Regional Entity compliance with 
statutory and regulatory criteria as well as applicable Commission 
orders. The Final Rule allows the Commission to impose a civil penalty 
on the ERO or a Regional Entity and permits its recovery from those 
responsible for funding the ERO or Regional Entity, although, as 
discussed previously, we would expect to use this provision only in 
extraordinary circumstances.
    786. The Commission has the legal authority to impose a civil 
penalty pursuant to section 316A of the FPA, which applies to a 
violation of any provision under part II of the FPA, including section 
215.\258\ We disagree with the assertion of NRECA and others that the 
Commission's ability to take action against the ERO or a Regional 
Entity is limited by section 215(e)(3). That provision, which relates 
to Commission action against a user, owner or operator of the Bulk-
Power System, is not relevant to our authority vis-[agrave]-vis the ERO 
or a Regional Entity.
---------------------------------------------------------------------------

    \258\ Section 316A provides that a person who violates any 
provision of Part II of the FPA, or any related rule or order, shall 
be subject to a civil penalty of not more than $1,000,000 for each 
day that such violation continues. Section 316A would apply to the 
extent that the ERO or a Regional Entity is in violation of section 
215 or any other provision of Part II of the FPA or any rule or 
order issued under any provision of Part II.
---------------------------------------------------------------------------

d. Penalizing an ERO or a Regional Entity Board Member
    787. Most commenters object to assessing a monetary penalty against 
a board member personally. They allege that this would have a chilling 
effect upon recruitment and retention of high quality board members as 
well as the resulting increase in insurance costs.\259\ NERC points out 
that the ERO's directors cannot profit monetarily when carrying out 
their duties since they cannot have any financial or other interest in 
any user, owner or operator of the Bulk-Power System, or otherwise gain 
financially from the actions of the ERO or a Regional Entity.
---------------------------------------------------------------------------

    \259\ See, e.g., Ameren, ELCON, EPSA, ISO/RTO Council, 
MidAmerican, Missouri Commission, NERC, Northern Maine Entities, 
Ontario IESO, PacifiCorp and WECC.
---------------------------------------------------------------------------

    788. The Missouri Commission questions the Commission's authority 
to assess a monetary penalty against a board member. It suggests, as a 
better approach, putting in place an incentive package for both board 
members and managers that would include both rewards and penalties. 
PacifiCorp suggests that other laws, regulations and corporate bylaws 
could address inappropriate actions by the ERO or Regional Entity board 
members.
    789. EEI contends that a monetary penalty should not be imposed on 
a board member except perhaps in the case of proven gross negligence or 
other extraordinary circumstances. EEI and TVA recommend the use of 
non-monetary penalties, such as removal from the board. Likewise, ERCOT 
and FRCC believe that penalizing a board member is inappropriate except 
in rare circumstances such as when a board member acts for his own 
pecuniary gain at the expense of legitimate reliability interests or 
when a board member has repeatedly and intentionally supported the 
violation of Reliability Standards.

Commission Conclusion

    790. The Commission agrees that assessing monetary penalties 
against ERO and Regional Entity board members would have a chilling 
effect on the recruitment and retention of highly qualified board 
members. Moreover, a board member of a not-for-profit ERO or Regional 
Entity would not have the opportunity to derive pecuniary gain from his 
or her position. Other forms of penalty, such as removal of a board 
member for good cause, are more appropriate. Accordingly, section 39.9 
of the Final Rule does not provide for the assessment of a monetary 
penalty against a board member of the ERO or a Regional Entity. The 
Missouri Commission comment regarding the Commission's authority to do 
so therefore need not be addressed.
10. Changes in Electric Reliability Organization Rules and Regional 
Entity Rules--Section 39.10
    791. The NOPR proposed that the ERO shall file with the Commission 
for approval of any proposed ERO Rule or changes to an ERO Rule, 
accompanied by an explanation of its basis and purpose. It also 
proposed that a Regional Entity shall submit a Regional Entity Rule or 
changes to Regional Entity Rule to the ERO and, upon approval by the 
ERO, the ERO shall file with the Commission for approval any proposed 
Regional Entity Rule or changes to a Regional Entity Rule accompanied 
by an explanation of its basis and purpose. Paragraph (b) of the 
proposed regulations on ERO and Regional Entity Rules provides that the 
Commission, upon its own motion or complaint, may propose changes to 
the Rules of the ERO or a Regional Entity.

[[Page 8729]]

    792. The NOPR also stated that a proposed ERO Rule, Regional Entity 
Rule, or changes to those Rules shall take effect upon a finding by the 
Commission, after notice and opportunity for comment, that the change 
is just, reasonable, not unduly discriminatory or preferential, is in 
the public interest, and satisfies the certification requirements in 
the regulations.

Comments

    793. MRO opposes Commission review of Regional Entity Rules and 
changes to Regional Entity Rules. It states that section 215(f) of the 
FPA provides for review of ERO Rules and changes to ERO Rules by the 
Commission, but the Commission has expanded its reach to include review 
of Regional Entity Rules and changes to Regional Entity Rules. It 
asserts that such interpretation is inconsistent with the statute and 
unnecessary. It asks the Commission to revise this section to exclude 
review of Regional Entity Rules and changes to Regional Entity Rules.
    794. On the other hand, the Oklahoma Commission requests that the 
Commission consider streamlining the Rule modification process by 
allowing a Regional Entity to submit a proposed Rule modification 
directly to the Commission, with simultaneous service of the proposed 
modification to the ERO. The ERO could then comment along with other 
interested parties and the Commission could make its decision 
accordingly. Such a process would cut out unnecessary expense and 
delay. The Oklahoma Commission claims that this approach would further 
Congress's intent to provide for the reliable operation of the Bulk-
Power System.
    795. In addition, the Oklahoma Commission contends that the 
proposed section is silent on many important aspects of the review such 
as: (1) What objective criteria will be used by the ERO when 
considering a proposed modification; (2) what is the timeline under 
which the ERO must make a decision; (3) whether the ERO is required to 
send a disapproved modification back to a Regional Entity for further 
study or modification; and (4) whether the ERO's Rule modification 
decision will be subject to appeal to or review by the Commission. 
According to the Oklahoma Commission, while the ERO and the Commission 
must have some flexibility when considering Rule modifications, any 
proponent of a proposed modification will, at a minimum, need to 
understand the process and standards against which the proposed 
modification will be judged.

Commission Conclusion

    796. We adopt in section 39.10 the substantive provisions of the 
proposed regulation. Our authority to review Regional Entity Rules and 
changes to Regional Entity Rules after they have been approved by the 
ERO follows from section 215(e)(4) of the FPA and is consistent with 
Congress's intent and the overall framework of section 215. Section 
215(e)(4) explicitly requires that the Commission shall issue 
regulations authorizing the ERO to enter into an agreement to delegate 
authority to a Regional Entity if it meets certain conditions.
    797. Although we do not adopt the Oklahoma Commission's suggestion 
that a Regional Entity directly submit the Regional Entity Rules or 
changes to Regional Entity Rules to the Commission because such a 
process would not be compatible with the ERO's authority to enforce its 
delegation agreement and its responsibility to ensure that such changes 
further the goals of the statute, we agree with the Oklahoma Commission 
that the Regional Entity should have a clear understanding of the 
process and criteria by which the Regional Entity Rules or changes to 
Regional Entity Rules will be judged by the ERO. Accordingly, the ERO 
should develop such procedures and criteria and submit these to the 
Commission for approval.
11. Reliability Reports--Section 39.11
    798. The NOPR provided that the ERO shall conduct periodic 
assessments of the reliability and adequacy of the Bulk-Power System 
and report its findings to the Commission, the Secretary of Energy, 
Regional Entities, and any Regional Advisory Bodies annually, or more 
frequently if directed by the Commission.\260\ Commenters address the 
required frequency of such reports, the scope and content of these 
reports, and whether they should be noticed and made available to the 
public.
---------------------------------------------------------------------------

    \260\ NOPR at P 95.
---------------------------------------------------------------------------

Comments

    799. MRO submits that, if the Commission were to require quarterly 
reporting, this obligation would be unnecessarily burdensome, and 
possibly redundant, given the other reporting obligations proposed in 
the NOPR. MRO recommends that the Commission require the ERO to provide 
an annual report assessing the reliability and adequacy of the Bulk-
Power System.
    800. PG&E submits that the regulations should additionally require 
that the ERO, at least on a yearly basis, obtain specific information 
on the contribution of all entities, including entities referenced in 
section 201(f) of the FPA, toward adequacy, including the amount of 
capacity and energy that such entities have under contract, and further 
require that the ERO make recommendations where entities have 
inadequate resources. PG&E notes that the ERO will be uniquely situated 
to evaluate adequacy, as the adequacy of generation and transmission 
resources on which reliability depends are governed by a wide array of 
federal, state and local jurisdictions within and between regions and 
control areas. In PG&E's view, only a uniform evaluation of readiness 
of the resources within these various jurisdictions can meaningfully 
reveal the extent to which the Bulk-Power System can be relied upon in 
both the near-term and long-term. Moreover, only an entity with broad 
authority to conduct such inquiries can reveal whether the burden of 
achieving adequacy is being equitably distributed or whether entities 
are ``free-riding.'' PG&E further asserts that, otherwise, the proposed 
regulation does not properly implement the Congressional intent 
manifest in the interplay of the requirements of sections 215(g) and 
(i)(2) of the FPA.\261\ PG&E recommends that the ERO must be empowered 
to provide timely alerts to the Commission, all other jurisdictional 
entities responsible for adequacy, and the Congress.
---------------------------------------------------------------------------

    \261\ While section 215(g) of the FPA pertains to ERO reporting 
on reliability and adequacy, section 215(i)(2) of the FPA notes that 
section 215 does not authorize either the Commission or the ERO to 
order construction of additional generation or transmission capacity 
or set and enforce compliance with standards for adequacy.
---------------------------------------------------------------------------

    801. Hydro One notes that, currently, the regional reliability 
councils play an important role in coordination of the conduct of 
periodic assessments of the reliability and adequacy of the Bulk-Power 
System within a region. It asks that the Commission ensure that the 
Regional Entities continue this important coordination function.
    802. NASUCA suggests that the Final Rule should provide that all 
reliability and adequacy reports filed pursuant to the regulation on 
reliability reports be made available to the public. PG&E submits that 
the ERO's reliability and adequacy reports, including those regarding 
section 201(f) entities, should be publicly noticed and made available 
to the public, while respecting confidentiality and competitiveness 
concerns, because the resulting public pressure would assist in 
convincing such entities to supplement their resource procurement 
programs.

[[Page 8730]]

Commission Conclusion

    803. The Final Rule requires the ERO to provide to the Commission 
two types of periodic reliability reports. First, the ERO must conduct 
reliability assessments and report its findings to the Commission 
regarding the overall state of the Reliable Operation of the Bulk-Power 
System. Second, the ERO must conduct assessments of the adequacy of the 
Bulk-Power System and report its findings to the Commission, the 
Secretary of Energy, each Regional Entity and each Regional Advisory 
Body.
    804. Section 39.11(b) provides the Commission discretion to require 
that the ERO submit an adequacy assessment report more frequently than 
annually. We appreciate MRO's concern about over-taxing the resources 
of the ERO and Regional Entities with multiple or frequent reporting 
requirements. The Commission sees no need, however, to limit its 
discretion in this area at this time. The Commission will balance the 
need for timely information regarding system reliability and adequacy 
with the burden on the ERO's resources whenever we consider having the 
ERO provide reports more frequently than annually.
    805. With respect to the concerns about the scope and content of 
the reliability and adequacy assessments prepared by the ERO, the 
Commission expects each assessment to be comprehensive in order for the 
Commission, the ERO, and the Regional Entities to fulfill their 
respective oversight responsibilities. As will be established in later 
proceedings, we would expect that such assessments could include, for 
example, operating and planning reports, reports of ongoing activities 
such as readiness audits, seasonal reliability assessments, as well as 
relevant recommendations. In addition, the Commission may determine 
that reliability and adequacy assessments should include appropriate 
metrics, if applicable, to assist the Commission in monitoring actual 
reliability performance and plans.
    806. We agree with PG&E's recommendation that the Commission 
require the ERO to obtain information on resource adequacy and make 
related recommendations where entities are found to have inadequate 
resources. Resource adequacy is a fundamental aspect of reliability. 
The ERO is in a unique position to obtain and analyze information 
regarding resource adequacy across all regions of the Bulk-Power System 
in interconnected North America. Although section 215(a)(3) of the FPA 
provides that the term Reliability Standard does not include any 
requirement to enlarge Bulk-Power System facilities or to construct new 
transmission capacity or generation capacity, it does not preclude the 
ERO from obtaining information relating to resource adequacy for the 
purposes of making its required reports on the adequacy of the Bulk-
Power System pursuant to section 215(g) of the FPA. Accordingly, 
section 39.11(b) of the Final Rule sets forth a separate requirement 
that the ERO conduct assessments of the adequacy of the Bulk-Power 
System in North America and report its findings to the Commission and 
others. Further, the ERO may obtain pertinent information on resource 
adequacy from any relevant user, owner or operator of the Bulk-Power 
System.
    807. We agree with commenters on the need for notice and public 
availability of reliability and adequacy assessments. Accordingly, 
reliability and adequacy assessments reports filed at the Commission 
will be made public unless the Commission deems it necessary and lawful 
not to do so or unless the ERO requests confidential treatment pursuant 
to our rules and regulations.
12. Inconsistency of a State Action and a Reliability Standard--Section 
39.12
    808. Consistent with section 215(i)(3) of the FPA, the proposed 
rule provided that nothing in the regulation shall be construed to 
preempt any authority of any state to take action to ensure the safety, 
adequacy, and reliability of electric service within that state, as 
long as such action is not inconsistent with any Reliability Standard. 
The NOPR also proposed that where a state takes action, the ERO, a 
Regional Entity, or any other party may ask the Commission to determine 
whether such state action is inconsistent with a Reliability Standard. 
The Commission would then provide notice and opportunity for hearing, 
take into consideration any recommendation of the ERO, and issue a 
final order on the matter within 90 days. It further provided that the 
Commission may stay the effectiveness of the state action until it 
issues the final order.
    809. Comments on this section cover three topics: The general 
balance of authority between the Commission and the states, 
recommendations regarding Commission procedures for reviewing the 
inconsistency of a state action with a Reliability Standard, and the 
concerns of specific states.
a. General Balance of Authority
    810. A number of commenters discuss the longstanding and legitimate 
role of states in overseeing Bulk-Power System reliability.\262\ They 
argue that the Commission should give great deference to state 
regulators and use its preemption power sparingly. Commenters recognize 
the interconnected, interstate nature of the Bulk-Power System, and 
argue that existing state authority to protect reliability should be 
preserved and should complement the new Commission authority to enforce 
Reliability Standards for the Bulk-Power System. For example, the 
Florida Commission expresses concern that the Final Rule could diminish 
a state authority's ability to assure safe, adequate, reliable, and 
efficient operation of a local electric grid. Some commenters further 
assert that EPAct limits the Commission's preemption power to those 
issues clearly outside the jurisdiction of the states.\263\
---------------------------------------------------------------------------

    \262\ See, e.g., NARUC, NPCC, NASUCA, LADWP, PacifiCorp, and 
Missouri Commission.
    \263\ See, e.g., NASUCA and Missouri Commission.
---------------------------------------------------------------------------

    811. Regarding state requirements for generation and transmission 
planning and adequacy, NASUCA, Missouri Commission and others point out 
that the statute gives the ERO authority to develop and enforce 
compliance with Reliability Standards for only the Bulk-Power System; 
it also denies the ERO and the Commission authority to order the 
construction of additional generation or transmission capacity, or to 
set and enforce compliance with standards for adequacy or safety of 
electric facilities or services. The Missouri Commission and others ask 
the Commission to respect the states' planning and resource adequacy 
authorities or to clarify the ERO's and the states' roles regarding 
generation and transmission planning standards in the Final Rule.
    812. State commenters argue that NERC and regional reliability 
council reliability rules developed previously for voluntary use were 
not intended to replace or limit other approaches to promoting 
reliability, and contend that making these mandatory Reliability 
Standards should not have this unintended effect.

Commission Conclusion

    813. The Commission recognizes the important role that state 
governments have in regulating many aspects of electric reliability, 
especially ensuring that state franchised utilities meet their 
obligation to construct enough capacity to ensure that they remain able 
to

[[Page 8731]]

provide the public with reliable electric service. We recognize that 
states have important reliability responsibilities and these generally 
include, and are not necessarily limited to, requiring franchise 
utilities to make adequate investment in new generation, distribution, 
and transmission infrastructure, and in many cases to develop adequate 
demand response as needed to help keep generation and load in balance. 
We do not, however, agree with the characterization made by some 
commenters that section 215 of the FPA restricts a Reliability Standard 
to addressing an issue clearly outside the jurisdiction of a state. 
Instead, section 215 generally permits a state to take action that 
addresses the safety, adequacy and reliability of electric service 
within the state, as long as such action is not inconsistent with a 
Reliability Standard. We intend to respect these important state 
government functions, and we agree with commenters that state 
authorities and our new authorities should be complementary and work in 
unison to ensure reliable electric service for our nation's electricity 
customers.
    814. Regarding the Missouri Commission's request that we clarify 
the ERO and state roles regarding generation and transmission planning 
standards in particular, we do not believe it is possible or desirable 
to try to develop generic guidelines on planning roles in this 
proceeding. If the ERO proposes a Reliability Standard, whether on 
planning or any other topic, we will consider carefully at the time 
when a specific Reliability Standard is before us whether it falls 
within the ERO's and the Commission's statutory area of responsibility. 
We emphasize that we intend to continue to respect states' roles in 
these areas. Indeed, the Commission has devoted considerable time and 
attention in recent years, through its orders and its many regional 
infrastructure conferences, to encouraging states and others to develop 
plans for ensuring adequate electric generation, transmission, and 
demand response infrastructure for both reliability and market 
adequacy.
    815. The statute explicitly bars preemption of any authority of any 
state to take action to ensure the safety, adequacy and reliability of 
electric service within the state, as long as such action is not 
inconsistent with a Reliability Standard. The Commission anticipates 
that conflicts between a state requirement and a Reliability Standard 
will be rare, if any occur at all. We expect that any potential 
conflict between a proposed Reliability Standard and an existing state 
requirement will be resolved as the Reliability Standard is developed, 
and parties may raise any such conflict before the Commission when a 
proposed Reliability Standard is submitted to us for approval. 
Similarly, if a state agency is considering an action that could 
possibly conflict with a Reliability Standard already in effect; we 
expect that parties will bring this to the attention of the state 
agency for resolution. If, however, such an inconsistency should occur, 
the statute and our regulations provide a criterion and a procedure for 
resolving the conflict.
b. Review of Allegedly Inconsistent State Actions
    816. Several commenters, especially state commissions, urge the 
Commission to consider state agency expertise and give as much weight 
to the input of state authorities as it does to the input of the ERO 
when reviewing a state action.\264\ Several make specific 
recommendations.
---------------------------------------------------------------------------

    \264\ See, e.g., Kentucky PSC, Oklahoma Commission, Florida 
Commission, and LADWP.
---------------------------------------------------------------------------

    817. The Kentucky PSC and the Oklahoma Commission request that the 
Final Rule resolve an apparent inconsistency between proposed 
subsections (b) and (c) of the state action regulations. According to 
subsection (c), the Commission would consult with both the ERO and the 
state taking an allegedly inconsistent action before staying the 
state's action. However, subsection (b)(2) provides explicitly that the 
Commission decision would take into consideration the recommendation of 
the ERO, without explicitly mentioning the recommendation of the state. 
Either (b)(2) should be revised to read like (c), they request, or both 
should be revised to allow all parties to make recommendations.
    818. The Oklahoma Commission argues that the state agency must have 
unfettered access to any proceeding that affects its authority because 
its jurisdictional responsibilities are at issue. It advises the 
Commission that this can be accomplished by requiring that notice be 
given to the affected state agency simultaneously with the filing with 
the Commission of a request to review a state action. Given the short 
90-day window within which the Commission must by law issue a final 
order on any alleged inconsistency, the Oklahoma Commission claims that 
due process dictates that the relevant state agency be involved from 
the outset.
    819. The Florida Commission believes that the Commission should not 
allow parties to seek a stay of a proposed state action while the state 
is still considering whether to undertake the action. It advocates that 
the Final Rule make clear that parties to a state proceeding should be 
required to wait until the final state action before Commission review 
is granted.
    820. LADWP asks the Commission not to interpret ``inconsistent'' in 
a way that would preclude a state from taking action to make its system 
more reliable.

Commission Conclusion

    821. The Commission agrees with commenters that the proposed rule 
may appear ambiguous regarding whether the Commission would consider 
the recommendation of the relevant state as well as the ERO when 
deciding an issue regarding an alleged inconsistency. Accordingly, 
section 39.12(b)(2) of the Final Rule provides that the Commission will 
take into consideration the recommendations of both the ERO and the 
state. We will also, of course, consider the views of all parties that 
file comments on the matter.
    822. As the Oklahoma Commission requests, we have added a new 
requirement in section 39.12(b)(1) of the Final Rule that a petition 
for determination of inconsistency be served on the relevant state 
agency, concurrent with filing with the Commission and the ERO.
    823. We will reserve judgment on the Florida Commission's 
recommendation that a state action must be final before an alleged 
inconsistency is referred to the Commission. We generally expect 
parties to delay a filing with the Commission until state action is 
final, but we will not mandate such a requirement at this time.
    824. LADWP asks about the authority of a state to require greater 
reliability than a Reliability Standard. Although we cannot speak 
definitively on the inconsistency of a state action and a Reliability 
Standard when neither is before us, in general a state action that 
simply sets an additional, and not a substitute, reliability 
requirement, or that provides for a more stringent reliability 
requirement than a Reliability Standard, and is not otherwise 
inconsistent with any Reliability Standard should not be precluded 
under this Final Rule.
c. Concerns of Specific States
    825. Some commenters ask the Commission to take into account the 
special circumstances of particular states. The City of San Antonio 
recommends that the Commission defer to ERCOT and the Texas Commission 
to determine whether a state action in ERCOT is consistent with a 
Reliability Standard because the expertise to

[[Page 8732]]

review the inconsistency between an ERCOT market rule or other rule and 
a Reliability Standard resides within ERCOT--and the Texas Commission 
has the authority to modify those market rules, if required.
    826. FRCC asserts that the reliability policies and practices for 
the Florida peninsula should be addressed at the state, not federal, 
level because of the peninsular geography, electric grid 
characteristics, and the tropical climate and severe weather of the 
area. FRCC foresees that the ``Regional Entity established for 
peninsular Florida'' will use the state action provision in the Act to 
address reliability issues unique to Florida.'' \265\ FRCC argues that 
Congress understood this need for local consideration of reliability 
issues when it drafted the provision that allows a state action that is 
not inconsistent with any Reliability Standard.
---------------------------------------------------------------------------

    \265\ FRCC at 3.
---------------------------------------------------------------------------

    827. For the State of New York, section 215(i)(3) of the FPA 
provides an exception to the rule by which the Commission must review 
the inconsistency of a state action with a Reliability Standard; 
however, the text of the proposed regulation does not explicitly state 
this exception. NERC recommends that the proposed rule be modified to 
reflect this special provision for reliability actions by the State of 
New York. In contrast, New York ISO interprets the absence of a 
reference to New York in our proposed rule as an appropriate 
recognition that this FPA provision for New York state reliability 
rules is outside the scope of this rulemaking.

Commission Conclusion

    828. Section 215(i) of the FPA authorizes the Commission to 
determine whether a state action is inconsistent with a Reliability 
Standard. Congress applied this provision to the United States, except 
Alaska and Hawaii, and provided a limited exception for the State of 
New York.
    829. The provision applies in the ERCOT region of Texas and the 
peninsular region of Florida. However, the parties in these regions 
should have ample opportunity to avoid a potential conflict between a 
Reliability Standard and any other requirements established by the 
states of Florida or Texas, by the FRCC or ERCOT as possible future 
Regional Entities under the statute, or by ERCOT as a market-
facilitating ISO created under Texas law. As discussed above, those 
parties developing, commenting on, and voting on a newly proposed 
Reliability Standard will be from all regions of the United States and 
other countries. They will have to consider how to make the proposed 
Reliability Standard suitable for all regions with different market 
structures and designs, as well as different geography, differences in 
severe weather threats, and grid characteristics. If the ERO does not 
resolve these concerns, parties are free to bring them to the 
Commission when a proposed Reliability Standard is filed with us for 
approval.
    830. Further, as discussed more fully elsewhere in this order, the 
statute and our regulations provide for Regional Entities and, where 
appropriate, regional differences in Reliability Standards to meet the 
unique needs of each region. ERCOT and FRCC indicate that they intend 
to seek approval as Regional Entities and will have the opportunity to 
propose needed regional differences. Also, as discussed elsewhere in 
this order, a Regional Entity may undertake to develop reliability 
activities outside the scope of the FPA and may seek to have state 
enforcement of any reliability requirements that are not jurisdictional 
to the Commission. We note further that the existing ERCOT regional 
reliability council is organized on an interconnection-wide basis, and 
the Commission will give due weight to the technical expertise of a 
Regional Entity organized on such a basis regarding a proposed 
Reliability Standard to be applicable in that interconnection, as 
required by statute. Further, the statute and our regulations provide 
for Regional Advisory Bodies to advise the Commission and the ERO on 
special regional needs. The Commission intends to take such advice 
seriously.
    831. With all these opportunities to avoid inconsistency between a 
state action and a Reliability Standard, we expect that applications to 
the Commission regarding alleged inconsistencies will be rare. Should 
such an application be filed, however, the Commission cannot delegate 
its responsibilities. The Commission will follow the process set out in 
the statute. We will determine, after consulting with both the state 
and the ERO, if there is an inconsistency between a Reliability 
Standard and any state's action, including an alleged inconsistency 
between a Reliability Standard applicable in ERCOT and an action by the 
State of Texas or between a Reliability Standard applicable in FRCC and 
an action by the State of Florida.
    832. City of San Antonio is concerned about who should resolve any 
inconsistency between an ERO or ERCOT Reliability Standard and an ERCOT 
market rule, stating that the Texas Commission has the expertise to 
resolve any market design issues. However, it is up to the Commission 
under the FPA to determine if there is such an inconsistency. If there 
is, the Reliability Standard is controlling under the statute.
    833. Finally, we agree with NERC regarding the New York exception 
and revise the regulations in the Final Rule to state it explicitly. It 
is inappropriate to interpret this omission from the NOPR as indicating 
that this provision is outside the scope of this rulemaking. The 
statute provides that the Commission must review any alleged 
inconsistency presented to us between a state action--including a New 
York action--and an ERO or Regional Entity Reliability Standard 
``except that the State of New York may establish rules that result in 
greater reliability within that State, as long as such action does not 
result in lesser reliability outside the State than that provided by 
the reliability standards.'' Although the standard of review for 
inconsistency is different for New York, the jurisdiction of the 
Commission to conduct the review is the same, and it is an appropriate 
subject for this rulemaking.
13. Regional Advisory Bodies--Section 39.13
    834. Consistent with section 215(j) of the FPA, proposed 
regulations provided that the Commission shall consider a petition to 
establish a Regional Advisory Body that is submitted by at least two-
thirds of the states within a region that have more than one-half of 
their electric load served within the region.
    835. The NOPR proposed that a Regional Advisory Body may provide 
advice to the Commission, the ERO, or a Regional Entity with respect to 
the governance of an existing or proposed Regional Entity within its 
region; whether a Reliability Standard proposed to apply within the 
region is just, reasonable, not unduly discriminatory or preferential, 
and in the public interest; whether fees for all activities under 
section 215 of the FPA proposed to be assessed within the region are 
just, reasonable, not unduly discriminatory or preferential, and in the 
public interest; and any other responsibilities requested by the 
Commission. The NOPR further proposed that the Commission may give 
deference to the advice of any such Regional Advisory Body if it is 
organized on an Interconnection-wide basis.
    836. In addition, the Commission sought comment on the scope of the 
term ``region'' as used in proposed section on Regional Advisory 
Bodies. In particular, the NOPR asked whether the

[[Page 8733]]

region represented by a Regional Advisory Body should correspond to 
that of an existing or proposed Regional Entity.

Comments

    837. NARUC agrees that the proposed regulations accurately track 
the statutory provision with respect to the composition of a Regional 
Advisory Body, the subject matter on which it is to provide advice, and 
the Commission's deference to the advice of a Regional Advisory Body 
organized on an Interconnection-wide basis. According to NARUC, the 
regulations should be adopted as proposed because they simply provide 
procedural instructions to accomplish the statutory objective.
    838. According to SoCalEd and the Ohio Commission, the formation of 
the Regional Advisory Body should follow the establishment of an ERO 
and Regional Entities because the establishment of an ERO and Regional 
Entities is important to implement the Reliability Standards whereas a 
Regional Advisory Body will simply perform an advisory task.
    839. With respect to the scope of the term ``region,'' several 
commenters \266\ assert that the region represented by a Regional 
Advisory Body should correspond to that of a Regional Entity. However, 
many other commenters \267\ recommend flexibility in the geographic 
coverage of Regional Advisory Body because Regional Entities are yet to 
be formed.
---------------------------------------------------------------------------

    \266\ See, e.g., AEP, Ameren, CPUC, ELCON, NPCC, PSEG and TVA.
    \267\ See, e.g., APPA, MRO, Progress Energy and Santee Cooper.
---------------------------------------------------------------------------

    840. NPCC believes that if the footprint of a Regional Advisory 
Body coincides with that of a Regional Entity, it will result in 
greater efficiency and cooperation with state and provincial 
governments. ELCON adds that if a Regional Entity later changes its 
geographical scope and configuration, the Regional Advisory Body should 
also change to match the new scope and configuration. NERC asserts 
that, to avoid overlapping or conflicting advice, the ERO will be best 
served by a Regional Advisory Body corresponding to the area covered by 
a Regional Entity. PSEG claims that a Regional Advisory Body that does 
not correspond to the area covered by Regional Entity would not only be 
inefficient but also cause confusion and conflicts. Southern contends 
that the region represented by a Regional Advisory Body should 
correspond to that of the existing Regional Reliability Council.
    841. MRO, on the other hand, contends that the region represented 
by a Regional Advisory Body should not necessarily have to correspond 
to the region of a Regional Entity because doing so will create 
unnecessary redundancy. For example, organizations such as MRO, which 
intend to be a Regional Entity, already have processes in place for 
state and provincial regulatory participation. According to MRO, a 
Regional Advisory Body will be more effective at the ERO level, as 
compared to the Regional Entity level, in providing advice on overall 
policy matters. However, it also supports Regional Advisory Body 
organized on an Interconnection-wide basis.
    842. APPA contends that the Commission should, at least initially, 
allow flexibility in the geographic coverage of a Regional Advisory 
Body. The Commission, however, should ensure that the representation on 
the Regional Advisory Body is broadly inclusive of all entities in the 
state that must comply with the ERO's Reliability Standards.
    843. Progress Energy and Santee Cooper contend that the Commission 
should provide some latitude in what constitutes a region, but certain 
guidelines could be applied (e.g., the boundaries of a Regional 
Entity).
    844. NARUC states that there is obvious symmetry and convenience if 
a Regional Advisory Body corresponds to the area covered by a Regional 
Entity. Yet, there are some valid reasons why this may not always be 
practical. One such situation would involve the possible consolidation 
of Regional Entities in the Midwest. States may be able to realign 
Regional Advisory Bodies, but that process may take some time. Another 
issue that could deter ideal alignment is the ``two-thirds'' and ``one-
half'' conditions. These conditions may influence which states are 
included as members of a Regional Advisory Body, even though adjoining 
states may have significant interest in actions of the related Regional 
Entity. A third alignment issue may relate to Regional State Committees 
based on the footprints of RTOs. For these reasons, the NARUC urges the 
Commission to understand that a Regional Advisory Body may sometimes 
not correspond exactly with a Regional Entity and contends that the 
Commission's reliability goal will be better facilitated by encouraging 
the states' regional cooperation in self-designated regions than by 
prescriptive attempts to define regions in ways that may not reflect 
all relevant considerations.
    845. NARUC notes that section 215(j) of the FPA allows the 
Commission discretion in giving deference to the advice given by a 
Regional Advisory Body that is organized on an Interconnection-wide 
basis. It states that the Commission's exercise of discretion in 
granting such deference should depend upon the type of advice being 
given by a Regional Advisory Body and issues surrounding it. Therefore, 
the Commission should not specify a greater precision in the degree of 
deference it would grant to such advice.
    846. NARUC states that, while there is no need to address such 
situations before they arise, the Commission should give appropriate 
consideration to advice offered by states or group of states in the 
following three situations: A group of states may offer advice on a 
reliability issue without seeking formal recognition as a Regional 
Advisory Body. Also, a recognized Regional Advisory Body may offer 
advice that is outside the scope of its legislative responsibilities. 
Further, bodies such as those organized to coordinate state RTO 
activities may offer advice on reliability issues.
    847. The Nova Scotia Board points out that, although the Commission 
might give deference to the advice received from a Regional Advisory 
Body, there is no such requirement for the Canadian regulator.
    848. The Ohio Commission states that a Regional Advisory Body is a 
body of states and that the states will form these Regional Advisory 
Bodies as they see fit. It questions the requirement that a Regional 
Advisory Body must have two-thirds of the states within a ``region'' 
and the ``region'' should have more than one-half of the state's load 
within the ``region.'' However, if the Commission adopts these 
requirements--two-thirds and one-half--in the Final Rule, special 
circumstances must be recognized. If a state is in more than one 
Regional Entity, careful scrutiny and special consideration must be 
given to adequately represent that state's interest. According to the 
Ohio Commission, the Commission must consider the following questions 
before adopting the requirements for a Regional Advisory Body: (1) Will 
the states have equal representation? (2) Will states in larger 
Regional Entities have less representation than states in smaller 
Regional Entities? (3) Do all Regional Entities (small and large) have 
the same amount of voting power? (4) What about states with greater 
generation, transmission and load than others and some consideration 
should be given to load weighting if their ratepayers bear the greater 
burden?
    849. According to the Missouri Commission and the Ohio Commission,

[[Page 8734]]

a Regional Advisory Body should not be limited to states that have more 
than one-half of their electric load served within the region. The 
Missouri Commission claims that neither the law nor the proposed 
regulations limit the participation of an individual state that has 
more than one-half of its electric load served within the region, but 
instead both the law and the proposed regulations require the 
Commission to establish a Regional Advisory Body when two-thirds of the 
states representing more than one-half of the region's electric load 
submit a petition for status as a Regional Advisory Body. It states 
that Missouri is currently divided among three different regional 
reliability councils with 48 percent of MWh sales in MAIN, 33 percent 
in SPP and 19 percent in SERC--none representing more than one-half of 
the electric load--a requirement under the proposed regulations. It is 
extremely important to the Missouri Commission for Missouri to be 
represented on all Regional Advisory Bodies associated with Regional 
Entities that include load or generation located within the state of 
Missouri. It requests the Commission not to limit participation in a 
Regional Advisory Body to states having more than one-half of the 
electric load in the region.
    850. Pointing out an apparent inconsistency between the proposed 
section 38.10(a) and section 215 (j) of the FPA, several commenters 
\268\ ask that the Commission amend its proposed rule to accurately 
reflect its mandatory obligation to establish a Regional Advisory Body 
upon petition by the states. They claim that section 215(j) requires 
the Commission to establish a Regional Advisory Body once it receives a 
petition whereas the proposed rule provides that ``The Commission shall 
consider a petition to establish a Regional Advisory Body that is 
submitted by at least two-thirds of the states within a region that 
have more than one-half of their electric load served within the 
region.''
---------------------------------------------------------------------------

    \268\ See, e.g., CREPC, the Missouri Commission and Western 
Governors.
---------------------------------------------------------------------------

Commission Conclusion

    851. We agree that it would generally be desirable to have a 
Regional Entity and a Regional Advisory Body cover the same region. 
However, we disagree that the formation of a Regional Advisory Body 
must follow the creation and final approval of a Regional Entity, as 
some commenters suggest. Section 215 of the FPA does not create such a 
limitation. As Progress Energy and Santee Cooper point out, section 215 
permits a Regional Advisory Body to form even if there is no Regional 
Entity. Further, one function of a Regional Advisory Body under section 
215 of the FPA is to advise the Commission and the ERO regarding the 
governance of a proposed Regional Entity, suggesting that a Regional 
Advisory Body may be created ahead of a Regional Entity.
    852. NARUC prefers a common boundary, but claims that a rigid 
requirement of a common boundary may interfere with the prospect of 
consolidating various Regional Entities, especially in the Midwest. We 
agree. A common boundary may be preferable in many instances, but we 
will not require a Regional Advisory Body and a Regional Entity to have 
a common boundary because such a requirement may hinder the prospect of 
consolidation of various Regional Entities in the future.
    853. We agree with NARUC and the Ohio Commission that many 
questions will arise with respect to adequate representation and voting 
power of the various states in a Regional Advisory Body as well as the 
scope of the matters on which a Regional Advisory Body can give advice. 
We also agree with NARUC that the Commission does not need to address 
those issues here. Those proposing a Regional Advisory Body are free to 
develop a voting structure for submission with the Regional Advisory 
Body petition.
    854. We agree with NARUC that a greater precision in the degree of 
deference we give to the advice we receive from a Regional Advisory 
Body organized on an Interconnection-wide basis is not needed and would 
largely depend upon the particular circumstances of the case. We also 
agree with NARUC that entities other than a Regional Advisory Body may 
offer advice on reliability and that a Regional Advisory Body may offer 
advice outside the scope of the statute; we will address such matters 
when they arise.
    855. The concerns expressed by the Missouri Commission and the Ohio 
Commission regarding individual state participation in one or more 
Regional Advisory Body are unfounded. We clarify that the ``two-
thirds'' and ``one-half'' are legislative requirements for the 
Commission establishing a Regional Advisory Body, not a requirement for 
participation. A state within a Regional Entity with less than one-half 
of its load served in that Regional Entity may still participate in a 
Regional Advisory Body formed by two-thirds of the other states in the 
Regional Entity that each have one-half of their load served within 
that Regional Entity.
    856. Finally, several commenters point out an apparent 
inconsistency between the proposed regulations and section 215(j) of 
the FPA and ask that the Commission amend its proposed rule to 
accurately reflect its mandatory obligation to establish Regional 
Advisory Bodies upon petition by the states. Accordingly, we are 
revising section 39.13(a) to state that ``The Commission will establish 
a Regional Advisory Body on the petition of at least two-thirds of the 
States within a region that have more than one-half of their electric 
load served within the region.''

V. Information Collection Statement

    857. The following collection of information contained in this 
Final Rule is being submitted to the Office of Management and Budget 
(OMB) for review under section 3507(d) of the Paperwork Reduction Act 
of 1995.\269\ The information collection requirements in this Final 
Rule are identified under the data collection, FERC-725 ``Certification 
of Electric Reliability Organization.'' The ``public protection'' 
provisions of the Paperwork Reduction Act \270\ require each agency to 
display a currently valid control number and inform respondents that a 
response is not required unless the information collection displays a 
valid OMB control number on each information collection or provides a 
justification as to why the information collection number cannot be 
displayed. In the case of information collections published in 
regulations, the control number is to be published in the Federal 
Register. At the time of submission of the NOPR, OMB did not assign a 
control number and the Commission will request the control number with 
this submission. Therefore, in compliance with the provisions of the 
PRA, the Commission may not conduct or sponsor a collection of 
information unless the OMB control number is displayed.
---------------------------------------------------------------------------

    \269\ 44 U.S.C. 3507(d)(2000).
    \270\ 44 U.S.C. 3512; 5 CFR 1320.5(b), 1320.6(a)(2000).
---------------------------------------------------------------------------

    858. Public Reporting Burden: In the NOPR, the Commission estimated 
the potential number of applicants to be recognized by the Commission 
as the single ERO or as a Regional Entity would vary as up to three (3) 
for the ERO and up to eight (8) for the Regional Entities, 
respectively. As these entities are select, special purpose entities of 
the new federal law and do not yet exist, it was not feasible to 
project the anticipated burden of complying with the proposed rule. 
However, staff conducted an outreach on the anticipated burden per 
response and

[[Page 8735]]

now provides the following estimate for the certification application.

----------------------------------------------------------------------------------------------------------------
                                                                                                   Total annual
               Data collection                   Number of        Number of        Hours per        hours per
                                                respondents       responses         response         response
----------------------------------------------------------------------------------------------------------------
FERC-725....................................               3                1       \*\ 25,800           77,400
----------------------------------------------------------------------------------------------------------------
\*\ These hours take into account the full array of personnel required to plan, develop, prepare and complete an
  information collection. This includes the time devoted by the respondent, all employees, partners and
  associates of the respondent, and the time of outside consultants, contractors, legal and financial advisors
  needed for the purpose of responding to the information. This includes obtaining specialized advice on how to
  respond and implement the information collection and also searching all available public and private sources
  of data, including sources which do not yet exist but which might need to be created pursuant to the
  information collection, and evaluating such sources to determine whether they satisfy the information
  collection.

    Information Collection Costs: Based on input provided to the 
Commission, the following is a projection of the average cost for 
submission of the application for certification:
    Annualized Capital/Startup Costs: $2,800,000 (this includes direct 
labor overhead costs to prepare the application and also consultation 
to obtain specialized advice in responding to and implementing the 
certification application).
    Annualized Costs (Operations & maintenance): As noted above, the 
entities do not exist at this time and therefore it would be 
impractical to determine the annual operations and maintenance costs 
for the applicant selected to become the ERO.
    Title: FERC-725, Certification of Electric Reliability 
Organization.
    Action: Proposed Information Collection.
    OMB Control No: To be determined.
    Respondents: Non-profit institutions.
    Necessity of the Information: The information collected from the 
ERO or Regional Entities under the requirements of FERC-725 is used by 
the Commission to implement the statutory provisions of section 215 of 
the FPA and implemented by the Commission in the Code of Federal 
Regulations under 18 part 39. Prior to the enactment of section 215 of 
the FPA under EPAct, the Commission had acted primarily as an economic 
regulator of wholesale power markets and the interstate transmission 
grid promoting a more reliable Bulk-Power System by facilitating 
regional coordination and planning of the interstate grid through ISOs 
and RTOs, adopting transmission pricing policies that provide price 
signals for the most reliable and efficient operation and expansion of 
the grid, and providing pricing incentives at the wholesale level for 
investment in grid improvements. EPAct buttresses the Commission's 
efforts to strengthen the interstate transmission grid through the 
grant of new authority pursuant to section 215 of the FPA which 
provides for a system of mandatory Reliability Standards developed by 
the ERO, established by the Commission, and enforced by the ERO and 
Regional Entities, subject to Commission review.
    For information on the requirements, submitting comments on the 
collection of information and the associated burden estimates including 
suggestions for reducing this burden, please send your comments to the 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC, 20426 (Attention: Michael Miller, Office of the 
Executive Director, 202-502-8415, e-mail: michael.miller@ferc.gov) or 
contact the Office of Management and Budget (Attention: Desk Officer 
for the Federal Energy Regulatory Commission, fax: 202-395-7285, e-
mail: oria_submission@omb.eop.gov.)

VI. Environmental Analysis

    859. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\271\ The 
Commission concludes that neither an Environmental Assessment or an 
Environmental Impact Statement is required for this Final Rule pursuant 
to section 380.4(a)(2)(ii) of the Commission regulations, which 
provides a ``categorical exclusion'' for rules that do not 
substantively change the effect of legislation.\272\
---------------------------------------------------------------------------

    \271\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47,897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
    \272\ 18 CFR 380.4(a)(2)(ii)(2005).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    860. The Regulatory Flexibility Act (RFA)\273\ directs all agencies 
to consider the potential impact of regulations on small business and 
other small entities. The RFA mandates consideration of regulatory 
alternatives that accomplish the stated objectives of a proposed rule 
and that minimize any significant economic impact on such entities. The 
RFA does not, however, mandate any particular outcome in a rulemaking. 
Under the RFA, an agency must prepare an initial regulatory flexibility 
analysis of the proposed rule's economic impact on small entities.\274\ 
The analysis requirement may be avoided if the head of the agency 
certifies in the NOPR that the proposed rule will not ``have a 
significant economic impact on a substantial number of small entities'' 
and sends the certification to the Chief Counsel for Advocacy of the 
Small Business Administration (SBA).\275\ The SBA's Office of Size 
Standards develops the numerical definition of a small business. (See 
13 CFR 121.201). For electric utilities, a firm is small if, including 
its affiliates, it is primarily engaged in the generation, transmission 
and/or distribution of electric energy for sale and its total electric 
output for the preceding 12 months did not exceed four million megawatt 
hours.
---------------------------------------------------------------------------

    \273\ 5 U.S.C. 601-612 (2000).
    \274\ 5 U.S.C. 603(a).
    \275\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    861. In the NOPR, the Commission certified that the proposed 
reliability rule would not likely impact certain small entities because 
the ERO and Regional Entities will be unlike most other businesses, 
either profit or not-for-profit. In creating the concept of the ERO and 
Regional Entities, Congress selected special purpose entities to both 
oversee the transition from voluntary industry reliability requirements 
for operating and planning the Bulk-Power System to mandatory, 
Commission-approved, enforceable electric Reliability Standards.

Comments

    862. In response to the Commission's certification, several 
commenters including APPA, NERC and NRECA believe the Commission has 
misapplied the provisions of the RFA. NRECA contends that the Small 
Business Regulatory Enforcement Fairness Act (SBREFA) provides an 
additional statutory reason to the RFA to have the

[[Page 8736]]

Commission exempt small electric utilities, particularly distribution 
cooperatives from coverage under the Reliability Standards. Many of 
NRECA's members, including all of its distribution cooperatives and 
some of its generation and transmission facilities, qualify as small 
entities under the statute, as do a number of public power entities and 
the potential exists that even some investor or privately-owned 
utilities that operate exclusively or primarily at retail. In NRECA's 
estimation, many of the small entities generally do not interact 
directly with the Bulk-Power System. Making such entities directly 
subject to the Reliability Standards for the Bulk-Power System would 
impose additional costs without producing any corresponding improvement 
in reliability. In NRECA's judgment, the Commission's regulations 
should explicitly require the ERO to be sensitive to the impact of the 
Reliability Standards upon small entities, and the ERO should exempt 
small entities from the Reliability Standards to the extent possible 
consistent with maintaining the reliability of the Bulk-Power System.
    863. APPA believes the Commission's RFA analysis is incorrect. APPA 
cites section 215(b)(1) of the FPA as granting the Commission 
reliability jurisdiction over all users, owners and operators of the 
Bulk-Power System within the United States. This jurisdiction includes 
and is not limited to the entities described in section described in 
section 201(f) of the FPA. APPA contends the regulatory scheme spelled 
out by the Commission in the NOPR is not restricted to just the ERO, 
Regional Entities and Regional Advisory Bodies. Rather, APPA believes 
the jurisdiction will encompass all users, owners and operators of the 
Bulk-Power System. For this reason, APPA asserts that the Commission 
should revise its RFA analysis to reflect this broader scope of section 
215 of the FPA.
    864. While APPA acknowledges its support for enactment of section 
215 of the FPA, it recognizes that a substantial number of its members 
(as entities described in section 201(f) of the FPA) would be subject 
to the statute. But the majority of the nearly 2,000 publicly owned 
utility systems in the United States are distribution-only utilities 
that have little or no interaction with the Bulk-Power System. APPA 
estimates that approximately 1,970 public power utilities meet the SBA 
standard for a ``small utility'' used by the Commission for RFA 
purposes. APPA assumes that the new ERO, the Regional Entities and the 
Commission will focus their reliability efforts on those entities whose 
activities substantially impact the Bulk-Power System, and that 
distribution-only entities will not be targeted. If this assumption is 
valid, then the Commission's ultimate conclusion under the RFA that the 
NOPR does not impact a substantial number of small entities is likely 
to be correct, although not for the reasons the Commission provides. If 
however, the Commission were to interpret its reliability jurisdiction 
more broadly, APPA believes this interpretation would be clearly 
erroneous and have very substantial RFA compliance issues. In 
conclusion, APPA hopes the new ERO and the Commission will focus their 
reliability efforts on only those entities whose activities 
substantially impact the Bulk-Power System, and not target 
distribution-only entities.
    865. NERC takes an approach that is similar to APPA's in terms of 
coverage under the RFA and yet different from APPA in terms of 
applicability. NERC contends that the Commission's regulations should 
make clear that all users, owners and operators of the Bulk-Power 
System must comply with: (1) Implementation of EPAct, (2) approved 
Reliability Standards, (3) Rules adopted by the ERO, and (4) requests 
for data submitted by the ERO and Regional Entities issued in 
furtherance of section 215 of the FPA. In essence, NERC believes that 
the Commission must place all users of the Bulk-Power System on notice 
of their obligations under the FPA and the Commission's regulations. 
Such notice ensures complete coverage as provided for in EPAct and the 
regulations proposed by the Commission, the ERO and the Regional 
Entities who are charged with monitoring and enforcing approved 
Reliability Standards.

Commission Conclusion

    866. As we noted previously in Part IV of the Preamble, this Final 
Rule is generally limited to developing and implementing the procedures 
for the formulation and functions of the ERO and Regional Entities as 
directed by Section 215(b) of the FPA. The Final Rule does not place 
any significant or substantial impact on entities other than the ERO 
and the Regional Entities. Section 215 of the FPA provides the 
Commission with jurisdiction over all users, owners and operators of 
the Bulk-Power System for purposes of ensuring compliance with the 
Reliability Standards. Until the Commission has approved a specific 
Reliability Standard that impacts a particular type/class of users, it 
is premature to consider NRECA's and APPA's concerns and RFA 
implications, if any, of the Commission's implementation of section 215 
of the FPA.
    867. As we noted in the NOPR, Congress created the concept of ERO 
and Regional Entities to be special purpose entities responsible for 
the Bulk-Power System and subject to Commission jurisdiction and 
oversight. Section 215(b) of the FPA merely establishes the criteria 
for the selection of these organizations so they may in turn propose 
and enforce Reliability Standards subject to the Commission approval 
for the Bulk-Power System. It is for these reasons that the Commission 
affirmed its certification statement contained in the NOPR and 
reaffirms here that the Final Rule will not have a significant impact 
on small entities.

VIII. Document Availability

    868. 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 p.m. 
eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    869. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, 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.
    870. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours. For assistance, please contact FERC 
Online Support at 1-866-208-3676 (toll free) or 202-502-6652 (e-mail at 
FERCOnlineSupport@FERC.gov), or the Public Reference Room at 202-502-

8371, TTY 202-502-8659 (e-mail at public.referenceroom@ferc.gov).

List of Subjects in 18 CFR Part 40

    Administrative practice and procedure, Electric power, Penalties, 
Reporting and recordkeeping requirements.

    By the Commission.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, the Commission amends Chapter I, 
Title 18, Code of Federal Regulations, by adding Part 39 to read as 
follows:

[[Page 8737]]

PART 39--RULES CONCERNING CERTIFICATION OF THE ELECTRIC RELIABILITY 
ORGANIZATION; AND PROCEDURES FOR THE ESTABLISHMENT, APPROVAL, AND 
ENFORCEMENT OF ELECTRIC RELIABILITY STANDARDS

Sec.
39.1 Definitions.
39.2 Jurisdiction and applicability.
39.3 Electric Reliability Organization certification.
39.4 Funding of the Electric Reliability Organization.
39.5 Reliability Standards.
39.6 Conflict of a Reliability Standard with a Commission order.
39.7 Enforcement of Reliability Standards.
39.8 Delegation to a Regional Entity.
39.9 Enforcement of Commission rules and orders.
39.10 Changes to an Electric Reliability Organization Rule or 
Regional Entity Rule.
39.11 Reliability reports.
39.12 Review of state action.
39.13 Regional Advisory Bodies.

    Authority: 16 U.S.C. 824o.

Sec.  39.1  Definitions.

    As used in this part:
    Bulk-Power System means facilities and control systems necessary 
for operating an interconnected electric energy transmission network 
(or any portion thereof), and electric energy from generating 
facilities needed to maintain transmission system reliability. The term 
does not include facilities used in the local distribution of electric 
energy.
    Cross-Border Regional Entity means a Regional Entity that 
encompasses a part of the United States and a part of Canada or Mexico.
    Cybersecurity Incident means a malicious act or suspicious event 
that disrupts, or was an attempt to disrupt, the operation of those 
programmable electronic devices and communications networks including 
hardware, software and data that are essential to the Reliable 
Operation of the Bulk-Power System.
    Electric Reliability Organization or ``ERO'' means the organization 
certified by the Commission under Sec.  39.3 the purpose of which is to 
establish and enforce Reliability Standards for the Bulk-Power System, 
subject to Commission review.
    Electric Reliability Organization Rule means, for purposes of this 
part, the bylaws, a rule of procedure or other organizational rule or 
protocol of the Electric Reliability Organization.
    Interconnection means a geographic area in which the operation of 
Bulk-Power System components is synchronized such that the failure of 
one or more of such components may adversely affect the ability of the 
operators of other components within the system to maintain Reliable 
Operation of the facilities within their control.
    Regional Advisory Body means an entity established upon petition to 
the Commission pursuant to section 215(j) of the Federal Power Act that 
is organized to advise the Electric Reliability Organization, a 
Regional Entity, or the Commission regarding certain matters in 
accordance with Sec.  39.13.
    Regional Entity means an entity having enforcement authority 
pursuant to Sec.  39.8.
    Regional Entity Rule means, for purposes of this part, the bylaws, 
a rule of procedure or other organizational rule or protocol of a 
Regional Entity.
    Reliability Standard means a requirement approved by the Commission 
under section 215 of the Federal Power Act, to provide for Reliable 
Operation of the Bulk-Power System. The term includes requirements for 
the operation of existing Bulk-Power System facilities, including 
cybersecurity protection, and the design of planned additions or 
modifications to such facilities to the extent necessary to provide for 
Reliable Operation of the Bulk-Power System, but the term does not 
include any requirement to enlarge such facilities or to construct new 
transmission capacity or generation capacity.
    Reliable Operation means operating the elements of the Bulk-Power 
System within equipment and electric system thermal, voltage, and 
stability limits so that instability, uncontrolled separation, or 
cascading failures of such system will not occur as a result of a 
sudden disturbance, including a Cybersecurity Incident, or 
unanticipated failure of system elements.
    Transmission Organization means a regional transmission 
organization, independent system operator, independent transmission 
provider, or other transmission organization finally approved by the 
Commission for the operation of transmission facilities.

Sec.  39.2  Jurisdiction and applicability.

    (a) Within the United States (other than Alaska and Hawaii), the 
Electric Reliability Organization, any Regional Entities, and all 
users, owners and operators of the Bulk-Power System, including but not 
limited to entities described in section 201(f) of the Federal Power 
Act, shall be subject to the jurisdiction of the Commission for the 
purposes of approving Reliability Standards established under section 
215 of the Federal Power Act and enforcing compliance with section 215 
of the Federal Power Act.
    (b) All entities subject to the Commission's reliability 
jurisdiction under paragraph (a) of this section shall comply with 
applicable Reliability Standards, the Commission's regulations, and 
applicable Electric Reliability Organization and Regional Entity Rules 
made effective under this part.
    (c) Each user, owner and operator of the Bulk-Power System within 
the United States (other than Alaska and Hawaii) shall register with 
the Electric Reliability Organization and the Regional Entity for each 
region within which it uses, owns or operates Bulk-Power System 
facilities, in such manner as prescribed in the Rules of the Electric 
Reliability Organization and each applicable Regional Entity.
    (d) Each user, owner or operator of the Bulk-Power System within 
the United States (other than Alaska and Hawaii) shall provide the 
Commission, the Electric Reliability Organization and the applicable 
Regional Entity such information as is necessary to implement section 
215 of the Federal Power Act as determined by the Commission and set 
out in the Rules of the Electric Reliability Organization and each 
applicable Regional Entity. The Electric Reliability Organization and 
each Regional Entity shall provide the Commission such information as 
is necessary to implement section 215 of the Federal Power Act.

Sec.  39.3  Electric Reliability Organization certification.

    (a) Any person may submit an application to the Commission for 
certification as the Electric Reliability Organization no later than 
April 4, 2006. Such application shall comply with the requirements for 
filings in proceedings before the Commission in part 385 of this 
chapter.
    (b) After notice and an opportunity for public comment, the 
Commission may certify one such applicant as an Electric Reliability 
Organization, if the Commission determines such applicant:
    (1) Has the ability to develop and enforce, subject to Sec.  39.7, 
Reliability Standards that provide for an adequate level of reliability 
of the Bulk-Power System, and
    (2) Has established rules that:
    (i) Assure its independence of users, owners and operators of the 
Bulk-Power System while assuring fair stakeholder representation in the 
selection of its directors and balanced decisionmaking in any Electric 
Reliability Organization

[[Page 8738]]

committee or subordinate organizational structure;
    (ii) Allocate equitably reasonable dues, fees and charges among end 
users for all activities under this part;
    (iii) Provide fair and impartial procedures for enforcement of 
Reliability Standards through the imposition of penalties in accordance 
with Sec.  39.7, including limitations on activities, functions, 
operations, or other appropriate sanctions or penalties;
    (iv) Provide reasonable notice and opportunity for public comment, 
due process, openness, and balance of interests in developing 
Reliability Standards, and otherwise exercising its duties; and
    (v) Provide appropriate steps, after certification by the 
Commission as the Electric Reliability Organization, to gain 
recognition in Canada and Mexico.
    (c) The Electric Reliability Organization shall submit an 
assessment of its performance three years from the date of 
certification by the Commission, and every five years thereafter. After 
receipt of the assessment, the Commission will establish a proceeding 
with opportunity for public comment in which it will review the 
performance of the Electric Reliability Organization.
    (1) The Electric Reliability Organization's assessment of its 
performance shall include:
    (i) An explanation of how the Electric Reliability Organization 
satisfies the requirements of Sec.  39.3(b);
    (ii) Recommendations by Regional Entities, users, owners, and 
operators of the Bulk-Power System, and other interested parties for 
improvement of the Electric Reliability Organization's operations, 
activities, oversight and procedures, and the Electric Reliability 
Organization's response to such recommendations; and
    (iii) The Electric Reliability Organization's evaluation of the 
effectiveness of each Regional Entity, recommendations by the Electric 
Reliability Organization, users, owners, and operators of the Bulk-
Power System, and other interested parties for improvement of the 
Regional Entity's performance of delegated functions, and the Regional 
Entity's response to such evaluation and recommendations.
    (2) The Commission will issue an order finding that the Electric 
Reliability Organization meets the statutory and regulatory criteria or 
directing the Electric Reliability Organization or a Regional Entity to 
come into compliance with or improve its compliance with the 
requirements of this part. If the ERO fails to comply adequately with 
the Commission order, the Commission may institute a proceeding to 
enforce its order, including, if necessary and appropriate, a 
proceeding to consider decertification of the ERO consistent with Sec.  
39.9. The Commission will issue an order finding that each Regional 
Entity meets the statutory and regulatory criteria or directing the 
Regional Entity to come into compliance with or improve its compliance 
with the requirements of this part. If a Regional Entity fails to 
comply adequately with the Commission order, the Commission may 
institute a proceeding to enforce its order, including, if necessary 
and appropriate, a proceeding to consider rescission of its approval of 
the Regional Entity's delegation agreement.

Sec.  39.4  Funding of the Electric Reliability Organization.

    (a) Any person who submits an application for certification as the 
Electric Reliability Organization shall include in its application a 
formula or method for the allocation and assessment of Electric 
Reliability Organization dues, fees and charges. The certified Electric 
Reliability Organization may subsequently file with the Commission a 
request to modify the formula or method.
    (b) The Electric Reliability Organization shall file with the 
Commission its proposed entire annual budget for statutory and any non-
statutory activities, including the entire annual budget for statutory 
and any non-statutory activities of each Regional Entity, with 
supporting materials, including the ERO's and each Regional Entity's 
complete business plan and organization chart, explaining the proposed 
collection of all dues, fees and charges and the proposed expenditure 
of funds collected in sufficient detail to justify the requested 
funding collection and budget expenditures 130 days in advance of the 
beginning of each Electric Reliability Organization fiscal year. The 
annual Electric Reliability Organization budget shall include line item 
budgets for the activities of each Regional Entity that are delegated 
or assigned to each Regional Entity pursuant to Sec.  39.8.
    (c) The Commission, after public notice and opportunity for 
hearing, will issue an order either accepting, rejecting, remanding or 
modifying the proposed Electric Reliability Organization budget and 
business plan no later than sixty (60) days in advance of the beginning 
of the Electric Reliability Organization's fiscal year.
    (d) On a demonstration of unforeseen and extraordinary 
circumstances requiring additional funds prior to the next Electric 
Reliability Organization fiscal year, the Electric Reliability 
Organization may file with the Commission for authorization to collect 
a special assessment. Such filing shall include supporting materials 
explaining the proposed collection in sufficient detail to justify the 
requested funding, including any departure from the approved funding 
formula or method. After notice and an opportunity for hearing, the 
Commission will approve, disapprove, remand or modify such request.
    (e) All entities within the Commission's jurisdiction as set forth 
in section 215(b) of the Federal Power Act shall pay any Electric 
Reliability Organization assessment of dues, fees and charges as 
approved by the Commission, in a timely manner reasonably as designated 
by the Electric Reliability Organization.
    (f) Any person who submits an application for certification as the 
Electric Reliability Organization may include in the application a plan 
for a transitional funding mechanism that would allow such person, if 
certified as the Electric Reliability Organization, to continue 
existing operations without interruption as it transitions from one 
method of funding to another. Any proposed transitional funding plan 
should terminate no later than eighteen (18) months from the date of 
Electric Reliability Organization certification.
    (g) The Electric Reliability Organization or a Regional Entity may 
not engage in any activity or receive revenues from any person that, in 
the judgment of the Commission represents a significant distraction 
from, or a conflict of interest with, its responsibilities under this 
part.

Sec.  39.5  Reliability Standards.

    (a) The Electric Reliability Organization shall file each 
Reliability Standard or modification to a Reliability Standard that it 
proposes to be made effective under this part with the Commission. The 
filing shall include a concise statement of the basis and purpose of 
the proposed Reliability Standard, either a summary of the Reliability 
Standard development proceedings conducted by the Electric Reliability 
Organization or a summary of the Reliability Standard development 
proceedings conducted by a Regional Entity together with a summary of 
the Reliability Standard review proceedings of the Electric Reliability 
Organization, and a demonstration that the proposed Reliability 
Standard is just, reasonable, not unduly discriminatory or 
preferential, and in the public interest.
    (b) The Electric Reliability Organization shall rebuttably presume 
that a proposal for a Reliability Standard

[[Page 8739]]

or a modification to a Reliability Standard to be applicable on an 
Interconnection-wide basis is just, reasonable, not unduly 
discriminatory or preferential, and in the public interest, if such 
proposal is from a Regional Entity organized on an Interconnection-wide 
basis.
    (c) The Commission may approve by rule or order a proposed 
Reliability Standard or a proposed modification to a Reliability 
Standard if, after notice and opportunity for public hearing, it 
determines that the proposed Reliability Standard is just, reasonable, 
not unduly discriminatory or preferential, and in the public interest.
    (1) The Commission will give due weight to the technical expertise 
of the Electric Reliability Organization with respect to the content of 
a proposed Reliability Standard or a proposed modification to a 
Reliability Standard,
    (2) The Commission will give due weight to the technical expertise 
of a Regional Entity organized on an Interconnection-wide basis with 
respect to a proposed Reliability Standard or a proposed modification 
to a Reliability Standard to be applicable within that Interconnection, 
and
    (3) The Commission will not defer to the Electric Reliability 
Organization or a Regional Entity with respect to the effect of a 
proposed Reliability Standard or a proposed modification to a 
Reliability Standard on competition.
    (d) An approved Reliability Standard or modification to a 
Reliability Standard shall take effect as approved by the Commission.
    (e) The Commission will remand to the Electric Reliability 
Organization for further consideration a proposed Reliability Standard 
or modification to a Reliability Standard that the Commission 
disapproves in whole or in part.
    (f) The Commission may, upon its own motion or a complaint, order 
the Electric Reliability Organization to submit a proposed Reliability 
Standard or modification to a Reliability Standard that addresses a 
specific matter if the Commission considers such a new or modified 
Reliability Standard appropriate to carry out section 215 of the 
Federal Power Act.
    (g) The Commission, when remanding a Reliability Standard to the 
Electric Reliability Organization or ordering the Electric Reliability 
Organization to submit to the Commission a proposed Reliability 
Standard or proposed modification to a Reliability Standard that 
addresses a specific matter may order a deadline by which the Electric 
Reliability Organization must submit a proposed or modified Reliability 
Standard.

Sec.  39.6  Conflict of a Reliability Standard with a Commission Order.

    (a) If a user, owner or operator of the transmission facilities of 
a Transmission Organization determines that a Reliability Standard may 
conflict with a function, rule, order, tariff, rate schedule, or 
agreement accepted, approved, or ordered by the Commission with respect 
to such Transmission Organization, the user, owner or operator shall 
expeditiously notify the Commission, the Electric Reliability 
Organization and the relevant Regional Entity of the possible conflict.
    (b) After notice and opportunity for hearing, within sixty (60) 
days of the date that a notice was filed under paragraph (a) of this 
section, unless the Commission orders otherwise, the Commission will 
issue an order determining whether a conflict exists and, if so, 
resolve the conflict by directing:
    (1) The Transmission Organization to file a modification of the 
conflicting function, rule, order, tariff, rate schedule, or agreement 
pursuant to section 205 or 206 of the Federal Power Act, as 
appropriate, or
    (2) The Electric Reliability Organization to propose a modification 
to the conflicting Reliability Standard pursuant to Sec.  39.5 of the 
Commission's regulations.
    (c) The Transmission Organization shall continue to comply with the 
function, rule, order, tariff, rate schedule, or agreement accepted, 
approved, or ordered by the Commission until the Commission finds that 
a conflict exists, the Commission orders a change to such provision 
pursuant to section 205 or 206 of the Federal Power Act, and the 
ordered change becomes effective.

Sec.  39.7  Enforcement of Reliability Standards.

    (a) The Electric Reliability Organization and each Regional Entity 
shall have an audit program that provides for rigorous audits of 
compliance with Reliability Standards by users, owners and operators of 
the Bulk-Power System.
    (b) The Electric Reliability Organization and each Regional Entity 
shall have procedures to report promptly to the Commission any self-
reported violation or investigation of a violation or an alleged 
violation of a Reliability Standard and its eventual disposition.
    (1) Any person that submits an application to the Commission for 
certification as an Electric Reliability Organization shall include in 
such application a proposal for the prompt reporting to the Commission 
of any self-reported violation or investigation of a violation or an 
alleged violation of a Reliability Standard and its eventual 
disposition.
    (2) Any agreement for the delegation of enforcement authority to a 
Regional Entity shall include a provision for the prompt reporting 
through the Electric Reliability Organization to the Commission of any 
self-reported violation or investigation of a violation or an alleged 
violation of a Reliability Standard and its eventual disposition.
    (3) Each report of a violation or alleged violation by a user, 
owner or operator of the Bulk-Power System shall include the user's, 
owner's or operator's name, which Reliability Standard or Reliability 
Standards were violated or allegedly violated, when the violation or 
alleged violation occurred, and the name of a person knowledgeable 
about the violation or alleged violation to serve as a point of contact 
with the Commission.
    (4) Each violation or alleged violation shall be treated as 
nonpublic until the matter is filed with the Commission as a notice of 
penalty or resolved by an admission that the user, owner or operator of 
the Bulk-Power System violated a Reliability Standard or by a 
settlement or other negotiated disposition. The disposition of each 
violation or alleged violation that relates to a Cybersecurity Incident 
or that would jeopardize the security of the Bulk-Power System if 
publicly disclosed shall be nonpublic unless the Commission directs 
otherwise.
    (5) The Electric Reliability Organization, and each Regional Entity 
through the ERO, shall file such periodic summary reports as the 
Commission shall from time to time direct on violations of Reliability 
Standards and summary analyses of such violations.
    (c) The Electric Reliability Organization, or a Regional Entity, 
may impose, subject to section 215(e) of the Federal Power Act, a 
penalty on a user, owner or operator of the Bulk-Power System for a 
violation of a Reliability Standard approved by the Commission if, 
after notice and opportunity for hearing:
    (1) The Electric Reliability Organization or the Regional Entity 
finds that the user, owner or operator has violated a Reliability 
Standard approved by the Commission; and
    (2) The Electric Reliability Organization files a notice of penalty 
and the record of its or a Regional

[[Page 8740]]

Entity's proceeding with the Commission. Simultaneously with the filing 
of a notice of penalty with the Commission, the Electric Reliability 
Organization shall serve a copy of the notice of penalty on the entity 
that is the subject of the penalty.
    (d) A notice of penalty by the Electric Reliability Organization 
shall consist of:
    (1) The name of the entity on whom the penalty is imposed;
    (2) Identification of each Reliability Standard violated;
    (3) A statement setting forth findings of fact with respect to the 
act or practice resulting in the violation of each Reliability 
Standard;
    (4) A statement describing any penalty imposed;
    (5) The record of the proceeding;
    (6) A form of notice suitable for publication; and
    (7) Other matters the Electric Reliability Organization or the 
Regional Entity, as appropriate, may find relevant.
    (e) A penalty imposed under this section may take effect not 
earlier than the thirty-first (31st) day after the Electric Reliability 
Organization files with the Commission the notice of penalty and the 
record of the proceedings.
    (1) Such penalty will be subject to review by the Commission, on 
its own motion or upon application by the user, owner or operator of 
the Bulk-Power System that is the subject of the penalty filed within 
thirty (30) days after the date such notice is filed with Commission. 
In the absence of the filing of an application for review or motion or 
other action by the Commission, the penalty shall be affirmed by 
operation of law upon the expiration of the thirty (30)-day period for 
filing of an application for review.
    (2) An applicant filing an application for review shall comply with 
the requirements for filings in proceedings before the Commission. An 
application shall contain a complete and detailed explanation of why 
the applicant believes that the Electric Reliability Organization or 
Regional Entity erred in determining that the applicant violated a 
Reliability Standard, or in determining the appropriate form or amount 
of the penalty. The applicant may support its explanation by providing 
information that is not included in the record submitted by the 
Electric Reliability Organization.
    (3) Application to the Commission for review, or the initiation of 
review by the Commission on its own motion, shall not operate as a stay 
of such penalty unless the Commission otherwise orders upon its own 
motion or upon application by the user, owner or operator that is the 
subject of such penalty.
    (4) Any answer, intervention or comment to an application for 
review of a penalty imposed under this part must be filed within twenty 
(20) days after the application is filed, unless otherwise ordered by 
the Commission.
    (5) In any proceeding to review a penalty imposed under this part, 
the Commission, after public notice and opportunity for hearing (which 
hearing may consist solely of the record before the Electric 
Reliability Organization or Regional Entity and the opportunity for the 
presentation of supporting reasons to affirm, modify, or set aside the 
penalty), will by order affirm, set aside, or modify the penalty or may 
remand the determination of a violation or the form or amount of the 
penalty to the Electric Reliability Organization for further 
consideration. The Commission may establish a hearing before an 
administrative law judge or initiate such further procedures as it 
determines to be appropriate, before issuing such an order. In the case 
of a remand to the Electric Reliability Organization, the Electric 
Reliability Organization may remand the matter to a Regional Entity for 
further consideration and resubmittal through the Electric Reliability 
Organization to the Commission.
    (6) The Commission will take action on an application for review of 
a penalty within sixty (60) days of the date the application is filed 
unless the Commission determines on a case-by-case basis that an 
alternative expedited procedure is appropriate.
    (7) A proceeding for Commission review of a penalty for violation 
of a Reliability Standard will be public unless the Commission 
determines that a nonpublic proceeding is necessary and lawful, 
including a proceeding involving a Cybersecurity Incident. For a 
nonpublic proceeding, the user, owner or operator of the Bulk-Power 
System that is the subject of the penalty will be given timely notice 
and an opportunity for hearing and the public will not be notified and 
the public will not be allowed to participate.
    (f) On its own motion or upon complaint, the Commission may order 
compliance with a Reliability Standard and may impose a penalty against 
a user, owner or operator of the Bulk-Power System, if the Commission 
finds, after public notice and opportunity for hearing, that the user, 
owner or operator of the Bulk-Power System has engaged or is about to 
engage in any acts or practices that constitute or will constitute a 
violation of a Reliability Standard.
    (g) Any penalty imposed for the violation of a Reliability Standard 
shall bear a reasonable relation to the seriousness of the violation 
and shall take into consideration efforts of such user, owner or 
operator of the Bulk-Power System to remedy the violation in a timely 
manner.
    (1) The penalty imposed may be a monetary or a non-monetary penalty 
and may include, but is not limited to, a limitation on an activity, 
function, operation, or other appropriate sanction, including being 
added to a reliability watch list composed of major violators that is 
established by the Electric Reliability Organization, a Regional Entity 
or the Commission.
    (2) The Electric Reliability Organization shall submit for 
Commission approval penalty guidelines that set forth a range of 
penalties for the violation of Reliability Standards. A penalty imposed 
by the Electric Reliability Organization or a Regional Entity must be 
within be within the range set forth in the penalty guidelines.

Sec.  39.8  Delegation to a Regional Entity.

    (a) The Electric Reliability Organization may enter into an 
agreement to delegate authority to a Regional Entity for the purpose of 
proposing Reliability Standards to the Electric Reliability 
Organization and enforcing Reliability Standards under Sec.  39.7.
    (b) After notice and opportunity for comment, the Commission may 
approve a delegation agreement. A delegation agreement shall not be 
effective until it is approved by the Commission.
    (c) The Electric Reliability Organization shall file a delegation 
agreement. Such filing shall include a statement demonstrating that:
    (1) The Regional Entity is governed by an independent board, a 
balanced stakeholder board, or a combination independent and balanced 
stakeholder board;
    (2) The Regional Entity otherwise satisfies the provisions of 
section 215(c) of the Federal Power Act; and
    (3) The agreement promotes effective and efficient administration 
of Bulk-Power System reliability.
    (d) The Commission may modify such delegation.
    (e) The Electric Reliability Organization shall and the Commission 
will rebuttably presume that a proposal for delegation to a Regional 
Entity organized on an Interconnection-wide basis promotes effective 
and efficient

[[Page 8741]]

administration of Bulk-Power System reliability and should be approved.
    (f) An entity seeking to enter into a delegation agreement that is 
unable to reach an agreement with the Electric Reliability Organization 
within 180 days after proposing a delegation agreement to the Electric 
Reliability Organization may apply to the Commission to assign to it 
the Electric Reliability Organization's authority to enforce 
Reliability Standards within its region. The entity must demonstrate in 
its application that it meets the requirements of paragraph (c) of this 
section and that continued negotiations with the Electric Reliability 
Organization would not likely result in an appropriate delegation 
agreement within a reasonable period of time. After notice and 
opportunity for hearing, the Commission may designate the entity as a 
Regional Entity and assign enforcement authority to it.
    (g) An application pursuant to paragraph (f) of this section must 
state:
    (1) Whether the Commission's Dispute Resolution Service, or other 
alternative dispute resolution procedures were used, or why these 
procedures were not used; and
    (2) Whether the Regional Entity believes that alternative dispute 
resolution under the Commission's supervision could successfully 
resolve the disputes regarding the terms of the delegation agreement.

Sec.  39.9  Enforcement of Commission Rules and Orders.

    (a) The Commission may take such action as is necessary and 
appropriate against the Electric Reliability Organization or a Regional 
Entity to ensure compliance with a Reliability Standard or any 
Commission order affecting the Electric Reliability Organization or a 
Regional Entity, including, but not limited to:
    (1) After notice and opportunity for hearing, imposition of civil 
penalties under the Federal Power Act.
    (2) After notice and opportunity for hearing, suspension or 
decertification of the Commission's certification to be the Electric 
Reliability Organization.
    (3) After notice and opportunity for hearing, suspension or 
rescission of the Commission's approval of an agreement to delegate 
certain Electric Reliability Organization authorities to a Regional 
Entity.
    (b) The Commission may periodically audit the Electric Reliability 
Organization's performance under this part.

Sec.  39.10  Changes to an Electric Reliability Organization Rule or 
Regional Entity Rule.

    (a) The Electric Reliability Organization shall file with the 
Commission for approval any proposed Electric Reliability Organization 
Rule or Rule change. A Regional Entity shall submit a Regional Entity 
Rule or Rule change to the Electric Reliability Organization and, if 
approved by the Electric Reliability Organization, the Electric 
Reliability Organization shall file the proposed Regional Entity Rule 
or Rule change with the Commission for approval. Any filing by the 
Electric Reliability Organization shall be accompanied by an 
explanation of the basis and purpose for the Rule or Rule change, 
together with a description of the proceedings conducted by the 
Electric Reliability Organization or Regional Entity to develop the 
proposal.
    (b) The Commission, upon its own motion or upon complaint, may 
propose a change to an Electric Reliability Organization Rule or 
Regional Entity Rule.
    (c) A proposed Electric Reliability Organization Rule or Rule 
change or Regional Entity Rule or Rule change shall take effect upon a 
finding by the Commission, after notice and opportunity for public 
comment, that the change is just, reasonable, not unduly discriminatory 
or preferential, is in the public interest, and satisfies the 
requirements of Sec.  39.3.

Sec.  39.11  Reliability reports.

    (a) The Electric Reliability Organization shall conduct assessments 
as determined by the Commission of the reliability of the Bulk-Power 
System in North America and provide a report to the Commission and 
provide subsequent reports of the same to the Commission.
    (b) The Electric Reliability Organization shall conduct assessments 
of the adequacy of the Bulk-Power System in North America and report 
its findings to the Commission, the Secretary of Energy, each Regional 
Entity, and each Regional Advisory Body annually or more frequently if 
so ordered by the Commission.

Sec.  39.12  Review of state action.

    (a) Nothing in this section shall be construed to preempt any 
authority of any state to take action to ensure the safety, adequacy, 
and reliability of electric service within that state, as long as such 
action is not inconsistent with any Reliability Standard, except that 
the State of New York may establish rules that result in greater 
reliability within that state, as long as such action does not result 
in lesser reliability outside the state than that provided by the 
Reliability Standards.
    (b) Where a state takes action to ensure the safety, adequacy, or 
reliability of electric service, the Electric Reliability Organization, 
a Regional Entity or other affected person may apply to the Commission 
for a determination of consistency of the state action with a 
Reliability Standard.
    (1) The application shall:
    (i) Identify the state action;
    (ii) Identify the Reliability Standard with which the state action 
is alleged to be inconsistent;
    (iii) State the basis for the allegation that the state action is 
inconsistent with the Reliability Standard; and
    (iv) Be served on the relevant state agency and the Electric 
Reliability Organization, concurrent with its filing with the 
Commission.
    (2) Within ninety (90) days of the application of the Electric 
Reliability Organization, the Regional Entity, or other affected 
person, and after notice and opportunity for public comment, the 
Commission will issue a final order determining whether the state 
action is inconsistent with a Reliability Standard, taking into 
consideration any recommendation of the Electric Reliability 
Organization and the state.
    (c) The Commission, after consultation with the Electric 
Reliability Organization and the state taking action, may stay the 
effectiveness of the state action, pending the Commission's issuance of 
a final order.

Sec.  39.13  Regional Advisory Bodies.

    (a) The Commission will establish a Regional Advisory Body on the 
petition of at least two-thirds of the states within a region that have 
more than one-half of their electric load served within the region.
    (b) A petition to establish a Regional Advisory Body shall include 
a statement that the Regional Advisory Body is composed of one member 
from each participating state in the region, appointed by the governor 
of each state, and may include representatives of agencies, states and 
provinces outside the United States.
    (c) A Regional Advisory Body established by the Commission may 
provide advice to the Electric Reliability Organization or a Regional 
Entity or the Commission regarding:
    (1) The governance of an existing or proposed Regional Entity 
within the same region;
    (2) Whether a Reliability Standard proposed to apply within the 
region is just, reasonable, not unduly discriminatory or preferential, 
and in the public interest;

[[Page 8742]]

    (3) Whether fees for all activities under this part proposed to be 
assessed within the region are just, reasonable, not unduly 
discriminatory or preferential, and in the public interest; and
    (4) Any other responsibilities requested by the Commission.
    (d) The Commission may give deference to the advice of a Regional 
Advisory Body established by the Commission that is organized on an 
Interconnection-wide basis.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

                         Appendix A.--Commenters
------------------------------------------------------------------------
         Abbreviation                          Commenter
------------------------------------------------------------------------
AEP..........................  American Electric Power Service Corp.
Alberta......................  Alberta Department of Energy; Alberta
                                Utilities and Energy Board; Alberta
                                Electric System Operator.
Alcoa........................  Alcoa, Inc. and Alcoa Power Generating
                                Company.
Allegheny....................  Allegheny Power and Allegheny Energy
                                Supply Company, LLC.
Ameren.......................  Ameren Services Company.
American Transmission........  American Transmission Company, LLC.
APPA.........................  American Public Power Association.
AWEA.........................  American Wind Energy Association.
BCTC.........................  British Columbia Transmission
                                Corporation.
California Board.............  California Electricity Oversight Board.
California Commission........  Public Utilities Commission of the State
                                of California.
California DWR...............  California Department of Water Resources
                                State Water Project.
California ISO...............  California Independent System Operator
                                Corporation.
CEA..........................  Canadian Electricity Association.
Centerpoint..................  Centerpoint Energy Houston Electric, LLC.
Chelan County................  Chelan County Public Utility District.
Cinergy......................  Cinergy Services, Inc.
City of San Antonio..........  City of San Antonio, City Public Service
                                Board.
City of Seattle..............  City of Seattle, Washington.
City Utilities Springfield...  City Utilities of Springfield, MO.
CREPC........................  Committee On Regional Electric Power
                                Cooperation.
Dairyland....................  Dairyland Power Cooperative.
Detroit Edison...............  The Detroit Edison Company.
DOE..........................  United States Department of Energy.
Dominion Power...............  Virginia Electric and Power Company.
EEI..........................  Edison Electric Institute.
ELCON........................  Electricity Consumers Resource Council,
                                American Iron and Steel Institute,
                                American Chemistry Council, Council of
                                Industrial Boiler Owners, Portland
                                Cement Association.
Empire District Electric.....  Empire District Electric Company.
Entergy......................  Entergy Services, Inc.
EPSA.........................  Electric Power Supply Association.
ERCOT........................  Electric Reliability Council Of Texas.
Exelon.......................  Exelon Corporation.
FirstEnergy..................  FirstEnergy Service Company.
Florida Commission...........  Florida Public Service Commission.
FPT Group....................  Canadian Federal-Provincial-Territorial
                                Assistant Deputy Minister Electricity
                                Working Group.
FRCC.........................  Florida Reliability Coordinating Council.
Hydro One....................  Hydro One Networks Inc.
Hydro-Qu[eacute]bec..........  Hydro-Qu[eacute]bec-TransEn[eacute]rgie.
IEEE.........................  Institute of Electrical and Electronics
                                Engineers--USA.
Indianapolis P&L.............  Indianapolis Power & Light Company.
International Transmission...  International Transmission Company.
International Transmission     International Transmission Company and
 and Michigan Electric.         Michigan Electric Transmission Company,
                                LLC, jointly.
ISO New England..............  ISO New England Inc.
ISO/RTO Council..............  The ISO/RTO Council.
Kansas City P&L..............  Kansas City Power & Light Company.
Kentucky PSC.................  Kentucky Public Service Commission.
LADWP........................  City of Los Angeles Department of Water
                                and Power.
LG&E.........................  LG&E Energy LLC.
Manitoba.....................  Public Utilities Board of Manitoba.
Massachusetts Commission.....  Massachusetts Department of
                                Telecommunications and Energy.
Michigan Electric............  Michigan Electric Transmission Company,
                                LLC.
MidAmerican..................  MidAmerican Energy Company.
MISO.........................  Midwest Independent Transmission System
                                Operator, Inc.
MISO Owners..................  Midwest ISO Transmission Owners.
Missouri Commission..........  Missouri Public Service Commission.
MRO..........................  Midwest Reliability Organization.
NARUC........................  National Association of Regulatory
                                Utility Commissioners.
NASUCA.......................  The National Association of State Utility
                                Consumer Advocates.
National Energy Board........  National Energy Board of Canada.
National Grid................  National Grid USA.
NE Pool Participants.........  New England Power Pool Participants
                                Committee.
NEMA.........................  National Electrical Manufacturers
                                Association.

[[Page 8743]]

NERC.........................  North American Electric Reliability
                                Council.
New York Commission..........  New York State Public Service Commission.
New York Companies...........  Central Hudson Gas & Electric
                                Corporation; Consolidated Edison Company
                                of New York, Inc.; LIPA; New York Power
                                Authority; New York State Electric & Gas
                                Corporation; Orange and Rockland
                                Utilities, Inc.; Rochester Gas and
                                Electric Corporation.
New York ISO.................  New York Independent System Operator,
                                Inc.
NiSource.....................  NiSource Inc.
North Carolina Commission....  North Carolina Utilities Commission.
Northeast Utilities..........  Northeast Utilities Service Company.
Northern Maine Entities......  Northern Maine Independent System
                                Administrator, Inc., Maine Public
                                Service Company, Eastern Maine Electric
                                Cooperative, Inc.
Nova Scotia Board............  Nova Scotia Utility and Review Board.
NPCC.........................  Northeast Power Coordinating Council.
NRECA........................  National Rural Electric Cooperative
                                Association.
NYSRC........................  New York State Reliability Council.
Ohio Commission..............  Public Utilities Commission of Ohio.
Oklahoma Commission..........  Oklahoma Corporation Commission.
Old Dominion.................  Old Dominion Electric Cooperative.
Ontario IESO.................  Ontario Independent Electricity System
                                Operator.
PacifiCorp...................  PacifiCorp.
PG&E.........................  Pacific Gas & Electric Company.
PJM..........................  PJM Interconnection, L.L.C.
Portland GE..................  Portland General Electric Company.
Progress Energy..............  Progress Energy, Inc.
PSEG Companies...............  Public Service Electric & Gas Company,
                                PSEG Energy Resources & Trade LLC, PSEG
                                Power LLC.
PSNM-TNPC....................  Public Service Company of New Mexico,
                                Texas-New Mexico Power Company.
Robert Thomas................  Robert J. Thomas, Professor of Electrical
                                and Computer Engineering at Cornell
                                University.
Santa Clara..................  City of Santa Clara dba Silicon Valley
                                Power.
Santee Cooper................  South Carolina Public Service Authority.
SERC.........................  Southeastern Electric Reliability
                                Council, Inc.
Siemens......................  Siemens Power Transmission and
                                Distribution.
SMA..........................  Steel Manufacturers Association.
SMUD.........................  Sacramento Municipal Utility District.
SoCalEd......................  Southern California Edison Company.
South Carolina E&G...........  South Carolina Electric & Gas Company.
Southern.....................  Southern Company Services, Inc.
SPP..........................  Southwest Power Pool.
TANC.........................  Transmission Agency of Northern
                                California.
TAPS.........................  Transmission Access Policy Study Group.
Texas Commission.............  Public Utilities Commission of Texas.
Trexco.......................  Trexco, LLC.
TVA..........................  Tennessee Valley Authority.
WECC.........................  Western Electricity Coordinating Council.
WestConnect..................  WestConnect Public Utilities.
Western Governments..........  The Council Of State Governments--West.
Western Governors............  Western Governors' Association.
Wisconsin Electric...........  Wisconsin Electric Power Company.
Xcel Energy..................  Xcel Energy Services, Inc.
------------------------------------------------------------------------

Appendix B

Participants/Filed Statements on November 18, 2005 Technical 
Conference

American Public Power Association (APPA)
Edison Electric Institute (EEI)
Electric Reliability Council of Texas (ERCOT)
Florida Reliability Coordinating Council (FRCC)
Institute of Electrical and Electronics Engineers, Inc.
Midwest Reliability Organization (MRO)
North American Electric Reliability Council (NERC)
Northeast Power Coordinating Council (NPCC)
United States Nuclear Regulatory Commission (NRC)
National Rural Electric Cooperative Association (NRECA)
New York State Reliability Council (NYSRC)
Ontario Independent Electricity System Operator (Ontario IESO)
Pennsylvania-New Jersey-Maryland Interconnection, L.L.C. (PJM)
ReliabilityFirst Corporation (RFC)
Southeastern Electric Reliability Council, Inc. (SERC)
Southwest Power Pool (SPP)
Tennessee Valley Authority (TVA)
Western Electricity Coordinating Council (WECC)

[[Page 8744]]

Participants/Filed Statements on the December 9, 2005 Technical 
Conference

Alberta Department of Energy (Alberta)
Edison Electric Institute (EEI)
Electricity Consumers Resource Council (ELCON)
Electric Power Supply Association (EPSA)
Florida Public Service Commission (FPSC)
ISO/RTO Council
Maryland Public Service Commission, National Association of 
Regulatory Utility Commissioners (NARUC)
Midwest Reliability Organization (MRO)
North American Energy Standards Board (NAESB)
National Association of Securities Dealers (NASD)
National Association of State Utility Consumer Advocates (NASUCA)
North American Electric Reliability Council (NERC)
United States Nuclear Regulatory Commission (NRC)
Natural Resources Canada (NRCan)
Organization of MISO States (OMS)
Western Electricity Coordinating Council (WECC)
Western Governor's Association (WGA)
Hydro One
Institute of Nuclear Power Operations (INPO)
Securities and Exchange Commission (SEC)

[FR Doc. 06-1227 Filed 2-16-06; 8:45 am]

BILLING CODE 6717-01-U