Mandatory Reliability Rules Implementing the Electric Reliability Organization

1. Mandatory Reliability RulesImplementingtheElectric Reliability Organization David W. Hilt Vice President & Director of Compliance APPA Reliability Symposium January 10, 2007

2. U.S. Energy Policy Act of 2005 Reliability Legislation • One industry self-regulatory ERO • FERC oversight • Delegates authority to set and enforce mandatory standards to ERO • ERO delegates authority to regional entities • Standards apply to all owners, operators and users of bulk power system • Independent governance and Compliance Program

3. Canada NEB, Alberta, British Columbia, Manitoba, Ontario, New Brunswick, Nova Scotia, Quebec, and Saskatchewan United States Federal Energy Regulatory Commission Mexico Comision Reguladora de Energia Reliability Standards Government Oversight Compliance Enforcement Electric Reliability Organization Regional Entities Reliability Assessment Other ERO Members Bulk Power System Owners, Operators, Users Electric Reliability Organization Overview

4. ERO Implementation – So Far • Aug. 2005 Energy Policy Act • Feb. 2006 FERC Implementing Rule • April 2006 NERC Application • April 2006 Standards Filing • July 2006 ERO Certification • Oct. 2006 Compliance Filing • Oct. 2006 Standards NOPR • Oct. 2006 Budget Approval • Nov. 2006 Uniform Compliance Program • Nov. 2006 Regional Delegation Agreements • Jan. 2007 Standards NOPR Response

5. Compliance Program Design Program Design • Modeled after otherindustry based self regulatoryorganizations • Regional implementation • Regional entities monitor responsible entities • NERC oversight role • Audit regional implementation • Measure regional compliance • Report to governmental andregulatory authorities(US, Canada and Mexico)

6. Compliance Enforcement Program The Program So Far • Since its beginning in 1999 • Monitor compliance with simulated enforcement actions (WECC exception) • Letters to non-compliant entities • Approximately 350 violations identified annually • Non-compliance identified corrective actions taken • Quarterly & Annual reports developed and posted at www.nerc.com

7. Compliance Monitoring Methods Compliance Monitoring • Periodic reporting • Self-certification • Exception reporting • Investigations • Random spot checking or audits • Compliance audits • Self Reporting

8. Compliance Monitoring and Enforcement Program • Single audit program for rigorous audit activities • Prompt reporting • Confidentiality provisions • ERO files summary reports to FERC • ERO or region imposes fair penalties and sanctions • Single appeals process

9. Penalties & Sanctions • FERC Policy Statement on Enforcement • Issued October 20, 2005 (Docket No. PL06-1-000) • Post Legislation Steering Committee • Penalties and Sanctions Task Group • Other efforts underway • Relative risk of standard – BOT direction • Other self-regulatory organizations • NASD • CBOE • NYSE

10. NERC Sanction Guidelines ERO Sanction Guidelines • Comparable to levels of threat to reliability • Promotes compliance with standards • Rewards self-reporting & voluntary corrective actions • Flexible to adapt to all relevant facts surrounding the violation • Consistent application of guidelines • Meets FERC policy statement

11. How Will Penalties Be Applied • Penalties will be applied by the Regional Entity • Staff will determine initial penalty or sanction • Regions may reach a settlement – must be filed with FERC • Penalties may be appealed • Once finalized NERC files “notice of penalty” • Penalties may be adjusted by FERC • Penalties become effective 31 days after filing • Remedial actions may be applied immediately to preserve reliability

12. Schedule for Implementation • Approval of Standards • Penalties apply to some entities • Standards NOPR Response • NERC proposed no actual penalties until January 1, 2008

13. Organization Registration Who Must Comply? • Any entity responsible for any part of bulk electric system reliability • Historically defined as control areas and reliability coordinators • Functional entities • Aligns reliability requirements with functional unbundling

14. Registered In 2005 Reliability Coordinator Balancing Authority Transmission Operator Generation Operator Generation Owner Transmission Owner Planning Authority Load Serving Entity Distribution Provider Purchasing Selling Entity Regional Reliability Organization Reserve Sharing Group Transmission Planner Transmission Service Provider Resource Planner Functional Responsibilities

15. Owners, Operators, and Users • Energy Policy Act: • All users, owners, and operators of the bulk-power system shall comply with reliability standards • FERC Rule • All entities subject to the Commission’s reliability jurisdiction… (users, owners, and operators of the bulk-power system) shall comply with applicable Reliability Standards … • Who are they?

16. Registration Selection Criteria Section II Functional Type Definitions Section I Owner, Operator, or User of the BPS Section III Smaller Entity De-selection Criteria Section IV Joint Action Agencies

17. Organization Registration • Registration process • Entities may register directly • Regions or NERC may add to the registration list • Others may nominate for registration • Entity may challenge being placed on the compliance registry • Must demonstrate why it is not a bulk power system owner, operator, or user

18. Entity Registration • Non-binding Registration List • First draft complete and under review • Registration completed once FERC approves NERC standards and rules on their applicability • Notices will be provided to entities beingregistered in the compliance registry

19. Next Steps • Regions continue efforts to complete preliminary registration • Criteria from “Statement of Compliance Registry Criteria (Revision 2)” • Posted on the NERC Web site

20. Functional Types Required to Register

21. Exceptions to the Registration Criteria • Certain functional Entities are allowed exceptions to the registration requirements • Load Serving Entities • Distribution Providers • Generator Owner/Operators • Transmission Owners • Statement of Compliance Registration Criteria (Revision 2) contaians specific requirements

22. Load Serving Entity Exceptions • The LSE • has a peak load that is < 25 MW or; • is NOT designated as the responsible entity for facilities that are part of a required UFLS or; • is NOT designated as the responsible entity for facilities that are part of a required UVLS.

23. Distribution Provider Exceptions • The DP • is a system serving a peak load that is < 25 MW or; • is NOT designated as the responsible entity for facilities that are part of a required UFLS or UVLS; • is NOT designated as the responsible entity for facilities that are part of a required Special Protection System or Transmission Protection System.

24. Generator Owner/Operator Exceptions • The GO/GOP is • an individual generating unit < 20 MVA or; • a generating plant/facility < 75 MVA or; • a generator, regardless of size, that is NOT a blackstart unit material to and designated as part of a TO entity’s restoration plan, or; • a generator, regardless of size, that is NOT material to the reliability of the bulk power system.

25. Transmission Owner Exceptions • The TO • is an entity that DOES NOT own an integrated transmission element 100 kV and above, or lower voltage necessary to provide for the reliable operation; or • is an entity that DOES NOT own a transmission element below 100 kV on a critical facilities list that is defined by the regional entity/CBRE, or; • DOES NOT have Ownership of radial transmission facilities where NERC Reliability Standards are applicable (e.g. vegetation management, system protection maintenance and testing) are included in this definition.

26. Generic Exception • An Entity will not be registered based on these criteria if effective control and responsibility for maintenance and operation of the designated function(s) has been transferred by acceptable contract to another entity, such as a load-serving entity, G&T cooperative or municipal joint action agency, etc.]

27. Joint Action Agencies & Members • A JAA (or similar organization) may register as a Registered Entity on behalf of one or more its members. • A member of a JAA may choose to register as a separate Registered Entity • Both the JAA and its member may choose to register for the same function as a Registered Entity. JAAs and Members who register in one of the above manners must comply with Registered Entity Compliance Reporting Requirements of Statement of Compliance Registration Criteria (Revision 2)

28. Questions