Mark E. Hegerle Deputy Director, Reliability Office of Energy Markets & Reliability

1. Preparing for the Next Storm: EPAct 2005 & Reliability Mark E. Hegerle Deputy Director, Reliability Office of Energy Markets & Reliability Federal Energy Regulatory Commission EUCI: Disaster Management and Cost Recovery New Orleans, LA June 6, 2006

2. The Impacts of Katrina and Rita • Unique Destruction (scope and magnitude) • Not Unique Frequency – hurricanes, etc. aren’t going away • “Unnatural” disasters are also part of today’s unfortunate reality

3. FERC’s Response • Temporarily waived rules to restore service and bring more natural gas to the Gulf area (EM06-5) • Waived certain standards of conduct record-keeping requirements (RM01-10/EY06-6) • Permitted Louisiana Municipal Gas Authority to waive penalties/fees/charges incurred as a result of the emergency (RP05-666) • Granted permission to reroute natural gas shut in by the hurricanes (EM06-1) • Relaxed rules and allowed electric utilities to take necessary steps to keep systems operating (EY05-14) • Extended filing deadlines for Entergy (EY05-13) • Maintained vigilant oversight of natural gas markets

4. Long-Term Needs:A Reliable Grid • A reliable grid is better positioned to withstand and rebound from disasters • The more robust the grid, the quicker the recovery • EPAct 2005’s requirement for mandatory and enforceable reliability standards is critical to making this grid a reality

5. Implemention of EPAct 2005 • The Final Rule implements the reliability provisions of EPAct in new Section 215 of the Federal Power Act. • Congress directed the development of mandatory, Commission-approved, enforceable reliability standards. • All users owners, and operators of the bulk power system must obey these mandatory reliability standards. • FERC issued its reliability regulations on February 3rd. • FERC established a process to certify an Electric Reliability Organization—the ERO. • FERC’s regulations provide for reliability standards that are developed by industry and approved by FERC. • The ERO may delegate its enforcement responsibilities to a regional entity.

6. International Coordination • EPAct “urges” the President to negotiate agreements with Canada and Mexico to provide for both effective compliance with reliability standards and for the effectiveness of the ERO. • The rule “encourages” the ERO candidate to seek recognition in Canada and Mexico while pursuing Commission certification. • The rule directs the ERO candidate to propose an approach to international coordination of standards regarding remands and development. • The rule acknowledges that the Commission will consider the time needed for Canadian and Mexican authorities to act when setting a remand deadline.

7. ERO Certification • An ERO applicant must demonstrate that: • it has the experience and ability to develop and enforce reliability standards; • it has procedural rules that meet statutory and regulatory criteria, e.g., for fairness and impartiality in in governance, processes, enforcement practices, and assessment of fees.

8. Becoming a Regional Entity • To become a regional entity with enforcement authority, a party must sign a delegation agreement with the ERO, and FERC must approve the agreement. • Approval has statutory criteria. These are similar to criteria for ERO approval, plus special criteria regarding governance, effectiveness, and efficiency. • The ERO and the Commission must “rebuttably presume” that a proposal from a party that spans an entire interconnection is effective and efficient. • If good faith negotiations with the ERO fail, a party seeking to be a regional entity may submit a delegation agreement directly to the Commission.

9. Special Delegation Provisions • In its application to be the ERO, the applicant must submit a “pro forma” delegation agreement with all the common core elements of all delegation agreements. • The ERO must ensure that a regional entity’s program for enforcing reliability standards is—and remains—fair and effective. • The Commission will assess the ERO’s oversight of a regional entity and may also oversee directly the regional entity’s conduct of its statutory functions. • Since the delegation agreement must include the regional entity’s procedural rules, any change in these rules must be approved first by the ERO, then by FERC.

10. ERO & Regional Entity Funding • In its application to FERC, the ERO must propose a detailed funding mechanism. • Annually, the Commission will approve funding for the ERO’s statutory functions. • This includes ERO funding for the statutory functions that the ERO delegates to the regional entities. • The ERO will approve regional entity budgets for statutory activities and include these in its own budget. • The ERO must submit to FERC for approval an annual business plan and budget for itself and regional entities. • FERC will financially audit the ERO—and the ERO audit the regional entities—to ensure that this mandatory funding is used effectively for statutory functions.

11. Commission Orders to the ERO • Commission may periodically audit the ERO to ensure its compliance with the statute, the regulations, and FERC orders. Normally, the ERO will audit regional entities. • The Commission may order the ERO or a regional entity to fulfill its responsibilities under the reliability law. • The Commission may take action against the ERO or regional entity for non-compliance with its orders. • Actions may include remedial actions and improvement programs and, in the extreme, civil penalties, suspension of ERO certification, and decertification.

12. Reliability Standards • The ERO must use a fair process to develop a reliability standard for proposal to the Commission. • A reliability standard is not enforceable under the law until FERC approves it. • FERC may approve a proposed reliability standard if it is just and reasonable, is not unduly discriminatory or preferential, and is in the public interest. • FERC will give due weight to the technical expertise of the ERO—and of a regional entity that spans an entire interconnection if the reliability standard is proposed to apply just to that interconnection. • FERC will not defer to the ERO or a regional entity, however, regarding a proposal’s effect on competition.

13. Regional Differences • Our regulations permit regional differences in reliability standards—as the exception rather than the norm. • A proposal for a difference first goes to the ERO. • The ERO must “rebuttably presume” that a reliability standard proposed by an interconnection-wide regional entity meets the statutory criteria. • If the ERO approves it, the regional difference becomes the ERO’s proposal to FERC. • Commission will generally accept a regional difference if: • it is more stringent than the ERO standard, or • it is needed to accommodate a physical difference in the system • A regional difference approved by FERC is an ERO reliability standard and is kept on file at the ERO.

14. States, Regions, and the ERO • A state may act to ensure the safety, adequacy, or reliability of electric service provided the action is not inconsistent with a reliability standard. • The regulations have a process for dealing with an alleged inconsistency. • States in a region may have FERC establish a regional advisory body to advise the ERO, a regional entity, or FERC on standards, governance and other matters. • FERC may defer to an interconnection-wide regional advisory body. • FERC must establish such a body whenever it satisfies the conditions set out in the law: • Covers 2/3 of the region’s states (>½ state’s load in the region) • Governor appoints one member from each state

15. Enforcement • The regulations require the ERO and each regional entity to have a program for ensuring compliance with the reliability standards by users, owners, and operators. • Each program must provide for audits of compliance, actions to remedy poor compliance, and provisions to investigate alleged violations. • Investigations must follow uniform procedures and provide due process. They are generally not public. • The ERO must report violations promptly to FERC. • A regional entity reports promptly through the ERO. • The Commission has its own independent authority to take any of these and other enforcement actions.

16. Penalties • The ERO or a regional entity may impose a penalty for a violation. It may be either non-monetary or monetary. • The ERO must develop penalty guidelines and follow due process in applying them. • There can be one appeal. The ERO will propose where. • The ERO must file a notice of penalty at FERC. • The alleged violator has 30 days to request Commission review of a violation allegation or of the penalty. Otherwise, the penalty goes into effect on the 31st day without Commission action. • FERC’s review of the allegation or penalty will be public unless disclosure would jeopardize system security.

17. Looking Ahead • The new law is a success for the electric utility industry. • It builds upon industry’s experience and expertise for developing and enforcing electric bulk power system reliability standards. • On April 4, NERC filed its reliability standards and an application to apply for the ERO position. • The Commission has announced it will conduct a review of the reliability standards by the rulemaking process. • An initial staff report was released May 11, 2006