Enforcement and Sanctions

1. Enforcement and Sanctions Presenter Name Presenter Title (Optional) Meeting Title (optional)

2. Violation Reporting Lane Robinson Meeting Title (optional) Date

3. Steps for NERC Violation Reporting • Initial notice of alleged violation is issued within five (5) days. • Proposed sanction or penalty is not required with initial notice. • Notice of alleged violation when issued contains the following: • The reliability standard and requirements allegedly violated • Date and time alleged violation occurred • Facts supporting the alleged violation • Proposed penalty or sanction, if any • Notice that registered entity has 30 days to: • Agree with the alleged violation and submit and implement a mitigation plan • Agree with the alleged violation and submit and implement a mitigation plan, but contest the proposed penalty or sanction • Contest both the alleged violation and proposed penalty or sanction • Required procedures to submit the registered entity’s mitigation plan • NERC shall forward a copy of alleged violation to FERC. • Upon acceptance, the final notice will be issued to the registered entity. Meeting Title (optional) Date

4. NERC Violation Reporting Requirements • Regional entities shall report to NERC, on a confidential basis, any alleged violations of reliability standards regardless of significance, whether verified or still under investigation, within five (5) business days, unless the violation has resulted in or has the potential to result in, a reduced level of reliability to the bulk power system (as provided in Section 408 of the NERC Rules of Procedure), in which cases the regional entity shall notify NERC within forty-eight (48) hours. • Regional entities shall report to NERC at least quarterly the status of the violations of reliability standards, regardless of significance, that have not yet resulted in a final determination of violation or have not completed the hearing process, or for which mitigation activities (including activities being carried out pursuant to a settlement) have not been completed. Meeting Title (optional) Date

5. NERC Violation Reporting Requirements (cont.) • Regional entities shall report to NERC all confirmed violations of reliability standards by registered entities including all penalties, sanctions, mitigation plans and schedules, and settlements within ten (10) business days of each determination. At the same time, regional entities will provide the report to the affected registered entity, accompanied by a notice that the registered entity may provide a statement to NERC to accompany the report when posted by NERC. The registered entity’s statement must be on a company letterhead and include the name, title, and signature of an officer of the registered entity. • NERC will publicly post each report of a confirmed violation, together with any statement submitted by the registered entity, no sooner than five (5) business days after the report is provided by the regional entity to NERC and the registered entity. Meeting Title (optional) Date

6. NERC Violation Reporting Requirements (cont.) • NERC will provide reports quarterly to FERC and the applicable governmental authorities on the status of all alleged and confirmed violations for which mitigation activities have not been completed. NERC will publish public reports quarterly on its website of all confirmed violations of reliability standards during the quarter just completed, with the identity of the violator. Refer to document Uniform Compliance Monitoring and Enforcement Program, Section 8.0, Reporting and Disclosure on the Compliance Monitoring and Enforcement Program section of the NERC website: http://www.nerc.com/~comply/ Meeting Title (optional) Date

7. Mitigation Plans Rashida Williams Meeting Title (optional) Date

8. When are Mitigation Plans Required? • A mitigation plan is required for each item of non-compliance to NERC reliability standards, regardless of how the non-compliance was discovered. For example: • Audits • Self-certifications • Self-reporting • Events • Complaints • A mitigation plan should be submitted for each NERC reliability standard violated. Meeting Title (optional) Date

9. Where to Find Texas RE’s Mitigation Form http://www.ercot.com/mktrules/compliance/tre/enforcement/index.html Meeting Title (optional) Date

10. Contents of Mitigation Plan A mitigation plan must include: • Registered entity's point of contact for the mitigation plan • The NERC reliability standards the mitigation plan will correct • The cause of the violation • The action plan to correct the violation • The action plan to prevent reoccurrence of the violation • The impact of the mitigation plan on the bulk power system reliability • A timetable for completion of the mitigation plan that includes the completion date • Any implementation milestones that are no more than three months apart • A signature by an officer of the registered entity Meeting Title (optional) Date

11. Mitigation Plans Submission • The mitigation plan must be submitted by the registered entity within 30 days after being served the notice of alleged violation • If the registered entity disputes the violation, the mitigation plan must be submitted within 10 business days after issuance of the hearing body’s hearing decision. • The registered entity may choose to submit a mitigation plan while it contests a violation. The submission is not an admission of a violation or appropriateness of a penalty. • Mitigation plans can also be submitted at the same time as self-reports and self-certifications. • Mitigation plans should be submitted to TREMitigation@ercot.com. Meeting Title (optional) Date

12. Accepting Mitigation Plans • Texas RE will accept or reject the mitigation plan within 30 days of receipt. • NERC will approve mitigation plans for violations of NERC reliability standards. • Texas RE will issue a written statement to the registered entity accepting or rejecting the mitigation plan. • If Texas RE rejects the mitigation plan, the registered entity will have the opportunity to submit a revised mitigation plan. Meeting Title (optional) Date

13. Completion of Mitigation Plans • Registered entity must provide to Texas RE quarterly updates on the progress of the mitigation plan. • When the mitigation plan is complete, the registered entity must provide certification of completion including the following: • Must be on company letterhead, • Must be signed by the registered entity’s officer responsible for the mitigation plan, and • Must include the NERC standard and the requirement(s) that mitigation plan addressed. • Texas RE will request data or information to verify that all required actions have been completed if that information is not provided by the registered entity during the certification. • Updates and certification of completions should be sent to TREMitigation@ercot.com. Meeting Title (optional) Date

14. Mitigation Plan Extensions • Texas RE must receive any requests for an extension of any milestone or completion date at least five business days before the original milestone or completion date. • Texas RE may extend a completion for good cause including. • Short assessment periods that are event driven or monthly assessments, and • Construction requirements in the mitigation plan that extend beyond the next assessment period. • Texas RE will notify the registered entity of the acceptance of an extension. • Extension requests should be sent to TREMitigation@ercot.com. Meeting Title (optional) Date

15. Due Process Lane Robinson Meeting Title (optional) Date

16. Regional Appeal/Hearing Process – Who Can Appeal What? • A registered entity may appeal the following: • Alleged violation • Proposed penalty • Both of the above • Remedial action directive • Compliance staff (Texas RE) rejection of registered entity’s proposed mitigation plan • Registered entity must contest the alleged violation in writing signed by an officer or equivalent. Meeting Title (optional) Date

17. Steps to Hearing Process • Texas RE identifies an alleged violation. • Notice of alleged violation (including proposed penalty sent to NERC). • Registered entity accepts or disagrees with alleged violation and/or proposed penalty within 30 days. • For disagreements, Texas RE has 10 days to set up a conference. • If after the conference, the registered entity disagrees with the conference decision, the registered entity has 30 days to decide to enter hearing process. Meeting Title (optional) Date

18. Hearing Process • All formal compliance hearings shall be held before the hearing body, the PUCT. • The PUCT shall issue a final recommendation to the Texas RE Chief Compliance Officer (CCO). • The CCO may accept, reject or modify any recommendation. • The registered entity may appeal any adverse decision to NERC. Refer to the following documentation on the Texas Regional Entity page of ERCOT.com: • Attachment 1 to Exhibit D – Compliance Monitoring and Enforcement Program - Texas Regional Entity Regional Hearing Process • Attachment 2 – Compliance Monitoring and Enforcement Program - Rules of Procedure http://www.ercot.com/mktrules/compliance/tre/index.html Meeting Title (optional) Date

19. Overview of Penalties, Sanctions, and Remedial Actions Lane Robinson Meeting Title (optional) Date

20. Authority – FERC Order 672 • FERC Order 672 provides: • Framework for authority and obligation for enforcement of approved reliability standards • Delegated authority to the ERO (NERC) and to its designees (regional entities) • ERO and designees shall determine and may levy monetary penalties, sanctions, and/or remedial actions. • Texas RE is the regional entity for the ERCOT ISO. Meeting Title (optional) Date

21. Basis for Determination • Foundational documents in the ERO Guidelines Document • FERC Policy Statement on Enforcement issued Oct. 20, 2005 • Docket No. PL06-00 • U.S. Securities and Exchange Commission (SEC) • Release No. 44969 under Act of 1934 • Release No. 1470 under Accounting and Auditing Enforcement • NERC Sanction Guidelines – Regional entities shall follow these guidelines to determine penalties, sanctions, or remedial actions. Refer to document Sanction Guidelines (Appendix 4B, June 7, 2007) on the Compliance Monitoring and Enforcement Program section of the NERC website: http://www.nerc.com/~comply/ Meeting Title (optional) Date

22. Types • Necessary element of NERC compliance program • Promote compliance behavior • Provide deterrence to future incidents, actions, or situations of non-compliance by the violator or others • Implement actions that will promptly correct behavior • Disgorge benefits that may or may have accrued to a violator as a consequence of violating • Visit upon a violator some portion of any damage its violation may or may have visited upon others • Types of penalties • Monetary penalties • Non-monetary sanctions • Remedial actions • Settlements Meeting Title (optional) Date

23. Monetary Penalties – Base Penalty Amount Base penalty amount (BPA) of a monetary penalty will be determined as follows: • Violation risk factor (VRF) – Lower, Medium, High • Violation severity level (VSL) – Lower, Moderate, High, Severe • Time horizon • Real-time operations • Same-day operations • Operations planning • Long-Term planning • Operations assessments and reporting • Other assessments and reporting • Impact assessment • Operation of the bulk system • Potential risk to reliability Meeting Title (optional) Date

24. Adjustment Factors • Application of adjustment factors • Repetitive violations and compliance history • Failure to comply with compliance directives • Self-disclosure and voluntary corrective action • Degree and quality of co-operation • Presence and quality of a compliance program • Concealment • Intentional violations • Extenuating circumstances • Can increase or reduce the penalty Meeting Title (optional) Date

25. Presence of a Compliance Program Some elements of a Compliance Program to be considered: • Was compliance program well documented • Was widely disseminated in the company • Had a named and staffed reliability compliance manager position • Was supervised at a high level in the company • Had independent access to CEO or board • Had independence of operation and management • Was sufficiently resourced • Was fully supported and participated in by senior management • Was being reviewed and modified sufficiently often • Included appropriate and sufficient training for all relevant staff • Included formal, internal self-auditing for compliance on a set periodic basis • Included disciplinary action for employees involved in violations • Included self-assessment and self-enforcement of internal controls to prevent re-occurrence of violations Meeting Title (optional) Date

26. Non-Monetary Sanctions • The imposition of sanctions is not bound to monetary penalties. • Non-monetary sanctions must be applied with the objective of promoting reliability and compliance with the reliability standards. • Non-monetary sanctions may include: • Limitations on activities, functions, or operations; • Placing an entity on a reliability watch list; and • Notification of boards of directors, regulators, and others. Meeting Title (optional) Date

27. Remedial Actions • NERC or the Texas RE may issue remedial action directives to correct compliance with NERC or regional reliability standards and reduce or eliminate threats to the reliability of the bulk power system. • Some examples are as follows: • Specifying operating or planning criteria, limits, or limitations • Requiring specific system studies • Defining operating practices or guidelines • Requiring confirmation of data, practices or procedures through inspection, testing, or other methods • Requiring specific training for personnel • Requiring development of specific operating plans Meeting Title (optional) Date

28. Base Penalty Matrix Meeting Title (optional) Date

29. Maximum Penalty • By FERC Order • Section 316A of the FPA, as amended by the Energy Policy Act of 2005, provides: “any person who violates any provision of Part II of this title or any provision of any rule or order there under shall be subject to a civil penalty of not more than $1,000,000 for each day that such violation continues.” • This is referred to as the “$1,000,000 per day violation” penalty. • Multiple Violations, Same Day, Same Requirement • FERC agreed with NERC that there may be multiple violations of the same requirement that occur on the same day, and that each such violation would be subject to a maximum potential penalty of $1,000,000. Meeting Title (optional) Date

30. Settlements • At any point in the process of determination and levying of a penalty, sanction, or remedial action, an entity found in or being investigated for a violation may request a settlement. • At no point within the processes and procedures, etc., described within the ERO Sanctions Guidelines is the option of settlement not available. • Users should be proactively aware of the prospect of settlement at all times. Meeting Title (optional) Date

31. NERC Compliance Workshop Questions and Answers Meeting Title (optional) Date