Implementing the ERO Status Update

1. Implementing the EROStatus Update Cherie Broadrick Manager of Regional Compliance Program Oversight February 13, 2007

2. 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

3. ERO Implementation – Compliance • Aug. 2005: Energy Policy Act • Feb. 2006: FERC Implementing Rule • April 2006: NERC ERO Application Filing NERC Standards Filing • July 2006: ERO Certification Order • Oct. 2006: NERC Compliance Filing FERC Standards NOPR Budget Approval Order • Nov. 2006 Uniform Compliance Program Filing Regional Delegation Agreements Filing • Jan. 2007 Standards NOPR Comments Filings NERC Non-Governance Order • Summer 2007 – Go live…

4. Standards Establish the Basis Established by the Industry ANSI-accredited process Ballot Pools Standards Requestors StandardsProcess Manager Elected Standards Committee SAR & Standard Drafting Teams

5. What Does the NOPR Propose? • Approve 87 standards for enforcement in the U.S. by June 2007 • Of those, direct improvements to 62 through the standards process • Hold 24 as pending further information • Regional “fill-in-the-blank” standards • Expect compliance as good utility practice • Can require reporting of reliability data • Set priorities and timelines, with flexibility

6. Compliance EnforcementIndependent Monitoring • Strong ERO oversight of regional implementation • Disclosure of all violations and compliance actions • Applies to all bulk power system owners, operators, and users • Registration required

7. Compliance program independence Including independence of staff making compliance determinations Monitor designated standards for all entities Timely reporting of information and all violations Single process to contest finding and appeal decision Compliance Program Essential Features

8. Topics • Organization Registration • Identifying who will be monitored for compliance with reliability standards • Craig Lawrence – NERC Manager of Organization Registration, Certification, and Compliance Monitoring • Consequences of noncompliance • Penalties & Sanctions • Tim Kucey – Manager of Enforcement and Mitigation

9. Organization Registration Craig Lawrence Manager – Organization Registration

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

11. Functional Responsibilities 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

12. Owners, Operators, and Users • Energy Policy Act: • All owners, operators, and users of the bulk power system shall comply with reliability standards • ERO Implementing Rule • All entities subject to the Commission’s reliability jurisdiction… (owners, operators, and users of the bulk power system) shall comply with applicable reliability standards …

13. Entity Registration • FERC rule requires all owners, operators, and users of the bulk power system in the U.S. to • comply with reliability standards • register with ERO according to ERO rules • provide requested information to regions and ERO • 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

14. ERO Organization Registration • Registration process • Entities may register directly • Regions or NERC may add to the registration list • Others may nominate those with material impact 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

15. ERO Certification Order • ¶ 714 • (W)e urge NERC and the Regional Entities to be as aggressive as practical in completing the preliminary nonbinding compliance registry prior to the Commission’s approval of any of the proposed Reliability Standards.

16. Next Steps • Regions continue efforts to complete preliminary registration • Criteria from “Statement of Compliance Registry Criteria (Revision 3)” which is posted on the NERC Web site under Organizational Registration

17. 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

18. Functional Types Required to Register

19. 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 • Refer to the Statement of Compliance Registration Criteria (Revision 3) for specific requirements

20. Load Serving Entity Exceptions for Registration • 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.

21. Distribution Provider Exceptions for Registration • 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.

22. Generator Owner/Operator Exceptions for Registration • 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.

23. 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 of the interconnected transmission grid; or • is an entity that DOES NOT own a transmission element below 100 kV associated with a facility that is included on a critical facilities list 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.

24. Generic Exception to the Registration Criteria • 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.

25. Joint Registration Organization/JRO Member Registration • A JRO (or similar organization) may register as a Registered Entity on behalf of one or more its members. • A member of a JRO may choose to register as a separate Registered Entity • Both the JRO and its member may choose to register for the same function as a Registered Entity (Joint Registration). • JROs 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 3)

26. Compliance Registration Timeline

27. Compliance Registration Timeline (cont.)

28. Questions Craig P. LawrenceManager of Organization Registration, Certification, and Compliance MonitoringNorth American Electric Reliability Council116-390 Village BoulevardPrinceton, New Jersey 08540609-452-8060

29. Penalties & Sanctions Tim Kucey Manager – Enforcement

30. NERC Pre-ERO Penalties & Penalty Matrix • Simple Approach • All violations treated equally • Provided for size adjustment • Used fixed amounts& multipliers • Penalties simulated • Letters of noncompliance to violators – no $$ collected (except where agreed to by contract; e.g. WECC RMS) • No Public disclosure (until after February 2004)

31. Sanctioning in the new ERO world? • No more anonymity or simulating; by statute: • Monetary penalties & other sanctioning assessed and enforced for violations of mandatory standards • Public disclosure of all violations, violators and sanctioning • Abandon NERC pre-ERO Penalty Matrix: no longer applicable; can no longer be used • Adopt policies, procedures and processes of new NERC-developed successor document: “Sanctions Guidelines of the North American Electric Reliability Corporation” • Latest version attached and filed as Appendix 4 of NERC Non-Governance Compliance filing dated October 10, 2006 • More complex approach, by necessity

32. New NERC Sanctions Guidelines - Influences • FERC Policy Statement on Enforcement • Issued October 20, 2005 (Docket No. PL06-1-000) • Post Legislation Steering Committee • Penalties and Sanctions Task Group • Standards Committee • Relative risk of standards - “Risk Factors” • Other self-regulatory organizations • NASD • CBOE • NYSE

33. ERO Penalties & Sanctions – Some Basics • Intended Purpose: Promote compliance with mandatory reliability standards • Necessary and consistent element of ERO monitoring & enforcementprogram • “Reward” positive actions “Punish” negative actions or inaction • No pre-determined or fixed sanctions or penalty amounts • Consider financial ability to pay • non-monetary sanctions where appropriate to reflect entity’s circumstances, structure, financial position, etc.

34. ERO Penalties & Sanctions - More Basics • Independence from: • Other NERC bodies (e.g., committees) • Other NERC processes (e.g., standards) • Compliance audit teams • Regional variance • Authorized and accountable to jurisdictional authorities (e.g. FERC), not the NERC membership or industry

35. New NERC Sanctions Guidelines • Modeled heavily on FERC’s policy statement • Framework to determine penalties and sanctions • Filed with and approved by FERC • Used by all regions to determine penalty or sanction • Reward • unsolicited self-reporting, quality compliance programs, voluntary corrective actions, etc. • Punish • repeat violation, evasion, inaction, unwarranted intentional violations (e.g., economic choice), etc. • Provide flexibility to consider all relevant facts regarding the violation by the violator

36. New NERC Sanction Guidelines… • Fundamental Principles to Note… • Required activity of the ERO CMEP; penalty &/or other sanctioning will be determined for every violation… • Penalties and sanctions are to bear reasonable relation to the seriousness of the violation to the reliability of the BPS • No fixed (e.g., $$ or $/MW, etc.) amounts • “Size” and asset mix, etc., can matter… • No penalty is to be inconsequential to the violator to whom it is assessed… • Penalties may be reduced or eliminatedthrough positive actions

37. Penalty Determination Process • Determination of a penalty starts with “Base Penalty Amount Table” • Consider “Violation Risk Factor” of the requirement violated • Lower, Medium, or High risk factor set through NERC Standards development process • Consider “Violation Severity Level” determined for the violation • Lower, Moderate, High, or Severe severity level

38. Base Penalty Amount Table (Proposed) Note: Amounts listed in the Table are generally “per incident”; however, in the U.S NERC is authorized to assess them on a “per day” basis where warranted.

39. Penalty Determination Process… • Set Base Penalty Amount(BPA) • Consequences to the BPS of the violation? • First time violation? • Set within appropriate range listedon the BPA table • Adjust BPA for relevant facts • Aggravating factors – increase penalty • Mitigating factors – reduce or eliminate penalty • Other (e.g., extenuating circumstances) • Limits set by governing statutes, not the amounts listed in BPA Table • Consider “ability to pay” (if entity requests) • Finalize penalty

40. Penalty Determination Process… • Mitigating and Aggravating Factors considered:(Standard list; Not Exclusive) • Time horizon of the violation (e.g. real-time or other) • Repetitive violations and the violator’s compliance history • Failure or refusal to comply with compliance directives issued by the ERO or an authorized regional entity • Self-disclosure and voluntary corrective action • Degree and quality of cooperation in the investigation of the violation and in any remedial action directed for the violation • Presence and quality of the violator’s compliance program • Any attempt by the violator at concealment of the violation • Non-justified intentional violations • Extenuating circumstances

41. How Will Sanctioning Be Carried Out? • Regional Entities and RE Staff (General) • RE Staff determine and propose appropriate sanctioning for violation • Entity can contest in a regional hearing • Penalties may be appealed to NERC(and beyond to FERC and the courts…) • Ongoing NERC review of REs’sanctioning activities • Uniformity of application & outcomes • NERC as ERO files “Notice of Penalty” • FERC accepts or adjusts penalty • Effective 31 days after filing • Remedial actions may be applied immediately to preserve reliability

42. Alternatives? • Negotiated Settlement • Entity, the regional entity and NERC may negotiate a settlement that is mutually-acceptable to all three parties • Voluntary option available to all Entities • Initiated by Entity; non-obligatory to NERC or the RE • Settlement reached will be filed and must be accepted by appropriate jurisdictional authority (e.g. FERC) • Public disclosure of violation, violator identity and settlement terms • Settlement includes mitigation and remediation plans to address violation(s) • No regional contest or appeal to NERC available if settlement is reached and approved

43. Other Considerations? • Mitigation Plan • What is the plan to remedy the situation or prevent recurrence of the incident? • How to mitigate the effects or risk to the reliability of the BPS while the plan is being implemented? • Mandatory (or else further violations and sanctioning…) • Must be formal, filed and accepted • Include completion date • Identify milestones • List primary and other authorized contacts • Determination of additional compliance violations and sanctioning continues while the plan is being implemented • Abeyance of further violation(s) and associated sanctioning during implementation of the plan • Assessment of accumulated violations and associated sanctioning if remediation not completed in accordance with approved plan (e.g. completion date)

44. Implementation Schedule • October 2006 • Revised Sanction Guidelines issued and filed with FERC • Today • NERC and regions are determining penalties using latest filed version of theSanction Guidelines (practice only right now…) • “Summer 2007” (Proposed by FERC in Standards NOPR) • Go live - penalty assessments and mandatory mitigation plans begin

45. Questions Tim KuceyManager of Enforcement and MitigationNorth American Electric Reliability Council116-390 Village BoulevardPrinceton, New Jersey 08540609-452-8060