NERC Compliance Enforcement Program: 2001-2002 Overview

1. 2002 Compliance Enforcement Program ************************************************* Regional Seminars ERCOT 03/07/02 NERC Compliance Enforcement Program

2. NERC CEP Outline – Regional Seminars • How Did We Do? (2001 Compliance Program) • What Changes Are On-the-Way? (Reporting Change/ Key Activities) • Where Are We Going? (2002 Compliance Program) • What Else Is New? • New NERC Standards Development Process • NERC Functional Model • Questions?

3. NERC Compliance Enforcement Program Background – Overall Program/Process • NERC CEP Is Beginning Its 4th Year. • New Measurements Were Introduced for Field-testing During Each of the 1st, 2nd, and 3rd Years. • New Measures for the 4th Year Have Been Delayed • NO New Standards Will Be Introduced Unless They Have Been through the New Standards Process. • Current Operating Policies Do NOT Support Formal Compliance.

4. How Did We Do? -2001 Compliance Program Major Objectives • Field-tested 30 “New” Planning Measures and 1 “New” Operating Measure • Further Refine the Process • Conduct Audits – Both Reliability Authority (Formerly, Called Security Coordinator) and Control Area • Continue TLR Investigations • Initiated When TLR 5 (Firm Curtailments) Occur

5. 2001 Compliance Program Preliminary Results

6. 2001 Compliance Program Preliminary Results/Findings • 2001 Implementation Plans Followed • Extensive Use of Self-Certifications • Process Working Extremely Well • More Audits and Spot Checks; Good Validation Observed • Officer/Executive Signatures Obtained (in Most Cases) • Difficulty in Establishing Contacts • Many Non Submittals-Applicability Issue – Members and Non-members • Some Small Entities Still Struggling • Most Regions Used a Late-Data Procedure • Most Regions Simulated Sanctions ($ and Letters) • Most Regions Requested and Obtained Mitigation Plans

7. 2001 Compliance Program Preliminary Results/Findings (Continued) • New Planning III C Measures (Gen. Protection and Control) • 10% Non-Compliance Rate • 55% of Planning Violations • 37% of Planning Non-Submittals • New Operating Measure P6 T2 (Restoration Plans) • 20% Non-Compliance Rate • New Planning IVA Measures (Blackstart) • 14% Non-Compliance Rate • 6 Regions Do NOT Have Automatic Load Restoration (IV B) • Many Comments on Planning Standards Field-Tested • CRS and PSS Will Review Comments • Measures to Enter Organization Standards Process

8. Reporting Change - Transition to a 12-Month Reporting Period Action – It’s Time to Transition from Field-testing to OperationalMode! 2001 Compliance Enforcement Program • Extend the 2001 CEP to December 31, 2001 (Originally, Set to End on October 1, 2001) • Region and Subgroup Compliance Reports are due February 6, 2002 • Full Year for Continuous Reporting Measures • NERC 2001 CEP Report to be Issued at the End of March, 2002 2002 Compliance Enforcement Program • Program Initiation - January 1, 2002 • Program Completion December 31, 2002 • Regional Summary Reports due to NERC - February 15, 2003

9. Key Activities - Regional Compliance Program Audits • Obligation of NERC to Oversee the Overall Program • NERC Audits the Regional Implementation 2000 “Pilot” Audit of 1999 Program Implementation • MAPP Region 2001 Audits of 2000 Program Implementation • ECAR, MAAC, and SERC Regions 2002 Audits of 2001 Program Implementation • FRCC, NPCC, and SPP Regions

10. Key Activities –NERC Reliability Authority Audits • NERC Operating Committee Directed Audits of Reliability Authorities (Security Coordinators) • “Pilot” Program for 2001 – Volunteers (6) • California ISO, ECAR North, Pacific Northwest, MAPP, Rocky Mountain Desert Southwest, and MAAC • New Reliability Authorities (Security Coordinators) – Readiness Audits (2) • Midwest ISO (MISO) & Alliance Regional Transmission Organization (ARTO)

11. Key Activities –NERC Reliability Authority Audits General Results/Next Steps • Audit Process, Procedure, and Questionnaires Working Well • Some Improvements Recommended in Overall Process Assessment • Existing Reliability Authority Audits, in General, are Showing Good Overall Performance • Final Reports • Identified Areas of Improvement • Posted on NERC Compliance Web Site • Includes Operational Readiness Audits for New RA’s • 2002 Audit Schedule Developed • 15 Reliability Authorities to be Audited!

12. Key Activities – September 11th Assessment Goals • Make an Assessment of the Alert Issued on September 11th • Were All Appropriate Entities Notified of the Threat? • What Types of Actions Were Requested and/or Taken as a Result of This Alert? • Confirm that Security Coordinators, Transmission and Generation Owners, and Load Serving Entities Have Pre-identified Their Contacts with the FBI • Document Lessons Learned and Best Practices • Make Recommendations to Address Any Identified Shortcomings in the NERC Operating Policies and Planning Standards

13. Results!!! – September 11th Assessment • Communications • Most Operating Entities Received Notification from Their Security Coordinator • Communications Beyond Control Areas Needs to be Improved • To Generation Owners, Municipals, Cooperatives, and Others • In Most Cases, Key Operating Personnel Were Notified • Most Had FBI Contacts Identified • Training with Operators Needed Improvement • Actions Taken • Some Activated Back-up Control Facilities • Most Increased Security at Critical Facilities • Some Stopped Contract Work • Performed Checks of Contract Personnel • Policy Changes Needed • Need to Clarify the Alert or Threat Levels and the Actions

14. Where Are We Going? - 2002 Compliance Enforcement Program • Objective –Develop a Manageable & Meaningful Program • Recognize the Effort Required to Transition to New NERC Standards - No “New” Measures Introduced • 17 Operating Policy Measures and10 Planning Measures Carried Forward into 2002 Program • Region Will Discuss Specifics

15. Where Are We Going? - Compliance Enforcement Program – Beyond 2002 • Existing Measures Were Identified from Current Operating Polices and Planning Standards • New “Organization Standards” Will Include Compliance Administration • Measures Utilized in Future Years’ Programs Must Meet the Organization Standard Definition. i.e., • Material to Reliability • Measurable • NERC Compliance Enforcement Program Will Identify and Utilize Compliance Measures that Will Endure through the New Standards Development Process

16. Contract Based Enforcement Program

17. Contract BasedEnforcement Program • 9-out-of-10 Regions Have Signed Agreement • Contains Three Compliance Measures • CPS1, CPS2, and DCS • Compliance Managers are Developing Revisions to Compliance Templates Used • Several Regions Expected to Include Enforcement Actions in 2003 • Talk to Your Region for Details

18. New Standards Development Process

19. NERC Standards - Historical • Industry Stakeholders Recognized Need for “Standards” to Allow for Reliable Operation of the Electric Systems as They Became interconnected • NERC was Created and Developed Guidelines from Previous Work • These Guidelines Became NERC Policies

20. NERC Standards - Historical • Standards • Focused on Reliable Operation • Were “Voluntary”! • Generally Applied to VerticallyIntegrated Utilities with Common Goals • Process was Committee Driven • FERC Order 888 and 889 Allowing Open Access to Grids - Changed the Industry Landscape • Stakeholders Identified Need to Develop Standards to Assure Reliable Operation with the New Markets • Standards Affected Other Market Participants & Market Operations

21. Mandatory Standards and Compliance Stakeholders & NERC Board Recognized Need to Make Policies/Standards Mandatory and to Monitor Compliance • Those Who Previously Cooperated Voluntarily on Reliability Matters, Became Competitors • Incentives Changed Among Market Participants • Voluntary Compliance with Industry Reliability Rules was No Longer Adequate. • Established the NERC Compliance Program and Sought Legislative Authority to Implement • Absent Legislation – Work with Contract Based Program

22. Need for Change to the Standards Process! Functional Model Driving the Change! Very High Level Issues Market Needs Compliance Enforcement Manageability of Standards Need for Legislative Authority

23. NERC Functional Model • Historically, NERC Operating Policies Assumed One Operational Entity – the Control Area. • Industry Structure has Changed and Continues to Change • Open Access and Functional Separation • FERC Order 2000 – RTO’s • Need to Identify “Functions” Rather than “Entities”

24. NERC Functional Model Standards (NERC) Develop Standards for These Entities! Compliance Monitor Reliability Authority Service Functions Interchange Authority Balancing Authority Trans Service Provider Planning Authority Generator Load-Serving Entity Purchase-Selling Entity Merchant Functions Planning & Operating Functions Transmission Owner Transmission Operator Distribution Provider

25. Standards and Compliance • Standards are Necessary to Assure a Reliable Delivery System • To Promote Efficient, Robust Competitive Markets • To Support Public Health, Safety, and Welfare or National Security (i.e., Public Good) • Require “Active” Monitoring for Compliance • Compare the Roles of the NTSB and FAA • FAA Monitors to Prevent Airline Accidents • NTSB Determines “What Went Wrong” When an Airline Incident Does Occur

26. Compliance Enforcement Requires Legislative Authority • To Establish a Self-Regulating Reliability Organization (SRRO) to Actively Monitor Certain Standards • To Allow “Organization Standards” to be Filed with FERC and Canadian Provinces • To Assure that the Standards and Compliance Actions Would Apply Equally to All Industry Participants • Similar to Securities Industry • NASD (National Assn. of Securities Dealers) and SEC Roles

27. NERC Board of Trustees Recognizes Need for New Standards Process Board of Trustees Established Standards Task Force in February 2000 Goal - Develop a Standards Process that Provides: • Measurable Performance Standards • Unambiguous Definition of “to Whom” Each Standard Applies • Distinction between Core Reliability Standards and Supporting Implementation Practices • Standards Process that is Above Reproach • Manageability of Standards and the Process

28. New Standards Process -“Approved” • NERC Board of Trustees Approved the New Process in October of 2001 • Recommended Voting be Modified to Sector Voting Model • Recommended Modifying Process to Develop Both Reliability Standards & Wholesale Electric Business Practice Standards

29. New Standards Process Approved • December FERC Order - Alternatives for Developing Wholesale Electric Business Practice Standards and Communication Protocols • Board Revisited October 2001 Decision at February 2002 Meeting • Re-affirmed the Need for NERC With Independent Board to Develop Core Reliability Standards • Continue to Work With Other Industry Groups to Determine if an Industry Response to FERC Can Be Achieved Regarding Business Practice Standards and Communication Protocols • Include Sector Voting Model and Apply to ANSI

30. Business Practice Standard Any Industry Stakeholder SAR Submitted SPM Review SAC Approval SAR Posted Comments Reviewed SAC Approval Standard Drafted SPM Review Draft Standard Posted SAC Approval Ballot 6-14 mo. Compliance Templates Organization Standards Standards Transition Project Advisory Group OperatingPolicies Planning Standards Standards Process Pipeline Compliance Enforcement Program

31. Trans Owners RTOs LSEs Brokers, Marketers Gov’t Trans Dep Utilities Elec Generators Lg Cust Sm Cust Players StandardsProcess Manager SAC (Stds. Auth. Comm.) Drafting Teams SAR Requestors Industry Stakeholders

32. SAR Submitted SPM Review SAC Approval SAR Posted Comments Reviewed SAC Approval Standard Drafted SPM Review Draft Standard Posted SAC Approval Ballot New NERC Standards Process • Is a Fair, Open, Balanced, and Inclusive Process • Supports Development of All Types of Standards • Incorporates the Concerns Expressed by Industry Stakeholders • Recognizes the Unique Needs of the Electric Wholesale Stakeholders and North American Bulk Electric Systems • Capable of Working with the NAESB Proposal Filling the Electric Wholesale Quadrant

33. Questions? www.nerc.com jbickley@nerc.com NERC Compliance Enforcement Program