177. Especially important is that the applicant or candidate must
demonstrate that it has, or has the demonstrated ability to acquire or
assemble, the technical expertise necessary for the enforcement of all
Reliability Standards. Specifically, it must show that it has, or has
experience with acquiring on a volunteer or other basis, the number of
persons with the level of technical experience necessary to audit the
users, owners and operators of the Bulk-Power System for compliance
with the Reliability Standards, to investigate questions or allegations
of noncompliance, and to determine the appropriate remedy or penalty.
The applicant or candidate must explain how it proposes to divide these
various areas of responsibility among its board and committee members,
its permanent staff, its organizational members if any, industry
volunteers, and any consultants or subcontractors.
    178. Further, an ERO applicant that satisfies the requirements for
independent governance, balanced decisionmaking, and appropriate ERO
Rules should be impartial and even-handed in the application of
Reliability Standards. Accordingly, we find that there is no need to
create additional certification criteria as suggested by PG&E.
Similarly, NiSource and others may address the technical qualifications
of any ERO applicant and the factors by which to consider such
qualifications, when an ERO application is filed.
e. Simultaneous Certification in Canada and Mexico
    179. The NOPR proposed that ERO Rules must specify the appropriate
steps, after certification by the Commission as the ERO, to gain
recognition in Canada and Mexico. The NOPR states that the ERO can
operate effectively only if it meets the requirements of all relevant
regulatory authorities.\38\
---------------------------------------------------------------------------

    \38\ NOPR at P 41.
---------------------------------------------------------------------------

Comments

    180. Numerous commenters agree that the ERO must take steps to be
recognized in Canada and Mexico. Some recommend that the Commission
permit an ERO candidate to seek approval in Canada concurrent with
approval in the United States. International Transmission suggests that
recognition in Canada and Mexico should be a high priority of the ERO,
once it is certified by the Commission. Detroit Edison comments that
energy market disparities and related reliability concerns cannot be
adequately addressed between the United States and Canada unless the
ERO or its designated Cross-Border Regional Entity is required to have
legal standing in Canada as the sole entity responsible for developing
and enforcing Reliability Standards affecting reliability within its
footprint.
    181. Alberta submits that the establishment of an international ERO
requires that an ERO applicant take appropriate steps to gain
recognition in the relevant jurisdiction at the same time. APPA
advocates that, although the statute requires the ERO to take steps to
gain recognition in Canada and Mexico after it is certified by the
Commission, the Commission should, nevertheless, allow an ERO applicant
or a proposed Regional Entity to seek approval in Canada and Mexico at
the same time it seeks certification from the Commission. Others, such
as CEA and BCTC, state that the Commission should encourage an ERO
applicant to work with Canadian authorities in advance of its
application for Commission certification. They believe that, consistent
with the bilateral principles, advance discussions would ensure that
the ERO applicant's governance structure reflects Canadian concerns and
identify potential areas of disagreement.

Commission Conclusion

    182. Section 215 of the FPA and our proposed rule require ERO
candidates to propose ``appropriate steps'' to gain recognition in
Canada and Mexico after certification by the Commission. The Commission
does not view this requirement as precluding ERO candidates from
seeking simultaneous certification in the United States, Canada and
Mexico. Therefore, an ERO candidate may, and is encouraged to, seek
recognition in Canada and, if

appropriate, in Mexico, while pursuing Commission certification. Each
ERO applicant or the certified ERO should keep the Commission informed
about the status of its efforts to gain recognition in Canada or
Mexico.
f. Periodic Performance Assessments
    183. The certification regulations proposed in the NOPR would
require the approved ERO to periodically submit an application to be
recertified as the ERO.\39\ The NOPR interpreted section 215 of the FPA
as requiring the ERO to comply with the certification criteria on an
ongoing basis, and that a violation of a certification criterion
constitutes a violation of the FPA. The NOPR asked for comment
regarding the appropriate cycle for periodic recertification and how
far in advance the ERO should submit its application for
recertification before its current certification period expires.
---------------------------------------------------------------------------

    \39\ Id. at P 42.
---------------------------------------------------------------------------

Comments

    184. Virtually all commenters that discuss this issue support the
notion that the ERO and each Regional Entity must meet the statutory
criteria on an ongoing basis. APPA asserts that periodic
recertification may keep the ERO diligent in carrying out its duties,
if the process is not too frequent or elaborate. PG&E agrees that
periodic recertification is important to ensure that the ERO is
properly performing its duties, but is concerned that the process not
dominate the ERO's time. However, most commenters question the need for
a periodic recertification process in addition to the various other
accountability processes proposed in the NOPR.\40\ Some note that there
is no specific statutory requirement for periodic recertification.\41\
Others submit that any periodic recertification process could become a
distraction and lead to inefficiency within the ERO and Regional
Entities, especially during the early years as these organizations
grapple with a multitude of start-up matters.\42\ Further, some assert
that periodic recertification could cause uncertainty among the owners,
users and operators of the Bulk-Power System when it appears that an
existing reliability organization may be close to losing its
certification.\43\ NERC submits that certification should not
automatically lapse at the end of a periodic recertification cycle,
rather certification should remain in place until the Commission makes
a recertification decision. MRO and NERC comment that the Commission
should coordinate recertification proceedings with Canadian regulators
or seek their concurrence. Others, including APPA and ELCON, suggest
that the Commission defer the decision on whether to require periodic
recertification until a later stage after it acts on applications for
ERO certification.
---------------------------------------------------------------------------

    \40\ E.g., Kansas City P&L, MidAmerican, FirstEnergy and MRO.
    \41\ See, e.g., NRECA, MRO, Southern, SERC and FirstEnergy.
    \42\ See, e.g., National Grid, AEP, Southern, SERC, and MRO.
    \43\ See, e.g., APPA and LG&E Energy.
---------------------------------------------------------------------------

    185. With regard to the timing of recertification, although
NiSource suggests a recertification cycle once every three years, most
commenters believe a longer cycle of five or six years would provide
needed stability.\44\ Commenters suggest a range from 180 days to two
years for the submission of a recertification application.
---------------------------------------------------------------------------

    \44\ See, e.g., Alcoa, the New York Companies, South Carolina
E&G, NERC and TAPS.
---------------------------------------------------------------------------

Commission Conclusion

    186. The Final Rule does not adopt the periodic recertification
process as proposed in the NOPR. Instead, we are mandating a regular
performance assessment that requires the ERO to affirmatively
demonstrate to the Commission that it satisfies the statutory and
regulatory criteria for an ERO and is not only maintaining but
improving the quality of its activities and those of the Regional
Entities to which it has delegated such activities.\45\ Although the
ERO must be accountable to the public, stakeholders, and the Commission
for good performance, we agree with commenters that a periodic
recertification process would tax the resources of the ERO and take the
focus away from its primary function of ensuring the reliability of the
Bulk-Power System. We believe that the performance assessment process
that we are adopting will enhance the Commission's oversight of the ERO
without the perceived destabilization of a periodic recertification
requirement that implies the ERO may cease to exist unless it succeeds
in a de novo certification application.
---------------------------------------------------------------------------

    \45\ Accordingly, we are striking proposed 18 CFR 38.3(c) and
38.7(f) which read, respectively:
    (c) The approved ERO is required to periodically submit an
application to be recertified as the ERO, in accordance with any
requirements the Commission issues in this regard.
    (f) An approved Regional Entity shall be required to
periodically submit an application to be re-approved as a regional
Entity, in accordance with any requirements the Commission issues in
this regard.
---------------------------------------------------------------------------

    187. Pursuant to this new process at new section 39.3(c) of our
regulations, the initial performance assessment will be required three
years after ERO certification, and then every five years thereafter.
New section 39.3(c) requires the ERO to affirmatively demonstrate that
it satisfies on an ongoing basis the statutory criteria to qualify as
an ERO. The Commission will review the periodic performance assessment
and may require follow-up actions by the ERO to comply or improve
compliance with the statutory and regulatory qualifications for the
ERO, if the Commission determines that the ERO has not satisfied
specific criteria. Moreover, the Commission views the performance
assessment as an opportunity not only to demonstrate that the ERO has
maintained, but also is improving, the quality of its activities and
those of the Regional Entities to which the ERO has delegated such
activities. The Commission expects the performance assessment to
include regular and systematic measurement and reporting of the ERO's
performance.
    188. The ERO shall submit an assessment of its performance, after
which the Commission will establish a proceeding with opportunity for
public comment in which it will review the performance of the ERO. The
ERO's assessment shall include: (1) An explanation of how it continues
to satisfy the certification requirements; (2) recommendations by
Regional Entities and other entities for improvement of the ERO's
operations, activities, oversight and procedures, and the ERO's
response; and (3) the ERO's evaluation of the effectiveness of each
Regional Entity, recommendations for improvement of the Regional
Entity's performance of delegated functions, and the Regional Entity's
response to such evaluation and recommendations.
    189. Regarding the first assessment item, the ERO should address
its ability to develop and enforce Reliability Standards providing for
an adequate level of reliability of the Bulk-Power System. The ERO
should explain how effectively it enforced Reliability Standards,
providing statistical information on its investigations, findings and
assessments of penalties, on a regional and continent-wide basis. The
ERO should also explain how it provided for fair and impartial
procedures for enforcement of Reliability Standards and provided for
openness, due process and balance of interests in developing
Reliability Standards. The ERO should also address these matters as
they pertain to the Regional Entities.
    190. The burden will be on the ERO to conduct this assessment and
affirmatively demonstrate that it satisfies the statutory criteria for
the

ERO and the quality of its activities. As part of this process, the ERO
must entertain, consider and respond to outside recommendations for
improvement from the Regional Entities and the owners, users and
operators of the Bulk-Power System. The ERO must also evaluate the
effectiveness of the Regional Entities to which it has delegated some
of its functions and suggest how the Regional Entities might improve
their performance.\46\
---------------------------------------------------------------------------

    \46\ See 18 CFR 39.8, discussed infra.
---------------------------------------------------------------------------

    191. As a result of its review of the performance assessment and
public comments, the Commission will issue an order finding that the
ERO meets the statutory and regulatory criteria or directing the ERO to
comply with or improve compliance with the statutory and regulatory
criteria for an ERO. Subsequently, if the ERO fails to comply
adequately with the Commission order, the Commission may institute a
proceeding to enforce its order as discussed below under Enforcement of
Commission Rules and Orders, including, if necessary and appropriate, a
proceeding to consider decertification of the ERO.
4. Funding of the Electric Reliability Organization--Section 39.4
    192. In the NOPR, the Commission recognized that certainty
regarding the funding of the ERO is essential for the stability and
ultimate success of the organization, and accordingly, proposed a
section of regulation text that provides requirements for funding and
budget oversight of the ERO.\47\ For discussion purposes in the Final
Rule, we have grouped the funding related comments into several
categories: Budget and business plan, funding for statutory activities,
role of the ERO in funding Regional Entities, funding consistency with
the bilateral principles, payment of dues and funding transition plan,
billing mechanics, and other funding matters.
---------------------------------------------------------------------------

    \47\ NOPR at P 99.
---------------------------------------------------------------------------

a. Budget and Business Plan
    193. Subsections (a) and (b) of the proposed regulation on funding
were intended to make the ERO accountable to the Commission for its
budget for activities within the United States. They provided that the
ERO must file a proposed annual budget and proposed annual funding
request 130 days in advance of the beginning of each fiscal year. The
Commission, after public notice and opportunity for comment, would
issue an order accepting, rejecting, remanding or modifying the
proposed ERO budget and business plan no later than sixty days before
the beginning of the ERO's fiscal year.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

Comments
    194. Most commenters agree that the Commission should review the
ERO's budget to ensure adequate funding.\49\ Exelon suggests that the
annual ERO funding requirement for budget purposes should include
amounts for all activities that are deemed necessary to achieve the
purposes of section 215 of the FPA including amounts for those
activities delegated to the Regional Entities. EEI agrees that the
Commission should have to approve the annual ERO budget, as proposed in
the NOPR, but argues that the review should be limited to the
development of Reliability Standards and enforcement functions and
should not include any other activities the ERO may choose to undertake
nor should it include the overall ERO business plan.\50\ Southern
states that the Commission should conduct a general review of the ERO's
budget and business plan to ensure that the ERO is maintaining spending
discipline and not overspending on some activities at the expense of
other activities, and that the Commission should defer to the ERO on
matters pertaining to the budget and business plan because the ERO will
possess the expertise to make the right decisions.
---------------------------------------------------------------------------

    \49\ See, e.g., Exelon, Indianapolis P&L, LG&E Energy and NERC.
    \50\ EEI envisions the ERO developing an annual budget for its
Reliability Standards and enforcement activities, including those
activities delegated to the Regional Entities to ensure that overall
funding adequately supports the delegated Regional Entity functions.
Specific funding and budget arrangements would be included in the
delegation agreement.
---------------------------------------------------------------------------

    195. Others suggest tighter scrutiny over the budget out of concern
that the new reliability program may lead to increased costs and,
therefore, the Commission should ensure that any higher costs imposed
on the electricity customers has a commensurate reliability
benefit.\51\ Ameren submits that a set of budget principles should be
established for the ERO and Regional Entities. Indianapolis P&L states
that the Final Rule should include a mechanism for stakeholders to
provide input to ensure that the Commission has all the information it
needs to make an informed decision on the ERO's budget. The Oklahoma
Commission suggests that the notice and comment provisions for the
ERO's annual funding request proposed in the NOPR also be applied to
any funding request the ERO makes to the Commission outside of the
annual budget process.
---------------------------------------------------------------------------

    \51\ See, e.g., APPA, LG&E Energy and the New York Companies.
---------------------------------------------------------------------------

    196. NERC asserts that the proposed regulations on funding be
modified to provide for emergency funding to deal with extraordinary
circumstances.

Commission Conclusion

    197. The Commission generally adopts subsections (a) and (b) of the
proposed regulation on funding as sections 39.4(a) and (b) with some
additional specificity. We continue to believe that ERO funding
certainty is essential for the stability and ultimate success of the
organization and will review the ERO's budget and business plan to
ensure that the ERO has adequate funding to carry out its
responsibilities under section 215 of the FPA. We will not defer to the
ERO on the budget or business plan as some suggest. However, we will
not adopt budget principles in the Final Rule beyond the requirements
specified in section 215(c)(2) of the FPA. We expect an ERO candidate
to propose budget principles in its certification application and to
consider the views of industry in developing its proposed budget and
business plan.
    198. Although our authority is limited to approving a business plan
and budget as it pertains to statutory activities in the United States,
the ERO must submit its business plan, entire budget, and
organizational chart to the Commission, including those portions
pertaining to activities in Canada and Mexico and any non-statutory
activities. The complete business plan and the entire budget will
inform the Commission as to what portion of the budget is expended upon
the activities within the United States. Further they will provide the
Commission with necessary information about any non-statutory
activities, the source of their funding, and whether the pursuit of
such activities presents a conflict of interest for the ERO.
Additionally, section 39.4(c) of the regulation provides for further
stakeholder participation through the Commission's public notice and
comment procedures. This will provide additional opportunity for
stakeholders to express their views so that the Commission can make an
informed decision on the ERO's budget proposal and business plan. The
same notice and opportunity for comment would apply to any funding
request the ERO makes to the Commission outside of the annual budget
process.
    199. As requested by NERC, the Final Rule adds a new subsection
39.4(d) that allows the ERO to request emergency funding. The new
provision states:

    (d) On a demonstration of unforeseen and extraordinary
circumstances requiring additional funds prior to the next Electric
Reliability Organization fiscal year, the Electric Reliability
Organization may file with the Commission for authorization to
collect a special assessment. Such filing shall include supporting
materials explaining the proposed collection in sufficient detail to
justify the requested funding, including any departure from the
approved funding formula or method. After notice and an opportunity
for hearing, the Commission will approve, disapprove, remand or
modify such request.
b. Funding for Statutory Activities
    200. In the NOPR, the Commission indicated that paragraph (c) of
the proposed section on funding intended to provide a Commission-
approved mechanism for mandatory ERO funding in the United States.\52\
However, rather than the Commission dictating a funding mechanism, the
NOPR would have allowed an ERO applicant to propose a funding mechanism
for Commission approval. Specifically, the proposed regulation stated
that any person that submits an application for certification as the
ERO must include a plan, formula and/or methodology for the allocation
and assessment of ERO dues, fees and charges; and the certified ERO may
subsequently file with the Commission a request to modify the plan,
formula and/or methodology from time-to-time at the ERO's discretion.
Comments related to funding responsibility are discussed here in four
groups: (1) General matters; (2) funding apportionment; (3) role of the
ERO in funding the Regional Entities; and (4) additional comments
regarding funding consistency with the bilateral principles.
---------------------------------------------------------------------------

    \52\ NOPR at P 100.
---------------------------------------------------------------------------

i. General Funding Matters
    201. Some commenters state that the NOPR generally provides a
workable funding process to ensure that reasonable ERO costs are fairly
recovered.\53\ Some comment that, while section 215 of the FPA
authorizes the ERO and the Regional Entities to collect funds only for
actions taken under the statute, they are not necessarily precluded
from pursuing other matters.\54\ APPA submits that the Commission must
make clear that the ERO and Regional Entities can fund activities which
are not related to their duties under section 215 of the FPA and
allocate the costs of those activities on a basis that is appropriate
for such activity. EPSA asks the Commission to ensure that any funding
proposal is developed in consultation with all affected users, owners
and operators of the Bulk-Power System. Detroit Edison and WECC submit
that no Regional Entity should be required to subsidize the delegated
functions of any other Regional Entity.
---------------------------------------------------------------------------

    \53\ See, e.g., EPSA, NERC and NiSource.
    \54\ See, e.g., APPA and NRECA.
---------------------------------------------------------------------------

Commission Conclusion

    202. We find that section 215 of the FPA provides for federal
authorization of funding limited to the development of Reliability
Standards and their enforcement, and monitoring the reliability of the
Bulk-Power System. However, the ERO or a Regional Entity is not
precluded from pursuing other activities, funded from other sources. We
agree with commenters that any funding proposal should be developed in
consultation with the users, owners and operators of the Bulk-Power
System and that no Regional Entity should subsidize the functions of
another Regional Entity.
ii. Funding Apportionment
    203. In the NOPR, the Commission noted that the responsibility for
NERC funding is based largely on ``net energy for load.'' The cost of
certain programs and tools that benefit only specific regions or
parties would be assigned only to the beneficiaries of those programs
or tools. In the NOPR, we indicated our belief that a funding method
based on net energy for load meets the requirements of section
215(c)(3) of the FPA and is appropriate for the allocation and
assessment of ERO dues, fees and charges.\55\
---------------------------------------------------------------------------

    \55\ NOPR at P 102.
---------------------------------------------------------------------------

Comments

    204. Most commenters support use of a net energy for load-based
funding apportionment for the ERO as well as the Regional Entity.\56\
However, a few claim that this method will not apportion costs
equitably and recommend other methods.\57\
---------------------------------------------------------------------------

    \56\ See, e.g., EPSA, PSE&G Companies, NASUCA, NARUC, NERC and
Chelan County.
    \57\ See, e.g., The New York Companies, International
Transmission and Entergy.
---------------------------------------------------------------------------

    205. PSE&G Companies states that the recovery of costs for the ERO
and Regional Entities should be apportioned on the basis of net energy
supplied to retail load because, as the ultimate beneficiaries of the
reliability of the electric system, retail customers should bear the
cost.
    206. EPSA states that a net energy for load-based funding
apportionment is appropriate because: (1) The statute requires funding
by end-users; (2) net energy for load represents the aggregate annual
energy consumption of end use customers in a particular region; and (3)
since NERC currently uses this method, keeping it would avoid cost
shifts. According to Chelan County, a net energy for load-based funding
formula is consistent with the concept that load (rather than
generation) should pay for reliability services that benefit end-users.
    207. A benefit of the net energy for load approach is that it
counts each kilowatt-hour of electric energy only once, and thus
represents the fairest and most efficient method of allocating costs
among end-users. Any other method may count energy more than once. A
net energy for load approach that charges based on energy consumed
avoids such ``double counting.'' \58\
---------------------------------------------------------------------------

    \58\ See, e.g., NASUCA and NRECA.
---------------------------------------------------------------------------

    208. Michigan Electric states that there should be no free riders
when it comes to system reliability but points out that the ultimate
payers of the ERO's costs will be retail customers, since charges
assessed to any other users will eventually be flowed through to retail
customers as part of the delivered cost of electricity. As such, the
Commission must ensure that ERO costs are allocated on an equitable
basis among retail customers and prevent multiple assessments
regardless of the upstream entities involved. FRCC submits that the
NOPR's focus on different types of users of the Bulk-Power System may
lead to two or more entities passing on such costs to the same
customers.
    209. The ISO/RTO Council argues that a transmission facility owner
or operator should not be allocated a share of ERO costs, except to the
extent that it also acts as a load-serving entity. Otherwise, an end
user could pay twice for the reliability functions of the ERO and the
Regional Entities once through charges assessed against an RTO, ISO,
independent transmission company, or transmission function of a
vertically integrated company, and a second time through an assessment
against its load-serving entity. To avoid this potential double count,
an end user should be assessed through its load-serving entity.\59\
---------------------------------------------------------------------------

    \59\ See, e.g.,, Ohio Commission, ISO/RTO Council and Alcoa.
---------------------------------------------------------------------------

    210. As an independent transmission owner, International
Transmission expresses concern about a system that treats both a local
utility using an independent transmission owner's system and the
transmission owner itself as ``beneficiaries'' of reliability that need
to be charged accordingly.
    211. The New York Companies state that net energy for load,
particularly in areas of the country where suppliers and load represent
different

organizations, will not work, as it would allow suppliers and perhaps
other organizations that are connected to the Bulk-Power System to
avoid paying their fair share of ERO and Regional Entity membership
fees.
    212. As an alternative to net energy for load-based funding,
International Transmission suggests that the ERO adopt the transmission
MWh usage model that the Commission applies to assess annual dues from
jurisdictional public utilities. However, MISO Transmission Owners
oppose this because it would result in a disproportionate assessment
against entities that belong to an RTO. Indianapolis P&L suggests
apportioning the ERO funding responsibility through an assessment on:
(1) Load-serving entities based on the number of their customers; (2)
independent transmission companies based on their transmission line
miles; and (3) independent power providers based on their sales volume.

Commission Conclusion

    213. Commenters largely agree that a funding apportionment method
based on net energy for load is appropriate. We find this funding
method to be a fair and reasonable method that minimizes the
possibility of ``double-counting.'' However, we will not codify any
particular formula in our regulations because some adjustment in the
formula may be needed in the future without the need to alter the rule.
Therefore, we do not rule out any other apportionment method that can
be shown to be fair and reasonable. Alternative funding apportionment
methods suggested by a few commenters appear to garner limited support,
can be more complex to implement, or raise the issue of double
counting.
    214. Section 39.4(a) of our regulations provides the ERO applicant
the flexibility to propose a formula or method for the allocation and
assessment of ERO costs to paying entities, as well as setting out
member dues, fees and service charges. However, any funding proposal by
an ERO applicant must ensure that costs are allocated equitably
consistent with section 215(c)(2)(B) of the FPA. In addition, any
funding proposal must ensure that cross-subsidization is minimized.
c. Role of the ERO in Funding the Regional Entities
    215. The NOPR asked what, if any, responsibility or involvement the
ERO should have regarding funding of Regional Entities.\60\ In
addition, the NOPR requested comments on whether the proposed
regulations on funding and budget oversight for the ERO should be
extended to the Regional Entities.\61\
---------------------------------------------------------------------------

    \60\ NOPR at P 84.
    \61\ NOPR at P 103.
---------------------------------------------------------------------------

i. ERO Responsibility for Regional Entity Funding
    216. Some commenters advocate ERO oversight of Regional Entity
funding. NERC and Exelon submit that, since the ERO is ultimately
responsible for the effective enforcement of Reliability Standards, it
must have the authority to review and approve each Regional Entity's
budget to ensure that each has the resources needed to meet its
assigned responsibilities. The ERO must include each Regional Entity's
budget in the ERO's annual funding submission to the Commission and
other appropriate regulatory authorities. The supporting materials
should be sufficient to allow the ERO to defend the Regional Entity
budgets as part of its budget submittal to the Commission.
    217. MRO suggests that the matter of funding the Regional Entities
should be left to negotiation between the ERO and Regional Entities and
detailed in the delegation agreements. SERC submits that the ERO should
not distinguish between Interconnection-wide and other Regional
Entities when it reviews a Regional Entity's budget and funding.
    218. In contrast, WECC submits that the ERO should not
substantively review the budget of an Interconnection-wide Regional
Entity. Alternatively, if the ERO does review the budget, the Regional
Entity should be entitled to a rebuttable presumption of reasonableness
similar to that applicable to a proposed Interconnection-wide
Reliability Standard. Otherwise, extensive ERO review would result in
an inefficient and uncertain budget and funding process that would
cause unnecessary delay. Further, extensive ERO review could create
conflicts if WECC's international members do not recognize the ERO's
authority to review the WECC budget.\62\
---------------------------------------------------------------------------

    \62\ See also Western Governments.
---------------------------------------------------------------------------

    219. Others comment that stakeholders and users, owners and
operators of the Bulk-Power System in a Regional Entity should be
solely responsible for Regional Entity funding decisions.\63\ The New
York Companies assert that it would not be appropriate, for example,
for the ERO to have the ability to withhold funding for a Regional
Entity because the ERO disagrees with a position the Regional Entity
has taken with respect to a proposed Reliability Standard; however,
Regional Entity funding should be subject to Commission oversight to
ensure that costs across regions are comparable. PSEG Companies submits
that the ERO's role should be limited to collecting the regional
requests and filing them as a package together with the ERO request to
the Commission.
---------------------------------------------------------------------------

    \63\ See, e.g., LADWP and SoCalEd.
---------------------------------------------------------------------------

    220. Some commenters submit that, in addition to approving each
Regional Entity budget, if a Regional Entity is acting on behalf of the
ERO and performing delegated enforcement tasks, the ERO should fund the
Regional Entity for carrying out such delegated functions. The ERO,
however, should not be responsible for funding any other functions that
a Regional Entity performs.\64\ Detroit Edison states that a Regional
Entity should be permitted to collect funds from its members without
Commission involvement.
    221. Some commenters contemplate that the Regional Entities should
fund the ERO. According to NiSource, currently NERC develops a budget
and, based on a set of formulas, allocates its funding requirements
among the ten regional reliability councils. NERC funding then becomes
a line-item in each regional reliability council's budget. Each
regional reliability council allocates its funding requirements among
its members. NiSource says ERO funding should follow the same general
format with the Regional Entities funded by the users of the system for
which the Regional Entity is responsible. A portion of the ERO budget
would then be allocated to and funded by each Regional Entity.
---------------------------------------------------------------------------

    \64\ See, e.g., ELCON and Michigan Electric.
---------------------------------------------------------------------------

    222. Hydro One points out that, ultimately, end-users will fund the
ERO by remitting fees to the Regional Entity. PacifiCorp submits that
the ERO should compensate a Regional Entity if it develops an
operational tool for itself at its own cost, but other Regional
Entities benefit from that tool.
    223. The City of San Antonio indicates that ERCOT is a state-funded
institution and any funding mechanism that the Commission decides for
the ERO should not conflict with the Texas state statutory funding
mechanism for ERCOT. It is concerned that, in the event ERCOT becomes a
Regional Entity, a fee from the Regional Entity to fund the ERO would
alter the Texas state statutory funding mechanism for ERCOT.

ii. Commission Oversight of Regional Entity Funding
    224. While many commenters support extending the Commission's ERO
funding regulations to the Regional Entities,\65\ a few oppose this
approach. Other commenters suggest extending the funding regulations to
those functions that the ERO delegates to a Regional Entity or funding
addressed in a delegation agreement.\66\ NARUC and NERC comment that
the regulations related to funding of Regional Entities should mirror
those of the ERO to the extent practicable or should be specifically
defined in the Regional Entity delegation agreement. Southern suggests
that the ERO, not the Commission, should review each Regional Entity's
proposed budget for delegated activities. PacifiCorp submits that each
Regional Entity should be able to develop its own budget to reflect
local needs, but the ERO should consolidate and submit all of the
Regional Entity budgets as a joint filing to the Commission. The ERO
should not be the entity with budget authority over an Interconnection-
wide Regional Entity.\67\
---------------------------------------------------------------------------

    \65\ See, e.g., ERCOT, APPA, AEP, Exelon, NARUC, NERC FRCC and
TAPS.
    \66\ See, e.g., NPCC and EEI.
    \67\ See, e.g., the City of Seattle.
---------------------------------------------------------------------------

    225. FRCC asserts that a Regional Entity should be responsible for
preparing its budget and providing support for it. Regional Entity
budgets should be combined with the ERO budget for convenience in the
submission of a complete, single annual reliability budget to the
Commission; however, the ERO should not try to integrate the Regional
Entity budgets with each other or the ERO's budget into a consolidated
budget. Although some ERO review of the reasonableness of the Regional
Entity budgets and their consistency with the ERO budget may be
appropriate, unnecessary review and consolidation would not serve a
useful purpose, and would only make the budgeting process unduly
lengthy and burdensome.
    226. In FRCC's view, the Commission's review of Regional Entity
budgeting and funding process should be limited to the delegated
functions carried out by a Regional Entity, as many of the other
functions in which a Regional Entity may engage are not jurisdictional
to the Commission.

Commission Conclusion

    227. Since the ERO is the primary entity responsible under section
215 of the FPA for the development and enforcement of Reliability
Standards, we find that the ERO should fund the Regional Entities as
well as approve their budgets, under the Commission's oversight. The
ultimate success of the ERO will depend on whether a Regional Entity
has adequate funding to carry out its delegated responsibilities. The
ERO must have oversight to ensure that Regional Entities are adequately
funded to accomplish their delegated functions. This oversight,
however, should be limited to the delegated activities that they
perform pursuant to their delegation agreements. To implement this, we
are including the following text at the end of subsection 39.4(b):

    The annual Electric Reliability Organization budget shall
include line item budgets for the activities of each Regional Entity
that are delegated or assigned to each Regional Entity pursuant to
section 39.8 of the Commission's regulations.

Accordingly, the ERO must exercise budgeting oversight over the
Regional Entities.
    228. Each Regional Entity must submit its complete business plan,
entire budget and organizational chart to the ERO for it to submit to
the Commission. The complete business plan and the entire budget will
provide the Commission with necessary information about any non-
statutory activities, the source of their funding, and whether the
pursuit of such activities presents a conflict of interest for the
Regional Entity. For a Cross-Border Regional Entity, this information
will also inform the Commission as to what portion of the budget is
expended upon activities within the United States.
    229. Any funding that is approved and provided by the ERO to a
Regional Entity would be limited to a Regional Entity's costs related
to the delegated functions. The ERO must determine, at a minimum,
whether each Regional Entity's proposed budget is adequate to carry out
the functions delegated to it. While a Regional Entity will be able to
perform other activities that do not conflict with its delegated
functions, periodic financial audits will be required to ensure that
any ERO-approved funding is appropriately expended for delegated
functions. ERO candidates should propose a plan for the collection of
sufficient funds for delegated activities in their application for
certification. The ERO must make a recommendation to the Commission on
this matter. A Regional Entity should arrange funds for its other
activities on its own. Procedures for ERO review of a Regional Entity's
budget should be addressed in the delegation agreement.
    230. The Regional Entity is responsible for supporting its budget
presentation to the ERO because it is responsible to the ERO for
carrying out delegated ERO responsibilities, whether or not it spans an
entire Interconnection. Therefore, we direct the ERO and each Regional
Entity to ensure that the delegation agreement lists all the statutory
activities that they intend the Regional Entity to undertake on behalf
of the ERO.
d. Funding Consistency With the Bilateral Principles
    231. In the NOPR, the Commission noted that the bilateral
principles include several funding principles: (1) A principle
specifying that net energy for load should be the primary basis upon
which the costs of the ERO are assigned and that costs for one region
or entity should be directly assigned to that region or entity; (2) a
principle specifying that funding mechanisms, budget direction and
budget levels should reflect consultations with appropriate
stakeholders and authorities in each country; and (3) a principle
specifying that the appropriate authorities in each country should be
responsible for approving and ensuring cost recovery by the ERO and
Regional Entities within their respective jurisdictions in a timely
manner. The NOPR inquired as to whether the Final Rule should address
such funding issues in detail or whether the ERO and Cross-Border
Regional Entities should propose resolution of these matters at a later
time.\68\
---------------------------------------------------------------------------

    \68\ NOPR at P 103.
---------------------------------------------------------------------------

Comments

    232. There is strong support for following the bilateral principles
on funding matters but not necessarily for incorporating them into the
Final Rule.\69\ Many commenters prefer that the ERO and Cross-Border
Regional Entities develop their own international funding proposals.
APPA notes that it participated in the development of the bilateral
principles and would have no objection to the Commission including
these principles, such as net energy for load-based funding, in the
Commission's Final Rule. ERCOT maintains that the Final Rule should
specify that the costs of the ERO should be assigned to the
participating nations on a net energy for load basis; however, costs
incurred by the ERO for operational tools such as NERC's current
Interchange Distribution Calculator should be assigned only to those
regions utilizing the tool. In the case of expenses incurred by a
Cross-

Border Regional Entity, the Commission should approve the share of
expenses incurred within the United States, while the relevant Canadian
and Mexican authorities should decide whether to approve the expenses
assigned to parties within its borders. Other commenters also submit
that it is appropriate for the ERO and Regional Entities to propose
such funding mechanisms in their applications for certification or
delegation agreement approval in consultation with appropriate
regulatory authorities in other countries in accord with the bilateral
principles.\70\
---------------------------------------------------------------------------

    \69\ See, e.g., AEP, APPA, Alberta, ELCON, NERC and Ontario
IESO.
    \70\ See, e.g., NERC and Ontario IESO.
---------------------------------------------------------------------------

    233. MRO comments that the Commission should allow the ERO and the
Cross-Border Regional Entities to address such international funding-
related details in a manner that best suits each individual situation.
Others contend that the Final Rule should not specify a detailed
funding mechanism, in part because Canadian regulators also have to
approve the mechanism for their jurisdictions.\71\ Funding mechanisms,
budget direction and budget level should be allowed to reflect ERO
consultation with stakeholders and the appropriate authorities in each
country, as the recovery of costs in Canada related to the ERO and
Cross-Border Regional Entities must be determined by the various
jurisdictions in Canada.\72\ Since regulatory authorities have
different views on how costs should be recovered within their
jurisdiction, the Final Rule should not include a provision specifying
what other jurisdictions should do.\73\
---------------------------------------------------------------------------

    \71\ See, e.g., Nova Scotia, Santee Cooper and NPCC.
    \72\ See, e.g., Alberta.
    \73\ See, e.g., NARUC and NERC.
---------------------------------------------------------------------------

Commission Conclusion

    234. We agree with commenters that the bilateral principles provide
a good starting point for funding guidelines in the continental North
American context. We also agree with the need to provide the ERO
candidates and Cross-Border Regional Entities with enough flexibility
to develop funding details with the appropriate regulators of all the
participating nations. Our review and approval of ERO and Cross-Border
Regional Entity funding mechanisms will be limited to their application
in the United States. However, as explained above, we expect that the
ERO or a Cross-Border Regional Entity will submit to the Commission and
other appropriate regulators its entire business plan for the whole
organization, its entire budget, its full funding mechanism, and budget
allocation. Complete funding information is necessary so that
regulators can assess the appropriateness of cost share and benefits
share for each country or region.
e. Payment of Dues and Funding Transition Plan
    235. The NOPR proposed that all entities within the Commission's
``reliability'' jurisdiction, as set forth in section 215(b) of the
FPA, must pay the ERO's assessment of dues, fees and charges in a
timely manner.\74\ The NOPR also provided that any person who submits
an application for certification as the ERO may include a plan for a
transitional funding mechanism that would allow it, if certified as the
ERO, to continue existing operations without interruption as it
transitions from one funding method to another.\75\ The proposed
maximum duration of any proposed transitional funding mechanism would
not exceed eighteen (18) months from the date of certification.
---------------------------------------------------------------------------

    \74\ NOPR at P 100.
    \75\ Id. at P 101.
---------------------------------------------------------------------------

Comments

    236. NERC agrees that certainty regarding the funding of the ERO is
essential for the stability and ultimate success of the organization in
carrying out its mission, particularly since the ERO is expected to be
nonprofit. Commenters generally agree on the need for a funding
transition plan. For example, Exelon supports a strong and stable
funding source to support the reliability efforts to be carried out by
the ERO. MRO asserts that the optimal time to achieve certainty of
funding for the ERO is during the certification process.

Commission Conclusion

    237. No commenter objects to our proposal that entities within our
jurisdiction must pay the ERO's assessment of dues, fees and charges in
a timely manner. Such timely payment is necessary for the continuity of
ERO activities and a reasonable requirement of those who benefit from
Bulk-Power System reliability. Accordingly, in section 39.4(e) of the
Final Rule, we adopt the substance of the proposed regulation text
requiring jurisdictional entities to pay the ERO's assessment of dues,
fees and charges in a timely manner. In section 39.4(f), we adopt, with
minor non-substantive revision, the proposed regulation regarding
transitional funding as to provide funding certainty during a period
when the industry transitions from a voluntary organization to an
organization for mandatory compliance with enforceable Reliability
Standards.
f. Billing Mechanics
    238. In the NOPR, the Commission noted that section 215 of the FPA
does not contain any specific requirements regarding the revenue
collection for the ERO, other than specifying that the Commission may
certify an ERO if it determines that such ERO, inter alia, has
established Rules that allocate equitably reasonable dues, fees, and
other charges among end-users.\76\
---------------------------------------------------------------------------

    \76\ Id. at P 99.
---------------------------------------------------------------------------

Comments

    239. Some commenters state that, with a few modifications, the
current method of funding NERC and the regional reliability councils
should be carried over to the funding of the ERO and the Regional
Entities; however, in a change from current practice, all users of the
Bulk-Power System should be directly allocated a share of a Regional
Entity's costs, not just the Regional Entity members.\77\ It is
unnecessary for the ERO and Regional Entities to be financed directly
by retail load and/or the entities that serve such load (such as
distribution cooperatives), since NERC and the regional reliability
councils are generally not funded in this manner today. Making such a
change would be administratively disruptive. South Carolina E&G states
that the ERO and a Regional Entity should jointly ensure that the fees
assessed to end-users will fund their activities.
---------------------------------------------------------------------------

    \77\ See, e.g., NiSource, Exelon, Entergy and MidAmerican.
---------------------------------------------------------------------------

    240. Allegheny expresses concern that the cost of operating and
maintaining the ERO will be a non-discretionary cost over which
industry participants will have no control. Consequently, ERO costs
should fall on retail consumers. The cost of operating the ERO will be
like a tax, yet neither the ERO nor the Commission has the ability to
levy a direct charge for ERO costs on an individual end user. The task
before the Commission and the ERO will be to design a mechanism that
allows ERO costs to be charged in an equitable manner to those entities
over which the Commission has jurisdiction and can be passed on by
local distribution companies to an end user. However, a distribution
company may be subject to a retail rate moratorium and the Commission
cannot provide a clear and unequivocal determination of preemption that
will enable a distribution company to recover ERO costs from its retail
ratepayers.

    241. NASUCA and ELCON recommend that the ERO funding mechanism
should be submitted to the Commission in the form of a tariff to be
formally approved. ELCON asks that such a net energy for load-based
tariff be levied on Balancing Authorities. Certain commenters caution
that the development of a funding mechanism should recognize the
possibility of trapped costs when there is a lag between cost
incurrence and the reflection of such costs in the rates of
transmission owners.\78\ The Commission should seek an alternative such
as an automatic trackers or true-up mechanism to minimize the risk of
trapped costs. The Commission should confirm that transmission owners
will be permitted to recover ERO costs that they are assessed and avoid
adopting any funding mechanism that requires transmission owners to
assess charges on the ERO's behalf where other transmission owners have
relinquished their wholesale billing function due to RTO/ISO
membership. In this regard, Michigan Electric suggests that the
Commission not adopt a mechanism that requires ``Balancing Entities''
as currently defined by NERC to perform such a billing function.
---------------------------------------------------------------------------

    \78\ See Michigan Electric and International Transmission.
Michigan Transmission supports inclusion of a formula-based process
as one of the alternatives the ERO may propose as part of its
funding mechanism.
---------------------------------------------------------------------------

Commission Conclusion

    242. The issue of billing mechanics associated with the collection
of funds refers to who receives invoices from the ERO or Regional
Entity and who collects the monies from end users. Billing mechanics
may depend on funding responsibility, for example, whether net energy
for load is adopted and whether generators, large industrial customers,
and others are billed directly by the ERO or if all invoices go only to
balancing entities (control areas) or only to all load serving
entities. Accordingly, cost allocation and cost responsibility
questions should be addressed first by the ERO and submitted together
with a proposal for revenue collection for Commission approval. A
candidate ERO's certification application should provide at least
enough detail for the Commission to assess the general plan.
Accordingly, we direct the ERO applicant to present a detailed proposal
for billing mechanics in its application.
g. Other Funding Matters
    243. NASUCA recommends requiring the ERO and Regional Entities to
use the Uniform System of Accounts for reasons of consistency.
    244. NiSource submits that once the Commission approves a
mechanism, it should limit the frequency of modifications in the
approved mechanism. CREPC suggests that the regulations should require
that any Regional Entity that spans an entire Interconnection must file
its proposed budget with its Regional Advisory Body at the same time it
files with the Commission and the ERO, and further require that the ERO
must file its proposed budget with the all of the Regional Advisory
Bodies at the same time it files with the Commission.
    245. CREPC also recommends that the Commission require each
Regional Entity to fund the relevant Regional Advisory Body.

Commission Conclusion

    246. With regard to NASUCA's suggestion, we find that consistency
of financial responsibility between the ERO and a Regional Entity is
desirable. However, we decline to decide in this Final Rule that the
Uniform System of Accounts designed for public utilities is best for
these non-utility entities. Rather, we will allow the ERO flexibility
to develop a reasonable and consistent system of accounts, with a level
of detail and record keeping comparable to the Uniform System of
Accounts and sufficient to allow the Commission to compare each
Commission-approved ERO fiscal year budget with the actual results at
the ERO and Regional Entity level. The pro forma delegation agreement
must specify that a Regional Entity must also follow the ERO's
prescribed system of accounts.
    247. With respect to NiSource's comment, we expect that requests to
modify the approved funding mechanism will be infrequent because such
change may be controversial and disrupt the ERO's ongoing funding.
    248. We find that it is not necessary to provide in our regulations
funding of a Regional Advisory Body. Such bodies are voluntary
organizations with members to be appointed by the Governor of each
participating state or province. Each Regional Advisory Body is
responsible for developing its own funding means.
5. Reliability Standards--Section 39.5
    249. Consistent with section 215(d) of the FPA, the proposed
regulations directed the ERO to file a proposed Reliability Standard or
modification to a Reliability Standard with the Commission for review.
The Commission may approve a proposed Reliability Standard or
modification to a Reliability Standard if it determines that the
Reliability Standard is just, reasonable, not unduly discriminatory or
preferential, and in the public interest. In its review, the Commission
will give due weight to the technical expertise of the ERO or a
Regional Entity organized on an Interconnection-wide basis with respect
to a Reliability Standard to be applicable within that Interconnection,
except that the Commission may not defer to the ERO or a Regional
Entity with respect to the effect of a Reliability Standard on
competition.
    250. The NOPR provided that the Commission shall remand a
Reliability Standard that it disapproves in whole or in part and, when
remanding, may set a deadline by which the ERO must submit a proposed
revision to the Reliability Standard. The proposed rule stated that the
Commission may direct the ERO to submit a proposed Reliability Standard
that addresses a specific matter. Further, the Commission may remand a
previously-approved Reliability Standard if it determines that it does
not satisfy the legal standard of review.
a. Reliability Standard Development by the ERO and Regional Entities
i. Reliability Standard Development by the ERO
    251. The regulations proposed in the NOPR directed the ERO to
consider and develop Reliability Standards and modifications to
Reliability Standards, applicable to the entire Bulk-Power System or to
a particular region or Interconnection.
    252. Though the comments on this section address a broad range of
issues, many focus on the proper scope of the subject matter of the
Reliability Standards, the role of the ERO and others in Reliability
Standard development. For example, NRECA emphasizes that any
Reliability Standard developed by the ERO must be limited to addressing
reliability issues; the Commission must not use its new authority to
impose economic regulation on a nonpublic utility.
    253. The ISO/RTO Council comments that Reliability Standards
developed by the ERO should reflect the ``what'' not the ``how'' of
reliability. By this they mean that the ERO's role should be to develop
a Reliability Standard specifying ``what'' is necessary to preserve
reliability and impose a penalty for violation of such a Reliability
Standard, whereas ``how'' such a Reliability Standard is implemented
should be left to others, such as control area operators and system
planners. Reliability Standards should apply equally well in areas with

organized markets and those without organized markets.
    254. The Missouri Commission suggests that, although neither the
ERO nor the Commission has been granted authority to order the
construction of new generation or transmission capacity, the ERO should
develop and the Commission should approve voluntary planning
standards--a traditional function of NERC and the regional reliability
councils. These voluntary planning standards could then be enforced by
the states. Trexco encourages the Commission to put a greater emphasis
on long-term plans because an emphasis on day-to-day operations could
increase future risk to the grid. Further, Reliability Standards should
provide incentives for enhancement of transmission capacity.
    255. International Transmission comments that the ERO should
establish and implement strong Reliability Standards that do not
reflect the lowest common denominator. Strong Reliability Standards
would also highlight the need to expand transmission infrastructure and
promote the deployment of advanced grid technologies.
    256. LADWP states that Reliability Standards should be clear,
unambiguous, practicable, but sufficiently flexible to allow the system
operator discretion in dealing with an emergency condition. Reliability
Standards that are overly prescriptive or too rigid would inhibit,
rather than facilitate, an operator's ability to respond rapidly in an
emergency. For example, under extreme conditions such as an earthquake,
there may be an occasion when a system operator may have to permit,
momentarily, a frequency level lower than that allowed by a Reliability
Standard to avoid tripping generating units and in turn avoid a
blackout. In addition, the Final Rule and Reliability Standards should
specify the roles of, and the actions to be taken by, the ERO and a
Regional Entity in the event of an emergency. After the emergency has
passed, the ERO Rules and Regional Entity Rules should allow for
stakeholder review of the actions taken and of the Reliability
Standards themselves.
    257. WECC asks the Commission to revise the proposed regulation to
clarify that a Regional Entity has the right to consider and develop
Reliability Standards or modifications. WECC asserts that this right is
absolutely clear from section 215(e)(4) of the FPA where the
legislative language requires the Commission to ``issue regulations
authorizing the ERO to enter into an agreement to delegate authority to
a regional entity for the purpose of proposing reliability standards to
the ERO.'' Such a right is only implied in the NOPR. WECC asks that the
Final Rule make this explicit by adding the following text at the end
of the first sentence of paragraph (a) of the Commission's proposed
regulations on Reliability Standards: ``Regional Entities may also
consider and develop Reliability Standards or modifications to
Reliability Standards to be applicable to the entire Bulk-Power System
or a particular region or Interconnection for submission to the ERO for
approval (subject to applicable presumptions) as ERO-proposed
standards.'' WECC argues that the addition of this sentence would avoid
any ambiguity regarding a Regional Entity's right to propose a
Reliability Standard and would provide proper context to the
Commission's regulations in subsections (b)(2) and (d) of the
Commission's proposed regulations on Reliability Standards.

Commission Conclusion

    258. The Commission adopts the substance of the proposed
regulation. Any proposed Reliability Standard development process must
ensure that any Reliability Standard is technically sound and the
technical specifications proposed would achieve a valuable reliability
goal. The process must also: (1) Be open and fair; (2) appropriately
balance the interests of stakeholders; (3) include steps to evaluate
the effect of the proposed Reliability Standard on competition; (4)
meet the requirements of due process; and (5) not unnecessarily delay
development of the proposed Reliability Standard.
    259. We agree with NRECA that the Reliability Standards should not
be used to impose economic regulation on entities that are not
jurisdictional to the Commission for their rates, terms and conditions.
However, each user, owner and operator of the Bulk-Power System will be
expected to comply with Reliability Standards. Pursuant to section 1241
of EPAct,\79\ the Commission will allow recovery of all costs prudently
incurred to comply with the Reliability Standards.
---------------------------------------------------------------------------

    \79\ We note that section 1241 of EPAct (Transmission
Infrastructure Investment) adds a new section 219 to the FPA which
mandates that not later than one year after enactment of section
219, the Commission establish, by rule, incentive-based (including
performance-based) rate treatments for the transmission of electric
energy in interstate commerce by public utilities for the purpose of
benefiting consumers by ensuring reliability and reducing the cost
of delivered power by reducing transmission congestion.
---------------------------------------------------------------------------

    260. While we are sympathetic to ISO/RTO Council's suggestion that,
in general, a Reliability Standard should address the ``what'' and not
the ``how'' of reliability and that the actual implementation of a
Reliability Standard should be left to entities such as control area
operators and system planners, in certain limited situations there may
be a good reason to leave implementation practices out of a Reliability
Standard. In other situations, however, the ``how'' may be inextricably
linked to the Reliability Standard and may need to be specified by the
ERO to ensure the enforcement of the Reliability Standard. For some
Reliability Standards, leaving out implementation features could: (1)
Sacrifice necessary uniformity in implementation of the Reliability
Standard; (2) create uncertainty for the entity that has to follow the
Reliability Standard; (3) make enforcement difficult; and (4) increase
the complexity of the Commission's oversight and review process.
Accordingly, we leave it to the ERO to develop proposed Reliability
Standards that appropriately balance reliability principles and
implementation features.
    261. In response to the Missouri Commission's comment regarding
planning standards, we do not believe it is possible or desirable to
try to develop generic guidelines on planning roles in this proceeding.
    262. We agree with LADWP that the Reliability Standards should be
clear, unambiguous, practicable, and must also address emergency
conditions. However, specifying the roles and actions to be taken by
the ERO and the Regional Entity in the event of an emergency, including
the post-review of the operator actions, is outside the scope of this
proceeding. We expect the ERO to develop proposed Reliability Standards
and these may address the roles of various entities in an emergency.
    263. In response to WECC, we clarify that a Regional Entity may
consider and propose a Reliability Standard or modification for its
region or the continent-wide Bulk-Power System to the ERO.
ii. Due Process in Reliability Standard Development
    264. Consistent with the statute, the NOPR proposed that an ERO
applicant must have established ERO Rules \80\ that provide reasonable
notice and opportunity for public comment, due process, openness, and
balance of interests in developing a proposed

Reliability Standard, and otherwise exercising ERO duties.\81\
---------------------------------------------------------------------------

    \80\ As noted in the NOPR, the ERO Rules include the bylaws,
rules of procedure and other organizational rules and protocols of
the ERO, and are distinguishable from the ERO's Reliability
Standards. NOPR at P 30.
    \81\ Id. at P 41.
---------------------------------------------------------------------------

Comments

    265. EEI states that the ERO must develop a Reliability Standard
using a process that meets the statutory requirements for due process,
openness and balance of interests. TAPS, EEI, and others commenters
suggest that ANSI accreditation is one way to satisfy the openness
requirement. Some favor ANSI accreditation, and one urges that ANSI
certification should be prima facie evidence that the ERO's Reliability
Standard development process meets the requirement that the ERO
establish Rules that provide reasonable notice and opportunity for
public comment, due process, openness, and balance of interests in
developing Reliability Standards, and otherwise exercising its duties,
and note that an ANSI-accredited process does not require participants
to be members.\82\ NRECA recommends that the Final Rule expressly
codify that the ERO must have ANSI accreditation for its Reliability
Standard development process.
---------------------------------------------------------------------------

    \82\ See, e.g., EEI, APPA, EPSA, South Carolina E&G and SERC.
---------------------------------------------------------------------------

    266. EEI suggests that an ANSI-certified process is one means to
satisfy the statutory requirements, but does not rule out the
possibility of a different ``rigorous process.'' Massachusetts
Commission and other commenters strongly urge that the ERO be required
to use the ANSI-certified Reliability Standard development process
currently used by NERC. Indianapolis P&L notes that this is important
for maintaining technical best practices. South Carolina E&G states
that ANSI certification would ensure openness, consensus, and due
process.
    267. With regard to openness in the Reliability Standard
development process, some commenters favor NERC's present nine
representative stakeholder sectors and registered ballot body process
as a workable template to follow.\83\
---------------------------------------------------------------------------

    \83\ See, e.g., SMA and ELCON.
---------------------------------------------------------------------------

Commission Conclusion

    268. As noted above, the Final Rule adopts the NOPR's requirement
that an ERO application must include ERO Rules that provide for
reasonable notice and opportunity for public comment, due process,
openness, and balance of interests in developing a Reliability Standard
and otherwise exercising its duties. The ERO should propose such a
process in its certification application in accordance with section
39.3(b)(2)(iv).
    269. Although we are not requiring that the ERO adopt an ANSI-
certified approach to meet all of the requirements of section 39.3, we
find that ANSI-accreditation is one reasonable means of doing so. We
agree with EEI that a process like the ANSI-certified process would
ensure openness and balance the interests of stakeholders. However, we
are concerned about the time it may take to develop a Reliability
Standard under the ANSI-certified process. The ERO applicant should
address in its application the timetable for developing a proposed
Reliability Standard under an ANSI-certified or other process,
including the timetable for developing a proposed Reliability Standard
that is urgently needed. Moreover, the ERO applicant should also
propose a process for modifying or replacing a Reliability Standard
(even if interim in nature) in the event that the Commission orders the
ERO to modify a Reliability Standard.
    270. Regardless of the method proposed by an ERO candidate to
ensure due process, openness, and balance of interests in developing a
Reliability Standard and otherwise exercising its duties, the ERO
application must describe how the ERO applicant would provide for fair
representation of all views in its process for developing a proposed
Reliability Standard.
iii. Regional Uniformity and Variation of a Standard
    271. In the NOPR, the Commission proposed that there should be
uniformity of Reliability Standards among regions unless a difference
is necessary for reliability. The Commission proposed in paragraph 46
of the NOPR that there should be a greater level of uniformity among
regional Reliability Standards for Regional Entities not organized on
an Interconnection-wide basis. The NOPR proposes an interpretation of
the FPA that any regional Reliability Standard proposed to the ERO by a
Regional Entity would, upon approval by the Commission, become a
variance of an ERO Reliability Standard, not a Regional Entity
Reliability Standard.\84\
---------------------------------------------------------------------------

    \84\ NOPR at P 80.
---------------------------------------------------------------------------

    272. In responding to the NOPR, commenters and participants in the
Commission's technical conferences on Electric Reliability Standards
refer to various types of regional difference. For example, some
commenters refer to a regional difference as a Reliability Standard
that is essentially the same as a continent-wide Reliability Standard
but is more stringent. Others refer to an aspect of a continent-wide
Reliability Standard that is applicable only in one region or a group
of regions, such as a difference that exempts a particular region from
some aspect of a Reliability Standard. Others refer to a difference
that permits a region to fulfill some component of the Reliability
Standard in an alternate manner. There is also a part of a continent-
wide Reliability Standard that contains a measure or performance
criterion that is left blank in the Reliability Standard for each
region to fill in. Some commenters distinguish two other types of
regional difference, a Reliability Standard for a region or group of
regions on a matter for which there is no comparable continent-wide
Reliability Standard and or an addition to a continent-wide Reliability
Standard for a region or group of regions for which there is no
comparable continent-wide Reliability Standard addition. There may be
others. \85\
---------------------------------------------------------------------------

    \85\ Some participants in our technical conferences also
mentioned an ``entity variance,'' referring to a difference in some
aspect of a Reliability Standard that would apply to a particular
entity that is smaller than a region, such as an RTO or ISO.
---------------------------------------------------------------------------

    273. In this Final Rule, we do not attempt to distinguish or rule
separately on these various types of regional difference but refer to
them generally as regional differences.\86\
---------------------------------------------------------------------------

    \86\ We note that some commenters call for greater flexibility
for a regional requirement that is not itself a Reliability Standard
but is a region's specification of how to comply with a continent-
wide Reliability Standard within the region. Some refer to this as a
``regional criterion.'' Our discussion below of requirements
regarding uniformity and regional differences does not necessarily
apply to such ``regional criteria'' that a region may seek to make
mandatory under section 215 of the FPA.
---------------------------------------------------------------------------

    274. It is not clear in every comment which type of regional
difference is being referred to, but where we believed the meaning is
clear we used the terminology above in summarizing comments.

Comments

    275. Commenters offer a range of views on the need for uniformity
of Reliability Standards among regions and the need for regional
differences. Many commenters cite the benefits of uniform continent-
wide Reliability Standards. Others assert that Reliability Standards
should be tailored to reflect each region's unique characteristics.
Others, however, see a middle ground, explaining that continent-wide
Reliability Standards could be supplemented by regional differences.
    276. Xcel Energy believes that a single uniform set of North
American Reliability Standards, without regional differences, should be
the goal. Alcoa comments that the Commission should

view regional variances with skepticism.
    277. EPSA comments that lack of uniformity in Reliability Standards
creates the potential for conflicts, thus increasing the cost of
electricity to consumers. In supporting regional uniformity, Hydro One
observes that the liberalization of energy markets in recent years has
been accompanied by a proliferation of new entities. The coordination
of reliability and commercial interests of these entities is becoming
complex and conflicting and has resulted in inconsistent roles and
responsibilities.
    278. Western Governments and others comment that, because there are
physical, economic, and institutional differences between the Western
Interconnection and the Eastern Interconnection, Reliability Standards
should not be standardized for the entire North American continent \87\
Western Governments adds that, because decisions are best made by those
closest to the issues and who bear the consequences of the decisions,
the Commission should defer to the Western Interconnection in setting
and enforcing Reliability Standards. The California Commission adds
that WECC, in collaboration with other regional organizations, has a
great deal of experience, and has already demonstrated much success at
assuring grid reliability in the Western United States.
---------------------------------------------------------------------------

    \87\ See, e.g., California Commission, City of Seattle, CREPC
and New York ISO.
---------------------------------------------------------------------------

    279. Many commenters support the need for a high level of
uniformity of Reliability Standards for Regional Entities within one
Interconnection. International Transmission, for example, states that
there should be fewer regional differences for regions within the same
Interconnection.
    280. Favoring the opportunity for regional differences, NPCC and
NYSRC recommend that the Commission not force on the regions a ``one-
size-fits-all'' approach that ignores unique regional needs and
concerns.\88\ Such an approach, they argue, would eventually degrade
reliability in eastern Canada and the northeastern portion of the
United States. NYSRC notes that EPAct does not require conformity but,
rather, anticipates that a Regional Entity may propose a regional
Reliability Standard applicable within its region. PSNM-TNPC is
concerned that a focus on uniformity of Reliability Standards would
result in an abrupt transition for market participants, which would
have a negative impact on grid investment and introduce significant
uncertainty into transmission planning efforts.
---------------------------------------------------------------------------

    \88\ See also ISO/RTO Council, NARUC, New York ISO and PSNM-
TNPC.
---------------------------------------------------------------------------

    281. ISO New England comments that regional differences in the
Bulk-Power System exist for historical reasons; and because there are
such differences, uniform continent-wide Reliability Standards may not
be appropriate in all instances.
    282. Several commenters, such as the California ISO, support a
regional variance that for a regional Reliability Standard that is more
stringent than the one developed by the ERO. FirstEnergy favors
regional differences, while also supporting a single set of Reliability
Standards proposed by the ERO and approved by the Commission. It
believes in standardization to the greatest extent possible, but would
make an exception if a proposed regional difference is found by the
ERO: (1) To be reasonable and not unduly discriminatory; (2) to be more
stringent than an ERO Reliability Standard; and (3) would result in no
harm to reliability in any other region. Similarly, the ISO/RTO Council
asserts that a regional difference, especially a more stringent
regional requirement, should be allowed where clearly justified to
support specific, identifiable regional needs.
    283. Dominion asserts that there should be no requirement for a
transmission owner to change to a Regional Entity's Reliability
Standards, principles, or guidelines, or to move to a new set of
Reliability Standards, in order to conform to all current Reliability
Standards of other NERC regions within an RTO. Such a requirement would
be very expensive and would require rebuilding the transmission system
without providing appreciable improvements in the reliability of the
system. Dominion recommends that the Commission permit a grandfathering
arrangement so that changes from one Regional Entity to another do not
have the effect of causing a transmission owner to rebuild the existing
transmission system. Dominion urges the Commission to maintain this
flexibility since it is not detrimental to reliability.
    284. Further, Dominion asserts that where a transmission owner's
system extends across more than one Regional Entity, the Commission
should not prescribe the Regional Entity's Reliability Standards with
which the transmission owner must comply. It argues that such
transmission owners have made their transmission facilities conform to
different Reliability Standards, either geographically or over time, as
set by existing regional reliability councils. Changing design and
maintenance standards now to meet the Reliability Standards of a single
Regional Entity would be difficult and costly.
    285. NERC, SERC and Cinergy suggest that regional criteria
represent a middle layer between enforceable Reliability Standards and
the operating and planning protocols of each entity. These, they argue,
should not require Commission approval and would not be enforceable
under section 215 of the FPA. Cinergy asserts that any operating Rule
that is to be enforceable should be considered a de facto Reliability
Standard, submitted back to the ERO for review, and submitted to the
Commission for approval.
    286. NERC notes several conditions that could result in regional
differences: (1) A proposed ERO Reliability Standard may conflict with
a regional practice, such as a Commission-approved protocol in an RTO
tariff; (2) an ERO Reliability Standard may require a Regional Entity
to define regional criteria and procedures necessary to implement the
Reliability Standard; and (3) a region may already have a more
stringent requirement than the continent-wide Reliability Standard to
meet the needs of the electric system within a particular area.
    287. Michigan Electric states that the Commission should articulate
clear policies with respect to the various types of regional
differences, including which differences are permitted, how such
differences would be developed, and the process that should be used by
the ERO to review a regional difference proposed by a Regional Entity.
    288. Many commenters, such as AEP, Ameren, AWEA, ELCON, EPSA,
Exelon, FRCC, and International Transmission, as well as NERC, support
the Commission's proposal that any enforceable regional difference be
incorporated into the set of ERO Reliability Standards.
    289. Other commenters, however, disagree with the Commission's
proposal that any regional difference be part of the ERO Reliability
Standards. The California Board and SoCalEd argue that the Commission's
interpretation of section 215(d)(3) is incorrect. While the California
Board agrees that EPAct creates a process for the proposal and approval
of a regional Reliability Standard, it sees nothing in EPAct to suggest
than an Interconnection-wide Reliability Standard may not be considered
a Regional Entity Reliability Standard.

Commission Conclusion

    290. The Commission believes that uniformity of Reliability
Standards

should be the goal and the practice, the rule rather than the
exception. Greater uniformity will encourage best practices, thereby
enhancing reliability and benefiting consumers and the economy.
Congress envisioned greater uniformity in adopting section 215 and a
broad cross-section of the industry supports this goal. At our November
18, 2005 technical conference, Michael Morris, the Chairman and CEO of
American Electric Power, Inc., testifying on behalf of EEI, stated
that: ``The regional differences should be few * * * and the
enforcement latitude should be small.'' Tr. at 77:25-78:1 (Nov. 18,
2005). His fellow panelists, representing various sectors of the
industry, agreed with his remarks.
    291. The goal of greater uniformity does not, however, mean that
regional differences cannot exist. We agree with WECC, NPCC, and others
that section 215 of the FPA provides for exceptions from continent-wide
uniformity in a Reliability Standard. Accordingly, we provide guidance
on the criteria for considering such exceptions. As a general matter,
we will accept the following two types of regional differences,
provided they are otherwise just, reasonable, not unduly discriminatory
or preferential and in the public interest, as required under the
statute: (1) A regional difference that is more stringent than the
continent-wide Reliability Standard, including a regional difference
that addresses matters that the continent-wide Reliability Standard
does not; and (2) a regional Reliability Standard that is necessitated
by a physical difference in the Bulk-Power System.
    292. We also recognize that greater uniformity cannot be achieved
overnight. For example, a significant number of current regional
standards have been developed on topics for which there is no
continent-wide standard, but rather only a NERC directive that the
regions develop a particular standard. Over time, we would expect that
the regional differences produced under this framework will decline and
a set of best practices will develop. We would expect that any ERO
applicant will propose a process by which regional differences in this
and other areas can be refined into a set of best practices over time.
This is particularly important for the Reliability Standards that apply
to regions within an Interconnection. Although we encourage the
development of continent-wide best practices, we recognize that greater
diversity may be appropriate as between the Interconnections than
within them.
    293. In response to PSNM-TNPC's concern that an abrupt transition
to uniform Reliability Standards would negatively affect grid
investment and transmission planning efforts, PSNM-TNPC has presented
no convincing argument that this effect would occur. We expect that
more uniformity of requirements could foster new investment. We agree,
however, that those proposing uniform Reliability Standards should take
into account the cost and time needed to achieve uniformity.
    294. The Commission does not establish here a generic
grandfathering arrangement that would exempt any user, owner or
operator from having to comply with any change in a Reliability
Standard or a change resulting from a move to another Regional Entity.
A user, owner or operator must follow the Reliability Standards of the
ERO and the Regional Entity within which it is located. The expected
level of uniformity of continent-wide Reliability Standards and of
Reliability Standards within an Interconnection should protect any
owner or operator that moves from one Regional Entity to another from
incurring a large cost.
    295. Until a proposed regional difference is filed by the ERO with
the Commission and approved by the Commission, any ERO-developed and
Commission-approved continent-wide Reliability Standard is in effect
and enforceable. No regional difference is enforceable under section
215 of the FPA until it is filed by the ERO with the Commission and
approved by the Commission.
    296. Any regional difference shall be considered part of the ERO's
set of Reliability Standards. A regional difference that is proposed to
the Commission by the ERO and approved by the Commission is an ERO
Reliability Standard, not a Regional Entity Reliability Standard in the
sense that California Board suggests.
    297. In response to the Western Governments and the California
Commission, while the Commission cannot simply defer to the members of
the Western Interconnection in regard to the establishment of regional
Reliability Standards for the West, we recognize that there may be
justifiable differences in a Reliability Standard based on physical
differences in the electrical systems. In addition, we respect the
rebuttable presumption afforded by section 215 of the FPA to a proposal
for a Reliability Standard from a Regional Entity organized on an
Interconnection-wide basis, as discussed below.
iv. Rebuttable Presumption for a Reliability Standard Proposed by an
Interconnection-Wide Regional Entity
    298. The proposed rule would require the ERO to rebuttably presume
that a proposed Reliability Standard or a modification to a Reliability
Standard to be applicable on an Interconnection-wide basis is just,
reasonable, not unduly discriminatory or preferential, and in the
public interest if it is proposed by a Regional Entity organized on an
Interconnection-wide basis.

Comments

    299. The ISO/RTO Council remarks that the rebuttable presumption is
only an evidentiary presumption, not a requirement to accept any
proposal. While complying with basic due process requirements, the ERO
has a duty to collect information on the advantages and disadvantages
of any proposed Reliability Standard. It states, however, that if after
completing its due diligence, the ERO has not found any information
rebutting the presumption, the ERO would accept the proposal.
    300. WECC and WestConnect ask the Commission to clarify the scope
of the ERO's authority in reviewing a Reliability Standard proposed by
an Interconnection-wide Regional Entity. Both recommend that the ERO be
required to give substantial weight to the statutory presumption and
deem it rebutted only in the most unusual circumstances based upon
clear, convincing, and documented evidence. To accomplish this, WECC
proposes a modification to the proposed regulation stating that, absent
a showing based upon clear and convincing evidence rebutting the
presumption, the ERO must promptly forward to the Commission a proposed
Reliability Standard entitled to a rebuttable presumption. Further, the
Regional Entity entitled to the rebuttable presumption should have an
opportunity to respond to any evidence allegedly rebutting the
presumption as well as an opportunity to appeal a decision not to
forward a proposed Reliability Standard entitled to a rebuttable
presumption to the Commission.

Commission Conclusion

    301. We clarify that the rebuttable presumption in section 39.5(b)
refers to the burden of proof before the ERO. Any person objecting to
the proposed Reliability Standard before the ERO would have the burden
of demonstrating to the ERO that a Reliability Standard proposed by an
Interconnection-wide Regional Entity

does not satisfy the ERO criteria for approval and is therefore not
entitled to any presumption. The opportunity for the Regional Entity to
respond to a rebuttal should be set out in the ERO Rules, as discussed
above under due process. If the ERO does not find that the presumption
is adequately rebutted, it must accept the proposed Reliability
Standard from a Regional Entity organized on an Interconnection-wide
basis to be just, reasonable, not unduly discriminatory or
preferential, and in the public interest and must submit such a
proposed Reliability Standard to the Commission for approval.
b. Reliability Standard Approval by the Commission
i. Commission Review
(a) Commission Review Process
    302. The proposed regulations on Reliability Standards provided
that the Commission may approve a proposed Reliability Standard by rule
or order. The NOPR states that the Commission anticipates that it will
provide notice and opportunity for hearing of any proposed Reliability
Standard or modification to a Reliability Standard.

Comments

    303. The few comments on this section generally recommend certain
refinements to the process outlined in the NOPR. LADWP, however,
suggests that greater detail and precision is required in the Final
Rule.
    304. NERC generally supports the open process for considering a
proposed Reliability Standard described in the NOPR, including the
Commission's plan to provide interested parties opportunity to comment
on a proposed Reliability Standard. NERC believes that, because of the
technical nature of a Reliability Standard, a paper hearing would
provide adequate opportunity for interested parties to explain their
position. Southern recommends that the Commission clarify that a
proceeding regarding a proposed Reliability Standard would generally be
a paper hearing, not a trial-type adjudication.
    305. LADWP asserts that the Commission's statement in the NOPR that
it ``generally anticipates'' that it will provide notice and
opportunity for hearing of any proposed Reliability Standard is
antithetical to the concept of due process in the FPA and the
Administrative Procedure Act (APA).\89\ NiSource also emphasizes the
need for notice and public comment.
---------------------------------------------------------------------------

    \89\ 5 U.S.C. Subchapter II (2005).
---------------------------------------------------------------------------

    306. FirstEnergy recommends that the Commission adopt an expedited
review process for any proposed Reliability Standard developed through
an ANSI-accredited process. A Commission hearing is unnecessary for a
Reliability Standard that was already subject to an open stakeholder
process. Ontario IESO and Progress Energy add that any perception that
the Commission's review process allows new debate on a proposed
Reliability Standard would weaken participants' commitment to the ERO's
process.

Commission Conclusion

    307. In response to the comments of NERC and Southern, although the
Commission agrees that it is likely that most proposed Reliability
Standards would be decided on a paper hearing, we will not eliminate
the possibility of setting a proposed Reliability Standard for a trial-
type hearing before an Administrative Law Judge, if appropriate.
    308. With regard to the comments of NiSource and LADWP, we note
that section 215(c)(2)(D) of the FPA specifically requires the ERO to
provide for reasonable notice and opportunity for public comment in
developing a Reliability Standard. In contrast, section 215 does not
specifically require that the Commission provide notice and an
opportunity for public comment when reviewing a Reliability Standard
proposed by the ERO. We will, however, provide notice and opportunity
for public comment except in extraordinary circumstances. We note that
section 215 of the FPA provides for an ERO Reliability Standard
development process open to the participation of affected entities and
do not want to encourage these entities to bypass that process in
anticipation of raising concerns only with the Commission. Except in
extraordinary circumstances, we expect persons commenting to the
Commission about a proposed Reliability Standard to explain how they
presented their views of the proposed Reliability Standard in the ERO
or Regional Entity process and the result.
    309. FirstEnergy asks the Commission to develop an expedited review
process for all proposed Reliability Standards. While it may be
appropriate to expedite the process for a particular proposed
Reliability Standard, we will not establish a special expedited process
at the Commission for all proposed Reliability Standards in the Final
Rule. The Commission may choose to have, or the ERO or others may
petition for, an expedited review of a particular proposed Reliability
Standard which may include waiver of our normal procedure for notice
and an opportunity for comment.
(b) Legal Standard of Review of a Proposed Reliability Standard
    310. The Commission asked for comments on how the legal standard of
review, i.e., whether a proposed Reliability Standard is ``just,
reasonable, not unduly discriminatory or preferential, and in the
public interest,'' should be applied to review of a proposed
Reliability Standard.\90\
---------------------------------------------------------------------------

    \90\ NOPR at P 55.
---------------------------------------------------------------------------

Comments

    311. Comments vary on how the Commission should apply the standard
of review. Some commenters offer a general principle while others
suggest multi-part tests. Some commenters recommend that the Commission
presume that a proposed Reliability Standard vetted through an ANSI-
certified process meets the standard of review.
    312. EEI states that the Commission should remain flexible in
applying the statutory standard of review to a proposed Reliability
Standard. According to EEI, a Reliability Standard should be based on
technical and operational factors, and not vary with facility
ownership. SMA and Oklahoma Commission suggest that the ERO should have
the burden of demonstrating that a proposed Reliability Standard
satisfies the statute's legal standard.
    313. Some commenters offer an overarching principle. For example,
Southern and SERC suggest that, to satisfy the legal standard of
review, a proposed Reliability Standard should promote the reliability
of the Bulk-Power System. NYSRC remarks that the Commission should
apply a general rule, such as, ``reasonably necessary to maintain an
adequate level of reliability of the bulk power system.''
    314. Other commenters offer separate analysis for the three
elements of the standard of review ``just and reasonable,'' ``undue
discrimination'' and ``public interest.'' For example, APPA recommends
that the Commission consider whether a proposed Reliability Standard is
fair, whether it unjustifiably discriminates in its application among
users of the Bulk-Power System and whether it furthers the public good.
FRCC states that the proposed Reliability Standard must also not tilt
the playing field in favor of a particular competitor or group of
competitors. Alcoa and ERCOT suggest that the Commission should weigh
the reliability benefits provided by a Reliability Standard with the
overall cost or impact of compliance.

    315. FRCC recommends that, for the Commission to find a proposed
Reliability Standard to be just and reasonable, the ERO must
demonstrate that its proposal is reasonably necessary to achieve a
legitimate reliability objective and not unduly expensive or burdensome
relative to the benefits of the objective. FRCC suggests that the ERO
should have to include with its submission an analysis of the costs,
risks and benefits of each proposed Reliability Standard to add
economic rigor to the Reliability Standard development process. For the
Commission to find a proposed Reliability Standard to be not unduly
discriminatory, no entity or group of entities should be required to
bear costs that are disproportionate to the efficient costs of
achieving reliability. EEI states that if the Commission finds that a
proposed Reliability Standard may have an unduly discriminatory impact
that is unrelated to technical or operational requirements, it should
remand the proposed Reliability Standard to the ERO to determine
whether the same level of reliability can be achieved in a non-
discriminatory way.
    316. NRECA proposes that the Commission determine whether (1) a
proposed Reliability Standard would accomplish its intended effect in
an efficient and effective manner (just and reasonable); (2) entities
that are similarly situated receive similar or comparable treatment,
and appropriate differences are recognized for entities that are not
similarly situated (not unduly discriminatory); and (3) the reliability
benefits are achieved in a manner that does not undermine, but may
further, other legitimate objectives (public interest). Further, the
Commission should ensure that a proposed Reliability Standard does not
unnecessarily burden small utilities that minimally impact reliability.
    317. Alcoa comments that a proposed Reliability Standard should
meet the following additional criteria: (1) The proposal is grounded in
sound transmission engineering principles; (2) its requirements are
clearly and unambiguously stated; and (3) it is not unduly burdensome
or beneficial with respect to any particular class of operators,
stakeholders, or end users.
    318. The ISO/RTO Council identifies numerous factors for the
Commission to consider, including: (1) Is the particular proposed
Reliability Standard the best way to define and measure the intended
reliability objective and has the ERO evaluated the consequential
impacts of the Reliability Standard? (2) Have any conflicts between the
proposed Reliability Standard and approved tariffs been resolved? (3)
Will entities be able to implement the proposed Reliability Standard in
a relatively uniform manner? and (4) Is the proposed Reliability
Standard capable of being implemented and enforced in other affected
countries as well as the United States?
    319. Numerous commenters ask that the Commission defer to the
technical expertise of the industry if a proposed Reliability Standard
is developed through an ANSI-certified (or other open and fair)
stakeholder process.\91\ They explain that an ANSI-certified process
will have important attributes, including due process, openness, and
balance, and will result in the most technically sound Reliability
Standards. Some of these commenters \92\ recommend that the Commission
establish a rebuttable presumption that a Reliability Standard
developed through an ANSI-accredited process satisfies the legal
standard.

Commission Conclusion

    320. We find informative the recommendations of commenters on
criteria for reviewing a proposed Reliability Standard, particularly on
how to apply the legal standard of review, ``just, reasonable, not
unduly discriminatory or preferential, and in the public interest.''
Although we will not adopt every test that commenters propose, we do
provide here general guidance regarding how the Commission will review
a proposed Reliability Standard.
    321. The proposed Reliability Standard must address a reliability
concern that falls within the requirements of section 215 of the FPA.
That is, it must provide for the reliable operation of Bulk-Power
System facilities. It may not extend beyond reliable operation of such
facilities or apply to other facilities. Such facilities include all
those necessary for operating an interconnected electric energy
transmission network, or any portion of that network, including control
systems. The proposed Reliability Standard may apply to any design of
planned additions or modifications of such facilities that is necessary
to provide for reliable operation. It may also apply to Cybersecurity
protection.
---------------------------------------------------------------------------

    \91\ See, e.g., AEP, NARUC, NERC, Northeast Utilities, Progress
Energy, PSEG Companies, Santee Cooper, SoCalEd, TVA and Ontario
IESO.
    \92\ See, e.g., NERC, Santee Cooper and SoCalEd.
---------------------------------------------------------------------------

    322. The proposed Reliability Standard may impose a requirement on
any user, owner, or operator of such facilities, but not on others.
    323. In considering whether a proposed Reliability Standard is just
and reasonable, we will consider the following general factors, as well
as other factors that are appropriate for the particular Reliability
Standard proposed.
    324. The proposed Reliability Standard must be designed to achieve
a specified reliability goal and must contain a technically sound means
to achieve this goal. Although any person may propose a topic for a
Reliability Standard to the ERO, in the ERO's process, the specific
proposed Reliability Standard should be developed initially by persons
within the electric power industry and community with a high level of
technical expertise and be based on sound technical and engineering
criteria. It should be based on actual data and lessons learned from
past operating incidents, where appropriate. The process for ERO
approval of a proposed Reliability Standard should be fair and open to
all interested persons.
    325. The proposed Reliability Standard should be clear and
unambiguous regarding what is required and who is required to comply.
Users, owners, and operators of the Bulk-Power System must know what
they are required to do to maintain reliability.
    326. The possible consequences, including range of possible
penalties, for violating a proposed Reliability Standard should be
clear and understandable by those who must comply.
    327. There should be a clear criterion or measure of whether an
entity is in compliance with a proposed Reliability Standard. It should
contain or be accompanied by an objective measure of compliance so that
it can be enforced and so that enforcement can be applied in a
consistent and non-preferential manner.
    328. The proposed Reliability Standard does not necessarily have to
reflect the optimal method, or ``best practice,'' for achieving its
reliability goal without regard to implementation cost or historical
regional infrastructure design. It should however achieve its
reliability goal effectively and efficiently.
    329. The proposed Reliability Standard must not simply reflect a
compromise in the ERO's Reliability Standard development process based
on the least effective North American practice--the so-called ``lowest
common denominator''--if such practice does not adequately protect
Bulk-Power System reliability. Although the Commission will give due
weight to the technical expertise of the ERO, we will not hesitate to
remand a proposed

Reliability Standard if we are convinced it is not adequate to protect
reliability.
    330. A proposed Reliability Standard may take into account the size
of the entity that must comply with the Reliability Standard and the
cost to those entities of implementing the proposed Reliability
Standard. However, the ERO should not propose a ``lowest common
denominator'' Reliability Standard that would achieve less than
excellence in operating system reliability solely to protect against
reasonable expenses for supporting this vital national infrastructure.
For example, a small owner or operator of the Bulk Power-System must
bear the cost of complying with each Reliability Standard that applies
to it.
    331. A proposed Reliability Standard should be designed to apply
throughout the interconnected North American Bulk-Power System, to the
maximum extent this is achievable with a single Reliability Standard.
The proposed Reliability Standard should not be based on a single
geographic or regional model but should take into account geographic
variations in grid characteristics, terrain, weather, and other such
factors; it should also take into account regional variations in the
organizational and corporate structures of transmission owners and
operators, variations in generation fuel type and ownership patterns,
and regional variations in market design if these affect the proposed
Reliability Standard.
    332. As directed by section 215 of the FPA, the Commission itself
will give special attention to the effect of a proposed Reliability
Standard on competition. The ERO should attempt to develop a proposed
Reliability Standard that has no undue negative effect on competition.
Among other possible considerations, a proposed Reliability Standard
should not unreasonably restrict available transmission capability on
the Bulk-Power System beyond any restriction necessary for reliability
and should not limit use of the Bulk-Power System in an unduly
preferential manner. It should not create an undue advantage for one
competitor over another.
    333. In considering whether a proposed Reliability Standard is just
and reasonable, the Commission will consider also the timetable for
implementation of the new requirements, including how the proposal
balances any urgency in the need to implement it against the
reasonableness of the time allowed for those who must comply to develop
the necessary procedures, software, facilities, staffing or other
relevant capability.
    334. Further, in considering whether a proposed Reliability
Standard meets the legal standard of review, we will entertain comments
about whether the ERO implemented its Commission-approved Reliability
Standard development process for the development of the particular
proposed Reliability Standard in a proper manner, especially whether
the process was open and fair. However, we caution that we will not be
sympathetic to arguments by interested parties that choose, for
whatever reason, not to participate in the ERO's Reliability Standard
development process if it is conducted in good faith in accordance with
the procedures approved by the Commission.
    335. Finally, we understand that at times development of a proposed
Reliability Standard may require that a particular reliability goal
must be balanced against other vital public interests, such as
environmental, social and other goals. We expect the ERO to explain any
such balancing in its application for approval of a proposed
Reliability Standard.
    336. In addition to the factors above, in considering a Reliability
Standard originally developed by a Regional Entity for application only
within its own region, the Commission will consider other appropriate
factors in determining if the proposed Reliability Standard is just and
reasonable, not unduly discriminatory or preferential, and in the
public interest. These include, but are not necessarily limited to,
whether a regional difference is necessary or appropriate to maintain
reliability and whether such a regional difference would affect
reliable operation in another region. The ERO should also examine such
factors in its consideration of such a regional proposal.
    337. In applying the legal standard to review of a proposed
Reliability Standard, the Commission will consider the general factors
above. The ERO should explain in its application for approval of a
proposed Reliability Standard how well the proposal meets these factors
and explain how the Reliability Standard balances conflicting factors,
if any. The Commission may consider any other factors it deems
appropriate for determining if the proposed Reliability Standard is
just and reasonable, not unduly discriminatory or preferential, and in
the public interest. The ERO applicant may, if it chooses, propose
other such general factors in its ERO application and may propose
additional specific factors for consideration with a particular
proposed Reliability Standard.
    338. We reject the notion that we should presume that a proposed
Reliability Standard developed through an ANSI-certified process
automatically satisfies the statutory standard of review. In this
regard, we agree with EEI and others that the development of a
Reliability Standard through the ERO's stakeholder process is no
guarantee that a proposed Reliability Standard does not have a
discriminatory impact or negative effect on competition even if the
proposal meets its technical or operational objective.
ii. Due Weight to Technical Expertise of the ERO and a Regional Entity
Organized on an Interconnection-Wide Basis
    339. Consistent with the statute, the NOPR proposed that the
Commission shall give due weight to the technical expertise of the ERO
or a Regional Entity organized on an Interconnection-wide basis.

Comments

    340. NERC comments that the Commission is correct in recognizing
that due weight should be given to the technical content of a
Reliability Standard proposed by the ERO or a Regional Entity organized
on an Interconnection-wide basis. However, the ISO/RTO Council and
others question what it means to give such ``due weight.'' PacifiCorp
and APPA suggest that providing ``due weight'' means that the
Commission will rebuttably presume that a Reliability Standard proposed
by an Interconnection-wide Regional Entity is just, reasonable, not
unduly discriminatory or preferential, and in the public interest.
PacifiCorp asks the Commission to clarify that it will approve such a
proposed Reliability Standard in the absence of a specific finding that
it would detrimentally affect competition to a substantial degree. APPA
believes that the requirement that the ERO rebuttably presume the
justness and reasonableness of an Interconnection-wide Regional
Entity's proposal implies that the Commission must give the same
rebuttable presumption.
    341. The ISO/RTO Council, in contrast, comments that EPAct does not
direct the Commission to afford either the ERO or any Regional Entity
the benefit of any presumption that a proposed Reliability Standard is
just and reasonable. It is concerned that the ERO not become an
automatic pass-through mechanism for all Reliability Standards proposed
by any Regional

Entity organized on an Interconnection-wide basis.
    342. The Oklahoma Commission asks that the Commission not interpret
the statutory grant of deference as a shift in the burden of proof;
instead, the entity with the expertise should provide support for its
proposal. Similarly, SMA suggests that the entity submitting a proposed
Reliability Standard should have the burden of proof, just as the
filing party has the burden of proof in an FPA section 205 or section
206 proceeding.
    343. NiSource requests clarification of the extent to which the
Commission will give due weight to the technical expertise of a
Regional Entity organized on an Interconnection-wide basis. Section
38.4(b)(1) of the proposed regulation makes clear that the Commission
will give deference to the ERO for both a new and a modified proposed
Reliability Standard. For a Regional Entity, however, proposed section
38.4(b)(2) refers to deference ``with respect to a Reliability
Standard.'' NiSource assumes the Commission intends to apply that
deference to both a new and a modified proposed Reliability Standard,
but requests clarification on that point.

Commission Conclusion

    344. The Commission adopts the provisions on due weight as proposed
in the NOPR. The Commission will give due weight to the ERO and a
Regional Entity organized on an Interconnection-wide basis with respect
to their technical expertise.
    345. We do not agree that giving due weight means a rebuttable
presumption that the Reliability Standard meets the statutory
requirement of being just, reasonable, not unduly discriminatory or
preferential, and in the public interest. Rather, we agree with the
Oklahoma Commission and SMA that the ERO must justify to the Commission
its contention that the proposed Reliability Standard or proposed
modification to a Reliability Standard is just, reasonable, not unduly
discriminatory or preferential, and in the public interest.
    346. Regarding the request for clarification by NiSource, we
confirm that we will give due weight to the technical expertise of a
Regional Entity organized on an Interconnection-wide basis with respect
to either a proposed Reliability Standard modification or a new
proposed Reliability Standard. The Final Rule reflects this in section
39.5(c)(2).
iii. Due Weight to the Technical Expertise of a Regional Entity Not
Organized on an Interconnection-Wide Basis
    347. The Commission interpreted sections 215(d)(2) and (3) of the
FPA as not requiring the Commission to accord any additional weight to
the technical expertise of a Regional Entity not organized on an
Interconnection-wide basis and not creating a rebuttable presumption
with regard to the reasonableness of a Reliability Standard proposed by
the ERO or proposed to it by such a Regional Entity for ERO
consideration.\93\
---------------------------------------------------------------------------

    \93\ NOPR at P 46.
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Comments

    348. Many commenters suggest that the Commission should also give
due weight to the technical expertise of a Regional Entity not
organized on an Interconnection-wide basis.\94\ They note that, while
the Commission is not required to give such due weight, nothing in
section 215 precludes the Commission from doing so in appropriate
circumstances. MidAmerican suggests that the Commission give
appropriate deference to the technical expertise of a Regional Entity
that represents a significant portion of the Eastern Interconnection
without being an Interconnection-wide organization. In a similar vein,
Northeast Utilities asserts that the extension of deference by Congress
to an Interconnection-wide Regional Entity should not be read as a
directive that a Regional Entity that is smaller in scope is entitled
to no deference at all. Rather, the Commission should recognize that
certain organizations that are not Interconnection-wide have a long
history of developing more stringent standards for regions that seek
more reliable service or have unique local circumstances.
---------------------------------------------------------------------------

    \94\ See, e.g., Ameren, California ISO, Diaryland, MidAmerican,
MISO Owners, NE Pool Participants, New York Companies, NiSource,
NYSRC, New York ISO and TANC.
---------------------------------------------------------------------------

    349. According to the New York Companies, the Commission's
interpretation that only an Interconnection-wide Regional Entity is
statutorily entitled to due weight would result in two classes of
Regional Entities and would disadvantage Regional Entities that are in
a large, complex Interconnection where regional technical expertise is
valuable. NYSRC and Dairyland contend that the Commission should
provide due deference to all Regional Entities since they must satisfy
the certification criteria applicable to the ERO.
    350. FRCC and Southern comment that a Reliability Standard proposed
by a Regional Entity not organized on an Interconnection-wide basis
must be approved by the ERO. Further, EPAct requires the Commission to
give due weight to the ERO's determinations. Therefore, when reviewing
such a proposed Reliability Standard, the Commission must give due
weight to the underlying technical determinations made by the ERO
because the proposal will have undergone ERO review and approval.

Commission Conclusion

    351. The statute provides that in the case of a Reliability
Standard proposed by a Regional Entity organized on an Interconnection-
wide basis the Commission should give due weight to the technical
expertise of that Regional Entity. The statute does not provide for
similar treatment for a Regional Entity that is not organized on an
Interconnection-wide basis. However, as a practical matter, the
Commission will give appropriate weight to the expertise of any
Regional Entity, and in all cases a proposed Reliability Standard must
be supported by the record. As stated above, the statute also provides
for a ``rebuttable presumption'' by the ERO that a proposed Reliability
Standard from an Interconnection-wide Regional Entity is just and
reasonable but does not provide for similar treatment for a Regional
Entity that is not organized on an Interconnection-wide basis.
Accordingly, no such presumption shall apply for Regional Entities that
are not organized on an Interconnection-wide basis.
iv. No Deference on Competition
    352. Consistent with the statute, the proposed regulations provided
that the Commission shall not defer to the ERO or a Regional Entity
with respect to the effect of a proposed Reliability Standard on
competition. The NOPR asked how the Commission should define
competition in this context and asked for examples of the effects of a
Reliability Standard on competition.\95\
---------------------------------------------------------------------------

    \95\ NOPR at P 48.
---------------------------------------------------------------------------

Comments

    353. Commenters explain that reliability and competition are
intrinsically linked. They provide several examples of the possible
effects of a Reliability Standard on competition. Commenters provide
varying definitions of competition. Substantive comments on this
section are grouped into three categories: (a) Linkage between
reliability and

competition; (b) definition of competition; and (c) Commission weighing
of competitive effects.
(a) Linkage Between Reliability and Competition
    354. Many commenters emphasize the close link between reliability
and competition.\96\ EEI and Entergy remark that it is difficult to
define a Reliability Standard that has no impact on competition. The
ISO/RTO Council explains that a Reliability Standard can adversely
impact competition either by creating a preference for one market
participant over another (by defining the limits within which market
participants compete) or by driving an outcome that eliminates the
ability of the market to respond to reliability needs with market-
oriented solutions.
---------------------------------------------------------------------------

    \96\ See. e.g., AEP, Ameren, Exelon, National Grid, NERC, Santee
Cooper and SPP.
---------------------------------------------------------------------------

    355. NERC notes that it currently uses five market-reliability
interface principles in developing a Reliability Standard: (1) The
planning and operation of bulk electric systems shall recognize that
reliability is an essential requirement of a robust economy; (2) a
Reliability Standard shall not give any market participant an unfair
competitive advantage; (3) a Reliability Standard shall neither mandate
nor prohibit any specific market structure; (4) a Reliability Standard
shall not preclude market solutions to achieving compliance with that
Reliability Standard; and (5) a Reliability Standard shall not require
the public disclosure of commercially sensitive information.
    356. Commenters identify numerous examples of the effects a
Reliability Standard may have on competition. EEI, SPP and others
identify the transmission loading relief curtailment practice as an
example of a Reliability Standard that affects competition. SPP states
that there are a number of market-based solutions to relieving
congestion but each has different results in reliability and market
outcomes. EEI also identifies as examples line rating methodologies,
generator testing requirements and calculation of available transfer
capability.
    357. TAPS identifies the treatment of inadvertent exchange and
energy imbalance as a Reliability Standard that has an effect on
competition. Inadvertent interchange between control areas may be
returned in kind, while non-control area utilities are subject to
unduly burdensome penalties for energy imbalances outside a narrowly
defined range.
    358. CenterPoint comments that the link between reliability and
competition is exemplified by a Reliability Standard mandating the
provision of reactive power by generating units connected to the grid.
While necessary for reliable operation of the grid, generators could
argue that such a Reliability Standard is anticompetitive because it
may not allow them to supply as many megawatts to the grid as they
would be able to supply absent the Reliability Standard or would
otherwise reduce the generators' operating margins.
    359. SoCalEd identifies reliability-must-run (RMR) generation and
local area reliability service (LARS) as examples of Reliability
Standards that can affect competition. SoCalEd states that the
designation of generators as RMR and LARS generation can result in
market power for these resources, to the detriment of the wholesale
market and customers.
(b) Definitions of Competition
    360. While commenters suggest varying definitions of
``competition,'' many focus on multiple sellers serving a market. For
example, EPSA states that, fundamentally, competition means the rivalry
among multiple businesses to supply potential customers with a
particular product or service within a given market. Generally, a
Reliability Standard that would influence anyone's opportunity to
compete, or to benefit from such competition, can be said to affect
competition, although the significance of the impact will vary. EPSA
states that the Commission should also consider whether a proposed
Reliability Standard would increase operating costs, reduce available
transmission capacity, deter flexible operations, ensure timely access
to information, or deter new entry.
    361. SPP and AEP would define ``competition'' as a business
environment in which more than one supplier can potentially serve a
market with like products and services and the customer has the ability
to choose the supplier that best serves its needs. APPA describes
competition as the ``availability or price of transmission service or
bulk power supplies to a user or class of users of the bulk power
system.''
    362. NARUC suggests defining ``competition'' for the evaluation of
a proposed Reliability Standard as ``commercial activities within the
electric industry that are limited in some way by the physical
limitations of the bulk power system.''
    363. Exelon quotes an American Heritage Dictionary definition of
competition but also adds the following electricity-market-specific
characteristics: (1) Many suppliers accessing the transmission system
to market diverse products to customers; (2) available information
about access and cost that allows market participants to identify and
allocate commercial risks; (3) efficient physical market structures and
operations that provide a strong platform for the development of
financial markets; (4) minimized market entry and exit costs; (5) all
interested parties are permitted to invest in and create new
infrastructure; and (6) a marketplace free from undue discriminatory
treatment.
    364. American Transmission and others focus on whether the impact
of a Reliability Standard on market participants would result in undue
discrimination. ELCON states the effect of a Reliability Standard on
competition lies in the ability of a market participant to use the
Reliability Standard to influence the price of a transaction or
discriminate against a competitor, or to give preferential treatment to
one class of market participants. Entergy recommends that the
Commission focus its reviews on ensuring that the proposed Reliability
Standard does not have an unduly discriminatory impact on a particular
class of customers.
    365. The New York Companies suggest that competition be defined as
the existence of ``effective'' competition. For example, if a specific
Reliability Standard requires the provision of a service that only a
few entities can provide, the Reliability Standard should consider
whether there are any barriers to the provision of that service in a
competitive manner. If so, the Commission must determine if this
service should be provided on a cost-of-service basis rather than on a
competitive basis.
    366. AWEA recommends that the Commission apply the classical