violation should be determined on a case-by-case basis, based on the
circumstances and consistent with the penalty guidelines proposed by
the ERO and approved by the Commission pursuant to section 39.7(g)(2)
of the Final Rule. These guidelines should include monetary and non-
monetary penalties.
iii. Limits on Monetary Penalties
    572. In the NOPR, the Commission interpreted section 316A of the
FPA,\163\ as amended by EPAct, as establishing a limit on a monetary
penalty for a violation of a Reliability Standard that may be imposed
by the ERO, Regional Entities and the Commission.\164\ The Commission
asked for comment on this interpretation.
---------------------------------------------------------------------------

    \163\ 16 U.S.C. 825o-1.
    \164\ NOPR at P 71 (enforcement question 4).
---------------------------------------------------------------------------

Comments

    573. Most commenters agree that the $1 million per day, per
violation cap set forth in section 316A of the FPA applies to any FPA-
related violation, whether the monetary penalty is levied by the
Commission, the ERO, or a Regional Entity.\165\ TAPS states that,
although it is not clear whether the statutory cap applies to the ERO,
the Commission would be prudent to apply the cap to all monetary
penalties, while reserving for future judgment the question of the
ERO's authority to exceed the $1 million/day limit if it is
insufficient to deter violations.
---------------------------------------------------------------------------

    \165\ See, e.g., AEP, Alcoa, Ameren, APPA, EEI, FRCC, MISO
Transmission Owners, MRO, NERC, NRECA, PG&E, Progress Energy and
Xeel Energy.
---------------------------------------------------------------------------

    574. Some comment that, in addition to the statutory cap, the ERO
should develop, for regulatory approval, a limit on the monetary
penalty for violation of a particular Reliability Standard. NERC
suggests that such a limit should balance two factors: (1) That a
penalty should not negatively affect the ability of an entity to
maintain reliability and (2) that a penalty must be sufficient to
assure that the entity responsible to maintain reliability does not
make an economic choice to violate a Reliability Standard. Ameren
comments that such a limit would benefit consumers because the risk of
an open-ended penalty would be passed to consumers in the form of
higher costs.

Commission Conclusion

    575. The Commission confirms its interpretation that section 316A
of the FPA establishes a limit on a monetary penalty for a violation of
a Reliability Standard that may be imposed by the Commission, the ERO,
or a Regional Entity pursuant to FPA section 215. The ERO, when
developing penalty guidelines, may propose an appropriate range of
monetary penalties for violation of each Reliability Standard that is
up to the cap for general civil penalties under part II of the FPA in
light of factors relating to a particular Reliability Standard. The
ERO's penalty guidelines, including any limits, will be subject to
Commission approval.
g. Reporting Violations and Alleged Violations
i. Procedures for Reporting Violations and Alleged Violations
    576. The NOPR proposed that the ERO and all Regional Entities must
have procedures to notify the Commission of all violations and alleged
violations of Reliability Standards concurrent with the time that the
ERO or Regional Entity first notifies the user, owner or operator of
the violation or alleged violation.\166\
---------------------------------------------------------------------------

    \166\ NOPR at P 71 (enforcement question 11).
---------------------------------------------------------------------------

Comments

    577. NiSource asks the Commission to clarify the meaning of
``potential violation.'' EPSA and the Oklahoma Commission suggest that
any entity identified as having allegedly violated a Reliability
Standard be notified immediately of any enforcement investigation.
    578. Cinergy comments that it is possible that a violation may
relate to improper documentation or a missed reporting deadline set
forth in a Reliability Standard. Thus, in reporting a violation or
alleged violation to the Commission, a significant incident of
noncompliance worthy of Commission attention may get ``lost in the
shuffle.'' Cinergy, therefore, recommends that the Commission either
require reporting only of those violations that have a material impact
on reliability or classify the violations and have less urgent
violations reported in a quarterly report.
    579. NiSource asks the Commission to clarify that the ERO and
Regional Entities must report to the Commission when an enforcement
proceeding is closed without a penalty to ``clear'' the record on the
alleged violation.
    580. Several state commissions ask that affected state commissions
receive notice of a violation or alleged violation simultaneously with
the Commission.\167\ The Missouri Commission adds that a state
commission should receive access to confidential information relating
to a reliability event affecting its state or an entity serving load in
its state.
---------------------------------------------------------------------------

    \167\ See, e.g., Missouri Commission, North Carolina Commission,
Ohio Commission and Oklahoma Commission.
---------------------------------------------------------------------------

Commission Conclusion

    581. The Commission adopts the substance of the proposed reporting
requirement in section 39.7(b) of the Final Rule. Several commenters
request clarification of the proposed reporting requirement. First, the
NOPR referred to a ``potential violation.'' This term creates an
ambiguity between an alleged past violation and future action that
would be a violation. The Final Rule uses the term ``alleged
violation'' in its place.
    582. Further, as explained earlier in the discussion of due process
issues, an entity alleged to have violated a Reliability Standard is
entitled to timely notice of any such allegation. The regulation,
however, does not specify a time for the ERO or a Regional Entity to
provide such notice. Rather, the proposed provision required that the
ERO or Regional Entity report a violation or alleged violation to the
Commission concurrent with the alleged violator receiving notice.
Consistent with our view of the ERO's lead role in the enforcement
process, we amend this provision to provide that the ERO must promptly
notify the Commission of a self-reported violation or an investigation
into a violation or alleged violation.
    583. This notification provision is intended as a mechanism to
provide the Commission promptly with limited

information, as described in the proposed regulation, to enable the
Commission to understand the general nature of a violation or an
alleged violation and identify a contact person who can furnish its
status to the Commission. The Commission requires prompt information
regarding all violations and alleged violations of a Reliability
Standard, not the delayed notification proposed by Cinergy. The
requirement is to report both ``violations'' and ``alleged
violations.''
    584. We reject Cinergy's suggestion that the Commission either
require only the reporting of violations that have a material impact on
reliability or classify violations and allow the reporting of ``less
urgent'' violations on a quarterly basis. While we recognize that
violations of Reliability Standards may vary in degree of immediate
impact on system reliability, classifying violations as ``less urgent''
is ultimately subjective. Thus, for example, a seeming ``less urgent''
violation that is significant in the context of a specific occurrence
may not be reported if we were to adopt Cinergy's proposal. Classifying
some violations as less significant would also send the wrong signal to
users, owner and operators of the Bulk-Power System. If experience
proves the proposed reporting system to be inefficient or unnecessary,
we can revisit this matter in the future.
    585. With regard to NiSource's request for clarification, we agree
that the ERO and Regional Entities should report to the Commission the
disposition of each violation or alleged violation. Accordingly,
section 39.7(b) of the Final Rule requires that, after the ERO submits
a report of a violation or alleged violation, it must subsequently
inform the Commission of the disposition of the matter. The ERO
applicant should propose a process for periodically reporting to the
Commission the disposition of violations and alleged violations on a
quarterly basis.
    586. As discussed above, a state commission generally will have an
opportunity to intervene in an adjudicatory proceeding before the
Commission, including a Commission review of a penalty imposed by the
ERO or a Regional Entity. Further, we will require the ERO and Regional
Entities to notify a Regional Entity and Regional Advisory Body of all
violations that have been determined to have occurred within its region
at the conclusion of the appeals process. However, we are not requiring
here that a state commission receive notice of an alleged violation of
a Reliability Standard or receive access to confidential information
when the ERO or a Regional Entity considers whether to impose a
penalty. As discussed below, the Commission will treat a report of an
alleged violation as nonpublic information, and a general rule
providing a state commission access to nonpublic information would be
contrary to the Commission's rules for treatment of investigative
information.
    587. The NOPR proposed, in the provisions on Reliability Reports, a
requirement that the ERO and Regional Entities must report on their
enforcement actions and associated penalties to the Commission and
others. The Final Rule adopts this proposal with modifications in the
section on Enforcement of Reliability Standards as new subsection
39.7(b)(5). The modifications make clear that the ERO is to report, and
the Regional Entities are to report through the ERO, on violations of
Reliability Standards and summary analyses of such violations as the
Commission will from time to time direct, and limit this reporting to
the Commission.
ii. Confidentiality of Reports
    588. The NOPR, referring specifically to the proposed reporting of
violations and potential, i.e. alleged, violations, asked for comment
regarding what confidentiality protections may be needed.\168\
---------------------------------------------------------------------------

    \168\ NOPR at P 71 (enforcement question 11).
---------------------------------------------------------------------------

Comments

    589. Numerous commenters urge the Commission to take adequate steps
to ensure that the notification of an alleged violation is made to the
Commission in a nonpublic manner and that the nonpublic nature of the
notification is maintained until the appeals process is exhausted.\169\
Some propose that, to achieve this, the Commission revise the proposed
regulations by eliminating the requirement that the ERO and Regional
Entities notify the Commission of an alleged violation.\170\ Others
propose that the Commission modify the Final Rule to state that
information submitted to the Commission regarding an alleged violation
must be kept confidential until the violation is ``confirmed,'' meaning
until the appeals process has been completed.\171\ These commenters
posit that an alleged violation that is found not to be an actual
violation through the appeals process should not be disclosed to the
public.
---------------------------------------------------------------------------

    \169\ See, e.g., Allegheny, APPA, EEI, ERCOT, MRO, National
Grid, NERC, NiSource, Progress Energy, PSEG Companies, SERC,
SoCalEd, TVA and Xcel Energy.
    \170\ See, e.g., AEP, Entergy, NERC, Progress Energy, Santee
Cooper and SERC.
    \171\ See e.g., APPA, EEI, Kansas City P&L, LADWP, TVA and WECC.
---------------------------------------------------------------------------

    590. NERC explains that the disclosure of a potential violation
with the alleged violator's identity could have significant and
possibly irreversible negative impacts for the entity, even if it is
ultimately found to have been in compliance. Further, faced with such
disclosure, entities may be unwilling to cooperate with ERO and
Regional Entity investigators. NERC states that a potential violation
should be reported to the Commission only if the Commission ensures
that the report will remain nonpublic to protect the identity of the
entity involved until due process is complete. NERC asserts that a
violation relating to information designated as CEII must remain
confidential even when a violation is confirmed.
    591. NERC adds that, if the Commission requires the reporting of
potential violations, the rules should define a ``potential violation''
as occurring ``when the ERO or Regional Entity has performed a
preliminary investigation and is prepared to formally charge an entity
with a violation of a Reliability Standard.'' NERC notes that this
would add an additional stage to the compliance process, establishing a
formal ``charging'' process.
    592. South Carolina E&G states that confidentiality provisions
similar to those in part 1b of the Commission's regulations are needed
to assure no unnecessary public disclosure of an enforcement
investigation. Alcoa, ELCON and others state that protections similar
to that afforded other Commission investigations are appropriate for
reliability-related investigations. ELCON comments that a claim of
confidentiality should not be used to hide a business practice that
harms reliability or competition.
    593. EEI opposes public disclosure unless and until a violation is
confirmed. It states that, consistent with the procedures of other
self-regulatory organizations, it supports an approach in which the ERO
immediately notifies the Commission that a compliance investigation has
commenced (including the entities involved and general nature of the
alleged violation), while deferring the submission of a detailed report
until the investigation is completed. EEI is concerned that alternative
approaches may have a chilling effect on the reporting of compliance
information and the self-reporting of violations.
    594. Others, such as FRCC and New York Companies, advocate that the
identity of an entity subject to an investigation should be kept

confidential during a proceeding below the Commission level. The
commenters posit that a Commission proceeding, however, should be
conducted on the basis of a public record, with suitable protections,
e.g., for confidential, proprietary or critical infrastructure
information.
    595. TAPS states that confidentiality should be required for
alleged violations, but confirmed violations should be made public, in
accordance with NERC's Guidelines for Reporting and Disclosure and the
Bilateral Principles. Apparently defining ``confirmed violation'' at an
earlier stage than the final appeal, TAPS would require public notice
of violations contested at the ERO level. Similarly, NASUCA comments
that a confirmed violation, regardless of the severity, should be
publicly disclosed--including a report to the relevant state regulatory
authorities--immediately upon the finding of a violation by the ERO or
a Regional Entity.

Commission Conclusion

    596. The Commission finds that a report of an alleged violation
pursuant to section 39.7(b) should receive nonpublic treatment. As
noted by commenters, and similar to our reasoning above with respect to
a nonpublic investigation by the ERO or a Regional Entity, public
disclosure that the ERO or a Regional Entity is investigating an
entity's violation or alleged violation of a Reliability Standard could
cause unwarranted damage to the entity's reputation, with resulting
financial repercussion. Further, public disclosure of an investigation
into a violation or an alleged violation could chill an entity's
cooperation with the investigator. The Commission will not make such
information public unless the Commission decides to initiate a public
investigation, issue a public compliance order or initiate a public
proceeding to impose a penalty, or is required by statute or
regulation, as in the situation where the Commission or a court
determines that information must be provided pursuant to a request for
information pursuant to the Freedom of Information Act (FOIA).\172\
---------------------------------------------------------------------------

    \172\ 5 U.S.C. 552 (2000). We note that FOIA does not require
the public disclosure of records or information compiled for law
enforcement purposes if, for example, disclosure could reasonably be
expected to interfere with enforcement proceedings, would deprive a
person of a right to a fair trial or an impartial adjudication or
could reasonably be expected to constitute an unwarranted invasion
of personal privacy. See 5 U.S.C. 552(b)(7).
---------------------------------------------------------------------------

    597. We reject the suggestions that the Commission eliminate the
proposed reporting requirement altogether or have the ERO create a
``formal charging'' process. The nonpublic treatment of such reports
should ensure that an inquiry will remain nonpublic and the subject of
the inquiry will not be damaged. Accordingly, the Final Rule inserts
section 39.7(b)(4) that states how an ERO report of an alleged
violation will receive nonpublic treatment by the Commission.
    598. However, a violation determined, for example, by a finding of
the ERO or a Regional Entity, self-reporting or an admission in a
settlement, generally will be made public after the matter is filed
with the Commission as a notice of penalty or resolved by an admission
that the user, owner, or operator of the Bulk-Power System violated a
Reliability Standard or a settlement or other negotiated disposition.
Further, pursuant to section 39.7(b)(4) of the Final Rule, the ERO
should file, for informational purposes only, any settlement of an
alleged violation regardless of whether the agreement contains an
admission by the settling user, owner or operator. Settlements will be
made public. This is consistent with our own procedures in which
enforcement settlements are made public. Settlements will not be
noticed for public comment; nor will they be subject to Commission
review pursuant to section 39.7(e) regarding Commission review of a
notice of penalty.
    599. Further, the Final Rule deletes from the proposed regulations
the requirement that reports of violations and alleged violations be
filed electronically with the Commission. The Commission will review
the reporting procedures proposed by the ERO and Regional Entities
before determining the appropriate filing procedures at the Commission.
h. Other Enforcement Issues
i. ERO and Regional Entity Appeals Processes
    600. The NOPR asked for comments on the appropriate appeals
process, if any, of an ERO or Regional Entity decision to impose a
penalty, whether it would be appropriate for the ERO and Regional
Entities to adopt processes similar to self-regulatory organizations,
and whether internal appeals within the ERO or a Regional Entity should
be permitted before appeal to the Commission.\173\
---------------------------------------------------------------------------

    \173\ NOPR at P 71 (enforcement question 1).
---------------------------------------------------------------------------

Comments
    601. A number of commenters agree that various self-regulatory
organization models provide an appropriate basis for an appeals
process.\174\ However, commenters vary regarding the proper number of
appeals and who should hear such appeals. Commenters consistently
emphasize the need for fair, independent, non-discriminatory and well-
defined due process procedures for appeals.\175\
---------------------------------------------------------------------------

    \174\ See, e.g., EPSA, FRCC, NERC, NiSource and SoCalEd.
    \175\ See, e.g., Alcoa, EEI, EPSA, MISO Transmission Owners,
NERC and PacifiCorp.
---------------------------------------------------------------------------

    602. Some commenters advocate, for a penalty imposed by a Regional
Entity, a first appeal within the relevant Regional Entity, with
additional appeals to the ERO and the Commission or other appropriate
authority in Canada or Mexico; \176\ and for a penalty imposed by the
ERO, a first appeal within the ERO.\177\ TAPS notes that a first appeal
within the Regional Entity would allow review by those with the most
knowledge about the regional system, and a further opportunity for
appeal to the ERO would ensure consistency of interpretation and
enforcement of ERO Reliability Standards. Entergy believes this process
would help to ensure resolution of penalties before they reach the
Commission, strengthen the ERO's role, and develop a clear factual
record if Commission review is necessary.
---------------------------------------------------------------------------

    \176\ See, e.g., Ameren, American Transmission, British
Columbia, ERCOT, Entergy, Hydro-Qu[eacute]bec, MRO, NERC, Southern,
TAPS and Xcel.
    \177\ See, e.g., American Transmission, ERCOT, Michigan
Electric, NERC and Southern.
---------------------------------------------------------------------------

    603. MRO believes that the ERO working with the Regional Entities
should decide on an appropriate appeals process at the ERO level. MRO
and AEP advocate that the ERO, through delegation agreements, establish
consistent principles for the investigations and imposition of
penalties of all Regional Entities. MRO supports appeals at both the
Regional Entity and ERO levels, but asks that the enforcement process
not become an endless series of appeals.
    604. TVA and others comment that, for non-monetary penalties
imposed by a Regional Entity, neither the ERO nor the Commission should
participate in the appeals process. Ontario IESO suggests that a
penalty imposed by either a Regional Entity or the ERO should be
appealed to the ERO, with a further appeal to the Commission or
appropriate Canadian authority.\178\ Ontario IESO states that ERO
appellate review is essential to ensure consistency within and across
regions and to reflect industry consensus.
---------------------------------------------------------------------------

    \178\ See also APPA, Kansas City P&L, LADWP and Michigan
Electric.
---------------------------------------------------------------------------

    605. CREPC comments that an appeal of a penalty imposed by an

Interconnection-wide Regional Entity should be made directly to the
Commission or the appropriate Canadian authority and not ``filtered''
through the ERO. WECC comments that, if the Commission allows an appeal
at the ERO level, such review should be subject to a rebuttable
presumption of validity of the Regional Entity's findings.
    606. Emphasizing that the appeals process should minimize
duplicative proceedings that add costs and delay, the MISO Transmission
Owners propose that the Commission create a limited, informal process
at the ERO and Regional Entity levels to aid in the development of the
record that is submitted to the Commission. Further, the process should
allow parties to go directly to the Commission and designate the
Commission as the decisionmaker. Likewise, the ISO/RTO Council and
Northern Maine Entities support a direct appeal to the Commission once
the ERO or Regional Entity issues a decision.
    607. A number of commenters discuss various details of how appeals
should be conducted. For example, FRCC comments that, while appeals
should be heard by ``disinterested parties,'' such parties must have
relevant experience and expertise. Further, FRCC states that, given the
importance of compliance with Reliability Standards, an appeal to the
Regional Entity or ERO should not act as a stay on the effectiveness of
a penalty. EEI and FRCC suggest that Regional Entities should make
provision for alternative dispute resolution. Alcoa, NRECA and LADWP
comment that appeals to the Commission should be reviewed de novo, with
full due process and ultimately judicial review.
    608. International Transmission and Michigan Electric believe that
some level of review at the ERO/Regional Entity level is appropriate,
and that any such appeal process should be completed in an efficient
and timely manner. Further, the ERO should be required to propose a
specific process and timeline in its application for certification.
PSEG Companies believes that the ERO and Regional Entities, through
stakeholder processes, should determine the best approach to appeals
and file the consensus position and the record with the Commission.
Ameren believes that the Final Rule should require an expedited
response period for the ERO and Regional Entities to respond to an
appeal.
    609. BCTC supports internal appeals at both the Regional Entity and
ERO level, believing that resolving matters before an appeal to a
regulatory body is more efficient. Further, given the international
nature of the ERO and some Regional Entities, resolution at the ERO or
Regional Entity level could provide more consistency in decisions. The
Nova Scotia Board comments that appeals affecting Canadian entities
would ultimately be appealed to the applicable Canadian authority. MRO
states that, for actions taken against Canadian entities, the ERO could
file a notice with the Commission for informational purposes.

Commission Conclusion

    610. The Commission finds that an appeals process at the ERO or
Regional Entity level is appropriate.\179\ Such an internal appeal will
assist in ensuring internal consistency in the imposition of penalties
by the ERO or the Regional Entity.
---------------------------------------------------------------------------

    \179\ NOPR at P 70.
---------------------------------------------------------------------------

    611. However, the Commission shares the concern of MRO and other
commenters that having both an ERO and a Regional Entity appeals
process for a penalty imposed by a Regional Entity could result in a
drawn-out series of sequential appeals. An overall process that allows
for multiple appeals could result in duplication that would delay a
final decision and unnecessarily increase the costs of those involved
in a penalty action. Thus, we find that there should be a single appeal
at either the ERO or the Regional Entity. The ERO applicant must
propose in its application for certification for approval by the
Commission whether the appeal of a penalty imposed by a Regional Entity
should be at the ERO or Regional Entity level. An entity that is the
subject of a penalty may not elect to bypass the appeals process
established by the ERO and seek immediate Commission review without the
approval of the ERO.
    612. We agree with the commenters regarding the need for fair,
independent, non-discriminatory and well-defined procedures for
appeals. Such procedures are consistent with the statutory requirements
that the ERO and Regional Entities have fair and impartial procedures
for enforcement of Reliability Standards.\180\ However, rather than the
Commission prescribing the internal appeals procedures, we will allow
an ERO applicant to develop procedures and submit them to the
Commission for approval with an ERO certification application.
---------------------------------------------------------------------------

    \180\ See sections 215(c)(2)(C) and (e)(4)(B) of the FPA.
---------------------------------------------------------------------------

    613. As discussed earlier, regardless of whether the single appeal
is at the ERO or the Regional Entity level, the ERO is responsible for
filing a notice of penalty with the Commission. Thus, we reject the
suggestion that an appeal of a penalty imposed by a Regional Entity
organized on an Interconnection-wide basis should be filed directly
with the Commission, bypassing the ERO.
    614. With regard to the comment of Alcoa and LADWP, we agree that
Commission review of a penalty imposed by the ERO or a Regional Entity
would be de novo. This standard is consistent with the practice of the
review by other regulatory agencies of sanctions imposed by their
associated self-regulatory organizations.\181\
---------------------------------------------------------------------------

    \181\ For example, the Securities and Exchange Commission
conducts de novo review of sanctions imposed by its SRO, the NASD:
``[a]ny final disciplinary sanction imposed by the [NASD] is subject
to full and independent review by the Securities and Exchange
Commission as to the facts as well as the law.'' Otto v. SEC, 253
F.3d 960, 964 (7th Cir. 2001), cert. denied, 534 U.S. 1021 (2001).
---------------------------------------------------------------------------

ii. Receipt and Use of Penalty Money
    615. The NOPR asked for comments regarding who should receive, and
what should be done with monies collected as monetary penalties.\182\
---------------------------------------------------------------------------

    \182\ NOPR at P 71 (enforcement question 7).
---------------------------------------------------------------------------

Comments

    616. Most commenters believe that the ERO and Regional Entities
should be able to make use of penalty monies. They differ, however, on
how the ERO or a Regional Entity should use the money. Many suggest
penalty monies be used to defray the cost of enforcement programs.
Others believe it is more appropriate to apply the monies against the
ERO's or Regional Entity's general operating budget. A few commenters
prefer that penalty monies not be used by the ERO or Regional Entities
but, rather, sent to the U.S. Treasury or relevant Canadian authority.
    617. NERC comments that the ERO should receive all monies collected
as monetary penalties for violations of ERO Reliability Standards in
the United States. Under NERC's proposal, the ERO would first use the
revenues to cover the incremental costs incurred by the ERO and
Regional Entities in investigating a specific violation or alleged
violation, including the costs of monitoring and verifying corrective
actions and determining that the violation is satisfactorily resolved.
According to NERC, the ERO should be authorized to disburse penalty
monies to a Regional Entity that incurs an incremental cost associated
with the particular violation. NERC suggests that any money remaining
after such disbursements should be returned to the general operating
fund of the ERO for the current year and noted as additional surplus at
the year-end true up with the

ERO budget. If a Reliability Standard is applicable only within a
region, such as an Interconnection-wide standard, the Regional Entity
should collect the penalty monies directly using procedures similar to
those of the ERO.\183\
---------------------------------------------------------------------------

    \183\ AEP, EEI, EPSA, FRCC, MRO, Ohio Commission, Progress
Energy, SMUD and TAPS also support the use of penalty monies to
defray the costs of the ERO and Regional Entity enforcement
programs.
---------------------------------------------------------------------------

    618. Many commenters \184\ state that using the monies in this
manner would not present a conflict of interest, noting that the
Commission and other regulatory authorities would have an annual review
of the use of such monies and that, by including a true-up each year,
the ERO would not benefit financially from the imposition of monetary
penalties. FRCC further notes that the Commission would have the
opportunity to approve any proposed penalty guidelines and any penalty
actually imposed.
---------------------------------------------------------------------------

    \184\ See, e.g., NERC, FRCC, TAPS, SERC and SoCalEd.
---------------------------------------------------------------------------

    619. TAPS notes that crediting penalty monies to reduce costs borne
by those in compliance is consistent with Commission precedent.\185\
According to SERC, such use of penalty monies would not create an
appearance of impropriety if compliance and audit programs are
``sufficiently independent'' and the compliance process includes a
robust appeals process. SoCalEd comments that such use of penalty
monies to fund enforcement programs would not create an appearance of
impropriety provided that stakeholders play a role in developing both
the Reliability Standards and associated penalties. SoCalEd states that
such a process was used in developing WECC's Reliability Management
System and has resulted in the non-subjective application of penalties
for violations. Santee Cooper adds that, to avoid an appearance of
impropriety, penalty monies collected by the ERO should be
redistributed among all Regional Entities.
---------------------------------------------------------------------------

    \185\ Citing, e.g., Carolina Power & Light Co., 103 FERC ]
61,209 at P 25 (2002).
---------------------------------------------------------------------------

    620. APPA suggests that monetary penalties should be credited on a
net energy for load basis against the ERO's annual budget. While such
revenues could be used to defray the cost of enforcement activities,
some APPA members are concerned that penalty amounts may be set to
raise sufficient revenues to offset the costs of the ERO's or Regional
Entities' enforcement programs. APPA states that, if the Commission
allows the use of penalty monies to defray the cost of enforcement
programs, the Commission should take steps to ensure that penalty
amounts are not based on revenue needs.
    621. In contrast, a number of commenters \186\ assert that penalty
monies should not be used to support ERO or Regional Entity enforcement
activities. Some express concern that this could result in the use of
enforcement activities for revenue production.\187\ NEPOOL Participants
believe that penalty monies should be used to reduce ERO and Regional
Entity costs that would otherwise be passed on to end use
customers.\188\
---------------------------------------------------------------------------

    \186\ See, e.g., Alcoa, Ameren, ERCOT, FirstEnergy, NEPOOL
Participants, New York Companies, Ni Source and Santee Cooper.
    \187\ See, e.g., ISO/RTO Council, New York Companies and
PacifiCorp.
    \188\ See also ELCON, pacifiCorp, Santee Cooper, Southern. New
York Companies agree with such an approach and suggest that the
violator not receive any benefit from a reduction in cost.
---------------------------------------------------------------------------

    622. TVA states that the ERO and Regional Entities should have
discretion in determining the allocation and use of penalty monies. It
suggests that penalty monies be used to create reliability-related
educational and training programs. ERCOT suggests that penalty monies
be used to fund research, for example, to develop better operating and
analysis tools for the industry.
    623. A few commenters suggest that any use of penalty monies by the
ERO would have the potential appearance of impropriety. For example,
International Transmission prefers allocating penalty monies to rebuild
transmission facilities damaged by natural disasters. American
Transmission and Michigan Electric state that penalty monies should go
to the treasury of the regulator's government to eliminate any
appearance of impropriety. Hydro One proposes that penalty monies
assessed should be paid directly to the appropriate state or province
for the benefit of the ratepayers.
    624. TAPS suggests that, consistent with the practice of self-
regulatory organizations, all or a portion of penalty monies may be
used for restitution in cases where a violation of a Reliability
Standard adversely affects identifiable and discrete victims. TAPS
states that the Commission could include restitution in its
interpretation of ``appropriate sanctions'' in section 215(c)(2) of the
FPA. Similarly, Missouri Commission proposes that penalty monies be
distributed to injured transmission customers or, if no specific harm
is identified, to law-abiding transmission customers.
    625. The Nova Scotia Board comments that the question of whether
monies collected from Canadian participants should flow to the ERO or
Regional Entity or remain in the jurisdiction should be considered.
Hydro-Qu[eacute]bec states that, in Canada, monetary penalties will be
collected and used in accordance with arrangements between the ERO and
Canadian authority. Ontario IESO recommends its current practice of
using penalty monies to fund reliability-related educational programs
or reducing the IESO's administration charge, so that the monies
benefit end users in the region.

Commission Conclusion

    626. The Commission believes that it is appropriate for the entity
investigating an alleged violation and imposing a penalty to receive
any penalty monies that result from that investigation.
    627. The Commission, however, sees a disadvantage in directing that
penalty monies offset a specific program, such as a compliance or
enforcement program, as pointed out by many commenters. Rather, for an
ERO or Regional Entity investigation, we find that the entity
conducting the investigation must receive the penalty monies as an
offset against its next year's budget for implementing FPA section 215.
With this approach, the monies represent a savings to those consumers
responsible ultimately for paying the costs of the ERO or Regional
Entity.
    628. An ERO candidate must describe in its certification
application its proposed mechanism regarding this offset. The ERO
candidate should explain how it would account for the receipt of
penalty monies, the allocation of penalty monies resulting from any
possible joint ERO/Regional Entity investigation, and other factors
that would help the Commission to understand fully how the offset would
operate. A delegation agreement must also contain the mechanism for the
Regional Entity's offset. The ERO may propose a common method for all
Regional Entities in any proffered pro forma delegation agreement.
    629. For a Commission-initiated investigation, or one initiated on
complaint to the Commission, any penalty monies must be directed to the
U.S. Treasury.
iii. RTO/ISO-Related Enforcement Issues
    630. Commenters raise several issues relating to the enforcement of
the Commission's reliability-related regulations to RTOs and ISOs. For
example, a number of commenters express concern regarding the
application of a penalty to an RTO or

ISO. NYISO comments that RTOs and ISOs, as not-for-profit, thinly
capitalized entities, have virtually no ability to pay financial
sanctions out of their own resources.\189\ Thus, NYISO contends that
only a non-monetary penalty is appropriate for deterring or punishing a
violation by an RTO or ISO. If a monetary penalty is imposed, the
Commission should allow the pass-through of the monies because
otherwise the RTO or ISO would face insolvency. It also suggests that
the Commission discourage the ERO and Regional Entities from adopting
Rules that penalize an RTO or ISO for a control area violation that is
caused by a market participant and that the RTO or ISO is unable to
prevent.
---------------------------------------------------------------------------

    \189\ See also Alcoa, Kentucky Commission and National Grid.
---------------------------------------------------------------------------

    631. PG&E suggests that members of an RTO or ISO would ultimately
bear the burden of any monetary penalty, and the Commission should
therefore allow dues-paying members of such an RTO or ISO subject to a
monetary penalty to request Commission review of the monetary penalty.
    632. NYISO recommends that the Commission establish confidentiality
rules that would prohibit a stakeholder board member of a Regional
Entity from having access to market information obtained during a
Regional Entity investigation that involves RTO or ISO markets.
Alternatively, NYISO asks that, if a stakeholder board member of a
Regional Entity is allowed access to such market information, the
Commission establish strict confidentiality protections to ensure that
a stakeholder board member does not make inappropriate use of sensitive
RTO or ISO market data.
    633. The City of Santa Clara questions whether the imposition of a
penalty on an RTO would have any deterrent effect since it has no
capital of its own and is strictly a ``pass-through'' entity. It
comments that a better system of accountability is necessary to ensure
that any penalty for misconduct is meaningful and effective for that
entity. The City of Santa Clara questions whether the Commission, as
the principal advocate of RTOs, can objectively impose sanctions on an
RTO and asks that the Commission develop safeguards that minimize this
conflict.

Commission Conclusion

    634. While we recognize that RTOs and ISOs have some unique
characteristics, we do not believe a generic exemption from any type of
penalty is appropriate for any entity, including an RTO or ISO. The ERO
or Regional Entity determining whether to impose a penalty on an RTO or
ISO may consider the entity's unique characteristics, as well as the
nature of the violation, in determining an appropriate and effective
sanction.\190\
---------------------------------------------------------------------------

    \190\ See Enforcement of Statutes, Orders, Rules, and
Regulations, 113 FERC ] 61,068 at P 20.
---------------------------------------------------------------------------

    635. Further, we do not decide generically whether an RTO or ISO
may pass a monetary penalty through to its members or customers. We
will consider such an issue on a case-by-case basis. We find no merit
in PG&E's suggestion that a dues-paying member of an RTO or ISO on
which a penalty has been imposed be permitted to seek Commission review
of a penalty. The FPA does not contemplate allowing a third-party to
seek review of a penalty.\191\ Moreover, PG&E does not provide a
justification that is unique to RTOs and ISOs (for example, municipal
entities and cooperatives that may be subject to monetary penalties may
have similar concerns). Nor has PG&E provided any reason for us to
believe that the RTO or ISO will not have sufficient incentive to
defend its actions and seek review if appropriate.
---------------------------------------------------------------------------

    \191\ Section 215(e)(2) of the FPA provides that a penalty
``shall be subject to review by the Commission, on its own motion or
upon application by the user, owner or operator that is the subject
of the penalty * * *.''
---------------------------------------------------------------------------

    636. With regard to NYISO's concern that RTOs and ISOs should not
be penalized for control area violations that are caused by market
participants and which RTOs and ISOs have no ability to prevent, we
agree generally that entities should not be punished for violations
that are not within their control. However, we will not make a generic
ruling on this issue for all RTOs and ISOs. Rather, NYISO should raise
these concerns with the ERO's or a Regional Entity's stakeholder
process if it believes that a proposed Reliability Standard would make
an RTO or ISO responsible for an action or occurrence outside its
control.
    637. NYISO's concerns about limits on access by a Regional Entity's
stakeholder board to market information obtained during an
investigation should be addressed by a Regional Entity when developing
its bylaws or Regional Entity Rules.
    638. The City of Santa Clara's comments on the Commission's
objectivity to impose a sanction on an RTO is unfounded and lacks
support.
8. Delegation to a Regional Entity--Section 39.8
    639. Consistent with section 215(e)(4) of the FPA, the NOPR
proposed that the ERO may enter into an agreement to delegate authority
to a Regional Entity for the purpose of proposing to the ERO and
enforcing Reliability Standards. Under the new system of mandatory
Reliability Standards to be developed by the ERO, Regional Entities
will, after entering into a Commission-approved delegation agreement,
fulfill certain functions currently performed by the regional
reliability councils.
    640. The statute allows the ERO to delegate authority to a Regional
Entity if: (1) The Regional Entity is governed by an independent board,
a balanced stakeholder board, or a combination of the two; (2) the
Regional Entity otherwise satisfies the criteria required for
certification of the ERO; and (3) the agreement promotes effective and
efficient management of the Bulk-Power System.
    641. The NOPR sought comment on numerous aspects of the delegation
of authority to a Regional Entity, including the role of a Regional
Entity in relationship to the ERO, the criteria for becoming a Regional
Entity, and the criteria for evaluating a Regional Entity applicant.
The NOPR also asked whether a delegation agreement should be
standardized and what degree of uniformity should be required for
Regional Entity processes and governance.
a. The Role of a Regional Entity and Its Relationship to the ERO
    642. Consistent with section 215(a)(7) of the FPA, which defines a
Regional Entity as an entity having enforcement authority pursuant to
section 215(e)(4) of the FPA, the NOPR interpreted the statute to mean
that the only delegated authority a Regional Entity would possess would
be the authority to enforce Reliability Standards approved by the
Commission in a specific region.\192\ The NOPR recognized that a
Regional Entity may also propose a Reliability Standard to the ERO
that, if ultimately approved by the Commission, would become an
enforceable standard under the FPA. A Regional Entity may also propose
a Reliability Standard to the ERO that would be applicable in a
specific region. The NOPR requested comment on what the role of a
Regional Entity should be in relationship to the ERO.\193\ The NOPR
also asked what, if any, additional authority a Regional Entity should
be allowed beyond enforcement and proposal of Reliability
Standards.\194\
---------------------------------------------------------------------------

    \192\ NOPR at P 80.
    \193\ Id. at P 84 (delegation question 2).
    \194\ Id. at P 84 (delegation question 3).

---------------------------------------------------------------------------

Comments

    643. Commenters differ on the appropriate role of a Regional Entity
in relationship to the ERO. Many commenters emphasize the importance of
a strong ERO at the top of the reliability hierarchy, while others
endorse a relationship similar to the historical arrangement between
NERC and the regional reliability councils. The majority of commenters
support the Commission's interpretation of the statute that the
authority delegated to a Regional Entity should be limited to
enforcement and the proposal of Reliability Standards to the ERO.
    644. Several commenters contend that Reliability Standards should
be developed and enforced on a top-down basis, with the Regional Entity
the subordinate partner in the ERO-Regional Entity relationship.\195\
These commenters describe a linear relationship between the Commission,
the ERO and a Regional Entity, with the Regional Entity held
accountable through the delegation agreement to the ERO for its
delegated responsibilities. Michigan Electric suggests that the
Regional Entity should be in the position of a subcontractor to the ERO
for purposes of enforcement.
---------------------------------------------------------------------------

    \195\ See, e.g., Alcoa, APPA, ELCON, Michigan Electric, NERC and
TAPS.
---------------------------------------------------------------------------

    645. In contrast, other commenters support a strong regional
organization similar to the existing relationship between NERC and the
regional reliability councils.\196\ They point to the vital role
regional reliability councils have played in the development and
enforcement of regionally-specific reliability criteria. NARUC contends
that regional reliability council enforcement of compliance has worked
effectively and cannot be duplicated at the continent-wide level. The
Ohio Commission asserts that the Commission should adopt a rebuttable
presumption that the existing structure is an appropriate starting
point, while others go so far as to say that the ERO and the Commission
should defer to decisions made by an Interconnection-wide Regional
Entity with regard to delegated responsibilities.\197\
---------------------------------------------------------------------------

    \196\ See, e.g., IEEE, NPCC and TANC.
    \197\ See, e.g., CREPC and Alberta.
---------------------------------------------------------------------------

    646. Some commenters advocate a relationship of equals between the
ERO and a Regional Entity. For example, EEI suggests that a partnership
between the Regional Entity and the ERO is appropriate because the
broad range of reliability-related activities to be conducted by a
Regional Entity are an essential part of the system by which
reliability is maintained. Other commenters contend that the statute
recognizes an Interconnection-wide Regional Entity as an equal partner
in proposing Reliability Standards.\198\
---------------------------------------------------------------------------

    \198\ See, e.g., California Board and NPCC.
---------------------------------------------------------------------------

i. Authority Delegated to a Regional Entity
    647. The majority of commenters agree with the Commission's
interpretation that the ERO may delegate authority to a Regional Entity
under the statute, and would limit a Regional Entity's authority to
proposing and enforcing Reliability Standards.\199\ These commenters
emphasize that the role of a Regional Entity should be well defined and
limited to the functions specified in the statute.
---------------------------------------------------------------------------

    \199\ See, e.g., AWEA, ERCOT, Exelon, International
Transmission, LADWP, NiSource, Ontario IESO, PSEG Companies and
SoCalEd.
---------------------------------------------------------------------------

    648. Other commenters, such as PacifiCorp and NYSRC, believe that
the Commission's interpretation of the role of a Regional Entity is too
narrow. NYSRC contends that a Regional Entity's authority to develop
and propose a Reliability Standard applicable to its region is no less
important than its authority to enforce a Reliability Standard.
    649. A few commenters argue that a Regional Entity should enforce,
but not propose, Reliability Standards.\200\ MISO asserts that a
Regional Entity that does not encompass an entire Interconnection may
develop a Reliability Standard that conflicts with the Reliability
Standard of another Regional Entity within the same Interconnection.
NiSource would limit a Regional Entity's authority to enforce a
Reliability Standard to the specific Interconnection to which the
Regional Reliability Standard applies.
---------------------------------------------------------------------------

    \200\ See, e.g., Ameren, AWEA and MISO.
---------------------------------------------------------------------------

    650. Alcoa asserts that a Regional Entity should not undertake
enforcement at all, but act only as a fact gatherer for the ERO.
    651. The Oklahoma Commission comments that the statute is silent on
which entity has ultimate responsibility for proposing and enforcing
Reliability Standards and encourages the Commission to weigh this
decision carefully.
ii. Other Regional Entity Activities
    652. A number of commenters advocate permitting a Regional Entity
to undertake functions that, although not explicitly delegated by the
ERO, provide a beneficial service to the region, such as coordination
of planning and operations, resource adequacy, maintaining databases,
and transaction tagging services.\201\ Some of these functions may
support reliability, such as assessing reliability adequacy and
performance, collecting and analyzing information, and educating market
participants on reliability data. National Grid notes that NPCC
establishes and maintains planning and resource adequacy criteria to
require that the Bulk-Power System be designed for a regional loss of
load expectation of no more than once in ten years, and asserts that,
if the Commission were to prohibit Regional Entities from performing
functions that complement the ERO's Reliability Standards, Bulk-Power
System reliability could be undermined.
---------------------------------------------------------------------------

    \201\ See, e.g., APPA, EEI, FRCC, Hydro One, National Grid, NERC
and WECC.
---------------------------------------------------------------------------

    653. Other commenters, such as AEP and Exelon, would limit the role
of a Regional Entity to functions explicitly delegated in the statute.
Exelon emphasizes that there is no right to a delegation of authority
beyond that which is clearly articulated in the statute.

Commission Conclusion

    654. The Commission concludes that a strong ERO with primary
responsibility for performing all reliability functions is the
preferred model for ensuring Bulk-Power System reliability. We believe
that having primary authority reside in the ERO is essential in
establishing a continent-wide self-regulating reliability organization.
It provides for an appropriate level of uniformity in Reliability
Standard development and enforcement policies. Section 215(e)(4) of the
FPA authorizes the ERO to delegate authority to a Regional Entity for
the purpose of proposing Reliability Standards to the ERO and enforcing
Reliability Standards. The statute assumes a strong ERO, which
generally will be responsible for all enforcement activities unless and
until the ERO delegates its authority. Thus, the ERO retains
responsibility to ensure that a Regional Entity implements its
enforcement program in a consistent manner and will require a Regional
Entity to file periodic reports on enforcement investigations, as
specified in the Final Rule's provisions on Enforcement of Reliability
Standards. We require the ERO to formally review a regional Reliability
Standard proposed by a Regional Entity. Only the ERO may submit a
proposed Reliability Standard to the Commission.
    655. The Commission disagrees with commenters who suggest that a
Regional Entity should not be allowed to propose a Reliability
Standard. Although

anyone, including a Regional Entity, may propose a Reliability Standard
to the ERO for its consideration, section 215(e)(4) of the FPA requires
the Commission to authorize the ERO to enter into a delegation
agreement for the purpose of, inter alia, proposing Reliability
Standards. Therefore, we affirm our statement in the NOPR that a
Regional Entity may propose a Reliability Standard to the ERO.
    656. While the ERO may not delegate other statutory functions to a
Regional Entity, the Commission will not prohibit a Regional Entity
from performing other reliability-related functions in service to its
region. As commenters indicate, regional reliability councils currently
perform a number of functions beyond the proposal and enforcement of
Reliability Standards. A Regional Entity may conduct such activities,
provided that they do not conflict or interfere with the performance of
a delegated function, which we view as the primary mission of a
Regional Entity.
    657. Further, any additional activity must not compromise the
oversight role or the independence of the Regional Entity. The activity
itself must not present a conflict of interest with the Regional
Entity's reliability oversight role of transmission operators. Further,
the funding for the activity must not be of such a significant amount
or from such a source as to compromise the independence of the Regional
Entity. Other activities not explicitly authorized under section 215 of
the FPA may not be funded through the ERO.
b. Process and Criteria for Becoming a Regional Entity
    658. Section 215(e)(4) of the FPA requires the Commission to issue
regulations authorizing the ERO to enter into an agreement to delegate
authority to a Regional Entity by filing a delegation agreement with
the Commission. The filing must include a detailed statement
demonstrating that: (1) The Regional Entity is governed by an
independent board, a balanced stakeholder board, or a combination
thereof; (2) the Regional Entity otherwise satisfies the certification
provisions of section 215(e)(4) of the FPA; and (3) the agreement
promotes effective and efficient administration of Bulk-Power System
reliability. The statute also requires the Commission and the ERO to
rebuttably presume that a proposal for a delegation to a Regional
Entity organized on an Interconnection-wide basis promotes effective
and efficient administration of Bulk-Power System reliability and
should be approved.
    659. Further, the NOPR sought comment on whether the Commission or
the ERO should set the criteria by which a Regional Entity application
\202\ to the ERO should be reviewed.\203\ The NOPR also asked what
criteria should be used to determine whether an applicant is eligible
to become a Regional Entity. Further, the NOPR asked whether the
Commission should prescribe a size, scope, or configuration requirement
for a Regional Entity and, if so, what it should be.\204\
---------------------------------------------------------------------------

    \202\ By application, the Commission means the ERO delegation
process specified in proposed 18 CFR 38.7.
    \203\ NOPR at P 84 (delegation question 9).
    \204\ Id. (delegation question 1).
---------------------------------------------------------------------------

Comments

    660. The Texas Commission asks the Commission to be more specific
as to how Regional Entities are established and approved. It suggests
that the Commission should consider an application process similar to
the one described in the NOPR for the ERO.
    661. As to the criteria for becoming a Regional Entity, commenters
are divided on who should set the criteria by which a Regional Entity
will be evaluated. A number of commenters suggest that the Commission
should set the criteria by which a Regional Entity application is
reviewed because the Commission is ultimately responsible for approving
all delegations of authority from the ERO to a Regional Entity.\205\
Other commenters respond that the ERO should develop the criteria by
which a Regional Entity application is reviewed, noting that each
Regional Entity's delegation agreement will be subject to Commission
approval.\206\
---------------------------------------------------------------------------

    \205\ See, e.g., Alcoa, California ISO, EEI, PSEG Companies and
Ontario IESO.
    \206\ See, e.g., ERCOT, LADWP, SERC and South Carolina E&G.
---------------------------------------------------------------------------

    662. The majority of commenters ask the Commission not to prescribe
a size, scope and configuration requirement, arguing that the
Commission should decide the appropriateness of a Regional Entity's
size, scope or configuration on a case-by-case basis.\207\ These
commenters suggest that the Commission should provide flexibility in
allowing a Regional Entity candidate to demonstrate that it meets the
standards of section 215(e)(4) of the statute, explaining that Regional
Entity configuration is less important than consistency in enforcement
of ERO Reliability Standards across an Interconnection. Hydro-
Qu[eacute]bec emphasizes that the Commission should work together with
the appropriate Canadian authorities on a case-by-case basis to
determine whether an applicant should be a Regional Entity. Several
commenters believe the Commission should prescribe the size, scope and
configuration of a Regional Entity.\208\ Most of these commenters
contend that a Regional Entity should be Interconnection-wide. AWEA
explains that industry participants are currently burdened by facing
different Reliability Standards in each regional reliability council
and notes that clear and consistent Reliability Standards across the
continent would allow wind turbine manufacturers to produce turbines at
a much lower cost to customers.
---------------------------------------------------------------------------

    \207\ See, e.g., APPA, City of Seattle, EEI, FRCC, Hydro-
Qu[eacute]bec, ISO New England, ISO/RTO Council, NiSource, NYSRC,
PacifiCorp, SMUD, TAPS and Xcel.
    \208\ See, e.g., Alcoa, Ameren, AWEA, BCTC and CREPC.
---------------------------------------------------------------------------

    663. A number of commenters emphasize the importance of preserving
the benefits of the regional reliability councils and argue that
deference should be given to applications from existing regional
reliability councils.\209\ For example, South Carolina E&G advocates
that the regional reliability councils should become Regional Entities
and asserts that the ``essential weakness of the current system lies in
its voluntariness, not in the number of reliability councils.'' \210\
---------------------------------------------------------------------------

    \209\ See, e.g., Cinergy, ERCOT, Hydro One, MISO Owners, NPCC,
Ohio Commission, South Carolina E&G and TVA.
    \210\ South Carolina E&G at 6.
---------------------------------------------------------------------------

    664. TVA submits that there should be a rebuttable presumption that
regional reliability councils are the appropriate starting point for
Regional Entities.\211\ It notes the importance of establishing
Regional Entities in a cost-effective manner and suggests that the
Commission should require evidence of problems before making changes to
the current regime.
---------------------------------------------------------------------------

    \211\ See also Cinergy and Ohio Commission.
---------------------------------------------------------------------------

    665. To the contrary, ELCON admonishes the Commission against
preserving the ``outmoded, existing industry governance structures,
relationships, and habits'' in setting requirements for a Regional
Entity.\212\ In a similar vein, EPSA urges the Commission to avoid the
``status quo quilt of decentralized, disparate entities.'' \213\
---------------------------------------------------------------------------

    \212\ ELCON at 3.
    \213\ EPSA at 12.
---------------------------------------------------------------------------

    666. A number of commenters suggest specific criteria for
evaluating a Regional Entity applicant.\214\ They cite a number of
factors, including governance, staff expertise, balance and diversity
of interests in the Reliability Standard development process,

sufficiency of resources and support systems, security of finances, and
track record with reliability issues. Some commenters also suggest that
the Commission consider whether a Regional Entity has demonstrated that
it has received approval from ANSI as a standards-setting organization,
which would help to ensure that a Regional Entity's Reliability
Standard development process is fair, open, balanced and
inclusive.\215\
---------------------------------------------------------------------------

    \214\ See, e.g., APPA, Hydro One, MISO, Missouri Commission and
NERC.
    \215\ See, e.g., APPA and EPSA.
---------------------------------------------------------------------------

    667. NERC points to the criteria in the bilateral principles, which
call for a Regional Entity with a size or scope that facilitates cross-
border trade and has boundaries that encompass the boundaries of other
transmission organizations.
    668. A few commenters recommend other criteria. For example, the
Missouri Commission suggests that there should be no more than two
Regional Entities per state; a Regional Entity should include a multi-
state geographic area that encompasses the major electric markets for a
region; or the region should be electrically connected with respect to
scope. Some commenters, such as NERC and NPCC, point to the benefits of
a Regional Entity with boundaries that encompass the boundaries of an
RTO or ISO to avoid the creation of new seams. In this regard, MISO
suggests that the entire geographic region of an RTO should be within
the scope of one Regional Entity.
    669. Some commenters suggest that, rather than prescribing size,
scope and configuration requirements, the Commission should focus on
the criteria prescribed in the legislation.\216\ National Grid submits
that the Commission's analysis should follow the statutory criteria for
a Regional Entity. International Transmission agrees, arguing that
additional requirements are unnecessary since the statute and proposed
regulations already provide that an Interconnection-wide Regional
Entity will be accorded certain deference with regard to Reliability
Standards proposed to be implemented on an Interconnection-wide basis.
---------------------------------------------------------------------------

    \216\ See, e.g., APPA, International Transmission and National
Grid.
---------------------------------------------------------------------------

Commission Conclusion

    670. The Final Rule adopts the criteria set out in section
215(e)(4) of the statute. Regional Entity applicants must enter into a
delegation agreement with the ERO. The ERO should evaluate the Regional
Entity applicant according to the statutory and regulatory criteria.
Once the ERO has signed a delegation agreement with a Regional Entity,
the ERO will submit it to the Commission for approval.
    671. The Commission agrees with those commenters who argue that the
statute provides adequate criteria for Regional Entities. The
Commission does not set criteria in the Final Rule for a Regional
Entity's size, scope and configuration, but will evaluate each Regional
Entity application on a case-by-case basis. Any change in the size,
scope or configuration of a Regional Entity would constitute an
amendment to the delegation agreement, and any amendment would be
subject to review by the ERO and approval by the Commission. Section
215(e)(4) of the FPA requires a Regional Entity to have an independent
board, a balanced stakeholder board or a combination of the two;
satisfy the same requirements as the ERO; and demonstrate that the
proposed delegation agreement promotes effective and efficient
administration of Bulk-Power System reliability. We do not provide
guidance in this Final Rule as to what constitutes ``effective and
efficient administration.'' We believe it more appropriate to address
the issue in the context of the particular facts and circumstances
presented by an individual proposed delegation agreement. Further, the
Commission prefers that the ERO make the initial assessment of each
Regional Entity applicant, and present its case to the Commission. The
Commission will conduct the final assessment.
    672. The statute requires, and we adopt here, a rebuttable
presumption that a proposal for delegation to a Regional Entity
organized on an Interconnection-wide basis promotes effective and
efficient administration of Bulk-Power System reliability and should be
approved, as discussed further below.
    673. As a general matter, the ERO will initially assess whether a
regional reliability council may become a Regional Entity, subject to
Commission approval. When this issue comes before the Commission, it
will consider a delegation agreement between the ERO and an existing
regional reliability council in light of whether the application
demonstrates compliance with the criteria to qualify as a Regional
Entity. The Commission may consider reconfiguration or consolidation if
a specific problem is raised in the approval process, or subsequently
if inadequate scope or configuration or other factors hamper the
performance of delegated responsibilities of a Regional Entity or fail
to promote effective and efficient administration of the Bulk-Power
System.
c. Review of a Regional Entity Applicant
    674. As noted above, EPAct provides criteria to be met by a
Regional Entity applicant, including the rebuttable presumption that a
proposal for a delegation to a Regional Entity organized on an
Interconnection-wide basis promotes effective and efficient
administration of Bulk-Power System reliability.
i. Review of a Regional Entity Organized on an Interconnection-Wide
Basis
    675. The California ISO contends that section 215 of the FPA
accords an Interconnection-wide Regional Entity only a rebuttable
presumption that it satisfies one of the statutory criteria required
for approval, effective and efficient administration of the Bulk-Power
System.

Commission Conclusion

    676. We agree with the California ISO's comment that the rebuttable
presumption that the proposed delegation agreement be approved applies
only to one of the statutory criteria. The Commission concludes that
the most reasonable interpretation of the provision is that the
rebuttable presumption applies only to the effective and efficient
administration of the Bulk-Power System criterion. However, parties are
free to intervene and make the case that a delegation agreement should
not be approved if it fails to satisfy this, or any of the other
statutory or regulatory criteria.
ii. Review of a Regional Entity Not Organized on an Interconnection-
Wide Basis
    677. The NOPR asked whether a higher standard of review should
apply to a proposed Regional Entity that is not organized on an
Interconnection-wide basis, given that section 215(e)(4) of the FPA
requires that the ERO and the Commission must rebuttably presume that a
proposal for a Regional Entity organized on an Interconnection-wide
basis promotes effective and efficient administration of Bulk-Power
System reliability, and if so, what the higher standard of review
should specify. The NOPR also asked whether a Regional Entity not
organized on an Interconnection-wide basis should have the burden to
demonstrate that it has the appropriate regional scope and
configuration to promote effective and efficient administration of
Bulk-Power System reliability.\217\
---------------------------------------------------------------------------

    \217\ NOPR at P 84 (delegation question 9).

---------------------------------------------------------------------------

Comments

    678. Several commenters support a higher standard of review for a
Regional Entity that is not organized on an Interconnection-wide basis.
Numerous other commenters do not see a need to distinguish Regional
Entity criteria according to whether or not a Regional Entity is
Interconnection-wide.
    679. Several commenters support a higher standard of review for a
Regional Entity that is not Interconnection-wide.\218\ For example,
CREPC asserts that the Commission should clearly separate the
authorities and responsibilities of a Regional Entity that oversees an
entire Interconnection from those that only oversee a portion.
---------------------------------------------------------------------------

    \218\ See, e.g., Ameren, AWEA, CREPC, EEI and NiSource.
---------------------------------------------------------------------------

    680. Many other commenters see no reason to differentiate Regional
Entity criteria according to whether or not the Regional Entity is
organized on an Interconnection-wide basis.\219\ FRCC submits that the
Commission should not set a standard of review beyond that in EPAct
because the Act does not require a higher standard of review for the
approval of a Regional Entity that is not organized on an
Interconnection-wide basis. Rather, it establishes a procedural
requirement for the burden of going forward with evidence and argument
on whether the delegation standard has been met. MISO Owners argue that
the Commission should refrain from setting a higher standard of review
because there is no real difference between Interconnection-wide
reliability organizations and today's Eastern Interconnection
organizations in terms of technical expertise. Dairyland adds that a
Regional Entity not organized on an Interconnection-wide basis should
get the same deference as one organized on an Interconnection-wide
basis if it can demonstrate the knowledge and technical expertise to
warrant deference, and is structured to operate independently from
members, market participants, and system operators. However, a Regional
Entity that is not a part of a larger Interconnection may need more
extensive coordination specificity requirements.
---------------------------------------------------------------------------

    \219\ See, e.g., California ISO, FRCC, MISO Owners, National
Grid, NYSRC and Ontario IESO.
---------------------------------------------------------------------------

    681. The California ISO asserts that the statute does not require a
higher substantive standard of review for a Regional Entity not formed
on an Interconnection-wide basis.
    682. Other commenters argue that the Commission must give due
consideration to entities that are less than Interconnection-wide. SERC
asserts that there is a longstanding historical precedent for smaller
regions with legitimate local reliability concerns that would not be
adequately addressed by a larger, more encompassing region.
    683. Commenters offer a number of suggestions on criteria for a
higher standard of review. Numerous commenters recommend that Regional
Entity qualifications should be based on the EPAct principle of
effective and efficient administration of Bulk-Power System
reliability, emphasizing that the statute already provides this
criterion.\220\ Commenters encourage the Commission to afford
appropriate weight to the technical expertise of a proposed Regional
Entity that is less than Interconnection-wide.\221\
---------------------------------------------------------------------------

    \220\ See, e.g., AEP, Alberta, APPA, EEI, FRCC, LADWP, National
Grid, PacifiCorp and Xcel Energy.
    \221\ See, e.g., CREPC, ISO New England and LG&E Energy.
---------------------------------------------------------------------------

    684. EPSA recommends that Regional Entity approval be based on the
existence of consistent and uniform Reliability Standards and
procedures. It contends that uniformity is particularly important in
cases where several Regional Entities exist within an Interconnection.

Commission Conclusion

    685. The Commission concludes that a Regional Entity that is not
Interconnection-wide must meet the same criteria as one organized on an
Interconnection-wide basis. However, it has the burden to demonstrate
effective and efficient administration of Bulk-Power System
reliability, since no rebuttable presumption applies for this
criterion. Accordingly, the Commission expects a proposed delegation to
a Regional Entity not organized on an Interconnection-wide basis to
affirmatively demonstrate that such delegation meets all the statutory
criteria and in particular would promote ``effective and efficient
administration of Bulk-Power System reliability.'' We note that an
Interconnection-wide Regional Entity offers the greatest potential for
effective reliability without seams.
    686. The Commission disagrees with commenters suggesting that we
establish a generic distinction in our regulations between the
authorities and responsibilities of an Interconnection-wide Regional
Entity and one that is less than Interconnection-wide. Once approved,
any Regional Entity will be delegated the authorities and
responsibilities articulated in its own Commission-approved delegation
agreement.
d. Eligibility of an RTO or ISO To Become a Regional Entity
    687. The NOPR asked whether an RTO or ISO should be permitted to
become a Regional Entity.\222\ It noted that the bilateral principles
provide that an RTO or ISO should not become a Regional Entity, and
that a Regional Entity should be distinct from an operator of the
system, such as an RTO or ISO.
---------------------------------------------------------------------------

    \222\ NOPR at P 71 (enforcement question 9).
---------------------------------------------------------------------------

Comments

    688. Several commenters ask the Commission not to preclude
generically an RTO or ISO from becoming a Regional Entity, but rather
allow them to present arguments and plans to address any necessary
separation requirements.\223\ They note that the statute does not
specifically preclude an RTO or ISO from serving as a Regional Entity
and assert that the Commission should not rely solely on the bilateral
principles as a basis for such preclusion. Alcoa points out that having
a separate RTO/ISO and Regional Entity could lead to duplicative
efforts and higher costs for consumers.
---------------------------------------------------------------------------

    \223\ See, e.g., Alcoa, Empire District Electric, Hydro-
Qu[eacute]bec, Kansas City P&L, Missouri Commission and Ontario
IESO.
---------------------------------------------------------------------------

    689. The California ISO contends that an RTO or ISO is well-
positioned to serve as a Regional Entity because it must satisfy
independence requirements, has the necessary expertise and knowledge of
regional conditions, already has reliability obligations under Order
No. 888, is of sufficient size and scope to serve as a Regional Entity,
and has Commission-approved enforcement programs. It further contends
that an RTO or ISO could satisfy the concerns expressed in the
bilateral principles through functional separation of compliance units
that would be autonomous of ISO/RTO management. Alternatively, the ERO
could be made responsible for monitoring the compliance of an RTO or
ISO that serves as a Regional Entity.
    690. Some commenters, including ERCOT and SPP, argue that it is
appropriate for an ISO or RTO to be a Regional Entity under certain
conditions. SPP cites its success in operating as a combined RTO and
regional reliability council and notes the efficiencies of a combined
organization. SPP claims that its structure satisfies the independence
requirement for a Regional Entity, explaining that the sole function of
its compliance monitoring staff is to comply with Reliability
Standards. SPP compliance staff does not participate in enforcement
audits of

the SPP system operator and three independent directors adjudicate the
assessment of penalties to SPP participants. The Ontario IESO similarly
notes that it serves as a system operator and oversees compliance with
Reliability Standards, with its enforcement unit insulated from the
rest of the organization. It claims that its process has been
effective, noting that compliance enforcement involves technical
matters that only the system operator fully understands.
    691. ERCOT and others assert that ERCOT should be able to maintain
its ISO and Regional Entity functions within the same organization.
They explain that Texas state law grants the Texas Commission authority
to adopt and enforce reliability rules. The Texas Commission has
delegated this authority to ERCOT, subject to its oversight. ERCOT is
uniquely situated because it has no AC interconnections to neighboring
control areas, it has a compliance office that is functionally
separated from the ISO organization, and the Texas Commission answers
directly to the state legislature on Bulk-Power System reliability.
    692. Many commenters admonish the Commission against allowing a
combined system operator/Regional Entity.\224\ NRECA notes, ``There is
already ample concern that RTOs and related entities have become too
overstaffed, too large, and too unaccountable to the public. Endowing
RTOs with additional powers and duties can only exacerbate these
problems at this time.'' \225\
---------------------------------------------------------------------------

    \224\ See, e.g., Alberta, BCTC, CEA, Ohio Commission, Old
Dominion, PG&E, NRECA, SMUD, Southern and TVA.
    \225\ NRECA at 33.
---------------------------------------------------------------------------

    693. Many commenters, such as New York Companies, express the
concern that an RTO's or ISO's operational duties would conflict with
the Regional Entity role of enforcing Reliability Standards.
Commenters, such as Alberta and SMUD, contend that since an RTO or ISO
will have to comply with Reliability Standards in its role as a
transmission operator, balancing authority and security coordinator,
such an entity should not also act as a Regional Entity. They argue
that it is not appropriate for a Regional Entity to exercise its
enforcement authority against itself. APPA and Old Dominion comment
that functional separation and behavioral criteria will not suffice
should an RTO or ISO seek to act as a Regional Entity. Despite any
devices used to address the independence issue, industry participants
may still lack confidence that a Regional Entity is competent to
discipline its Bulk-Power System operations function. SMUD adds that
functional separation would require a new layer of enforcement that
would impose additional costs on market participants.
    694. EPSA suggests that an RTO seeking to qualify as a Regional
Entity must satisfy a heavy burden, including complete detachment of
the enforcement function from RTO operations. It suggests that other
criteria to consider in determining whether an RTO meets this heavy
burden include detailed, written procedures for the separation of
functions; a determination of whether a delegation is limited to ERO
functions that do not require the RTO to serve as the reliability
compliance monitor for itself; and periodic audits that provide
independent verification that an RTO is performing its dual roles
properly.
    695. Hydro-Qu[eacute]bec suggests that an RTO or an ISO may be a
Regional Entity if it can demonstrate its independence from the
enforcement authority in the region. MRO contends that the Commission
should prohibit an RTO or ISO from becoming a Regional Entity unless
such a requirement conflicts with a state or provincial mandate, as is
the case with ERCOT.
    696. CEA and Hydro Qu[eacute]bec express concern about the
implications for Canadian companies of having a combined system
operator/Regional Entity. They warn that allowing an RTO or an ISO to
become a Regional Entity should not be used to force Canadian utilities
to become members of an RTO or ISO. Further, CEA comments that allowing
an RTO or ISO to become a Regional Entity could serve as a disincentive
for Cross-Border Regional Entities to the extent Canadian utilities may
be unable or unwilling to transfer operational authority to an RTO or
ISO.

Commission Conclusion

    697. The Commission considers the matter of whether a combined
system operator/Regional Entity is able to engage in both separate
system operations and enforcement as distinct from the matter of
whether the boundaries of an RTO or ISO correspond to the boundaries of
a Regional Entity. The Commission recognizes the potential benefits of
having the same boundaries for an RTO/ISO and a Regional Entity.
    698. The Commission is concerned, however, that an RTO or ISO may
have an inherent conflict of interest if it is also a Regional Entity
itself. The same institution would operate the Bulk-Power System and be
responsible for overseeing its own compliance with Reliability
Standards. The comments received reinforce the Commission's opinion
that such self-enforcement is extremely difficult to carry out
satisfactorily. A system operator/Regional Entity in a single
corporation--absent a very strong separation between the oversight and
operations functions--should not oversee its own compliance with
Reliability Standards.
    699. We will not in the Final Rule prohibit an entity from making
its case for adequate separation. However, an RTO or ISO that lies in
whole or in part in the United States and applies to become a Regional
Entity will have a heavy burden to show that it meets the statutory
criterion that it be independent of the operators of the Bulk-Power
System in its region.\226\
---------------------------------------------------------------------------

    \226\ The Commission acknowledges the existence of two such
combined entities in the United States today. Although commenters
note that an operating entity in Canada may enforce reliability
rules against itself, we know of no case where such an entity seeks
to become a Regional Entity. In any event, how such matters are
decided in Canada is outside our jurisdiction.
---------------------------------------------------------------------------

    700. A combined system operator/regional reliability council
currently in operation may seek Regional Entity status but, to qualify
as a Regional Entity, it must demonstrate a strong separation plan with
sufficient protections. The separation plan must show full independence
between the enforcement/Reliability Standard development and the
transmission operations. If a combined system operator/Regional Entity
cannot demonstrate adequate separation, it will not be approved.
e. Delegation Agreements
    701. Paragraphs (b) and (c) of the NOPR's proposed section on
delegation provided that the ERO must file a delegation agreement with
the Commission for approval and that the delegation agreement shall not
be effective until it is approved by the Commission.
    702. The NOPR asked whether the ERO should be required to submit a
standardized form of delegation agreement concurrently with the ERO
application that would delineate a uniform relationship between the ERO
and all Regional Entities. Alternatively, should all of a delegation
agreement be tailored to the individual needs and circumstances of each
region and the ERO? \227\
---------------------------------------------------------------------------

    \227\ NOPR at 84 (delegation question 4).
---------------------------------------------------------------------------

    703. The NOPR also asked what guidelines, measures or criteria to
apply in determining whether a delegation agreement promotes effective
and efficient administration of Bulk-Power

System reliability. If the primary function of a Regional Entity is
enforcement of Reliability Standards, in what ways will Regional
Entities bring effective and efficient administration in the
enforcement function? \228\
---------------------------------------------------------------------------

    \228\ Id. (delegation question 11).
---------------------------------------------------------------------------

Comments

    704. Most commenters on delegation agreements support some sort of
standardized delegation agreement, while others assert the need for an
individualized delegation agreement for each Regional Entity. A number
of commenters support a pro forma delegation agreement, which would
define certain standardized criteria to be consistent across all
Regional Entities.
    705. Commenters, such as EPSA and FirstEnergy, emphasize the
importance of uniformity with respect to enforcement of Reliability
Standards, and for processes and procedures implemented by all Regional
Entities. EPSA notes that standardization can facilitate transactions
across regions, cut costs and avoid litigation. EPSA asserts that
variations in Regional Entity delegation agreements should be rare, and
thus it should be possible to standardize major elements of the
delegation agreement.
    706. A number of commenters would not standardize the delegation
agreement, instead asserting that a Regional Entity must have the
flexibility to develop an individual delegation agreement.\229\ Many of
these commenters believe the Commission should allow entities
considerable latitude to negotiate these agreements, and should not
create a disincentive to innovation.
---------------------------------------------------------------------------

    \229\ See, e.g., Alberta, BCTC, City of Seattle, ISO/RTO
Council, Kansas City P&L, PacifiCorp and TANC.
---------------------------------------------------------------------------

    707. CEA and Hydro-Qu[eacute]bec prefer individualized delegation
agreements because a uniform delegation agreement may not reflect the
differing authorities of a Cross-Border Regional Entity.
    708. A number of commenters assert that Regional Entity delegation
agreements need to be flexible enough to accommodate regional
differences.\230\ Progress Energy submits that the delegation agreement
should specify a uniform relationship between the ERO and Regional
Entity but should also provide enough flexibility to allow for the
individual needs and circumstances of each region. APPA asserts that
additional terms and conditions addressing the unique circumstances of
a region could be spelled out in addenda to the pro forma delegation
agreement.
---------------------------------------------------------------------------

    \230\ See, e.g., Ameren, APPA, Progress Energy, SERC and
Southern.
---------------------------------------------------------------------------

    709. ERCOT and WECC suggest that the delegation of authority to a
Regional Entity that is organized on an Interconnection-wide basis
should be allowed more flexibility than one for a Regional Entity that
is less than Interconnection-wide. They assert that the Commission
should allow the ERO and an Interconnection-wide Regional Entity to
negotiate an individual delegation agreement that reflects its unique
system needs and give it broader responsibility for readiness audits
and assessments of reliability in its region.
    710. Numerous commenters favor a pro forma agreement, to be
submitted concurrently with the ERO application, to maximize
consistency among Regional Entity delegation agreements.\231\ The ERO
would identify specifically how each region meets the qualification
criteria and would include the Rules of procedure used within the
region for delegated functions.
---------------------------------------------------------------------------

    \231\ See, e.g., AEP, EEI, Hydro One, International
Transmission, NERC, NPCC, SoCalEd, TVA and Xcel Energy.
---------------------------------------------------------------------------

    711. International Transmission and Michigan Electric are concerned
that delegations to Regional Entities create opportunities for the
development or enforcement of Reliability Standards to vary by region.
They assert that undue influence by individual stakeholders or
stakeholder sectors, the Regional Entities themselves, or even the
Commission could compromise grid reliability, and argue that a
prerequisite to any delegation of authority to a Regional Entity should
be a finding that the ERO is fully independent with respect to its
review and that any specific delegation of authority does not undermine
such independence.

Commission Conclusion

    712. As most commenters observe, there is value to consistency
among the delegation agreements of Regional Entities. Industry
participants should be able to conduct business in the same way from
one Regional Entity to the next. Some standardization of the delegation
agreement will facilitate uniformity in ERO-Regional Entity
relationships, Regional Entity processes, accountability and
enforcement of Reliability Standards. It may also help to minimize
seams between regions. The Commission concludes that the ERO should
submit a pro forma delegation agreement. This is a delegation agreement
with core elements to be uniformly applied to all Regional Entities.
The ERO applicant must submit the pro forma delegation agreement
concurrently with the ERO application. Addenda to the delegation
agreement can address regional differences and unique system needs for
each Regional Entity, including any need to address differing
authorities of Cross-Border Regional Entities.
    713. The Commission sees no need to make a finding that the ERO is
fully independent as part of the delegation of authority to Regional
Entities, as suggested by International Transmission and Michigan
Electric. The Commission will evaluate such criteria during the ERO
certification process.
f. Regional Entity Governance
    714. The NOPR asked to what extent the ERO, when delegating
responsibility to a Regional Entity, should require uniform processes
with regard to governance, among other things.
    715. The NOPR also asked whether the delegation criteria for a
Cross-Border Regional Entity should specify that each country
represented in the region should have the opportunity to have members
from the country on the board of the Cross-Border Regional Entity in
numbers that reflect the country's approximate percentage of net energy
for load in that region, similar to that provided in the bilateral
principles.\232\
---------------------------------------------------------------------------

    \232\ NOPR at P 84-88 (delegation question 8).
---------------------------------------------------------------------------

Comments

    716. A number of commenters emphasize the importance of governance
and request additional guidance from the Commission on how a Regional
Entity would be governed. MISO asserts that the NOPR does not contain
sufficient detail to ensure that a Regional Entity is properly
structured and not dominated by any particular industry sector. TAPS
asks for guidance on the statutory requirement for balanced stakeholder
or hybrid boards at the Regional Entity level and public meeting
requirements. It also requests that the Commission spell out the
meaning of the ``balance'' requirement, consistent with Order Nos. 888
and 2000 and the bilateral principles.
    717. EPSA emphasizes that a Regional Entity must be independent and
notes the difficulty of achieving true independence with a stakeholder
board and a committee process that is staffed primarily by employees of
grid operators or market participants. EPSA encourages the Commission
to require boards that properly balance the interests of all users,
owners and operators of the Bulk-Power System.
    718. Commenters stress the importance of a Regional Entity
developing a fair system of sector

representation and voting as a requirement for approval of a delegation
agreement. ELCON advocates that the Commission require NERC's
governance structure for a Regional Entity which organizes stakeholders
into nine representative industry sectors. It asserts that end users
should be permitted to participate in the affairs of a Regional Entity
on an equal and non-discriminatory basis to meet statutory objectives,
and observes that a membership requirement can be a barrier to
participation.
    719. NASUCA submits that consumer representatives should be
entitled to membership and voting rights in any Regional Entity that is
delegated ERO functions. Consumers should be fully represented on the
stakeholder committees that advise the board of any Regional Entity
that has an independent board.
    720. The California ISO requests that the Commission confirm that
its new board selection process satisfies the independence requirement
under section 215(e)(4)(B) of the FPA and the proposed regulations in
the event it seeks to become a Regional Entity.
    721. NPCC asserts that a delegation agreement should not prescribe
a Regional Entity's governance beyond the requirement that it fairly
represent the composition of its region.
    722. While some commenters support a requirement that the number of
board members of a Cross-Border Regional Entity must be in proportion
to net energy for load for each participating country, other commenters
argue that the Commission should not dictate such a structure for a
Cross-Border Regional Entity's board.
    723. Alberta, BCTC, Hydro One, and Hydro Qu[eacute]bec believe that
the delegation criteria for a Cross-Border Regional Entity should
specify that each country should be allowed membership based on net
energy for load in each region. PSEG Companies agrees, but adds that
the number of representatives should be roughly proportional to load
and not less than one.
    724. Ontario IESO recommends specifying a minimum number of
Canadian board seats for Cross-Border Regional Entities, rounded up
from the proportion of net energy for load.
    725. WECC strongly endorses the notion that international members
should have assured representation on a Cross-Boarder Regional Entity's
board, but expresses concern about requiring a Regional Entity to have
a governing board based strictly on net energy for load. WECC's current
bylaws do not require that representation be based strictly on the net
energy for load proportion. WECC explains that its board is composed of
a delicate balance of combined stakeholder and nonaffiliated members
and asserts that the Final Rule should permit delegation to a Cross-
Border Regional Entity in a manner that will accommodate current WECC
bylaws.
    726. APPA argues that the Commission should not specify the details
of a Cross-Border Regional Entity's board membership in the Final Rule
to allow flexibility in the structure of a Regional Entity's board as
intended in the statute. Instead, it suggests that the Commission could
state in the preamble to the Final Rule that it would accept a division
of representation on a Cross-Border Regional Entity's board based on
net energy for load in each country.

Commission Conclusion

    727. Section 215(e)(4)(A) of the statute provides criteria for the
governance of a Regional Entity. As noted above, the statute directs
the Commission to issue regulations authorizing the ERO to enter into a
delegation agreement between the ERO and a Regional Entity if, inter
alia, the Regional Entity is governed by an independent board, a
balanced stakeholder board, or a combination of the two. The statute
provides no further guidance on Regional Entity governance. The
Commission observes that there may be more than one acceptable approach
for a Regional Entity to establish a balanced or combination board. The
Commission does not give further guidance regarding the statutory
criteria for Regional Entity governance here. Instead we will interpret
the statutory criteria in light of the facts presented in each Regional
Entity's proposed delegation agreement. It is premature for the
Commission to make a finding on any particular Regional Entity
governance at this time.
    728. As explained above, just as the Commission requires an ERO
candidate to demonstrate in its application for certification how it
will establish Rules that ensure its independence from the users,
owners and operators of the Bulk-Power System, while assuring
stakeholder representation in the selection of its directors and
balanced decisionmaking in any ERO committee or subordinate
organizational structure, we also adopt this requirement to demonstrate
these factors in each Regional Entity delegation agreement. The
Commission agrees that appropriate Regional Entity Rules should include
a provision specifying that no two industry sectors should control any
decision and no single segment should be able to veto any matter,
unless the ERO adequately explains why it cannot apply these
principles.
    729. We note that the ERO may seek recognition for a Cross-Border
Regional Entity applicant in Canada and Mexico, in accordance with the
relevant requirements of the Canadian and Mexican authorities. We see
no reason to differ for a Cross-Border Regional Entity regarding our
conclusion above not to further interpret the statutory Regional Entity
governance criteria.
g. Notice Requirement for Submission of Delegation Agreements
    730. NiSource comments that the NOPR was silent as to the process
the Commission will use to approve the ERO's proposed delegation of
authority to a Regional Entity. Although the proposed regulations would
require the ERO to file with the Commission a delegation agreement, the
NOPR did not propose a notice requirement or provision for public
comment or protest regarding the filing. NiSource requests
clarification that any proposed delegation agreement or Regional Entity
Rule will be subject to notice and public comment.
    731. PG&E requests that the Commission modify the proposed
regulations to include explicitly the opportunity for public notice and
comment on an application to become the ERO and a proposed delegation
agreement between the ERO and a Regional Entity.

Commission Conclusion

    732. The Commission will provide notice and opportunity for comment
on an ERO application and a proposed delegation agreement. Interested
persons will have an opportunity to express their concerns about the
application or agreement. The Commission will consider all
interventions and comments in making an informed decision on whether to
accept a delegation agreement.\233\
---------------------------------------------------------------------------

    \233\ Notice and comment procedures are to be under Rule 210 of
the Commision's rules of practice and procedure. 18 CFR 385.210.
---------------------------------------------------------------------------

h. Uniform Processes Among Regional Entities
    733. The NOPR asked about the extent to which the ERO, when
delegating responsibility to Regional Entities, should require uniform
processes in matters including, but not limited to, governance,
collection of dues and fees, compliance monitoring, and enforcement
action procedures.\234\
---------------------------------------------------------------------------

    \234\ NOPR at P 84 (delegation question 5).

---------------------------------------------------------------------------

Comments

    734. Comments on this matter largely overlap the comments discussed
above under Delegation Agreement and Governance. A number of commenters
support a standardized process across Regional Entities. \235\ These
commenters emphasize the need for uniformity in processes, especially
those relating to governance, collection of dues and fees, compliance
monitoring and enforcement proceedings, and hearing procedures.
Commenters, including EEI and NERC, note that NERC and the industry are
preparing a proposed pro forma delegation agreement that should specify
the necessary uniform processes within the Regional Entities.
---------------------------------------------------------------------------

    \235\ See, e.g., EEI, ELCON, FRCC, EPSA, NERC and NiSource.
---------------------------------------------------------------------------

    735. EPSA argues that the ERO should require, and the Commission
should condition Regional Entity approval on, the establishment of
consistent and uniform standards and procedures. NiSource and PSEG
Companies stress the importance of consistency for stakeholders that do
business in multiple regions.
    736. Other commenters do not believe absolute standardization is
necessary.\236\ Rather, they argue, the responsibilities delineated in
the relationship between the ERO and Regional Entities should have a
common look and feel, but standardization should not be overly
prescriptive. First Energy submits that the Commission should allow
flexibility in the implementation of uniformity, such as for self-
assessment programs and the development of best practices.
---------------------------------------------------------------------------

    \236\ See, e.g., Ameren, Progress Energy, Santee Cooper, SERC
and SoCalEd.
---------------------------------------------------------------------------

Commission Conclusion

    737. As noted above under the Delegation Agreements and Governance,
the Commission will review the pro forma delegation agreement when it
is filed by the ERO applicant. The pro forma delegation agreement must
propose which regional processes should be standardized. The Commission
believes that regional processes should be uniform unless regional
facts, other than custom, require a difference.
i. Commission Assignment of Enforcement Authority Directly to a
Regional Entity
    738. The NOPR proposed that, if a prospective Regional Entity
seeking to enter into a delegation agreement with the ERO is unable to
reach agreement with the ERO within 180 days, and the entity can
demonstrate that continued negotiations would not likely result in a
delegation agreement within a reasonable period of time, such entity
may apply to the Commission directly for authority to enforce
Reliability Standards within a region.\237\
---------------------------------------------------------------------------

    \237\ NOPR at P 83.
---------------------------------------------------------------------------

Comments

    739. Among the commenters on assignment of enforcement authority
directly to a Regional Entity, Hydro-Qu[eacute]bec expresses general
support for the Commission's proposal to allow a Regional Entity to
apply directly to the Commission for enforcement authority if a
delegation agreement cannot be reached within 180 days. EPSA emphasizes
that the entity making such a direct application to the Commission must
demonstrate that its dealings with the ERO were conducted in good faith
and with the goal of minimizing areas in dispute.
    740. The ISO/RTO Council notes that the Commission does not explain
or justify the proposed requirement that a prospective Regional Entity
wait 180 days after proposing a delegation agreement to the ERO before
seeking Commission action and questions why such a waiting period is
necessary. It recommends deleting the words ``within 180 days'' from
proposed section 38.7(e).
    741. APPA questions whether the statute clearly authorizes the
Commission to determine the terms and conditions of a delegation
agreement over the objection of the ERO. A preferable approach might be
for the Commission to offer to mediate any dispute over the terms of a
delegation agreement between the ERO and a prospective Regional Entity.

Commission Conclusion

    742. The Commission concludes that a prospective Regional Entity
may submit a delegation agreement directly to the Commission if good
faith negotiations with the ERO fail. The Commission strongly
encourages the parties prior to this submission to consider the use of
ADR \238\ to resolve any disputes over the terms of the delegation
agreement. Thus, a prospective Regional Entity that submits a
delegation agreement directly to the Commission must state: (i) Whether
the Commission's Dispute Resolution Service (DRS) was used, or why the
DRS was not used and (ii) whether the Regional Entity believes that ADR
under the Commission's supervision could successfully resolve the
disputes regarding the terms of the delegation agreement. We therefore
affirm our statement in the NOPR that a Regional Entity applicant may
apply to the Commission directly for authority to enforce Reliability
Standards within a region if it is unable to reach agreement with the
ERO within 180 days and can demonstrate that continued negotiations
would not likely result in a delegation agreement within a reasonable
period of time. The Commission will provide notice of such an
application and an opportunity for all interested persons, including
the ERO, to comment.
---------------------------------------------------------------------------

    \238\ Alternative dispute resolution encompasses a variety of
dispute resolution mechanism including mediation, early neutral
evaluation and settlement judge procedures. It always involves the
use of a third party neutral to help the parties find mutually
acceptable solutions to their disputes. Unassisted negotiation
between parties should not be confused with ADR. To discuss
appropriate ADR options, the parties should contact the Dispute
Resolution toll free at 1-877-337-2237 (local number:<PHONE_NUMBER>),
or by e-mail at<EMAIL_ADDRESS>---------------------------------------------------------------------------

    743. A minimum time for negotiations is necessary to prevent a
prospective Regional Entity from merely going through the formality of
seeking an ERO delegation before bypassing the ERO and asking the
Commission to intervene. This practice would not be consistent with our
intent to have a strong ERO. The Commission emphasizes that direct
application to the Commission by a prospective Regional Entity should
be considered an option only after other means for reaching agreement
with the ERO have been exhausted. The Final Rule does not preclude
mediation, but there is no need to impose such a requirement at this
time. Mediation may be considered on a case-by-case basis. We disagree
with APPA that the statute does not permit the Commission to direct the
ERO to enter into the delegation agreement with the Regional Entity.
Section 215(e)(4) permits the Commission to assign the ERO's authority
to enforce Reliability Standards directly to a Regional Entity.
j. Performance Assessment of Regional Entities
    744. Paragraph (f) of the proposed section on delegation required a
Regional Entity approved by the Commission to periodically submit to
the Commission an application to be approved as a Regional Entity.\239\
The NOPR also sought comment on what would constitute a reasonable
length of time for such periodic re-approval to be effective.\240\
---------------------------------------------------------------------------

    \239\ Id.
    \240\ Id. at P 84 (delegation question 10).
---------------------------------------------------------------------------

Comments

    745. Many commenters generally support a re-approval process for a
Regional Entity. While several commenters support the Commission's

suggestion of a five-year re-approval, others offer alternative
suggestions on an appropriate time frame.
    746. A number of commenters support a re-approval process for
Regional Entities.\241\ Cinergy argues that, absent such a requirement,
the delegation approval process would be a one-time evaluation, after
which the Regional Entity would lack accountability. SMUD suggests that
the Commission should consider a periodic review of Regional Entities
on a staggered basis to reduce the strain on ERO or Commission
resources that could result from simultaneous reviews. Several
commenters suggest that any Regional Entity re-approval process should
follow the same timetable as ERO recertification.\242\
---------------------------------------------------------------------------

    \241\ See, e.g., Alcoa, Cinergy, NERC and SMUD.
    \242\ See, e.g., APPA, International Transmission, SERC, South
Carolina E&G and TVA.
---------------------------------------------------------------------------

    747. Commenters suggest several alternative time frames for review,
varying from two to six years. Some commenters suggest regional
delegation agreements should be subject to review every six years.\243\
A number of commenters suggest a five-year review cycle for a Regional
Entity delegation agreement.\244\
---------------------------------------------------------------------------

    \243\ See, e.g., APPA, NERC and TAPS.
    \244\ See, e.g., Alcoa, PSEG, SoCalEd, South Carolina E&G and
TVA.
---------------------------------------------------------------------------

    748. APPA and EPSA recommend that the ERO should be involved in the
review of a Regional Entity delegation agreement that is submitted to
the Commission for re-approval by providing input on the merits of re-
approval for each Regional Entity and submitting the delegation
agreement for re-approval. Other commenters suggest that resubmission
of the delegation agreement is unnecessary unless a change has taken
place.\245\
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    \245\ See, e.g., Alcoa, PSEG and TVA.
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    749. Several commenters recommend requiring the Regional Entity to
apply for re-approval in advance of the end of its term, with some
commenters suggesting six months, and others a year in advance.\246\
EPSA also suggests that a Regional Entity consult with the ERO in
advance about its performance and need for changes in the delegation
agreement and provide notice to the Commission one year before the end
of its term. NERC advises that the Commission's approval should not
expire automatically at the end of a term, but should continue until
the Commission completes its periodic review of the Regional Entity
performance and its delegation agreement.
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    \246\ See, e.g., EPSA, PSEG, South Carolina E&G and TVA.
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    750. CEA and NERC suggest that the Commission coordinate with the
appropriate regulatory authorities in Canada prior to denying re-
approval of a Regional Entity. Any unilateral action taken by the
Commission would be inconsistent with the goal of establishing a
cooperative cross-border approach.
    751. Numerous commenters argue that the Commission should not
require a re-approval process.\247\ SERC asserts that a requirement for
periodic re-approval is not contained in the legislation and argues
that a re-approval process would divert significant resources from a
Regional Entity's primary purpose of proposing and enforcing
Reliability Standards. Instead, a ``decertification'' process should be
adopted that would be applied by the Commission at the request of the
ERO if the Regional Entity fails to meets its requirements for
remaining a Regional Entity.
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    \247\ See, e.g., ERCOT, FirstEnergy, FRCC, NPCC, NRECA, Ontario
IESO, Progress Energy, SERC and Southern.
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    752. FirstEnergy and FRCC argue that the Commission should
decertify the ERO or a Regional Entity only as a last resort.
FirstEnergy remarks that such an action ``would be equivalent to the
death penalty for the ERO or Regional Entity and would cause
significant logistical problems'' in transitioning to a new Regional
Entity.\248\
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    \248\ FirstEnergy at 5.
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    753. ERCOT argues that instead of re-approval, the ERO should
perform periodic audits of each Regional Entity, consistent with the
Commission's proposal for the ERO.

Commission Conclusion

    754. The Commission is persuaded by commenters that a Commission
re-approval process could disrupt the work of the Regional Entities.
The Commission does not adopt the proposed re-approval process as
described in proposed section 38.7(f) of the NOPR. However, we adopt
instead a periodic performance assessment process that requires a
Regional Entity to affirmatively demonstrate to the ERO that it
satisfies statutory criteria for the responsibilities it has been
delegated. Section 39.3(c)(1)(iii) of the Final Rule requires that the
ERO, as an element of the ERO performance assessment process, evaluate
the effectiveness of each Regional Entity. The ERO must assess each
Regional Entity's ability to develop and enforce Reliability Standards
and provide for an adequate level of Bulk-Power System reliability. The
ERO should explain how effectively each Regional Entity enforces
Reliability Standards, providing statistical information on its
investigations, findings and assessments of penalties. The ERO should
also explain how each Regional Entity provides for fair and impartial
procedures for enforcement of Reliability Standards and provides for
openness, due process and balance of interests in developing
Reliability Standards. The ERO's performance assessment of each
Regional Entity must be presented to the Commission as part of the
ERO's own periodic performance assessment filing.
    755. As noted earlier in the ERO certification discussion, the
Commission will allow for public comment on the ERO's performance
assessment filing, including the performance assessment of each
Regional Entity. In this proceeding, the Commission will issue an order
finding that the ERO meets the statutory and regulatory criteria or
directing the ERO to comply or improve its compliance with the
statutory and regulatory criteria for the ERO. This order will also
include similar findings of compliance or directives to ensure that the
Regional Entities comply or improve compliance with the statutory and
regulatory criteria. Subsequently, if a Regional Entity 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 rescission of approval of the Regional Entity's
delegation agreement.
    756. Outside of the periodic assessment process, any interested
person who is dissatisfied with a Regional Entity's performance of its
delegated functions may file a complaint with the ERO, concurrently
informing the Commission of the complaint. If the ERO cannot resolve
the complaint in a timely manner, the complainant may request that the
Commission resolve the dispute.
9. Enforcement of Commission Rules and Orders--Section 39.9
    757. Consistent with section 215(e)(5) of the FPA, the NOPR
proposed that the Commission may take action as necessary and
appropriate against the ERO or a Regional Entity ``to ensure compliance
with a reliability standard or any Commission order affecting the ERO
or a Regional Entity.'' The NOPR proposed that, upon notice and
opportunity for hearing, the Commission may suspend or rescind the

ERO's certification or a Regional Entity's delegated authority.
Further, the NOPR proposed that the Commission will periodically audit
and review the ERO's and each Regional Entity's compliance with the
statutory and regulatory criteria for certification and delegation of
functions.
a. Action Against the ERO or a Regional Entity
    758. The proposed regulations provided that the Commission may take
such action as is necessary and appropriate against the ERO or a
Regional Entity to ensure compliance with a Reliability Standard or any
Commission order affecting the ERO or a Regional Entity.\249\ Possible
actions include the suspension or rescission of authority or the
imposition of civil penalties under the FPA.
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    \249\ NOPR at P 74.
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Comments

    759. NRECA comments that Congress envisioned a cooperative, rather
than a contentious, process and urges that the Commission, the ERO and
Regional Entities work together to resolve any tensions that may
emerge. APPA and LG&E Energy ask that the Final Rule identify specific
causes for decertification.
    760. Entergy states that the Commission should establish levels of
ERO and Regional Entity non-compliance that would gradually lead to
suspension or decertification since decertification as a first step
would leave a large void and create unnecessary uncertainty for members
of the organization. NERC suggests that, to prevent an unintended lapse
in authority to set and enforce Reliability Standards, if the
Commission decides to decertify the ERO, the ERO should remain in place
until a successor is certified.

Commission Conclusion

    761. While the Commission has the authority to take action against
the ERO or a Regional Entity for non-compliance with section 215 of the
FPA or rules or responsibilities thereunder, we would resort to
assessing a monetary penalty only in extraordinary circumstances, and
would consider decertification only as a last resort after all other
attempts to resolve a significant compliance matter have failed.
However, in a situation of deliberate non-compliance with a Commission
order, we would not hesitate to impose an appropriate penalty.
    762. The Commission would ensure that there is no gap in carrying
out the requirements of section 215. The Commission would not permit
any decertification to become effective until such time as the
Commission itself, or another entity, were prepared to step in and
implement the reliability functions of the decertified entity.
    763. With regard to Entergy's comment, the Commission will
determine the appropriate penalty for ERO or Regional Entity non-
compliance on a case-by-case basis.\250\ We do not establish here the
levels of non-compliance suggested by Entergy.
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    \250\ Enforcement of Statutes, Orders, Rules, and Regulations,
113 FERC ] 61,068 at P 17-20.
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    764. The Commission is revising the text of the Final Rule to
replace the phrase ``rescission of the Commission's grant of
certification to the Electric Reliability Organization,'' with the
phrase ``decertification of the Electric Reliability Organization.''
This revision will provide consistency in terminology throughout the
Final Rule.
    765. Further, the proposed regulation, which tracks the statutory
text, provides that the Commission may take such action as is necessary
and appropriate against the ERO or a Regional Entity ``to ensure
compliance with a Reliability Standard * * *.'' Although, taken
literally, this implies that the ERO or a Regional Entity may be in
non-compliance with a Reliability Standard, this is not the correct
interpretation because a Reliability Standard is applicable only to a
user, owner, or operator of the Bulk-Power System, from which the ERO
and each Regional Entity must maintain independence. This phrase means
that the Commission can take appropriate action against the ERO or a
Regional Entity when it has failed in its responsibility to assure that
owners, users and operators of the Bulk-Power System are complying with
a Reliability Standard. We also would take appropriate action, for
example, if the ERO or a Regional Entity fails to comply with a
Commission order requiring that a Reliability Standard be developed or
modified as necessary to maintain reliability.
b. Audits of ERO and Regional Entity Criteria
    766. The NOPR provided that the Commission would periodically audit
and review the ERO's and Regional Entities' compliance with the
statutory and regulatory criteria for certification and delegation of
functions, respectively. The Commission requested comment on what
mechanism of review and methods of oversight should be used to assure
the Commission that the ERO or a Regional Entity is meeting its
responsibilities for monitoring compliance with the Reliability
Standards.\251\
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    \251\ NOPR at P 76.
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    767. Numerous commenters agree that the ERO and Regional Entities
should be audited for compliance on a regular basis.\252\ Santa Clara
suggests that the Commission perform such audits at least annually to
prevent inadequacies in the ERO's performance from going unaddressed
for too long. ERCOT suggests that the Commission periodically audit the
ERO with Regional Entity representatives on the audit team, and the ERO
periodically audit Regional Entities with Commission staff represented
on the audit team.
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    \252\ See, e.g, APPA, CREPC, EEI, ELCON, ERCOT, FRCC, MRO, NERC,
Santa Clara, Santee Cooper, Southern, TVA and Xcel Energy.
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    768. A number of commenters urge that independent auditors perform
the enforcement audits. NERC and Southern recommend that independent
enforcement audits of the ERO occur once every three years, and that
the ERO should audit each Regional Entity at least once every three
years and report the results to the Commission. The enforcement audit
process used by the ERO to audit Regional Entities and the audit
results should be included in the independent audit of the ERO.\253\
The Missouri Commission suggests the creation of an independent, INPO-
type entity to assess the performance of the ERO and Regional Entities
and believes that this approach provides more continuity and efficiency
than Commission staff performing this function.
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    \253\ MRO states that the Commission should rely on an
independent assessment ``similar to Statement of Auditing Standards
No. 70 review,'' explaining that ``The SAS No. 70 audit or service
auditor's examination is widely recognized because it represents
that a service organization has been through an in-depth audit of
their control activities * * *.'' MRO at 25.
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    769. CREPC comments that the relevant Regional Advisory Body should
be invited to participate in the periodic enforcement audit and review
of the ERO and Regional Entities.
    770. A number of commenters suggest additional mechanisms to ensure
ERO and Regional Entity compliance. Ameren, APPA and NiSource suggest
that the Commission monitor ERO and Regional Entity performance by
requiring that they submit periodic reports. APPA also proposes the use
of industry surveys to determine the effectiveness of the ERO and
Regional Entities. PacifiCorp suggests that the required submission of
annual working plans and budgets by the ERO and Regional Entities can
be tools to assess

effectiveness. Likewise, Ontario IESO recommends an annual performance
filing by the ERO and each Regional Entity, including actual