[Federal Register: February 17, 2006 (Volume 71, Number 33)]
[Rules and Regulations]
[Page 8661-8744]
[DOCID:fr17fe06-20]

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Part II

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Part 39

Rules Concerning Certification of the Electric Reliability
Organization; and Procedures for the Establishment, Approval, and
Enforcement of Electric Reliability Standards; Final Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 39

[Docket No. RM05-30-000; Order No. 672]

Rules Concerning Certification of the Electric Reliability
Organization; and Procedures for the Establishment, Approval, and
Enforcement of Electric Reliability Standards

Issued February 3, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: Pursuant to Subtitle A (Reliability Standards) of the
Electricity Modernization Act of 2005, which is Title XII of the Energy
Policy Act of 2005 (EPAct) and which added a new section 215 to the
Federal Power Act (FPA), the Commission is amending its regulations to
incorporate: Criteria that an entity must satisfy to qualify to be the
Electric Reliability Organization (ERO) which the Commission will
certify as the organization that will propose and enforce Reliability
Standards for the Bulk-Power System in the United States, subject to
Commission approval; procedures under which the ERO may propose new or
modified Reliability Standards for Commission review; a process for
timely resolution of any conflict between a Reliability Standard and a
Commission-approved tariff or order; a process for resolution of an
inconsistency between a state action and a Reliability Standard;
regulations pertaining to the funding of the ERO; procedures governing
an enforcement action by the ERO, a Regional Entity or the Commission;
criteria under which the ERO may enter into an agreement to delegate
authority to a Regional Entity for the purpose of proposing Reliability
Standards to the ERO and enforcing Reliability Standards; regulations
governing the issuance of periodic reliability reports by the ERO that
assess the reliability and adequacy of the Bulk-Power System in North
America; and procedures for the establishment of Regional Advisory
Bodies that may provide advice to the Commission, the ERO or a Regional
Entity on matters of governance, applicable Reliability Standards, the
reasonableness of proposed fees within a region, and any other
responsibilities requested by the Commission.

DATES: This Final Rule will become effective March 20, 2006.

FOR FURTHER INFORMATION CONTACT:
William Longenecker (Technical Information), Office of Energy Markets
and Reliability, Division or Policy Analysis and Rulemaking, Federal
Energy Regulatory Commission, 888 First Street, NE., Washington, DC
20426,<PHONE_NUMBER>.
David Miller (Technical Information), Office of Energy Markets and
Reliability, Division of Reliability, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
6473.
Jonathan First (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.
Christy Walsh (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
III. Procedural Matters
IV. Discussion
    A. Overview
    B. Section-by-Section Discussion of the Final Rule
    1. Definitions--Section 39.1
    a. Terms Defined in the Statute
    i. Bulk-Power System
    ii. Reliable Operation
    iii. Reliability Standard
    iv. Transmission Organization
    b. Additional Terms Commenters Seek To Define in the Final Rule
    i. Physical Security Standards
    ii. Regional Reliability Standard and Regional Variance
    iii. User of the Bulk-Power System
    iv. End User
    (a) End User as a Retail Customer
    (b) End User as a Customer That Uses the Bulk-Power System
    (c) Broader Definition of End User
    2. Jurisdiction and Applicability--Section 39.2
    a. Commission Jurisdiction
    b. International Regulatory Coordination
    3. Electric Reliability Organization Certification--Section 39.3
    a. The Oversight Roles of the Commission and the ERO
    i. Building on the Existing Reliability Framework
    ii. Concerns About an Excessively Rigid Hierarchal Reliability
Framework
    b. Statutory Certification Criteria
    i. Governance
    ii. Other Statutory Criteria
    c. Opportunity for Public Comment
    d. Non-Statutory Criteria
    i. Membership
    (a) Open Membership
    (b) Membership Fees
    (c) Membership as a Requirement To Participate in the
Reliability Standard Development Process
    ii. Additional Non-Statutory Criteria
    e. Simultaneous Certification in Canada and Mexico
    f. Periodic Performance Assessments
    4. Funding of the Electric Reliability Organization--Section
39.4
    a. Budget and Business Plan
    b. Funding for Statutory Activities
    i. General Funding Matters
    ii. Funding Apportionment
    c. Role of the ERO in Funding the Regional Entities
    i. ERO Responsibility for Regional Entity Funding
    ii. Commission Oversight of Regional Entity Funding
    d. Funding Consistency With the Bilateral Principles
    e. Payment of Dues and Funding Transition Plan
    f. Billing Mechanics
    g. Other Funding Matters
    5. Reliability Standards--Section 39.5
    a. Reliability Standard Development by the ERO and Regional
Entities
    i. Reliability Standard Development by the ERO
    ii. Due Process in Reliability Standard Development
    iii. Regional Uniformity and Variation of a Standard
    iv. Rebuttable Presumption for a Reliability Standard Proposed
by an Interconnection-Wide Regional Entity
    b. Reliability Standard Approval by the Commission
    i. Commission Review
    (a) Commission Review Process
    (b) Legal Standard of Review of a Proposed Reliability Standard
    ii. Due Weight to Technical Expertise of the ERO and a Regional
Entity Organized on an Interconnection-Wide Basis
    iii. Due Weight to the Technical Expertise of a Regional Entity
Not Organized on an Interconnection-Wide Basis
    iv. No Deference on Competition
    (a) Linkage Between Reliability and Competition
    (b) Definitions of Competition
    (c) Commission Weighing of Competitive Effects
    c. Effective Date
    d. Remand of a Proposed Reliability Standard
    i. Remand
    ii. International Coordination of Remands
    iii. Deadline for Submitting a Revised Proposal for a
Reliability Standard in Response to a Remand
    e. Commission-Initiated Actions on a Reliability Standard
    i. Commission Directive That the ERO Address a Specific Issue
    ii. Review of an Approved Reliability Standard
    iii. Commission Authority To Void a Reliability Standard
    6. Conflict of a Reliability Standard With a Commission Order--
Section 39.6
    7. Enforcement of Reliability Standards--Section 39.7
    a. General Comments on Enforcement
    b. Compliance
    i. Enforcement Audits of Compliance With Reliability Standards

    ii. Reliability-Related Programs
    iii. Remedial Action
    c. Assessing a Penalty for a Violation
    i. Procedures for Investigations and Penalty Assessments
    ii. Due Process
    iii. Notice
    iv. Effective Date of Penalty and Commission Review of Penalties
    (a) Effective Date and General Commission Review
    (b) Automatic Commission Review of Certain Penalties
    v. Answer to an Application for Review
    d. Nonpublic Matters and CyberSecurity Procedures
    i. Stage at Which an Investigation or Penalty Should Be Made
Public
    ii. Nonpublic Treatment of Certain Types of Proceedings
    e. Commission-Ordered Compliance and Penalties
    f. Penalties' Relation to the Seriousness of the Violation
    i. Penalty Guidelines
    ii. Non-Monetary Penalties
    iii. Limits on Monetary Penalties
    g. Reporting Violations and Alleged Violations
    i. Procedures for Reporting Violations and Alleged Violations
    ii. Confidentiality of Reports
    h. Other Enforcement Issues
    i. ERO and Regional Entity Appeals Processes
    ii. Receipt and Use of Penalty Money
    iii. RTO/ISO-Related Enforcement Issues
    8. Delegation to a Regional Entity--Section 39.8
    a. The Role of a Regional Entity and Its Relationship to the ERO
    i. Authority Delegated to a Regional Entity
    ii. Other Regional Entity Activities
    b. Process and Criteria for Becoming a Regional Entity
    c. Review of a Regional Entity Applicant
    i. Review of a Regional Entity Organized on an Interconnection-
Wide Basis
    ii. Review of a Regional Entity Not Organized on an
Interconnection-Wide Basis
    d. Eligibility of an RTO or ISO To Become a Regional Entity
    e. Delegation Agreements
    f. Regional Entity Governance
    g. Notice Requirement for Submission of Delegation Agreements
    h. Uniform Processes Among Regional Entities
    i. Commission Assignment of Enforcement Authority Directly to a
Regional Entity
    j. Performance Assessment of Regional Entities
    9. Enforcement of Commission Rules and Orders--Section 39.9
    a. Action Against the ERO or a Regional Entity
    b. Audits of ERO and Regional Entity Criteria
    c. Monetary Penalties
    d. Penalizing an ERO or a Regional Entity Board Member
    10. Changes in Electric Reliability Organization Rules and
Regional Entity Rules--Section 39.10
    11. Reliability Reports--Section 39.11
    12. Inconsistency of a State Action and a Reliability Standard--
Section 39.12
    a. General Balance of Authority
    b. Review of Allegedly Inconsistent State Actions
    c. Concerns of Specific States
    13. Regional Advisory Bodies--Section 39.13
V. Information Collection Statement
VI. Environmental Analysis
VII. Regulatory Flexibility Act Certification
VIII. Document Availability

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead
Brownell, and Suedeen G. Kelly.

I. Introduction

    1. Pursuant to Subtitle A (Reliability Standards) of the
Electricity Modernization Act of 2005, which is Title XII of the Energy
Policy Act of 2005 (EPAct)\1\ and which added a new section 215 to the
Federal Power Act (FPA), the Commission is amending its regulations to
incorporate:
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    \1\ Pub. L. 109-58, Title XII, Subtitle A, 119 Stat. 594, 941 to
be codified at 16 U.S.C. 824o (2000).
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    (1) Criteria that an entity must satisfy to qualify to be the
Electric Reliability Organization (ERO), which the Commission will
certify as the organization that will propose and enforce Reliability
Standards for the Bulk-Power System \2\ in the United States, subject
to Commission approval;
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    \2\ Capitalized terms used in this Final Rule have the meanings
specified in section IV.B.1 of the Preamble.
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    (2) Procedures under which the ERO may propose new or modified
Reliability Standards for Commission review;
    (3) A process for timely resolution of any conflict between a
Reliability Standard and a Commission-approved tariff or order;
    (4) A process for resolution of an inconsistency between a state
action and a Reliability Standard;
    (5) Regulations pertaining to the funding of the ERO;
    (6) Procedures governing an enforcement action by the ERO, Regional
Entity or the Commission;
    (7) Criteria under which the ERO may enter into an agreement to
delegate authority to a Regional Entity for the purpose of proposing
Reliability Standards to the ERO and enforcing Reliability Standards;
    (8) Regulations governing the issuance of periodic reliability
reports by the ERO that assess the reliability and adequacy of the
Bulk-Power System in North America; and
    (9) Procedures for the establishment of Regional Advisory Bodies
that may provide advice to the Commission, the ERO or a Regional Entity
on matters of governance, applicable Reliability Standards, the
reasonableness of proposed fees within a region, and any other
responsibilities requested by the Commission.
    2. The Commission believes incorporating this reliability rule into
the Commission's regulations pursuant to the direction of Congress is
an important step toward ensuring more reliable and secure electric
utility service.

II. Background

    3. On August 8, 2005, EPAct was enacted into law by President Bush.
New section 215 of the FPA provides for a system of mandatory,
enforceable Reliability Standards. Reliability Standards are to be
developed by the ERO, subject to Commission review and approval. An
approved Reliability Standard may be enforced by the ERO, subject to
the Commission's review, or the Commission may initiate an
investigation or imposition of a penalty. Below, we summarize the
provisions of Subtitle A of the EPAct:
    4. Section 215(a) (Definitions) defines relevant terms used in the
Act.
    5. Section 215(b) (Jurisdiction and Applicability) provides that,
for purposes of approving Reliability Standards and enforcing
compliance with such standards, the Commission shall have jurisdiction
over the certified ERO, any Regional Entities, and all users, owners
and operators of the Bulk-Power System, including but not limited to
the public and governmental entities described in section 201(f) of the
FPA.\3\ Section 215(b)(2) requires the Commission to issue a Final Rule
to implement the requirements of section 215 of the FPA no later than
180 days after the date of enactment.
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    \3\ Section 201(f) of the FPA, 16 U.S.C. 824(f), provides that
``[n]o provision in this Part shall apply to, or be deemed to
include, the United States, a state or any political subdivision of
a State, an electric cooperative that receives financing under the
Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.) or that
sells less than 4,000,000 megawatt hours of electricity per year, or
any agency, authority, or instrumentality of any one or more of the
foregoing, or any corporation which is wholly owned, directly or
indirectly, by any one or more of the foregoing, or any officer,
agent, employee of any of the foregoing acting as such in the course
of his official duty, unless such provision makes specific reference
thereto.''
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    6. Section 215(c) (Certification) authorizes the Commission to
certify a person as an ERO, provided that the applicant meets specified
criteria.
    7. Section 215(d) (Reliability Standards) provides the process for
the ERO to propose a Reliability Standard, subject to Commission review
and approval. This subsection also directs the Commission to adopt
rules to establish a fair process for the

identification and timely resolution of any conflict between a
Reliability Standard and any function, rule, order, tariff, rate
schedule, or agreement accepted, approved, or ordered by the Commission
applicable to a Transmission Organization.
    8. Section 215(e) (Enforcement) authorizes the ERO, after notice
and opportunity for hearing, to impose a penalty for a violation of a
Reliability Standard, subject to review by the Commission. This section
also provides for enforcement initiated by the Commission on its own
motion. Section 215(e)(4) requires that the Commission issue
regulations under which the ERO will be authorized to enter into an
agreement to delegate authority to a qualified Regional Entity for the
purpose of proposing Reliability Standards to the ERO and enforcing
them. Further, subsection 215(e)(6) requires that any penalty imposed
shall bear a reasonable relation to the seriousness of the violation
and take into consideration timely remedial efforts.
    9. Section 215(f) (Changes in Electric Reliability Organization
Rules) requires Commission approval of any proposed ERO Rule or
proposed Rule change.
    10. Section 215(g) (Reliability Reports) requires that the ERO
conduct periodic assessments of the reliability and adequacy of the
North American Bulk-Power System.
    11. Section 215(h) (Coordination With Canada and Mexico) urges the
President to negotiate international agreements with the governments of
Canada and Mexico to provide for effective compliance with Reliability
Standards and the effectiveness of the ERO in the United States and
Canada or Mexico.
    12. Section 215(i) (Savings Provisions) states that the ERO shall
have authority to develop and enforce compliance with Reliability
Standards for only the Bulk-Power System and provides that section 215
of the FPA shall not be construed to preempt any authority of any state
to take action to ensure the safety, adequacy, and reliability of
electric service within that state, as long as such action is not
inconsistent with any Reliability Standard. Section 215 also contains a
provision relating specifically to reliability rules established by the
State of New York.
    13. Section 215(j) (Regional Advisory Bodies) requires the
Commission to establish a Regional Advisory Body upon petition of at
least two-thirds of the states within a region that have more than one-
half of their electric load served within the region. A Regional
Advisory Body may provide advice to the ERO, a Regional Entity or the
Commission.
    14. Section 215(k) (Application to Alaska and Hawaii) provides that
section 215 of the FPA does not apply to Alaska or Hawaii.
    15. The statute directs the Commission to issue a Final Rule to
implement the requirements of section 215 no later than 180 days after
enactment, or by February 5, 2006. On September 1, 2005 the Commission
issued a Notice of Proposed Rulemaking (NOPR) that proposed regulations
regarding certification of the ERO, development of Reliability
Standards, enforcement of Reliability Standards, ERO delegation of
authority to Regional Entities, ERO funding and other matters necessary
to implement the statute.\4\
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    \4\ Additional background information is provided in the NOPR,
discussing the Commission's reliability-related activities and the
development of voluntary reliability guidelines. Rules Concerning
Certification of the Electric Reliability Organization; and
Procedures for the Establishment, Approval, and Enforcement of
Electric Reliability Standards, 70 FR 53,117 (Sept. 7, 2005), FERC
Stats. & Regs., Proposed Regulations ] 32,587 (Sept. 1, 2005).
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III. Procedural Matters

    16. The statute directs the Commission to issue a Final Rule to
implement the requirements of section 215 of the FPA no later than 180
days after enactment, or by February 5, 2006. The Commission issued the
NOPR on September 1, 2005. It required that comments be filed by
October 7, 2005 to assist the Commission in meeting the statutory 180-
day deadline. Several parties submitted late-filed comments. The
Commission will accept these late-filed comments. A list of commenters
appears in Appendix A.
    17. Although the Commission did not request reply comments because
of the relatively short statutory time frame for issuing a Final Rule,
several commenters nonetheless submitted reply comments. The Commission
will reject such reply comments. The Commission did not solicit reply
comments and, therefore, accepting such comments from those who chose
to submit them would be unfair to others.
    18. The Commission held two technical conferences on this
rulemaking. The first technical conference was held on November 19,
2005. Comments on the first technical conference were due by December
8, 2005. The technical conference was transcribed and is a part of the
record in this docket.
    19. The second technical conference was held on December 9, 2005.
Comments on the second technical conference were due by December 23,
2005. The technical conference was transcribed and is a part of the
record in this docket. A list of commenters for both technical
conferences is in Appendix B.

IV. Discussion

A. Overview

    20. On August 8, 2005, EPAct was enacted into law. New section 215
of the FPA provides for a system of mandatory, enforceable Reliability
Standards. Under the new electric power reliability system enacted by
the Congress, the United States will no longer rely on voluntary
compliance by participants in the electric industry with industry
reliability requirements for operating and planning the Bulk-Power
System. Congress directed the development of mandatory, Commission-
approved, enforceable electricity Reliability Standards.
    21. The Commission will certify a single Electric Reliability
Organization, the ERO, to oversee the reliability of the United States'
portion of the interconnected North American Bulk-Power System, subject
to Commission oversight. It will be responsible for developing and
enforcing the mandatory Reliability Standards. The Reliability
Standards will apply to all users, owners and operators of the Bulk-
Power System. The Commission has the authority to approve all ERO
actions, to order the ERO to carry out its responsibilities under these
new statutory provisions, and also may independently enforce
Reliability Standards.
    22. The ERO must submit each proposed Reliability Standard to the
Commission for approval. Only a Reliability Standard approved by the
Commission is enforceable under section 215 of the FPA.
    23. The ERO may delegate its enforcement responsibilities to a
Regional Entity. Delegation is effective only after the Commission
approves the delegation agreement. A Regional Entity may also propose a
Reliability Standard to the ERO for submission to the Commission for
approval. This Reliability Standard may be either for application to
the entire interconnected Bulk-Power System or for application only
within its own region.
    24. The ERO or a Regional Entity must monitor compliance with the
Reliability Standards. It may direct a user, owner or operator of the
Bulk-Power System that violates a Reliability Standard to comply with
the Reliability Standard. The ERO or Regional Entity may impose a
penalty on a user, owner or operator for violating a Reliability
Standard,

subject to review by, and appeal to, the Commission.
    25. On September 1, 2005 the Commission issued a NOPR that proposed
regulations regarding certification of the ERO, development of
Reliability Standards, enforcement of Reliability Standards, delegation
of authority to Regional Entities, ERO funding and other matters
necessary to implement the statute.
    26. Based on careful consideration of the comments submitted in
response to the NOPR, the Commission adopts a Final Rule that generally
follows the approach of the NOPR. We note that numerous commenters
express support for the NOPR and believe that the proposed regulations
establish the framework for an effective ERO, as intended by
Congress.\5\
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    \5\ See, e.g., Ameren, CEOB, Exelon, FRCC, NASUCA, NERC,
NiSource and TAPS.
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    27. The Final Rule is generally limited to developing and
implementing the processes and procedures that section 215 of the FPA
directs the Commission to develop and undertake with regard to the
formation and functions of the ERO and Regional Entities. Section
215(b) obligates all users, owners and operators of the Bulk-Power
System to comply with Reliability Standards that become effective
pursuant to the process set forth in the statute. The Commission
recognizes the critical need for an ERO that is effective in developing
and enforcing mandatory Reliability Standards.
    28. The Commission believes that, to achieve this goal, it is
necessary to have a strong ERO that promotes excellence in the
development and enforcement of Reliability Standards. Accordingly,
various provisions of the Final Rule are intended to set out the ERO's
role and responsibilities with respect to the users, owners and
operators of the Bulk-Power System. The Final Rule requires periodic
review of the ERO and Regional Entities to ensure that the statutory
qualifying criteria are maintained on an ongoing basis.
    29. A mandatory Reliability Standard should not reflect the
``lowest common denominator'' in order to achieve a consensus among
participants in the ERO's Reliability Standard development process.
Thus, the Commission will carefully review each Reliability Standard
submitted and, where appropriate, remand an inadequate Reliability
Standard to ensure that it protects reliability, has no undue adverse
effect on competition, and can be enforced in a clear and even-handed
manner. Further, the Final Rule allows the Commission to set a deadline
for the ERO to submit a proposed Reliability Standard to the Commission
to ensure that the ERO will revise in a timely manner a proposed
Reliability Standard that is not acceptable to the Commission. These
provisions, as well, will strengthen the ERO and Regional Entities by
providing mechanisms to achieve effective and fair Reliability
Standards.
    30. The major provisions of the Final Rule are as follows.
1. ERO Certification
    31. The Final Rule provides that the Commission will, after notice
and opportunity for comment, certify one applicant as the ERO. The
Final Rule sets forth the criteria that an ERO applicant must satisfy
to qualify as the ERO, including the ability to develop and enforce
Reliability Standards.\6\
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    \6\ The criteria stated in the Final Rule track the statutory
criteria for ERO certification provided in section 215(c) of the
FPA.
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    32. To ensure that the ERO complies with the certification criteria
on an ongoing basis, the Final Rule requires the ERO to undergo a
performance assessment three years after certification and every five
years thereafter. The ERO must file a self-assessment with the
Commission explaining how it satisfies the ERO requirements. Regional
Entities, users, owners and operators of the Bulk-Power System, and
other interested entities will have an opportunity to make
recommendations for the improvement of the ERO. After receipt of the
performance assessment, the Commission will establish a proceeding in
which it will assess the performance of the ERO. The Commission will
also allow opportunity for public comment. As a result of the
performance assessment, the Commission will issue an order finding that
the ERO meets the statutory and regulatory criteria or directing the
ERO to comply or improve compliance with the statutory and regulatory
criteria for the ERO. Subsequently, if the ERO fails to comply
adequately with the Commission order, the Commission may institute a
proceeding to enforce its order, including, if necessary and
appropriate, a proceeding to consider decertification of the ERO.
    33. The ERO submission must include an evaluation of the
effectiveness of each Regional Entity. The Commission will, as part of
its proceeding to assess the ERO's performance, assess the performance
of each Regional Entity and issue an order addressing Regional Entity
compliance. If a Regional Entity fails to comply adequately with the
Commission order, the Commission may institute a proceeding to enforce
its order, including, if necessary and appropriate, a proceeding to
consider rescission of the Commission's approval of the Regional
Entity's delegation agreement.
2. ERO and Regional Entity Funding
    34. Section 215 of the FPA generally provides for Commission
authorization of funding for statutory functions, such as the
development of Reliability Standards and their enforcement, and
monitoring the reliability of the Bulk-Power System. The Final Rule
clarifies, however, that while the ERO or a Regional Entity is not
necessarily precluded from pursuing other activities, it may not use
Commission-authorized funding for such activities.
    35. The Final Rule directs ERO candidates to propose a formula or
method of funding addressing cost allocation and cost responsibility,
along with a proposed mechanism for revenue collection for Commission
consideration. The Final Rule finds that funding based on net energy
for load is one fair, reasonable and uncomplicated method that
minimizes the possibility of ``double-counting.'' \7\ However, the
Commission does not rule out other apportionment methods that can be
shown to be just and reasonable.
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    \7\ Net Energy for Load means balancing authority area
generation (less station use), plus energy received from other
balancing authority areas, less energy delivered to balancing
authority areas through interchange. It includes balancing authority
area losses, but excludes energy required for storage at electric
energy storage facilities, such as pumped storage.
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    36. As the primary entity responsible for the development and
enforcement of Reliability Standards, the ERO should fund the Regional
Entities as well as approve their budgets, under the Commission's
general oversight. The Final Rule requires periodic financial audits to
ensure that any ERO-approved funding is appropriately expended for
delegated functions. It addresses concerns that a significant amount of
the ERO's or a Regional Entity's total revenue from an alternative
source could compromise the mission or independence of the ERO or a
Regional Entity.
    37. The Final Rule provides that the ERO should include line item
budgets for the activities that it delegates to each Regional Entity.
The Final Rule permits the ERO to request emergency funding on a
demonstration of unforeseen and extraordinary circumstances. It also
clarifies that Commission review and approval of ERO and Cross-Border
Regional Entity funding mechanisms

will be limited to their application in the United States.
3. Reliability Standards
    38. The Final Rule implements the new FPA provisions relating to
mandatory and enforceable Reliability Standards to be developed by the
ERO. It establishes the ERO as the only entity that can submit a
proposed Reliability Standard to the Commission for approval.
    39. The Final Rule determines that the ERO's Reliability Standard
development process must provide for reasonable notice and opportunity
for public comment, due process, openness and balance of interests. The
Commission observes that an American National Standards Institute
(ANSI)-accredited process is one reasonable means of satisfying these
requirements.
    40. The Commission may approve a proposed Reliability Standard (or
modification to a Reliability Standard) if it determines that it is
just, reasonable, not unduly discriminatory or preferential, and in the
public interest. In its review, the Commission will give due weight to
the technical expertise of the ERO or a Regional Entity organized on an
Interconnection-wide basis with respect to a proposed Reliability
Standard to be applicable within that Interconnection. However, the
Commission will not defer to the ERO or a Regional Entity with respect
to a Reliability Standard's effect on competition.
    41. The Commission seeks as much uniformity as possible in the
proposed Reliability Standards across the interconnected Bulk-Power
System of the North American continent. The Final Rule permits a
regional difference in a Reliability Standard, in particular for a
regional difference that is more stringent than a continent-wide
Reliability Standard, including a regional difference that addresses
matters that the continent-wide Reliability Standard does not, and a
regional difference necessitated by a physical difference in the Bulk-
Power System. The Commission would generally find acceptable a proposed
regional difference that satisfies the statutory and regulatory
criteria for approval of a proposed Reliability Standard and that is
more stringent than a continent-wide Reliability Standard.\8\
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    \8\ The Commission notes that the Bulk-Power System includes
interconnected portions of the United States, Canada and Mexico.
However, this Final Rule only applies to that portion of the Bulk-
Power System within the United States (excluding Alaska and Hawaii).
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    42. The statute requires the ERO to apply a rebuttable presumption
to a proposal for a Reliability Standard from an Interconnection-wide
Regional Entity to be applicable within its Interconnection. The Final
Rule clarifies that this rebuttable presumption refers to the burden of
proof. Thus, if the ERO does not find that the presumption for a
proposed Reliability Standard is adequately rebutted, it must accept it
as just, reasonable, not unduly discriminatory or preferential, and in
the public interest, and submit it to the Commission for approval.
    43. Section 215(d)(6) of the FPA requires the Commission's Final
Rule to include ``fair processes for the identification and timely
resolution of any conflict between a Reliability Standard and any
function, rule, order, tariff, rate schedule, or agreement accepted,
approved, or ordered by the Commission applicable to a transmission
organization.'' Accordingly, the Final Rule provides a process for a
user, owner or operator to notify the Commission of such possible
conflicts for timely resolution by the Commission.
    44. Further, the Commission interprets section 215 as generally
permitting a state to take action, as long as such action is not
inconsistent with a Reliability Standard. The Commission will consider
the recommendation of a relevant state as well as the ERO and will
require that a petition for determination of inconsistency be served on
a relevant state agency.
4. Enforcement of Reliability Standards
    45. The ERO is responsible under section 215(e) of the FPA for
ensuring that all users, owners and operators of the Bulk-Power System
comply with Reliability Standards. In addition, the statute provides
that the Commission can, independent of the ERO, investigate compliance
with a Reliability Standard and impose a penalty for a violation. The
ERO may delegate its enforcement responsibilities to a Regional Entity.
The Final Rule sets forth various elements of the enforcement process,
including (1) the ERO and each Regional Entity is expected to have a
compliance program that includes proactive enforcement audits to
determine if users, owners and operators are complying with Reliability
Standards; (2) the ERO and the appropriate Regional Entity will conduct
investigations of alleged violations of Reliability Standards, and the
ERO must inform the Commission promptly of these investigations and
their disposition; and (3) the ERO or a Regional Entity may assess a
penalty (non-monetary or monetary), subject to Commission review.
    46. The Final Rule requires the ERO to develop an enforcement audit
program. In addition, any Regional Entity that receives a delegation of
enforcement function also should have an audit program. The Final Rule
explains that there should be a single audit program applicable to both
the ERO and Regional Entities unless there is a compelling reason for a
difference between the ERO and a particular Regional Entity.
    47. The Final Rule implements the enforcement provisions of section
215(e) of the FPA, which authorize the ERO to impose a penalty for a
violation of a Reliability Standard, subject to Commission review. The
enforcement provisions in section 39.7 of the Final Rule allow the ERO
or a Regional Entity with delegated enforcement authority to impose a
penalty on a user, owner or operator of the Bulk-Power System for a
violation of a Reliability Standard. The ERO will retain oversight
responsibility for enforcement authority that is delegated to a
Regional Entity. To ensure consistency in the implementation of
delegated enforcement authority, a Regional Entity must report
periodically to the ERO on how it carries out its delegated enforcement
authority. The Final Rule makes clear that the ERO and Regional
Entities must establish uniform Rules that provide adequate due process
to an alleged violator when the ERO or Regional Entity is determining
whether to assess a penalty. The Final Rule concludes that, to provide
adequate due process yet prevent duplicative and unnecessary expenses,
there should be a single opportunity for internal appeal within the ERO
or Regional Entity. Further, the Final Rule establishes expedited
procedures for Commission review of a penalty, as required by EPAct.
    48. The Final Rule discusses the ERO's and a Regional Entity's
ability to take remedial action separate from its penalty authority.
For example, the ERO or a Regional Entity may direct a user, owner or
operator to come into compliance with a Reliability Standard.
    49. The Final Rule requires the ERO to notify the Commission
promptly of a self-reported violation or an investigation into a
violation or alleged violation and its eventual disposition. This will
allow the Commission to receive timely information on a violation or
alleged violation of a Reliability Standard and determine whether
Commission action is appropriate. The Final Rule requires the ERO to
develop, and submit to the Commission for approval, penalty guidelines
that identify a range of non-

monetary and monetary penalties to be applied by the ERO for
determining the appropriate penalty for violation of a Reliability
Standard. Regional Entities should adopt the ERO's penalty guidelines
with change only as necessary to reflect regional differences in
Reliability Standards.
    50. The Final Rule finds that an investigation conducted by the
ERO, a Regional Entity, or the Commission of a violation or an alleged
violation of a Reliability Standard will be nonpublic unless the
Commission authorizes a public investigation. However, once the ERO or
a Regional Entity imposes a penalty and files the statutorily-required
``notice of penalty'' with the Commission, the Commission will publicly
disclose the penalty. The Final Rule includes an exception to this
public disclosure with respect to Cybersecurity Incidents and other
matters that would jeopardize system security.
5. Delegation to a Regional Entity
    51. Consistent with the statute, the Final Rule establishes
criteria for the ERO to delegate authority to a Regional Entity to
enforce Reliability Standards and to propose Reliability Standards to
the ERO. It sets out the role of a Regional Entity in relationship to
the ERO, concluding that the ERO holds the primary responsibility for
enforcement of Reliability Standards and that any delegation of this
responsibility to a Regional Entity is subject to ERO oversight.
    52. The Commission explains the process and criteria for becoming a
Regional Entity. The Final Rule relies on statutory criteria for
evaluating a Regional Entity applicant. Each application will be
evaluated on a case-by-case basis. The Final Rule establishes a
rebuttable presumption afforded to a proposal for delegation to a
Regional Entity organized on an Interconnection-wide basis. This
rebuttable presumption is that such a proposed Regional Entity promotes
the effective and efficient administration of Bulk-Power System
reliability. The Final Rule adopts a periodic Regional Entity
performance assessment process administered primarily by the ERO.
    53. The Final Rule addresses the subject of uniformity among
delegation agreements. It emphasizes the value of uniformity and
requires the ERO applicant to submit a pro forma delegation agreement
concurrently with its ERO application. The Final Rule allows a
prospective Regional Entity to submit a delegation agreement directly
to the Commission if good faith negotiations with the ERO fail. The
Commission strongly urges a prospective Regional Entity to consider the
use of alternative dispute resolution (ADR) to resolve any disputes
over the terms of the delegation agreement. The Final Rule requires a
prospective Regional Entity that submits a delegation agreement
directly to the Commission to state whether ADR procedures were used
and whether the Regional Entity believes that ADR under the
Commission's supervision could successfully resolve the disputes
regarding the terms of the delegation agreement. The Commission may, if
appropriate, upon review, direct the ERO to enter into the delegation
agreement with the Regional Entity.
    54. The Final Rule clarifies that a Regional Entity should not
directly submit a Regional Entity Rule or change to a Regional Entity
Rule to the Commission because this is consistent with the role of the
ERO overseeing the Regional Entities, as discussed below. The Final
Rule directs the ERO to develop procedures and criteria by which a
Regional Entity Rule or change to Regional Entity Rule will be judged
by the ERO, and then be submitted to the Commission for approval.
    55. The Final Rule provides for the establishment of Regional
Advisory Bodies. It observes that it would generally be desirable to
have a Regional Entity and a Regional Advisory Body cover the same
region but does not require a Regional Advisory Body and a Regional
Entity to have a common boundary. The Final Rule finds that section 215
of the FPA permits a Regional Advisory Body to form even if there is
not yet a Regional Entity in a region, in part so that a Regional
Advisory Body may advise the Commission and the ERO regarding the
governance of a proposed Regional Entity.
6. Enforcement of Commission Rules and Orders
    56. The Commission generally expects to work cooperatively with the
ERO and Regional Entities to resolve issues that may arise.
Nonetheless, the Final Rule clarifies the Commission's authority to
take action against the ERO or a Regional Entity for non-compliance
with section 215 of the FPA. The Final Rule 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 or any Commission order affecting the ERO or a Regional
Entity. The Commission may suspend or rescind the ERO's certification
or a Regional Entity's delegated authority.
    57. The Final Rule establishes the policy that, in general, the
Commission oversees the ERO and the ERO oversees any approved Regional
Entity. Consistent with this approach, the Final Rule provides that the
Commission may periodically conduct a compliance audit to examine the
ERO's compliance with the statutory and regulatory criteria for
becoming the ERO and performance in enforcing Reliability Standards.
The ERO must periodically audit each Regional Entity's compliance with
relevant statutory and regulatory criteria for becoming a Regional
Entity and performance in enforcing Reliability Standards and report
the results to the Commission.
    58. Although we would expect to use this provision only in
extraordinary circumstances, the Final Rule allows the Commission to
impose civil penalties on the ERO or a Regional Entity. The Final Rule
does not provide for the assessment of a monetary penalty against a
board member of the ERO or a Regional Entity.
    59. The Final Rule is organized into 13 sections:

Section 39.1--Definitions,
Section 39.2--Jurisdiction and applicability,
Section 39.3--Electric Reliability Organization certification,
Section 39.4--Funding of the Electric Reliability Organization,
Section 39.5--Reliability Standards,
Section 39.6--Conflict of a Reliability Standard with a Commission
order,
Section 39.7--Enforcement of Reliability Standards,
Section 39.8--Delegation to a Regional Entity,
Section 39.9--Enforcement of Commission rules and orders,
Section 39.10--Changes in Electric Reliability Organization Rules and
Regional Entity Rules,
Section 39.11--Reliability reports,
Section 39.12--Review of state action, and
Section 39.13--Regional Advisory Bodies

B. Section-by-Section Discussion of the Final Rule

    60. Below, the Commission discusses the regulations proposed in the
NOPR, the comments received, and the Commission's conclusion. We note
that, while the NOPR indicated that the rules would be set forth in
Title 18, part 38 of the Code of Federal Regulations (CFR), the Final
Rule codifies the rules in Title 18, part 39 of the CFR. To provide
consistency and clarity in the discussion of proposed rules, comments
and Commission conclusions, the Final Rule refers to part 39 or, when
referring

to a particular section within part 39, section 39, throughout the
discussion.
1. Definitions--Section 39.1
    61. This section of the NOPR defined the relevant terms used in
part 39 of the Commission's regulations, including the terms that are
defined in the statute to provide a consistent meaning throughout the
proposed rule. Comments relating to the proposed definitions are
discussed below.
a. Terms Defined in the Statute
i. Bulk-Power System
    62. The NOPR defined the term ``Bulk-Power System'' as set forth in
section 215(a)(1) of the FPA:

    Bulk-Power System means facilities and control systems necessary
for operating an interconnected electric energy transmission network
(or any portion thereof), and electric energy from generating
facilities needed to maintain transmission system reliability. The
term does not include facilities used in the local distribution of
electric energy.

    63. Several commenters seek clarification to narrow the
interpretation of the term ``Bulk-Power System.'' National Grid asserts
that the definition of ``Bulk-Power System'' is ambiguous as to whether
it encompasses generation facilities and precisely which facilities are
covered. National Grid recommends that the Commission clarify the term
by adopting a functional interpretation rather than an arbitrary test
based on a single attribute, such as voltage or facility capacity to
identify facilities included as part of the Bulk-Power System. Hydro-
Qu[eacute]bec submits that the definition of ``Bulk-Power System''
should be interpreted narrowly, that is, jurisdiction on generating
facilities should be strictly limited to that needed to maintain
transmission system reliability, as ascertained by the ERO or the
Regional Entity. NiSource, submits that the definition should exclude
generating facilities and include the electric energy from those
facilities only to the extent needed to maintain transmission system
reliability. SoCalEd asserts that the Commission should include
generators that receive transmission service pursuant to a wholesale
distribution access tariff in its jurisdiction.
ii. Reliable Operation
    64. The NOPR defined the term ``Reliable Operation'' as set forth
in section 215(a)(4) of the FPA:

    Reliable Operation means operating the elements of the Bulk-
Power System within equipment and electric system thermal, voltage,
and stability limits so that instability, uncontrolled separation,
or cascading failures of such system will not occur as a result of
sudden disturbance, including a Cybersecurity Incident, or
unanticipated failure of system elements.

    65. Kansas City P&L is concerned that including the phrase
``unanticipated failure of system elements'' in the definition of
``Reliable Operation'' makes it too vague for development of efficient
and workable Reliability Standards related to reliability planning
criteria. It recommends that the Commission either delete the phrase or
explain the meaning of the phrase.
iii. Reliability Standard
    66. The NOPR defined the term ``Reliability Standard'' as set forth
in section 215(a)(3) of the FPA:

    Reliability Standard means a requirement, approved by the
Commission under the instant proposed regulation, to provide for
Reliable Operation of the Bulk-Power System. The term includes
requirements for the operation of existing Bulk-Power System
facilities, including cybersecurity protection, and the design of
planned additions or modifications to such facilities to the extent
necessary to provide for Reliable Operation of the Bulk-Power
System. The term does not include any requirement to enlarge such
facilities or to construct new transmission capacity or generation
capacity.

    67. The Oklahoma Commission finds this definition reasonable
because it does not encompass any requirement to enlarge or construct
new transmission or generation capacity; however, it seeks
clarification that a Commission-approved Reliability Standard will
apply equally to both existing facilities and new facilities added in
the future.
iv. Transmission Organization
    68. The NOPR defined the term ``Transmission Organization'' as set
forth in section 215(a)(6) of the FPA:

    Transmission Organization means a Regional Transmission
Organization, Independent System Operator, independent transmission
provider, or other Transmission Organization finally approved by the
Commission for the operation of transmission facilities.

    69. South Carolina E&G asks the Commission to clarify that the
definition of ``Transmission Organization'' includes a non-independent
Transmission Provider that maintains separation of functions pursuant
to Standards of Conduct Order No. 2004.\9\
---------------------------------------------------------------------------

    \9\ Standards of Conduct for Transmission Providers, Order No.
2004, FERC Stats. & Regs., Regulations Preambles ]31,155 (2003),
order on reh'g. Order No. 2004-A, III FERC Stats. & Regs. ]31,161
(2004), order on reh'g, Order No. 2004-B, III FERC Stats & Regs.
]31,166 (2004).
---------------------------------------------------------------------------

Commission Conclusion

    70. We adopt the NOPR's definition of ``Bulk-Power System,''
``Reliable Operation,'' ``Reliability Standard,'' and ``Transmission
Organization'' because the definition of these terms originates in
section 215 of the FPA.\10\ However, we offer the following
clarifications.
---------------------------------------------------------------------------

    \10\ 16 U.S.C. 824o(a) (2000).
---------------------------------------------------------------------------

    71. With regard to generators, Congress included in the definition
of Bulk-Power System ``electric energy from generation facilities
needed to maintain transmission system reliability.'' If electric
energy from a generating facility is needed to maintain a reliable
transmission system, that facility is part of the Bulk-Power System
with respect to the energy it generates that is needed to maintain
reliability. We conclude that the precise scope of generators as
facilities to which the Reliability Standards apply would be best
considered in the context of our review of those Standards, taking into
account the views of the ERO and others. Therefore, until we have
proposed Reliability Standards before us, we will reserve further
judgment on whether additional guidance on generators' status as Bulk-
Power System facilities is appropriate or whether the decision of which
generators are Bulk-Power System facilities should be made on a case-
by-case basis.
    72. With regard to the term ``Reliable Operation,'' we decline to
generically interpret the meaning of the phrase ``unanticipated failure
of system elements'' in advance of submission of proposed Reliability
Standards requiring interpretation of the phrase or other specific
instances where the issue and all of the relevant facts are presented
to allow the Commission to make a proper determination.
    73. With regard to the term ``Reliability Standard,'' we clarify
that a Reliability Standard will equally apply to the existing Bulk-
Power System and any future additions to the Bulk-Power System unless
the Reliability Standard itself provides for an exception. Section 215
of the FPA makes no distinction between existing and new facilities.
    74. With regard to the term ``Transmission Organization,'' we
clarify that the transmission arm of a vertically integrated utility
that is subject to the Commission's Standards of Conduct, absent any
other relevant facts, would not be a Transmission Organization for
purposes of FPA section 215(a)(6). Given that each of the examples of
Transmission Organizations provided by Congress are independent of
market participants, the Commission finds that

Congress intended that ``Transmission Organization'' be an entity
approved by the Commission that is independent of market participants.
However, in response to South Carolina E&G, any interested person that
perceives a possible conflict between a Reliability Standard and a
tariff may bring this to the Commission's attention.
b. Additional Terms Commenters Seek To Define in the Final Rule
    75. Commenters suggest seven new terms to define in the Final Rule:
``Competition,'' ``Physical Security Standard,'' ``Potential
Violation,'' ``Regional Reliability Standard,'' ``Regional Variance,''
``User of the Bulk-Power System'' and ``End User.''\11\
---------------------------------------------------------------------------

    \11\ We address issues pertaining to ``Competition'' and
``Potential Violation'' in section IV.B.5 and section IV.B.7 of the
Preamble, Reliability Standards and Enforcement of Reliability
Standards, respectively.
---------------------------------------------------------------------------

i. Physical Security Standards
    76. NERC recommends adding the defined term ``Physical Security
Standard'':

    Physical Security Standard means a Reliability Standard adopted
to safeguard personnel and prevent unauthorized access to critical
equipment, systems, material, and information at critical
facilities.
ii. Regional Reliability Standard and Regional Variance
    77. NYSRC and the New York Companies recommend adding the defined
term ``regional reliability standard'' to mean a Reliability Standard
that is consistent with the generally applicable ERO Reliability
Standard but is more specific or more stringent to meet the particular
reliability needs of the region:

    Regional Reliability Standard: A Reliability Standard applicable
within a particular region that is not inconsistent with, but may be
more stringent, add detail to, or implement an ERO Reliability
Standard, or may cover matters not covered by an ERO Reliability
Standard.

    78. While the New York Companies indicate that they would define
term ``regional variance'' in the same manner, NYSRC would define this
term separately, as follows:

    Regional Variance: An aspect of an ERO Reliability Standard that
applies only within a given region. A Regional Variance may be used,
for example, to exempt a particular region from all or a portion of
an ERO Reliability Standard that does not apply to that region, or
may establish different measures or performance criteria necessary
to achieve reliability within that region.
iii. User of the Bulk-Power System
    79. NERC proposes to add a definition for ``user of the Bulk-Power
System.'' NERC asks that the Commission require every such user to
register with the ERO. It considers a user to be a direct user that
transacts business on the Bulk-Power System subject to Commission
jurisdiction under section 215 of the FPA. It would exclude an end-use
customer who receives electric energy indirectly from the Bulk-Power
System. NERC proposes the definition:

    User of the Bulk-Power System means any entity that sells,
purchases, or transmits electric power directly over the Bulk-Power
System, or that maintains facilities or controls systems that are
part of the Bulk-Power System, or that is a system operator. The
term excludes customers that receive service at retail that do not
otherwise sell, purchase, or transmit power over the Bulk-Power
System or own, operate or maintain, control or operate facilities or
systems that are part of the Bulk-Power System.

    80. MidAmerican suggests that the Commission clarify that the use
of local distribution in the term ``Bulk-Power System'' refers to the
Commission's definition for local distribution as provided in Order No.
888 as the facilities that meet the seven factor test for distribution.
    81. APPA states that it assumes that both the new ERO and the
Commission will focus their reliability efforts on those entities with
activities that substantially impact the Bulk-Power System, and that
distribution-only entities will not be targeted because the
Commission's jurisdiction under section 215 does not extend to local
distribution activities. NRECA argues that status as a section 201(f)
entity, ownership of distribution facilities, and even ownership of
local transmission facilities should not be considered ipso facto to
cause one to be deemed a ``user, owner, or operator'' of the Bulk-Power
System for purposes of application of the Reliability Standards.
    82. NRECA notes that a distribution cooperative serving customers
entirely at retail and operating facilities at lower voltages might
still be said to be a user of the Bulk-Power System to the extent that
its electricity is delivered over higher-voltage facilities of its
generation and transmission company or even the interconnected
facilities of an investor-owned utility and/or a federal power
marketing agency or large public power entity. However, NRECA states
that this is not a meaningful basis for interpreting the Commission's
jurisdiction of ``user'' since the same reasoning would apply to a
large industrial customer or, ultimately, even a single residential
customer.
    83. Therefore, NRECA asks that the Commission interpret ``user'' as
one that has an active role in, and some measure of control over the
Bulk-Power System, and whose activities have the potential to directly
disrupt the Bulk-Power System, such as an owner or operator of a high-
voltage transmission facility, a large generator, or a control area
operator. Users should not include those that have no active role in or
control over the Bulk-Power System.
iv. End User
    84. The NOPR solicited comments on whether the term ``end user''
should be defined for purposes of the ERO's equitable allocation of
reasonable dues, fees and charges among end users.\12\ The NOPR further
inquired as to whether the term ``end user'' should be defined as a
customer using net energy for load or in terms of those who directly or
indirectly use the Bulk-Power System. The NOPR asked whether we should
limit the term to an entity transmitting electric energy through the
transmission facility of another, or should ``end user'' include a
transmission facility owner or operator with a business that depends on
the Reliable Operation of the interconnected Bulk-Power System.
---------------------------------------------------------------------------

    \12\ NOPR at P 43.
---------------------------------------------------------------------------

    85. Several commenters submit that it is critical that the
Commission define ``end user'' to establish a fair funding mechanism
for the ERO and Regional Entities. These commenters, however, do not
agree on how to define ``end user'' or are uncertain as to how best to
carry out their recommendations, since certain users of the Bulk-Power
System may not be allowed by local regulators to assess rates to
recover such costs.
(a) End User as a Retail Customer
    86. A number of commenters \13\ recommend defining the term ``end
user'' as a customer represented by net energy for load, i.e., an
ultimate retail consumer. NASUCA submits that ``end user'' in section
215(c)(2)(B) of the FPA is intended to refer to a retail customer who
actually uses the electricity that comes off the grid and, in this
respect, is to be distinguished from a user, owner or operator of the
Bulk-Power System that buys, sells, generates or transmits electricity
at the wholesale bulk-power level and to whom the Reliability Standards
directly apply. National Grid asserts that the plain language of the
statute requires that ``end user,'' not wholesale or transmission
customers, fund the ERO so that applying the term only to direct

users of the Bulk-Power System does not fit within the context of the
statute.
---------------------------------------------------------------------------

    \13\ See, e.g., NARUC, TAPS and PSE&G Companies.
---------------------------------------------------------------------------

    87. A few commenters submit that ``end user'' should be defined in
terms of a transmission provider that collects fees from customers and
remits them to the ERO.\14\ Detroit Edison claims that the most
equitable means by which the ERO could recover its costs from all
consumers would be a direct bill targeted to all load. Given that the
Commission's jurisdictional reach is limited, that portion of the ERO's
charges attributable to domestic entities and approved by the
Commission through the budget process should be deemed a prudently
incurred transmission expense allocable to all transmission owners
subject to the Commission's jurisdiction. This expense should be
recoverable from wholesale and retail customers to ensure that all
consumers, either directly or indirectly, share in the costs of
maintaining and enhancing a reliable transmission network.
---------------------------------------------------------------------------

    \14\ See, e.g., Allegheny, Hydro One and Detroit Edison.
---------------------------------------------------------------------------

(b) End User as a Customer That Uses the Bulk-Power System
    88. Several commenters, including BCTC and Old Dominion, recommend
that the Commission include all users of the Bulk-Power System within
the definition of the term ``end user.'' MidAmerican submits that, if
the term ``end user'' is defined as a customer using net energy for
load, it should be made clear that the intent is to capture the end-use
load of all direct or indirect users of the transmission system that
benefit from the reliability of the Bulk-Power System.
    89. MISO contends that the term ``end user'' should be broadly
defined in the Final Rule to include an entity that directly or
indirectly uses the wholesale transmission grid so that any party
receiving the benefits of Bulk-Power System reliability will bear the
costs of promoting short-term reliability.\15\
---------------------------------------------------------------------------

    \15\ See also AEP, Exelon, Entergy and NiSource.
---------------------------------------------------------------------------

    90. NiSource and Entergy submit that the term should encompass
independent system operators (ISOs), power marketers, qualifying
facilities and all who directly or indirectly use the transmission
systems and ``drive system reliability.''
    91. SERC recommends including customers with alternative sources of
generation in the definition of ``end user.'' LADWP recommends that
``end user'' include all customer-owned distributed generation and
merchant utility distributed generation, and that any entity with an
obligation to serve should be assessed based on its end user
responsibilities.
(c) Broader Definition of End User
    92. A number of commenters suggest an expansive definition of ``end
user'' that would include all users, owners and operators of the Bulk-
Power System.
    93. EEI recommends that the Commission define ``end user'' for the
purpose of equitable allocation of ERO dues, fees and charges. It asks
that the term be defined in the context of reliability, not in the
context of electricity. EEI argues that generators and transmitting
utilities are ``end users'' of reliability because they receive the
benefits of reliability, just as retail electricity purchasers do. EEI
submits that ``end user'' should include any entity that buys or sells
electric energy, or transmits electric energy as an owner, operator or
user of the Bulk-Power System.
    94. New York Companies recommends that ``end user'' be defined as
an entity that injects energy into or withdraws energy from the grid,
emphasizing that in areas of the country where deregulation has
occurred, an entity that supplies power is different from an entity
that withdraws power. It observes that entities responsible for paying
the costs of an organization are more sensitive to the resource needs
of that organization.
    95. Wisconsin Electric asserts that the definition of ``end user''
should not encompass transmission owners or operators, or even end use
customers of local distribution companies and marketers in retail
access states, given the Commission's lack of jurisdiction over local
distribution of energy.

Commission Conclusion

    96. We decline to define all of these terms in this Final Rule
without prejudice to the ERO proposing to define these terms as part of
its certification application process or as part of a Reliability
Standard. However, we offer the following clarifications.
    97. In regard to the terms ``regional Reliability Standard'' and
``regional variance,'' we recognize that regional ``differences'' \16\
of several sorts are possible as more fully discussed under section
IV.B.5, Reliability Standards, of the Preamble. There we call on the
ERO applicant to propose definitions of the various types of
differences.\17\
---------------------------------------------------------------------------

    \16\ Throughout the Final Rule, we use the term regional
differences to refer to any type or category of difference from a
continent-wide Reliability Standard that applies on a regional
basis.
    \17\ See also section IV.B.8 of the Preamble, Delegation to a
Regional Entity.
---------------------------------------------------------------------------

    98. In regard to ``User of the Bulk-Power System,'' we agree that a
customer that receives electric service at retail and does not
otherwise directly receive, sell, purchase, or transmit power over the
Bulk-Power System or own, operate or maintain, control or operate
facilities or systems that are part of the Bulk-Power System would not
in general be considered to be a user of the Bulk-Power System.
    99. We recognize that ``User of the Bulk-Power System'' is a
critical jurisdictional term. However, at this time, we do not think it
is appropriate to try and develop a specific definition. Generally, a
person directly connected to the Bulk-Power System selling, purchasing,
or transmitting electric energy over the Bulk-Power System is a User of
the Bulk-Power System. With regard to NERC's proposed definition, we
are concerned that a large industrial customer that receives electric
energy directly from the Bulk-Power System may not be defined as a user
of the Bulk-Power System, even though it may directly affect the
reliability of the Bulk-Power System. We conclude that the precise
scope of the term ``User of the Bulk-Power System,'' and thus the
extent of persons subject to the Reliability Standards, would be best
considered in the context of our review of those Standards, taking into
account the views of the ERO and others. Therefore, until we have
proposed Reliability Standards before us, we will reserve further
judgment on whether a definition of ``User of the Bulk-Power System''
is appropriate or whether the decision of who is a ``User of the Bulk-
Power System'' should be made on a case-by-case basis.
    100. With regard to local distribution facilities, Congress
specifically exempted ``facilities used in the local distribution of
energy'' from the definition of Bulk-Power System, and, as such, the
Commission's regulations do not subject such facilities to the ERO's or
a Regional Entity's Rules or the Commission-approved mandatory
Reliability Standards. As noted by NRECA, the owner or operator of a
local distribution facility can be a user of the Bulk-Power System. If
the owner or operator of a local distribution facility is a ``user'' of
the Bulk-Power System, it must comply with all relevant Reliability
Standards as a user.\18\
---------------------------------------------------------------------------

    \18\ Similarly, an owner or operator of a generating facility
may be a user of the Bulk-Power System without that facility
necessarily being a part of the Bulk-Power System.
---------------------------------------------------------------------------

    101. We agree with commenters that there are good reasons to
distinguish an ``end user'' from a ``user, owner or

operator of the Bulk-Power System.'' The latter phrase refers to an
entity that must comply with the Reliability Standards, and perhaps
also pay directly for the cost of the ERO. The term end user, is a term
in common use in the electric power industry, which the Commission has
used at times in its orders without a definition and no one has
expressed any uncertainty about the meaning of the term. In general, it
means a retail consumer of electricity. Therefore, we do not see a need
to adopt a formal definition for ``end user'' here. If an ERO applicant
believes additional definition is needed as part of its application for
explaining its funding mechanism or for another reason, it may propose
a definition at that time.
2. Jurisdiction and Applicability--Section 39.2
a. Commission Jurisdiction
    102. This section discusses the Commission's jurisdiction under
section 215 of the FPA and who must comply with this Final Rule. The
NOPR explained that, consistent with section 215(b) of the FPA, for the
purposes of approving and enforcing Reliability Standards established
by the Commission in accordance with this new regulation, the
Commission has jurisdiction over the ERO, any Regional Entities, and
all users, owners and operators of the Bulk-Power System within the
United States (other than Alaska and Hawaii) including, but not limited
to, the entities described in section 201(f) of the FPA.

Comments

    103. The Ohio Commission is concerned that a statement in the
proposed rule may go beyond the powers delegated by Congress. It
asserts that Congress indicated that the Commission would have
jurisdiction over approval of the Reliability Standards established
under the ERO, but went no further, neither regarding the Regional
Entities nor the enforcement provisions.
    104. NERC and EEI recommend that the regulations make clear that
each user, owner or operator of the Bulk-Power System must comply with
the Commission's regulations implementing the Act, with approved
Reliability Standards, and with the Rules adopted by the ERO and
Regional Entities. In addition, NERC and TAPS assert that the ERO and
Regional Entities may need to obtain information or data from users,
owners and operators of the Bulk-Power System to develop Reliability
Standards and to ensure compliance with those Reliability Standards
and, therefore, the Final Rule should require users, owners and
operators of the Bulk-Power System to respond to such requests for
data.
    105. DOE states that the language of section 215 of the FPA gives
the ultimate authority for the certification of the ERO and the
enforcement of the Reliability Standards to the Commission. Therefore,
DOE asserts that it is imperative that the Commission be able to direct
the ERO to collect, validate, and preserve data related to reliability
performance in such form as the Commission may require, and that the
ERO be required to provide such information to the Commission upon
request.
    106. Exelon notes that not all entities subject to mandatory
Reliability Standards currently report information through the regional
reliability councils and to NERC. In its view, it is critical that all
entities subject to ERO Rules be required to provide the Commission,
the ERO, and the Regional Entities with data when requested. Therefore,
Exelon suggests that the Final Rule include an additional section
requiring all users, owners and operators of the Bulk-Power System to
furnish the Commission, the ERO and the applicable Regional Entity with
information requested in order to carry out their functions under this
Final Rule.
    107. Professor Robert Thomas raises the need for the Final Rule to
establish procedures to ensure that the Commission has appropriate
access to any relevant reliability data in a meaningful format.
Professor Thomas suggests that, for the Commission to perform its
oversight function, it must receive timely information in connection
with any potential violation of a Reliability Standard. He recommends
that the Commission have unfettered access to specific real-time and
other system data.
    108. EPSA requests that the Commission require the ERO and each
Regional Entity to adopt procedures to prevent the unintended
disclosure of any data they obtain. Further, it asks that, in instances
when it is necessary to disclose such information, the Commission
require the ERO and Regional Entities to establish procedures to
protect such information from disclosure beyond what is necessary to
protect the reliability of the Bulk-Power System.
    109. NERC, TAPS, and Exelon state that the Final Rule should
provide a mechanism for the ERO and Regional Entitles to learn the
identity of each user, owner and operator of the Bulk-Power System to
ensure that each such entity complies with Reliability Standards. NERC
and Ontario IESO assert that the Final Rule should implement this
identification process by requiring each user, owner, and operator of
the Bulk-Power System to register with the ERO and the appropriate
Regional Entity.
    110. ELCON suggests that a requirement that all entities subject to
enforcement under section 215(e) of the FPA register with the ERO for
administrative purposes should not be confused with dues requirements
or any concept of membership. However, FRCC suggests that all users of
the Bulk-Power System should be required to register with the ERO and
the appropriate Regional Entity for both cost recovery and enforcement
purposes.

Commission Conclusion

    111. Section 39.2 of the regulations codifies the jurisdiction
conferred by statute. Congress specifically gave the Commission
jurisdiction over Regional Entities and enforcement of compliance with
section 215 of the FPA. Section 215(b) specifically states:

    The Commission shall have jurisdiction, within the United
States, over the ERO certified by the Commission * * *, any regional
entities, and all users, owners and operators of the bulk-power
system, including but not limited to the entities described in
section 201(f), for purposes of approving reliability standards
established under this section and enforcing compliance with this
section. All users, owners and operators of the bulk-power system
shall comply with reliability standards that take effect under this
section. (emphasis added)

Thus, the Ohio Commission's concern that the proposed relationship
between the Commission and a Regional Entity or the Commission's role
in enforcement may go beyond the powers delegated to the Commission by
Congress is unfounded.
    112. The Commission notes that the proposed regulations in the NOPR
did not specifically state that all users, owners and operators of the
Bulk-Power System shall comply with Reliability Standards that take
effect under part 39. NERC and EEI recommend that the Commission add
such an explicit requirement in the regulations. Although all entities
subject to the Commission's reliability jurisdiction under section 215
of the FPA are required to comply with regulations promulgated under
that section without an explicit requirement to do so, we will grant
NERC's and EEI's request to explicitly state in the regulations that
all users, owners and operators must comply with the regulations under
part 39.
    113. Finally, NERC and EEI further request that the regulations
require all

users, owners and operators to comply with ERO Rules and Regional
Entities Rules. Congress gave the Commission jurisdiction over all
users, owners and operators of the Bulk-Power System, for purposes of,
inter alia, enforcing compliance with Reliability Standards. As defined
by the proposed rule, the Rules of the ERO and Regional Entities are
the bylaws, rules of procedure and other organizational rules and
protocols of the ERO or a Regional Entity, respectively. These Rules
should be developed to further the ERO's and Regional Entities'
purpose--which is to improve Bulk-Power System reliability. The
Commission concludes that it is appropriate for each user, owner and
operator of the Bulk-Power System to be required to abide by any such
Commission-approved Rules. Therefore, we will add a subsection (b) to
section 39.2, stating:

    (b) All entities subject to the Commission's reliability
jurisdiction under section 39.2(a) shall comply with applicable
Reliability Standards, the Commission's regulations, and applicable
Electric Reliability Organization Rules and Regional Entity Rules
made effective under this part.

    114. The Commission agrees with commenters that, to fulfill its
obligations under this Final Rule, the ERO or a Regional Entity will
need access to certain data from users, owners and operators of the
Bulk-Power System. Further, the Commission will need access to such
information as is necessary to fulfill its oversight and enforcement
roles under the statute. Section 39.2 of the regulations will include
the following requirement:

    (d) Each user, owner or operator of the Bulk-Power System within
the United States (other than Alaska and Hawaii) shall provide the
Commission, the Electric Reliability Organization and the applicable
Regional Entity such information as is necessary to implement
section 215 of the Federal Power Act as determined by the Commission
and set out in the Rules of the Electric Reliability Organization
and each applicable Regional Entity. The Electric Reliability
Organization and each Regional Entity shall provide the Commission
such information as is necessary to implement section 215 of the
Federal Power Act.

    115. We also agree with EPSA that the ERO and each Regional Entity
must adopt confidentiality Rules to prevent the unintended disclosure
of such information. However, because the Commission has not certified
an ERO or seen the Rules that it and the Regional Entities will propose
pertaining to data access and retention, the Commission will not
address with specificity what such a confidentiality Rule would entail.
Rather, the ERO must address ERO disclosure-related Rules in its
application for certification. If such Rules do not apply to all
Regional Entities, then each Regional Entity must address its
disclosure Rules in the delegation agreements. The ERO or the Regional
Entity should review a request for confidential treatment and make a
determination if it is reasonable.
    116. Although we agree with Professor Thomas that having procedures
in place for the Commission to have such information in meaningful
formats is useful, we will not address this issue in the Final Rule.
The complexity of this issue and the need for substantive input from
the ERO, Regional Entities, and the industry on what a meaningful
format would be and the feasibility and costs of providing information
in such a format would be more appropriately addressed outside the
context of this rulemaking.
    117. Several commenters assert that the Commission should provide a
mechanism for the ERO and Regional Entities to identify all users,
owners and operators of the Bulk-Power System. The Commission agrees
and finds that a registration requirement, as suggested by NERC and the
Ontario IESO, may help identify those entities subject to the
Commission's reliability jurisdiction and the Reliability Standards and
rules of the ERO or a Regional Entity. Therefore, the Final Rule
includes a registration requirement at section 39.2, as follows:

    (c) Each user, owner and operator of the Bulk-Power System
within the United States (other than Alaska and Hawaii) shall
register with the Electric Reliability Organization and the Regional
Entity for each region within which it uses, owns or operates Bulk-
Power System facilities, in such manner as prescribed in the Rules
of the Electric Reliability Organization and each applicable
Regional Entity.

If, in the registration process, there remains a question whether a
specific user or other entity is subject to this rule, it or the ERO
may request the Commission's guidance on the matter.
    118. Because the Final Rule provides for mandatory funding of the
ERO and those functions that it may delegate to the Regional Entities,
there should be no fee for registering with the ERO or a Regional
Entity. Further, registration does not commit a person to membership.
Membership issues are discussed further below.
b. International Regulatory Coordination
    119. The statute contemplates that the ERO will be subject to the
jurisdiction of the United States, Canada, and possibly Mexico. This
section discusses how the Commission reconciles its exclusive authority
to regulate the ERO within the United States and the exclusive
authority of regulators in other countries to regulate the ERO within
their borders. On August 9, 2005, the Federal-Provincial-Territorial
Electricity Working Group (FPT Group) in Canada and DOE jointly
submitted to the Commission ``Principles for an Electric Reliability
Organization that Can Function on an International Basis'' (bilateral
principles) based on stakeholder dialogues. The NOPR asked for comment
on these bilateral principles and whether they should be included in
the Final Rule. Many of these principles are presented below. Comments
and Commission conclusions on those topics are treated in the
appropriate location. Here, we discuss the general comments on the
principles.

Comments

    120. Many commenters, including MRO and BCTC, state that the
bilateral principles are essential because they provide a foundation to
guide the operation of the ERO as an international organization.\19\
NERC states that it supports the bilateral principles and will be
guided by them in developing its rules of procedure and ERO
application. NERC asserts that the bilateral principles are a sound
basis on which NERC expects that the appropriate regulatory authorities
in Canada will extend recognition to the ERO.
---------------------------------------------------------------------------

    \19\ See also Hydro-Qu[eacute]bec, APPA, MRO, ELCON, Detroit
Edison and Ontario IESO.
---------------------------------------------------------------------------

    121. Several other commenters submit that the Commission's
oversight of the ERO and Regional Entities should be informed by the
bilateral principles. CEA sees the Commission working cooperatively
with Canadian authorities in the establishment of the ERO and Regional
Entities, the development and approval of Reliability Standards, and
the operation of the ERO and the Regional Entities. MRO views Canadian
support as essential. Hydro One urges consistency with applicable
Canadian and Mexican regulatory principles. While Detroit Edison
supports the bilateral principles, it submits that they fail to address
how Reliability Standards will be interpreted by entities on each side
of the border operating under disparate market rules. Detroit Edison is
also concerned about whether the ERO, or its designated Cross-Border
Regional Entity, will have the authority to enforce non-discriminatory
Reliability Standards on all transmission users within its
international footprint and define the terms used in those Reliability
Standards, binding all

entities within its footprint to those definitions.
    122. Commenters ask the Commission to explain how it intends to
work with regulators in Canada to provide for effective enforcement
across boarders given the limits of the respective jurisdictions.\20\
Commenters also urge the Commission to explain how cross-border
compliance and enforcement will work in these situations.
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    \20\ See, e.g., CEA, Hydro One and Detroit Edison.
---------------------------------------------------------------------------

    123. American Transmission comments that the ERO cannot adjudicate
differences between regulators with sovereign powers and cannot
function effectively without the concerted efforts of all relevant
regulators. Therefore regulators in the U.S. and Canada must develop
their own coordination process, compatible with the bilateral
principles, to achieve consensus prior to a remand or proposal to void
a Reliability Standard and the enforcement appeals process. Further,
American Transmission states that the specific jurisdiction of each
regulator should be clear to all; no entity should be exposed to
jeopardy from multiple jurisdictions for the same violation.
    124. Northern Maine Entities ask how Canadian or Mexican utilities
will be required to comply with Reliability Standards, the violation of
which, by virtue of the Commission's approval of those Reliability
Standards, will constitute a violation of the FPA. Northern Maine
Entities are concerned that a user, owner or operator of the Bulk-Power
System within the U.S. portion of a Cross-Border Regional Entity would
be subject to mandatory compliance, while those in the Canadian or
Mexican portion might operate under voluntary, unenforceable
Reliability Standards. In addition, in the interests of consistency and
fairness, Northern Maine Entities argues that the Commission's Final
Rule should clarify that no Cross-Border Regional Entity may subject an
entity within the United States to the jurisdiction of a foreign court.
    125. On November 18, 2005, the Ambassador of Canada, the Honorable
Frank McKenna, forwarded additional comments from the Canadian FPT
Group on the international implications of the NOPR and the need for
United States and Canadian reliability regulators to cooperate. The FPT
Group reiterates several of the points made by numerous Canadian
commenters and others that are addressed throughout this Final Rule.
The FPT Group also emphasizes the need for continued cooperation among
reliability regulators within the United States and Canada through the
work of the United States-Canada Bilateral Electric Reliability
Oversight Group (Bilateral Group) and other means on matters pertaining
to certification of the ERO, approval of Cross-Border Regional
Entities, remands of Reliability Standards, enforcement and imposition
of penalties.

Commission Conclusion

    126. We agree that for the ERO to be effective in maintaining Bulk-
Power System reliability across national borders, it must be able to
operate in an international arena. As American Transmission suggests,
regulators in the U.S. and Canada should cooperate to help the ERO
protect reliability in both countries. To this end, the Commission has
worked with our partners in Canada to develop the Terms of Reference
for the Bilateral Group, executed by the Commission, the U.S.
Department of Energy, and the FPT Group on June 30, 2005 (the Terms of
Reference).\21\
---------------------------------------------------------------------------

    \21\ Available at http://www.ferc.gov/industries/electric/indus-act/reliability/06-30-05-agreement.pdf_____________________________________-

    127. Pursuant to the Terms of Reference, the Bilateral Group is
intended to have an ongoing role in identifying issues related to
international aspects of the reliability framework and identifying
options for resolution of those issues. The Bilateral Group intends to
consult on international aspects of reliability policies and
reliability regulatory issues.
    128. With respect to Northern Maine Entities' concern that entities
within the United States may be subject to mandatory compliance,
whereas entities in Canada and Mexico may still operate under voluntary
standards, Northern Maine's concern is outside our jurisdiction to
address. EPAct requires the ERO to seek recognition in Canada and
Mexico and we will work with our counterparts in Canada and Mexico
regarding cooperative development of mandatory Reliability Standards.
3. Electric Reliability Organization Certification--Section 39.3
    129. Consistent with section 215(c) of the FPA, the NOPR proposed
that any person may submit an application to the Commission for
certification as the ERO within sixty (60) days following the issuance
of the Final Rule. The Commission would then certify one applicant as
the ERO, if the Commission determines that the applicant meets
specified criteria set forth in the proposed regulations. An ERO
applicant must demonstrate that it has the ability to develop and
enforce Reliability Standards that provide for an adequate level of
reliability of the Bulk-Power System. An ERO applicant must also
document that it has established ERO Rules that assure its independence
of the users, owners and operators of the Bulk-Power System. Such ERO
Rules must further provide for allocation of reasonable dues, fees and
charges among end users for all reliability activities, provide for
fair and impartial procedures for enforcement of Reliability Standards,
and provide reasonable notice and opportunity for comment, due process,
openness, and balance of interests in developing Reliability Standards
and otherwise exercising its duties.
    130. The NOPR interpreted section 215(c) of the FPA to mean that
the ERO must comply with the certification criteria on an ongoing
basis, and that a violation of the certification criteria constitutes a
violation of the FPA.\22\
---------------------------------------------------------------------------

    \22\ NOPR at P 38-39.
---------------------------------------------------------------------------

Comments

    131. NERC and others support the proposed certification
requirements as faithfully reflecting the requirements set forth in
section 215 of the FPA. Several commenters address the oversight roles
of the Commission and the ERO. Some commenters address statutory
criteria for ERO certification, namely ERO governance. Others raise the
procedural issue of whether the public would have an opportunity to
comment on ERO applications. Commenters also address non-statutory ERO
certification issues such as ERO membership, simultaneous certification
in Canada and Mexico, and periodic recertification. Many commenters, in
discussing the ERO certification criteria, note that their concerns
apply to Regional Entity formation as well.
    132. The Oklahoma Commission states that, while Congress expressed
clear intent that ``[t]he Commission shall issue a rule to implement
the requirement of this section not later than 180 days after the date
of enactment* * *,'' Congress also expressed clear intent that due
process and other rights be honored. Thus, it asserts that the
Commission should regard some of the regulations in the Final Rule as
interim ``place-holders'' and be prepared to add to, or review, the
regulations after the Commission and the interested parties have an
opportunity to determine how well they implement the due process
requirements and other requirements of the statute.

a. The Oversight Roles of the Commission and the ERO
    133. Many commenters recommend a strong ERO under the general
oversight of the Commission.\23\ They view the Commission primarily
relying on the ERO to ensure that each Regional Entity is properly
performing its responsibilities.
---------------------------------------------------------------------------

    \23\ See, e.g., ELCON and NRECA.
---------------------------------------------------------------------------

    134. Other commenters suggest more of a partnership relationship
among the ERO, Regional Entities, the federal government and state
governments. In this vein, for instance, Indianapolis P&L urges the
Commission to be light-handed in its oversight of the ERO and provide
it considerable flexibility to carry out its mission. In its view, the
ERO should be a technically competent, fact-finding organization that
will have the full confidence of stakeholders and be authoritative in
and of itself.
    135. Some commenters suggest that the Commission should carefully
balance the need for a strong ERO with regional and state needs in the
transition to enforceable Reliability Standards. EEI sees the need for
a strong international ERO coupled with a significant role for Regional
Entities. EEI supports the initial steps that NERC has taken to
implement the changes necessary for certification as the ERO. In its
view, timely recognition of NERC as the ERO and approval of initially
proposed ERO Reliability Standards, on an interim basis if necessary,
are critical steps in maintaining the reliability of the nation's Bulk-
Power System.
i. Building on the Existing Reliability Framework
    136. Some commenters suggest building upon the NERC/regional
reliability council framework. Empire District Electric asserts that it
is essential for the Commission to promulgate a comprehensive, well-
thought-out transition and implementation plan for the business
processes, requirements, and accountabilities of NERC, the ERO, the
existing regional reliability councils, the existing Regional
Transmission Organizations (RTOs), and North American Energy Standards
Board (NAESB). The Commission should allow sufficient time for the
transition from NERC to the ERO, transition of regional reliability
councils to Regional Entities, and Regional Entity coordination with
existing security coordinators. NARUC suggests that the Commission
should build on and transition from the current reliability
organizations to preserve efficiencies and reliability. Starting over
would be non-productive, economically wasteful and, most importantly,
would put system reliability at risk.
    137. AEP maintains that timely recognition of NERC as the ERO, and
the proposed ERO Reliability Standards with whatever modifications are
required by the Commission, is a critical step in ensuring the
reliability of the nation's Bulk-Power System. NPCC asserts that the
statute recognizes that there will be a partnership between the federal
government, the ERO, the Regional Entities, and the states in the
development of continent-wide Reliability Standards and Reliability
Standards to be effective only within a region. EEI submits that
understanding and recognition of the critical reliability functions
carried out at the regional level, and a smooth transition to the new
statutory scheme whereby Regional Entities can propose regional
Reliability Standards and carry out enforcement duties delegated to
them by the ERO, are critical to ensuring reliability.
ii. Concerns About an Excessively Rigid Hierarchal Reliability
Framework
    138. Some commenters express concern about a new reliability
bureaucracy. Alcoa, for instance, is concerned that the creation of a
new bureaucracy has the potential to duplicate reliability costs and
expenses already incurred by public utilities and consumers. PacifiCorp
is concerned that the Final Rule could establish an excessively
hierarchical and rigid ERO-Regional Entity framework that could
needlessly complicate effective Reliability Standards development and
compliance in Interconnection-wide regions. Similarly, NiSource asserts
that, without some procedural clarification, the NOPR's multilayered
and overlapping responsibilities of the ERO, Regional Entities and the
Commission may lead to a cumbersome and overly complex process with
overlapping or conflicting authority or duplicative efforts that cause
confusion.
    139. ELCON urges that the Final Rule preserve the intent of the law
to eliminate the fragmented lines of authority that currently exist
between NERC, regional reliability councils, RTOs and transmission
owners. It further states that the Commission should resist any efforts
to preserve outmoded, existing industry governance structures,
relationships, and habits that prevent a world-class organization from
emerging from the ERO certification process. NASUCA asks the Commission
not to overlook the fact that the cost of the ERO, Regional Entities
and Reliability Standards will ultimately be borne by consumers.

Commission Conclusion

    140. The Commission finds that a strong ERO is critical to
maintaining Bulk-Power System reliability. The ERO generally should be
the point of contact between the Commission and the Regional Entities
in carrying out reliability responsibilities pursuant to this Final
Rule. Although we disagree with Indianapolis P&L that the Commission
should necessarily be light-handed in its oversight of the ERO, we do
recognize the need to be flexible in carrying out our regulatory
oversight responsibilities.
    141. In this Final Rule, the Commission gives the ERO guidance as
to the content of its application and certain functions it must
undertake, including its relationships with the Regional Entities. In
certain areas, the Commission asks that the ERO applicant provide more
detail regarding how it intends to perform its functions within the
parameters set out in section 215 of the FPA and by the Commission.
    142. The Commission understands the need for an orderly transition
from the current approach of voluntary reliability standards under NERC
and the regional reliability councils to the mandatory regime under the
Commission's ultimate oversight through the ERO and Regional Entities.
The Commission intends to provide industry participants adequate time
to transition from the current system of voluntary reliability
standards to mandatory Reliability Standards under the ERO. The
Commission's process of certifying the ERO and approving Regional
Entities and their delegation agreements and Reliability Standards will
provide for public notice and comment to allow industry participants to
weigh in on any potentially disruptive changes. If transition issues
become a problem in the future, the Commission will address them at
that time.
    143. Several commenters express support for NERC as the ERO. The
Commission will, however, not prejudge whether any specific entity
should be certified as the ERO.
    144. We agree with the Oklahoma Commission that the Commission may,
at any time it sees a need, augment or modify its regulations. It may
propose to do so in another NOPR or issue supplemental orders to
provide interpretation or guidance on compliance or other matters.
However, we regard the provisions of this Final Rule as more than a
``place-holder.'' The regulations contained in this Final Rule are not
intended as a halfway step, but

as the permanent regulations concerning section 215 of the FPA, unless
and until we determine that revision is required.
b. Statutory Certification Criteria
    145. Section 215(c) of the FPA lays out certain statutory criteria
that any ERO applicant must meet before being certified by the
Commission. The Commission included these statutory criteria in the
proposed regulations on certification. The comments on this section
primarily address the issue of governance.
i. Governance
    146. The NOPR proposed that an ERO candidate must demonstrate in a
certification application that it has established Rules that assure its
independence from the users, owners and operators of the Bulk-Power
System, while assuring fair stakeholder representation in the selection
of its directors and balanced decisionmaking in any ERO committee or
subcommittee.\24\ The NOPR asked for comment on whether the ERO
certification criteria should specify that the number of board members
representing each participating country in the ERO must be in rough
proportion to total load and whether there should be an opportunity for
each country to have an equitable number of members on an ERO committee
based on total load.\25\
---------------------------------------------------------------------------

    \24\ NOPR at P 40.
    \25\ Id. at P 57.
---------------------------------------------------------------------------

Comments
    147. Many commenters express concern and offer suggestions
regarding the proper means to assure ERO independence and more balanced
decisionmaking in terms of opportunities to be represented and more
inclusive participation.\26\ The California ISO maintains that
independence from market participants and owners, users and operators
of the Bulk-Power System should extend from the board level down to the
staff level. NASUCA urges that, where a Regional Entity uses a
stakeholder board, the concept of a balanced board cannot be
accomplished without opportunity for adequate consumer representation.
PG&E requests clarification as to how the ERO should achieve both fair
stakeholder representation and the necessary expertise while
maintaining its independence.
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    \26\ See, e.g. NASUCA, SMA, EPSA and PG&E.
---------------------------------------------------------------------------

    148. With regard to balanced decisionmaking, many commenters
express concern that the ERO provide for openness and inclusiveness,
particularly with regard to representation on any stakeholders
committee.\27\ Some commenters, such as TAPS, specifically ask that the
Final Rule provide guidance on the NOPR's requirement for balanced
decisionmaking in any ERO committee or subordinate organizational
structure. The California ISO states the stakeholder representation
must be balanced on both an industry sector and geographic basis and
that all distinct industry segments, including ISOs and RTOs, should
have fair representation. NASUCA maintains that consumers should be
fully represented on the stakeholders committee that advises the board
and, where a Regional Entity establishes a stakeholder board, consumers
must have direct representation on that board. Siemens states that
equipment suppliers should also be allowed to participate and offer
their expertise.
---------------------------------------------------------------------------

    \27\ See, e.g., NRECA, SMA and California ISO.
---------------------------------------------------------------------------

    149. Commenters discuss the need for Rules on fair voting. For
example, ELCON suggests that a stakeholders committee should directly
elect the members of the board, vote on bylaws and amendments to the
bylaws, and vote on other governance issues. Others suggest that no two
stakeholder sectors should be able to control the vote on any matter,
no single sector should be able to defeat a matter, and no entity
should be eligible to be a member of more than one sector in the board
selection process and the Reliability Standard development process, or
in any committee, subcommittee or other subordinate organizational
structure.\28\
---------------------------------------------------------------------------

    \28\ See, e.g., NASUCA and TAPS.
---------------------------------------------------------------------------

    150. Most commenters favor country representation requirements for
the ERO board. Some comment that the ERO certification criteria should
specify that the number of board members and committee members in the
ERO and the Cross-Border Regional Entities should be in proportion to
load of each participating country.\29\ International Transmission
states that Canadian board representation is important because of the
interconnected nature of the Bulk-Power System and the need to minimize
the likelihood that a Canadian regulatory body would find it necessary
to remand a Commission-approved Reliability Standard to the ERO. The
ERO must be seen as a forum for the expression of views and resolution
of issues raised by Canadian users, owners and operators. APPA does not
believe that the Final Rule should specify in detail the representation
of each country on the ERO's board and committees but, rather,
generally require that the ERO have appropriate international
representation and allow the ERO to work out the details.
---------------------------------------------------------------------------

    \29\ See, e.g., Alberta, NERC and the New York Companies.
---------------------------------------------------------------------------

    151. Commenters, however, do not consistently favor mandatory
country representation for ERO committees. For example, ERCOT states
that, while the ERO board and standing committee levels should have
appropriate country representation, such representation on ERO
subcommittees should be optional, depending upon the nature of the
issues that are addressed. BCTC suggests that national representation
should be required on ERO subcommittees, but only to the extent that
eligible candidates are put forward. Santee Cooper suggests that the
emphasis should be more on the technical expertise of those who would
populate the ERO's committees and other subordinate groups. Hydro-One
advocates that there be periodic rotation of the Chair/Vice-Chair among
each participating nation with maximum terms. Southern submits that a
country representation requirement could prove problematic in practice
and difficult to implement and manage in every ERO working group. In
this regard, ELCON notes the recent experience of NERC and NAESB with
under-populated segments.

Commission Conclusion

    152. The Commission recognizes that there are many ways that an ERO
could provide balanced governance and decisionmaking. The Commission
will not mandate a specific approach to ERO governance but, rather,
will allow an ERO candidate to develop a proposal to be provided in its
application for certification. Consistent with the Final Rule, an ERO
applicant's proposal must include ERO Rules that assure the ERO's
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.
    153. Appropriate ERO Rules should include provisions specifying
that, on a committee or other subordinate organizational structure, no
two stakeholder sectors should be able to control the vote on any
matter, no single sector should be able to defeat a matter, and no
entity should be eligible to be a member of more than one sector in the
board selection process,\30\ unless the

ERO adequately explains why it cannot apply these principles.
---------------------------------------------------------------------------

    \30\ Cf., Regional Transmission Organizations, Order No. 2000,
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ]
31,089 at 31,226, 31,074 (1999), order on reh'g, Order No. 2000-A,
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ]
31,092 (2000), affirmed sub nom. Public Utility District No. 1 of
Snohomish County, Washington v. FERC, 272 F.3d 607 (DC Cir. 2001).
(``Where there is a governing board with classes of market
participants, we would expect that no one class would be allowed to
veto a decision reached by the rest of the board and that no two
classes could force through a decision that is opposed by the rest
of the board'').
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    154. On the matter of country representation requirements, for the
reasons discussed below, the Commission finds generally that it would
be appropriate for country representation on the ERO board to be in
rough proportion to the net energy for load of each participating
country. We encourage ERO applicants to consider such a country
representation requirement and explain any departure from this
principle. We clarify that we are using the term ``country''
representation rather than ``national'' representation because we are
not referring to representation by government officials but by persons
associated with each participating country. Appropriate country
representation on the board would assure that the ERO is truly
international in addressing Bulk-Power System reliability. This is
important given the interconnected nature of the Bulk-Power System.
Further, appropriate country representation would assure that the ERO
is aware of and considers the concerns of parties in each country
participating in the ERO when addressing reliability matters.
    155. With regard to ERO committees and subcommittees or other
subordinate organizational structures, we encourage the ERO to allow
equal opportunity for participation from each country to be on such
committees. However, we decline to require that every committee have
exact proportional representation. As noted by some commenters,
technical expertise and other factors may be equally important in
selecting committee members from a pool of volunteer candidates. For
similar reasons, the Commission declines to require the ERO to adopt
specific Rules for the selection of the committee Chair and Vice-Chair.
That is a matter for those forming a proposed ERO to address in
developing proposed ERO Rules.
ii. Other Statutory Criteria
    156. The NOPR's proposal on certification requirement also
specified other statutory criteria for ERO certification, such as a
requirement that the ERO applicant must demonstrate that it has the
ability to develop and enforce Reliability Standards that provide for
an adequate level Bulk-Power System reliability. It also proposed that
ERO Rules must allocate equitably reasonable dues, fees and charges
among end users for all activities under this new reliability
regulation. It further provided that ERO Rules are to be fair and
impartial procedures for enforcement of Reliability Standards through
the imposition of penalties, including limitations on activities,
functions or operations, or other appropriate sanctions. In addition,
it provided that such ERO Rules are to provide for reasonable notice
and opportunity for public comment, due process, openness, and balance.
    157. No comments were filed on the proposed text of these
regulations. The Commission adopts the regulation text of the NOPR.
However, further comments on the substance of these requirements are
discussed below as follows: comments on dues, fees and charges of the
ERO are discussed in section IV.B.4 of the Preamble, comments on the
development of Reliability Standards are discussed in section IV.B.5 of
the Preamble, and comments on the enforcement of Reliability Standards
are discussed in section IV.B.7.
c. Opportunity for Public Comment
    158. NiSource is concerned that there is no express provision in
the proposed regulations to allow for public comment once an ERO
candidate submits a certification application. They contend that the
overall process would benefit if the Commission provided an opportunity
to comment on whether the ERO applicants meet the certification
criteria. Likewise, PG&E states that, although the selection of the ERO
or a Regional Entity will affect users, owners and operators of the
Bulk-Power System, neither the proposed section on certification nor
the proposed section on delegation expressly allows for public comment.

Commission Conclusion

    159. The Commission will provide notice and an opportunity for
public comment when selecting the ERO or approving a Regional Entity
delegation agreement and has written the Final Rule accordingly. This
will allow interested persons an opportunity to voice their concerns
and will assist the Commission in making an informed decision with
respect to ERO certification and the delegation of ERO responsibilities
to a Regional Entity. Accordingly, the Final Rule modifies the proposed
regulations to provide for notice and an opportunity for comment
selecting the ERO or approving a Regional Entity delegation agreement.
d. Non-statutory Criteria
    160. Some commenters recommend the inclusion of other certification
criteria, in addition to those set forth in the NOPR. The bulk of the
commenters asking that the Commission address non-statutory criteria
request that the Commission address the issue of membership.
i. Membership
    161. The statute neither requires nor prohibits an ERO structure
that allows persons to have membership in the ERO. Nor did the NOPR
discuss whether the ERO should allow membership. Further, the NOPR
asked for comment on whether membership in the ERO or a Regional Entity
should be a condition for participation in either the ERO's Reliability
Standard development process or that of a Regional Entity.\31\ Numerous
commenters discuss their concerns regarding the responsibilities and
rights of any members, the openness of membership, and the level of
membership fees.
---------------------------------------------------------------------------

    \31\ NOPR at P 56.
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(a) Open Membership
    162. A few commenters, such as EPSA, urge the Commission to
establish membership principles or require that the ERO be ANSI
accredited. Numerous commenters insist that, if the ERO has members,
that membership policies should allow for open membership so that
limited membership does not become a barrier to participation in the
ERO.\32\ NRECA, for instance, notes that, early on, it had joined the
broad coalition of industry participants to support EPAct based on an
agreement that mandatory Reliability Standards should be drafted and
enforced by a self-regulatory industry organization that would have
access to the engineering expertise of all the stakeholders. ELCON
asserts that the ERO should have an open door policy and, if a
membership requirement is allowed, anyone wishing to be a member of the
ERO should be allowed to become a member without any explicit or
implied barriers to membership. NASUCA submits that consumer
representatives should be entitled to full membership and voting
rights. Ameren suggests that members should not be subject to any
obligations

that place burdens on members' resources, such as mandatory
participation in reliability audits.
---------------------------------------------------------------------------

    \32\ See, e.g., ELCON, EPSA, NASUCA and NRECA.
---------------------------------------------------------------------------

    163. APPA states that membership rights should be limited to
participation in the development of internal ERO Rules and voting to
select or approve slates of nominees to the ERO board.\33\
---------------------------------------------------------------------------

    \33\ See also EPSA and MRO.
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    164. Most commenters made similar comments regarding the openness
of Regional Entity membership. FRCC, however, asserts that, because
Commission jurisdiction over Regional Entities is limited to their
delegated authorities and functions, membership or other participation
policies of Regional Entities are not related to delegated authorities
and, thus, not subject to Commission jurisdiction.
(b) Membership Fees
    165. Many commenters either oppose membership fees or recommend
limiting them to nominal amounts, should the ERO allow membership. For
example, EPSA contends that membership fees for joining or leaving a
Regional Entity must not become a barrier to entry or exit. APPA
contends that membership fees tend to discourage broad participation by
Bulk-Power System users, especially the smaller entities, while
generally raising minimal amounts of revenue and suggests that annual
fees should be no more than $1,000 per year per organization. ELCON
contends that charging end users additional fees or dues as a condition
to membership in the ERO is discriminatory and contrary to the
statutory mandate of equitable allocation of reasonable dues, fees and
charges. It suggests that the Final Rule provide that fees must be non-
discriminatory and not duplicate charges that end users are already
assessed. Similarly, NASUCA advocates that consumers should not have to
pay for the ERO twice--through rates and then again through membership
fees or dues.
(c) Membership as a Requirement To Participate in the Reliability
Standard Development Process
    166. Many commenters recommend that, assuming the ERO establishes a
structure that allows for membership, membership should not be a
requirement to participate in the Reliability Standard development
process.\34\ For example, National Grid comments that membership must
be open to satisfy the statutory requirement that the Reliability
Standard development process allow for ``public comment, due process,
openness and balance of interests.''
---------------------------------------------------------------------------

    \34\ See, e.g., NRECA, NERC, NE Pool Participants, Progress
Energy, AEP, EEI, South Carolina E&G, SERC, TVA, Ontario IESO and
Hydro-Qu[eacute]bec.
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    167. Alcoa suggests that any entity that believes that its
interests would be affected by a Reliability Standard should be allowed
to participate. Several commenters assert that a membership requirement
would be inconsistent with ANSI accreditation of the process.\35\ PSEG
Companies notes that ANSI processes have long been recognized as best
for meeting the requirements of OMB Circular A-119, which sets forth
the requirements for federal agencies to utilize consensus standards
developed by industry stakeholders. The North Carolina Commission
points out that, as a state commission, it could not become an ERO
member.
---------------------------------------------------------------------------

    \35\ See, e.g., AEP, NRECA and South Carolina E&G.
---------------------------------------------------------------------------

    168. In contrast, Ameren and International Transmission comment
that membership in the ERO should be a requirement of participation in
the Reliability Standard development process. International
Transmission suggests that the membership requirement should be coupled
with fair and equitable membership Rules so that all entities should
have an equitable influence on the Reliability Standard development
process. New York Companies assert that ERO members should be the
primary participants in developing a Reliability Standard, but that the
process should be transparent so that all interested parties are aware
of the proposed Reliability Standard under development, either directly
or through a Regional Advisory Body.
    169. Other commenters suggest that, while membership in the ERO
should not be a condition for participation in Reliability Standard
development, registered membership should be a necessary condition for
the right to vote on a proposed Reliability Standard.\36\ SMUD adds
that members would benefit from advice offered by non-members
participating in Reliability Standard development. SoCalEd states that
only those entities directly and materially affected by the reliability
of the Bulk-Power System should be allowed to vote on a Reliability
Standard. Those who are not affected by a Reliability Standard should
not be able to jeopardize the reliability of the system.
---------------------------------------------------------------------------

    \36\ See, e.g., EEI, SMUD, American Transmission, Kansas City
P&L, Southern and Xcel Energy.
---------------------------------------------------------------------------

Commission Conclusion

    170. The Commission will neither require nor preclude a particular
membership structure. Rather, the ERO applicant should determine
whether membership is useful and appropriate in fulfilling its roles
under EPAct and, if so, should submit any ERO Rules on membership to
the Commission as part of its ERO application. If the ERO decides to
create a membership structure, membership must be open to allow full
and fair participation of all interested stakeholders through their
representatives. Open membership is consistent with the statutory
requirement that the ERO establish Rules that assure fair stakeholder
representation in the selection of board members and balanced
decisionmaking in any ERO committee or subordinate organizational
structure.\37\
---------------------------------------------------------------------------

    \37\ See section 215(c)(2)(C) of the FPA.
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    171. Moreover, we conclude that, if the ERO decides to establish a
membership structure, the ERO may charge only a nominal fee as a
condition of membership. First, the Commission is not persuaded that
membership fees, nominal or otherwise, are necessary given that the
Final Rule provides for mandatory funding of the ERO and those
functions that it may delegate to a Regional Entity. Also, we share the
concern of commenters that a membership fee should not become a
limitation on participation in the ERO or a Regional Entity. To ensure
that all interested stakeholders have an opportunity to participate, if
the ERO chooses to charge a nominal membership fee, the ERO should have
a Rule providing that it may waive the fee for good cause shown.
    172. With regard to Reliability Standard development, we agree with
the majority of commenters that principles of due process and openness,
as set forth in section 215(c)(2)(D) of the FPA, dictate that
membership must not be a condition for participating in Reliability
Standard development, or for voting on the approval of a Reliability
Standard. Section 215(c)(2)(D) requires that the ERO have Rules that
provide for public comment and a balance of interests in developing a
Reliability Standard, and membership should not thwart this
requirement. Moreover, like SMUD, we believe that involving a wide
range of viewpoints from interested parties benefits the Reliability
Standard development process.
    173. Finally, we find that the above discussion on ERO membership
applies equally to membership in a Regional Entity. Each Regional
Entity may determine whether membership is useful and appropriate in
fulfilling its roles under EPAct and create Regional Entity Rules on
membership. We reject

FRCC's argument that, because Commission jurisdiction over a Regional
Entity is limited to its delegated authorities, membership policies of
a Regional Entity are not subject to Commission jurisdiction. As
discussed above, membership provisions can affect whether a Regional
Entity meets statutory criteria, including openness, due process,
balanced decisionmaking and equitable allocation of reasonable dues and
fees. The Commission intends to review a proposed Regional Entity Rule
on membership and determine whether it is consistent with statutory
criteria, including those described above.
ii. Additional Non-Statutory Criteria
    174. A number of commenters express concern regarding the technical
and financial expertise of the ERO. For example, PG&E suggests that the
Commission's regulations should ensure that the ERO will be
knowledgeable to further ensure impartial and even-handed application
of the Reliability Standards. To function effectively, the ERO must
have a thorough understanding of the technical aspects of the industry,
its financial requirements, and its applicable legal regulations, as
well as of specific regional concerns. NiSource asks the Commission to
clarify how it will assess an ERO or Regional Entity applicant's
technical expertise when determining whether it has the ability to
develop and enforce a Reliability Standard.

Commission Conclusion

    175. It is critical that the ERO and each Regional Entity have
adequate technical expertise. Pursuant to section 215(c)(1) of the FPA,
an ERO applicant or a Regional Entity candidate must demonstrate in its
application or request for approval of its delegation agreement that it
has the ability to develop and enforce Reliability Standards for the
Bulk-Power System. Accordingly, an ERO applicant or Regional Entity
candidate must present evidence that it has, or has demonstrated access
to, the necessary high level of technical expertise needed for carrying
out these two functions. The applicant or candidate must present
documented evidence that it has on staff, or has demonstrated
experience in acquiring on a volunteer or other basis, the numbers of
persons with the level of technical experience necessary to carry out
the responsibilities of the ERO or a Regional Entity. The applicant or
candidate must explain how it proposes to ensure appropriate kinds of
technical, financial, and other expertise in the selection of board
members, the recruitment of its staff, and the staffing of its
committees and subordinate organizational structures. The ERO applicant
must explain the extent to which it proposes to rely on the
establishment of, and delegation to, Regional Entities to provide the
numbers and levels of technical experts for carrying out its
responsibilities.
    176. Regarding the development of Reliability Standards, the ERO
applicant or Regional Entity candidate must explain how it proposes to
ensure the participation of technical experts in the initial
development of a draft Reliability Standard for ERO stakeholder
consideration. It must explain how the technical merit of a proposed
Reliability Standard would be maintained in any balloting or board
process for approval of a draft Reliability Standard for proposal to
the Commission.