criteria of ``perfect'' competition. Thus, any Reliability Standard
that reduces the number of buyers or sellers, creates barriers to entry
or exit, reduces the information available to the market, or increases
transaction costs should be deemed to harm competition. Such harm to
competition must be weighed against the reliability benefits--except
for discrimination which must not be balanced against other factors.
    367. Other commenters, such as Ameren, FRCC and MidAmerican, state
that the Commission should evaluate the effect of a proposed
Reliability Standard on competition on a case-by-case basis. Ameren
suggests that the Commission decide for each proposed Reliability
Standard whether it would effect competition in an unreasonable way.

    368. TAPS notes that competition takes place not only through
prices, but also through the quality of service. The Commission must
consider the competitive impact of a Reliability Standard in the
context of retail and wholesale markets, as well as in the context of
other jurisdictional tariffs, rate schedules, rules and policies, and
business practices.
    369. Kansas City P&L states that Reliability Standards should be
based on the physical limitations and operational parameters of the
Bulk-Power System for reliable, stable operation. Rules, regulations
and policy that determine the market actions necessary to conduct
business, including promoting competition, should follow the framework
and structures created by the Reliability Standards, not vice-versa.
(c) Commission Weighing of Competitive Effects
    370. Commenters offer various prescriptions regarding how the
Commission should weigh competitive effects when reviewing a proposed
Reliability Standard. Ohio Commission and others emphasize that system
reliability is paramount and should not be compromised. International
Transmission comments that Reliability Standards are not a barrier to
competition but, rather, support competition since reliability is the
basis on which competitive markets are built. Thus, incidental effects
on competition cannot be allowed to overrule the need for strong
Reliability Standards.
    371. National Grid comments that the Commission's assessment of the
competitive effects of a proposed Reliability Standard should involve a
traditional balancing of various factors, and the Commission should
approve a proposed Reliability Standard that meets a reliability need
as long as it would not unduly harm competition.
    372. Old Dominion comments that the Commission should prefer
Reliability Standards that promote competition, while rejecting or
correcting Reliability Standards that harm competition. NRECA comments
that, rather than reject a proposed Reliability Standard out of concern
for the effect it may have on competition, it is more appropriate for
the Commission to change market rules under FPA section 206. It is
easier for entities to adapt to a new Reliability Standard than it is
for the Commission to compensate consumers for the enormous economic
disruption caused by a widespread outage on the Bulk-Power System.
    373. MISO comments that the Commission should ensure that
Reliability Standards are compatible with competitive energy markets.
However, SERC and TVA are concerned that reliability not be made
secondary to the promotion of competitive markets. SoCalEd and National
Grid similarly note that effects on competition in non-formal,
bilateral markets must be considered, and any evaluation of effects on
competition should not be limited to an assessment of organized
electricity markets under RTOs or ISOs.
    374. CenterPoint asserts that it is appropriate and in the public
interest for Reliability Standards to affect competition in certain
instances. It states that the Commission and the ERO cannot
unreasonably discriminate among competitors, but it is reasonable and
in the public interest, and consistent with the intent of EPAct, to
establish Reliability Standards that afford an advantage to competitors
that enhance the reliability of the grid over competitors that do not.
    375. NARUC and others note that NERC's existing standards
development process works to minimize the impact of Reliability
Standards on competition by working closely with NAESB, which
establishes business practice standards. Others, such as MidAmerican
and PSEG Companies, recommend that the Commission use the processes
developed jointly by NERC and NAESB as an appropriate indication of the
demarcation between the reliability and commercial aspects of the Bulk-
Power System.

Commission Conclusion

    376. While it is clear that reliability and competition may be
intrinsically linked at times, the Commission declines to adopt a
generic test to balance reliability and competition concerns in the
absence of specific facts. We will evaluate the effects of a proposed
Reliability Standard on competition on a case-by-case basis.
    377. Although comments on how to define competition have been
informative, we conclude that no such definition is necessary in the
Final Rule. No single definition appears sufficient to cover all the
relevant bases for evaluating a proposed Reliability Standard's effect
on competition.
    378. In approving a Reliability Standard, we will ensure that it
does not have the implicit effect of either favoring or thwarting
either bilateral or organized markets. At the same time, we will also
ensure that a proposed Reliability Standard does not unduly favor
either individual participants or certain classes of participants, as
required by the statute. Accordingly, we will balance any conflict
between a proposed Reliability Standard and competition on a case-by-
case basis.
c. Effective Date
    379. The proposed regulations provided that an approved Reliability
Standard or a modification to a Reliability Standard shall take effect
``as approved by the Commission.''
    380. MidAmerican asks that the Commission revise the provision to
state that a Reliability Standard shall take effect ``when approved by
the Commission.''

Commission Conclusion

    381. We decline to make the requested change because, in accepting
a Reliability Standard, the Commission may find it necessary to phase-
in certain requirements due to the costs and difficulties of
implementation, or because a sudden changeover could have a negative
impact on reliability. Therefore, we decline to change the Final Rule
from ``as'' to ``when.''
d. Remand of a Proposed Reliability Standard
    382. The FPA authorizes the Commission to remand a proposed
Reliability Standard to the ERO if it determines that it does not meet
the legal standard of review. The NOPR attempted to better define the
precise nature of this remand authority, as well as the requirements
for international coordination of remand, and for setting deadlines on
remand.
i. Remand
    383. Consistent with the statute, the NOPR proposed that the
Commission would remand to the ERO for further consideration a proposed
Reliability Standard or proposed modification to a Reliability Standard
that the Commission disapproves in whole or in part.

Comments

    384. NERC comments that, while it supports the proposed remand
provision, the Commission is not authorized to rewrite the rejected
Reliability Standard. Rather, the ERO should be able to apply its
technical expertise to all phases of the drafting of a proposed
Reliability Standard.
    385. IEEE recommends that, when remanding a proposed Reliability
Standard or a proposed modification to an existing Reliability
Standard, the Commission make clear any technical objections that it
has with the proposal so that its concerns may be properly addressed on
remand.
    386. South Carolina E&G and Southern ask the Commission to clarify

that the ERO, when deliberating on a remanded Reliability Standard,
must allow affected parties to fully participate through an ANSI-
certified stakeholder process.
    387. Old Dominion states that the Commission should not only be
able to remand a proposed Reliability Standard but also be allowed to
reject it. However, the Commission should only reject or remand a
proposed Reliability Standard if an interim Reliability Standard is in
place, or if the proposed Reliability Standard does not address a vital
reliability concern. It states that, where the Commission rejects or
remands a proposed Reliability Standard, it should do so with specific
direction for a revised or alternative Reliability Standard to be
proposed within a reasonable time.
    388. SERC, TVA, and Santee Cooper recommend that the Commission not
remand a Reliability Standard absent a clear showing of a failure of
the ERO's Reliability Standard approval process because a Reliability
Standard proposed by the ERO will have already been through due process
with open participation by all stakeholders.
    389. Hydro-Qu[eacute]bec comments that the Commission should remand
a Reliability Standard to the ERO only if the ERO is the only entity
permitted to propose a Reliability Standard to the Commission. However,
if a Regional Entity may submit a proposed Reliability Standard
directly to the Commission, the Commission should remand the proposal
to the Regional Entity.

Commission Conclusion

    390. The Commission adopts the substance of the NOPR's provisions
on remand of a proposed Reliability Standard. We will either accept or
remand a proposed Reliability Standard. If we remand a proposed
Reliability Standard or a proposed modification to a Reliability
Standard, we intend to specify our concerns so that the ERO can address
them. We disagree with SERC and others that the Commission should not
remand a proposed Reliability Standard or a proposed modification to a
Reliability Standard absent a clear showing of a failure of the ERO's
Reliability Standard development process. Because the Commission has a
responsibility to ensure that a proposed Reliability Standard or
modification to a Reliability Standard is just, reasonable, not unduly
discriminatory or preferential, and in the public interest--as well as
assess its effects on competition--we will not so limit our ability to
remand.
    391. Old Dominion does not explain the meaning of a ``rejected''
Reliability Standard or the difference between remand and rejection. We
assume Old Dominion refers to a proposed Reliability Standard that we
find to be wholly inappropriate. In the unlikely event of such a
rejection, the Commission would provide any specific direction
necessary to ensure that reliability is protected.
    392. Hydro-Qu[eacute]bec's concern is moot because a Regional
Entity cannot submit a Reliability Standard directly to the Commission.
ii. International Coordination of Remands
    393. The NOPR asked for comment on whether the Final Rule should
specify a process for notifying all relevant regulatory authorities
when a proposed Reliability Standard is remanded to ensure that all
concerns of such regulatory authorities are addressed prior to
resubmission of the Reliability Standard.\97\ The NOPR also asked
commenters to discuss the implications of the remand by an authority in
Canada of a Reliability Standard that has been approved by the
Commission.
---------------------------------------------------------------------------

    \97\ NOPR at P 57.
---------------------------------------------------------------------------

Comments

    394. All commenters agree that international coordination on remand
of a Reliability Standard is extremely important. They differ on
whether the Commission should address such coordination in the Final
Rule or whether this issue is better addressed at the time the ERO
files its application. As a third option, some Canadian commenters
suggest that coordination between Canadian and United States
jurisdictions is more properly the subject of an international
agreement directly between the respective regulatory authorities.
Further, commenters differ on whether an approved Reliability Standard
should go into effect if an authority in another country remands the
Reliability Standard.
    395. BCTC, SoCalEd, and PSEG Companies believe that the Final Rule
should require the ERO to notify all relevant regulatory authorities
when a proposed Reliability Standard has been remanded by any one of
them. Alcoa states that the Commission should specify a process for the
resolution of conflicts between the Commission and Canadian
authorities. Hydro-Qu[eacute]bec recommends that the Final Rule
establish only general principles for coordination because overly
prescriptive directives could jeopardize the ERO's ability to harmonize
Reliability Standards across international borders.
    396. In contrast, EEI and NERC state that the Final Rule should not
specify a process by which the ERO must coordinate among the relevant
regulatory authorities but, rather, an ERO applicant should propose an
approach in its ERO application. APPA states that the ERO should be
free to negotiate procedures and substantive rules with Canadian and
Mexican authorities based on their own statutory requirements. Ontario
IESO states that international coordination is best addressed by an
agreement between authorities.
    397. Some commenters express views on whether a Reliability
Standard approved by the Commission but remanded by Canadian
authorities should be enforceable in the United States. EEI states
that, in such a scenario, the Commission should ensure that there is no
gap in its application within the United States while Canadian concerns
are being addressed by the ERO. Alberta and the ISO/RTO Council comment
that a remand in one jurisdiction should not necessarily negate
enforcement of a Reliability Standard in another. However, the remand
of a proposed Reliability Standard by the Commission will require the
ERO to revisit it and address the concern of all relevant authorities.
Similarly, Ameren and FRCC do not believe that a Canadian remand would
bind the Commission.
    398. National Grid and MRO take the opposite view and state that a
proposed Reliability Standard should not become effective until all
affected countries have approved it. National Grid comments that,
without explicit coordination among regulatory officials of all
affected countries, a proposed Reliability Standard could be accepted
in one jurisdiction but remanded in another, which could lead to the
untenable situation of having different Reliability Standards apply to
different parts of the same grid. The interconnected grid cannot be
operated or used in accordance with multiple, inconsistent Reliability
Standards.
    399. Commenters support international coordination not only at the
remand stage, but also stress that consultation among authorities in
the Reliability Standard development process will reduce the likelihood
of a remand in one country but not the other.\98\ The ISO/RTO Council
comments that preventing conflicts

between jurisdictions should be an integral, high-priority element of
the procedures and stakeholder processes employed by the ERO and Cross-
Border Regional Entities in developing a proposed Reliability Standard.
When first evaluating a proposed Reliability Standard, the Commission
should consider whether the ERO has determined that all other affected
jurisdictions can implement the Reliability Standard. Hydro-
Qu[eacute]bec emphasizes the importance of integrating Canadian
perspectives into the ERO's Reliability Standard development process.
---------------------------------------------------------------------------

    \98\ See, e.g., BCTC, CEA, ISO/RTO Council, MRO and National
Grid.
---------------------------------------------------------------------------

Commission Conclusion

    400. The ERO will be an international organization that must seek
recognition in Canada and Mexico. Thus, we agree with commenters that
international coordination is important to the Reliable Operation of
the Bulk-Power System. Therefore, we direct the ERO applicant to
propose in its certification application an approach for international
coordination regarding the remand, as well as the initial development,
of a Reliability Standard that will apply in each relevant country.
iii. Deadline for Submitting a Revised Proposal for a Reliability
Standard in Response to a Remand
    401. The NOPR proposed that the Commission, when remanding a
proposed Reliability Standard, may state a deadline by which the ERO
must resubmit the proposed Reliability Standard with revisions that
address the reasons for the remand.\99\ The NOPR stated that the
failure to meet such a deadline would constitute a violation of the
FPA.
---------------------------------------------------------------------------

    \99\ NOPR at P 53.
---------------------------------------------------------------------------

Comments

    402. While a few commenters agree that the Commission is authorized
to set a deadline, most caution that strict enforcement of deadlines
either will interfere with international coordination or violate the
requirement for openness and balance of interests in the ERO's
Reliability Standard development process.
    403. NARUC and the Ohio Commission comment that, while imposing a
deadline for resubmitting a remanded Reliability Standard may be within
the scope of the Commission's authority, the Commission should exercise
caution in using that authority so as not to interfere with the ERO's
Reliability Standard development process.\100\ NARUC states that the
integrity of the existing process rests on balanced stakeholder input,
which in turn depends on notice and opportunity for comment.
---------------------------------------------------------------------------

    \100\ See also APPA, MidAmerican, South Carolina E&G and Xcel
Energy.
---------------------------------------------------------------------------

    404. APPA comments that it may be appropriate for the Commission to
set a deadline for resubmission of a proposed Reliability Standard but
expresses concern that the deadline must be reasonable. South Carolina
E&G recommends that the Commission should allow a minimum of six
months. NiSource urges flexibility in setting deadlines.
    405. CEA and Alberta comment that the remand provision is a key
factor in allowing the ERO to function on an international basis, and
imposing a deadline for consideration of a remanded Reliability
Standard could compromise the ERO's ability to coordinate with the
various jurisdictional authorities. By allowing the industry-based
organization to work with its regulatory agencies, the remand process
is intended to ensure that no one regulatory body can impose a
Reliability Standard outside of its jurisdiction.
    406. MRO contends that a failure by the ERO or a Regional Entity to
meet a Commission deadline should not be considered a violation of the
FPA. MRO believes that the Commission's authorities to decertify the
ERO and revoke a Regional Entity's delegation agreement are more
appropriate for ensuring that Commission-imposed deadlines are met.
Also, because the ERO and Regional Entities will most likely be
organized as nonprofit organizations, monetary penalties will have to
be passed along to those entities subject to the Reliability Standards.
    407. MidAmerican states that the Commission should not impose a
penalty for failure to meet a deadline if the ERO demonstrates good
faith progress and provides a reasonable schedule for completion.

Commission Conclusion

    408. Timely attention to the reliability needs of the Bulk-Power
System requires that the Commission have appropriate procedural tools
to guide the ERO through a timely Reliability Standard remand process.
Such procedural tools, while not specified in detail in new section 215
of the FPA, are both necessary and fully consistent with the
authorities expressly granted to the Commission by statute. The Final
Rule contains Commission authority to set a deadline on remand at
section 39.5(g). Any necessary deadline will be established in a
reasonable manner taking into consideration the complexity of the
issue.
    409. The Commission recognizes the benefit of coordination with
relevant Canadian and Mexican authorities on remand, including
consideration of a deadline. Accordingly, if we remand an ERO-proposed
Reliability Standard, we will consider the time needed for Canadian and
Mexican authorities to act also.
    410. We appreciate APPA's comment about the reasonableness of a
deadline; we will consider the time needed for a proposed revision to
go through the ERO's process as well as any need to have an enforceable
Reliability Standard in a timely manner. The ERO applicant should
specifically propose an accelerated process for addressing a
Reliability Standard that has been remanded with a specific
deadline.\101\
---------------------------------------------------------------------------

    \101\ For example, NERC's existing ANSI-certified process
incorporates an ``urgent action'' procedure, which allows an interim
reliability standard to be developed more quickly.
---------------------------------------------------------------------------

    411. We disagree with MRO and reaffirm our interpretation that a
failure to meet a Commission-imposed deadline would be considered a
violation of the FPA. The ability to set a deadline derives from the
Commission's authority to remand a proposed Reliability Standard
together with our authority under section 215(e)(5) to take such action
as is necessary or appropriate against the ERO or a Regional Entity to
ensure compliance with any Commission order affecting the ERO or a
Regional Entity.
    412. As to the recommendation of MidAmerican that the Commission
defer imposing a penalty while the ERO or Regional Entity is making a
good-faith effort, we repeat that we will be flexible and reasonable in
setting deadlines. However, should we determine that a deadline is
necessary and the ERO fails to comply with the deadline we have
established, we reserve the authority to impose a penalty according to
the FPA.
e. Commission-Initiated Actions on a Reliability Standard
i. Commission Directive That the ERO Address a Specific Issue
    413. The NOPR proposed that the Commission may, upon its own motion
or a complaint, order the ERO to submit a proposed Reliability Standard
or a proposed modification to a Reliability Standard that addresses a
specific matter if the Commission considers such a new or modified
Reliability

Standard appropriate to carry out section 215 of the FPA.

Comments

    414. EEI comments that, while the Commission may determine that a
particular reliability issue should be addressed by the development of
a Reliability Standard, it should use the ERO's Reliability Standard
development process to implement its determination.
    415. Santa Clara recommends that the Final Rule expressly include a
clear, fair and meaningful petition process that would enable any
interested person to petition the Commission or the ERO to add or
revise a Reliability Standard. The ERO and the Commission would retain
the discretion whether or not to accept an outside party's request for
the adoption of a new or revised Reliability Standard.

Commission Conclusion

    416. Section 39.5(f) of the Final Rule accommodates these two
comments. First, the Commission's authority to order the ERO to address
a particular reliability topic is not in conflict with other provisions
of the Final Rule that assign the responsibility for developing a
proposed Reliability Standard to the ERO.
    417. Second, section 39.5(f) of the Final Rule authorizes the
Commission to act on its own motion or upon ``a complaint.'' The
Commission may direct the ERO to propose a new Reliability Standard in
response to a complaint. The ERO, as the entity responsible for the
development of Reliability Standards, should normally be approached
first with a request to initiate a new Reliability Standard to address
a particular issue. As we discuss above, the ERO's Reliability Standard
development process must be open to public participation.
ii. Review of an Approved Reliability Standard
    418. The NOPR proposed that the Commission, upon its own motion or
complaint, may review a previously-approved Reliability Standard and
order the ERO to modify it if it no longer satisfies the statutory
standard of review.\102\
---------------------------------------------------------------------------

    \102\ While the proposed regulation allows a remand to the ERO,
the NOPR, at P 52, states that the Commission may remand the
Reliability Standard to the ERO or the relevant Regional Entity.
---------------------------------------------------------------------------

Comments

    419. NERC comments that, while the NOPR would allow the Commission
to direct either the ERO or a Regional Entity to modify a Reliability
Standard, the Commission should direct only the ERO because the ERO is
the only entity that directly submits a proposed Reliability Standard
to the Commission for approval. Further, EPAct does not provide for a
request for modification to a Regional Entity.
    420. APPA comments that the Commission must send a previously-
approved Reliability Standard to the ERO and the Commission cannot
change the Reliability Standard. It states that, in reviewing a
previously-approved Reliability Standard, the burden of proof must rest
on the party seeking to change or overturn the Reliability Standard.
Also, after a previously-approved Reliability Standard is sent for
modification, it should remain enforceable until the replacement is
approved and in effect--unless the Commission determines that Bulk-
Power System reliability is better served by not having and enforcing
the Reliability Standard.
    421. Similarly, Xcel Energy recommends that when ordering a
modification of a previously-approved Reliability Standard, to avoid a
period with no Reliability Standard in place, the Commission should
grant a grace period for the ERO to propose a modification to the
Reliability Standard. During that period, the original unmodified
Reliability Standard would be in effect.
    422. LADWP states that the Commission should order the ERO to
submit a modification only after notice and opportunity for hearing,
and after having found that the Reliability Standard is unjust,
unreasonable or unduly discriminatory and not in the public interest.

Commission Conclusion

    423. The Commission adopts the proposal that the Commission may
review a previously-approved Reliability Standard and order the ERO to
modify it if it no longer satisfies the statutory standard of review as
proposed. We agree with NERC that the Commission should order only the
ERO to modify a Reliability Standard because the ERO is the only entity
that may directly submit a proposed Reliability Standard to the
Commission for approval. There is no change needed in the text of the
proposed regulations because they provided that the Commission may
order only the ERO to modify a Reliability Standard.
    424. We agree with APPA that the Commission cannot change the
Reliability Standard and must send the Reliability Standard to the ERO
for modification.
    425. Regarding the comments of APPA and Xcel Energy that the
existing Reliability Standard should remain enforceable until a
replacement is approved, we agree. However, in the rare case of a
Reliability Standard that is causing harm to the Bulk-Power System we
expect all interested persons to cooperate in a process to correct the
approved Reliability Standard as soon as possible.
    426. We reject the proposition of LADWP that special procedures
must apply to the action of the Commission on its own motion.
iii. Commission Authority To Void a Reliability Standard
    427. The Commission asked for comments on whether it has authority
to void a previously-approved Reliability Standard and, if so, whether
it is beneficial to have such a provision in the Commission's
regulations.\103\
---------------------------------------------------------------------------

    \103\ NOPR at P 54.
---------------------------------------------------------------------------

Comments

    428. Most commenters caution the Commission against claiming the
authority to void a previously approved Reliability Standard, claiming
that: (1) It is not permitted by section 215 of the FPA; (2) it is
antithetical to the ANSI stakeholder process; and (3) the relationship
between individual Reliability Standards is complex so that voiding one
Reliability Standard could result in unwanted gaps or conflicts with
the remaining Reliability Standards. Other commenters favor the
proposal and argue that the authority to void a Reliability Standard is
a natural extension of the authorities defined in section 215 of the
FPA.
    429. NARUC and LADWP do not believe that section 215 of the FPA
grants the Commission authority to void a Reliability Standard, in
whole or in part, whether new or previously accepted.\104\ Section 215
of the FPA authorizes the Commission to approve or remand a proposed
Reliability Standard. If the Commission takes issue with an existing
approved Reliability Standard, it should direct the ERO to modify the
Reliability Standard through its Reliability Standard development
process, as provided by statute. Voiding a Reliability Standard would
extend beyond the Commission's statutory authority and would be
contrary to the approach in section 215. APPA also argues that the
Commission lacks the authority to void a previously approved
Reliability Standard, with the possible exception of those found to
have a

substantial negative impact on competition.
---------------------------------------------------------------------------

    \104\ See also FRCC, MRO, NRECA, Ohio Commission and Southern
Companies.
---------------------------------------------------------------------------

    430. Progress Energy and others caution the Commission against
voiding a previously approved Reliability Standard that has been
developed through an ANSI-approved process, which is open, balanced,
and adheres to due process principles.\105\ The Commission should not
void a Reliability Standard simply because it does not measure up to
the Commission's technical or administrative desires. Instead, the
Commission should direct the ERO to modify the Reliability Standard
through its Reliability Standard development process.
---------------------------------------------------------------------------

    \105\ See also MidAmerican, Santee Cooper, SERC, TVA and South
Carolina E&G.
---------------------------------------------------------------------------

    431. CEA, NARUC and the New York Commission claim that the
relationships and dependencies between Reliability Standards are
complex. If the Commission were to void a previously accepted
Reliability Standard, the result might interfere with the
implementation or enforcement of other Reliability Standards. All
individual Reliability Standards are parts of a complex whole designed
to maximize overall reliability.
    432. A number of commenters claim that voiding a Reliability
Standard would leave a gap in an area of reliability where the ERO or
Regional Entity determined that a Reliability Standard is
required.\106\ Some add that such a gap could result in operational
conflicts between international jurisdictions. International
Transmission adds that a change to the Reliability Standards may affect
tariffs and contracts. They recommend, as an appropriate alternative,
that the Commission remand an approved Reliability Standard for further
development in an ANSI-accredited process. Ameren adds that changing a
previously approved Reliability Standard can have serious competitive
implications and should only be done for compelling reasons. Hydro-
Qu[eacute]bec recommends that the authority to void an approved
Reliability Standard be restricted to exceptional situations because
the ERO will have to fulfill both Canadian and American mandates.
---------------------------------------------------------------------------

    \106\ See, e.g., BCTC, NERC, Ontario IESO, TAPS and South
Carolina E&G.
---------------------------------------------------------------------------

    433. Other commenters believe that the Commission has the legal
authority to void a Reliability Standard.\107\ Ameren and SoCalEd
believe that the Commission, based on its authority to direct the ERO
to modify a Reliability Standard, also has the authority to void an
approved Reliability Standard. SoCalEd states that the Commission
should set guidelines in its regulations and establish a process for
voiding a Reliability Standard.
---------------------------------------------------------------------------

    \107\ See, e.g., Ameren, EPSA, ERCOT, Old Dominion, PacifiCorp
and SoCalEd.
---------------------------------------------------------------------------

    434. NiSource states that it is unclear whether the Commission may
void a previously-approved Reliability Standard based on a finding that
it no longer meets the legal standard of review. When tariff provisions
are found to be unjust or unreasonable, they are generally allowed to
remain in effect pending the filing and approval of revised tariff
provisions. While NiSource agrees with the Commission's unstated
concern that unjust and unreasonable standards should be removed, when
and how that happens requires a careful balancing. The Commission
should analyze whether the Reliability Standard is so unjust,
unreasonable or discriminatory that the Bulk-Power System is better off
without it or whether system reliability requires that the Reliability
Standard remain in effect pending its replacement. NiSource proposes
that if a Reliability Standard is found to be unjust, unreasonable or
discriminatory but remains in place pending its replacement, then no
penalties should be imposed for violations of that Reliability Standard
during that period.

Commission Conclusion

    435. The Commission does not adopt a provision in the regulations
for the Commission to void an approved Reliability Standard. If in the
future, a situation arises in which it may be appropriate to remove
immediately an existing Reliability Standard that is determined to do
more harm than good, we may consider at that time whether to void a
previously-approved Reliability Standard.
6. Conflict of a Reliability Standard With a Commission Order--Section
39.6
    436. Section 215(d)(6) of the FPA requires that the Commission's
Final Rule 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.'' Consistent with this requirement, the Commission
proposed regulations which provided such processes, such as for a
Transmission Organization expeditiously to notify the Commission, the
ERO and the relevant Regional Entity of a conflict between a
Reliability Standard and the Transmission Organization's Commission-
approved function, rule, order, tariff, rate schedule, or
agreement.\108\ The proposed section sets a 60-day deadline, subject to
Commission waiver, for the Commission to act on a notification of a
potential conflict.
---------------------------------------------------------------------------

    \108\ NOPR at P 87-90.
---------------------------------------------------------------------------

    437. In the NOPR, the Commission asked for examples of situations
or areas of concern in which commenters believe that a conflict between
a Reliability Standard and a Transmission Organization function, rule,
order, tariff, rate schedule, or agreement exists or may arise.\109\
---------------------------------------------------------------------------

    \109\ Id. at P 91.
---------------------------------------------------------------------------

Comments

    438. The ISO/RTO Council and NERC believe that potential conflicts
could be identified and resolved in an open Reliability Standard
development process. Similarly, EEI suggests that the Commission
require a Transmission Organization to raise any concern regarding a
potential conflict during the Reliability Standard development process
as a condition precedent to a Transmission Organization invoking the
Commission's proposed process for resolving Reliability Standard-
related conflicts.
    439. American Transmission asserts that there may be situations
where a new or modified Reliability Standard affects the economic terms
of a tariff. It suggests that, in such a situation, the Commission
would either have to change the economic terms of the tariff or change
the Reliability Standard's application to ensure a just and reasonable,
and nondiscriminatory result. In contrast, International Transmission
asserts that, because the Commission's first concern should be
reliability, when a Reliability Standard is in conflict with a tariff,
the tariff should be revised, not the Reliability Standard.
    440. FirstEnergy argues that the proposed conflict resolution
process should extend to a pre-Order No. 888 grandfathered agreement of
a member of an RTO. It contends that the phrase ``applicable to any
transmission organization,'' as used in section 215(d)(6) of the FPA,
should be interpreted to include any requirement that affects the
transmission or generation facilities of an entity that is a member of
the transmission organization, regardless whether the Transmission
Organization is a party to the agreement.
    441. Commenters ask the Commission to include procedures for other
circumstances that may arise. Oklahoma Commission asks the Commission
to establish a process for responding to an

emergency situation in which a lapse in Bulk-Power System reliability
results from an entity having to deal with conflicting authorities.
International Transmission suggests that the Commission establish an
expedited process for tariff changes required because of a conflict
with a Reliability Standard. Furthermore, it states that a tariff
revision that is required due to a conflict with a Reliability Standard
should not open the remainder of the entity's tariff to review.
FirstEnergy suggests that the Commission and the ERO provide a process
for resolving a conflict between a Reliability Standard and any other
regulatory or contractual obligation of a Bulk-Power System user.
    442. The Texas Commission supports the proposed process to address
a potential conflict between a Reliability Standard and a Commission-
approved tariff. It contends, however, that ERCOT would not be subject
to the proposed provision since ERCOT's market rules are not approved
by the Commission.
    443. In response to the Commission's inquiry, a few commenters
offer examples of conflicts. NERC states that, aside from specific
variances that are included in NERC's current version ``0'' reliability
standards, it is not aware of any conflict between its current
standards and a Transmission Organization tariff. The ISO/RTO Council
comments that, in the past, conflicts have arisen between market rules
and NERC's reliability requirements for transmission loading relief
procedures, tagging rules, and the requirement for reliability-based
ancillary services such as voltage support.

Commission Conclusion

    444. As discussed below, the Final Rule adopts the substance of the
proposed regulations on conflicts with a Reliability Standard as
section 39.6. We agree with commenters that a potential conflict
between a Reliability Standard under development and a Transmission
Organization function, rule, order, tariff, rate schedule, or agreement
accepted, approved, or ordered by the Commission should be identified
and addressed during the ERO's Reliability Standard development
process. Although we encourage parties to follow EEI's proposal that a
Transmission Organization should have to raise a concern regarding a
potential conflict during the Reliability Standard development process,
we will not require it in this Final Rule. Such a condition would
preclude a Transmission Organization from invoking the procedure if a
potential conflict is first recognized after a Reliability Standard has
been approved. EEI's proposal would also preclude a Transmission
Organization from notifying the Commission pursuant to section 39.6 in
a situation where the Transmission Organization finds that a new or
modified tariff potentially conflicts with an existing Reliability
Standard.
    445. While we agree with International Transmission regarding the
paramount importance of maintaining Bulk-Power System reliability, we
do not agree that every conflict between a Reliability Standard and a
Transmission Organization tariff must be resolved by changing the
tariff. A modification of a Reliability Standard to resolve a conflict
may be accomplished without necessarily compromising Bulk-Power System
reliability. We will decide on a case-by-case basis the appropriate
manner of resolving such a conflict.
    446. With regard to FirstEnergy's comment, we reserve judgment on
whether the process prescribed in section 39.6 should extend to an RTO
member's pre-Order No. 888 grandfathered agreements. The Commission
understands the phrase ``applicable to any transmission organization,''
as used in section 215(d)(6) of the FPA, to limit the provision to a
Transmission Organization function, rule, order, tariff, rate schedule,
or agreement, thus not applying to the resolution of a potential
conflict with agreements to which the Transmission Organization is not
a party or other non-Transmission Organization agreements or tariffs
via the process prescribed in section 39.6. The Commission recognizes
that pre-Order No. 888 grandfathered agreements can be complex, and for
that reason, we are not making a generic determination at this time. We
will, however, consider on a case-by-case basis whether the conflict
resolution process, as prescribed in section 39.6, should be extended
to an RTO's member's pre-Order No. 888 grandfathered agreements when an
actual conflict is identified.
    447. With regard to the Oklahoma Commission's and International
Transmission's comments, we do not establish here a separate generic
procedure to expedite resolving a potential conflict between a
Reliability Standard and a Transmission Organization tariff. A
Transmission Organization may request expedited treatment of a filing,
however, and the Commission will consider such a request on a case-by-
case basis. We agree with International Transmission that a proceeding
to resolve a potential conflict should not normally address tariff
issues unrelated to the potential conflict. However, the Commission
recognizes that it is possible that a reliability-related change to a
Transmission Organization's tariff may upset a negotiated balance
within the tariff. In those instances, the Commission may allow tariff
issues unrelated to the potential conflict to be resolved.\110\
---------------------------------------------------------------------------

    \110\ See also Expedited Tariff Revisions for Regional
Transmission Organizations and Independent System Operators, 111
FERC ] 61,009 (2005).
---------------------------------------------------------------------------

    448. With regard to the Texas Commission's comments, we agree that
section 39.6 applies only to a potential conflict between a Reliability
Standard and a Commission-approved tariff, precluding its use for the
resolution of a potential conflict involving tariffs, market rules,
etc. that are not subject to Commission approval.\111\
---------------------------------------------------------------------------

    \111\ See, infra, section IV.B.12, State Actions.
---------------------------------------------------------------------------

    449. With regard to FirstEnergy's suggestion that the Commission
and the ERO provide a process for resolving a conflict between a
Reliability Standard and any other regulatory or contractual obligation
of a Bulk-Power System user, such a process is outside the scope of
this proceeding. However, this decision does not preclude a
Transmission Organization from identifying a potential conflict during
the Reliability Standard development process or at other times and
taking steps to seek resolution of the matter before the appropriate
regulatory authority. Nor does this prejudice the rights under other
provisions of the FPA of any user, owner or operator of the Bulk-Power
System to notify the Commission about a conflict between a Reliability
Standard and any function, rule, order, tariff, rate schedule, or
agreement ordered or approved by the Commission.
7. Enforcement of Reliability Standards--Section 39.7
    450. The proposed section in the NOPR on Enforcement of Reliability
Standards addressed compliance and enforcement issues.\112\ The
proposal would implement 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 an opportunity for Commission
review. The term ``penalty'' as used throughout the NOPR included both
monetary and non-monetary penalties, unless specifically stated
otherwise.\113\
---------------------------------------------------------------------------

    \112\ NOPR at P 58-62.
    \113\ We also include both monetary and non-monetary penalties
in the term ``penalty'' throughout the Final Rule, unless
specifically stated otherwise.

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

    451. Consistent with the statute, the proposed enforcement
regulations would 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.
    452. The NOPR provided that a penalty imposed by an ERO or a
Regional Entity may not take effect until the 31st day after a notice
of the penalty is filed with the Commission. The NOPR proposed that
either the ERO or a Regional Entity may file such a notice with the
Commission. The alleged violator, or the Commission on its own motion,
may seek review of the penalty within 30 days after the notice is filed
with the Commission.
    453. The following discussion generally follows the stages of the
enforcement process, first addressing compliance matters such as
enforcement audits, voluntary compliance programs and compliance
directives. Next, we address investigations by the ERO or a Regional
Entity, including matters such as due process, followed by a discussion
of various aspects regarding the imposition of penalties, such as
appropriate non-monetary penalties, limits on monetary penalties and
the need for the ERO to develop penalty guidelines. The Final Rule then
discusses ERO reports of alleged violations and Commission review of
penalties imposed by the ERO or a Regional Entity, including matters
related to the nonpublic treatment of investigations and Commission
proceedings. Finally, the issue of appeals and other enforcement-
related matters are discussed.
a. General Comments on Enforcement
    454. Several commenters emphasize that penalties and sanctions may
not necessarily improve compliance or reliability and are concerned
that entities may simply view a penalty as a cost of doing business if
it is set too low or imposed so often that it is viewed as
unavoidable.\114\ They propose that the Final Rule explicitly recognize
that the goal of a penalty is to create an incentive for compliance.
They urge the Commission to monitor the effectiveness of penalties and
revise or revoke an ineffective penalty.
---------------------------------------------------------------------------

    \114\ See, e.g., Ohio Commission, International Transmission and
Michigan Electric.
---------------------------------------------------------------------------

Commission Conclusion

    455. The Commission concurs that the fundamental goal of mandatory,
enforceable Reliability Standards and related enforcement programs is
to promote behavior that supports and improves Bulk-Power System
reliability. A monetary penalty must be assessed and structured in such
a way that a user, owner or operator of the Bulk-Power System does not
consider its imposition as simply an economic choice or a cost of doing
business. Further, a non-monetary penalty should be structured to
encourage or require compliance and improve reliability by regulating
the behavior of the entity subject to the penalty. In its oversight
role, the Commission plans to monitor the effectiveness of enforcement
penalties, both monetary and non-monetary.
b. Compliance
    456. The term ``enforcement'' in the context of this Final Rule
includes both pro-active compliance efforts by the ERO or a Regional
Entity as well as after-the-fact investigations and imposition of
penalties. The ERO and Regional Entities are expected to have a
compliance program for ongoing monitoring of user, owner and operator
compliance with Reliability Standards. Compliance activities such as
enforcement audits, best-practices programs and remedial action are
discussed below.
i. Enforcement Audits of Compliance With Reliability Standards
    457. The NOPR asked whether the proposed rule should specify any
enforcement audit requirements to be included in the ERO certification
requirements and the Regional Entity delegation requirements.

Comments

    458. Numerous commenters state that they support the bilateral
principles on the subject of enforcement audits \115\ and would support
the inclusion of such audit requirements in the Commission's Final
Rule.\116\ Santee Cooper and SERC comment that the Final Rule should
specify an enforcement audit process ``hierarchy'' under which the
Commission audits the ERO; the ERO audits the Regional Entities, and
the Regional Entities audit entities responsible for compliance with
Reliability Standards.
---------------------------------------------------------------------------

    \115\ NOPR at P 71 (enforcement question 8). The bilateral
principles, at 3, provide that: (1) The ERO and Regional Entities
should conduct rigorous audits to ensure both the capability to
comply and actual compliance with Reliability Standards; (2) audits
should meet relevant auditing standards; (3) the ERO should take
steps to ensure that auditors are properly trained; and (4) the same
audit standards apply to all audits conducted by the ERO and
Regional Entities.
    \116\ See, e.g., AEP, Ameren, CEA, ELCON, ERCOT, FRCC, MRO,
NERC, New York Companies, SERC, SoCalEd, South Carolina E&G and TVA.
---------------------------------------------------------------------------

    459. Some commenters add that the Commission should allow an ERO or
Regional Entity candidate to propose enforcement-related auditing
procedures in a certification application and delegation agreement,
respectively.\117\ NERC recommends the inclusion of a requirement that
the ERO develop and approve enforcement audit requirements in the
Regional Entity delegation agreements. NERC states that it expects both
the certification and readiness audit programs to include general audit
criteria. Similarly, the New York Companies suggest that the Final Rule
require that compliance with Reliability Standards be audited, but not
specify in detail how the audits are to be performed. Kansas City P&L
comments that the Final Rule should include criteria for the auditors
of the ERO or a Regional Entity but that the ERO should have discretion
with respect to the particulars of enforcement audit requirements.
---------------------------------------------------------------------------

    \117\ See, e.g., AEP, EEI, International Transmission, Southern
and SoCalEd.
---------------------------------------------------------------------------

    460. CEA and Alberta state that uniform enforcement auditing
standards should be required in the ERO's certification application to
ensure that the ERO has the necessary tools in place to maintain a
reliable transmission grid. In addition, Alberta suggests that the ERO
should rebuttably presume that enforcement audits conducted by WECC, as
a Regional Entity organized on an Interconnection-wide basis, follow
consistent procedures for rigorous auditing. Further, Alberta states
that the Commission should permit WECC to have compliance monitoring
and enforcement procedures that do not necessarily conform to other
regions.
    461. EEI states that a comprehensive enforcement audit program is
the first line of prevention and explains that the ERO and Regional
Entities should have flexibility in tailoring audits for different
circumstances. EEI suggests that the Commission consider requiring the
ERO to use a certified audit program, to be included in an ERO
application or Regional Entity delegation agreement, which is subject
to independent audit by relevant regulatory authorities. Likewise, PSEG
Companies recommend that the Commission allow the ERO and Regional
Entities, through their stakeholder processes, to determine the best
approach to enforcement audits.
    462. APPA supports the implementation of audit standards but
suggests that, initially, they be provisional in nature to allow
flexibility

in adjusting audit standards based on hands-on experience and regional
differences determined during the initial audits.

Commission Conclusion

    463. The Commission agrees with the commenters that support the
need for rigorous enforcement audits of users, owners and operators of
the Bulk-Power System by well-trained auditors applying consistent
audit standards. The Commission finds that an effective enforcement
audit program is a necessary component of the requirement that the
certified ERO have the ability to develop and enforce Reliability
Standards, set forth in section 215(c)(1) of the FPA. Any Regional
Entity that receives a delegation of enforcement functions also must
have in place an audit program. Accordingly, the Final Rule includes a
new section 39.7(a) that requires the ERO and Regional Entities to
``develop an audit program that provides for rigorous audits of
compliance with Reliability Standards by users, owners and operators of
the Bulk-Power System.''
    464. The ERO shall submit the initial enforcement audit program, as
well as any significant change, to the Commission for review and
approval. We intend the enforcement audit program to be a single
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. Such programs must not vary significantly
from region to region unless good cause is shown for such differences.
ii. Reliability-Related Programs
    465. The NOPR asked a series of related questions regarding whether
the Commission and/or the ERO should adopt features of the Nuclear
Regulatory Commission's (NRC) and the Institute of Nuclear Power
Operations' (INPO) reliability-related programs, such as the NRC Action
Matrix and nuclear power plant assessment program, and the INPO
information sharing network, equipment failure database and monitoring
of performance indicators.\118\
---------------------------------------------------------------------------

    \118\ NOPR at P 72-73.
---------------------------------------------------------------------------

Comments
    466. Some commenters favor the ERO developing a program similar to
those utilized in the nuclear industry.\119\ Xcel Energy and others
express concern that some or all of the nuclear industry programs are
either inapplicable to electric transmission or unnecessarily
duplicative of existing programs. EEI, Entergy and others comment that
it is premature to establish a watchlist or other INPO-type features
and the Commission should first get experience with the ERO process
before such decisions are made. A number of commenters urge that, to
the extent that any such program is developed, it should be developed
by the ERO on a voluntary basis without a Commission mandate.\120\
---------------------------------------------------------------------------

    \119\ See, e.g., APPA, NASUCA, Southern and SERC (supporting
development of a reliability ``watchlist''); AEP, American
Transmission, EEI, Kansas City P&L and TVA (supportring development
of an ``INPO-type best practices'' program).
    \120\ See, e.g., Progress Energy, Santee Cooper and South
Carolina E&G.
---------------------------------------------------------------------------

Commission Conclusion

    467. We understand that the performance-oriented, results-driven
aspects of such programs would serve as useful models for the ERO and
the electric industry. For example, ``best practices,'' as applied in
the nuclear industry, are the basis of the INPO program for evaluation
of a nuclear generating plant. The best practices program focuses on
the plant meeting performance objectives based on the industry's best
practices for excellence in the operation of a nuclear generating
plant. Similarly, aspects of INPO's other core reliability-related
programs, which include, for example, personnel training and
accreditation, events analysis and information sharing, and proactive
assistance for generating plants that have indications of declining
performance, have enabled the nuclear industry to improve all facets of
nuclear plant operations. Such models may have application for the ERO
and electric industry reliability.
    468. The Commission believes that programs of the NRC and INPO such
as an action matrix, compliance watch-list or ``best practices''
program would enhance Bulk-Power System reliability. Such programs
would be most effective if developed by the ERO and approved by the
Commission. We agree with EEI and others that it is appropriate to
first establish the ERO and then use its Commission-approved procedures
to develop such programs. The Commission will require the certified ERO
to make a compliance filing no later than one year from the date of
certification proposing reliability enhancement programs that would
improve Bulk-Power System reliability, along with a program
implementation schedule. The ERO may propose such a reliability
enhancement program earlier than one year from certification.
iii. Remedial Action
    469.The NOPR did not directly discuss the authority of the ERO or a
Regional Entity to take ``remedial'' action, with the goal of bringing
a noncompliant entity back into compliance. Nonetheless, a number of
commenters discuss the ERO's and a Regional Entity's need to take
remedial action, distinct from a non-monetary penalty.
    470. To place these comments in context, we first discuss generally
remedies and non-monetary penalties. If an entity violates a legal
requirement, one remedy is to place the violator into compliance
prospectively. Ending a violation or preventing future violations does
not penalize the violator but instead seeks to return it to
compliance.\121\ A directive to stop a violation, i.e., a compliance
directive, is one type of remedy. Staff training may be another type of
remedy. In contrast, a penalty is imposed to punish a violator.
Penalties may be monetary, such as a civil penalty or a fine, or non-
monetary. As appropriate here, a non-monetary penalty may include
limitations on activities, functions, or operations, or other
appropriate sanctions.\122\
---------------------------------------------------------------------------

    \121\ Cf. U.S. v. Telluride Co., 146 F.3d 1241 (10th Cir. 1998)
(For purpose of determining whether the statute of limitations in 28
U.S.C. 2462 for penalty assessments applied, injunctive relief was
not a penalty.)
    \122\ FPA section 215(c)(2)(C).
---------------------------------------------------------------------------

Comments

    471. A number of commenters state that, generally, remedial action
should focus first on bringing an entity back into compliance.\123\ For
example, American Transmission comments that the ``penalty'' structure
should provide first for mitigation of the violation, second for
correction of behavior and third for punishment for behavior. EEI
suggests that compliance actions may be very effective in assuring
future compliance with Reliability Standards, and that compliance
efforts should precede monetary penalties.
---------------------------------------------------------------------------

    \123\ See, e.g., American Transmission, EEI, Hydro One, NYISO
and TAPS.
---------------------------------------------------------------------------

    472. TAPS emphasizes that only a penalty, and not a compliance
directive, should be subject to the 31-day waiting period set forth in
section 215(e)(2) of the FPA. APPA also comments that the ERO should
have the authority to issue directives to cease and desist from a
violation, which APPA views as different from a non-monetary penalty.
    473. NERC comments that the ERO should be able to take action
outside of the penalty process to bring an entity into compliance with
a Reliability

Standard. NERC mentions several examples of such action, including
directing the development of a remediation plan, increased auditing of
an entity displaying marginal performance, increasing training
requirements to correct an operating problem, or sending a letter to an
industry CEO to draw executive attention to a problem relating to the
CEO's company.
    474. Commenters differ on whether certain actions by the ERO or a
Regional Entity would constitute a non-monetary penalty versus a
compliance or remedial action. For example, when responding to the
NOPR's request for comments on appropriate types of non-monetary
penalties, some commenters identified the following actions by the ERO
or a Regional Entity as a type of non-monetary penalty: Disclosure of a
confirmed violation; informing an industry CEO of a noncompliance
matter; and notifying a regulatory authority of an entity's
noncompliance.\124\ Other commenters, however, characterized these
actions as remedial.\125\
---------------------------------------------------------------------------

    \124\ See, e.g., MRO, Progress Energy, Santee Cooper, SERC and
TVA.
    \125\ See, e.g., APPA and TAPS.
---------------------------------------------------------------------------

Commission Conclusion

    475. We agree with commenters that the ERO or a Regional Entity may
take certain actions with the intent of bringing an entity into
compliance with a Reliability Standard rather than to penalize the
entity for its noncompliance. As discussed above, the Commission
concludes there is a distinction between a remedial action versus a
non-monetary penalty. The ERO or a Regional Entity may take remedial
action to bring a user, owner or operator of the Bulk-Power System into
compliance with a Reliability Standard. One example of a remedial
action is a compliance directive. The ERO or Regional Entity may
conclude, based on the evidence available to it, that an entity is
violating a Reliability Standard and may issue a compliance directive
to the entity that it stop its violation and come into compliance with
the Reliability Standard. A compliance directive may establish a
timetable for compliance.
    476. We agree with TAPS that a compliance directive differs from a
penalty. An ERO or Regional Entity compliance directive is a directive
that a user, owner or operator comply with a Reliability Standard. A
compliance directive is a remedial action, not a penalty, and thus does
not have to satisfy the 31-day waiting period (related to the
imposition of a penalty) to take effect. The ERO or Regional Entity
must inform the Commission of any compliance directive pursuant to
section 39.7(b).
    477. Likewise, the ERO or a Regional Entity may take other remedial
actions without having to satisfy the 31-day waiting period that
applies to a penalty. For example, if the ERO or Regional Entity
conclude, based on the evidence available to it, that an entity is
violating a Reliability Standard, it may take remedial actions such as
informing an industry CEO of a violation of a Reliability Standard,
notifying a relevant regulatory authority, directing a user, owner or
operator to develop and comply with a remediation plan, and imposition
of increased auditing or additional training requirements. Further,
pending completion of its investigation, the ERO or a Regional Entity
may informally notify an entity, orally or in writing, that the entity
appears to be violating a Reliability Standard and request that the
entity stop that activity or otherwise return to compliance with the
Reliability Standard. The ERO or Regional Entity must inform the
Commission of any remedial actions pursuant to section 39.7(b).
    478. We agree with commenters that, as a general matter, ERO or
Regional Entity action should bring a user, owner or operator into
compliance. Moreover, penalties, both non-monetary as well as monetary,
can be imposed by the ERO or a Regional Entity either in conjunction
with, or after, action to bring an entity into compliance. The proper
approach may vary in a particular situation depending on the severity
of the violation, the frequency of noncompliance, whether the
noncompliance was deliberate and other relevant considerations. When
determining the appropriate penalty for violation of a Reliability
Standard, the ERO or a Regional Entity may take into account a user's,
owner's or operator's failure to meet a deadline for compliance or
other provisions of a compliance directive. Further, if the ERO or
Regional Entity has not acted to require remedial action to bring a
user, owner or operator into compliance, has not imposed a penalty, or
has ordered remedial action but not imposed a penalty, and the
Commission concludes that remedial action or a penalty is appropriate,
the Commission on its own motion may take appropriate action.
    479. We direct the ERO to specify in its application these and
other types of remedial actions that may be undertaken without invoking
the waiting period required for monetary and non-monetary penalties to
be imposed. We will allow the ERO and Regional Entities to further
clarify the distinction between a remedial action and a non-monetary
penalty in the ERO certification application, penalty guidelines
(discussed later), or delegation agreement.
c. Assessing a Penalty for a Violation
i. Procedures for Investigations and Penalty Assessments
    480. The NOPR proposed that the ERO or a Regional Entity may impose
a penalty on a user, owner or operator of the Bulk-Power System for a
violation of a Reliability Standard if the ERO or the Regional Entity,
after public notice and opportunity for hearing, finds that the user,
owner or operator has violated a Reliability Standard and files notice
and the record of the ERO's or the Regional Entity's proceeding with
the Commission.\126\
---------------------------------------------------------------------------

    \126\ NOPR at P 58.
---------------------------------------------------------------------------

Comments

    481. NiSource asks that the Commission clarify how the existence of
a violation will be brought to the attention of the ERO or a Regional
Entity. Further, it suggests that, because an investigation might be
initiated by the ERO, a Regional Entity or the Commission, the NOPR
leaves open the possibility of forum shopping or duplicative
proceedings. NiSource requests clarification of the process by which
these entities will inform each other of enforcement investigations to
prevent the possibility of multiple proceedings addressing the same
violation.
    482. FirstEnergy suggests that the Commission establish a three-
year statute of limitations for a violation of a Reliability Standard.
It contends that a longer period would be needlessly burdensome and not
relevant to maintaining current system reliability. Further, a three-
year limitation would be consistent with NERC's current data retention
policy.
    483. Alcoa comments that only the ERO should have the authority to
levy penalties and that the enforcement role of Regional Entities
should be limited to developing a factual record relating to the
imposition of a penalty.
    484. Hydro-Qu[eacute]bec suggests that the Final Rule clarify that
the ERO or a Regional Entity will have enforcement authority in a
Canadian province only to the extent that the provincial government or
its regulatory agency decides to delegate enforcement authority to the
ERO or a Regional Entity.

Commission Conclusion

    485. As to NiSource's comment, the ERO or a Regional Entity may
become aware of a violation through compliance monitoring, periodic
audits or self-reporting by the non-compliant entity, among other
means. The Commission agrees that the ERO, Regional Entities and the
Commission should generally avoid multiple investigations involving the
same violation. There may be situations in which it would be
appropriate to have concurrent investigations but we expect any such
occasions to be rare. In those situations we would coordinate efforts
with the ERO or any relevant Regional Entity. The requirement in
section 39.7(b) of the Final Rule that the ERO and Regional Entities
have procedures to report an alleged violation to the Commission early
on in the enforcement process should help prevent inadvertent multiple
investigations involving the same violation. We reserve the right to
initiate our own investigation on a matter already under investigation
by the ERO or a Regional Entity and, if appropriate, direct the ERO or
Regional Entity to refer the matter to us.\127\ We do not believe
another communication process is needed.
---------------------------------------------------------------------------

    \127\ December 9, 2005 Technical Conference Tr. at 169-70
(remarks of John Polise, Assistant Chief Counsel for Markets of the
Securities and Exchange Commission's Division of Enforcement).
---------------------------------------------------------------------------

    486. As discussed later with regard to Delegation to a Regional
Entity, the ERO will retain oversight responsibility for enforcement
authority that is delegated to a Regional Entity. Further, the ERO is
ultimately responsible for how a Regional Entity conducts
investigations. We expect the ERO to set up a uniform process for
implementing its enforcement authority to be carried out by a Regional
Entity. To ensure that each Regional Entity implements the enforcement
program in a consistent manner, we will require each Regional Entity to
file a periodic report with the ERO on its enforcement investigations
(i.e., identifying its investigations and their dispositions) in a
manner to be determined by the ERO in its certification application.
This report differs from the periodic summary reports on violations
required pursuant to section 39.7(b)(5) in that the report on
investigations will specify how a Regional Entity carries out its
delegated enforcement authority, rather than identifying the violations
themselves. Because it is primarily responsible for enforcement of
Reliability Standards, the ERO maintains the right to initiate its own
investigation on a matter under investigation by a Regional Entity,
and, if appropriate, direct the Regional Entity to refer the matter to
the ERO.
    487. Section 215(e) of the FPA does not create a temporal limit on
when an investigation that may culminate in a penalty may be initiated.
The general statute of limitations for a civil penalty, 28 U.S.C. 2462,
imposes a five-year limitation period on any ``action, suit, or
proceeding for the enforcement of any civil fine, penalty, or
forfeiture, pecuniary or otherwise.'' We will exercise prosecutorial
discretion in determining whether to pursue an alleged violation based
on all the facts presented, including the time elapsed since the
violation is alleged to have occurred, and will adhere to the five-year
statute of limitations when we seek a civil penalty.\128\
---------------------------------------------------------------------------

    \128\ Prohibition of Energy Market Manipulation, Order No. 670,
III FERC Stats. & Regs. ] ------ at P 62-63 (January 19, 2006).
---------------------------------------------------------------------------

    488. The Commission adopts the substance of the proposed regulation
that authorizes the ERO or a Regional Entity to impose a penalty after
finding that a user, owner or operator violated a Reliability
Standard.\129\ The Commission rejects Alcoa's suggestion that only the
ERO should have authority to levy a penalty subject to Commission
approval. Section 215(e)(4) of the FPA provides that the ERO may
delegate its authority to enforce a Reliability Standard to a Regional
Entity. The ability to impose a penalty is one aspect of enforcement.
Thus, the ERO's statutory authority to delegate enforcement functions
to a Regional Entity includes the delegation of authority to impose a
penalty on a user, owner or operator of the Bulk-Power System.
---------------------------------------------------------------------------

    \129\ As discussed later under the topic of ``Confidentiality of
Reports,'' the Final Rule revises the proposed regulation,
eliminating the requirement that the ERO or a Regional Entity
provide ``public'' notice of determining whether to impose a
penalty. The revised provision at section 39.7(c) requires that an
alleged violator receive notice and an opportunity for hearing.
---------------------------------------------------------------------------

    489. With regard to Hydro-Qu[eacute]bec's comment, the Commission
finds that enforcement authority under section 215(e) of the FPA
applies only to violations that occur within the United States. The
enforcement authority of the ERO or a Regional Entity in Canada is
outside the scope of this proceeding.
ii. Due Process
    490. A number of commenters express concern about whether the ERO
and Regional Entities will have adequate procedures to ensure due
process in considering whether to impose a penalty. For example,
PacifiCorp, New York Companies, and LADWP emphasize that due process
for parties subject to penalties must be clearly defined for each stage
of the penalty process, including protection for alleged violators. EEI
states that the Commission must ensure that the ERO and Regional
Entities include in their respective applications and agreements a set
of compliance processes that meet due process requirements. PG&E asks
the Commission to clarify that a notice of violation should provide
complete information to which the alleged violator can respond.
    491. Some commenters, such as WECC, ask the Commission to clarify
that the ERO and Regional Entities must propose specific Rules ensuring
that any imposition of a penalty is subject to due process. Others,
such as Northern Maine Entities, ask that the Commission, rather than
the ERO and Regional Entities, prescribe the general procedures in this
context.
    492. FirstEnergy comments that the ERO should develop standardized
enforcement processes providing for uniformity across regions except in
discrete circumstances so that a user, owner or operator of the Bulk-
Power System is not subject to different enforcement procedures, fines
or other sanctions simply because of geographic location.
    493. APPA notes that there is currently little detail regarding the
procedures that the ERO and Regional Entities will use to assess
penalties and, therefore, suggests that the Commission revise the
proposed regulations to provide that ``the specific procedures to be
used will be ordered in the context of each proceeding.''

Commission Conclusion

    494.The Commission agrees with the commenters that the ERO and
Regional Entities must have procedures to ensure due process when
considering whether to impose a penalty. We interpret section
215(c)(2)(C) of the FPA, which requires the ERO to have established
Rules that, inter alia, ``provide fair and impartial procedures for
enforcement of reliability standards * * *,'' as requiring due process
in enforcement proceedings.\130\ Accordingly, the Commission expects an
ERO candidate to develop procedures to ensure due process and submit
the procedures for Commission review with its ERO certification
application.
---------------------------------------------------------------------------

    \130\ Pursuant to section 215(e)(4) of the FPA, Regional
Entitites must also establish fair and impartial enforcement
procedures.
---------------------------------------------------------------------------

    495. Likewise, procedures to ensure due process should be included
in any delegation agreement submitted for Commission review. We agree
that there

should be uniformity among the ERO and Regional Entities regarding due
process elements such as adequacy of notice and opportunity to present
facts and arguments at a hearing before an impartial adjudicator. These
general due process requirements should be identified in the pro forma
delegation agreement either explicitly or by reference to the ERO
Rules.
iii. Notice
    496. The NOPR proposed that the ERO or a Regional Entity must
include specified information in any notice of an enforcement
action.\131\
---------------------------------------------------------------------------

    \131\ NOPR at P 59.
---------------------------------------------------------------------------

Comments

    497. NiSource asks the Commission to revise the proposed regulation
to clarify that both proposed sections (a)(2) and (c) of the proposed
enforcement regulations refer to the same notice that the ERO must file
with the Commission following a finding that an entity violated a
Reliability Standard.

Commission Conclusion

    498. The Final Rule adopts the substance of the proposed notice
requirement with some minor changes for purposes of clarification. In
response to NiSource, the Final Rule revises the text of the proposed
regulations to consistently use the term ``notice of penalty'' when
referring to the notice the ERO must file with the Commission following
imposition of a penalty.
iv. Effective Date of Penalty and Commission Review of Penalties
    499. The NOPR proposed that a penalty imposed by the ERO or a
Regional Entity may take effect not earlier than the 31st day after the
ERO files with the Commission a notice of penalty and the record of the
proceeding.\132\ Such penalty would be subject to review by the
Commission, either on its own motion or upon application by the entity
that is the subject of the penalty filed within 30 days after the date
such notice is filed with Commission. An application to the Commission
for review, or the initiation of review by the Commission on its own
motion, would not operate as a stay of such penalty unless the
Commission otherwise orders. In any proceeding to review a penalty, the
Commission, after public notice and opportunity for hearing, would by
order affirm, set aside or modify the penalty and, if appropriate,
remand to the ERO for further proceedings.
---------------------------------------------------------------------------

    \132\ Id. at P 60.
---------------------------------------------------------------------------

(a) Effective Date and General Commission Review
    500. TAPS notes language in the proposed enforcement regulations
that would allow a Regional Entity to interact directly with the
Commission. TAPS believes that this approach is inconsistent with
sections 215(e)(1) and (2) of the FPA, which authorize the ERO to
impose penalties, the ERO to file notice of a penalty with the
Commission, and the Commission to remand an action to the ERO.
According to TAPS, any imposition of a penalty should go through the
ERO to ensure consistency and prevent the undermining of its authority.
Likewise, PG&E contends that the proposal that a Regional Entity may
file a notice of penalty with the Commission to start the 30-day window
for seeking Commission review precludes any meaningful opportunity to
appeal to the ERO a penalty imposed by a Regional Entity. PG&E suggests
that, if the Commission allows an appeal of a Regional Entity action to
the ERO, the Commission should delete the language allowing a Regional
Entity to file a notice with the Commission.
    501. PG&E also requests that, to avoid a situation where the ERO or
a Regional Entity imposes a penalty only to have the Commission reverse
the decision on review, the Final Rule should modify the proposed
regulation to allow for an automatic stay of a penalty once a
Commission review is initiated.
    502. Ameren suggests that the Commission clarify the types of
further proceedings that it contemplates should it remand a penalty to
the ERO.
    503. The Oklahoma Commission suggests that the Final Rule include a
process for a state commission, through its own concurrent
jurisdictional authority, to intervene and participate in an
investigation, ``penalty imposition,'' and Commission review of a
penalty (including those involving a Cybersecurity Incident) to the
extent a state commission deems necessary to fulfill its ratemaking or
other authorities. It notes the Commission's current rules that allow
state commissions to intervene in proceedings before the Commission.
    504. NERC asks the Commission to reconsider the proposed notice and
opportunity for comment on a notice of penalty filed with the
Commission. NERC states that the Commission does not currently allow
the public to participate in enforcement proceedings. Further, for
purposes of clarification, NERC proposes modifying the first sentence
of proposed section 38.5(d)(4) to include the phrase ``[a]n applicant
for review of a penalty shall file * * *.''

Commission Conclusion

    505. The Final Rule adopts, with some non-substantive changes, the
proposed regulations regarding the effective date of a penalty and
Commission review of a penalty. The Commission may review a penalty,
but only on its own motion or upon application by the entity that is
subject of the penalty.
    506. We agree with the commenters who suggest that only the ERO
should file with the Commission a notice of penalty. A Regional Entity
that determines, after due process, to impose a penalty, must submit a
notice to the ERO, which may then submit the notice of penalty to the
Commission. Likewise, a Commission remand of any penalty-review
proceeding pursuant to section 39.7(e)(5) is a remand to the ERO
regardless of the entity that would impose the penalty. Accordingly,
the Final Rule modifies the proposed regulation text at section 39.7(c)
to provide that the ERO must file the notice of penalty with the
Commission.
    507. We reject PG&E's suggestion to modify the proposed regulation
by including an automatic stay of a penalty once Commission review is
initiated. Section 215(e)(2) of the FPA requires that an ``application
to the Commission for review, or the initiation of review by the
Commission on its own motion, shall not operate as a stay of such
penalty unless the Commission otherwise orders * * *.'' Our regulations
at section 39.7(e)(3) provide the opportunity for a stay on a case-by-
case basis (either as a result of a motion by the alleged violator or
an order by the Commission). We see no need to order an automatic stay
in the Final Rule for review of all penalties.
    508. Ameren asks for clarification regarding the types of further
proceedings the Commission contemplates if a penalty is remanded to the
ERO pursuant to section 39.7(e)(5). Without limiting ourselves in
addressing a specific circumstance, we believe that a remand to the ERO
for additional fact-finding proceedings may be appropriate. For
example, we may determine that additional fact-finding is necessary
regarding an alleged violation, or support for a penalty imposed, and
conclude that the ERO is best situated to engage initially in such
fact-finding.
    509. With regard to the Oklahoma Commission's comments, we agree
that a state commission generally may intervene in a Commission
proceeding for review of a penalty imposed by the ERO or a Regional
Entity. To address

these comments, we distinguish between an investigation pursuant to
part 1b of our regulations and an adjudicatory proceeding arising out
of such an investigation. Under Part 1b, the Commission and its staff
treats as nonpublic any enforcement investigation and any information
and documents obtained during such investigation except to the extent
that the Commission directs or authorizes the public disclosure of the
investigation.\133\ There are no parties in a part 1b enforcement
investigation, and no person may intervene or participate as a matter
of right in such an investigation.\134\ However, if a Part 1b
enforcement investigation leads to an on-the-record proceeding in which
the existence of a violation and any appropriate sanction for it are at
issue, interventions in that proceeding are governed by Rule 214 of our
Rules of Practice and Procedure.\135\ In this respect, a proceeding in
which the Commission reviews a penalty assessment by a Regional Entity
or the ERO is no different from an on-the-record proceeding resulting
from a Part 1b investigation or a formal complaint filed with the
Commission in which a complainant alleges the existence of a violation
and requests that the Commission assess a penalty for it.
---------------------------------------------------------------------------

    \133\ 18 CFR 1b.9(2005). Pursuant to this regulation, public
disclosure of investigative information or documents also may occur
during the course of an adjudicative proceeding or when required
under the Freedom of Information Act.
    \134\ 18 CFR 1b.11. part 1b enforcement investigations differ as
a general matter from ``investigations'' the Commission initiates
pursuant to section 206 of the FPA. Section 206 investigations are
public on-the-record proceedings in which interventions may occur;
part 1b investigations generally are nonpublic and may be initiated
by the Commission or its staff.
    \135\ 18 CFR 385.214.
---------------------------------------------------------------------------

    510. We view inquiries conducted by the ERO or a Regional Entity
into alleged violations or self-reported violations as well as ERO or a
Regional Entity monitoring and enforcement audit activities to
determine whether violations are occurring to be akin to our staff's
Part 1b investigations. As a result, we conclude that these activities
generally should be nonpublic and that there should be no right to
intervene in them.
    511. Moreover, we will not require that a state commission have a
right to intervene in any ERO or Regional Entity investigation or
imposition of a penalty. If the ERO or a Regional Entity wishes to
conduct a public investigation, enforcement audit or permit
interventions when determining whether to impose a penalty, the ERO or
the Regional Entity must receive advance authorization from the
Commission. Consistent with further discussion below, ERO or Regional
Entity investigations, enforcement audits and penalty actions must be
nonpublic if they involve a Cybersecurity Incident or would jeopardize
Bulk-Power System security if disclosed publicly. Further, while we are
allowing interventions and comments by third parties in a proceeding
for review of a penalty imposed by the ERO or a Regional Entity, we
expect in most instances not to open the record to additional material
from third parties that was not in the record compiled by the ERO or
the Regional Entity.\136\
---------------------------------------------------------------------------

    \136\ See 16 U.S.C. 824(o)(e)(2) (providing that a hearing for
Commission review of a penalty imposed by the ERO ``may consist
solely of the record before the ERO and opportunity for the
presentation of supporting reasons to affirm, modify, or set aside
the penality.'')
---------------------------------------------------------------------------

    512. However, we reject NERC's suggestion that we eliminate the
notice and opportunity to comment in a Commission proceeding to review
a penalty. As explained above, while our rules generally require that a
Part 1b investigation be nonpublic, the Commission issues public notice
of filings made with it and interventions are allowed pursuant to the
requirements in Rule 214 in on-the-record adjudicatory proceedings
relating to violations and penalties. Other than with respect to a
Commission proceeding that relates to a Cybersecurity Incident or that
would jeopardize Bulk-Power System security if made public, commenters
have not provided any compelling reason that the Commission's review of
the assessment of penalties pursuant to section 215 of the FPA should
differ in this respect from other, similar proceedings.
    513. We clarify the first sentence of section 39.7(e)(2), based on
NERC's proposal and further revised based on our concerns, to state:
``An applicant filing an application for review shall comply with the
requirements for filings in proceedings before the Commission.''
(b) Automatic Commission Review of Certain Penalties
    514. The Commission asked for comment on whether it should
determine by rule that certain categories of penalties should be
automatically subject to Commission review.\137\
---------------------------------------------------------------------------

    \137\ NOPR at P 71 (enforcement question 5).
---------------------------------------------------------------------------

Comments

    515. Most commenters oppose this proposal, explaining that the
entity against which the penalty is assessed should decide whether to
appeal a penalty and, to do otherwise, would increase costs to
participants and administrative burdens.\138\ Similarly, NERC comments
that there is no need for automatic review where there is no contest.
It also notes that the Commission has the authority to review any
particular case.
---------------------------------------------------------------------------

    \138\ See, e.g., AEP, Ameren, APPA, EEI, FRCC, LADWP, MRO, NERC,
New York Companies, Progress Energy, SERC, SoCalEd, South Carolina
E&G, TVA and WECC.
---------------------------------------------------------------------------

    516. A few commenters support automatic Commission review in
limited situations. ERCOT and PG&E state that a penalty above a
threshold dollar amount should automatically trigger Commission review.
PG&E states that automatic review would promote fairness and
consistency among Regional Entities with regard to high penalties.
NiSource proposes that a monetary penalty falling within the top 25
percent of a penalty range or guideline and a non-monetary penalty that
is in effect for 60 days or longer should trigger automatic Commission
review. APPA comments that the Commission may want to revisit this
issue in the periodic ERO recertification proceeding.

Commission Conclusion

    517. The Commission is not adopting an automatic review provision.
We agree with the vast majority of commenters that there is no need for
automatic review of certain penalties. The Commission retains the
option to review a penalty on a case-by-case basis if an entity against
which a penalty is assessed fails to appeal the penalty before the
Commission.
v. Answer to an Application for Review
    518. The NOPR provided that, unless the Commission orders
otherwise, answers, interventions and comments to an application for
review of a penalty must be filed within twenty (20) calendar days
after the application is submitted.
    519. APPA suggests that the Commission revise this section to
require that answers, interventions and comments to an application for
review of penalty be filed within twenty days of notice to the public,
as opposed to the currently proposed ``within twenty days after the
application is filed.''

Commission Conclusion

    520. We do not adopt APPA's recommendation. The NOPR's proposal, as
reflected in section 39.7(e)(4) of the Final Rule, is consistent with
the statute's requirement that the Commission develop expedited
procedures for review of penalties. The

Commission has discretion to change the deadline in specific
proceedings if it determines that more time for responses is
appropriate.
d. Nonpublic Matters and CyberSecurity Procedures
    521. The proposed rule would establish a limited exception to the
public notice requirement and allow nonpublic proceedings before the
Commission for matters that involve a Cybersecurity Incident, unless
the Commission determines on a case-by-case basis that such protection
is not necessary.\139\ The alleged violator would be given timely
notice and an opportunity for a nonpublic hearing. The Commission
sought comment on (1) whether the proposal provides sufficient due
process and (2) the identification of other specific events that should
be subject to nonpublic hearing procedures.
---------------------------------------------------------------------------

    \139\ NOPR at P 62.
---------------------------------------------------------------------------

Comments

    522. A number of commenters state that the Commission's proposal
provides sufficient due process.\140\ South Carolina E&G, NiSource and
others comment that a nonpublic hearing in which the alleged violator
can be heard coupled with a right to appeal provide sufficient due
process.
---------------------------------------------------------------------------

    \140\ See, e.g., ERCOT, NERC, NiSource, Progress Energy, Santee
Cooper and FRCC.
---------------------------------------------------------------------------

    523. EEI and others suggest that, in addition to actions involving
a Cybersecurity Incident, all other proceedings should be nonpublic if
they involve an unconfirmed violation, i.e., when there has not been an
admission of a violation or a determination by the ERO or a Regional
Entity that a violation occurred.\141\ The commenters explain that this
practice is appropriate because most investigations or proceedings
regarding reliability matters are likely to involve confidential or
sensitive information that should be shared only with investigators. In
particular, an investigation or proceeding regarding physical assets
that make up the Bulk-Power System may involve sensitive information
and may include critical energy infrastructure information (CEII).
Further, public disclosure of an alleged violation can damage a
utility's reputation and its relationship with customers and regulators
and cause financial impacts. Thus, these commenters assert that a
nonpublic proceeding is appropriate because an entity should not suffer
any adverse consequences from an allegation that an entity violated a
Reliability Standard until due process has been completed.
---------------------------------------------------------------------------

    \141\ See also Ameren, National Grid, NiSource,, WestConnect and
Xcel Energy.
---------------------------------------------------------------------------

    524. National Grid adds that EPAct, which elsewhere specifically
requires ``public'' notice, speaks only of ``notice and opportunity for
hearing'' in section 215, suggesting that only the alleged violator is
entitled to notice.
    525. Some commenters suggest that there should be no public
dissemination of any information involving a Cybersecurity Incident or
an incident that compromises physical security or exposes a single
point of weakness of a specific user, owner or operator of the Bulk-
Power System (even after a violation is confirmed) because it is
possible that system security and reliability would be further
jeopardized if potential vulnerabilities are publicly identified.\142\
---------------------------------------------------------------------------

    \142\ See, e.g., Ontario IESO, Progress Energy, Sante Cooper,
SERC and TVA.
---------------------------------------------------------------------------

    526. Other commenters support the provision to make a Cybersecurity
Incident proceeding nonpublic but do not advocate any further extension
of nonpublic proceedings.\143\ AEP explains that, while public
disclosure of noncompliance is proper in most cases, public disclosure
in the area of cybersecurity allows for easier access and intrusion by
cyber terrorists and would not be in the public interest.
---------------------------------------------------------------------------

    \143\ See, e.g., AEP, ELCON, IPL, LADWP, Ohio Commission, PSEG
Companies, Siemens, South Carolina E&G, Southern and WECC.
---------------------------------------------------------------------------

    527. Indianapolis P&L suggests that the Final Rule allow an entity
involved in the appeal process to make an independent showing that
information is security sensitive. ELCON states that an event should
not qualify for a nonpublic hearing unless there is compelling evidence
that this would be in the public interest.
    528. APPA questions whether the proposed procedures ensure due
process, stating that the presumption in proceedings before the
Commission should be in favor of proceeding publicly, unless the
Commission determines for good cause shown that a proceeding should be
closed. Thus, while respecting national security concerns, APPA
advocates handling confidentiality issues on a case-by-case basis to
maintain transparency when possible. APPA believes that transparency is
important because industry participants have the right to know how the
Commission is applying a Reliability Standard in a particular case and
transparency would foster industry confidence that the reliability
regime is being fairly administered. Siemens notes that, without
mandated reporting of Cybersecurity Incidents, good metrics cannot be
developed to assess cybersecurity threats and countermeasures.
    529. TAPS cautions that nonpublic procedures for cybersecurity
enforcement are inconsistent with due process and threaten core
principles, such as the right to a speedy and public trial, underlying
the nation's administrative and judicial processes. According to TAPS,
the public has an interest in knowing that a Cybersecurity Incident
occurred at a particular facility or with the involvement of a
particular contractor. TAPS states that it is not seeking public
disclosure of information that endangers national security, but is
concerned that an across-the-board ban on public disclosure goes too
far.
    530. NASUCA supports maintaining confidentiality of the details of
a Cybersecurity Incident and violation, but believes that the identity
of the violator and the fact that a violation occurred should be
publicly disclosed. NRECA asks the Commission to explain why the CEII
procedures are not adequate for cybersecurity violations. NRECA remarks
that, alternatively, if CEII protections are inadequate for
cybersecurity, they may be inadequate for other purposes as well and
that such protections may need to be changed generally.
    531. Cinergy is concerned about the need to maintain the
confidentiality of commercially sensitive data during a penalty
proceeding. In particular, it suggests that the Commission establish a
requirement to notify third parties before their data is submitted in
an action and allow any party or third party whose data is submitted in
a penalty proceeding to request confidential treatment of data.

Commission Conclusion

    532. Our conclusion addresses separately two related issues raised
by commenters: At what stage an investigation or penalty should be
nonpublic, and what types of events should receive nonpublic treatment.
i. Stage at Which an Investigation or Penalty Should Be Made Public
    533. The Commission recognizes that it is generally desirable for
investigations relating to a violation or an alleged violation to be
nonpublic. As noted by commenters, public disclosure of an
investigation may affect the reputation of an alleged violator, which
in turn could have significant financial ramifications. Further, a
nonpublic investigation would make less likely the possible public
disclosure of information relating to a system vulnerability. We also
note that a

violator or an alleged violator is more likely to cooperate in a
nonpublic investigation. As previously discussed, pursuant to section
39.7(b)(4) of the Final Rule, an investigation conducted by the ERO or
a Regional Entity of a violation or an alleged violation of a
Reliability Standard will be nonpublic unless the Commission authorizes
a public investigation. This approach is consistent with our part 1b
rules relating to investigations that, as discussed above, require
nonpublic investigations except to the extent the Commission publicly
discloses the existence of an investigation or investigative
information.\144\
---------------------------------------------------------------------------

    \144\ 18 CFR part 1b.
---------------------------------------------------------------------------

    534. Accordingly, the Final Rule revises the proposed regulations
to eliminate the requirement that the ERO or a Regional Entity provide
``public'' notice when determining whether to impose a penalty. As
revised, the ERO or a Regional Entity will conduct a nonpublic
investigation or penalty action unless otherwise authorized by the
Commission. For example, there may be circumstances in which a public
investigation may be appropriate or a particular entity may prefer the
openness of a public forum. We direct any ERO applicant to submit ERO
Rules with an ERO certification application, and Regional Entity Rules
with a delegation agreement, that require nonpublic investigations and
confidentiality of material obtained during an investigation unless
otherwise authorized by the Commission.
    535. Moreover, if the ERO or a Regional Entity determines that a
user, owner, or operator has violated a Reliability Standard and
imposes a penalty, the ERO must file a notice of penalty with the
Commission pursuant to section 215(e)(1) of the FPA. The Commission
will publicly disclose the filing of such a notice, except as discussed
below with respect to Cybersecurity issues and other matters that would
jeopardize Bulk-Power System security if publicly disclosed. Except for
these issues, an application for review and also the related proceeding
at the Commission will be made public. Participants in a public
enforcement proceeding conducted at the Commission will have the
opportunity to seek confidential treatment of materials and a
protective order pursuant to our Rules of Practice and Procedure.
    536. While recognizing the role of nonpublic investigations, we
also encourage entities to disclose violations voluntarily early in the
enforcement process. We believe that voluntary disclosure would benefit
the public, for example, in understanding the cause of a disruption in
electric service. Other industry members would benefit if they
understand sooner the causes of such a disruption, how the user, owner
or operator of the Bulk-Power System acted and the results of these
actions.
    537. Finally, regarding Cinergy's concern about protecting third-
party data, third-party data may well be relevant to a determination
whether to impose a penalty. However, we will not attempt to set out
here a complete set of criteria for disclosure or non-disclosure.
Instead, we will consider the nature and relevance of the data on a
case-by-case basis.
ii. Nonpublic Treatment of Certain Types of Proceedings
    538. As explained in the NOPR, and confirmed by numerous
commenters, a proceeding involving a Cybersecurity Incident requires
additional protection because it is possible that Bulk-Power System
security and reliability would be further jeopardized by the public
dissemination of information involving incidents that compromise the
cybersecurity system of a specific user, owner or operator of the Bulk-
Power System.\145\ For example, even publicly identifying which entity
has a system vulnerable to a ``cyber attack'' could jeopardize system
security, allowing persons seeking to do harm to focus on a particular
entity in the Bulk-Power System. While the Commission recognizes the
benefit of transparency in Commission proceedings, as discussed by APPA
and TAPS, the benefits of transparency are overridden in the limited
situation of cases in which such transparency would jeopardize Bulk-
Power System security.
---------------------------------------------------------------------------

    \145\ NOPR at P 62.
---------------------------------------------------------------------------

    539. The Commission may establish a nonpublic proceeding if public
disclosure would jeopardize system security. We find that, in the
balance, Commission authority to establish a nonpublic proceeding if
necessary and lawful, including but not limited to, a proceeding
involving a Cybersecurity Incident, serves an important public interest
that outweighs the competing goals of openness and transparency.
    540. Commenters identify a number of categories of incidents or
types of facilities that they believe should be subject to a nonpublic
hearing at the Commission. We are concerned, however, that this
prescriptive approach would result in an overly inclusive requirement
for nonpublic proceedings even if they are not necessary or,
conversely, an overly narrow requirement that would make public a
proceeding that is deserving of nonpublic treatment. Thus, section
39.7(e)(7) of the Final Rule allows the Commission to determine on a
case-by-case basis whether a particular Commission proceeding to review
an enforcement penalty for violation of a Reliability Standard can and
should be nonpublic.
e. Commission-Ordered Compliance and Penalties
    541. The NOPR provided that, on its own motion or upon complaint,
the Commission may order compliance with a Reliability Standard and may
impose a penalty against a user, owner or operator of the Bulk-Power
System, if the Commission finds, after notice and opportunity for
hearing, that the user, owner or operator has engaged or is about to
engage in any acts or practices that constitute or will constitute a
violation of a Reliability Standard.\146\
---------------------------------------------------------------------------

    \146\ NOPR at P 65.
---------------------------------------------------------------------------

    542. Related to this provision, the NOPR asked if the Commission
should clarify that, in a situation where an entity is about to engage
in an act that will constitute a violation of a Reliability Standard,
Commission action should be in the form of a compliance order with the
goal of preventing the violation from occurring; and further clarify
that an entity that has engaged in an actual violation may be subject
to both penalties and a compliance order.\147\ The NOPR also asked
whether there are situations that may warrant a penalty where an entity
is about to engage in activity that would violate a Reliability
Standard but the activity was ultimately averted.
---------------------------------------------------------------------------

    \147\ NOPR at P 71 (enforcement question 10).
---------------------------------------------------------------------------

Comments

    543. Many commenters favor the issuance of a compliance order as
the appropriate response to an entity that is about to engage in
activity that would violate a Reliability Standard.\148\ However, some
believe that a compliance order is unnecessary, overly-prescriptive or
simply adds an additional layer of bureaucracy.\149\ Further, most
commenters believe that, in a situation where an entity is about to
engage in activity that would violate a Reliability Standard but the
activity is ultimately averted, imposing a monetary penalty is not
justified and raises serious due process issues.\150\ A few

commenters suggest that monetary penalties may be warranted in extreme
situations that, for example, involve intentional acts or reckless
misconduct that endanger system reliability.
---------------------------------------------------------------------------

    \148\ See, e.g., Ameren, EEI, EPSA, International Transmission,
NERC, NRECA, NYISO, Progress Energy, South Carolina E&G and
Southern.
    \149\ See, e.g., Cinergy and Portland GE.
    \150\ See, e.g., AEP, Ameren, EEI, ERCOT, Kansas City P&L, NERC,
New York Companies, Santee Cooper, SERC, SoCalEd, South Carolina
E&G, Southern and TVA.
---------------------------------------------------------------------------

Commission Conclusion

    544. In section 39.7(f) of the Final Rule, the Commission adopts
the proposal in the NOPR that the Commission may order compliance with
a Reliability Standard and may impose a penalty on a user, owner or
operator of the Bulk-Power System. We confirm that, in a situation that
is brought to our attention where an entity is about to engage in an
act that would constitute a violation of a Reliability Standard, our
action would typically be in the form of a compliance order. If an
entity fails to comply with the compliance order, we could seek
enforcement through an action for injunctive relief in the appropriate
court.
    545. We believe that, in most circumstances, a monetary penalty
would not be appropriate where a violation is imminent but ultimately
averted.\151\ Nonetheless, we will not limit our options in responding
to an extraordinary circumstance. The Commission does not state as a
matter of policy that it will never impose a monetary penalty in a
situation where an entity is about to violate a Reliability Standard.
Likewise, we will not limit our options with regard to imposing an
appropriate non-monetary penalty where an entity is about to engage in
an action that would violate a Reliability Standard but the activity is
ultimately averted.
---------------------------------------------------------------------------

    \151\ See section 215(e)(3) of the FPA.
---------------------------------------------------------------------------

    546. The Final Rule does not preclude the ERO or a Regional Entity
that is aware of an entity that is about to engage in an act or
practice that would result in noncompliance from notifying the entity
by issuing a compliance directive. If, after receiving such a
directive, the entity does not take appropriate action to avert a
violation of a Reliability Standard, the ERO or Regional Entity could
file a petition with the Commission to issue a Commission compliance
order. The Commission would review such a petition on an expedited
basis. Alternatively, if the ERO or a Regional Entity determines that
an entity's imminent action or inaction could jeopardize Bulk-Power
System reliability, the ERO or Regional Entity may seek immediate
injunctive relief in an appropriate court.
f. Penalties' Relation to the Seriousness of the Violation
    547. The NOPR provided that any penalty imposed for the violation
of a Reliability Standard shall bear a reasonable relation to the
seriousness of the violation and shall take into consideration efforts
of such user, owner or operator of the Bulk-Power System to remedy the
violation in a timely manner.\152\ The proposal stated that penalties
should not be limited to monetary penalties and may include limitations
on activities, functions, operations, or other appropriate sanctions,
including the establishment of a reliability watch list composed of
major or frequent violators.
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    \152\ NOPR at P 76.
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Comments

    548. International Transmission and Michigan Electric ask for
clarification that the phrase ``seriousness of the violation'' is
intended to correlate the magnitude of the penalty with the actual or
potential impact of a violation.
    549. EPSA asks for clarification on whether the phrase
``limitations on activities, functions [or] operations,'' is intended
to bar users, owners or operators from engaging in transactions or
operating their facilities for an indefinite period of time. EPSA
states that, while suspension of operations may be necessary to address
immediate reliability concerns, suspension could also adversely affect
reliability. Also, if a limitation on activity is intended to deprive
the violator of the fruits of its violation, EPSA contends that a
monetary penalty should provide a sufficient sanction.
    550. Ameren seeks clarification of the term ``major violators''
that may be placed on a reliability watch list.

Commission Conclusion

    551. Section 39.7(g) of the Final Rule adopts the NOPR proposal
that a penalty must bear a reasonable relation to the seriousness of
the violation. While the actual or potential effect of a violation is
certainly one consideration in determining the seriousness of the
violation, it is not the only consideration, in contrast to the
suggestions of International Transmission and Michigan Electric. For
example, a violation by an entity with a weak compliance program may
merit a larger penalty than a violation by an entity with a strong
compliance program.\153\ All users, owners and operators of the Bulk-
Power System should have in place strong programs to ensure compliance
with ERO and Regional Entity Reliability Standards.
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    \153\ Enforcement of Statutes, Orders, Rules, and Regulations,
113 FERC ] 61,068 at P 22-23 (2005) (identifying internal compliance
as a factor the Commission will take into account when determining a
civil penalty).
---------------------------------------------------------------------------

    552. With regard to EPSA's request for clarification, a non-
monetary penalty involving a limitation on activities, functions or
operations may include, but is not limited to, a ban on engaging in
certain transactions or limiting the operation of facilities. The
duration of the ban would normally be for the period needed to
implement the necessary corrective action, whether installation of
required equipment or completion of personnel training.
    553. Regarding Ameren's request for clarification of the term
``major violators'' that may be placed on a reliability watch list, we
clarify that the term includes users, owners or operators that have
either committed one or more serious violations or have a history of
frequent, albeit less serious violations.
i. Penalty Guidelines
    554. The Commission asked in the NOPR whether it should approve a
penalty range or guidelines before the ERO can levy a penalty or
sanction for any violation, and, if so, whether the penalty range or
guidelines for a violation should be submitted for Commission approval
at the same time that the corresponding Reliability Standard is
submitted to the Commission for approval.\154\
---------------------------------------------------------------------------

    \154\ NOPR at P 71 (enforcement question 2).
---------------------------------------------------------------------------

Comments

    555. Virtually all commenters on this issue agree that the
Commission should approve a penalty range or guidelines that include a
schedule of non-monetary and monetary penalties of increasing
severity.\155\ They contend that basic due process requires that a
regulated entity must know both the legal standard to which its action
must conform as well as the corresponding penalty before that entity
can be penalized for noncompliance. Commenters, however, differ on
whether the ERO should develop and submit penalty guidelines concurrent
with or separate from the Reliability Standard development process.
---------------------------------------------------------------------------

    \155\ See, e.g., APPA, EEI, ERCOT, FirstEnergy, FRCC, Hydro One,
Kansas City P&L, LADWP, Michigan Electric, MRO, New York Companies,
NEPOOL Participants, NERC, NiSource, NRECA, Ohio Commission, Ontario
IESO, PacifiCorp, PSNM-TNPC, Southern, and Xcel Energy. Conversely,
commenters consistently oppose a single penalty approach in response
to the NOPR's question on uniform penalties, NOPR at P 71
(enforcement question 3).
---------------------------------------------------------------------------

    556. Numerous commenters suggest that the Reliability Standard
development process should not require

that each Reliability Standard have its own range or guidelines for
penalties.\156\ Rather, these commenters assert that the ERO should
develop, for Commission review, an enforcement policy that separates
approval of penalty guidelines from approval of each Reliability
Standard. These commenters suggest that, at the time a Reliability
Standard is filed with the Commission for approval, the ERO should
indicate what part of the overall sanctioning guidelines and penalty
ranges would apply to the particular Reliability Standard. While some
commenters urge uniformity and suggest that Regional Entity delegation
agreements include a provision requiring use of the ERO penalty
guidelines, TANC suggests that, to reflect unique regional conditions,
each Regional Entity should develop its own proposal for penalty
guidelines to be submitted to the ERO. PacifiCorp comments that penalty
guidelines should be developed jointly by the ERO and Regional Entities
to provide a balance of uniformity and regional experience. It also
suggests periodic review of guidelines to ensure that the program is
having the desired effect, with an opportunity for needed adjustments.
---------------------------------------------------------------------------

    \156\ See, e.g., AEP, APPA, TVA, EEI, FRCC, Michigan Electric,
NERC, Progress Energy, Santee Cooper, South Carolina E&G, SERC and
Xcel Energy.
---------------------------------------------------------------------------

    557. Other commenters support a set range of monetary and non-
monetary penalties for each Reliability Standard that is submitted to
the Commission for approval at the same time as the Reliability
Standard is submitted.\157\ These commenters assert that, to ensure
that a penalty bears a reasonable relation to the violation, the
penalty guideline must be not be arbitrarily developed in isolation
from the development of the Reliability Standard.
---------------------------------------------------------------------------

    \157\ See, e.g., Ameren, American Transmission, British
Columbia, Cinergy, FirstEnergy, MRO, NEPOOL Participants, NiSource,
PG&E and SMUD.
---------------------------------------------------------------------------

    558. WECC and Entergy ask that the Commission not mandate any
particular approach to penalties but, rather, allow the ERO and each
Regional Entity to propose standardized penalties or penalty guidelines
as part of its enforcement program. SoCalEd suggests that WECC's
Reliability Management System (RMS) could serve as model for
establishing a graduated schedule of non-monetary and monetary
penalties.
    559. South Carolina E&G comments that penalties should not be
imposed on an entity for failure to meet standards that are contrary to
or are in violation of local, state or federal statutes or
jurisdictional requirements.
    560. APPA comments that the Commission should afford the ERO and
Regional Entities latitude to impose higher monetary penalties on
violations by larger entities than by smaller entities. For example,
according to APPA, the ERO may impose a higher monetary penalty on a
regional coordinator or large balancing authority responsible for
operation of a large portion of an Interconnection than a smaller
balancing authority or transmission owner.

Commission Conclusion

    561. The Commission concludes that penalty guidelines, developed by
the ERO and approved by the Commission, would provide a predictable,
uniform and rational approach to the imposition of penalties.\158\ Such
guidelines would help ensure that a penalty bears a reasonable relation
to the seriousness of the violation, as required by section 215(e)(6)
of the FPA. Accordingly, the Final Rule revises the proposed regulation
text to create a new section 39.7(g)(2) that 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 or a Regional Entity for determining the appropriate
penalty for the violation of a Reliability Standard. We agree with the
commenters that urge consistency in the imposition of penalties by the
ERO and Regional Entities. Accordingly, Regional Entities should adopt
the ERO's penalty guidelines, with changes or supplements only as
necessary to reflect regional differences in a Reliability Standard.
Any such changes by a Regional Entity must be approved by the ERO and
the ERO must submit them to the Commission for approval.
---------------------------------------------------------------------------

    \158\ Our Policy Statement on Enforcement articulates factors
the Commission considers when determining an appropriate penalty.
See Enforcement of Statutes, Orders, Rules, and Regulations, 113
FERC ] 61,068. The ERO should look to our Policy Statement on
Enforcement for guidance in developing certain enforcement penalty
policies. For example, our policies on internal compliance, self-
reporting and cooperation, id. at P 22-27, may assist the ERO in
formulating its enforcement penalty policies.
---------------------------------------------------------------------------

    562. The ERO may propose for Commission review one set of penalty
guidelines for all Reliability Standards, with the flexibility to
propose a unique penalty for a particular Reliability Standard, if
necessary. The Commission must approve the proposed penalty guidelines
prior to the ERO's use of the guidelines to impose a penalty for the
violation of a Reliability Standard.
    563. With regard to South Carolina E&G's comment, we do not
preclude the imposition of a penalty if an entity is in noncompliance
with a Reliability Standard that is inconsistent with a state or local
statute or regulation. We also note that South Carolina E&G has not
provided any examples of when such a conflict would exist and we would
expect any such conflicts to be rare. In our December 9, 2005 technical
conference, the state representatives testified that standards or
regulations adopted at the state level are complementary to, or more
stringent than, continent-wide or regional Reliability Standards, not
less stringent or in conflict with them.\159\
---------------------------------------------------------------------------

    \159\ December 9, 2005 Technical Conference, Tr. at 95.
---------------------------------------------------------------------------

    564. We agree with APPA that the relative size of an entity or its
financial ability is a factor that the ERO or a Regional Entity may
consider when developing penalty guidelines or determining an
appropriate penalty in a particular case.
ii. Non-Monetary Penalties
    565. The NOPR requested comments regarding what types of non-
monetary penalties, if any, are appropriate.\160\
---------------------------------------------------------------------------

    \160\ NOPR at P 71 (enforcement question 6).
---------------------------------------------------------------------------

Comments

    566. Most commenters suggest that non-monetary penalties are
appropriate and that such sanctions may include: Imposing a limit on
activities, functions and operations; turning over operation of a
facility to a third party; prohibiting an entity from engaging in a
certain type of transaction; requiring an entity to carry additional
operating reserves for a certain period of time; increasing training
requirements; and a disconnection order for persistent violators.\161\
---------------------------------------------------------------------------

    \161\ See, e.g., EEI, ERCOT, Hydro-Qu[eacute]bec, Kansas City
P&L, NERC, New York Companies, and Ontario IESO.
---------------------------------------------------------------------------

    567. While some commenters recommend suspending or revoking
appropriate organizational certification,\162\ PG&E believes that this
sanction may be appropriate for other industries regulated by a self-
regulatory organization, but is inappropriate in the utility industry.
---------------------------------------------------------------------------

    \162\ See, e.g., Ameren, International Transmission, MRO and
WECC.
---------------------------------------------------------------------------

    568. SMUD suggests that the ERO have flexibility in imposing non-
monetary penalties, so long as the penalty is proportionate to the
violation and is tied to the nature of the conduct to be discouraged.
APPA notes that section 215(e)(6) of the FPA requires that any penalty
must bear a reasonable relationship to the seriousness of the

violation and take into consideration timely remedial efforts.
    569. Progress and SERC suggest that, generally, Regional Entities
should administer non-monetary penalties, which should apply to
``administrative'' violations such as failure to produce documentation
required by a Reliability Standard. In contrast, Alcoa comments that
only the Commission should impose non-monetary penalties.

Commission Conclusion

    570. Section 215 of the FPA contemplates the imposition of both
non-monetary and monetary penalties. Section 215(c)(2)(C) of the FPA
provides that the ERO certified by the Commission must have ERO Rules
that, inter alia, provide fair and impartial procedures for enforcement
of Reliability Standards ``including limitations on activities,
functions, or operations, or other appropriate sanctions.''
    571. While commenters identify an array of possible non-monetary
penalties, the Commission is not formally adopting or rejecting any
particular suggestion here. The appropriate penalty for a particular