[Federal Register Volume 78, Number 96 (Friday, May 17, 2013)]
[Rules and Regulations]
[Pages 29209-29231]
[FR Doc No: 2013-11130]

Vol. 78

Friday,

No. 96

May 17, 2013

Part II

Department of Energy

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Federal Energy Regulatory Commission

18 CFR Part 40

Revisions to Electric Reliability Organization Definition of Bulk
Electric System and Rules of Procedure; Final Rule

Federal Register / Vol. 78 , No. 96 / Friday, May 17, 2013 / Rules
and Regulations

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 40

[Docket Nos. RM12-6-001 and RM12-7-001; Order No. 773-A]

Revisions to Electric Reliability Organization Definition of Bulk
Electric System and Rules of Procedure

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing and clarification.

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SUMMARY: The Commission denies rehearing in part, grants rehearing in
part and otherwise reaffirms its determinations in Order No. 773. In
addition, the Commission clarifies certain provisions of the Final
Rule. Order No. 773 approved the modifications to the currently-
effective definition of ``bulk electric system'' developed by the North
American Electric Reliability Corporation (NERC), the Commission-
certified Electric Reliability Organization. Order No. 773 also
approved NERC's revisions to its Rules of Procedure, which create an
exception process to add elements to, or remove elements from, the bulk
electric system on a case-by-case basis and established a process
pursuant to which an entity can seek a determination by the Commission
whether facilities are ``used in local distribution'' as set forth in
the Federal Power Act.

DATES: Effective Date: This rule will become effective May 17, 2013.

FOR FURTHER INFORMATION CONTACT: Susan Morris (Technical Information),
Office of Electric Reliability, Division of Reliability Standards and
Security, Federal Energy Regulatory Commission, 888 First Street NE.,
Washington, DC 20426, Telephone:<PHONE_NUMBER>.

Nicholas Snyder (Technical Information), Office of Energy Market
Regulation, Division of Electric Power Regulation-Central, Federal
Energy Regulatory Commission, 888 First Street NE., Washington, DC
20426, Telephone:<PHONE_NUMBER>.
Robert Stroh (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street NE., Washington,
DC 20426, Telephone:<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:
Before Commissioners: Jon Wellinghoff, Chairman; Philip D. Moeller,
John R. Norris, Cheryl A. LaFleur, and Tony Clark.

Order on Rehearing and Clarification (Issued April 18, 2013)

I. Introduction

    1. On December 20, 2012, the Commission issued a Final Rule (Order
No. 773) approving modifications to the currently-effective definition
of ``bulk electric system'' developed by the North American Electric
Reliability Corporation (NERC), the Commission-certified Electric
Reliability Organization (ERO).\1\ The Commission found that the
modified definition of ``bulk electric system'' improves upon the
currently-effective definition by establishing a bright-line threshold
that includes all facilities operated at or above 100 kV and removing
language that allows for broad regional discretion. The Commission also
found that the revised definition provides improved clarity by
identifying specific categories of facilities and configurations as
inclusions and exclusions. The Commission also found that NERC's case-
by-case exception process to add elements to, and remove elements from,
the definition of the bulk electric system adds transparency and
uniformity to the determination of what constitutes the bulk electric
system. The Final Rule found that, after notice and comment, the
Commission can designate sub-100 kV facilities, or other facilities, as
part of the bulk electric system. The Commission also established a
process pursuant to which an entity can seek a determination by the
Commission whether facilities are ``used in local distribution'' as set
forth in the Federal Power Act (FPA).
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    \1\ Revisions to Electric Reliability Organization Definition of
Bulk Electric System and Rules of Procedure, Order No. 773, 141 FERC
] 61,236 (2012).
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    2. In this order, the Commission denies in part and grants in part
the requests for rehearing and clarification of the Final Rule, as
discussed below.

A. Background

1. Order Nos. 743 and 743-A
    3. On November 18, 2010, in Order No. 743, the Commission directed
that NERC, through NERC's Reliability Standards Development Process,
develop modifications to the currently-effective definition of the term
``bulk electric system'' to ensure that the definition encompasses all
facilities necessary for operating the interconnected transmission
network.\2\ The Commission also directed NERC to address the
Commission's technical and policy concerns. Among the Commission's
concerns were inconsistencies in the application of the definition and
a lack of oversight and exclusion of facilities from the bulk electric
system required for the operation of the interconnected transmission
network. In Order No. 743, the Commission concluded that the best way
to address these concerns was to eliminate the Regional Entity
discretion to define the bulk electric system without NERC or
Commission review, maintain a bright-line threshold that includes all
facilities operated at or above 100 kV except defined radial
facilities, and adopt an exemption process and criteria for removing
from the bulk electric system definition, those facilities that are not
necessary for operating the interconnected transmission network. In
Order No. 743, the Commission allowed NERC to ``propose a different
solution that is as effective as, or superior to, the Commission's
proposed approach in addressing the Commission's technical and other
concerns so as to ensure that all necessary facilities are included
within the scope of the definition.'' \3\ The Commission directed NERC
to file the revised definition of bulk electric system and its process
to exempt facilities from inclusion in the bulk electric system within
one year of the effective date of the final rule.\4\
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    \2\ Revision to Electric Reliability Organization Definition of
Bulk Electric System, Order No. 743, 133 FERC ] 61,150, at P 16
(2010), order on reh'g, Order No. 743-A, 134 FERC ] 61,210 (2011).
    \3\ Order No. 743, 133 FERC ] 61,150 at P 16.
    \4\ Id. P 113.
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    4. In Order No. 743-A, the Commission reaffirmed its determinations
in Order No. 743. In addition, the Commission clarified that the issue
the Commission directed NERC to rectify was the discretion the Regional
Entities have under the current definition to define the bulk electric
system in their regions without any oversight from the Commission or
NERC.\5\ The Commission also clarified that the 100 kV threshold was a
``first step or proxy'' for determining which facilities should be
included in the bulk electric system.\6\
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    \5\ Order No. 743-A, 134 FERC ] 61,210 at P 11.
    \6\ Id. PP 40, 67, 102-103.
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    5. The Commission further clarified that the statement in Order No.
743, ``determining where the line between `transmission' and `local
distribution' lies [hellip] should be part of the exemption process the
ERO develops,'' was intended to grant discretion to NERC, as the entity
with technical expertise, to develop criteria to determine how to
differentiate between local distribution and transmission facilities in
an objective, consistent, and transparent

manner.\7\ The Commission stated that the ``Seven Factor Test'' adopted
in Order No. 888 could be relevant and possibly a logical starting
point for determining which facilities are local distribution for
reliability purposes.\8\ However, the Commission left it to NERC to
determine if and how the Seven Factor Test should be considered in
differentiating between local distribution and transmission facilities
for purposes of determining whether a facility should be classified as
part of the bulk electric system.\9\ Order No. 743-A re-emphasized that
local distribution facilities are excluded from the definition of Bulk-
Power System and, therefore, must be excluded from the definition of
bulk electric system.\10\ In Order No. 743-A, the Commission also
stated that, ``although local distribution facilities are excluded from
the definition, it still is necessary to determine which facilities are
local distribution, and which are transmission. Whether facilities are
used in local distribution will in certain instances raise a question
of fact, which the Commission has jurisdiction to determine.'' \11\

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    \7\ Id. P 68.
    \8\ Order No. 743-A, 134 FERC ] 61,210 at P 69. See Promoting
Wholesale Competition Through Open Access Non-Discriminatory
Transmission Services by Public Utilities; Recovery of Stranded
Costs by Public Utilities and Transmitting Utilities, Order No. 888,
FERC Stats. & Regs. ] 31,036, at 31,783-84 (1996), order on reh'g,
Order No. 888-A, FERC Stats. & Regs. ] 31,048, order on reh'g, Order
No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, Order No. 888-C,
82 FERC ] 61,046 (1998), aff'd in relevant part sub nom.
Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (DC
Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002).
    \9\ Order No. 743-A, 134 FERC ] 61,210 at P 70.
    \10\ Id. PP 25, 58.
    \11\ Id. P 67.
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2. Order No. 773
    6. On January 25, 2012, NERC submitted two petitions pursuant to
the directives in Order No. 743: (1) NERC's proposed revision to the
definition of ``bulk electric system'' which includes provisions to
include and exclude facilities from the ``core'' definition (Docket No.
RM12-6-000); and (2) revisions to NERC's Rules of Procedure to add a
procedure (an exception process) to classify or de-classify an element
as part of the ``bulk electric system'' (Docket No. RM12-7-000).\12\
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    \12\ The Commission-approved core definition, inclusions and
exclusions are included in Attachment A to this order on rehearing.
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    7. On December 20, 2012, the Commission issued Order No. 773, a
final rule approving NERC's modifications to the definition of ``bulk
electric system'' and the exception process, in response to Order Nos.
743 and 743-A. The Commission found that the revised definition of
``bulk electric system'' establishes a bright-line threshold that
includes all facilities operated at or above 100 kV and removed
language from the prior definition that allows for broad regional
discretion. Further, the Commission found that inclusions and
exclusions in the definition that address typical system facilities and
configurations such as generation and radial systems provide additional
granularity that improves consistency and provides a practical means to
determine the status of common system configurations.\13\
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    \13\ Order No. 773, 141 FERC ] 61,236 at PP 2, 4, 38-40, 51.
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    8. In the Final Rule, the Commission found that the modified
definition is consistent, repeatable and verifiable and will provide
clarity that will assist NERC and affected entities in implementing
Reliability Standards. The Commission also found that NERC's proposal
satisfies the directives of Order No. 743 to develop modifications to
the currently-effective definition of bulk electric system to ensure
that the definition encompasses all facilities necessary for operating
an interconnected transmission network.
    9. The Commission also approved NERC's case-by-case exception
process to add elements to, and remove elements from, the definition of
the bulk electric system.\14\ In addition, the Final Rule established a
process by which an entity can seek a determination by the Commission
whether facilities are ``used in local distribution'' as set forth in
the FPA on a case-by-case basis.\15\ The Commission also directed NERC
to (1) implement the exclusions for radial systems (exclusion E1) and
local networks (exclusion E3) so that they do not apply to tie-lines,
i.e. generator interconnection facilities, for bulk electric system
generators; and (2) modify the local network exclusion to remove the
100 kV minimum operating voltage to allow systems that include one or
more looped configurations connected below 100 kV to be eligible for
the local network exclusion.\16\
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    \14\ Order No. 773, 141 FERC ] 61,236 at PP 251-262.
    \15\ Order No. 773, 141 FERC ] 61,236 at PP 66-73.
    \16\ Order No. 773, 141 FERC ] 61,236 at PP 155, 164-169.
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B. Requests for Rehearing

    10. The following entities filed timely requests for rehearing and/
or clarification of Order No. 773: NERC, American Public Power
Association (APPA); American Wind Energy Association (AWEA); City of
Holland, Michigan Board of Public Works (Holland); Dow Chemical Company
(Dow); Electricity Consumers Resource Council (ELCON); National
Association of Regulatory Utility Commissioners (NARUC); National Rural
Electric Cooperative Association (NRECA); New York State Public Service
Commission (NYPSC); Public Utility District No. 1 of Snohomish County,
Washington (Snohomish); Transmission Access Policy Study Group (TAPS);
and Utility Services, Inc. (Utility Services).\17\
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    \17\ We find that Utility Services' rehearing request is
deficient because it fails to include a Statement of Issues section
separate from its arguments, as required by Rule 713 of the
Commission's Rules of Practice and Procedure. 18 CFR 385.713(c)(2)
(2012). Rule 713(c)(2) requires that a rehearing request include a
separate section entitled ``Statement of Issues'' listing each issue
presented to the Commission in a separately enumerated paragraph
that includes representative Commission and court precedent on which
the participant is relying. Under Rule 713, any issue not so listed
will be deemed waived. See Revision of Rules of Practice and
Procedure Regarding Issue Identification, Order No. 663, FERC Stats.
& Regs. ] 31,193 (2005), order on reh'g, Order No. 663-A, FERC
Stats. & Regs. ] 31,211 (2006). Accordingly, we dismiss Utility
Services' rehearing request. However, we note that Utility Services'
rehearing request raises issues similar to those addressed in other
petitions in this proceeding.
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    11. Exelon Corporation filed a response to the NERC request for
clarification. The ITC Companies filed a motion for leave to answer and
answer to the Holland rehearing request, and NERC filed a motion for
leave to answer and answer in response to Exelon's response. Holland
filed an answer to the answer of the ITC Companies, and Exelon filed a
response to NERC's answer.

II. Discussion

A. Procedural Matters

    12. Rule 213(a)(2) of the Commission's Rules of Practice and
Procedure, 18 CFR 213(a)(2) (2012), provides that answers are generally
not permitted unless requested by the decisional authority. Rule 713(d)
of the Commission's Rules of Practice and Procedure, 18 CFR 713(d)
(2012), prohibits answers to requests for rehearing. Accordingly, we
will reject the answers filed by the parties in this proceeding.

B. Challenges to Commission Approval of the Revised Bulk Electric
System Definition and Use of a 100 kV Bright-Line Threshold

    13. NYPSC argues that the Commission's approval of the 100 kV
bright-line threshold was arbitrary, capricious and unsupported by

substantial evidence because the record lacks a technical justification
for using the 100 kV threshold. NYPSC adds that the Commission failed
to demonstrate a sufficient technical justification that the bright-
line definition only encompasses facilities needed for the reliable
operation of the Bulk-Power System. While NYPSC believes that the
Commission's bright-line approach is designed to ensure consistency,
NYPSC states the Commission cannot evade the jurisdictional limitations
of the FPA to ensure consistency. NYPSC also argues that the Final Rule
contains no factual basis for establishing 100 kV as the appropriate
place to draw the line and contends that the Commission conceded that
not all facilities operated at or above 100 kV are necessary for
operating the interconnected transmission network.
    14. NARUC and NYPSC also argue that the definition encompasses
facilities that are used for local distribution and are not necessary
for operating an interconnected transmission network. NYPSC contends
that, through studies and functional testing, the New York Independent
System Operator, Inc. (NYISO) has developed a list of facilities that
have the potential to cause cascading problems on the system as well as
facilities that can have an impact on the Bulk-Power System but whose
main function is to serve load. NYPSC claims that the Commission
ignored this information in establishing a bright-line definition.
    15. NARUC argues that a 100 kV bright-line threshold sweeps into
the bulk electric system elements that were previously classified as
local distribution. According to NARUC, the Final Rule creates the
possibility of entities having to engage in a costly analysis to seek
an exception for facilities used in local distribution. NARUC states
that neither the inclusions and exclusions in the definition, nor the
exception process cure the jurisdictional overreach inherent in the
bright-line rule set at 100 kV.
    16. Further, NYPSC argues that, even though the definition does not
include facilities used for local distribution, the Commission
``effectively acknowledged that such facilities would be placed under
its jurisdiction by establishing an exception process whereby entities
may seek to demonstrate that the facilities are not necessary for
operating the interconnected transmission network, or are used in local
distribution.''\18\ NYPSC argues that the Commission should not assume
it has jurisdiction over facilities operated at 100 kV and above until
an entity demonstrates that the Commission does not have jurisdiction.
According to NARUC and NYPSC, the approach adopted in the Final Rule
inappropriately shifts the legal and technical burdens on the
jurisdictional issue to the entity applying for an exception.\19\ NYPSC
adds that the Commission improperly dismissed NYPSC's evidence that
there is a layer of ``area'' transmission facilities below the Bulk-
Power System and above distribution facilities that move energy within
a utility service territory and toward load centers and only a small
subset of these ``area'' facilities assists in maintaining the
reliability of the Bulk-Power System.
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    \18\ NYPSC Request for Rehearing and Clarification at 11 (citing
Order No. 773, 141 FERC ] 61,236 at P 40). See also NARUC Request
for Rehearing at 3-4.
    \19\ See, e.g., NYPSC Request for Rehearing and Clarification at
11-12.
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    17. NYPSC contends that the bright-line definition is inconsistent
with the FPA's definition of the Bulk-Power System, which, according to
NYPSC, recognizes that a functional test is needed to determine whether
a facility is necessary for reliable operation. NYPSC claims that the
Commission ignored a functional test for defining the Bulk-Power
System, such as the one the Northeast Power Coordinating Council, Inc.
(NPCC) has historically used to identify facilities having an adverse
impact on the Bulk-Power System. NYPSC also argues that the Commission
should not require utilities to upgrade facilities to comply with
Commission-approved Reliability Standards where a timely request for an
exception has been submitted and is still pending. NYPSC contends that
compliance and the expenditure of ratepayer funds should not be
required until after the Commission has made a final determination on
the exception, which will ensure that the costs of compliance are not
unnecessarily imposed upon ratepayers, and the Commission does not
impermissibly exert jurisdiction.
Commission Determination
    18. We deny rehearing and affirm the findings in the Final Rule. As
described below, petitioners have previously raised, and the Commission
has addressed and rejected, the arguments with respect to the
Commission's authority and technical justification for the 100 kV
bright-line threshold and the functional test.
    19. In Order No. 743, the Commission found sufficient justification
for the finding that the current definition allows broad regional
discretion without ERO or Commission oversight, which has resulted in
reliability issues and has failed to ensure that all facilities
necessary for operation of the interconnected transmission network are
covered by the Reliability Standards.\20\ The Commission found that
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    \20\ Order No. 743, 133 FERC ] 61,150 at P 72.

many facilities operated at 100 kV and above have a significant
effect on the overall functioning of the grid. The majority of 100
kV and above facilities in the United States operate in parallel
with other high voltage and extra high voltage facilities,
interconnect significant amounts of generation sources and operate
as part of a defined flow gate, which illustrates their parallel
nature and therefore their necessity to the reliable operation of
the interconnected transmission system.\21\
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    \21\ Order No. 773, 141 FERC ] 61,236 at P 41 (citing Order No.
743, 133 FERC ] 61,150 at P 73).

    The Commission also explained its concern with the application of
the currently-effective definition by illustrating examples of wide-
scale cascading outages that NERC or the Commission did not have a
chance to mitigate because the facilities were not considered part of
the bulk electric system.\22\ As discussed in Order No. 743, the
Commission found that failure of 100-200 kV facilities has caused
cascading outages that would have been minimized or prevented if these
facilities were operated in compliance with the NERC Reliability
Standards.\23\
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    \22\ Order No. 743, 133 FERC ] 61,150 at PP 72-96.
    \23\ Order No. 743, 133 FERC ] 61,150 at P 87.
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    20. The Commission also noted that NERC already applies a general
100 kV threshold, and all regions, with the exception of NPCC, also
apply a 100 kV threshold.\24\ The Commission stated that the best way
to address its concerns ``is to eliminate the regional discretion in
the ERO's current definition, maintain the bright-line threshold that
includes all facilities operated at or above 100 kV except defined
radial facilities, and establish an exemption process and criteria for
excluding facilities the ERO determines are not necessary for operating
the interconnected transmission network.'' \25\ The Commission did not
propose to change the existing threshold in the definition, but rather
charged NERC with eliminating ``the ambiguity created by the current
characterization of that threshold as a general guideline.'' \26\ In
other words, while the Commission did

not mandate the 100 kV threshold, it directed NERC to develop a revised
definition that addresses the inconsistency, lack of oversight and
exclusion of facilities inherent in the current definition.\27\
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    \24\ Order No. 743, 133 FERC ] 61,150 at P 56; Order No. 773,
141 FERC ] 61,236 at P 42.
    \25\ Order No. 743, 133 FERC ] 61,150 at P 30.
    \26\ Id. (footnotes omitted).
    \27\ See Order No. 743-A, 134 FERC ] 61,210 at P 53.
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    21. We disagree with NYPSC and NARUC that by establishing an
exception process the Commission effectively acknowledged that local
distribution facilities would be placed under its jurisdiction. As we
explained in the Final Rule, the bright-line threshold would be a
``first step or proxy'' in determining which facilities should be
included in the bulk electric system. The Commission also explained
that the ``definition, coupled with the exception process will ensure
that facilities not necessary for the operation of the interconnected
transmission network will be properly categorized.'' \28\ Thus, the
exception process is not evidence that the ``core'' definition violates
the FPA but instead is a means to ensure the application of the
definition complies with the FPA.
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    \28\ Id.
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    22. Further, as we explained in the Final Rule, the determination
of whether an element or facility is ``used in local distribution,'' is
a multi-step process that may require a jurisdictional analysis that is
more appropriately performed by the Commission.\29\ The Commission
stated:
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    \29\ Order No. 773, 141 FERC ] 61,236 at P 69 (citations
omitted).

application of the ``core'' definition and the four exclusions
should serve to exclude most facilities used in local distribution
from the bulk electric system. However, there may be certain
circumstances that present a factual question as to whether a
facility that remains in the bulk electric system after applying the
``core'' definition and the four exclusions should nonetheless be
excluded because it is used in local distribution. In such
circumstances, which we expect will be infrequent, an entity must
petition the Commission seeking a determination that the facility is
used in local distribution. Such petitions should include
information that will assist the Commission in making such
determination, and notice of the petition must be provided to NERC
and relevant Regional Entities.\30\
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    \30\ Order No. 773, 141 FERC ] 61,236 at P 72 (citations
omitted).

    In other words, if a facility is classified as part of the bulk
electric system by application of the definition but should be excluded
because it is a facility used in local distribution, an entity may
apply to the Commission for a local distribution determination. Thus,
because application of the 100 kV threshold is the first step in the
process of determining whether an element is part of the bulk electric
system, we reject the argument that the definition will sweep in all
elements above 100 kV in a manner inconsistent with the Commission's
jurisdiction.\31\
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    \31\ Order No. 773, 141 FERC ] 61,236 at P 41.
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    23. In sum, we deny rehearing and affirm that approval of the 100
kV bright-line threshold was adequately supported with a technical
justification. Petitioners raise arguments that the Commission has
previously considered and rejected in this proceeding as well as
previous Commission decisions with respect to the reasons for requiring
revisions to the definition of bulk electric system. In all these
cases, the Commission explained and justified the appropriateness of a
100 kV threshold. Therefore, we reject the requests for rehearing on
these issues.
    24. We also reject the argument that a functional test is a more
appropriate manner to determine which facilities are part of the bulk
electric system. In Order No. 743, the Commission concluded that a
material impact or functional test excludes facilities ``without regard
to whether they are necessary to operate the system, and instead seek
to determine the impact of the loss of an element.'' \32\ The
Commission also concluded that these tests are subjective and result in
an inconsistent process that excludes facilities from the bulk electric
system.\33\ In the NOPR comments in this proceeding, these same issues
were raised, and in the Final Rule the Commission again rejected
them.\34\ Further, as discussed in detail in the Final Rule, the
Commission found that NERC's proposal adequately ensures that all
facilities necessary for operating an interconnected electric energy
transmission network are included under the bulk electric system. In
the Final Rule, the Commission also relied on its finding in Order No.
743 that
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    \32\ Order No. 743, 133 FERC ] 61,150 at P 76.
    \33\ Order No. 743, 133 FERC ] 61,150, at PP 73-86.
    \34\ Order No. 773, 141 FERC ] 61,236 at P 41.

    ``[U]niform Reliability Standards, and uniform implementation,
should be the goal and the practice, the rule rather than the
exception, absent a showing that a regional variation is superior or
necessary due to regional differences. Consistency is important as
it sets a common bar for transmission planning, operation, and
maintenance necessary to achieve reliable operation. . . . [W]e have
found several reliability issues with allowing Regional Entities
broad discretion without ERO or Commission oversight.''\35\
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    \35\ Order No. 773, 141 FERC ] 61,236 at P 39 (citing Order No.
743, 133 FERC ] 61,150, at P 82 (footnote omitted)). Order No. 743
did not reject all material impact assessments but instead took
issue with particular tests and outlined general problems with the
material impact tests used to determine the extent of the bulk
electric system. Order No. 743, 133 FERC ] 61,150 at PP 76-78; Order
No. 743-A, 134 FERC ] 61,210 at PP 44-47. Indeed, the ERO had
flexibility to develop alternative approaches, such as a functional
test. However, the ERO, in applying its technical expertise,
developed a revised definition that retained a 100 kV threshold.
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    25. We also disagree with NYPSC's claim that the Commission ignored
the NYPSC evidence of NYISO studies and functional testing. As NYPSC
states, the NYISO data is the result of a functional test.\36\ While
the Commission did not reject all material impact tests, the Commission
took issue with particular tests and outlined general problems with the
material impact tests used to date because they exclude facilities
without regard to whether they are necessary to operate the
interconnected transmission network. In addition, as explained above,
failure of 100-200 kV facilities has caused cascading outages that
would have been minimized or prevented if these facilities were
operated in compliance with the NERC Reliability Standards. Further, in
the Final Rule the Commission noted that NYPSC cited specific examples
of facilities that should be excluded, but found that determinations
for treatment for specific facilities were ``more appropriate for the
exception process'' and were beyond the scope of this proceeding.\37\
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    \36\ NYPSC Request for Rehearing at 10.
    \37\ Order No. 773, 141 FERC ] 61,236 at P 43.
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    26. With regard to NYPSC's request for clarification about the need
to upgrade facilities while an exception request is pending, in Order
No. 743-A we agreed with petitioners ``that currently unregistered
entities that may be required to seek an exemption for facilities under
the revised bulk electric system definition will not be required to
register and thereafter comply with Reliability Standards until a final
decision is made to deny the application for exemption,'' stating that
``entities should not be required to take costly steps to comply with
the Reliability Standards prior to the ERO's initial determination on
an exemption request.'' \38\ NERC's exception process is consistent
with the approach in Order No. 743-A. According to NERC, elements that
are newly-included in the bulk electric system due to the revised
definition will only become subject to relevant Reliability Standards
twenty-four months after the effective date of the revised
definition.\39\ It is NERC's

expectation that during the twenty-four month transition period
entities with newly-included elements will file exception requests and
the Regional Entities and NERC will make determinations of the
exception requests.\40\ This transition period is sufficient to obtain
a NERC ruling and avoid any compliance costs.\41\ However, if an
element that is already deemed part of the bulk electric system and
subject to relevant Reliability Standards today is included by
application of the revised definition of bulk electric system, but an
entity seeks an exclusion exception of the element, the element will
remain subject to the relevant Reliability Standards during the
pendency of the exception process. Conversely, if an element is
excluded from the bulk electric system by application of the revised
definition, but a different entity with a reliability oversight
obligation seeks to include the element in the exception process, the
element will not be subject to Reliability Standards during the
exception process. If NERC determines the element is needed for
operation of the interconnected transmission network and thus part of
the bulk electric system, the entity can propose an appropriate
implementation plan for compliance.\42\
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    \38\ See Order No. 743-A, 134 FERC ] 61,210 at PP 91, 93.
    \39\ NERC Petition at 34.
    \40\ See NERC BES Petition at 36.
    \41\ See Order No. 743-A, 134 FERC ] 61,210 at P 93. See also
NERC BES Petition at 36.
    \42\ NERC ROP Petition, Att. 1 (``Proposed Appendix 5C to the
Rules of Procedure, Procedure for Requesting and Receiving an
Exception from the NERC Definition of Bulk Electric System, Section
10.1'') at 16: ``In the case of an Element not included in the BES
by application of the BES Definition but for which an Inclusion
Exception is approved, the Owner shall submit a proposed
implementation plan to the Regional Entity detailing the schedule
for complying with any Reliability Standards applicable to the newly
included Element. The Regional Entity and Owner shall confer to
agree upon such schedule.''
---------------------------------------------------------------------------

C. Order No. 773 Directives Regarding the Revised Definition

    27. A number of entities request clarification and/or rehearing in
connection with the Commission directives in the Final Rule.
Specifically, they request clarification and/or rehearing of (1) the
Commission decision for treatment of looped configurations connected
below 100 kV and the corresponding directive to modify the local
network exclusion (exclusion E3) to remove the 100 kV minimum operating
voltage; and (2) the directive to implement the exclusions for radial
systems (exclusion E1) and local networks (exclusion E3) so that they
do not apply to tie-lines (generator interconnection facilities) for
bulk electric system generators indentified in inclusion I2 (generating
resources).\43\
---------------------------------------------------------------------------

    \43\ The phrase generator tie-line means the same as generator
interconnection facility as used in the Notice of Proposed
Rulemaking in Docket No. RM12-16-000. Generator Requirements at the
Transmission Interface, 143 FERC ] 61,049 (2013).
---------------------------------------------------------------------------

1. Looped Configurations Connected below 100 kV and Removing the 100 kV
Minimum in Exclusion E3
Order No. 773
    28. In the Final Rule, the Commission held that radial systems with
elements operating at 100 kV or higher in a configuration that emanate
from two or more points of connection cannot be deemed ``radial'' if
the configuration remains contiguous through elements that are operated
below 100 kV. The Commission held that such a configuration is a
networked configuration and does not qualify for exclusion E1. The
Commission included a depiction of this configuration, shown below, in
the Final Rule as Figure 3.\44\ However, the Commission also found that
the facilities below 100 kV may or may not be necessary for the
operation of the interconnected transmission network, and this decision
can be made case-by-case in the exception process.
---------------------------------------------------------------------------

    \44\ See Order No. 773, 141 FERC ] 61,236 at P 150.
    [GRAPHIC] [TIFF OMITTED] TR17MY13.000

Requests for Rehearing
    29. APPA, TAPS and ELCON argue that the Commission erred in holding
that two radial lines at or above 100 kV connected by a sub-100 kV line
are not eligible for exclusion E1.\45\ They argue that the Commission
lacks authority to redraft standards, but claim that the Final Rule
does so by reinterpreting the exclusion contrary to its language and
NERC's interpretation. They claim that finding that exclusion E1 is
inapplicable to such a configuration because the configuration is
``networked'' and not a ``radial system'' is unreasonable and
constitutes an impermissible change to the NERC-filed definition. APPA,
TAPS and ELCON state that, if radial systems connected by a sub-100 kV
loop had not been intended to be eligible for exclusion E1, then
exclusion E3 would have been drafted to allow such configurations to be
covered. They contend that the fact that exclusion E1 is intended to
encompass radial lines at or above 100 kV that are connected below 100
kV works in tandem with exclusion E3's limitation to facilities 100 kV
and above and reinforces the conclusion that the Final Rule's
interpretation of exclusion E1 is inconsistent with the language and
structure of the definition. They also argue that the ruling on
exclusion E1 and the corresponding directive to modify exclusion E3
improperly substituted the Commission's own judgment for NERC's which,
they claim, violates the FPA section 215(d)(2) requirement for the
Commission to give due weight to the technical expertise of the ERO.
---------------------------------------------------------------------------

    \45\ See also Dow Request for Rehearing at 8-10.
---------------------------------------------------------------------------

    30. APPA, TAPS and ELCON contend that the Final Rule's
identification of additional factors that NERC did not consider
provides no support for second guessing the technical content of NERC's
definition. APPA states that the exception process exists to consider
other factors, such as the factors the Commission indicated that may be
relevant in particular cases.\46\ According to APPA, TAPS and ELCON,
NERC made a determination that loops below 100 kV generally do not
impact the grid, but recognized that those that do are more
appropriately handled through the exception process. They also argue
that the Commission effectively changed the definition without giving
NERC the opportunity to find an equally effective or superior solution
to the Commission's concern.
---------------------------------------------------------------------------

    \46\ See Order No. 773, 141 FERC ] 61,236 at P 155 n.139.
---------------------------------------------------------------------------

    31. Further, TAPS and ELCON argue that the Commission should also
reverse its directive to NERC to modify exclusion E3 to remove the 100
kV minimum threshold. They contend that the need to change exclusion E3
arises only if exclusion E1 is changed to foreclose exclusion of
radials above 100 kV connected at lower voltages, resulting in the need
for consideration of such configurations under exclusion E3. According
to TAPS and ELCON, exclusion E3, as written, works well with the rest
of the definition when exclusion E1 is construed as NERC intended. TAPS
and ELCON state that, if the Commission is concerned that NERC's
process is not adequately including radial facilities of 100 kV or more
connected by sub-100 kV loops, the Commission should not revise
exclusions E1 and E3 but should direct NERC to submit a report that
provides information on how entities use this exclusion, similar to the
Final Rule directive in connection with exclusion E3's 300 kV voltage
ceiling.\47\
---------------------------------------------------------------------------

    \47\ TAPS and ELCON Request for Rehearing and Clarification at 6
(citing Order No. 773, 141 FERC ] 61,236 at P 206).
---------------------------------------------------------------------------

    32. APPA claims that, by not allowing exclusion E1 to apply to sub-
100 kV loops between radial systems in conjunction with deletion of the
100 kV floor in exclusion E3, the Commission directive will create a
disincentive for distribution providers from connecting their
distribution systems to the bulk electric system at multiple points at
voltages greater than 100 kV. APPA also stated that distribution
providers will be less likely to construct such distribution networks
with built-in redundancy that provide multiple paths to provide
continuous, high quality service, because of the concern that these
distribution systems will be designated as bulk electric system
elements.
    33. NERC seeks clarification of the Commission directive to revise
exclusion E3. Specifically NERC requests clarification that it should
remove the phrase ``or above 100 kV but'' in the first sentence of
exclusion E3 as shown below.

    E3--Local networks (LN): A group of contiguous transmission
Elements operated at or above 100 kV but less than 300 kV that
distribute power to Load rather than transfer bulk power across the
interconnected system. LN's emanate from multiple points of
connection at 100 kV or higher to improve the level of service to
retail customer Load and not to accommodate bulk power transfer
across the interconnected system. The LN is characterized by all of
the following:\48\
---------------------------------------------------------------------------

    \48\ NERC Request for Clarification at 4.

    NERC contends that the Commission's approach will entail the
evaluation of significantly more facilities in applying exclusion E3
and is administratively burdensome, NERC requests that the Commission
clarify the basis and intent of this directive to allow NERC to
implement this directive appropriately.\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

Commission Determination
    34. The Commission denies rehearing and upholds the Final Rule. The
Commission disagrees that it failed to give due weight to NERC. As
explained below, the Commission considered NERC's rationale, but after
giving due weight found it unpersuasive.
    35. In the NOPR, the Commission agreed with NERC's proposal that
radial systems only serving load and emanating from a single point of
connection of 100 kV or higher should be excluded from the bulk
electric system. However, we expressed concern ``that the exclusion
could allow elements operating at 100 kV or higher in a configuration
that emanates from two or more points of connection ``to be deemed
``radial'' even though the configuration remains contiguous through
elements that are operated below 100 kV.'' \50\ The Commission also
requested comment on the appropriateness of examining elements below
100 kV to determine if the configuration (shown in the figure above)
meets exclusion E1, i.e., whether the figure depicts ``a system
emanating from two points of connection at 230 kV and, therefore, the
230 kV elements above the transformers to the points of connection to
the two 230 kV lines would not be eligible for the exclusion E1
notwithstanding the connection below 100 kV.'' \51\ In response to the
NOPR, some commenters disagreed with the Commission's characterization
that the configuration depicts a loop, claiming that it represents two
separate radial systems, while other commenters agreed with the NOPR
that the configuration does not meet the definition of a radial
system.\52\ The Commission considered NERC's explanations, but in the
Final Rule the Commission found that the configuration shown above is a
networked configuration through a 69 kV loop and does not qualify for
exclusion E1 because the load can be served by either 230 kV line.\53\
---------------------------------------------------------------------------

    \50\ Revisions to Electric Relibaility Organization Definition
of Bulk Electric System and Rules of Procedure, Notice of Proposed
Rulemaking (NOPR), 139 FERC ] 61,247 at P 81.
    \51\ Id.
    \52\ Order No. 773, 141 FERC ] 61,236 at P 154.
    \53\ Order No. 773, 141 FERC ] 61,236 at P 155.
---------------------------------------------------------------------------

    36. The Commission disagrees that this decision is contrary to the
language of exclusion E1. Instead, our

interpretation of NERC's wording reasonably construes the ambiguity, if
any, in exclusion E1. Even apart from NERC's wording of exclusion E1,
it is difficult to envision any reasonable exclusion for radial lines
that would cover the facilities in the configuration above. The looped
systems have more than one path to the bulk electric system and,
therefore, it is reasonable not to consider them ``radial'' in nature.
Exclusion E1 provides a definition of ``radial system'' as ``[a] group
of contiguous transmission Elements that emanates from a single point
of connection of 100 kV or higher . . .'' (emphasis added).\54\ This
definition of ``radial system'' only allows a single point of
connection and does not limit operating voltage of the transmission
elements connecting two such points to any minimum value. Therefore,
``radial systems'' as defined in exclusion E1 includes elements that
cover the entire range of operating voltages. It strikes us as
unreasonable to characterize lines as radial by ignoring connecting
facilities below 100 kV. Rather the reasonable approach is to find
these lines to be non-radial and then consider whether they should be
excluded as a local network or through the exception process. Further,
as we noted previously, many facilities operated at 100 kV and above
have a significant effect on the overall functioning of the grid. The
majority of 100 kV and above facilities in the United States operate in
parallel with other high voltage and extra high voltage facilities,
interconnect significant amounts of generation sources and operate as
part of a defined flow gate, which illustrates their parallel nature
and therefore their necessity to the reliable operation of the
interconnected transmission system. The Final Rule also noted that NERC
emphasized that radial systems cannot have multiple connections at 100
kV or higher.\55\ For these reasons, we believe it is important that
these configurations be assessed for exclusion from the bulk electric
system under the criteria in exclusion E3, to ensure that any excluded
facilities do not contribute to the reliable operation of the
interconnected system. Moreover, as noted in the Final Rule, the sub-
100 kV elements comprising radial systems and local networks will not
be included in the bulk electric system, unless determined otherwise in
the exception process.\56\
---------------------------------------------------------------------------

    \54\ Order No. 773, 141 FERC ] 61,236 at P 18.
    \55\ Order No. 773, 141 FERC ] 61,236 at P 42.
    \56\ Order No. 773, 141 FERC ] 61,236 at P 155. In the Final
Rule the Commission states that it expects entities to identify and
include sub-100 kV facilities necessary for the operation of the
interconnected transmission network and found NERC's approach to
include such facilities in the bulk electric system to be
reasonable. Order No. 773, 141 FERC ] 61,236 at P 269. The
Commission notes that the joint NERC and Commission staff report on
the September 8, 2011, Arizona-Southern California blackout explains
why facilities operating below 100 kV should not be ignored simply
because the elements are below 100 kV. See Arizona-Southern
California Outages on September 8, 2011--Causes and Recommendations
at 96 (September 2011 Blackout Report), available at http://www.ferc.gov/legal/staff-reports/04-27-2012-ferc-nerc-report.pdf.
There, facilities below 100 kV were a significant factor in a major
blackout, but their significance was not fully or widely recognized
until after the blackout.
---------------------------------------------------------------------------

    37. We also deny rehearing on TAPS' and ELCON's argument that the
Commission's decision regarding exclusion E1 and the Final Rule
directive to change the language in exclusion E3 (removing the 100 kV
minimum operating threshold language) will no longer allow exclusions
E1 and E3 to work together and will be administratively more
burdensome. As we stated in the Final Rule, exclusion E3 as written
applies to a local network that is contiguous and above 100 kV. Thus,
the exclusion E3 language, as NERC initially proposed, did not apply to
a configuration where the facilities in question are contiguous below
100 kV.\57\ Removing the 100 kV minimum operating voltage in exclusion
E3 allows networked configurations below 100 kV, that may not otherwise
be eligible for exclusion E1, to be eligible for exclusion E3. This
modification also makes the ``local network'' exclusion language
consistent with language in exclusion E3 criterion (a), which limits
generation on the local network and its underlying elements. As we
stated in the Final Rule, the entire range of operating voltage
elements must be examined when considering a local network.\58\
---------------------------------------------------------------------------

    \57\ Order No. 773, 141 FERC ] 61,236 at P 155.
    \58\ Id.
---------------------------------------------------------------------------

    38. In the Final Rule, the Commission concluded that removing the
100 kV floor in exclusion E3 will decrease the burden for some entities
that would have otherwise been included in the bulk electric system
because these entities may now apply exclusion E3. This is because
many, if not most, of the configurations in question may still be
excluded through application of the modified exclusion E3.
    39. We disagree with TAPS's, ELCON's and APPA's contention that the
Final Rule's identification of other possible factors to be considered
does not support dismissing the technical content of NERC's definition.
The Commission did not rely on these other factors as the basis for its
decision.\59\ Instead, the Commission found that looped systems have
more than one path to the bulk electric system. Therefore, the
Commission concluded that it is reasonable not to consider them
``radial'' in nature.\60\
---------------------------------------------------------------------------

    \59\ See Order No. 773, 141 FERC ] 61,236 at P 155 n.139.
    \60\ Id.
---------------------------------------------------------------------------

    40. With respect to NERC's request for clarification, we agree that
removing the phrase ``or above 100 kV but'' from the definition of
local networks in the first sentence of exclusion E3 is an appropriate
way to meet the Commission's directive to remove the 100 kV minimum
operating voltage in the local network definition. As we explained in
the Final Rule, this modification, together with satisfying the
criteria outlined in exclusion E3, will appropriately exclude local
network configurations that are not necessary to the reliable operation
of the interconnected transmission network.\61\
---------------------------------------------------------------------------

    \61\ Order No. 773, 141 FERC ] 61,236 at P 155.
---------------------------------------------------------------------------

    41. While APPA claims that the Commission directive to not allow
exclusion E1 to apply to sub-100 kV loops will create a disincentive
for distribution providers to connect their distribution systems to the
bulk electric system, our result derives directly from NERC's own
wording of exclusion E1. We cannot avoid the reasonable effect of these
words based on an unsupported claim that concerns about jurisdiction
will cause distribution providers to forgo the significant reliability
benefits of an added connection.
    42. We do not agree with NERC that ``the Commission's approach will
entail the evaluation of significantly more facilities in applying
exclusion E3 and is administratively burdensome.'' Exclusion E3 is one
part of the bright-line definition of bulk electric system, and all
asset owners must apply the definition as a whole in order to determine
whether their elements are part of the bulk electric system. As we
stated in the Final Rule, exclusion E3 as proposed by NERC requires the
local network to be contiguous and above 100 kV. Thus, the exclusion E3
language, as NERC initially proposed, did not allow for the figure
above to be eligible for the local network exclusion because it
includes contiguous facilities below 100 kV and could have resulted in
more exception process decisions.\62\ However, as we explained,
removing the 100 kV minimum operating voltage in the local network
definition allows networked configurations comprised of facilities
ranging from below 100 kV to multiple connections at 100 kV and above
to be candidates for exclusion E3. In other words, removing the
language from exclusion E3 will relieve the burden of

addressing all configurations similar to the looped configuration
described above in the exception process by first allowing entities
that do not qualify for exclusion E1 to apply exclusion E3. We
recognize that certain facilities that might have qualified for
exclusion E1 as interpreted by NERC may now seek instead to qualify for
exclusion E3 or, if unsuccessful there, may seek relief through the
exception process. However, we expect that documenting a valid claim of
exclusion E3 will not be particularly burdensome, consisting often of
reviewing historic data or relying on information that entities already
possess (such as the amount of generation connected to the facilities
or whether the facilities contain a Flowgate or transfer path), not
necessarily preparing new load flow studies or similar analyses, and
retaining such records for possible future review by the Regional
Entity. Also, certain entities that will not qualify even for exclusion
E3 may seek relief under the exception process. While this possibility
exists, we are not persuaded that there will be an inordinate number of
such instances, particularly since commenters have not submitted
estimates of the number of facilities affected by the entirety of our
changes to NERC's proposal.
---------------------------------------------------------------------------

    \62\ Order No. 773, 141 FERC ] 61,236 at P 155.
---------------------------------------------------------------------------

    43. Thus, while we have carefully considered the concerns raised by
petitioners, we are not persuaded that the Commission's directives in
the Final Rule will result in a significant increase in administrative
and compliance burdens. Further, we reiterate that elements that are
newly-included in the bulk electric system due to the revised
definition will only become subject to relevant Reliability Standards
twenty-four months after the effective date of the revised
definition.\63\ It is NERC's expectation that during the twenty-four
month transition period entities will file exception requests and the
Regional Entities and NERC will make determinations on the exception
requests.\64\ We expect that this transition period will be sufficient
for those few configurations that may need to seek an exception based
on the Commission's determinations regarding exclusions E1 and E3 to
obtain a NERC ruling and avoid any compliance costs.\65\ However, if an
element that is already deemed part of the bulk electric system and
subject to relevant Reliability Standards today is included by
application of the revised definition of bulk electric system, but an
entity seeks an exclusion exception of the element, the element will
remain subject to the relevant Reliability Standards during the
pendency of the exception process. Conversely, if an element is
excluded from the bulk electric system by application of the revised
definition, but a different entity with a reliability oversight
obligation seeks to include the element in the exception process, the
element will not be subject to Reliability Standards during the
exception process. If NERC determines the element is needed for
operation of the interconnected transmission network and thus part of
the bulk electric system, the entity can propose an appropriate
implementation plan for compliance.\66\
---------------------------------------------------------------------------

    \63\ NERC Petition at 34.
    \64\ See NERC BES Petition at 36.
    \65\ See Order No. 743-A, 134 FERC ] 61,210 at P 93. See also
NERC BES Petition at 36.
    \66\ NERC ROP Petition, Att. 1 (``Proposed Appendix 5C to the
Rules of Procedure, Procedure for Requesting and Receiving an
Exception from the NERC Definition of Bulk Electric System, Section
10.1'') at 16: ``In the case of an Element not included in the BES
by application of the BES Definition but for which an Inclusion
Exception is approved, the Owner shall submit a proposed
implementation plan to the Regional Entity detailing the schedule
for complying with any Reliability Standards applicable to the newly
included Element. The Regional Entity and Owner shall confer to
agree upon such schedule.''
---------------------------------------------------------------------------

    44. Notwithstanding the foregoing, we agree with petitioners that
NERC has the flexibility to develop an equally effective and efficient
alternative, provided that NERC addresses our concern to ensure
elements at or above 100 kV in a looped configuration are not excluded
from the bulk electric system under exclusion E1.\67\

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

    \67\ See Mandatory Reliability Standards for the Bulk-Power
System, Order No. 693, FERC Stats. & Regs. ] 31,242, at P 186 order
on reh'g, Order No. 693-A, 120 FERC ] 61,053 (2007).
---------------------------------------------------------------------------

2. Generator Interconnection Facilities Connected to Bulk Electric
System Generators
Order No. 773
    45. In the Final Rule, the Commission directed NERC to implement
exclusion E1 (radial systems) and exclusion E3 (local networks) so that
they do not apply to generator interconnection facilities for bulk
electric system generators identified in inclusion I2. The Commission
stated that, if the generator is necessary for the operation of the
interconnected transmission network, it is appropriate to have the
generator interconnection facility operating at or above 100 kV that
delivers the generation to the bulk electric system included as well.
The Commission also stated that it is appropriate to have the bulk
electric system contiguous, without facilities or elements ``stranded''
or ``cut-off'' from the remainder of the bulk electric system.\68\
---------------------------------------------------------------------------

    \68\ Order No. 773, 141 FERC ] 61,236 at PP 164-165, 214.
---------------------------------------------------------------------------

Requests for Rehearing
    46. NERC requests that the Commission clarify the directives to
implement exclusions E1 and E3 so that they do not apply to generator
interconnection facilities for bulk electric system generators
identified in inclusion I2. NERC states that the Commission does not
state whether ``implementation'' applies to Phase 1 or Phase 2 or how
the implementation would be effectuated without a change to the
definition of bulk electric system.\69\ Specifically, NERC requests
that the Commission clarify how these directives should be reconciled
with the plain language of the exclusions.
---------------------------------------------------------------------------

    \69\ NERC separated the development of the revised definition
into two phases. Phase 1 culminated in the language of the proposed
modified definition that is the primary subject of this Final Rule.
Phase 2, which is ongoing, intends to focus on other industry
concerns raised during Phase 1. Order No. 773, 141 FERC ] 61,236 at
P 52 n.46.
---------------------------------------------------------------------------

    47. NERC opines that the Commission's use of the term ``tie-line''
is potentially confusing for stakeholders and claims that it could
create additional complications with the implementation of the
Commission's directive unless the Commission clarifies its use of this
term. NERC also requests that the Commission reconcile the directives
with the express language of the definition. NERC states that the
Commission acknowledged in the Final Rule that exclusion E1 as written
does not prevent the radial tie-line operating at or above 100 kV from
the high side of the step-up transformer to the bulk electric system
from being excluded.
    48. Similarly, NRECA requests that the Commission clarify that,
when the Commission directed NERC to implement exclusion E1 it was not
seeking to directly modify the definition or the exclusions with
respect to generator tie-lines, but rather that it was directing that
this issue be addressed in the Phase 2 process as required by FPA
section 215(d)(4). NRECA states that the tie-line distinction is an
important directive that must be evaluated under the Phase 2 process,
and implemented only after the Commission rules on the further revision
to the definition that is proposed by NERC at the conclusion of the
Phase 2 process. NRECA states that NERC should be given an opportunity
to address the Commission's concern and present a response for
consideration as part of a rule emanating from the Phase 2 process.
NRECA adds that such a directive is consistent with the

Commission's obligation to remand to the ERO any proposed Reliability
Standard or a modification to a Reliability Standard that the
Commission disapproves in whole or in part.
    49. APPA, TAPS and ELCON contend that the Commission's
interpretation will prevent radial systems and local networks from
qualifying for exclusions E1 and E3, respectively, if they connect to
bulk electric system generators identified in inclusion I2 with gross
nameplate ratings between 20 MVA and 75 MVA. They also argue that the
Commission's directive fails to give due weight to NERC's expertise.
APPA, TAPS and ELCON contend that the directive will force many more
facilities into the exception process. They also argue that the
Commission does not have the authority to direct NERC to implement the
definition contrary to its plain meaning. Further, they contend that
the Commission's concern is already being addressed in the Phase 2
process. APPA, TAPS and ELCON state that, if the Commission determines
it needs more information to address its concerns with respect to tie-
lines for bulk electric system generators identified in inclusion I2,
it should direct NERC to submit a report regarding how entities utilize
this exclusion.
Commission Determination
    50. We grant rehearing to the extent that, rather than direct NERC
to implement exclusions E1 and E3 as described above, we direct NERC to
modify the exclusions pursuant to FPA section 215(d)(5) to ensure that
generator interconnection facilities at or above 100 kV connected to
bulk electric system generators identified in inclusion I2 are not
excluded from the bulk electric system. We find that the Phase 2
standard development process is an appropriate means to address the
Commission's concern. If NERC chooses to propose a different solution,
it must demonstrate that its proposal is equally effective or efficient
to ensure that generator interconnection facilities that connect
generators included in the bulk electric system to the grid, and that
are at or above 100 kV, are included in the bulk electric system and
must support any alternate proposal with a technical analysis
sufficient for the Commission to make an informed decision.
    51. We deny rehearing regarding arguments that the Commission did
not give due weight to NERC's technical justification. As an initial
matter, the Final Rule focused on a generator interconnection facility
that connects the bulk electric system generator to the interconnected
transmission network at a voltage of 100 kV or above.\70\ The language
was accompanied by the following:
---------------------------------------------------------------------------

    \70\ Order No. 773, 141 FERC ] 61,236 at P 165.
    [GRAPHIC] [TIFF OMITTED] TR17MY13.001

    In the Final Rule, the Commission found that NERC's rationale did
not support excluding generator interconnection facilities operated at
or above 100 kV connecting bulk electric system generators to the bulk
electric system.\72\ NERC based its proposal on the premise that a
single point of failure causing the radial systems to separate from the
bulk electric system results in a loss of a limited amount of
generation that will not have an adverse impact on reliability. In the
Final Rule, however, the Commission noted that there are other
reliability concerns that NERC did not address. For example, the
Commission noted that ``both the radial line emanating from a generator
and the portion of the bulk electric system to which it is connected
have protective relays that require coordination to prevent the lines
from tripping. The generator needs to coordinate the protective relays
with transmission operators, otherwise there may not be adequate
information to prevent a fault on the radial line from causing
cascading outages on the bulk electric system.'' \73\ The Commission
also relied on the fact that an ``adverse reliability impact . . . is
an extreme result that should not occur from the loss of a single tie-
line for any sized generator''

because a single event that results in an adverse reliability impact
violates planning and operating criteria in Commission approved
Reliability Standards.\74\ The Final Rule also explained that, in
general, ``it is appropriate to have the bulk electric system
contiguous,'' without facilities ``stranded'' or ``cut off.'' \75\ As
shown in the diagram above, inclusion I2 (generator resources) includes
the generator and the generator terminals through the high-side of the
step-up transformer(s) connected at a voltage of 100 kV or above.\76\
However, NERC's interpretation of exclusion E1 would have excluded the
230 kV generator interconnection facility from the high side of the
step-up transformer to the interconnected transmission network. This
would be inconsistent with the Commission's statement in the Final Rule
that, if the generator is necessary for the operation of the
interconnected transmission network, it is generally appropriate to
include the generator interconnection facility radial tie-line
operating at or above 100 kV that delivers the generation to the bulk
electric system.\77\
---------------------------------------------------------------------------

    \71\ Order No. 773, the Commission included this diagram
identified as ``Radial System with BES Generation.'' See Order No.
773, 141 FERC ] 61,236 at PP 165.
    \72\ Order No. 773, 141 FERC ] 61,236 at PP 165-168.
    \73\ Order No. 773, 141 FERC ] 61,236 at P 166 and n.150
(citing, Reliability Standards, TPL-002-0b and IRO-004-2).
    \74\ Id.
    \75\ Order No. 773, 141 FERC ] 61,236 at P 165.
    \76\ Order No. 773, 141 FERC ] 61,236 at P 85. Inclusion I2
states ``Generating resource(s) with gross individual nameplate
rating greater than 20 MVA or gross plant/facility aggregate
nameplate rating greater than 75 MVA including the generator
terminals through the high-side of the step-up transformer(s)
connected at a voltage of 100 kV or above.''
    \77\ Order No. 773, 141 FERC ] 61,236 at P 167.
---------------------------------------------------------------------------

    52. We disagree with APPA that the directive to include 100 kV and
above generator interconnection facilities connected to bulk electric
system generators will result in making the owners of these qualifying
100 kV and above generator interconnection facilities subject to the
full range of transmission planner, transmission owner and transmission
operator Reliability Standards and requirements. As we state above, in
cases of generator interconnection facilities for bulk electric system
generators where the generator owner also owns the generator
interconnection facility, NERC has determined on a case-by-case basis
which entities require registration as transmission owners/operators
and identified sub-sets of applicable Reliability Standard requirements
for these entities rather than automatically subjecting such generators
to the full scope of standards applicable to transmission owners and
operators.\78\
---------------------------------------------------------------------------

    \78\ In addition, in Docket No. RM12-16-000, NERC has submitted
proposed revisions to certain Reliability Standards to assure that
generator interconnection facilities are adequately covered rather
than subjecting them to all of the requirements applicable to
transmission owners and operators.
---------------------------------------------------------------------------

D. Arguments Regarding the Need to Modify the Inclusions and Exclusions

    53. In the NOPR, the Commission requested comment on certain
aspects of NERC's petition to better understand the application of the
specific inclusions and exclusions. NERC and other entities filed
comments that assisted in our understanding of the parameters of the
definition. In the Final Rule, in addition to the ``core'' definition,
the Commission adopted many of these explanations and approved without
modification most of the specific inclusions and exclusions, finding
that they add clarity regarding which elements are part of the bulk
electric system as compared to the existing definition.\79\ Several
entities request rehearing of the approval of specific inclusions and
exclusions that the Commission approved without modification. On
rehearing, entities argue that the Commission erred by failing to
direct NERC to (1) Eliminate inclusion I4 (dispersed power producing
resources); (2) modify or eliminate the generator thresholds in
exclusions E1 and E3; and (3) eliminate exclusion E3(b), the criterion
that power cannot flow out of a local network in order to be eligible
for exclusion from the bulk electric system.
---------------------------------------------------------------------------

    \79\ Order No. 773, 141 FERC ] 61,236 at P 39.
---------------------------------------------------------------------------

1. Inclusion I4 (Dispersed Power Producing Resources)
Order No. 773
    54. Inclusion I4 includes in the bulk electric system dispersed
power producing resources with aggregate capacity greater than 75 MVA
(gross aggregate nameplate rating). In the Final Rule, the Commission
approved inclusion I4 finding that it provides useful granularity in
the bulk electric system definition. The Commission also found that the
language in inclusion I4 regarding the collector system language is
consistent with language in the Registry Criteria, section III.c.2 and
agreed that it is appropriate ``to expressly cover dispersed power
producing resources utilizing a system designed primarily for
aggregating capacity.'' \80\
---------------------------------------------------------------------------

    \80\ Order No. 773, 141 FERC ] 61,236 at P 112.
---------------------------------------------------------------------------

Requests for Rehearing
    55. AWEA states that the Commission did not base its approval of
inclusion I4 on sufficient evidence to show inclusion I4 would result
in any material reliability benefit. AWEA contends that neither the
Final Rule nor the record demonstrate that the inclusion of dispersed
generation resources would help protect the reliable operation of the
interconnected transmission network. AWEA contends that all evidence in
the record indicates that dispersed generation resources are unlikely
to affect the reliability of the interconnected transmission network.
AWEA argues that the Commission's decision ``to modify the definition
regardless of the record on dispersed generation resources shows the
Commission's decision was arbitrary and capricious . . . and not the
result of reasoned decision-making.''\81\
---------------------------------------------------------------------------

    \81\ AWEA Request for Rehearing and Reconsideration at 3.
---------------------------------------------------------------------------

    56. AWEA argues that the electrical equipment at the point of
interconnection with the bulk electric system is a more appropriate
point for delineating between the bulk electric system and non-bulk
electric system electrical components because the point of
interconnection for a wind project comprised of more than 75 MVA of
generation and operating at more than 100 kV is the only part of the
wind project that could reasonably affect bulk electric system
reliability.
    57. AWEA adds that the Commission erred in agreeing with NERC's
suggestion to include individual dispersed generators and their
collector systems in approving the modification because this inclusion
was not based on evidence supported by the record. According to AWEA,
the typical electrical layout of a wind plant will be aggregated onto
an electrical string of the collector array that operates at voltages
``well below'' 100kV, so losing a single electrical string or even
multiple electrical strings will typically only result in the loss of a
few dozen MWs of generation.\82\ AWEA also states the capacity value
contribution that grid operators typically assume for wind projects for
meeting peak electricity demand is less than 20% of the nameplate
capacity of the wind project. AWEA maintains that such minimal impacts
fall well below the 75 MVA threshold that inclusion I4 seeks to
establish, as well as any reasonable threshold for determining which
electrical components are likely to cause a reliability problem on the
bulk electric system. Alternatively, AWEA states that if the Commission
does not modify the definition as AWEA proposes it could recognize that
all wind turbines installed in the United States are not subject to the
modified definition.
---------------------------------------------------------------------------

    \82\ Id.

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

Commission Determination
    58. The Commission denies rehearing and confirms its finding that
inclusion I4 provides useful granularity in the bulk electric system
definition.
    59. The Commission's approval of the bulk electric system
definition including inclusion I4 is adequately supported by the
evidence in the record in this proceeding. In the Final Rule, the
Commission agreed with NERC's statement that the purpose of this
inclusion is to include variable generation (e.g., wind and solar
resources).\83\ The Commission also agreed with NERC that, while such
generation could be considered subsumed in inclusion I2 (because the
gross aggregate nameplate rating of the power producing resources must
be greater than 75 MVA), it is appropriate for clarity to add this
separately-stated inclusion to expressly cover dispersed power
producing resources using a system designed primarily for aggregating
capacity.\84\
---------------------------------------------------------------------------

    \83\ Order No. 773, 141 FERC ] 61,236 at P 115. See also NERC
BES Petition, Exhibit D, August 19, 2011 Consideration of Comments,
at 416: ``Although dispersed power producing resources (wind, solar,
etc.) can be intermittent suppliers of electrical generation to the
interconnected transmission network, the [standard drafting team]
has been made aware of geographical areas that depend on these types
of generation resources for the reliable operation of the
interconnected transmission network which has prompted the
development of Inclusion I4. . . .'' See also NERC BES Petition,
Exhibit D, ``Consideration of Comments on Second Draft of the
Definition of the Bulk Electric System'' at 160: ``The [standard
drafting team] disagrees with excluding dispersed power producing
sources such as wind and solar from the BES definition. These
resources comprise a significant share of the North American
resource mix.''
    \84\ Order No. 773, 141 FERC ] 61,236 at P 115.
---------------------------------------------------------------------------

    60. The Commission further concluded that, although dispersed power
producing resources (wind, solar, etc.) are typically variable
suppliers of electrical generation to the interconnected transmission
network, certain geographical areas depend on these generation
resources for the reliable operation of the interconnected transmission
network.\85\ In addition, having considered NERC's rationale for
adopting inclusion I4 in its petition and NOPR comments, the Commission
concluded that owners and operators of dispersed power producing
resources that meet the 75 MVA gross aggregate nameplate rating
threshold are, in some cases, already registered and have compliance
responsibilities as generator owners and generator operators. The
threshold of 75 MVA for plants is well established in the NERC
Statement of Compliance Registry Criteria and consistently applicable
to all generating facilities.\86\ Therefore, the Commission denies
rehearing that it did not adequately support its approval of inclusion
I4.
---------------------------------------------------------------------------

    \85\ Order No. 773, 141 FERC ] 61,236 at P 115. See also the
ERCOT daily wind integration reports at: http://www.ercot.com/gridinfo/generation/windintegration/.
    \86\ Order No. 773, 141 FERC ] 61,236 at P 112.
---------------------------------------------------------------------------

2. Generator Thresholds in Exclusions E1 and E3
Order No. 773
    61. In its petition, NERC explained that conditions ``b'' and ``c''
of exclusion E1 allow some generation to be connected to a radial
system while still qualifying for the radial systems exclusion
(aggregate capacity less than or equal to 75 MVA). Similarly, with
respect to exclusion E3, NERC explained that the purpose of local
networks is to provide local distribution service, not to provide
transfer capacity for the interconnected transmission network, thus
some generation within a local network would be appropriate.\87\ NERC
stated, that the maximum amount of generation allowed on the radial
facility per exclusion E1 conditions ``b'' and ``c'' is consistent with
the aggregate capacity threshold presently provided in the Registry
Criteria for registration as a generator owner or generator operator
(75 MVA gross nameplate rating). In the Final Rule, the Commission
found NERC's explanations for limiting generation capacity reasonable
because the amount of connected generation allowed by conditions ``b''
and ``c'' is intended to have limited benefit to the reliability of the
interconnected transmission network and pose no reliability risk to the
interconnected transmission network.\88\
---------------------------------------------------------------------------

    \87\ NERC Petition at 22.
    \88\ Order No. 773, 141 FERC ] 61,236 at PP 158, 164, 201, 207,
209, 211, 216.
---------------------------------------------------------------------------

Requests for Rehearing
    62. Holland raises three arguments on rehearing. First, Holland
states that the Commission should have revised the generator thresholds
in exclusion E1 for radial systems and in exclusion E3 for local
networks to ensure that they do not inappropriately include local
distribution facilities. Second, Holland argues that the Commission
failed to respond to Holland's alternative recommendation that the
Commission modify the generation limits in exclusions E1 and E3 by
basing the limit on net generation. Third, Holland argues that the
Commission erred in its conclusion with respect to the meaning of
``emanates from a single point of interconnection'' in exclusion E1.
    63. Holland states that it supports the exclusion of radial systems
from the bulk electric system but that exclusion E1 will still capture
facilities used in local distribution. Holland notes that in its NOPR
comments, it recommended that the Commission revise exclusion E1 to
remove the generation threshold from exclusion E1(c) but that the
Commission failed to consider and respond to Holland's comments.
Holland also argues that the Commission erred by (1) failing to state a
factual basis upon which the Commission reached its decision not to
exclude from the bulk electric system radial systems that also serve
load and (2) citing no record evidence to support its rejection of
Holland's comments. Holland maintains that the effect of approving
exclusions E1 and E3 without the modification it proposed is that only
those systems electrically isolated from the bulk electric system or
those with no generation above the threshold size will meet the
criteria for exclusion E1. Holland contends that the Commission's
approval of the exclusion prejudges the outcome of the Seven Factor
Test by arbitrarily approving criteria without having the results of
any such test, or without having a specific context in which to apply
the criteria.
    64. Similarly, Holland argues that the Commission erred by failing
to remove or alter the generator thresholds from exclusion E3 local
networks, and that approving exclusion E3 with the generator thresholds
encroaches on facilities used in the local distribution of electric
energy. Holland states that the Commission erred by not directing any
changes to the connected generation limitation, and that the Commission
erroneously relied on the fact that the generation limits were
consistent with the NERC Registration Criteria. Holland argues that the
Commission finding could make some local distribution facilities that
do not meet exclusion E3 subject to Reliability Standards and
Commission authority. According to Holland, the Commission must revise
exclusion E3 regarding local networks to ensure that the definition
does not conflict with the FPA section 215 prohibition against
regulating facilities used in the local distribution of electric
energy. Holland states that the Commission did not address how local
networks with internal generation consumed internally differ from local
distribution facilities with lesser amounts of or no generation, or how
this interpretation is consistent with the Commission's determination
that ``local distribution'' has a consistent meaning throughout the
FPA. Holland also claims that, despite having decided to use the Seven
Factor Test for local

distribution determinations, the Commission made factual determinations
without any application of the Seven Factor Test.
    65. Further, Holland argues that the Commission failed to consider
Holland's alternative comments that the Commission modify the
generation limit in exclusion E3 by basing the limit on net generation.
Holland contends that exclusion E3(a) arbitrarily ignores the
development and practice of local networks operated by municipal
utilities. Holland maintains that, historically, municipal utilities
with internal generation installed to meet the municipality's
distribution load sized the generation comparably to the local
distribution load. Holland contends that the Commission disregarded
that history and assumes that all internal generation, regardless of
how remote, connects to and is exported to the bulk electric system.
According to Holland, the Commission compounded its error by
disregarding Holland's comments stating that local networks should be
able to deliver power to the bulk electric system.
    66. Holland also contends that the Commission dismissed its comment
that the Commission should interpret the phrase ``emanates from a
single point of interconnection'' for radial systems to mean a single
electrical point, such as a single bus or normally connected bus work
within a substation, without citing any record evidence equating
electrical points with physical locations.
Commission Determination
    67. The Commission denies rehearing on these issues raised by
Holland. Pursuant to section 215(d)(2) of the FPA, the Commission gives
due weight to the technical expertise of the ERO with respect to the
content of a Reliability Standard or definition.\89\ In this instance,
NERC explained that exclusion E1(c) addresses limited amounts of
generation that are installed within a radial system and are intended
to serve local load within that radial system.\90\ In the NOPR, the
Commission requested comment about the delivery or injection of power
from the radial systems described in these exclusions. NERC responded
that, ``because of the limitation of the generation in exclusion E1(c),
the power generated on the radial system would be delivered to the
embedded load within the radial system and injected into the bulk
electric system in very limited quantities . . .'' and ``subjecting the
elements associated with this type of radial system to all the
Reliability Standards has limited benefit to the reliability of the
interconnected transmission network.'' \91\ Further, NERC found that
``it is more appropriate to identify these elements through the `the
applicability in specific standards where a reliability benefit can be
identified.' '' \92\ Holland's arguments were directed to unlimited
generation for radial systems and local networks, but the Commission
found NERC's explanations for the limitations reasonable and approved
this aspect of the exclusion.\93\ Removing the generator limitation or
using net generation in excess of load would also be inconsistent with
the bright-line concept and NERC's approach that the definition should
be based on physical characteristics and not based on function. Also,
the NERC standards drafting team concluded the following regarding
generator size thresholds:
---------------------------------------------------------------------------

    \89\ 16 U.S.C. 824o(d)(2).
    \90\ Order No. 773, 141 FERC ] 61,236 at P 159.
    \91\ NOPR, 139 FERC ] 61,247 at P 160.
    \92\ Id. at P 161 (citing NERC's NOPR Comments at 21-22).
    \93\ Order No. 773, 141 FERC ] 61,236 at P 164.

    [t]he vast array of functional qualities of generation does not
lend itself to a `bright-line' concept of identifying BES Elements.
Therefore the SDT has opted for the size threshold designation of
generating facilities and allows for use of the Exception Process
for further analysis of the facility and potential exclusion from or
inclusion to the BES.\94\
---------------------------------------------------------------------------

    \94\ NERC BES Petition, Exhibit D, August 19, 2011,
Consideration of Comments at 439.

    68. Holland raised the same argument with respect to the generating
limits in exclusion E3. NERC provided ample justification for its
selection of generator thresholds. As NERC stated in its ``LN Technical
Justification'' paper in Exhibit G of its petition, including a
restriction on generation in a local network ``minimizes the
contribution and influence the local network may have over the
neighboring [e]lements of the [bulk electric system] by limiting both
the magnitude and the function of the connected generation. NERC chose
the threshold of 75 MVA to provide consistency with the criteria
applied in the ERO's [Registry Criteria] regarding the registration for
entities owning and operating generation plants in aggregate.'' \95\ In
the Final Rule, the Commission found reasonable NERC's rationale for
limiting both the magnitude and the function of a local network by
limiting the amount of connected generation and that use of the
generator thresholds was consistent with the existing thresholds in the
Commission-approved NERC Registry Criteria.\96\ Thus, the Commission
disagrees that it did not provide adequate explanation for rejecting
Holland's NOPR arguments on this issue.
---------------------------------------------------------------------------

    \95\ NERC BES Petition, Exhibit G at 3.
    \96\ Order No. 773, 141 FERC ] 61,236 at P 216.
---------------------------------------------------------------------------

    69. Holland also argues that the Commission did not consider that
exclusion E3 has the possibility of encompassing local distribution
facilities. As stated in the Final Rule as well as elsewhere in this
order on rehearing, determining whether a facility is part of the bulk
electric system is a multi-step process and applying the definition is
just one step in that process.\97\ If an entity believes its facility
is a local distribution facility but after applying the definition and
its exclusions the facility is not excluded, the entity may apply to
the Commission to determine whether a facility is used for local
distribution. The Commission disagrees, however, that it made factual
determinations in the Final Rule without application of the Seven
Factor Test, or arbitrarily adopted criteria that prejudge that test.
The Commission approved NERC's bright-line approach to the definition,
and the definition by itself is not intended to resolve all bulk
electric system determinations. An entity's application of the
definition as a whole, inclusive of the inclusions and exclusions, is
the first step in determining whether the element is part of the bulk
electric system and is a separate inquiry from the Commission's use of
the factors in the Seven Factor Test in a local distribution
determination. Further, as we stated in the Final Rule, the Commission
will apply the factors in the Seven Factor Test, plus other factors, as
the starting point for making local distribution determinations on a
case-by-case basis.\98\ In sum, the Commission's approval of NERC's
process establishes a process for determining whether a facility is
part of the bulk electric system and is not making specific
determination about particular facilities.
---------------------------------------------------------------------------

    \97\ Order No. 773, 141 FERC ] 61,236 at P 216.
    \98\ Order No. 773, 141 FERC ] 61,236 at P 71.
---------------------------------------------------------------------------

    70. Further, in the Final Rule, the Commission addressed Holland's
argument about the meaning of ``emanates from a single point of
connection.'' Specifically, in the Final Rule the Commission dismissed
Holland's contention that the phrase can refer to multiple buses. The
Commission noted that NERC, in the standard development process,
considered the issue and concluded that radial systems ``cannot have
multiple connections at 100 kV or higher. Networks that have multiple
connections at 100 kV or

higher may qualify under exclusion E3.'' \99\
---------------------------------------------------------------------------

    \99\ Order No. 773, 141 FERC ] 61,236 at P 142 (citing NERC BES
Petition, Exhibit E, ``Complete Development Record of the Proposed
Revised Definition of `Bulk Electric System,' Consideration of
Comments on Initial Ballot--Definition of BES,'' at 259).
---------------------------------------------------------------------------

3. Exclusion E3(b) and Power Flows
Order No. 773
    71. Exclusion E3 criterion (b) specifies that, to qualify for the
local network exclusion, power can only flow into the local network and
the local network does not transfer energy originating outside the
local network for delivery through the local network. In its NOPR
comments NERC elaborated by stating that, to be considered for
exclusion pursuant to criterion (b), generation produced inside a local
network cannot be transported to other markets outside the local
network. NERC also stated that criterion (b) applies in both normal and
emergency operating conditions. In the Final Rule the Commission found
NERC's explanation reasonable and approved exclusion E3 criterion
(b).\100\
---------------------------------------------------------------------------

    \100\ Order No. 773, 141 FERC ] 61,236 at P 228.
---------------------------------------------------------------------------

Requests for Rehearing
    72. Holland and Dow state that the Commission erred by not
modifying exclusion E3 to allow it to apply even if some power flowed
from the local network to the bulk electric system. Holland notes that
the Commission's explanation that, if facilities are capable of
supplying power when needed under any normal or emergency operating
condition these facilities would forfeit their designation as local
networks under exclusion E3, is premised incorrectly ``on a presumption
that the facilities in question perform a transmission function, rather
than a distribution function.'' \101\ Holland states that courts have
held that the Commission does not have authority over facilities used
in local distribution, not just over those facilities used solely in
local distribution. Accordingly, Holland states that simply because the
``facilities are capable of being called upon to support the bulk
electric system, does not mean that is how those facilities are used in
the normal course of business.'' \102\
---------------------------------------------------------------------------

    \101\ Holland Request for Rehearing at 16.
    \102\ Holland Request for Rehearing at 15-16 (citing Detroit
Edison v. FERC, 334 F.3d 48, 54 (DC Cir. 2003)).
---------------------------------------------------------------------------

    73. Dow states that the Commission's resolution regarding the
requirement that power may only flow into and not out of a local
network requires clarification. Dow notes that, in its NOPR comments,
it requested that the Commission clarify that exclusion E3(b) only
prohibits energy originating outside the local network from being
transferred through the network and into the bulk electric system, and
does not prohibit energy generated by resources connected to the local
network for delivery into the bulk electric system. Dow states this
understanding is consistent with exclusion E3(a) allowing up to 75 MVA
of non-retail generation to be attached to a local network. Dow
maintains that it would not make sense to permit non-retail generation
resources to be attached to local networks if output from such
resources could not be delivered into the bulk electric system for
purposes of making non-retail sales to downstream buyers. Dow asserts
that, while the Commission suggested that the issue be addressed
further in Phase 2, the Commission appears to have adopted an
interpretation of the local network exclusion that is inconsistent with
Dow's requested clarification. According to Dow, for the local network
exclusion to be applicable, the Commission stated that ``generation
produced inside a local network should not transport power to other
markets outside the local network,'' but that the Commission indicated
it could be addressed further in Phase 2. According to Dow, it is not
clear whether and to what extent the Commission intended to resolve
this issue in the Final Rule and, if it did, what additional issues
would be eligible for further consideration in the Phase 2 process. Dow
also requests that the Commission clarify which of Dow's concerns it
can raise in the Phase 2 process.
    74. Snohomish agrees with the Commission's conclusion that the ``no
outflow'' condition in exclusion E3 applies in both normal and
emergency circumstances. However, Snohomish notes that, in the Phase 2
process, NERC is examining the types of ``emergency'' that should be
considered in examining the flow conditions in a local network.
Snohomish requests that the Commission clarify that the appropriate,
technically justified definition of ``emergency'' should be based upon
the technical analysis now being performed as part of Phase 2 and that
the Final Rule does not restrict the examination of this question.
Snohomish also requests that the Commission clarify that, in Phase 2,
NERC is free to develop a technically justified threshold for outflow
that would not disqualify a local network under exclusion E3.
    75. In addition, while agreeing that historical records of power
flow on a local network form an appropriate evidentiary basis for
demonstrating that power only flows into a local network, Snohomish
requests that the Commission clarify (1) that entities can establish
power flows through more than just historical records and (2) a local
network will remain eligible for exclusion if it contains temporary
reversals of flows resulting from extreme and unlikely emergency
conditions. Otherwise, according to Snohomish, local networks that rely
on historical flow data could, if an unusual event happens causing a
temporary outflow, suddenly become part of the bulk electric system.
Commission Determination
    76. We deny the requests for rehearing of Dow and Holland on the
power flow issue. As part of its rationale for developing the local
network exclusion, NERC explained that power always flows in the
direction from the interconnected transmission network into the local
network.\103\ NERC also explained that ``[l]ocal networks provide local
electrical distribution service and are not planned, designed or
operated to benefit or support the balance of the interconnected
transmission network.'' \104\ Further, NERC explained that the
reliability of the interconnected transmission network is not impacted
by the existence or absence of a local network. Exclusion E3 will
satisfy this principle because NERC crafted exclusion E3 to ensure
reliability is not adversely impacted by the disconnection of the local
network.\105\ NERC confirmed that, pursuant to criterion (b), exclusion
E3 applies if generation produced inside a local network is not
transported to other markets outside the local network. NERC stated
that prohibitions on outbound power flow and transportation of power to
other markets beyond the local network apply in all conditions, both
normal and contingent, and will not exclude facilities which may
contribute power flow into the bulk electric system under contingent or
unusual circumstances. NERC's Local Network (LN) Technical Paper
further explains these statements:
---------------------------------------------------------------------------

    \103\ NERC BES Petition at 22.
    \104\ Id.
    \105\ See Order No. 773, 141 FERC ] 61,236 at P 189.

    By restricting the flow direction to be exclusively into the
network at its connection points to the BES and precluding the
network from providing transmission wheeling service, this exclusion
characteristic further ensures that the local network is providing
only a distribution service, and is not contributing to, nor is
necessary for, the

reliable operation of the interconnected electric transmission
network.\106\
---------------------------------------------------------------------------

    \106\ NERC BES Petition, Exhibit G at 3.

    77. In approving exclusion E3, the Commission found NERC's
explanations for the applicability of exclusion E3(b) to be
reasonable.\107\ The Commission also agreed with NERC's explanation
that, with respect to exclusion E3(b), generation produced inside a
local network should not be transported to other markets outside the
local network.\108\
---------------------------------------------------------------------------

    \107\ Order No. 773, 141 FERC ] 61,236 at P 193.
    \108\ Order No. 773, 141 FERC ] 61,236 at P 231.
---------------------------------------------------------------------------

    78. The Commission rejects Holland's contention that the
Commission's finding is premised on a presumption that ``the facilities
in question perform a transmission function.'' \109\ One of NERC's
overarching principles in revising the definition was to establish a
bright-line definition that will eliminate discretion in application of
the revised definition, and the local network exclusion is consistent
with that principle.\110\ If an entity applies the definition and the
exclusions to an element and finds that the element is included by
application of the definition of the bulk electric system, it may avail
itself of the exception process for a determination that the element
should be excluded from the bulk electric system or seek a
determination from the Commission that the element is used in local
distribution.
---------------------------------------------------------------------------

    \109\ Holland Request for Rehearing at 15.
    \110\ See, e.g., NERC BES Petition at 15.
---------------------------------------------------------------------------

    79. In its request for rehearing, Dow seeks clarification regarding
what issues were resolved in the Final Rule and what it may raise in
Phase 2. As stated above, NERC developed exclusion E3 with the bright-
line concept in mind and its conclusion that power may not be delivered
from a local network to the bulk electric system. The Commission
approved exclusion E3 with this understanding.\111\ Thus, if power
flows out of a local network to the bulk electric system, it is not
eligible for the exclusion, no matter the type of generation. However,
we recognize that in crafting the revised definition to be responsive
to Order No. 743, entities raised additional issues that, due to time
constraints in meeting the compliance deadline set in Order No. 743,
NERC postponed to Phase 2 in which it is focusing on other industry
concerns raised during Phase 1. Thus, if Dow believes that a local
network should be allowed to have some non-retail generation that
delivers power to the bulk electric system, we believe that this issue
is better suited for vetting through the NERC standard development
process, including the Phase 2 process.\112\
---------------------------------------------------------------------------

    \111\ Order No. 773, 141 FERC ] 61,236 at PP 201, 205, 218, 228.
    \112\ Indeed, this issue is one that the NERC standard drafting
team is considering in Phase 2. See the NERC Standard Authorization
Request at 3: ``[d]etermine if there is a technical justification to
support allowing power flow out of the local network under certain
conditions. . . .'' Available at:http://www.nerc.com/docs/standards/sar/SAR_BES_Definition_Phase_2_final_071012_clean.pdf.
---------------------------------------------------------------------------

    80. With regard to the Snohomish request for clarification of
additional terms in the Phase 2 process, the standard development
process allows NERC to develop new or revised Reliability Standards or
definitions to address any issues and the Final Rule does not restrict
this process. NERC may propose changes to the bulk electric system
definition with supporting technical justification for submission to
the Commission.
    81. Snohomish requests that the Commission clarify that entities
can establish power flows through more than just historical records.
Snohomish also seeks clarification that a local network will remain
eligible for exclusion if it contains temporary reversals of flows
resulting from extreme conditions. We clarify that historical records
are not the only basis for establishing power flows. However, we deny
clarification that temporary reversals of flows should not disqualify a
local network from being treated as a local network because, as written
and presented to us in this proceeding, exclusion E3(b) does not permit
power flows from the local network in any circumstances.\113\
Nevertheless, similar to our response to Dow above, Snohomish can raise
its concerns through the NERC standards development process in Phase 2.
---------------------------------------------------------------------------

    \113\ See Order No. 773, 141 FERC ] 61,236 at P 228.
---------------------------------------------------------------------------

E. NERC Exception Process and Commission Local Distribution
Determinations

Order No. 773
    82. In the Final Rule, the Commission approved NERC's exception
process to add elements to, and remove elements from, the bulk electric
system, on a case-by-case basis.\114\ However, the Commission
determined that the Commission, rather than NERC, will determine on a
case-by-case basis whether an element or facility is used in local
distribution and will apply the conditions set forth in the Seven
Factor Test.\115\
---------------------------------------------------------------------------

    \114\ Order No. 773, 141 FERC ] 61,236 at P 251 (citing Order
No. 743, 133 FERC ] 61,150 at P 16).
    \115\ Order No. 773, 141 FERC ] 61,236 at P 252.
---------------------------------------------------------------------------

Requests for Rehearing

1. Jurisdictional and Due Process Issues
    83. A number of entities claim that, or are unsure of whether, the
Commission has imposed duplicative processes (the NERC exception
process and the Commission process for making local distribution
determinations) for determining whether particular facilities are part
of the bulk electric system.\116\ TAPS and ELCON question whether NERC
would be bound by prior Commission determinations on local distribution
and whether the Commission would reopen NERC determinations, and they
request that on rehearing the Commission state that it will make local
distribution determinations only in connection with review of NERC
exception decisions. TAPS and ELCON state that the Commission should
clarify that it will address local distribution issues if raised in
connection with review of NERC exception determinations, so a full
record can be developed through a single process. Alternatively, TAPS
and ELCON request clarification (1) of how the Commission intends the
process for making local distribution determinations to interact with
the NERC exception process, especially when similar facts are at issue,
and (2) that entities are not foreclosed from making all applicable
arguments to NERC in the exception process.
---------------------------------------------------------------------------

    \116\ E.g., NRECA, TAPS, ELCON and NYPSC.
---------------------------------------------------------------------------

    84. NRECA states that the Commission's role as primary arbiter of a
local distribution decision and its reliance on the Seven Factor Test
raises ambiguity and must be clarified. NRECA questions whether the
process runs concurrently with the NERC exception process and, if not,
which process will be conducted first. NRECA also questions whether
``an entity that is currently registered and seeks to remove itself
from the registry based on the local distribution distinction, or,
conversely, the ERO that desires to include an entity not currently on
the registry based on the absence of local distribution facilities,
would first have to engage a proceeding before the Commission. . . .''
\117\ NRECA states that a multi-tiered process will be expensive and
unnecessarily time consuming for the Commission, NERC and the affected
entities. NRECA further questions what rules and timeframe the
Commission will use and whether the Commission considered the greater

expense of running two processes for small entities.
---------------------------------------------------------------------------

    \117\ NRECA Motion for Clarification, or in the Alternative,
Request for Rehearing at 5-6.
---------------------------------------------------------------------------

    85. Holland argues that applying the definition and exception
process unlawfully subjects facilities used in the local distribution
of electric energy to NERC authority through the exception process
before a determination is made on whether those facilities serve a
local distribution function.\118\ Holland claims that the Final Rule is
internally inconsistent because it directs entities to seek an
exception from NERC before the Commission will apply the Seven Factor
Test to determine whether the facilities are subject to regulation
under the FPA. Holland states that the Commission must prohibit NERC
from exercising any authority over any facilities while the owners and
operators of such facilities petition the Commission for a
determination that they are used in the local distribution of electric
energy.
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    \118\ For example, Holland argues that the limitations on
exclusion E1 conditions (b) and (c) will still capture facilities
used in local distribution and is tantamount to making a factual
determination without any application of the Seven Factor Test.
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    86. NYPSC contends that the exception process is an impermissible
approach to exercising jurisdiction. NYPSC claims that, although the
definition states that it ``does not include facilities used in the
local distribution of electric energy,'' the Commission effectively
acknowledged that such facilities would be placed under its
jurisdiction by establishing a process whereby entities may seek to
demonstrate that the facilities are not necessary for operating the
interconnected transmission network, or are used in local distribution.
    87. NYPSC and NARUC claim that the Commission failed to provide
adequate notice and comment regarding the decision to use the Seven
Factor Test and the Commission's decision to itself make determinations
of whether a facility is used in local distribution. They state the
Final Rule is the first time the Commission established a process for
petitioning for a local distribution determination and argue that the
Commission has not substantiated its decision to apply the Seven Factor
Test. NARUC states that the Commission should develop a full record to
determine what criteria ``would be lawfully applied if the Commission
were to make case-by-base local distribution determinations under
section 215.'' \119\ NYPSC states that the Commission failed to comply
with the Administrative Procedure Act (APA) requirement that agencies
provide notice of a proposed rule and a meaningful opportunity for
parties to comment.
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    \119\ NARUC Request for Rehearing at 7.
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Commission Determination
    88. The Commission denies rehearing on the issues related to the
exception process and the Commission making local distribution
determinations. The Commission believes that entities misconstrue the
function of the NERC exception process and the Commission's local
distribution determinations. Accordingly, we reiterate and expand on
those functions below.
    89. As explained below, the two processes are separate, not
concurrent and will be used for different determinations. In the Final
Rule, the Commission found that ``NERC's case-by-case exceptions
process is appropriate to determine the technical issue of whether
facilities are part of the bulk electric system'' and that ``the
jurisdictional question of whether facilities are used in local
distribution should be decided by the Commission.''\120\
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    \120\ Order No. 773, 141 FERC ] 61,236 at P 66.
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    90. The Commission also stated that we expect that the ``core''
definition together with the exclusions ``should provide a reasonable
means to accurately and consistently determine on a generic basis
whether facilities are part of the bulk electric system.'' \121\ Also,
the Commission explained that most local distribution facilities will
be excluded by the 100 kV threshold or exclusion E3 without needing to
seek a Commission jurisdictional determination. However, if after
applying the definition and exclusions, an entity believes its facility
is used in local distribution, it must petition the Commission for a
determination, and the Commission will apply the factors in the Seven
Factor Test, plus other factors, as the starting point for making local
distribution determinations.\122\ This inquiry is a distinct process
not made in connection with review of NERC exception process decisions.
In response to NRECA's question regarding what process an entity or
NERC would use with respect to a local distribution determination, as
stated above, the Commission will decide all local distribution
determinations.
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    \121\ Order No. 773, 141 FERC ] 61,236 at P 67.
    \122\ Order No. 773, 141 FERC ] 61,236 at P 69.
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    91. All inquiries that do not involve a question of whether a
facility is used in local distribution (i.e., whether the facility is
or is not part of the bulk electric system) are to be presented through
the NERC exception process. In other words, if an entity believes its
facilities are non-local distribution facilities but nevertheless are
incorrectly included by application of the bulk electric system
definition and its inclusions and exclusions, it should use the NERC
exception process to determine whether the facilities in question
should be excluded from the bulk electric system. In response to the
questions about appeals to the Commission, as stated in the Final Rule,
an entity may appeal a final NERC exceptions process decision to the
Commission.\123\ In response to TAPS and ELCON's request, we clarify
that, in the exception process, entities have the option of making all
applicable arguments that a facility should not be included in the bulk
electric system.
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    \123\ Order No. 773, 141 FERC ] 61,236 at P 251.
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    92. With regard to NRECA's question about the rules and timeframe
the Commission will apply, as the Commission stated in the Final Rule,
the Commission will assign local distribution inquiries ``RC'' dockets
and the determinations will be public proceedings subject to notice and
comment requirements which will allow NERC and interested parties to
provide input on a petition. We decline to establish a specific
timeframe within which we will act because such decisions will be based
on the specific facts of each case.
    93. In response to Holland's arguments that the Commission
improperly included or excluded local distribution facilities in the
definition, the Commission notes that, although the bulk electric
system definition excludes local distribution facilities, it still may
be necessary to factually determine which facilities are used for local
distribution or transmission.\124\ The Commission stated in the Final
Rule that applying the definition and its exclusions is not necessarily
the end of the inquiry, and the Commission ultimately determines
whether facilities are used in local distribution and thus excluded
from the bulk electric system.\125\ Thus, if an entity believes its
facility is a local distribution facility but after applying the bulk
electric system definition including inclusions and exclusions the
facility is not excluded, the entity may apply to the Commission to
determine whether the facility is used for local distribution. Thus, as
explained above, the Final Rule contemplates two separate and distinct
processes and does not direct entities to seek an exception from NERC
before seeking a local distribution determination from the Commission.
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    \124\ Order No. 743-A, 134 FERC ] 61,210 at P 67.
    \125\ Order No. 773, 141 FERC ] 61,236 at P 70.

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    94. We disagree with Holland's argument that all facilities that
NERC reviews through the exception process that the Commission later
finds are used in local distribution will have been unlawfully
regulated by NERC. NERC, in applying the bulk electric system
definition and exception process, established an implementation period
for newly identified elements in the bulk electric system before
compliance enforcement is initiated. This should provide ample time for
the affected entity to request a local distribution determination from
the Commission before any compliance obligations are imposed.
    95. NYPSC and NARUC take issue with the Commission's decision to
apply the factors set forth in the Seven Factor Test when determining
whether a facility is used in local distribution. NYPSC and NARUC
contend that the Commission deprived them of their due process rights
and violated the APA because the Commission stated it will apply the
Seven Factor Test without providing entities an opportunity to comment
on the Commission's decision.\126\ As explained below, we deny
rehearing on this issue.
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    \126\ The APA requires agencies to give interested parties an
opportunity for ``the submission and consideration of facts,
arguments, offers of settlement, or proposals of adjustment when
time, the nature of the proceeding, and the public interest permit .
. . .'' 5 U.S.C. 554(c)(1) (2006).
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    96. Due process requires certain procedural safeguards, including
the requirement that a party affected by government action be given
``notice reasonably calculated, under all the circumstances, to apprise
interested parties of the pendency of the action,'' \127\ and also
``the opportunity to be heard at a meaningful time and in a meaningful
manner.'' \128\ However, circumstances vary and the sufficiency of the
procedures supplied must be decided in light of the circumstances of
each case.\129\ The Commission assesses due process claims case-by-case
based on the totality of the circumstances.\130\ In this case, the
Commission expressed its concerns with respect to treatment of local
distribution facilities in Order Nos. 743 and 743-A and suggested that
the Seven Factor Test could be relevant and a possible starting point
for local distribution determinations.\131\ In addition, in the NOPR in
this proceeding, the Commission expressed its concern with NERC's
approach by requesting additional explanation from NERC on its proposal
regarding how the exception process would handle local distribution
facilities. These instances gave fair notice of the Commission's
concerns and positions on this issue.
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    \127\ Jones v. Flowers, 547 U.S. 220, 226 (2006) (citation and
quotation omitted).
    \128\ Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (citations
and quotation omitted).
    \129\ Id. 334 (``[D]ue process, unlike some legal rules, is not
a technical conception with a fixed content unrelated to time, place
and circumstances.'') (citation and quotation omitted).
    \130\ See Morrissey v. Brewer, 408 U.S. 471, 481 (1972) (``[D]ue
process is flexible and calls for such procedural protections as the
particular situation demands.'').
    \131\ Order No. 743, 133 FERC ] 61,150 at PP 37-38, Order No.
743-A, 134 FERC ] 61,210 at PP 25, 55, 58, 67-72.
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    97. Under these circumstances, an additional comment period on the
local distribution determination is unnecessary. The Commission has
wide discretion in selecting its procedures.\132\ The Commission thus
rejects NYPSC's claim that the Commission's decision to determine
whether facilities are used in local distribution on a case-by-case
basis and apply the factors of the Seven Factor Test violated due
process.
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    \132\ Pacific Gas and Electric Co. v. FERC, 746 F.2d 1383, 1386
(9th Cir. 1984) (``We must allow the [Commission] wide discretion in
selecting its own procedures . . . and must defer to the
[Commission] interpretation of its own rules, unless the
interpretation is plainly erroneous.'') (citations omitted).
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2. State Involvement in Local Distribution Determinations and the NERC
Exception Process; Application of the Seven Factor Test
    98. NYPSC, NARUC, NRECA and APPA argue that the Commission did not
explain how it will apply the Seven Factor Test or properly acknowledge
state involvement in the local distribution process as contemplated by
Order No. 888. NYPSC and NARUC request clarification or rehearing on
whether, in adopting the Seven Factor Test, the Commission intended to
apply the Order No. 888 finding that gives deference to state
determinations as to which facilities are transmission and which are
local distribution. NYPSC states that the Commission ``indicated in
Order No. 888 that it would entertain proposals by public utilities,
filed under section 205 of the Federal Power Act, containing
classifications for transmission and local distribution facilities''
but required consultation with state regulatory authorities as a
prerequisite to making such filings.\133\ NRECA maintains the Seven
Factor Test should not be determinative in the context of section 215
jurisdiction decisions because the test involves coordination with
state regulators and proceedings involving the affected parties and
wholesale and retail interests. NARUC and APPA contend that the
Commission ignored the circumstances under which a local distribution
test would be employed as described in Order No. 888.\134\ NARUC states
that in Order No. 888, the Commission acknowledged that in making case-
by-case determinations concerning local distribution, it would ``take
advantage of state regulatory authorities' knowledge and expertise
concerning the facilities of the utilities that they regulate . . .
defer[ring] to the recommendations by state regulatory authorities
concerning where to draw the jurisdictional line under the Commission's
technical test for local distribution facilities.''\135\ According to
NARUC and APPA, rather than deferring to the state's expertise, as it
did when it developed the Seven Factor Test, the Commission is
relegating the states to commenter status.
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    \133\ NYPSC Request for Rehearing at 5.
    \134\ Order No. 888, FERC Stats. & Regs. ] 31,036 at 31,783-84
(1996).
    \135\ NARUC Request for Rehearing at 7 (citing Order No. 888,
FERC Stats. & Regs. ] 31,036 (1996)).
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    99. APPA, NARUC and NRECA express concern that use of the Seven
Factor Test may not translate well into the reliability context. NRECA
requests clarification that, because of the differences between FPA
sections 201 and 215, the Commission will review significantly more
than the Seven Factor Test components and will not apply the Seven
Factor Test in the same manner it has in section 201 analyses.\136\
NRECA argues that section 215 states that NERC and the Commission lack
reliability jurisdiction over facilities used in local distribution,
which is a different inquiry from the one made in rate cases, where the
``predominant use'' of the facilities may be of significance.\137\
NRECA claims it is also different from the determination made when
evaluating the Commission's jurisdiction over a facility for purposes
of sections 205 and 206 of the FPA. NRECA states that under those
analyses, facilities used for both distribution and transmission are
treated as Commission-jurisdictional transmission facilities. NRECA
contrasts that with section 215 which states that any use of the
facility for distribution removes it from NERC's and the Commission's
reliability jurisdiction. APPA, NARUC and NRECA claim that, while some
of the seven factors may apply, others seem less appropriate to