[Federal Register: October 27, 2008 (Volume 73, Number 208)]
[Rules and Regulations]
[Page 63795-63832]
[DOCID:fr27oc08-19]

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Part III

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Part 358

Standards of Conduct for Transmission Providers; Final Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 358

[Docket No. RM07-1-000; Order No. 717]

Standards of Conduct for Transmission Providers

Issued October 16, 2008.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule.

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SUMMARY: The Federal Energy Regulatory Commission is amending its
regulations adopted on an interim basis in Order No. 690, in order to
make them clearer and to refocus the rules on the areas where there is
the greatest potential for abuse. The Final Rule is designed to foster
compliance, facilitate Commission enforcement, and conform the
Standards of Conduct to the decision of the U.S. Court of Appeals for
the DC Circuit in National Fuel Gas Supply Corporation v. FERC, 468 F.
3d 831 (DC Cir. 2006). Specifically, the Final Rule eliminates the
concept of energy affiliates and eliminates the corporate separation
approach in favor of the employee functional approach used in Order
Nos. 497 and 889.

DATES: Effective Date: This rule will become effective November 26,
2008.

FOR FURTHER INFORMATION CONTACT:
Kathryn Kuhlen, Office of Enforcement, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-6855.
Jamie A. Jordan, Office of Enforcement, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-6628.

                            Table of Contents

                                                               Paragraph
                                                                Number

I. Introduction.............................................           1
II. Background..............................................           3
III. Discussion.............................................           9
    A. Overall Approach.....................................           9
        1. Commission Proposal..............................           9
        2. Comments.........................................          10
        3. Commission Determination.........................          12
    B. Jurisdiction and Applicability of the Standards......          13
        1. Applicability to Pipelines Operating Under Part            13
         157................................................
        2. Applicability to Pipelines with No Marketing               16
         Affiliate Transactions.............................
        3. Commencement Date................................          24
        4. Waivers from Coverage of the Standards...........          27
    C. Independent Functioning Rule.........................          34
        1. Transmission Functions...........................          37
        2. Transmission Function Employee...................          41
        3. Marketing Functions..............................          50
        4. Marketing Function Employee......................          97
        5. Supervisors, Managers and Corporate Executives...         106
        6. Elimination of Shared Employees Concept..........         122
        7. Long-Range Planning and Procurement..............         134
        8. Exclusion for Permitted Information Exchanges....         152
    D. The No Conduit Rule..................................         187
        1. Commission Proposal..............................         188
        2. Comments.........................................         189
        3. Commission Determination.........................         197
    E. Transparency Rule....................................         204
        1. Waivers and Exercises of Discretion..............         205
        2. Other Posting Requirements.......................         218
    F. Other Definitions....................................         249
        1. Affiliate........................................         250
        2. Transmission.....................................         259
        3. Transmission Customer............................         265
        4. Transmission Function Information................         267
        5. Transmission Provider............................         277
    G. Per Se Violation.....................................         283
        1. Commission Proposal..............................         284
        2. Comments.........................................         285
        3. Commission Determination.........................         291
    H. Training Requirements................................         295
        1. Commission Proposal..............................         295
        2. Comments.........................................         296
        3. Commission Determination.........................         305
    I. Compliance Date......................................         310
    J. Miscellaneous Matters................................         313
        1. Comments.........................................         313
        2. Commission Determination.........................         314
IV. Information Collection Statement........................         318
V. Environmental Analysis...................................         324
VI. Regulatory Flexibility Act..............................         325
VII. Document Availability..................................         326
VIII. Effective Date and Congressional Notification.........         329

Regulatory Text
Appendix A

Before Commissioners: Joseph T. Kelliher, Chairman; Svedeen G.
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

I. Introduction

    1. This Final Rule amends the Standards of Conduct for Transmission
Providers (the Standards of Conduct or the Standards) to make them
clearer and to refocus the rules on the areas where there is the
greatest potential for abuse. The Standards have substantially evolved
over the twenty years since they were first adopted for the gas
industry in 1988. During that time, the Commission added numerous
exceptions and additions to the original regulations (and to the
regulations adopted for the electric industry in 1996), including
revisions made in Order No. 2004,\1\ in which the Commission combined
the separate Standards for the gas and electric industry, expanded the
scope of the Standards to include the new concept of energy affiliates,
and adopted a corporate separation approach to the relationship of
transmission providers and their marketing arms. The cumulative effect
of many of these changes rendered the Standards as a whole difficult
for regulated entities to apply and for the Commission to enforce.
Furthermore, on appeal of Order No. 2004, the U.S. Court of Appeals for
the DC Circuit disapproved of the expansion of the Standards to include
energy affiliates, and vacated Order No. 2004 as it applied to the gas
industry.\2\
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    \1\ Standards of Conduct for Transmission Providers, Order No.
2004, FERC Stats. & Regs., Regulations Preambles 2001-2005 ] 31,155
(2003), order on reh'g, Order No. 2004-A, FERC Stats. & Regs.,
Regulations Preambles 2001-2005 ] 31,161 (2004), order on reh'g,
Order No. 2004-B, FERC Stats. & Regs., Regulations Preambles 2001-
2005 ] 31,166 (2004), order on reh'g, Order No. 2004-C, FERC Stats.
& Regs., Regulations Preambles 2001-2005 ] 31,172 (2004), order on
reh'g, Order No. 2004-D, 110 FERC ] 61,320 (2005), vacated and
remanded as it applies to natural gas pipelines sub nom. Nat'l Fuel
Gas Supply Corporation v. FERC, 468 F.3d 831 (DC Cir. 2006)
(National Fuel).
    \2\ National Fuel, 468 F. 3d at 845.
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    2. The reforms adopted in this Final Rule are designed to eliminate
the elements that have rendered the Standards difficult to enforce and
apply. They combine the best elements of Order No. 2004 (especially the
integration of gas and electric Standards, an element not contested in
National Fuel), with those of the Standards originally adopted for the
gas industry in Order No. 497 \3\ and for the electric industry in
Order No. 889.\4\ Specifically, the Final Rule (i) eliminates the
concept of energy affiliates and (ii) eliminates the corporate
separation approach in favor of the employee functional approach used
in Order Nos. 497 and 889. In addition, the reforms adopted here
conform the Standards to the National Fuel opinion. At bottom, these
reforms, by making the Standards clearer and by refocusing them on the
areas where there is the greatest potential for affiliate abuse, will
make compliance less elusive and subjective for regulated entities, and
will facilitate enforcement of the Standards by the Commission.
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    \3\ Inquiry Into Alleged Anticompetitive Practices Related to
Marketing Affiliates of Interstate Pipelines, Order No. 497, 53 FR
22139 (1988), FERC Stats. & Regs., Regulations Preambles 1986-1990 ]
30,820 (1988); Order No. 497-A, order on reh'g, 54 FR 52781 (1989),
FERC Stats & Regs., Regulations Preambles 1986-1990 ] 30,868 (1989);
Order No. 497-B, order extending sunset date, 55 FR 53291 (1990),
FERC Stats. & Regs., Regulations Preambles 1986-1990 ] 30,908
(1990); Order No. 497-C, order extending sunset date, 57 FR 9
(1992), FERC Stats. & Regs., Regulations Preambles 1991-1996 ]
30,934 (1991), reh'g denied, 57 FR 5815 (1992), 58 FERC ] 61,139
(1992); aff'd in part and remanded in part sub nom. Tenneco Gas v.
FERC, 969 F.2d 1187 (DC Cir. 1992) (collectively, Order No. 497)
(Tenneco).
    \4\ Open Access Same-Time Information System (Formerly Real-Time
Information Network) and Standards of Conduct, Order No. 889, 61 FR
21737 (May 10, 1996), FERC Stats. & Regs., Regulations Preambles
January 1991-June 1996 ] 31,035 (1996); Order No. 889-A, order on
reh'g, 62 FR 12484 (Mar. 14, 1997), FERC Stats. & Regs., Regulations
Preambles July 1996--December 2000 ] 31,049 (1997); Order No. 889-B,
reh'g denied, 62 FR 64715 (Dec. 9, 1997), 81 FERC ] 61,253 (1997)
(collectively, Order No. 889).
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II. Background

    3. The Commission first adopted Standards of Conduct in 1988, in
Order No. 497. These initial Standards prohibited interstate natural
gas pipelines from giving their marketing affiliates or wholesale
merchant functions undue preferences over non-affiliated customers.
Citing demonstrated record abuses, the U.S. Court of Appeals for the DC
Circuit upheld these Standards in 1992.\5\ The Commission adopted
similar Standards for the electric industry in 1996, in Order No. 889,
prohibiting public utilities from giving undue preferences to their
marketing affiliates or wholesale merchant functions. Both the electric
and gas Standards sought to deter undue preferences by: (i) Separating
a transmission provider's employees engaged in transmission services
from those engaged in its marketing services, and (ii) requiring that
all transmission customers, affiliated and non-affiliated, be treated
on a non-discriminatory basis.
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    \5\ Tenneco, 969 F. 2d at 1214.
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    4. Changes in both the electric and gas industries, in particular
the unbundling of sales from transportation in the gas industry and the
increase in the number of power marketers in the electric industry, led
the Commission in 2003 to issue Order No. 2004, which broadened the
Standards to include a new category of affiliate, the energy
affiliate.\6\ The new Standards were made applicable to both the
electric and gas industries, and provided that the transmission
employees of a transmission provider \7\ must function independently
not only from the company's marketing affiliates but from its energy
affiliates as well, and that transmission providers may not treat
either their energy affiliates or their marketing affiliates on a
preferential basis. Order No. 2004 also imposed requirements to
publicly post information concerning a transmission provider's energy
affiliates.
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    \6\ The new Standards defined an Energy Affiliate as an
affiliate of a transmission provider that (1) engages in or is
involved in transmission transactions in U.S. energy or transmission
markets; (2) manages or controls transmission capacity of a
transmission provider in U.S. energy or transmission markets; (3)
buys, sells, trades or administers natural gas or electric energy in
U.S. energy or transmission markets; or (4) engages in financial
transactions relating to the sale or transmission of natural gas or
electric energy in U.S. energy or transmission markets. 18 CFR
358.3(d). Certain categories of entities were excluded from this
definition in following subsections of the regulations.
    \7\ A transmission provider was defined as (1) any public
utility that owns, operates or controls facilities used for
transmission of electric energy in interstate commerce; or (2) any
interstate natural gas pipeline that transports gas for others
pursuant to subpart A or part 157 or subparts B or G of part 284 of
the same chapter of the regulations. 18 CFR 358.3(a).
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    5. On appeal by members of the natural gas industry, the U.S. Court
of Appeals for the DC Circuit overturned the Standards as applicable to
gas transmission providers, on the grounds that the evidence of energy
affiliate

abuse cited by the Commission was not in the record.\8\ The court noted
that the dissenting Commissioners in Order No. 2004 had expressed
concern that the Order would diminish industry efficiencies without
advancing the FERC policy of preventing unduly discriminatory
behavior.\9\
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    \8\ National Fuel, 468 F. 3d at 841.
    \9\ Id. at 838.
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    6. The Commission issued an Interim Rule on January 9, 2007,\10\
which repromulgated the portions of the Standards not challenged in
National Fuel. The Commission then set about determining how to respond
to the DC Circuit's order on a permanent basis. On January 18, 2007,
the Commission issued its initial NOPR,\11\ requesting comment on
whether the concept of energy affiliates should be retained for the
electric industry, proposing the creation of two new categories of
employees denominated as Competitive Solicitation Employees and
Planning Employees, carrying over the Interim Rule's new definition of
marketing to cover asset managers, and making numerous other proposals.
The Commission received thousands of pages of both initial and reply
comments from some 95 individuals, companies, and organizations.
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    \10\ Standards of Conduct for Transmission Providers, Order No.
690, 72 FR 2427 (Jan. 19, 2007); FERC Stats. & Regs. ] 31,237 (2007)
(Interim Rule); clarified by, Standards of Conduct for transmission
providers, Order No. 690-A, 72 FR 14235 (Mar. 27, 2007); FERC Stats.
& Regs. ] 31,243 (2007) (Order on Clarification and Rehearing).
    \11\ Standards of Conduct for Transmission Providers, 72 FR 3958
(Jan. 29, 2007), FERC Stats. & Regs. ] 32,611 (2007) (initial NOPR).
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    7. Consideration of these comments, coupled with the Commission's
own experience in administering the Standards, persuaded the Commission
to modify the approach advanced in the initial NOPR. For that reason,
the Commission issued a new NOPR on March 27, 2008,\12\ and invited
comment both on its general approach and on its specific provisions. In
the NOPR, the Commission proposed to return to the approach of
separating by function transmission personnel from marketing personnel,
an approach that had been adopted in Order Nos. 497 and 889. The
Commission also proposed to clarify and streamline the Standards in
order to enhance compliance and enforcement, and to increase
transparency in the area of transmission/affiliate interactions that
would aid in the detection of any undue discrimination. Comments were
received from 62 companies and organizations, which are listed in
Appendix A.\13\ The vast majority of the comments were laudatory both
of the Commission's efforts to simplify and clarify the Standards, and
of the general approaches taken by the Commission to achieve that goal.
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    \12\ Standards of Conduct for Transmission Providers, 73 Fed.
Reg. 16,228 (March 27, 2008), FERC Stats. & Regs. ] 32,630 (2008)
(NOPR).
    \13\ The acronyms used throughout are defined in Appendix A.
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    8. Notwithstanding general agreement with the Commission's overall
approach, many commenters submitted requests for clarification and
modifications. In most instances, the modifications proposed were
advanced with the stated goal either to make the Standards even
clearer, or to address matters which some entities believed had fallen
between the cracks in the transition from the existing Standards to a
more streamlined approach. The Commission has carefully considered
these comments and agrees that in several areas, modifications to the
regulatory text are needed. This Final Rule adopts the overall approach
set forth in the NOPR, but modifies the regulatory text to better
achieve the goals of clarity and enforceability. It also provides
clarifications in several areas in order to aid regulated entities in
applying the Standards.

III. Discussion

A. Overall Approach

1. Commission Proposal
    9. The NOPR proposed to simplify and clarify the Standards, and in
particular to: (i) Eliminate the concept of energy affiliates, and (ii)
eliminate the corporate separation approach to separating a
transmission provider's transmission function employees from its
marketing function employees, instead returning to the employee
functional approach utilized in Order Nos. 497 and 889. The NOPR
pointed out that the corporate separation approach had proven difficult
to implement, as evidenced by the scores of waiver requests submitted
to the Commission, and impeded legitimate integrated resource planning
and competitive solicitations, as reflected in the concerns raised by
the electric industry in particular and also by state commissions. The
Commission also found that the existing Standards are too complex to
facilitate compliance or support enforcement efforts, and have had the
unintended effect of making it more difficult for transmission
providers to reasonably manage their businesses.
2. Comments
    10. The vast majority of commenters agreed with the Commission's
goals of simplifying the Standards in order to achieve greater clarity,
efficiencies of operation, and ease of compliance. They also applauded
the proposed return to the employee functional approach, stating that
it would better promote regulatory certainty than had the corporate
separation approach.\14\
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    \14\ Most commenters expressly support the change in approach to
the independent functioning rule from ``corporate separation'' to
``employee functional,'' including ALCOA; Ameren; AGA; APPA; ATC;
Arizona PSC; Bonneville; CenterPoint; Chandeleur; California PUC
(particularly supporting the Commission's efforts to remove
impediments to integrated resource planning); Destin; Dominion
Resources; Duke; E.ON; EEI; El Paso; EPSA; Idaho Power; FirstEnergy;
INGAA; Iroquois; Kinder Morgan; LPPC; MidAmerican; NARUC; National
Grid; NGSA; New York PSC; Nisource; NCPA; PG&E PSEG; Puget Sound;
SMUD; Salt River; SCE; Southern Co. Services; Spectra; TAPS; TANC;
TDU Systems; Vectren; WA UTC; Western Utilities Compliance Group;
Wisconsin Electric; and Xcel.
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    11. No commenters proposed that the corporate separation approach
be continued, and no commenters requested continuation of the energy
affiliate concept. The FTC, however, contended that behavioral rules,
including the employee functional approach, cannot fully achieve
independent functioning because such an approach remains vulnerable to
subtle events of discrimination and preference that may be difficult to
detect and document.\15\ The FTC and ITC recommend instead that the
Commission require vertically integrated firms to structurally unbundle
transmission and place operation of the transmission function in the
hands of the relevant Regional Transmission Organization (RTO) or
Independent System Operator (ISO).\16\
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    \15\ FTC at 6-7.
    \16\ FTC at 9-10; ITC Reply at 4-5.
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3. Commission Determination
    12. The overwhelming support from commenters on the NOPR's overall
approach confirms the Commission's conviction that simplifying and
clarifying the Standards in the manner proposed will best achieve the
twin goals of compliance and enforcement. The Commission therefore
adopts the employee functional approach, as set forth in the regulatory
text, and eliminates the concept of energy affiliates. Specifics and
definitions regarding the employee functional approach, as well as
other matters, are discussed below. With respect to the comments of the
FTC and ITC, there has been no demonstration that the proposed rules
are inadequate to address the potential for undue preferences. Nor do
we believe this proceeding is the proper forum to

address issues as complex and far-reaching as those raised by the FTC
and ITC.

B. Jurisdiction and Applicability of the Standards

1. Applicability to Pipelines Operating Under Part 157
a. Commission Proposal
    13. In the NOPR, the Commission carried forward from the existing
Standards the essence of the language in section 358.1 governing the
applicability of the Standards to interstate natural gas pipelines. The
proposed text reads in pertinent part: ``This part applies to any
interstate natural gas pipeline that transports gas for others pursuant
to subpart A of part 157 or subparts B or G of part 284 of this chapter
and conducts transmission transactions with an affiliate that engages
in marketing functions.'' Likewise, the definition of transmission
provider in proposed section 358.3(k), insofar as it pertains to the
gas industry, reads as follows: ``Any interstate natural gas pipeline
that transports gas for others pursuant to subpart A of part 157 or
subparts B or G of part 284 of this chapter.''
b. Comments
    14. Hampshire Gas and Northwest Natural object that the texts of
proposed sections 358.1(a) and 358.3(k) bring within the ambit of the
Standards certain gas pipelines that did not fall within the Standards
as issued under Order No. 497.\17\ They contend that the NOPR's use of
the word ``or'' instead of ``and'' in proposed section 358.1(a) expands
the ambit of the regulations to any pipeline that transports gas either
under subpart A of part 157 or under subpart B or G of part 284. Both
commenters note that a pipeline operating only under part 157 does not
have the authority to provide open access transportation, as it may
only transport for specific authorized shippers, and thus it is not
possible for a part 157 pipeline to engage in discrimination in favor
of an affiliate. Hampshire and Northwest Natural urge the Commission to
change the Standards' applicability to cover only those pipelines that
operate under both parts 157 and 284.\18\
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    \17\ Hampshire Gas at 6-9; Northwest Natural at 3-7.
    \18\ Id.
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c. Commission Determination
    15. The current Standards, as well as the proposed Standards,
contain the word ``or'' instead of ``and'' in sections 358.1(a) and
358.3(k)(2). The fact that the Commission is returning to the employee
functional approach used in Order No. 497 does not automatically mean,
however, that it must resurrect all other aspects of Order No. 497.
Each provision must be considered on a case-by-case basis. The
Commission has evaluated the comments contending that part 157
pipelines should not be included in the ambit of section 358.1(a), and
determines that their position is well-taken. Pipelines operating only
under part 157 cannot discriminate in favor of an affiliate, because
such pipelines can only transport for specific shippers authorized by
their certificates. Put another way, in this Final Rule, we are
concerned about the relationship between pipelines and their shippers
where the pipelines are providing transportation service pursuant to
part 284 blanket certificate authorization and open access rules, which
give the pipelines the flexibility to discriminate in favor of their
affiliates because they may commence and terminate service without ex
ante review by market participants or the Commission. By contrast, the
very few pipelines that are not part 284 open-access transporters must
receive shipper-specific certificate authorization from the Commission,
which must find the service is required by the public convenience and
necessity under Section 7 of the Natural Gas Act. Accordingly, part 157
transporters do not have the flexibility that could lead to
discriminating unduly in favor of their affiliates. The Commission will
therefore eliminate the reference to part 157, leaving only interstate
pipelines that transport gas for others pursuant to subparts B or G of
part 284 subject to the Standards and within the scope of the
definition of transmission provider. Accordingly, the Standards now
apply to those pipelines subject to the Commission's open access rules
under part 284.
2. Applicability to Pipelines With No Marketing Affiliate Transactions
a. Commission Proposal
    16. The NOPR requested comment as to whether the statement of the
Standards' applicability to interstate pipelines in section 358.1(a)
should parallel the statement of the Standards' applicability to the
electric industry set forth in section 358.1(b).\19\ The language in
question reads: ``and conducts transmission transactions with an
affiliate that engages in marketing functions.''
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    \19\ NOPR at P 58.
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b. Comments
    17. INGAA asserts that the cited language is essential, because it
exempts those pipelines with affiliates that have marketing function
employees, but with which the pipeline conducts only non-transmission
transactions. INGAA argues that these non-transmission transactions do
not pose the potential for the types of abuse the rules seek to
prevent. According to INGAA, the cited language also ensures that the
proposed Standards operate within the boundaries set forth in National
Fuel, by not extending coverage to relationships and transactions for
which the Commission has no record evidence of undue discrimination or
preference.\20\
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    \20\ INGAA at 9-12.
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    18. NGSA argues that the limitation in the current language implies
an exemption from the Standards for sales of gas in which the gas is
not shipped using capacity held or controlled by the seller's
affiliated transmission provider. NGSA urges the Commission to either:
(i) Clarify that the No Conduit Rule (and the Standards generally)
would nonetheless apply to such gas sellers when they share the same
facilities or trading floor with marketing function employees who are
not exempt from the Standards, or (ii) require entities that house
exempt marketing function employees in the same facility as non-exempt
marketing function employees to provide some physical separation
between the two groups, to prevent uncontrolled flow of restricted
information.\21\
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    \21\ NGSA Reply Comments at 12-14.
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    19. While agreeing with INGAA, other commenters would apply the
conditional language in section 358.1(a) to public utilities as well as
pipelines, thereby limiting the Standards' application to both public
utilities and interstate natural gas pipelines that conduct
transportation transactions with marketing affiliates.\22\
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    \22\ Nisource at 25-28; DCP Midstream at 2; Southwest Gas at 18-
20.
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c. Commission Determination
    20. The Commission agrees with INGAA that there is no evidence in
the record to suggest that pipelines that do not conduct transmission
transactions with an affiliate engaged in marketing functions are in a
position to engage in the type of affiliate abuse to which the
Standards are directed. Therefore, the Commission will retain the
language in section 358.1(a) that sets forth this limitation.
    21. The Commission disagrees with NGSA's contention that certain
sales of gas have, by implication, been made

exempt. The Commission is not exempting any sales of gas; the Standards
apply to conduct, not to products. Section 358.1 addresses which
pipelines and which electric utilities fall within the ambit of the
Standards. A pipeline may have some marketing affiliates with which it
conducts transmission transactions, and some with which it does not. A
pipeline that conducts transmission transactions with a marketing
affiliate must comply with the Standards, including the No Conduit
Rule.
    22. If a pipeline has affiliates of both types (some with which it
conducts transmission transactions and some with which it does not),
the pipeline must ensure that there is no prohibited communication with
marketing function employees, in accordance with the requirements of
the No Conduit Rule. The pipeline can determine how best to ensure
compliance with the regulation, and we decline to order physical
separation of employees on a generic basis. We might consider it on a
case-specific basis, however, in the event the Commission found a
violation.\23\
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    \23\ C.f., e.g., Southern Co. Serv. Inc., 117 FERC ] 61,021
(2006).
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    23. The Commission agrees with those commenters that suggest
parallelism between the electric and gas industries could be achieved
by also applying to public utilities the limitation applicable to
pipelines. Because the core abuse to which the Standards are directed
is that of undue preference in favor of an affiliate (defined to
include divisions of the transmission provider as well as separate
corporate entities), a public utility that does not engage in any
transmission transactions with a marketing affiliate should be excluded
from the Standards' coverage, just as should a pipeline. Therefore, the
Commission modifies the language of section 358.1(b) accordingly.
3. Commencement Date
a. Commission Proposal
    24. The Commission proposed in section 358.8(a) that a transmission
provider must comply with the Standards as of the earlier of the date
it has a rate on file with the Commission or the date it commences
transmission transactions.
b. Comments
    25. INGAA and APGA disagree with the commencement date proposed in
section 358.8(a). INGAA asserts that the Standards should not apply to
a pipeline unless and until the pipeline engages in transportation
transactions with a marketing or brokering affiliate. INGAA believes
that proposed section 358.8(a) is inconsistent with the Standards'
purpose of preventing preferential treatment and with proposed section
358.1(a), which applies the Standards only to pipelines conducting
transmission transactions with an affiliate engaging in marketing
functions.\24\ Conversely, APGA would have the Standards apply to a
newly-certificated pipeline as soon as the pipeline begins soliciting
customers or negotiating contracts, rather than deferring compliance
until such time as the pipeline commences transportation.\25\
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    \24\ INGAA at 58-61.
    \25\ APGA at 8-10.
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c. Commission Determination
    26. The Commission believes that INGAA's comments on this point are
well-taken. Under section 358.1, a pipeline that does not conduct
transmission transactions with an affiliate that engages in marketing
functions need not comply with the Standards. In this Final Rule, we
expand that same provision to apply to public utilities as well, as
discussed above. Therefore, we will modify the effective date upon
which a transmission provider must be in full compliance with the
Standards to provide that a transmission provider must comply with the
Standards on the date it commences transmission transactions with an
affiliate that engages in marketing functions. See section 358.8(a).
4. Waivers From Coverage of the Standards
a. Commission Proposal
    27. In the NOPR, the Commission did not address the issue of
whether existing waivers from the Standards should apply to the new
Standards.
b. Comments
    28. Numerous commenters request that the Commission clarify that
existing waivers from the application of the current Standards remain
in effect upon finalization of this rulemaking, to the extent they
remain relevant.\26\ Questar further requests that exemptions and
waivers granted under Order No. 2004 be functionally adapted to the
rules as proposed in the NOPR.\27\
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    \26\ AGA at 26; INGAA at 61-62; New York PSC at 5-6; National
Grid at 28-29; Northwest Natural at 6-7; Questar at 2; TDU Systems
at 18; Unitil at 4-5. New York PSC adds that without such
confirmation, existing sales activities authorized under the
standing waivers may be disrupted at the expense of the public
interest. New York PSC at 5. New York PSC offers the example of
National Fuel Gas Distribution Corporation (NFGD), which it states
received a waiver to make off-system sales from contract storage
located on an affiliated pipeline system to marketers who resell
that gas to NFGD's retail customer under a New York PSC-approved
retail choice program. New York PSC states that uncertainty
regarding status of the waiver may compel NFGD to terminate those
sales. Id. at 5-6.
    \27\ Questar at 2.
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    29. Northwest Natural requests that the Commission broaden existing
waivers from ``partial'' to ``full'' for pipelines that provide
transportation for a single affiliated shipper.\28\ Similarly, USG
believes that pipelines transporting gas only for affiliated shippers
should be exempted from the rules. It recommends that the Commission
either amend proposed section 358.1(a) to exclude pipelines that do not
serve unaffiliated customers, amend the exceptions to the proposed
definition of ``marketing functions,'' or grant USG and B-R Pipeline a
waiver.\29\
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    \28\ Northwest Natural at 7.
    \29\ USG at 10-12.
---------------------------------------------------------------------------

    30. With regards to the Commission's continued willingness to
consider requests for waivers, Unitil seeks clarification that the
Commission will continue to consider requests for waivers by entities
that would have qualified for waivers under the requirements of Order
Nos. 889, 497, or 2004.\30\ TDU Systems supports the Commission's
proposal to allow transmission owners who are members of RTOs and ISOs,
do not operate or control their transmission facilities, and have no
access to transmission function information, to request waivers from
the Standards.\31\
---------------------------------------------------------------------------

    \30\ Unitil at 4-5.
    \31\ TDU Systems at 17.
---------------------------------------------------------------------------

c. Commission Determination
    31. The Commission agrees that it would be both burdensome and
unfair to require entities that have already received waivers from the
Standards on a case-by-case basis to file their requests again.
Therefore, existing waivers relating to the Standards shall continue in
full force and effect.
    32. The determination as to whether a waiver is appropriate for an
entity that serves only a single, affiliated customer is best made on
an individual basis. Any entity that believes it is entitled to a
waiver may apply for one, and any entity that has already received a
full or partial waiver may continue to rely upon it. This Final Rule is
not the appropriate vehicle to grant or modify individual waivers for
specific entities, as requested by Questar and USG. We note, however,
that many of the waivers previously granted transmission providers may
be rendered moot by the revisions made here to the Standards.

    33. The Commission clarifies that nothing in this Final Rule
precludes an entity from seeking a waiver. Indeed, section 358.1(d)
specifically so provides. If an entity believes it is entitled to a
waiver but has not yet applied for one, it is thus free to do so. The
appropriateness of granting such a waiver will be based on the facts
and circumstances of the individual case, examined in light of the
specific provisions and stated principles of the Standards adopted in
this Final Rule.

C. Independent Functioning Rule

    34. In the NOPR, the Commission proposed to continue the policy,
established in Order Nos. 497 and 889 and referred to as the
Independent Functioning Rule, of requiring the transmission function
employees of a transmission provider to function independently of the
marketing employees of the transmission provider. However, the NOPR
proposed eliminating the corporate separation approach to the
Independent Functioning Rule, which was adopted in Order No. 2004, and
replacing it with the employee functional approach previously utilized
in Order Nos. 497 and 889. Under the NOPR proposal, the relevant
consideration for purposes of applying the Independent Functioning Rule
is the function performed by the employee himself (or herself). Thus,
while under the current Standards any employee of a marketing or energy
affiliate is prohibited from interacting with transmission function
employees, the proposed Standards restricted the category of employees
who must function independently from transmission function employees to
those who actively and personally engage in marketing functions.
    35. To implement this approach, the NOPR proposed definitions of
certain key terms, the principal two being ``transmission functions''
and ``marketing functions.'' The definitions of ``transmission function
employee,'' ``marketing function employee,'' ``transmission function
information'' and ``marketing function information'' all keyed off
these two core definitions.
    36. Commenters generally approved of the NOPR approach, but raised
certain concerns about the manner of its implementation and about the
proposed definitions of terms. They also requested clarification on
various matters. These topics are addressed below.
1. Transmission Functions
a. Commission Proposal
    37. The NOPR proposed to define ``transmission functions'' as
``transmission system operations and the planning, directing,
organizing or carrying out of transmission operations, including the
granting and denying of transmission service requests.'' See proposed
section 358.3(h).
b. Comments
    38. ALCOA requests clarification that the word ``planning'' in the
definition of transmission function applies only to planning associated
with transmission operations. ALCOA proposes that the Commission refine
the term ``planning,'' as used in this definition, so that it is
limited to current, near-term and real-time operations, and requests
that the Commission exclude long-range system planning.\32\
---------------------------------------------------------------------------

    \32\ ALCOA at 4.
---------------------------------------------------------------------------

    39. In asserting that the proposed definition of transmission
functions is ambiguous, National Grid urges the Commission to adopt a
more precise definition of ``transmission function'' that encompasses
those activities that directly affect open access, i.e., real-time
control of the transmission system; planning of electric transmission
facilities or expansions; and the receipt, processing and granting of
transmission service requests.\33\ For other functions that could
reasonably be interpreted to relate to transmission, National Grid
posits, the No-Conduit Rule will prevent abuses.\34\ Furthermore,
National Grid requests clarification of the scope of the phrases
``operations,'' ``transmission system operations,'' and ``transmission
operations.'' \35\
---------------------------------------------------------------------------

    \33\ National Grid would exclude the planning of gas
transmission from the scope of the definition because pipeline open
seasons allow all interested parties to seek capacity in gas
expansion projects; it states that such conversations therefore do
not create concerns about preferential sharing of information.
Alternatively, it suggests that the definition of transmission
function could expressly exempt natural gas transmission planning
discussions that involve projects subject to an open season.
National Grid at 9-10.
    \34\ National Grid at 7-11.
    \35\ Id. at 9.
---------------------------------------------------------------------------

c. Commission Determination
    40. The proposed NOPR definition of ``transmission functions''
carries over the principal concepts contained in the existing
definition of ``transmission function employee'' (there is no
definition of the term ``transmission functions'' in the existing
Standards). We agree, however, that additional language may be needed
to clarify that the Commission intends the definition to apply to day-
to-day operations, not long-range planning. Therefore, we will modify
the definition in section 383.3(h) to read: ``the planning, directing,
organizing or carrying out of day-to-day transmission operations,
including the granting and denying of transmission service requests.''
This modification focuses the definition on those areas most
susceptible to affiliate abuse. Furthermore, information about long-
range activities, such as planned transmission lines, are likely
already to be in the public sphere.\36\ The definition we adopt in this
Final Rule is directed at short-term real time operations, including
those decisions made in advance of real time but directed at real time
operations. To the extent the Commission's prior cases and No Action
Letters are in accord with this principle, they may be consulted for
guidance as to individual activities in question.
---------------------------------------------------------------------------

    \36\ Issues relating to long-range planning are governed by
other Commission actions, such as in Order No. 890 for electric
utilities and in the long-standing policies regarding open seasons
subject to certificate policies for gas pipelines. See, e.g., Gulf
Crossing Pipeline Co., LLC, 123 FERC ] 61,100 at P 105 (2008).
---------------------------------------------------------------------------

2. Transmission Function Employee
a. Commission Proposal
    41. In the NOPR, the Commission proposed to define transmission
function employee as: ``an employee, contractor, consultant or agent of
a transmission provider who actively and personally engages in
transmission functions.'' See proposed section 358.3(i).
b. Comments
    42. Many commenters disagreed with the proposed classification of
field, maintenance, and construction employees as ``transmission
function employees'' \37\ for a variety of reasons, including the fact
that field employees do not actively and personally engage in system
operations \38\ and do not have access to transmission information.\39\
Similarly, MidAmerican requests that the definition of transmission
function employee expressly exclude the following categories: Engineers
who plan, design and oversee construction of transmission facilities;
construction workers who build transmission facilities; engineers who
make engineering decisions regarding the operation and maintenance of
transmission facilities; engineers who determine whether transmission

requests can be accommodated by the existing transmission system;
utility line workers who operate, repair and maintain transmission
facilities according to orders; and clerical staff and mapping
personnel who draw plans for and process communications about
transmission facilities.\40\
---------------------------------------------------------------------------

    \37\ ATC at 18; Dominion Resources at 14; EEI at 54; Puget Sound
at 7-8; INGAA; Nisource; Southern Co. Services at 24-25.
    \38\ Southern Co. Services at 25.
    \39\ Puget Sound at 8.
    \40\ MidAmerican at 11-12.
---------------------------------------------------------------------------

    43. To mirror the language in the preamble of the NOPR, Bonneville
suggests that a transmission or marketing function employee be one who
actively and personally engages in ``more than a de minimis amount of''
transmission or marketing functions.\41\ In addition, E.ON seeks more
clarity on the scope of the de minimis exception proposed in the
preamble, so as to avoid contrasting interpretations by transmission
providers.\42\
---------------------------------------------------------------------------

    \41\ Bonneville at 4-5. See also AGA at 18.
    \42\ E.ON at 12-13.
---------------------------------------------------------------------------

    44. Wisconsin Electric is unclear as to whether the standards
applicable to transmission function employees also apply to employees
engaged in certain reliability functions. More specifically, Wisconsin
Electric requests clarification that balancing authority employees are
not transmission function employees or agents under the proposed
rules.\43\
---------------------------------------------------------------------------

    \43\ Wisconsin Electric at 6.
---------------------------------------------------------------------------

    45. Commenters also raised concerns regarding the use of the phrase
``actively and personally engages.'' EEI requests that the Commission
clarify that an employee is not ``actively and personally engaged'' in
transmission or marketing functions so long as the employee is not
engaged in such activities on a day-to-day basis. Furthermore, EEI
believes that precedent under Order No. 889 regarding the ``day to day
activities'' standard should continue to apply, except for certain
precedent that undermined the ``day-to-day'' standard as it applied to
officers.\44\ Idaho Power requests that the Commission explain any
difference between the term ``actively and personally engages in'' and
the ``directing, organizing, or executing'' classification standard of
Order No. 889.\45\
---------------------------------------------------------------------------

    \44\ EEI at 5-6, 11-12; Entergy at 2-3.
    \45\ Idaho Power at 6-7.
---------------------------------------------------------------------------

c. Commission Determination
    46. The Commission agrees that field, maintenance and construction
workers, as well as engineers and clerical workers, are not normally
involved in the day-to-day operations of the transmission system.
Therefore, they would not fall within the scope of the definition of
transmission function employee, unless in addition to functioning in
their stated capacity they also engaged in the day-to-day operation of
the transmission system.
    47. The Commission declines to add a further exclusion in the
regulatory text for de minimis involvement. As discussed in the section
on officers, directors and supervisors, the Commission has determined
to add the phrase ``day-to-day'' to further clarify the scope of
activity covered by the definition. This addition should capture the
concerns of the commenters who requested inclusion of the phrase de
minimis. However, as noted in the preamble of the NOPR, if a non-
transmission function employee were pressed into service on an isolated
occasion to perform a transmission function, perhaps under emergency
conditions, such de minimis involvement would not convert him into a
transmission function employee. The remote possibility that such a
scenario would occur does not warrant adding exclusion language to the
text, which would unduly elevate the exclusion and raise more questions
than it answers.
    48. Similarly, the question of whether balancing authority
personnel are included in the definition of transmission function
employees depends on the circumstances. If the transmission provider
also serves as a balancing authority, and an employee's duties
encompass both transmission provider and balancing authority
activities, such an employee would be a transmission function employee
(provided his or her duties are encompassed by the definition of
transmission function employee). If, however, the two functions are
separate, and the employee performs no duties outside of those specific
to a balancing authority employee, he or she would not be considered a
transmission function employee.
    49. The phrase ``actively and personally'' applies to marketing
function employees as well as transmission function employees, and its
application arises most notably with respect to supervisory personnel.
The comments relating to that phrase, and the Commission's
determination with respect to it, are set forth below in the section
entitled Supervisors, Managers and Corporate Executives.

3. Marketing Functions

a. Commission Proposal
    50. The NOPR proposed defining marketing functions as ``the sale
for resale in interstate commerce, or the submission of offers or bids
to buy or sell natural gas or electric energy or capacity, demand
response, virtual electric or gas supply or demand, or financial
transmission rights in interstate commerce,'' subject to the following
``exemptions'':
    (1) Bundled retail sales, including sales of electric energy made
by providers of last resort (POLRs),
    (2) Incidental purchases or sales of natural gas to operate
interstate natural gas pipeline transmission facilities,
    (3) Sales of natural gas solely from the transmission provider's
own production,
    (4) Sales of natural gas solely from the transmission provider's
own gathering or processing facilities, and
    (5) Sales by an intrastate natural gas pipeline or local
distribution company making an on-system sale.
b. Comments
    51. Several commenters recommend that the Commission consider the
differences between the electric and gas industries and adopt separate
definitions of the term marketing functions for each of the
industries.\46\
---------------------------------------------------------------------------

    \46\ INGAA at 14; NGSA at 10-11; Nisource at 10; AGA at 11-13;
Williston at 3.
---------------------------------------------------------------------------

i. Electric Industry
    52. Commenters from the electric industry raised concerns about the
inclusion of ``bids to buy'' in the definition of marketing functions,
and the effects of such inclusion on planning activities. Commenters
also sought clarification and modification as to various individual
components of the definition, and identified a number of issues
regarding the bundled retail sales exemption and the inclusion of POLRs
in that exemption.
(a) Bids to Buy and Other Terms Listed in the Definition
    53. Dominion Resources believes that the definition, as it applies
to the electric industry, should be limited to sales for resale or
purchases for resale of electricity in interstate commerce,\47\ while
NiSource proposes limiting the definition to wholesale sales of
electricity.\48\ On the other hand, TAPS believes that the definition
of marketing functions is too narrow, in that it only covers purchases
that involve the ``submission of offers or bids to buy or sell.'' It
argues that the definition of marketing functions should include
purchases, as well as sales, for resale of energy, in order to ensure
that all transmission provider activities in wholesale markets,
including the purchase of electric energy, capacity,

and physical and financial transmission rights and other energy related
products for bundled retail load, are covered by the Standards. TAPS
requests that the proposed definition be modified to include purchases,
regardless of whether they are accomplished through the submission of a
bid or offer.\49\
---------------------------------------------------------------------------

    \47\ Dominion Resources at 11-13.
    \48\ NiSource at 10.
    \49\ TAPS at 11-14.
---------------------------------------------------------------------------

    54. Some commenters requested clarification of various terms used
in the definition of marketing functions. First, commenters ask the
Commission to clarify that the scope of the term ``demand response'' is
limited to the bidding or supply of demand response in a FERC
jurisdictional context, and does not cover the development of a retail
customer demand response program or a balancing authority's dispatch of
demand response for reliability.\50\ Dominion Resources requests that
the definition exclude regulated utilities demand/load response
programs in their regulated service territories, as being part of their
integrated resource planning.\51\
---------------------------------------------------------------------------

    \50\ Arizona PSC at 6; EEI at 48; SCE at 8-9; Western Utilities
at 10.
    \51\ Dominion Resources at 12-13.
---------------------------------------------------------------------------

    55. Second, commenters request clarification of the term
``capacity'' as used in the marketing functions definition. Dominion
Resources and EEI request that the term refer to generation and not
transmission capacity.\52\ Some commenters seek further clarifications
on other terms used in the definition of marketing functions. Dominion
Resources and MidAmerican request that the Commission confirm that
certain terms carry the same meaning in the Standards as they do in
Commission-administered organized markets, or, alternatively, that the
terms should be interpreted in a manner that limits the definition to
activities that occur in interstate commerce. These terms include: (i)
``Virtual electric or gas supply or demand;'' (ii) ``financial
transmission rights;'' (iii) ``offer'' or ``bid;'' (iv) ``demand
response;'' and (v) ``bundled retail sales.'' \53\ Similarly, NiSource
requests that the definition of marketing functions, as it applies to
the natural gas industry, should exclude the terms demand response,
virtual bids, and allocations of financial transmission rights.\54\
---------------------------------------------------------------------------

    \52\ Id. at 12; EEI at 49.
    \53\ Dominion Resources at 12; MidAmerican at 9-10.
    \54\ NiSource at 10-11.
---------------------------------------------------------------------------

    56. APPA and TAPS are concerned that the definition of marketing
functions, although it includes financial transmission rights, excludes
resale of a public utility transmission provider's physical electric
system transmission rights. These commenters believe that the omission
allows transmission provider employees engaging in such transmission
activities to communicate with other personnel on a preferential basis
regarding the availability of new firm transmission rights.\55\ TAPS
further asserts that the definition should include transmission
reservations and scheduling of transmission.\56\
---------------------------------------------------------------------------

    \55\ APPA at 6-9; TAPS at 28-31.
    \56\ TAPS at 30.
---------------------------------------------------------------------------

(b) Exclusions
    57. Commenters express varying opinions on the proposed exclusion
in section 358.3(c)(1) for ``bundled retail sales, including sales of
electric energy made by providers of last resort (POLRs).'' National
Grid and EEI generally supported the exemption.\57\ National Grid
recommends, however, that the proposed exemption be revised to read
``bundled retail sales or retail sales of electric energy made by
providers of last resort,'' rather than treating POLR sales as a subset
of bundled retail sales.\58\ Ameren believes that the POLR exclusion
should apply to all procurement or sale of energy by a POLR in support
of its POLR function, and urges the Commission to clarify that
incidental sales or purchases of energy by a POLR that benefit POLR
customers who are required to meet reliability or RTO requirements are
not activities within the scope of marketing functions, even if made on
an unbundled basis.\59\
---------------------------------------------------------------------------

    \57\ National Grid at 12-13; EEI at 34.
    \58\ National Grid at 12-13.
    \59\ Ameren at 22-24.
---------------------------------------------------------------------------

    58. On the other hand, EPSA and TAPS both oppose a blanket
exemption for POLRs.\60\ TAPS asserts that the Commission has denied
waivers to some affiliated POLRs in the past, and the waivers it has
granted have been fact-specific.\61\ TAPS likewise opposes a blanket
exclusion for all bundled retail sales,\62\ suggesting it be limited to
cases in which the retail marketing function has been separated from
the wholesale marketing function,\63\ and EPSA would eliminate an
exclusion both for POLRs and for all bundled retail sales insofar as
the exclusion would apply to utilities engaged in both bundled retail
sales and wholesale sales.\64\ TAPS requests that the Commission
clarify that the bundled retail sales exemption does not extend to
activities of the transmission provider's merchant function.\65\
---------------------------------------------------------------------------

    \60\ EPSA at 6-8; TAPS at 26-28.
    \61\ TAPS at 26-27.
    \62\ Id. at 15-25.
    \63\ Id.
    \64\ EPSA at 7-8.
    \65\ TAPS at 25-26.
---------------------------------------------------------------------------

    59. Many commenters request clarifications on the scope of the
bundled retail sales exclusion. EEI requests that the Commission
confirm that the exclusion covers purchases in support of retail sales
only as long as the resale of excess purchased power is made by
separate employees.\66\ WA UTC urges the Commission to include in the
exclusion the incidental wholesale power purchases and sales a utility
serving bundled retail load must make to balance its variable output
resources with variations in its actual bundled retail loads.\67\
---------------------------------------------------------------------------

    \66\ EEI at 34.
    \67\ WA UTC at 8-10.
---------------------------------------------------------------------------

    60. Several commenters sought additional exclusions from the
marketing functions definition as it applies to the electric industry.
California PUC recommends that the Commission exclude from the
marketing functions definition utility employees engaged in state-
regulated activities, such as engaging in purchases necessary to serve
bundled retail load or to meet the requirements of state-mandated
programs, because these activities are overseen by state
regulators.\68\ MidAmerican asks the Commission to clarify that all
planning personnel, whether or not engaged in state-mandated integrated
resource planning, be excluded from the definition of marketing
functions.\69\
---------------------------------------------------------------------------

    \68\ California PUC at 10. California PUC also asks the
Commission not to exempt any interactions between a utility's
transmission function employees and the employees of a utility's
unregulated affiliates, on the grounds that state regulators do not
oversee the activities of a utility's unregulated affiliates. Id.
    \69\ MidAmerican at 8-9.
---------------------------------------------------------------------------

    61. LPPC requests that the definition of marketing functions
expressly exclude electricity exchanges, arguing they are often
necessary to accomplish a transmission transaction, such as when access
to renewable sources of power requires crossing multiple systems.\70\
---------------------------------------------------------------------------

    \70\ LPPC at 15-16.
---------------------------------------------------------------------------

ii. Natural Gas Industry
    62. Commenters from the natural gas industry raised concerns about
the inclusion of ``bids to buy'' in the definition of marketing
functions, as had commenters from the electric industry. They also seek
modifications of existing exclusions and the addition of new
exclusions, and request clarification as to whether various activities
that arise in the gas industry are encompassed by the definition.

(a) Bids To Buy and Other Terms Listed in the Definition
    63. Many commenters believe that purchases should be excluded from
the definition of marketing functions as it applies to the natural gas
industry, arguing that their inclusion would extend the Standards
beyond the limits set by National Fuel.\71\ Southwest Gas requests that
the Commission clarify that the definition of marketing functions
covers only the sale of gas in interstate commerce,\72\ and AGA and
Dominion Resources request that marketing functions be defined in terms
of natural gas sales for resale in interstate commerce.\73\ AGA and
Southwest Gas believe this approach appropriately excludes natural gas
hedging activities.\74\ NGSA, rather than deleting purchases from the
definition itself, requests that purchase be included in the exclusions
to the definition in proposed sections 358.3(c)(3-5).\75\
---------------------------------------------------------------------------

    \71\ Salt River at 7-9; INGAA at 14; Nisource at 10.
    \72\ Southwest Gas at 5-9.
    \73\ AGA at 12-13; Dominion Resources at 7-8.
    \74\ AGA at 12-13; Southwest Gas at 14-15. Southwest Gas further
requests confirmation that the proposed definition reflect its view
that financial transactions designed to hedge price risk associated
with on-system retail sales are an important tool for an LDC's
provision of economical retail sales service, citing to Order No.
2004-C. Id.
    \75\ NGSA at 13.
---------------------------------------------------------------------------

    64. Several commenters believe that the phrase ``natural gas or
electric energy or capacity'' is ambiguous as to whether it encompasses
natural gas capacity, which they argue should not be included in the
definition.\76\ NGSA believes that an extension of the concept to
natural gas is not supported and is unnecessary due to the extensive
regulations governing pipeline capacity marketing.\77\ Southwest Gas
requests that, if the Commission intends to include pipeline capacity
in the definition, it amend proposed section 358.3(c)(5) to expressly
exempt a purchase or release of interstate pipeline capacity by a local
distribution company (LDC).\78\
---------------------------------------------------------------------------

    \76\ National Grid at 11-12; NGSA at 9-11; Williston at 13-14;
Southwest Gas at 16-17.
    \77\ NGSA at 11-13.
    \78\ Southwest Gas at 16-17.
---------------------------------------------------------------------------

(b) Exclusions
    65. With respect to the exclusion for bundled retail sales, New
York PSC requests that the Commission add to the exclusion the
purchasing of natural gas to make such sales.\79\
---------------------------------------------------------------------------

    \79\ New York PSC at 3.
---------------------------------------------------------------------------

    66. With respect to the exclusions for sales of gas from one's own
production or from one's own gathering or processing facilities, some
commenters assert that these exclusions have been narrowed from the
prior Standards without explanation. First, commenters observe that
proposed sections 358.3(c)(3) and (c)(4) exclude sales of natural gas
from a transmission provider's own production, gathering or processing
facilities, whereas the prior Standards extended the exclusion to also
include sales of natural gas from gathering and processing facilities
that are owned by the transmission provider's affiliate.\80\ INGAA
finds no reason to distinguish between a transmission provider's
directly and indirectly owned gathering and processing facilities.
INGAA and others request that these proposed exclusions be modified to
encompass sales and purchases of gas from the production, gathering or
processing facilities owned by either a transmission provider or its
affiliate.\81\
---------------------------------------------------------------------------

    \80\ INGAA at 15; NGSA at 14-15; Williston at 14-15.
    \81\ Id.
---------------------------------------------------------------------------

    67. Calypso urges the Commission either to clarify that the term
``transmission provider's own production'' encompasses a transmission
provider's foreign-sourced natural gas, or that the Commission extend
the exclusion to cover such gas.\82\
---------------------------------------------------------------------------

    \82\ Calypso at 2-4.
---------------------------------------------------------------------------

    68. With respect to the exclusion for sales by an intrastate
natural gas pipeline or LDC making an on-system sale, some commenters
would expand the exclusion to cover sales by LDCs that are off-system
but entered into with non-affiliated pipelines,\83\ to exclude
intrastate and Hinshaw pipelines that must buy enough gas to meet
predicted peak loads and sometimes must make off-system sales when
circumstances create surpluses,\84\ and to exclude 7(f) companies,
arguing the Commission recognized in Order No. 2004 that there is no
reason to treat 7(f) companies differently than LDCs with respect to
this exclusion.\85\ Alternatively, to the extent the Commission
believes exclusion of additional sales would create a potential area of
abuse, INGAA recommends that the transactions be evaluated on a case-
by-case basis.\86\ On the other hand, AGA disapproves of the proposed
exclusion, because it believes it creates potential for abuse and is
inconsistent with the NGA's prohibition against undue
discrimination.\87\ Southwest Gas believes that Hinshaw pipelines
should be excluded from the Standards altogether, arguing that doing so
would be consistent with Order No. 497 and the Commission's treatment
of Hinshaw pipelines as LDCs under the NGPA.\88\
---------------------------------------------------------------------------

    \83\ INGAA at 18-19; SCANA at 3-4; AGA at 14-15; National Grid
at 13-14; New York PSC at 3-4; Northwest Natural at 7-8; Dominion
Resources at 8; Duke at 8-9; Southwest Gas at 12-13.
    \84\ INGAA at 18-19; SCANA at 3-4.
    \85\ Southwest Gas at 18.
    \86\ INGAA at 20.
    \87\ AGA at 5-8.
    \88\ Southwest Gas at 17-18.
---------------------------------------------------------------------------

    69. INGAA and Unitil also object that certain sales by LDCs,
intrastate pipelines and other shippers necessary to maintain balances
are captured in the proposed definition of marketing functions, and
argue that Order No. 2004 excluded these sales as operational through
the concept of energy affiliates. INGAA believes the Commission should
restore this exclusion.\89\ Unitil argues further that Order No. 2004-A
excluded from the Standards de minimis off-system sales related to an
LDC's balancing requirements.\90\
---------------------------------------------------------------------------

    \89\ INGAA at 16-17.
    \90\ Until at 6-7.
---------------------------------------------------------------------------

    70. Questar requests that exchanges of gas for the purpose of
reducing transmission costs be excluded from the definition of
marketing functions.\91\
---------------------------------------------------------------------------

    \91\ Questar at 4-5.
---------------------------------------------------------------------------

    71. Commenters contend that, as proposed, the Standards may be read
to cover a natural gas pipeline's relationship with its electric
marketing affiliates or employees, or with its other employees who are
not making sales of natural gas.\92\ As remedies, MidAmerican proposes
to exclude the activities of an LDC, including those affiliated with an
electric transmission provider,\93\ and TDU Systems proposes to remove
from the definition of marketing functions the purchase or sale of
natural gas by an electric transmission provider.\94\
---------------------------------------------------------------------------

    \92\ INGAA at 14; MidAmerican at 16-18; TDU Systems at 14-15.
    \93\ MidAmerican at 16-18.
    \94\ TDU Systems at 14-15.
---------------------------------------------------------------------------

(c) Clarifications
    72. Several commenters raise concerns that, as proposed, the NOPR
would apply the Standards to a pipeline's relationship with affiliates
that do not hold capacity on the affiliate pipeline.\95\ These
commenters request that the Commission clarify that the Standards apply
only to the relationship between the pipeline and affiliates that hold
or control capacity on the affiliate pipeline.
---------------------------------------------------------------------------

    \95\ INGAA at 17-18; USG at 7-10; Spectra at 5-7; PSEG at 10-11;
AGA at 14-16.
---------------------------------------------------------------------------

    73. Spectra asks the Commission to clarify that the definition of
marketing functions excludes affiliated foreign pipelines that either
do not participate

in the U.S. energy markets or that are interconnected with U.S.
pipelines, but are subject to a foreign country's regulation, stating
that the current Standards exclude them from the definition of energy
affiliate.\96\
---------------------------------------------------------------------------

    \96\ Spectra at 7-8.
---------------------------------------------------------------------------

    74. SCANA requests clarification that if an LDC sells gas to an
asset manager in connection with establishing an asset management
arrangement for its off-system sales, the LDC is not engaging in a
marketing function or compromising its supposed status as an entity
exempt from the Standards.\97\
---------------------------------------------------------------------------

    \97\ SCANA at 3-6.
---------------------------------------------------------------------------

c. Commission Determination
    75. The definition of ``marketing functions'' was designed to
encompass both the electric and gas industries, as do the Standards as
a whole. The list of activities in proposed section 358.3(c) therefore
listed concepts that are not only applicable to both industries, but
also concepts applicable to one or the other. For instance, virtual
bidding is currently limited to the electric industry, as are financial
transmission rights. The many requests for clarification by commenters,
however, suggest this combined definition is confusing, exacerbated by
the fact that some concepts have different meanings in the two
industries, such as the word ``capacity.'' Therefore, in order to avoid
any further confusion regarding such matters, the Commission agrees
with those commenters who request separate definitions for the electric
and gas industries, and modifies the regulatory text at section
358.3(c) to so provide. We also clarify several of the terms used in
the definitions, as requested by commenters, and discuss separately
below other issues pertaining to the electric or gas industries.
i. Electric Industry
    76. Besides modifying section 358.3(c) to provide a separate
definition of marketing functions for public utilities and their
affiliates, the Commission revises the definition to read as follows:
``the sale for resale in interstate commerce, or the submission of
offers to sell in interstate commerce, of electric energy or capacity,
demand response, virtual transactions, or financial or physical
transmission rights, all as subject to an exclusion for bundled retail
sales, including sales of electric energy made by providers of last
resort (POLRs) acting in their POLR capacity.'' See section
358.3(c)(1).
(a) Bids To Buy and Other Terms Listed in the Definition
    77. Importantly, in addition to separating electric from gas, this
definition removes ``bids to buy'' from the category of marketing
functions. Many commenters requested this exclusion, for reasons that
include the jurisdictional reach of the Commission and National Fuel
concerns. The Commission agrees that restricting the definition of
marketing functions to include only sales, rather than purchases, more
closely matches the statutory prohibitions against undue
preferences.\98\ Furthermore, the removal of purchases from the
definition of marketing functions frees companies to conduct the
informational exchanges necessary to engage in integrated resource
planning,\99\ and eliminates the difficulties which might otherwise be
experienced by executive personnel who have overall procurement
responsibilities that include both transmission and marketing. At the
same time, it preserves protection against affiliate abuse, as it is
those employees who are making wholesale sales of electricity, not
purchases, who can improperly benefit from transmission function
information obtained from the affiliated transmission provider. (The
issue of long-range planning is discussed more fully below in the
section entitled Long-Range Planning and Procurement.) It also
addresses the concern of California PUC that purchases of power to
serve bundled retail load or to meet the requirements of state-mandated
programs should not be considered marketing functions.
---------------------------------------------------------------------------

    \98\ Statutory coverage encompasses any transmission or sale of
electric energy subject to the Commission's jurisdiction, and any
transportation or sale of natural gas subject to the Commission's
jurisdiction; sales subject to the Commission's jurisdiction being
sales for resale in interstate commerce. Sections 205 and 206 of the
Federal Power Act (FPA), 16 U.S.C. 824d-824e (2000), Sections 4 and
5 of the Natural Gas Act (NGA), 15 U.S.C. 717c-717d (2000).
    \99\ Many commenters requested that long-range planning be
excluded from the scope of the Standards. Comments on this topic are
set forth below in the section entitled Long-Range Planning and
Procurement.
---------------------------------------------------------------------------

    78. The Commission also clarifies what is meant by certain of the
categories listed within the definition of marketing functions, or that
are subsumed in the categories listed. The Commission clarifies that
inclusion of the term ``demand response'' in this definition is not
intended to interfere with demand response programs that a load-serving
entity (LSE) has established for its customers.\100\ Confusion over the
terms ``capacity,'' ``virtual'' and ``financial transmission rights''
are eliminated by restricting their application to the electric
industry. The Commission also agrees with APPA and TAPS that inasmuch
as physical as well as financial transmission rights may be sold by
marketing function employees, physical transmission rights should be
added to the definition of marketing functions, and so modifies the
regulatory text. Ancillary services, when referring to sales for resale
as opposed to an integrated public utility's actions in calling on its
own generation or demand response resources for ancillary services
purposes, are included within the definition of marketing functions as
sales for resale either of generation or demand response. For example,
a number of RTOs and ISOs have established or are in the process of
establishing ancillary services markets, and sales into these markets
would fall within the definition of marketing functions.\101\
---------------------------------------------------------------------------

    \100\ If concerns remain despite this clarification, interested
persons may present them to the Commission on a case-by-case basis.
    \101\ See, e.g., Midwest Independent Transmission System
Operator, Inc., 122 FERC ] 61,172 (2008), reh'g granted in part and
denied in part and clarification granted, 123 FERC ] 61,297 (2008);
New England Power Pool, 115 FERC ] 61,175 (2006), reh'g denied, 117
FERC ] 61,106 (2006); Atlantic City Electric Company, 86 FERC ]
61,248 (1999), clarification granted, 86 FERC ] 61,310 (1999).
---------------------------------------------------------------------------

    79. We decline to grant APPA's and TAPS's further request that we
add to the definition of marketing functions both the making of
transmission reservations and the scheduling of transmission. These
activities are beyond the scope of electric energy sales. However, we
note that marketing function employees making sales of energy will need
to schedule transmission for such sales (at least outside of organized
electric energy markets), and thus those individuals will most likely
already fall within the definition of marketing function employees and
within the scope of the Independent Functioning Rule.
(b) Exclusions
    80. Some commenters objected to the proposed inclusion of POLRs in
the exclusion for bundled retail sales, while others suggested the
exclusion should be broader and encompass all procurement or sales by a
POLR in support of its POLR function. As the Commission explained in
the NOPR, actual instances of abuse in this regard have not been
presented, even though entities have been granted waivers to exempt
their POLR activities from the

Standards.\102\ Inasmuch as entities acting as POLRs are providing
bundled retail service, it is appropriate to include POLR sales in the
definition of bundled retail sales. However, we decline to extend the
exclusion to cover all procurement or sale of energy by a POLR in
support of its POLR function, as requested by Ameren. POLRs should not
have special exclusions not shared by other providers of bundled retail
service. (However, we note that insofar as Ameren is concerned about
procurement of energy for POLR purposes, that concern is mooted by our
removal of purchases from the definition of marketing functions.) We
also decline Ameren's request to exclude incidental sales of energy by
a POLR. Public utilities serving retail load often make off-system
wholesale sales, which are not covered by the exclusions for bundled
retail sales and which are susceptible to affiliate abuse. Likewise,
off-system wholesale sales made by POLRs should not be excluded.
Furthermore, activities made by a POLR that is not acting within its
POLR capacity are not covered by the exclusion.
---------------------------------------------------------------------------

    \102\ See High Island Offshore System, L.L.C., 116 FERC ] 61,047
(2006); Cinergy Services Inc., 111 FERC ] 61,512 (2005); Exelon
Corp., 123 FERC ] 61,167 (2008).
---------------------------------------------------------------------------

    81. We also decline to extend the exclusion for bundled retail
sales to include incidental off-system sales by a utility serving
bundled retail load, as requested by WA UTC. Once the utility is making
wholesale sales off-system, it is no longer serving retail load but
engaging in marketing transactions, and should be treated no
differently than other marketers making wholesale sales. Otherwise, a
utility could purchase quantities of power excess to its needs and then
sell the power off-system, free of the restrictions pertaining to
marketing function employees that are imposed by the Standards.
    82. The Commission also declines to grant LPPC's request that
exchanges of electricity designed to work around scarce transmission
should be excluded from the definition of marketing functions. It is
not always obvious whether such exchanges should be classified as
transmission or as the purchase and sale of generation. The
determination of that question often turns on the specifics of the
transactions in question,\103\ making a blanket exclusion
inappropriate. An entity seeking guidance for its individual situation
may file for a waiver or pursue other means of resolution, such as a No
Action Letter or a General Counsel opinion letter.\104\ Further, as
noted with respect to Ameren's request regarding POLR purchases and
sales, to the extent such exchanges involve purchases, those purchases
are not included in the definition of marketing functions which we
adopt in this Final Rule.
---------------------------------------------------------------------------

    \103\ See, e.g., Utah Assoc. Mun. Power Sys., 83 FERC ] 61,337
(1998); El Paso Elec. Co., 115 FERC ] 61,312 (2006).
    \104\ A comprehensive discussion of the various sources of
guidance available from the Commission and its staff is set forth in
our recent Interpretative Order Modifying No-Action Letter Process
and Reviewing Other Mechanisms for Obtaining Guidance. See Obtaining
Guidance on Regulatory Requirements, 123 FERC ] 61,157 (2008).
---------------------------------------------------------------------------

ii. Natural Gas Industry
    83. In accordance with our determination to provide separate
definitions for the electric and gas industries, the Commission adopts
the following definition of marketing functions for pipelines and their
affiliates: ``the sale for resale in interstate commerce, or the
submission of offers to sell in interstate commerce, of natural gas,
subject to the following exclusions: (i) Bundled retail sales, (ii)
Incidental purchases or sales of natural gas to operate interstate
natural gas pipeline transmission facilities, (iii) Sales of natural
gas solely from a seller's own production, (iv) Sales of natural gas
solely from a seller's own gathering or processing facilities, and (v)
Sales by an intrastate natural gas pipeline, by a Hinshaw pipeline
exempt from the Natural Gas Act, or by a local distribution company
making an on-system sale.'' This revised definition reflects our
response to the various requests made by the commenters pertaining to
the natural gas aspects of the definition of marketing functions, as
discussed below.
(a) Bids to Buy and Other Terms Listed in the Definition
    84. The major alteration in the definition from that proposed in
the NOPR is the elimination of ``bids to buy.'' As with the case of the
electric industry, this elimination will address jurisdictional and
National Fuel concerns.
    85. The Commission agrees with the commenters who contend that
``capacity'' is a term that should be confined to the electric industry
insofar as the definition of marketing functions is concerned; that in
fact had been the intent of the NOPR. Accordingly, the term is removed
from the gas specific definition.
(b) Exclusions
    86. New York PSC's requested clarification, regarding whether the
exclusion for bundled retail sales should include the purchase of
natural gas to make such sales, has been rendered unnecessary by the
Commission's determination to exclude purchases from the definition of
marketing functions.
    87. The Commission agrees with INGAA's observation that in the
reworking of the regulatory text, the NOPR inadvertently limited two of
the existing exclusions applicable to sales from a transmission
provider's production or gathering or processing facilities, thus not
also encompassing sales from an affiliate's production or gathering or
processing facilities. Exclusions (iii) and (iv) should not focus on
the transmission provider but on the seller. Therefore, we modify
exclusion (iii) to read ``sales of natural gas solely from a seller's
own production,'' and exclusion (iv) to read ``sales of natural gas
solely from a seller's own gathering or processing facilities.''
    88. The Commission also agrees with Calypso's request for
clarification that foreign-sourced gas be included in the exclusion for
sales of natural gas from an entity's own production. Whether the gas
is foreign or domestic, the operative consideration is whether it is
from the entity's own production.
    89. The Commission likewise grants Spectra's request for
confirmation that sales by foreign LDCs are covered by the exclusion
for sales by an intrastate natural gas pipeline or local distribution
company making an on-system sale.
    90. In regard to Southwest Gas' request for a similar clarification
regarding Hinshaw pipelines, the Commission determines that exclusion
(v) for intrastate pipelines should also apply to Hinshaw
pipelines,\105\ which are exempted from coverage under section 1(c) of
the NGA,\106\ and modifies the wording of the exclusion accordingly.
---------------------------------------------------------------------------

    \105\ Hinshaw pipelines are interstate pipelines in which all
the gas is consumed within one state and the pipeline is subject to
regulation by a state commission.
    \106\ 15 U.S.C. 1(c) (2006).
---------------------------------------------------------------------------

    91. Several commenters request that the Commission add a new
exclusion to the definition of marketing functions, to encompass off-
system sales by LDCs on non-affiliated pipelines. The Commission
declines to do so. If the LDC in question makes sales of gas off-system
for resale, that sale qualifies as a marketing function. As discussed
above, however, if a pipeline does not conduct transmission
transactions with an affiliate that engages in marketing functions, it
is not subject to the Standards under section 358.1(a).

Therefore, if the LDC in question does not conduct transmission
transactions with an affiliated interstate pipeline, its off-system
sales on an unaffiliated pipeline are irrelevant insofar as the
Standards are concerned. In support of its request for this new
exclusion, AGA cites Order No. 497-A and a waiver granted to National
Fuel Gas Supply Corporation in 1993.\107\ In Order No. 497-A, however,
the Commission affirmatively stated that when a pipeline or LDC sells
gas off-system, it is a marketer of that gas within the scope of the
rule.\108\ The referenced waiver addressed the issue of applicability,
not the definition of marketing, pointing out that a pipeline that does
not conduct transportation transactions with its affiliated marketer is
not subject to the Standards.\109\ It is thus inapposite to AGA's point
(and in accord with our observation above on applicability).
---------------------------------------------------------------------------

    \107\ AGA at 14-15, citing Order No. 497-A at p. 31,592 and
Nat'l Fuel Gas Supply Corp., 64 FERC ] 61,192 (1993).
    \108\ Order No. 497-A at p. 31,592.
    \109\ Id. p. 31,590-91.
---------------------------------------------------------------------------

    92. Similarly, several commenters express concern that the
definition of marketing functions may sweep within its scope LDCs that
do not sell gas from capacity held or controlled by them on their
affiliated pipeline. As discussed above, the Standards do not apply to
pipelines that do not conduct transmission transactions with an
affiliate that engages in marketing functions, and such pipelines
therefore need not concern themselves with the definition.
    93. Questar's request that exchanges of gas for the purpose of
reducing transportation costs be excluded from the definition of
marketing functions \110\ is the analog on the gas side of LPPC's
request concerning exchanges on the electric side, and the same
reasoning and result apply. However, we note that the procurement of
gas during the exchange would not be covered by the definition of
marketing functions, inasmuch as purchases are no longer included. This
also applies to the situation in which the receipt of a ``field
exchange'' serves to supply on-system bundled retail customers.\111\
---------------------------------------------------------------------------

    \110\ Questar at 4-5.
    \111\ A field exchange is the exchange of natural gas in the
field from company-owned production for equivalent quantities of gas
that is closer to the entity's distribution system, made to lower
the delivered costs of gas for on-system retail sales. Alcoa Power
Generating Inc., 108 FERC ] 61,243 (2004) at P 179.
---------------------------------------------------------------------------

(c) Clarifications
    94. Spectra contends that a foreign entity that does not
participate in United States energy markets had been excluded from the
definition of energy affiliate, and requests that such exclusion
continue to apply. The revised Standards have discarded the concept of
energy affiliate, so there is no need to address Spectra's request. As
to whether such an entity would be subject to the Standards, section
358.1 controls the question of applicability, as discussed above.
    95. INGAA and SCANA request that not only should on-system sales by
LDCs be excluded from the definition of marketing functions, but off-
system sales should be as well, on the grounds such sales are entered
into by non-marketing affiliates. However, the categorization of the
affiliate is immaterial. If employees of an LDC make an off-system sale
for resale in interstate commerce, they qualify as marketing function
employees (assuming they are employed by a marketing affiliate of a
transmission provider with which the affiliate conducts transmission
transactions).
    96. INGAA's and other commenters' contention that a pipeline should
only be concerned with interactions with its gas marketing function
employees, not with affiliated electric marketing function employees,
is misplaced (or has been subsumed in the exclusion of energy affiliate
from coverage of the Standards). Gas marketing function employees would
not be making a sale for resale to electric marketing function
employees, who would be purchasing the gas for consumption and thus in
a retail capacity. Therefore, the definition of marketing function
would not be triggered.
    97. SCANA inquires whether pipelines and LDCs may remove themselves
from coverage of the Standards by contracting with asset managers to
make their off-system sales, and Southwest Gas requests clarification
regarding the definition of ``marketing function employees'' in
relation to asset management agreements. The Commission clarifies that
under the Independent Functioning Rule and the No Conduit Rule, it
would be the employees of the asset manager, acting as agents or
contractors for the pipeline or LDC, rather than employees of the
pipeline or LDC, who would qualify as marketing function employees
after the asset arrangement was consummated, inasmuch as they would be
the persons making all the subsequent sales for resale. The inclusion
of agents and contractors in the definition of transmission function
employee or marketing function employee is discussed in more detail
below in the section entitled Elimination of Shared Employees Concept.

4. Marketing Function Employee
a. Commission Proposal
    98. The NOPR proposed defining a marketing function employee as
``an employee, contractor, consultant or agent of a transmission
provider or of an affiliate of a transmission provider who actively and
personally engages in marketing functions.'' See proposed section
358.3(d).
b. Comments
    99. Xcel seeks clarification as to whether the employees who
purchase natural gas and interstate pipeline capacity to deliver fuel
to the utility's electric generation fleet are marketing function
employees under the revised definition.\112\
---------------------------------------------------------------------------

    \112\ Xcel at 20-21.
---------------------------------------------------------------------------

    100. Several commenters request amendments to the definition of
marketing function employees that would limit its application. AGA,
Destin, and EPSA recommend that the Commission limit the definition of
a marketing function employee to employees who actively and personally
engage in marketing functions ``involving an affiliated transmission
provider'' to ensure that the Standards are narrowly directed at the
activities that give rise to concerns of undue preference.\113\ EPSA
would also include employees who engage in marketing functions on
behalf of a transmission provider located within its affiliated
transmission provider's electric control area.\114\
---------------------------------------------------------------------------

    \113\ AGA at 16; Destin at 8; EPSA at 6.
    \114\ EPSA at 6.
---------------------------------------------------------------------------

    101. Other commenters request clarifications regarding which
employees are included in the definition of marketing function
employees. Arizona PSC suggests that the employees who perform
competitive solicitations should not be categorized as marketing
function employees, because their inclusion may unnecessarily limit
their ability to obtain the non-public transmission function
information necessary to make competitive solicitations as efficient
and cost effective as possible.\115\ MidAmerican seeks clarification
that generator operating personnel are not a subcategory of marketing
function employees.\116\ Finally, EEI seeks clarification on which
types of ``analysts,'' such as forecasters and employees who coordinate
strategic planning and regulatory services, would

be considered marketing function employees under the proposed
rule.\117\
---------------------------------------------------------------------------

    \115\ Arizona PSC at 5.
    \116\ MidAmerican at 7.
    \117\ EEI at 49.
---------------------------------------------------------------------------

c. Commission Determination
    102. The Commission adopts the proposed definition of marketing
function employee in section 358.3(d), with the addition of the
adverbial phrase ``on a day-to-day basis.'' A discussion of the
comments which prompted this addition is set forth in the section on
Supervisors, Managers and Corporate Executives. In this section, we
address the other concerns of commenters with respect to the
definition.
    103. Xcel's requested clarification as to whether employees who
purchase natural gas for their electric fleet are marketing function
employees is rendered moot inasmuch as we have deleted purchases from
the definition of marketing functions, and such employees would thus
not be marketing function employees. (Furthermore, such a purchase
would be one made at retail, rather than wholesale, and thus not
subject to the definition of marketing function for that reason as
well.)
    104. We decline to limit the definition of marketing function
employee by adding a requirement that the employee be engaged in
marketing functions ``involving an affiliated transmission provider.''
An employee making off-system sales could potentially use non-public
transmission function information to its advantage. However, as
described in more detail above, if a transmission provider does not
conduct any transmission transactions with an affiliate that engages in
marketing functions, it does not fall within the scope of the Standards
under section 358.1.
    105. EPSA's concerns regarding the definition of marketing function
employee in relation to transactions with affiliates that do not
conduct transmission transactions with their affiliated transmission
provider within the latter's electric control area mixes two unrelated
concepts. Whether a transmission provider conducts transmission
transactions with a marketing affiliate governs the question of the
applicability of the Standards under section 358.1, not the definition
of marketing function employee. If a transmission provider does not
fall within the scope of the Standards under that provision, it need
not concern itself with the definitions relating to the Standards'
proscribed activities.
    106. Arizona PSC's concerns regarding competitive solicitations are
resolved by the removal of purchases from the definition of marketing
functions. We also clarify, in response to Arizona PSC's request, that
generating operator personnel are not marketing function employees,
unless they also engage in marketing functions. The question of whether
analysts (such as forecasters and employees who coordinate strategic
planning and regulatory services) are marketing function employees can
be answered by reference to the definition itself. If such analysts are
not actively and personally involved on a day-to-day basis in the sale
for resale of electric energy (or the other items mentioned in the
definition), they are not marketing function employees.
5. Supervisors, Managers and Corporate Executives
a. Commission Proposal
    107. The second sentence of the proposed NOPR definitions of
transmission function employee and marketing function employee stated
that an officer, director or other supervisory employee is not
considered to be a transmission function or marketing function employee
if he or she does not actively and personally engage in transmission or
marketing functions. See proposed sections 358.3(d) and (i).
b. Comments
    108. Concerns surrounding whether officers, directors or
supervisors could be classified as marketing or transmission function
employees generated many comments, more than on almost any other issue.
Many commenters agree with the NOPR formulation that officers,
directors and other supervisory employees that do not ``actively and
personally engage'' in marketing or transmission functions should be
exempted from the definition of a marketing function employee or
transmission function employee.\118\ Idaho Power, on the other hand,
asserts that the explicit carve-out of officers, directors and other
supervisors who do not ``actively and personally engage'' in the
functions is redundant and therefore superfluous.\119\
---------------------------------------------------------------------------

    \118\ See AGA at 18, Ameren at 20-22, Duke at 4-5; SCE at 9-10;
Vectren at 3-4; INGAA at 21.
    \119\ Idaho Power at 7-8.
---------------------------------------------------------------------------

    109. Some commenters raise concerns about the application of the
``actively and personally engaged'' standard to different types of
corporations. Salt River, for example, requests clarification that
high-level officials of vertically integrated utilities will not be
deemed either transmission or marketing function employees for
approving department budgets or signing large value contracts.\120\ In
addition, INGAA requests guidance on how to apply the definitions of
transmission and marketing function employees to organizations of
varying sizes and structure, considering the different levels of
involvement that supervisory employees must have depending on the size
of the organization.\121\
---------------------------------------------------------------------------

    \120\ Salt River at 10-14.
    \121\ INGAA at 33.
---------------------------------------------------------------------------

    110. Several commenters recommended alternative approaches to
determine whether officers, directors or other supervisory employees
should be classified as marketing or transmission function employees.
For example, many commenters requested that the Commission re-introduce
the concept of ``day-to-day'' involvement, used in Order No. 2004, to
make the distinction between an ``employee'' and a supervisor or
executive.\122\
---------------------------------------------------------------------------

    \122\ NGSA at 25-28; Southern Co. Services at 15-20; LPPC at 13.
Southern Co. Services further requests the Commission to eliminate
what it regards as the confusing precedent regarding the treatment
of shared officers set forth in Ameren Serv. Co., 87 FERC ] 61,145
(1999). Southern Co. Services at 15-20.
---------------------------------------------------------------------------

    111. National Grid, however, suggests using a corporate governance
approach to make the distinction, as follows: Managers and employees
negotiating deals and undertaking certain activities would fall within
the definition of transmission or marketing function employee; senior
executives and members of risk management committees who oversee the
managers and employees would not.\123\ Vectren believes that any
confusion might be eliminated by deleting ``supervisory'' from the
proposed definition.\124\
---------------------------------------------------------------------------

    \123\ INGAA also comments on the status of risk management
personnel in the context of the concept of ``shared employees.''
INGAA at 36-40.
    \124\ TDU Systems at 10.
---------------------------------------------------------------------------

    112. Numerous commenters seek additional guidance on the de minimis
language used in the preamble of the NOPR.\125\ Commenters object that
the NOPR guidance regarding de minimis involvement does not indicate
what amount and kind of activity exceeds the threshold. They request a
more precise discussion with specific activities that would require
classifying the employee as either marketing or transmission.\126\ Both
Idaho Power and Bonneville request that the Commission include the de
minimis language directly in the

regulatory text and provide guidance as to its meaning.\127\
---------------------------------------------------------------------------

    \125\ EPSA at 6; Idaho Power at 7; MidAmerican at 12; National
Grid at 17, PG&E at 16-18; Puget Sound at 4-6.
    \126\ Idaho Power at 7; NGSA at 5, National Grid at 17, PG&E at
16-18; Puget Sound at 4-6. INGAA requests a list of factors the
Commission will consider in evaluating whether a particular employee
qualifies as a marketing or transmission function employee. INGAA at
25-28.
    \127\ Idaho Power at 7; Bonneville at 4-5.
---------------------------------------------------------------------------

    113. Commenters also requested further guidance from the Commission
as to which type of conduct would classify a supervisory employee as
actively and personally engaged in one of these functions.\128\ Many of
these commenters seek assurance from the Commission that officers,
directors and other supervisory employees will not be classified as
marketing or transmission function employees by fulfilling their
fiduciary duties and informing themselves of business operations.\129\
Southern Co. Services is concerned that some may construe the
``actively and personally engaged'' standard to be the same as the
standard used to determine professional conflicts of interest, which
would inhibit effective corporate governance.\130\
---------------------------------------------------------------------------

    \128\ E.ON at 10, AGA at 20, El Paso at 1; Idaho Power at 7; TDU
Systems at 8-9; Western Utilities at 4-5; Williston at 12-13. INGAA
presents hypothetical examples of varying levels of supervisory
involvement in a number of different transactions, seeking guidance
as to what level of involvement distinguishes supervisory personnel
from those that fall within the definition of marketing function
employee. INGAA at 30-32.
    \129\ INGAA at 112; LPPC at 11-12; Western Utilities at 4-5;
Idaho Power at 7, National Grid at 17, PG&E at 16-18; Puget Sound at
4-6; E.ON at 10. AGA would add fulfilling obligations associated
with corporate delegation policy or strategic or long-term planning.
AGA at 20. Nisource asserts that the Commission has permitted
transmission providers to allow senior managers, officers or
directors to have ultimate responsibility for transmission
operations and wholesale merchant functions, as long as they do not
participate in directing, organizing or executing transmission
system operations or reliability functions or wholesale merchant
functions. Nisource at 13.
    \130\ Southern Co. Services at 21-22.
---------------------------------------------------------------------------

    114. Commenters request that the Commission confirm that if an
officer, director, or other supervisory employee engages in the
following activities, they will not be classified as marketing or
transmission function employees. These activities include (i) passive
involvement in contracting, so long as employees do not take an active
role in the decision-making process and do not disclose non-public
transmission information; \131\ (ii) occasional participation in
routine customer meetings; \132\ (iii) executing and/or approving large
wholesale sales or purchase agreements consistent with the officer's
delegated approval authority and fiduciary obligations on behalf of the
company; \133\ and (iv) participating in the formulation of an overall
wholesale strategy for a utility, and establishing general parameters
for negotiation of wholesale contracts.\134\ Similarly, MidAmerican
requests that the definition clarify that it excludes officers and
personnel who do not have first line reporting relationships with
transmission or marketing function personnel.\135\
---------------------------------------------------------------------------

    \131\ TDU Systems at 9-11; SCANA at 7-8. TDU Systems also asks
that the Commission clarify and expand its explanation of the
activities that would cause a supervisor or director to be regarded
as actively and personally engaged in transmission functions. TDU
Systems at 9.
    \132\ SCANA at 7-8.
    \133\ Duke at 5-6.
    \134\ Id.
    \135\ MidAmerican at 12.
---------------------------------------------------------------------------

    115. Instead of specifically addressing each type of conduct, INGAA
recommends that the Commission adopts a rule of reason approach to
determining, on a case-by-case basis, whether or not an executive's or
supervisor's conduct was a good faith attempt to fulfill his corporate
responsibilities.\136\
---------------------------------------------------------------------------

    \136\ INGAA at 112.
---------------------------------------------------------------------------

c. Commission Determination
    116. In an effort to provide clarity in this area, which has long
been the subject of much discussion and concern, the Commission in the
NOPR included a second sentence in the definition of both transmission
and marketing function employees that specifically addressed corporate
executives and supervisory personnel. The proposed sentence provided
that such employees were not considered to be transmission or marketing
function employees if they were not actively and personally engaged in
such functions, and was included to provide reassurance to officers,
directors and supervisors that a mere oversight role did not render
them transmission or marketing function employees. As Idaho Power
points out, however, the sentence is redundant, as no employee,
contractor or agent not so engaged is considered to be a transmission
or marketing function employee. Therefore, we delete the sentence from
the definitions of transmission and marketing function employees.
    117. The Commission's intention in introducing the phrase
``actively and personally engaged,'' which is retained in the first
sentence of each definition, was similar to that implicit in use of the
phrase ``day-to-day.'' \137\ The concept underlying both is simply
this: If an employee regularly carries out or supervises the details of
the activities in question, he or she is actively and personally
engaged in them; if he or she merely signs off on the activities
without having directed or organized the activities, he or she is not
personally engaged in them. Thus, for example, supervisors who are not
involved in the negotiation of a gas or electric energy sale, and who
do not oversee or provide input into the details of the negotiations
being carried out by another employee (e.g., by editing and revising
material elements of a contract), but rather simply approve the
contract governing the sale, are not marketing function employees.
Furthermore, as we noted in the preamble of the NOPR, de minimis
involvement in transmission and marketing functions will not render a
person a transmission or marketing function employee. Therefore, a
supervisor who on rare occasions has tangential involvement in a
negotiation, such as being called in to meet the negotiating parties
from the other side, is not thereby rendered a marketing function
employee.
---------------------------------------------------------------------------

    \137\ The phrase ``day-to-day'' appears in the definition of
transmission function employee in the existing Standards. 15 CFR
358.3(j).
---------------------------------------------------------------------------

    118. That said, the Commission will add the phrase ``day-to-day''
to the definition of transmission and marketing function employees, in
order to provide even greater certainty. Our addition of the phrase
``day-to-day'' also obviates the need to add the phrase de minimis in
the regulatory text.
    119. As noted, INGAA posits a number of hypotheticals involving
varying percentages of time that a supervisor spends reviewing trades,
and seeks guidance as to when such involvement would rise to the level
of rendering him a marketing function employee. It is unnecessary to
address each of these hypotheticals, because the key to the question
lies in the fact that if a supervisor is simply signing off on a deal
negotiated or proposed by someone else, and is not involved in
overseeing and providing input into the negotiations, he is not himself
engaged in the marketing function activity. Likewise, upper level
management personnel who review contracts over a certain dollar amount
are not converted into deal-makers themselves, simply by virtue of that
review. This is also true for other personnel, such as attorneys,
accountants and other advisors who may examine a contract for its
conformity to legal, accounting or other requirements. Such review does
not render them marketing function employees.
    120. It may be objected that a lower level supervisor on the
trading floor could hardly ignore proscribed transmission function
information with which he is familiar in reviewing a deal. However, the
closer the supervisory employee is to the trading activity, the more
likely it is that he will be overseeing and providing input into the
trades, and not simply signing off on a deal, and thus would be
considered a marketing function employee.

    121. A principal goal of the reforms made in this Final Rule is to
provide greater certainty to regulated entities and their employees
regarding the scope of the Independent Functioning Rule and the No
Conduit Rule. The carefully circumscribed nature of the definitions of
transmission functions and of transmission and marketing function
employees should provide greater clarity than is contained in the
existing Standards with regard to the permissible activities of
supervisors, managers, and corporate executives. We suggest that if a
situation truly does appear to be a close call, that in itself should
be a red flag that suggests conservatism in applying the rule. In this
area, it is best to err on the side of caution.\138\
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    \138\ As observed above, entities also have several avenues by
which to receive guidance on such issues from the Commission or
Commission staff. See Obtaining Guidance on Regulatory Requirements,
123 FERC ] 61,157 (2008).
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    122. For further clarification as to what is included in the day-
to-day operation of the transmission system (and thus which employees
would be considered transmission function employees), we mention the
following examples, in addition to the granting and denying of service
requests already specified in the definition: Coordinating the actual
physical flows of power or gas, balancing load with energy or capacity,
isolating portions of the system to prevent cascades, imposing
transmission loading relief, and the like. Supervisors who are not
actively and personally engaged in activities of these or a similar
nature would not be considered to be transmission function employees.
In regard to AGA's and Duke's requests for clarification regarding the
roles of managers and officers who are involved in corporate
governance, strategic and long-range planning, and development of
general negotiating parameters for wholesale contracts, we clarify that
these types of activities go beyond the day-to-day activities that
characterize transmission function employees and marketing function
employees, and participation in them would not make an employee a
transmission function employee or a marketing function employee.
6. Elimination of Shared Employees Concept
a. Commission Proposal
    123. In the NOPR, the Commission noted that the corporate
separation approach instituted in Order No. 2004 made it difficult for
companies to transact needed business because all the employees of a
marketing affiliate would be walled off from the transmission
provider's transmission function employees. The corporate separation
approach required the creation of whole categories of employees who
could be shared between the transmission provider and the marketing
affiliate, such as officers and members of the board, field and
maintenance employees, and risk management employees.\139\ Issues have
also arisen under the existing Standards as to whether such employees
as lawyers, accountants, and rate design personnel should be exempted.
The NOPR's substitution of the employee functional approach in place of
the corporate separation approach eliminates the need for shared
employees, since it is now only marketing function employees who must
function independently from transmission function employees. Therefore,
the regulatory text omitted any mention of shared employees.
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    \139\ NOPR at P 24.
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b. Comments
    124. The elimination of the concept of shared employees seemed to
have confused some commenters. Idaho Power requests that the Commission
clarify what it means when it states in the NOPR that there is no
longer a need for the concept of shared employees, considering that
those employees' roles have not changed.\140\ EPSA requests that the
Commission either amend all other orders that reference shared
employees or address the ambiguity in the Final Rule by stating the
concept no longer exists in Commission regulations.\141\ However,
NiSource requests that the Commission confirm that the categories of
employees identified by Order No. 2004 as ``shared'' continue to exist
with the same status under the proposed Standards.\142\
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    \140\ Idaho Power at 9.
    \141\ EPSA at 5.
    \142\ NiSource at 11-12.
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    125. Wisconsin Electric and INGAA request additional guidance on
how some formerly ``shared employees'' would be classified. These
employees include attorneys, accountants, risk management personnel,
and regulatory personnel who must approve the transactions made by
marketing function employees.\143\ Wisconsin Electric and INGAA request
that these employees should not be classified as marketing or
transmission function employees and INGAA proposes that the Commission
modify the definitions of transmission and marketing function employees
to expressly exclude risk management employees.\144\
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    \143\ INGAA at 36-40; Wisconsin Electric at 4-5; LPPC at 18-19.
    \144\ INGAA at 36-40.
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    126. Similarly, PSEG requests clarification as to the comment in
paragraph 41 of the NOPR that rate design employees fall within the
current Standards' concept of ``shared employees.'' PSEG asks whether
this comment indicates that the Commission is abandoning what PSEG
states was its position in Order No. 2004-C as to considering certain
rate design functions to be transmission functions.\145\ PSEG also
requests that the Commission clarify that employees who are shared
between affiliated transmission and marketing functions and whose
primary purpose is to develop and implement policy for the companies,
advocate policies in various forums, or engage in strategic planning or
financial decision making do not fall within the definitions of
``transmission function employee'' or ``marketing function employee.''
\146\
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    \145\ PSEG at 7.
    \146\ PSEG at 5.
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    127. EPSA asks the Commission to clarify whether the Independent
Functioning Rule extends to consultant companies that offer both
transmission and marketing services for corporate companies.\147\ In
addition, National Grid asks whether contractor firms who are retained
to provide services may be considered transmission and marketing
function employees.\148\ Although National Grid does not believe
contracting firms should be tied to a function, EPSA and National Grid
would subject employees of these respective companies to the No Conduit
Rule as appropriate.\149\
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    \147\ EPSA at 6.
    \148\ National Grid at 20.
    \149\ EPSA at 6; National Grid at 20.
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    128. Idaho Power seeks clarification that despite the elimination
of the shared employee concept, those employees who were formerly
considered shared employees will still be subject to the No Conduit
Rule.\150\
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    \150\ Idaho Power at 9.
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c. Commission Determination
    129. As discussed in the NOPR, the substitution of the employee
functional approach for the corporate separation approach renders
continuation of the concept of ``shared employees'' unnecessary. Since
only those individuals who engage in transmission or marketing
functions now fall within the scope of the Independent Functioning
Rule, support personnel of the type formerly included in the concept of
shared employees, and who

do not meet those definitions, do not. Therefore, there is no need to
further exempt them under the outmoded rubric of shared employees.
    130. We decline to amend prior orders that mention shared
employees; guidance from prior orders will be applicable or not
depending on whether those orders address concepts that survive the
revisions made in this Final Rule. We also decline to grant NiSource's
request that employees formerly classified as ``shared'' continue in
that classification. This would entail resurrecting the concept, and is
unnecessary.
    131. Commenters raise questions as to whether various types of
employees formerly classified as shared employees are beyond the scope
of the Independent Functioning Rule, citing such employees as
attorneys, accountants, risk management personnel, regulatory
personnel, rate design personnel, and strategic planning personnel.
Again, the determination depends on the answer to a more fundamental
question: Do such employees function in their stated roles, or do they
also actively and personally perform day-to-day transmission functions
or marketing functions? If they do not perform transmission functions
or marketing functions, they are not subject to the Independent
Functioning Rule. Therefore, if an attorney is rendering legal advice,
he may consult with both transmission function employees and marketing
function employees. Likewise, a risk management employee may develop
risk guidelines for both transmission function employees and marketing
function employees. And regulatory personnel may present before
regulatory bodies filings that cover both transmission and marketing
issues. Of course, all such employees would remain subject to the No
Conduit Rule, and are prohibited from transmitting transmission
function information to marketing function employees.
    132. We disagree with PSEG's contention that the Commission is
abandoning its position in Order No. 2004-C, which PSEG characterizes
as determining that certain rate design functions qualified as
transmission functions. Order No. 2004-C specifically stated that we
would consider ``the actual duties and responsibilities of employees in
determining whether they are transmission function employees.'' \151\
Here, as well, if a rate design employee were also assigned the
responsibility for performing transmission functions, he or she would
be a transmission function employee. However, if the rate design
employee is merely calculating rates to propose to the appropriate
regulatory body, the employee would not be a transmission function
employee; as discussed above, we are restricting the definition of
transmission functions to the day-to-day operation of the transmission
system.
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    \151\ Order No. 2004-C at P 30.
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    133. We grant EPSA's and National Grid's requests for clarification
as to whether consultants and contractors are subject to the
Independent Functioning Rule, and whether their firms are as well.
Agents and outside consultants and contractors who serve as
transmission function employees must function independently of
marketing function employees, and vice versa. However, the fact that
given individuals employed by a consulting firm may function in one of
the two categories does not bar other individuals employed by the same
firm from functioning in the other category. Of course, consultants and
contractors functioning as transmission function employees may not
interact with consultants and contractors functioning as marketing
function employees, and all such consultants and contractors must abide
by the No Conduit Rule.
    134. We also grant Idaho Power's request for clarification that
employees formerly classified as shared employees are still subject to
the No Conduit Rule. Not only are these employees subject to the No
Conduit Rule, but so are all employees, regardless of their status or
classification.
7. Long-Range Planning and Procurement
a. Commission Proposal
    135. The corporate separation approach of the former Standards
created difficulties for public utilities engaged in long-range
planning, and this difficulty was one of the impetuses that led to the
reforms instituted in this Final Rule. Because such planning activities
frequently encompass both transmission and generation issues, and
because under the existing Standards none of the employees of a
marketing or energy affiliate (except for shared employees) could
interact with the transmission function employees of a transmission
provider, it was difficult for planning personnel to gather needed
information and to consult with appropriate personnel in order to make
decisions on such basic matters as whether to build generation or to
buy power. It was never the intent of the Commission to interfere with
legitimate planning activities, something that is vital for the
continued efficient operation of both the electric and natural gas
industries.
    136. The NOPR proposed substituting the employee functional
approach for the corporate separation approach to the Independent
Functioning Rule, thus permitting most company employees to interact
with one another, and eliminating the wholesale walling off of all
marketing and energy affiliate employees from the transmission function
employees of the transmission provider.
b. Comments
    137. Many commenters seek additional clarification from the