Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 02:30 PM

Mr. Rick Sergel

North American Electric Reliability Council

Chief Executive Officer, North American Electric Reliability Council
Before the
May 15, 2006

Implementing Reliability Legislation

 On August 8, 2005, the President signed into law the Energy Policy Act of 2005.  One of the most important elements of that legislation was authorization to FERC to approve and oversee an Electric Reliability Organization (ERO) that will promulgate and enforce mandatory reliability standards for the bulk power system.  
On April 4th, the North American Electric Reliability Council, most often called NERC, filed applications with the Federal Energy Regulatory Commission, the National Energy Board of Canada, and with eight Canadian provinces to become the North American Electric Reliability Organization, or ERO.  These filings represent a major milestone in NERC's effort to become the ERO – a strong, independent organization with the authority to establish and enforce mandatory reliability standards for all users, owners and operators of the interconnected North American bulk electric system.
We hope that FERC will approve our application to be the ERO this summer, although much work will remain to be done to fully implement the reliability provisions of EPACT 2005.     If this happens, I believe we can have mandatory standards in place well before the summer of 2007.
The reliability legislation that you wrote, combined with FERC’s rule implementing this legislation, provide the necessary statutory and regulatory framework for an outstanding Electric Reliability Organization.  You and the FERC have done your jobs in authorizing and launching a mandatory system of bulk power reliability standards.  Now it is time for NERC and the industry to do our jobs. You should have very high expectations of the ERO. We intend to meet those expectations.
  NERC has done an enormous amount of work to position itself to deliver on these high expectations.    For the remainder of 2006, we will continue our efforts to:
•      obtain certification as the ERO in the United States and Canada
•        negotiate and execute delegation agreements with regional entities, as contemplated by the legislation
•        develop additional reliability standards and strengthen existing ones,
•        establish the registry of entities who will be subject to the mandatory standards, audit requirements, and enforcement
•        prepare ERO and regional entity budgets for 2007, and
•        establish and implement the ERO funding mechanism.

Let me provide some additional information on these.
   Obtain Certification as the ERO in the U.S. and Canada

Ten days ago, FERC received comments from more than 70 entities on our ERO application.  While we received widespread support for NERC’s being certified as the ERO, many of the commenters suggested changes of one kind or another they would like to see in the details of our proposal.  We are preparing a response to those suggestions, and the Commission will then be in a position to act on our application.
In Canada, the provincial governments are responsible for electricity regulation.  Some Canadian provinces will provide "recognition" by law.  Some will do so by regulation.  For others, the process has not yet been determined, but we have established good working relationships across the continent.  There will be some difference in implementation details between Canada and the U.S. (for example penalty money will most likely go to the ERO or the regional entities in the U.S., but will most likely go to provincial governments in Canada).  However, the standards themselves must be consistent.  Based on the long history of Canadian participation in and coordination with NERC and its members, we are optimistic that this will be achieved.
Regional Delegation Agreements
The law that you passed provides for delegation of standards and compliance/enforcement to qualified regional reliability entities.  Of particular importance to the West and to Texas, the law directs the ERO to presume (rebuttably) that a proposal from a regional entity organized on an interconnection-wide basis for a reliability standard or modification to a reliability standard to be applicable on an interconnection-wide basis is appropriate and in the public interest.  We have developed a model delegation agreement and continue to work closely with the regions to ensure that we are coordinated properly.  Delegation is our desire as well.
 It is important we take advantage of the substantial work done by the regions, rather than re-inventing the wheel.  The Western Electricity Coordinating Council (WECC), for example, has developed a solid compliance program.  We do not intend to start over.  However, delegation and deference to qualified regional entities does not mean preservation of the status quo.  Congress passed reliability legislation to make the bulk power system more reliable through better reliability standards, applied and enforced by independent authorities.  We are committed to bringing that change about.
 Reliability Standards
 NERC currently has in place a comprehensive and measurable set of reliability standards for the bulk power system that provides a solid foundation for future ERO standards.  We have filed with FERC the complete set of NERC’s existing reliability standards (102 of them). However, substantial work lies ahead to bring these standards to the quality necessary to underpin a mandatory system of enforceable rules.  NERC’s petition for approval of the 102 reliability standards identified a number of standards where further action on NERC’s part was necessary before the Commission could approve the standards and a number of additional areas where the proposed standards could be improved over time. NERC also provided a work plan for completing those improvements.
FERC has indicated it will use rulemaking procedures to adopt these standards, as authorized by the legislation you passed.  That choice will enable FERC to consult with its Canadian counterparts and all industry stakeholders as it moves forward on the standards.  FERC has also interpreted section 215 to authorize it to consider the reliability standards at the same time it is considering our application for certification as the ERO. We support that interpretation. It will enable us to have mandatory standards in effect sooner than if we had to wait for ERO certification and only then begin developing standards to be filed with FERC sometime later. We expect to have mandatory reliability standards in place well before the summer of 2007.
Last week, FERC released a preliminary staff assessment of our proposed standards. The preliminary staff assessment echoes many of the points from NERC’s evaluation of the standards and identifies additional areas for improvement in some of the standards. The Commission directed that NERC file a response to the staff assessment by June 26, 2006.
The release of the staff assessment marks the next step in the transition from voluntary to mandatory reliability standards.  This increased scrutiny of the content and quality of the reliability standards is a natural progression as the standards, originally developed for a voluntary and cooperative set of industry relationships, will now be used for a new purpose:  Once approved, the standards will be legally binding and provide a basis for enforcement actions in the event of non-compliance, including the levying of financial penalties.  We look forward to working with the Commission and its staff, governmental authorities in Canada, and all industry stakeholders to identify the priorities and a timetable for putting a solid foundation of mandatory reliability standards in place promptly and working over time to improve those standards.
As to regional standards, we want to delegate to regions where appropriate and have included those provisions in our proposed rules.   At the same time, however, regional standards must be coordinated and consistent, to the maximum extent possible.  Different regional standards may be appropriate to reflect physical differences in the operation of the grid, or if the proposed regional standard goes beyond the requirements of a national one.  A different regional standard is not appropriate merely because “that is the way we always have done it.”
Applicability of Reliability Standards
The reliability legislation that you passed applies to all “users, owners and operators” of the bulk-power system.  Given the potentially enormous number of entities that could be encompassed in this definition, there has been debate about who is and who is not covered.  FERC provided some guidance on this in its rule implementing the legislation, but essentially has asked the ERO to address this issue.  We have chosen to do this by creating a registry of those we believe are users, owners, and operators.  If your name appears on the registry you must follow the standards.  If not, you will not be subject to the mandatory requirements.  NERC, working with the regions, will make a preliminary judgment as to who should be on the registry.  Those entities will be notified and provided an opportunity to challenge their inclusion on the registry if they believe they have been registered in error. Entities will also have the right to appeal that decision to FERC. The goal is to include those entities on the registry whose actions or inactions can have a material impact on the reliability of the bulk power system and to do so on a consistent basis across all regions.
 Budget and Funding
We will submit to FERC in August a proposed budget for the ERO. Approval is expected by November 1, with funding to start January 1, 2007.  This budget will include funding for activities delegated to regional reliability entities.  The regions must supply the rest of their budgets, for information purposes only.  The ERO must ensure that the budgets proposed by the regional entities are adequate to perform their delegated functions.
Finally, and in addition to these matters, we will start the process of soliciting and enrolling members in the ERO, and establishing the member representatives committee, which will vote on the ERO’s bylaws and elect the ERO’s trustees.  NERC also will evaluate regional entity standards development and compliance enforcement procedures to ensure that they comply with all requirements for ERO certification and delegation.
Need for Mandatory Reliability Standards
It is important that we continue to proceed promptly to implement the reliability legislation, and that we do it right.  If anything, the need for mandatory reliability standards today is even greater than when the bill was passed.  The economy continues to grow, along with electricity demand, but infrastructure development is lagging.  This means that the industry must do more with the assets it has, which, in turn, requires greater attention to standards.  There is good news.  Progress is being made on matters such as cyber-security standards and vegetation management (tree-cutting) standards, but much more progress is needed.
NERC has in place a Compliance Enforcement Program that monitors and promotes compliance with NERC and regional reliability standards.  This program reflects cumulative improvements made over the past seven years, but now we must move to the next level.  We must develop a comprehensive audit program.  Where necessary, the ERO must be ready to pursue penalties and enforcement actions. 
Finally, I believe the ERO can do more to track and inspire adoption of best practices across the industry.  NERC has a long history of assessing the reliability and adequacy of the North American and regional bulk power systems, and has established procedures for conducting and reporting the results of these assessments.  However, we can and will make better use of benchmarking and identification of metrics against which industry participants can be measured. That will mean these assessments are not merely reports from others, but the product of independent evaluation of resource and transmission adequacy.
In conclusion, the reliability legislation that you wrote, combined with FERC’s rule and other actions implementing that legislation, provide the necessary statutory and regulatory framework for creating a strong, effective Electric Reliability Organization.  NERC has the experience, vision, expertise, working relationships, infrastructure, and independence necessary to be the strong ERO that Congress envisioned.  Working with FERC, regional entities, the states, the provinces and other Canadian officials, we will put in place and administer a system of mandatory bulk power system reliability standards, as Congress intended.   It will take some time to make the transition from today’s voluntary system of reliability standards to mandatory, independently administered reliability standards, but the transition is well underway and we are committed to completing it as effectively and as promptly as possible.
Thank you for the opportunity to present this testimony.  I welcome your questions.