[Federal Register Volume 69, Number 80 (Monday, April 26, 2004)]
[Notices]
[Pages 22502-22507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9358]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL04-5-000]


Policy Statement on Matters Related to Bulk Power System 
Reliability

Issued April 19, 2004.
    Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher, and Suedeen G. Kelly.
    1. This Policy Statement responds to recommendations in the U.S.-
Canada Power System Outage Task Force's (Task Force) Interim and Final 
Blackout Reports on initiatives the Commission should undertake. This 
Policy Statement also responds to comments submitted after the 
Commission's December 1, 2003 public conference, in Docket No. RM04-2-
000, on actions the Commission should take to promote reliable 
transmission service in interstate commerce (December 1 Reliability 
Conference). As such, the Policy Statement addresses a number of issues 
that relate to the Commission's role and policies regarding reliability 
of the nation's interstate bulk power systems. In particular, the 
Policy Statement clarifies Commission policy with regard to: the need 
to expeditiously modify existing bulk power system reliability 
standards,\1\ to translate them into clear and enforceable 
requirements; public utility compliance with industry reliability 
standards and possible Commission action to address specific bulk power 
system reliability issues; cost recovery of prudent bulk power system 
reliability expenditures; the need for communication and cooperation 
between the Commission and the States; the need for communication and 
cooperation among

[[Page 22503]]

the Commission, Canada and Mexico regarding reliability issues; 
consideration of reliability in Commission decision-making; and 
limitations on liability. This Policy Statement benefits citizens by 
providing clarity about this agency's policies to support and take what 
steps it can under current law to enhance transmission grid 
reliability.
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    \1\ Current industry reliability standards are found in the 
North American Electricity Reliability Council's (NERC) Planning 
Standards and the NERC Operating Manual, with operating standards 
set forth in operating policies contained in the Operating Manual 
and Appendices. The operating policies include ``standards'' and 
``requirements,'' along with ``guidelines'' and ``criteria.'' For 
purposes of this Policy Statement, the term ``reliability 
standards'' refers to the entirety of reliability-related policies 
now in the NERC Operating Manual and Planning Standards and those 
evolving through the formal standards development process.
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    2. The Commission strongly supports legislative reform to provide a 
clear Federal framework for developing and enforcing mandatory 
reliability rules. In the interim, the Commission is issuing this 
Policy Statement and taking other steps within its existing authority 
to promote greater reliability of the United States' bulk power system 
and its operation and to support industry efforts to improve the 
current voluntary industry based approach.\2\
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    \2\ Concurrent with the issuance of this order, the Commission 
is issuing an order directing transmission providers to report on 
their vegetation management practices related to certain overhead 
interstate transmission lines. Order Requiring Reporting on 
Vegetation Management Practices Related to Designated Transmission 
Facilities, 107 FERC ] 61, 053(2004).
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Background

    3. On August 14, 2003, an electric power blackout affected large 
portions of the Northeast and Midwest United States and Ontario, 
Canada. The blackout lasted up to two days in some areas of the United 
States and longer in some areas of Canada. It affected an area with an 
estimated 50 million people and 61,800 megawatts of electric load.
    4. On August 15, 2003, President George W. Bush and Prime Minister 
Jean Chr[eacute]tien established a joint U.S.-Canada Power System 
Outage Task Force (Task Force) to investigate the causes of the 
blackout and how to reduce the possibility of future outages.
    5. During the December 1 Reliability Conference, the Commission 
conducted a public inquiry into electric reliability. The conference 
addressed topics related to ensuring the reliability of the nation's 
bulk power system, including what the Commission should do to promote a 
reliable bulk power system (Docket No. RM04-2-000). Written comments 
submitted by John Derrick, Chairman PEPCO Holdings, Inc., on behalf of 
the Edison Electric Institute (EEI) proposed that the Commission 
continue to pursue its pending pricing policy for developing 
transmission infrastructure incentives and build on the NERC structure 
that is already in place by engaging the industry in a focused, 
sustained dialogue on (1) Enforcing reliability standards and 
practices, (2) the six near-term critical reliability elements 
identified by NERC in an October 15, 2003 inquiry directed to control 
area operators and reliability coordinators,\3\ (3) third-party 
liability issues, and (4) clarification of the relationship between 
grid operations, and market and business practices.
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    \3\ NERC's six critical reliability elements include: (1) 
Ensuring that high voltage transmission line rights-of-way are free 
of vegetation and other obstacles; (2) ensuring sufficient reactive 
power for voltage support; (3) strengthening where needed the 
reliability communications protocols between control area operators 
and reliability coordinators; (4) establishing as necessary more 
formal means to immediately notify control room personnel about 
failures of system monitoring and control functions; (5) ensuring 
that emergency actions plans and procedures are in place; and (6) 
ensuring that all operating staff are trained and certified in 
emergency drills.
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    6. On April 5, 2004, the Task Force issued a Final Blackout 
Report,\4\ replacing the interim report issued in November 2003.\5\ The 
Final Blackout Report describes the blackout investigation findings and 
identifies the causes of the blackout. There are four groups of causes 
that coincided on August 14, 2003 to produce the blackout:
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    \4\ U.S.-Canada Power System Outage Task Force, Final Report on 
the August 14th Blackout in the United States and Canada: Causes and 
Recommendations (April 2004) (Final Blackout Report). The Final 
Blackout Report is available on the Internet at http://www.ferc.gov/cust-protect/moi/blackout.asp.
    \5\ U.S.-Canada Power System Outage Task Force, Interim Report: 
Causes of the August 14th Blackout in the United States and Canada 
(Nov. 2003) (Interim Blackout Report). The Interim Blackout Report 
is available on the Internet at http://www.ferc.gov/cust-protect/moi/blackout.asp.
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     inadequate system understanding;
     inadequate situational awareness;
     inadequate tree trimming; and
     inadequate reliability coordinator diagnostic 
support.
    Further, the Final Blackout Report indicates that several entities 
violated NERC operating policies and planning standards, and those 
violations directly contributed to the start of the blackout. However, 
the Final Blackout Report finds that due to a variety of institutional 
issues, the NERC standards are sufficiently unclear, ambiguous and non-
specific that it was possible for bulk power system participants to 
interpret these standards in widely varying ways that, while producing 
low reliability, could still be considered to comply with the 
standards.
    7. The Final Blackout Report stated that the August 14, 2003 
blackout was preventable and provided 46 recommendations to enhance 
grid reliability, which emphasize comprehensiveness, monitoring, 
training and enforcement of reliability standards.\6\ Several of these 
recommendations suggest actions the Commission should take to improve 
bulk power system reliability. For example, the report recommends that 
the Commission not approve the operation of a new Regional Transmission 
Organization (RTO) or Independent System Operator (ISO) until the 
applicant has met the minimum functional requirements of reliability 
coordinators.\7\ In addition, the Final Blackout Report states that the 
Commission should develop a Commission-approved mechanism for funding 
NERC and the regional reliability councils to ensure their independence 
from the parties they oversee,\8\ clarify that prudent expenditures and 
investments for bulk system reliability will be recoverable through 
transmission rates,\9\ and integrate a reliability impact consideration 
into our regulatory decision-making process.\10\ The report also states 
that operators who initiate load shedding pursuant to approved 
guidelines should be shielded from liability or retaliation.\11\
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    \6\ Final Blackout Report at 139.
    \7\ Recommendation 6. Id. at 147.
    \8\ Recommendation 2. Id. at 143.
    \9\ Recommendation 4. Id. at 146.
    \10\ Recommendation 9. Id. at 147.
    \11\ Recommendation 8. Id.
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    8. The Interim Blackout Report indicated (and the Final Blackout 
Report confirms) that, in the period of time immediately preceding the 
August 14 blackout, Northeast Ohio had significant reactive power 
needs. FirstEnergy, a Midwest utility identified as one of the entities 
whose violations of NERC standards contributed to the blackout, was 
severely deficient in reactive power to support the Cleveland-Akron 
area before the blackout. Based on these circumstances, the Commission 
determined that the availability of reactive power, and more generally, 
the availability of sufficient generation and transmission facilities 
in Eastern Ohio are matters deserving more study.\12\ The Commission 
directed FirstEnergy to retain an independent expert to prepare a study 
of the adequacy of transmission and generation facilities in 
Northeastern Ohio.\13\ FirstEnergy has retained an independent expert 
as directed and is currently preparing the required study, which will 
be completed in April, 2004.
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    \12\ FirstEnergy Corporation, 105 FERC ] 61,372 (2003).
    \13\ Id.
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    9. Responding to the blackout and the blackout investigation, on 
February 10, 2004, the NERC Board of Trustees approved recommendations 
to take steps to improve the reliability of the bulk electric system, 
including a

[[Page 22504]]

recommendation to review the reliability readiness of reliability 
coordinators and the major control areas.\14\ NERC plans to complete 
the 20 highest priority reviews by June 30, 2004, inspecting the 
operators which serve over 80 percent of North America's electric load.
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    \14\ See Recommendation 3a. The text of the February 10, 2004 
document is available on NERC's Web site, http://www.nerc.com.
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    10. The Commission supports NERC's and the industry's efforts to 
take concrete steps to improve system reliability. Pursuant to an 
explicit provision in its 2004 appropriation, the Commission is 
establishing a new reliability division to be staffed with grid-
reliability engineering experts in the Office of Markets, Tariffs and 
Rates, to assure sound integration of reliability and market 
considerations in Commission decision-making. Members of this division 
are participating with other industry volunteers in NERC's reliability 
readiness reviews and supporting the development of new reliability 
standards.
    11. The Congress is currently considering energy legislation, which 
would address the reliability of the nation's bulk power system based 
on mandatory industry compliance with enforceable reliability 
standards. The Commission strongly supports the enactment of 
legislation containing such a reliability provision. This Policy 
Statement is intended to be consistent with both current FERC authority 
and responsibility, and the implementation of such legislation.

Discussion

A. Need for Expeditious Revision of NERC Reliability Standards

    12. Over the past 30 years NERC has developed ``operating policies 
and planning standards'' with which its members are expected to 
voluntarily comply. As mentioned above, the operating policies consist 
of a collection of standards, requirements and guidelines that, 
together, instruct on the reliable operation of interconnected systems 
operations and, as currently drafted, place the primary responsibility 
for reliable operations on control area operators. NERC's planning 
standards are intended to state the fundamental requirements for 
planning reliable interconnected bulk electric systems.
    13. In 2002, NERC began developing clear and enforceable 
``reliability standards,'' under an American National Standards 
Institute (ANSI)-accredited process, which includes a voting model that 
provides for open participation and voting by industry stakeholders, 
weighted by industry segment. These new standards will be clear and 
unambiguous as to what needs to be done and who needs to do it to 
achieve reliable grid operations, and will include compliance measures 
for each standard. NERC is also working to transition its policies away 
from control area-oriented terminology suited for traditional 
vertically-integrated utilities and toward the terminology of a 
functional model that focuses on tasks or functions required for 
maintaining electric system reliability. The functional model 
recognizes changes to new industry structures that have emerged from 
the advent of open access transmission service.\15\
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    \15\ Historically, control areas were established by vertically-
integrated utilities to balance the control area's load with its 
generation, implemented interchange schedules with other control 
areas, and ensured transmission reliability. Industry restructuring 
in some areas has led NERC to restate its reliability standards in 
terms that fit the new--as well as the traditional--industry 
structures. This means replacing the term ``Control Area Operator'' 
with new terms that identify more closely which entity in a more 
disaggregated industry structure is responsible for complying with 
each NERC standard. To facilitate the update of its reliability 
standards, NERC has established the functional model. This model now 
recognizes a ``Balancing Authority Area'' as the collection of 
generation, transmission, and loads within the metered boundaries 
where a ``Balancing Authority'' maintains a load-resource balance. A 
``Reliability Authority Area'' is recognized as having borders that 
may coincide with one or more balancing authority areas. A 
``Reliability Authority'' may direct the ``Transmission Operators'' 
or Balancing Authorities to take action, for example, to maintain 
interconnection reliability operating limits. Also, as the 
functional model was being developed, the term ``Reliability 
Coordinator'' was used on an interim basis before Reliability 
Authority became the accepted term.
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    14. The Commission agrees with the critical need to replace the 
current standards with standards that are clear, unambiguous, 
measurable and enforceable. To date NERC has completed development of 
one interim reliability standard, relating to cyber security. NERC has 
identified approximately twelve additional reliability standards that 
it plans to develop that, when completed, will replace the existing 
operating policies and planning standards. NERC and the industry have 
recently agreed to expedite the development of these new standards and 
are currently working toward the completion and adoption of new 
standards by the end of 2004. The Commission supports NERC's commitment 
and our expectation is that such standards will be enforceable in early 
2005.\16\
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    \16\ In this vein, the Commission notes NERC's April 5, 2004 
announcements of the adoption of (1) Revised Compliance Templates 
and (2) Interim Guidelines for Reporting and Disclosure of 
reliability audit results and reliability standards compliance 
violations.
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    15. The Final Blackout Report identifies topics that are not 
currently addressed by NERC standards or are addressed so vaguely as to 
be ineffective, but are important in maintaining system reliability. 
Such ``gaps'' include vegetation management for transmission rights-of-
way, line ratings, operator training, adequacy of operator tools, and 
minimum functional requirements and capabilities for reliability 
authorities and balancing authorities.\17\ The Commission advises NERC 
and the industry to include these priority matters in the list of 
topics for which immediate reliability standards must be developed, and 
to develop such standards as quickly as reasoned deliberation allows.
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    \17\ See Final Blackout Report at 21-22.
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    16. The Commission requests status reports from NERC and the 
industry on the development of these revised standards. Pursuant to a 
recommendation in the Final Blackout Report, the Commission is working 
with the United States and Canadian governments to hold a meeting with 
NERC and the electric industry about how the findings of the blackout 
investigation should affect electric reliability standards and 
regulation, and looks forward to discussing these issues in that 
meeting.
    17. The Commission believes that NERC's reliability standards 
should represent a floor for grid operator and bulk system 
participants' reliability efforts, and not a ceiling. Utilities and 
other entities involved in transmission system reliability should 
strive toward achieving reliable transmission service and not simply 
act with the aim of meeting the minimum requirements that have been set 
forth in manuals and standards.
    18. The Commission recognizes that entities may be subject to 
regional reliability standards developed by NERC's regional reliability 
councils or State agencies. The Commission supports variations where 
the transmission provider or other relevant entity can demonstrate that 
regional reliability standards are necessary to account for physical 
differences in the bulk power system and are no less stringent than, 
and not inconsistent with, NERC's reliability standards.\18\ Regional 
or State standards that do not

[[Page 22505]]

account for physical differences and do not produce the same or a 
higher level of performance are not acceptable. Likewise, we cannot 
support regional or State reliability standards that result in 
variations that are less stringent and produce lower reliability than 
NERC standards. The Commission is concerned, however, that regional 
variations may create market seams or allow anti-competitive behavior 
and will watch carefully for any such problems.
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    \18\ NERC recently explained that ``regional standards may be 
more stringent than, but may not be inconsistent with or less 
stringent than, the NERC standards. Both sets of rules apply, and 
operators must comply with the more stringent one.'' March 12, 2004 
Response to Questions posed by the Senate Committee on Energy and 
Natural Resources, Michehl Gent, President and CEO of NERC.
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    19. In summary, we support NERC and industry efforts to translate 
the existing reliability standards into clear and enforceable standards 
by early 2005, and we encourage NERC to address the ``gaps'' in 
existing reliability standards.

B. Good Utility Practice

    20. Nearly all transmission-providing public utilities are members 
of one of NERC's ten regional reliability councils.\19\ NERC has taken 
the position that all members must voluntarily agree to operate their 
transmission systems consistent with NERC reliability standards.
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    \19\ NERC's members are the ten regional reliability councils.
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    21. In Order No. 888, the Commission required that all public 
utilities that own, control or operate facilities used for transmitting 
electric energy in interstate commerce have on file an open access, 
non-discriminatory transmission tariff (OATT).\20\ The pro forma OATT, 
issued as part of Order No. 888, contains numerous provisions that 
reference ``Good Utility Practice,'' \21\ some of which specifically 
relate to the reliable operation of the transmission grid. For example, 
``Control Area'' is defined as a system or systems to which a common 
automatic generation control scheme is applied in order to, among other 
things, ``maintain scheduled interchange with other control areas, 
within the limits of Good Utility Practice'' and ``maintain the 
frequency of the electric power systems within reasonable limits in 
accordance with `Good Utility Practice.' '' \22\
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    \20\ Order No. 888, Promoting Wholesale Competition Through Open 
Access Non-discriminatory Transmission Services by Public Utilities 
and Recovery of Stranded Costs by Public Utilities and Transmitting 
Utilities, Order No. 888, 61 FR 21,540 (1996), FERC Stats. & Regs. ] 
31,036 (1996), order on reh'g, Order No. 888-A, 62 FR 12,274 (1997), 
FERC Stats. & Regs. ] 31,048 (1997), order on reh'g, Order No. 888-
B, 62 FR 64,688, 81 FERC ] 61,248 (1997), order on reh'g, Order No. 
888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub nom. 
Transmission Access Policy Study Group, et al. v. FERC, 225 F.3d 667 
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 
(2002).
    \21\ Order No. 888 defined ``Good Utility Practice'' in section 
1.14 of the pro forma OATT as follows:
    Any of the practices, methods and acts engaged in or approved by 
a significant portion of the electric utility industry during the 
relevant time period, or any of the practices, methods and acts 
which, in the exercise of reasonable judgment in light of the facts 
known at the time the decision was made, could have been expected to 
accomplish the desired result at a reasonable cost consistent with 
good business practices, reliability, safety and expedition. Good 
Utility Practice is not intended to be limited to the optimum 
practice, method, or act to the exclusion of all others, but rather 
to be acceptable practices, methods, or acts generally accepted in 
the region. (Emphasis added)
    \22\ Pro forma OATT at section 1.6.
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    22. With regard to network integration transmission service, the 
OATT provides that a transmission provider is responsible to plan, 
construct, operate and maintain its Transmission System in accordance 
with Good Utility Practice \23\ and may curtail service consistent with 
Good Utility Practice to maintain system reliability.\24\ Further, the 
OATT specifically requires that a network customer satisfy its control 
area requirements by either operating as a control area under NERC and 
regional reliability council guidelines, contracting with the 
Transmission Provider or contracting with another entity ``consistent 
with Good Utility Practice, which satisfies NERC and the [applicable 
regional reliability council] requirements.'' \25\
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    \23\ Id. at section 28.2.
    \24\ Id. at section 33.7.
    \25\ Id. at section 35.2.
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    23. In this Policy Statement, we clarify that the Commission 
interprets the term ``Good Utility Practice'' to include compliance 
with NERC reliability standards or more stringent regional reliability 
council standards. Accordingly, public utilities that own, control or 
operate Commission-jurisdictional transmission systems should operate 
their systems in accordance with Good Utility Practice as set forth in 
the Commission's pro forma open OATT, including complying with NERC 
reliability standards.
    24. With respect to ISOs and RTOs, they must comply with NERC 
reliability standards pursuant to both Order No. 888 and Order No. 
2000. Order No. 888-A, in discussing the characteristics and functions 
of ISOs, states that ISOs should comply with ``applicable standards set 
by NERC and the regional reliability council.'' \26\ Likewise, with 
regard to RTOs, the Commission discussed in Order No. 2000 a specific 
requirement that RTOs follow NERC standards. The Commission determined 
that RTOs must have exclusive authority for maintaining the short-term 
reliability of the grid that it operates. In that context, the 
Commission concluded that:
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    \26\ Order No. 888-A, FERC Stats. & Regs. ] 31,048 at 30,247-48.

the RTO must perform its functions consistent with established NERC 
(or its successor) reliability standards, and notify the Commission 
immediately if implementation of these or any other externally 
established reliability standards will prevent it from meeting its 
obligation to provide reliable, non-discriminatory transmission 
service.\27\
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    \27\ Regional Transmission Organizations, Order No. 2000, 65 FR 
809 (2000), FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000 ] 31,089 at 31,106 (1999), order on reh'g, Order No. 
2000-A, 65 FR 12088 (2000), FERC Stats. & Regs., Regulations 
Preambles July 1996-December 2000 ] 31,092 (2000), aff'd, Public 
Utility District No. 1 of Snohomish County, Washington v. FERC, 272 
F.3d 607 (D.C. Cir. 2001).

    Accordingly, the Commission expects ISOs and RTOs to perform their 
functions consistent with NERC reliability standards (or with regional 
variations that are no less stringent than, and not inconsistent with, 
NERC standards) and the findings and recommendations of NERC audits.
    25. In sum, the Commission expects public utilities to comply with 
NERC reliability standards and to remedy any deficiencies identified in 
NERC compliance audit reports and recommendations. The Commission will 
consider taking utility-specific action on a case-by-case basis to 
address significant reliability problems or compliance with Good 
Utility Practices, consistent with its authority. A failure to comply 
with such industry standards could in some circumstances affect 
Commission determinations as to whether rates are just and reasonable. 
For example, it may be appropriate to deny full cost recovery in 
circumstances where a transmission provider fails to provide full 
reliability of service.\28\
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    \28\ See, e.g., Village of Freeport, New York v. Consolidated 
Edison Co. of New York, Inc., 87 FERC ] 61,301 (1999) (setting for 
hearing whether ConEd followed good utility practice in providing 
firm transmission service required by the OATT and, if not, what 
remedies are appropriate); Green Mountain Power Co., 59 FERC ] 
61,213 at 61,739 (1992).
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    26. Generators, transmission customers and other market 
participants are also expected to support transmission system 
reliability, and to obey the directives of a balancing authority or 
reliability authority for operational reliability in real time. The 
Commission plans to explore this topic further to determine the best 
means to ensure that all market participants are held responsible to 
act to support transmission system reliability.

[[Page 22506]]

C. Cost Recovery of Prudent Reliability Expenditures

    27. The Commission understands that public utilities may need to 
expend significant amounts of money to implement measures necessary to 
maintain bulk electric system reliability, including vegetation 
management, improved grid monitoring and management tools, and improved 
operator training. The Commission is also aware that there may be 
uncertainty about public utilities' ability to recover as additional 
expenses the expenses necessary to ensure bulk electric system 
reliability, especially if they are operating under frozen or indexed 
rates. Further, the blackout investigation Final Blackout Report 
Recommendation 4 recommends that regulators clarify that prudent 
expenditures and investments to maintain or improve bulk power system 
reliability will be recoverable through rates.\29\ Accordingly, the 
Commission assures public utilities that we will approve applications 
to recover prudently incurred costs necessary to ensure bulk electric 
system reliability, including prudent expenditures for vegetation 
management, improved grid management and monitoring equipment, operator 
training, and compliance with NERC reliability standards and Good 
Utility Practices.
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    \29\ Final Blackout Report at 146.
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    28. In a Statement of Policy issued September 14, 2001, the 
Commission provided assurances to regulated entities that the 
Commission ``will approve applications to recover prudently incurred 
costs necessary to further safeguard the reliability and security of 
our energy supply infrastructure in response to the heightened state of 
alert. Companies may propose a separate rate recovery mechanism, such 
as a surcharge to currently existing rates or some other cost recovery 
method.'' \30\ The Commission stands by this policy and clarifies that 
the policy extends to the recovery of prudent reliability expenditures, 
including those for vegetation management, improved grid management and 
monitoring equipment, operator training and compliance with NERC 
standards.
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    \30\ Extraordinary Expenditures Necessary to Safeguard National 
Energy Supplies, 96 FERC ] 61,299 at 61,129 (2001).
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D. Commission Relationship with States on Reliability Issues

    29. The Commission recognizes that many aspects of system 
reliability are within the purview of the states. To maintain and 
enhance reliability, it is necessary that all those with responsibility 
for the bulk electric system work together to achieve the common goal 
of a reliable electric system. Accordingly, the Commission intends to 
work closely with the states to address vegetation management, 
jurisdictional overlap issues regarding reliability upgrades, cost 
recovery, and other reliability-related issues of mutual concern. To 
date we have been holding such discussions with individual State 
officials, through the National Association of Regulatory Utility 
Commissioners, and through interactions on the joint U.S.-Canada Power 
System Outage System Task Force. We look forward to continuing and 
strengthening these efforts.
    30. With regard to reliability ``upgrades,'' we note that several 
State and regional entities have asked the Commission to recognize that 
State or regional reliability rules may be more stringent than those 
developed by NERC. For example, in follow-up comments to the 
Commission's December 1 Reliability Conference, the New York State 
Reliability Council, Northeast Power Coordinating Council and the 
Western Electricity Coordinating Council all indicated that, while they 
support efforts to develop enforceable, industry-wide reliability 
standards, such standards ``should represent a floor rather than a 
ceiling.'' They stated that it is essential for regional entities to 
have the ability to promulgate more specific and more stringent 
regional and local reliability standards. According to these comments, 
more stringent regional criteria that address unique regional needs or 
concerns make for a more robust overall bulk electric system and allow 
greater flexibility when extraordinary events occur.
    31. As discussed above, the Commission supports regional standards 
that are necessary to account for physical differences in the bulk 
power system and are no less stringent than, and not inconsistent with, 
NERC's reliability standards. The Commission recognizes that regional 
criteria may be necessary and that the State and regional entities have 
legitimate interests in enhancing reliability beyond the level achieved 
by compliance with NERC standards.
    32. We are also interested in working together with the States and 
NERC to address and remedy any deficiencies in public utility 
implementation of reliability requirements, or any shortfalls in actual 
bulk system reliability.

E. Commission Relationship with Canada and Mexico on Reliability Issues

    33. The Commission recognizes the common interest of the United 
States, Canada and Mexico in maintaining a safe and reliable 
interconnected North American bulk electric system.\31\ In this vein, 
the Commission will work closely and cooperatively with officials 
designated by the Canadian and Mexican governments to achieve this 
common interest.
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    \31\ The northern portion of Baja California Norte, Mexico is 
interconnected with the western United States and Canada and is part 
of the WECC, a NERC region.
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    34. Further, the Commission will work closely with Canada to 
achieve common reliability of the interconnected transmission grid to 
attain consistent cross-border treatment of reliability standards and 
regulation as they affect bulk system participants and NERC under 
current regulatory conditions. When energy legislation is enacted, we 
will work closely with appropriate Canadian authorities to assure the 
success of the Electricity Reliability Organization (ERO) and address 
any issues required to assure that our nations share a reliable 
electric grid.

F. Recommendations of Blackout Investigation Final Report

    35. In addition to recommending that the Commission allow recovery 
of prudently incurred reliability-related costs, discussed in Section 
C, above, the April 5 Final Blackout Report recommends or discusses 
several other actions related to the Commission and its regulation of 
public utilities. Below we adopt new policies and announce new steps in 
response to the final report.
Reliability of ISOs and RTOs
    36. The Final Blackout Report's Recommendation 6 \32\ recommends 
that the Commission not authorize a new RTO or ISO to become 
operational until the applicant has met the minimum functional 
requirements for reliability coordinators. In response to this 
recommendation, the Commission will continue its policy of taking 
reliability considerations into account before authorizing a new ISO or 
RTO to become operational. An ISO or RTO must meet all minimum 
functional requirements for reliability coordinators in order to 
fulfill its responsibility as reliability coordinator for the area 
within its footprint.
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    \32\ Final Blackout Report at 147.

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[[Page 22507]]

Consideration of Reliability Impacts in Commission Decision-Making 
Process
    37. The Final Blackout Report's Recommendation 9 \33\ recommends 
that the Commission integrate a formal reliability impact consideration 
into our regulatory decision-making to ensure Commission actions 
improve, or at a minimum do not harm, reliability. In response to this 
recommendation, the Commission will continue its policy of considering 
the reliability implications of Commission decisions, as appropriate.
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    \33\ Final Blackout Report at 147.
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Funding of NERC
    38. The Final Blackout Report's Recommendation 2 \34\ recommends 
that the U.S. and Canadian regulatory authorities develop a regulator-
approved mechanism for funding NERC and the regional reliability 
councils, to ensure their independence from, the parties they oversee. 
In response, the Commission will appoint a staff task force to report 
to the Commission on potential mechanisms for funding NERC, the 
regional reliability councils, and, should energy legislation be 
passed, the Electricity Reliability Organization, to ensure 
independence from the utilities they oversee. This staff task force 
will be directed to work closely with our Canadian counterparts, as 
well as State regulatory authorities, NERC, the regional reliability 
councils, and industry participants, to develop funding options and 
recommendations. Such options should take into account funding 
mechanisms for current entities, such as NERC and the regional 
reliability councils, and entities created by the passage of 
reliability legislation.
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    \34\ Id. at 143.
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Memorandum of Understanding with NERC
    39. The Final Blackout Report recommends that government agencies 
in the U.S. and Canada decide whether to develop individual memoranda 
of understanding (MOUs) with NERC that would define the agency's 
working relationship with NERC, government oversight of NERC 
activities, if appropriate, and the reliability responsibilities of the 
signatories.\35\ In response to this recommendation, the Commission 
directs staff to draft a MOU which will define NERC's working 
relationship with the Commission. In addition, this MOU will clarify 
the appropriate Commission oversight of NERC and the respective 
reliability responsibilities of both NERC and the Commission. This MOU 
will be signed by the Chairman, on behalf of the Commission.
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    \35\ Id.
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G. Limitations on Liability

    40. In view of the Commission's interpretation in this Policy 
Statement that Good Utility Practice includes compliance with NERC 
reliability standards and NERC compliance audit recommendations, the 
Commission will consider, on a case-by-case basis, proposals by public 
utilities to amend their OATTs to include limitations on liability. 
While this issue has not been resolved on a standardized basis, the 
Commission has entertained RTO transmission providers' specific 
proposals to amend their OATTs to include provisions addressing 
limitations on liability.\36\ Such proposals should address the 
standard for liability (e.g., gross negligence and willful misconduct) 
and the types of damages for which the public utility may be liable 
(e.g., direct damages and not consequential or indirect damages).
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    \36\ See Wholesale Market Power Platform White Paper (April 28, 
2003) (stating that a standard tariff provision limiting liability 
for transmission providers would be included in the Final Rule 
Remedying Undue Discrimination through Open Access Transmission 
Service and Standard Electricity Market Design). See also Midwest 
Independent Transmission System Operator, Inc., 100 FERC ] 61,144 
(2002) (conditionally accepting for filing a proposed OATT revision 
that would limit the liability of the Midwest ISO and Midwest ISO 
transmission owners for certain damages related to services provided 
under the Midwest ISO OATT); and ISO New England, et al., 106 FERC ] 
61,280 (2004).

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 04-9358 Filed 4-23-04; 8:45 am]
BILLING CODE 6717-01-P