A year has passed since the Federal Energy Regulatory Commission ("FERC" or the "Commission") issued a landmark series of electric reliability orders that riled the industry. Although progress has been made toward healing the rift created by the orders, important jurisdictional conflicts between FERC and the North American Electric Reliability Corporation ("NERC") remain. Recent developments include the following:

  • On March 17, 2011, FERC approved NERC's proposed changes to its Rules of Procedure governing the development of electric reliability standards. Although FERC promised to use its statutory authority to issue directives "judiciously," FERC maintained that it has the statutory authority to direct NERC to submit a new or revised reliability standard—even if NERC does not support the new or revised standard.
  • On March 17, 2011, FERC reaffirmed its final rule requiring NERC to revise the definition of the Bulk Electric System to eliminate regional discretion. While denying rehearing, FERC repeatedly suggested that NERC could develop an alternative proposal that is "equally efficient and effective as the Commission's suggested approach" of adopting a 100 kV bright-line standard.
  • On March 18, 2011, industry representatives requested reconsideration of Order 733-A, in which the Commission directed NERC to modify Standard PRC-023-1 to address a Commission-identified reliability concern. The parties argued that adopting the Commission's proposed approach could actually harm reliability and that NERC should not be limited to proposing an alternative that is "equally efficient and effective" as the Commission's proposed approach.

As the jurisdictional dispute evolves, entities subject to electric reliability standards should actively participate in NERC's standards development process to ensure that NERC is fully informed regarding the practical implications of proposed responses to FERC's directives.

Background: March 18, 2010 Orders

On March 18, 2010, FERC issued a series of reliability orders (the "March 18 Orders"), which generated significant controversy. As noted by former FERC Chairman Joseph T. Kelliher, "the orders loudly suggest FERC does not believe NERC has established itself as a strong organization."1 Among other things, the Commission required NERC to revise the process by which NERC develops reliability standards to ensure that NERC can comply with Commission directives,2 directed NERC to submit modifications to various reliability standards3 and proposed to issue a rule requiring NERC to revise the definition of the Bulk Electric System ("BES") to eliminate regional discretion.4

FERC's Authority Under FPA Section 215

Many viewed the orders as overreaching the Commission's statutory authority under the Federal Power Act ("FPA"). Section 215(d) of the FPA divides the responsibility and authority for developing mandatory reliability standards between FERC and a self-regulatory Electric Reliability Organization ("ERO").5 As the Commission-certified ERO, NERC is vested with the primary responsibility for developing reliability standards and modifications to existing standards, subject to the review and approval of the Commission.6 Section 215(d)(2) requires FERC, when considering whether to approve a proposed standard or modification, to "give due weight to the technical expertise" of NERC. If FERC disapproves of a proposed standard in whole or in part, Section 215(d)(4) provides that FERC must remand the standard to NERC for further consideration—FERC cannot unilaterally modify NERC's proposed standards.7

Under Section 215(d)(5), however, FERC is authorized to direct NERC to develop or modify a reliability standard to address a "specific matter" if the Commission considers it "appropriate" to carry out the purposes of Section 215. Debate over the scope of Commission's authority to issue directives under Section 215(d)(5) was brought to a head by the March 18 Orders.

Fallout From the March 18, 2010 Orders

Rehearing was sought for several of the March 18 Orders, and numerous comments were filed objecting to the rulemakings. As discussed in our September 21, 2010 client update, for example, NERC and numerous other parties sought rehearing of FERC's order directing NERC to modify its standards development process ("SDP") to ensure that the SDP could not be used to negate a Commission directive. The parties expressed concern that FERC's required modifications to the SDP would have the effect of requiring NERC to modify or propose reliability standards that satisfied FERC directives as to the specific technical content of the reliability standards. This result, the parties argued, would be inconsistent with the requirement in Section 215(d)(2) that FERC give deference to NERC's decisions on technical matters, and it would undermine effective industry and international participation in the SDP.

Similar concerns were raised regarding FERC's proposal to direct NERC to revise the definition of the BES to include all electric transmission facilities with a rating of 100 kV or more. Because the question of which facilities are material to the reliability of the BES is a technical question, the parties argued, FERC could not substitute its own judgment and prescriptively direct NERC to adopt a 100 kV threshold for the BES. Nonetheless, FERC adopted the proposed BES rule8and denied rehearing in the SDP proceeding.9 FERC's SDP order was subsequently appealed to the Court of Appeals for the District of Columbia, where it remains pending.10

Self-Regulatory Model or Command-and-Control?

The debate over how mandatory reliability standards should be developed goes back to the enactment of the Energy Policy Act of 2005, when two competing regulatory models were proposed. Then-Sen. Tom Daschle (D-S.D.) proposed a bill that would have given FERC the authority to directly establish reliability standards. The late Sen. Craig Thomas (R-Wyo.), on the other hand, advocated a self-regulatory model—a "participant-run, FERC-overseen electric reliability organization."11 Among the reasons stated for favoring a self-regulatory model rather than the command-and-control model were (1) the need to accommodate the participation of stakeholders in Canada and Mexico, and (2) the fact that developing reliability standards was very technical in nature.12 Congress ultimately opted for Sen. Thomas' proposal, which became the basis for what is now Section 215. The issue has not fully been resolved, however—as demonstrated by the Commission's March 18 Orders, the continuing fallout from these orders, and the mounting political pressure being put on FERC to do more to oversee and ensure the reliability of the grid.

March 17, 2011 Orders

On March 17, 2011, the Commission issued another series of reliability orders (the "March 17 Orders"). In a statement accompanying these orders, Commissioner John R. Norris opined that the March 17 Orders "reflect a more cooperative partnership with NERC and industry" as well as an "effort to ensure [the Commission] give[s] due weight to NERC's technical expertise and be mindful when issuing Commission directives."13 According to Norris, the industry's reaction to the March 18 Orders had been a "wake up call."14 Two of the March 17 Orders, in particular, addressed the scope of the Commission's authority under Section 215(d).

First, in Order 743-A, the Commission reaffirmed its November 10, 2010 Final Rule requiring NERC to revise the definition of the BES to ensure that the definition encompasses all facilities necessary for operating an interconnected electric transmission network.15 The Commission reiterated that it believed the best way to address the Commission's concerns is to eliminate regional discretion, maintain a bright-line threshold that includes all facilities operated at or above 100 kV except defined radial facilities, and establish an exemption process and criteria for excluding facilities not necessary for operating the transmission network. However, the Commission repeatedly asserted that it was not mandating any specific result and that NERC retains the ability to develop an alternative proposal to address the Commission's concerns so long as the alternative was "equally efficient and effective as the Commission's suggested approach" and would not result in a reduction in reliability. It is not readily apparent how NERC could propose anything other than the bright-line 100 kV test put forth by the Commission to satisfy its stated concerns with the existing definition.

Second, in Docket No. RR09-6-003, the Commission approved the NERC compliance filing that proposed changes to NERC's Rules of Procedure governing the development of electric reliability standards.16 Among the proposed changes is new Section 321 to the NERC Rules of Procedure. This section would allow the NERC Board to file a draft standard in response to a Commission directive if the Board finds that the SDP has not resulted in a standard that adequately addresses the directive. In such circumstances, if the Board does not agree that the proposed standard meets the statutory standard for approval, the Board may direct that the standard be filed with the Commission as a compliance filing with a recommendation that it not be made effective. The resulting standard would not be eligible for submission as an American National Standard.

In approving these changes, FERC acknowledged the concerns raised by NERC and industry representatives that FERC had overstepped its authority by prescriptively managing how NERC develops reliability standards. While promising to use its authority under Section 215(d)(5) of the FPA "judiciously," FERC reiterated its position that Section 215(d)(5) gives it the authority to require NERC to submit a new or revised reliability standard even if NERC does not support the new or revised standard.

Jurisdictional Conflict Unresolved, Unlikely to Go Away

Notwithstanding the Commissioners' conciliatory statements and the suggestion that relations between FERC and NERC have turned over a new leaf, the fundamental tension between NERC's authority as a self-regulatory entity to develop reliability standards under Section 215(d)(1) and FERC's expansive interpretation of its authority under Section 215(d)(5) will likely remain unresolved until either Congress or the courts step in to decide the issue.

Just one day after the March 17 Orders were issued, for example, industry representatives filed requests for reconsideration of the Commission's February 17, 2011 order on rehearing in RM08-13-001.17 The parties disagreed with FERC's suggestion that NERC, when responding to a Commission directive, is limited to proposing alternatives that are "equally efficient and [as] effective" as what the FERC proposes to address a Commission-identified reliability concern. To the contrary, the parties asserted, FERC is required not only to respect the technical expertise of NERC regarding how to address the Commission's underlying reliability concern, but also regarding whether to address the concern. According to the industry's experts, FERC's proposal to modify PRC-023-1 is technically unsound and could actually harm reliability if implemented.

Practical Implications

Until the jurisdictional dispute is resolved, entities subject to electric reliability standards will remain caught in the middle of the FERC/NERC power struggle. In the mean time, affected entities are advised to actively participate in NERC's SDP to ensure that NERC is fully informed regarding the practical effects of proposed responses to FERC's directives. Information regarding standards that are currently under development can be found here or at www.nerc.com.

Footnotes

1. The Honorable Joseph T. Kelliher, Remarks at the Reliability Primer for Lawyers and Energy Professionals, Energy Bar Association (Apr. 28, 2010).
2. North American Electric Reliability Corp., 130 FERC 61,203 (2010).
3. Order Setting Deadline for Compliance, 130 FERC 61,218 (2010) (setting deadline for modifications to BAL-003-0); Order Setting Deadline for Compliance, 130 FERC 61,200 (2010) (setting deadline for modifications to TPL-002-0); Transmission Relay Loadability Reliability Standard, 130 FERC 61,221 (2010) (directing NERC to modify PRC-023-1).
4. Revision to Electric Reliability Organization Definition of Bulk Electric System, 130 FERC 61,204 (2010).
5. See 16 U.S.C. § 824o(d).
6. See id. §§ 824o(a)(2), (d)(1)-(2); North American Electric Reliability Corp., 116 FERC 61,062 (2006), order on reh'g & compliance, 117 FERC 61,126 (2006).
7. See 16 U.S.C. § 824o(d)(2), (4).
8. Revision to Electric Reliability Organization Definition of Bulk Electric System, Order No. 743, 133 FERC 61,150 (2010).
9. North American Electric Reliability Corp., 132 FERC 61,218 (2010).
10. See The American Public Power Association v. FERC, Nos. 10-1387 & 10-1383 (D.C. Cir.)
11. 148 Cong. Rec. S1873 (March 14, 2002).
12. Id. at 3217–18.
13. Statement of Commissioner John R. Norris on Reliability Orders, RM09-18-001, et. al. (March 17, 2010), available at http://www.ferc.gov/media/statements-speeches/norris/2011/03-17-11-norris-E-4.asp.
14. Id.
 15. Revision to Electric Reliability Organization Definition of Bulk Electric System, Order No. 743-A, 134 FERC ¶ 61,210 (2011).
16. Order on Compliance Filing, 134 FERC ¶ 61,216 (2011).
17. Transmission Relay Loadability Reliability Standard, Order No. 733-A 134 FERC ¶ 61,127 (2011).

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