United States: FERC Confirms that NERC Must Comply with Its Directives Regarding Reliability Standards

On September 16, 2010, the Federal Energy Regulatory Commission ("FERC" or the "Commission") re-affirmed its March 18, 2010 order directing the North American Electric Reliability Corporation ("NERC") to revise its reliability standards development process in order to ensure that the process cannot be used to negate a Commission directive.¹ The Commission clarified that it was not requiring NERC to change its rules of procedure so that the Commission could dictate the specific content of the reliability standards, but rejected the suggestion that NERC could respond to Commission directives by simply "considering" them during the standards development process and deciding not to comply. Rather, in order to satisfy NERC's statutory obligations under Section 215(d)(5) of the Federal Power Act, NERC must develop a proposal that affirmatively responds to the concern or goal underlying the directive, and it must provide a technical analysis if it takes a different approach. The Commission also refused to reconsider its directive to develop modifications to FAC-008-1. It rejected requests for reconsideration on this issue as untimely requests for rehearing of Order 693 and explained that the directive serves a reliability goal.

Background: Reliability Standards Development Under Section 215 of the Federal Power Act

Section 215 of the Federal Power Act ("FPA") divides the responsibility and authority for developing mandatory reliability standards between FERC and a Commission-certified self-regulatory Electric Reliability Organization ("ERO").² The ERO is vested with primary responsibility for developing reliability standards and modifications to existing standards, subject to the review and approval of the Commission. When considering whether to approve a proposed standard or modification, FERC is required to "give due weight to the technical expertise" of the ERO. If FERC disapproves of a proposed standard in whole or in part, FERC must remand the standard to the ERO for further consideration.

FERC is vested with the authority to direct the ERO to develop or modify a reliability standard addressing a specific matter if the Commission determines it is appropriate to carry out the purposes of Section 215. The statute also grants FERC the authority to direct the ERO to modify its rules of procedure, including the rules by which the ERO develops reliability standards (the "Standards Development Process").

NERC Ordered to Revise Reliability Standard Development Process and Comply With Deadlines for Proposed Revisions to FAC-008-1

On March 18, 2010, as part of a package of reliability orders, FERC directed NERC, the Commission-certified ERO, to submit proposed modifications to its Standards Development Process.³ Modifications are necessary, FERC stated, in order to resolve a conflict between the Standards Development Process and NERC's obligation as the ERO to comply with Commission directives that require it to submit new or modified reliability standards addressing a specific matter.

According to FERC, the current procedures in the Standards Development Process can be misused to delay or block NERC's ability to respond to Commission directives intended to protect the reliability of the Bulk-Power system. Because each new or modified reliability standard must be approved by two-thirds of the stakeholder ballot body before it can be presented to the NERC board of trustees, FERC reasoned, the ballot body could effectively "veto" a Commission directive by voting against ("balloting down") a new or modified reliability standard that is drafted to comply with a Commission directive. Similarly, the ballot body could approve ("ballot up") a new or modified reliability standard that purposefully fails to respond to a Commission directive. FERC was concerned that, in either case, NERC's good faith efforts to comply with Commission directives could be thwarted.

To remedy the apparent conflict, FERC directed NERC to file modifications to its Standards Development Process to ensure that it can comply with a Commission directive to develop a new or modified reliability standard addressing a specific matter. FERC stated that it will issue a notice allowing for comments on the proposed changes and will issue its order regarding the proposal after considering comments. FERC also established a compliance deadline for NERC to submit modifications to reliability standard FAC-008-1, as previously directed in Order 693,⁴ within 90 days of the Commission's future order regarding NERC's proposed modifications to the Standards Development Process. The Commission identified NERC's failure to comply with the FAC‑008‑1 directive as a prime example of the need for modifications to the Standards Development Process.

Petitions for Rehearing, Reconsideration and Stay

On April 19, 2010 NERC requested rehearing, reconsideration, and stay of the Commission's order directing NERC to propose modifications to the Standards Development Process. Rehearing and reconsideration were also requested by industry stakeholders, public power representatives and Canadian electric organizations.

A primary concern of the parties requesting rehearing was that FERC, through its March 18 Order on NERC's Standards Development Process as well as several other March 18 reliability orders,⁵ had overstepped its authority by prescriptively managing how NERC developed reliability standards. The parties expressed concern, for example, that FERC was requiring modifications to the Standards Development Process that would have the effect of requiring NERC to modify or propose reliability standards consistent with FERC directives as to the specific technical content of such reliability standards. This result, the parties argued, would be inconsistent with Section 215's requirement that FERC give deference to NERC's decisions on technical matters and would undermine effective industry and international participation in the Standards Development Process. The parties also requested that FERC reconsider its directive to modify FAC-008-1, arguing that the directive improperly served a commercial purpose rather than a reliability purpose.

Rehearing Order

In the Rehearing Order, the Commission first took issue with the parties' claims that it was requiring NERC to change its rules to allow the Commission to dictate the specific content of reliability standards. The Commission explained that instead, the March 18 Order simply required NERC to develop a mechanism that was designed to prevent the Standards Development Process from negating a Commission directive to submit a new or modified standard.

The Commission clarified that it is not denying NERC the opportunity to develop reliability standards using its technical expertise, and that it does not intend to prescribe the text or substance of reliability standards. The Commission further confirmed that when it issues a directive pursuant to Section 215(d)(5) of the FPA, NERC has the flexibility to respond with an alternative that is an equally effective and efficient means of addressing the Commission's underlying goal or concern, so long as NERC "fully explains how the alternative produces a result that is as effective as or more effective than the Commission's example or directive."⁶

The Commission also rejected the suggestion that NERC could satisfy its responsibility under Section 215(d)(5), and respond to a Commission directive by simply "considering" it during the standards development process and deciding not to comply. First, the Commission reasoned that the "only reasonable reading of the language" in Section 215(d)(5) is that if the Commission has the authority to order a new or modified reliability standard, NERC is legally obligated to submit it. Second, the statute conditions the Commission's authority to direct a new or modified reliability standard on the Commission's judgment that the subject of the standard needs to be addressed. Therefore, once the Commission determines that a new or modified reliability standard is needed and issues a final directive to that effect, NERC is not free to substitute its judgment for the Commission's judgment by concluding through the Standards Development Process that the directive is technically unsound or unnecessary.

Regarding the parties' arguments that the Commission's March 18 Order was inconsistent with the requirement in Section 215(d)(2) that the Commission give due weight to NERC's technical expertise, the Commission clarified that although FERC is required to give due weight to NERC's technical expertise, the Commission will nonetheless remand a proposed standard if it is not convinced that the standard is adequate to provide for reliable operation of the Bulk-Power system. In response to arguments regarding inconsistency with the requirement in Section 215(c)(2)(E) that NERC attempt to gain recognition in Canada and Mexico, the Commission found that the parties' concerns were due to their misunderstanding that the Commission directives would require NERC to let the Commission dictate the specific content of a reliability standard. Nothing in the March 18 Order would prevent NERC from using a Standards Development Process that includes the full and voluntary participation of Canadian and Mexican entities.

The Commission rejected the requests for reconsideration of its FAC-008-1 directive as untimely requests for rehearing of Order 693. The Commission stated further that the directive serves a reliability goal, and that NERC must develop a modification to comply with its directive.

Finally, the Commission denied NERC's request for a stay of FERC's March 18 Order.⁷ The Commission disagreed with NERC's claim that it would suffer irreparable injury without a stay, found that NERC had failed to show that a stay is in the public interest and stated that it was not persuaded that NERC would need more time to consider the Commission's required modifications to FAC-008-1. Although the Commission denied the request for a stay, the Commission recognized the need for a continued dialogue between NERC, the Commission, international regulators and the industry with respect to shared responsibilities to provide for reliable operation of the Bulk Power system.

Next Steps

NERC has until December 13, 2010 to file a petition with FERC proposing revisions to the Standards Development Process that address the Commission's concerns.⁸ Before the Commission issues an order, it will publicly notice the petition and accept comments from interested parties.

Footnotes

1. North American Electric Reliability Corp., 132 FERC ¶ 61,218 (2010) ("Rehearing Order").

2. The Commission certified NERC as the ERO in July 2006. Further references in this Update to NERC refer to NERC in its role as the ERO.

3. North American Electric Reliability Corp., 130 FERC ¶ 61,203 (2010) ("March 18 Order").

4. FERC ordered NERC to submit modifications to FAC-008-1 that would require each transmission owner and generation owner to (1) document the underlying assumptions and methods used to determine normal and emergency facility ratings; (2) develop facility ratings consistent with industry standards; and (3) identify, for each facility, the limiting component and, for critical facilities, the resulting increase in rating if that component is no longer limiting.

5. For example, FERC issued a Notice of Proposed Rulemaking on March 18, 2010 proposing to direct NERC to revise its definition of the term "bulk electric system" ("BES") to include all electric transmission facilities with a rating of 100 kV or more. See Revision to Elect. Reliability Org. Definition of Bulk Elec. Sys., 130 FERC ¶ 61,204 (2010). Some stakeholders have objected, stating that this proposal fails to respect Section 215's requirement that FERC defer to NERC on technical matters. Because the question of which facilities are material to the reliability of the BES is a technical question, the parties argue, FERC should not substitute its own judgment and prescriptively direct NERC to adopt a 100 kV threshold for the BES.

6. March 18 Order P 32 n.59.

7. NERC had also requested that the Commission convene a public conference to consider issues pertaining to implementation of Section 215 of the FPA and technical issues related to the directive to modify FAC-008-1. The Commission deemed this request moot due to a reliability conference the Commission held on July 6, 2010, in Docket No. AD10-14-000.

8. See Notice of Extension of Time, Docket No. RR09-6-000 (Aug. 19, 2010).

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