FERC Leaves a Sugarplum for Reliability Compliance, Adopts NERC "Bulk Electric System" Definition

December 22, 2012

While the Federal Energy Regulatory Commission at its December meeting put Bonneville Power Administration on the "naughty" list, it awarded the North American Electric Reliability Corporation's ("NERC") industry-led "Bulk Electric System" Standards Drafting Team a place on the "nice" list. On December 20, FERC issued Order No. 773, which adopts a new definition of "Bulk Electric System." The new definition is fundamental to FERC's electric reliability enforcement regime because FERC's mandatory enforcement authority is limited by statute to elements of the "Bulk Electric System." In addition, Order No. 773 adds a couple of stocking-stuffers for the industry in the form of new procedures for regulated entities seeking to reduce their compliance burdens by excluding systems or elements from the Bulk Electric System.

As we have previously explained in greater detail, for several years after Congress adopted a mandatory electric reliability requirement in 2005, FERC relied on the pre-existing definition of "Bulk Electric System," despite its ambiguity. In March, 2010, however, FERC reversed course, proposing a new definition of "Bulk Electric System" that would classify all elements rated at 100 kV or above as "Bulk Electric System" with very limited exceptions. FERC's unexpected move provoked a fierce backlash from all sectors of the industry. In response, FERC again changed course, this time ordering NERC to develop a new Bulk Electric System definition using the NERC standards development process.

In response, NERC formed the BES Standards Development Team which conducted a standards development process over the course of 2011. Utilities from across the country, including a large coalition of public power entities from the West, devoted a great deal of time and talent to developing a workable "Bulk Electric System" definition. These efforts culminated in a revised "Bulk Electric System" submitted by the Standards Drafting Team for approval by FERC in January of this year. The new definition starts with a 100-kV threshold, but adds several specific inclusions and exclusions. For example, exclusions for "Local Networks" and radial systems will cover most local distribution systems, allowing them to escape the considerably more burdensome reliability requirements that would apply if they are classified as part of the Bulk Electric System. The NERC proposal also includes an "Exceptions" process that allows case-by-case variations from the Bulk Electric System definition based upon system-specific technical information.

In this week's order, FERC adopts the Bulk Electric System definition as proposed by the NERC Standards Drafting Team. This should come as a great relief to many in the industry because, in a Notice of Proposed Rulemaking issued earlier this year, FERC expressed considerable skepticism about the NERC proposal.

While adopting the substance of the Bulk Electric System definition, FERC added three procedural mechanisms worth noting. First, FERC specified that, as a matter of its authority to define its own jurisdiction, entities claiming that a system is excluded from the Bulk Electric System because the system is "used for local distribution of electric power" are to petition FERC directly, rather than petitioning their regional reliability organization. In making this determination, FERC will rely on existing precedent defining "local distribution" under the Federal Power Act, including the "seven-factor test" first developed in Order No. 888 to define the boundaries of FERC's open-access regime for electric transmission. The order is maddeningly short on details of how this process is intended to work. However, it appears that an entity claiming that its system is excluded from the Bulk Electric System by virtue of its function as local distribution must petition FERC directly. On the other hand, an entity claiming that its system should be excluded from the Bulk Electric System because it has no impact on the reliable operation of the bulk transmission system must petition its regional reliability entity using the Exceptions process.

The second important procedural mechanism set forth in Order No. 773 makes clear that regulated entities may exclude specific elements from the Bulk Electric System (as opposed to full systems) simply by notifying their regional reliability entity that an element is excluded. In this way, entities should be able to reduce their compliance burdens by removing specific lines, substations, and the like from the Bulk Electric System, even if they cannot justify an across-the-board change in their functional registration.

The third procedural refinement contained in Order No. 773 may prove to be the most problematic element of the order. In this portion of the order, FERC specifies that it may unilaterally direct specific elements to be included in the Bulk Electric System. Most in the industry argued that FERC should, where it is concerned that an important element has been improperly, direct the relevant regional entity to determine whether the element should be included in the Bulk Electric System. FERC's claim of unilateral power relies on a strained statutory interpretation and risks the same kind of industry backlash that greeted its March 2010 order.

If you have any questions about the FERC or the reliability compliance matters discussed here or other matters related to the utility industry, resource development, or FERC, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have years of experience in FERC and BPA matters, the Northwest's energy industry, complex administrative matters, appellate litigation, and related fields.