Eric Christensen Publishes Article on Reducing NERC-WECC Regulatory Burdens in February Northwest Public Power Association Bulletin

February 13, 2013

Eric Christensen published an article in this month's Northwest Public Power Bulletin entitled "Electric Reliability and the Bulk Electric System Definition: Next Steps for Reducing Regulatory Burdens." The article is a follow-on to the article he published in the November 2012 Bulletin concerning the development of the keystone "Bulk Electric System" definition. We've reprinted the new article here:

ELECTRIC RELIABILITY AND THE "BULK ELECTRIC SYSTEM" DEFINITION:
NEXT STEPS FOR REDUCING REGULATORY BURDENS

By
Eric Christensen, Partner
Gordon Thomas Honeywell

On December 20, the Federal Energy Regulatory Commission ("FERC") issued Order No. 773, adopting a new "Bulk Electric System" ("BES") definition. The BES definition is foundational to FERC's reliability regime because it defines the universe of facilities over which FERC can exercise its reliability authority. Order No. 773 also includes new procedural tools for public power utilities seeking to reduce their reliability compliance burdens. The order represents a major victory for public power, but, to obtain its full benefits, utilities should consider additional steps. This article outlines the major options now available.

As reported in the November 2012 Bulletin, Order No. 773 culminates two years of work by the NERC Standards Drafting Team, with strong participation of Western public power coordinated through NWPPA, to develop a rational and workable BES definition. The new definition, developed with what FERC Commissioner Lafleur describes as "creativity and care," initially defines facilities operating above 100-kV as BES, but then refines this "core definition" with "a thoughtful and nuanced list of specifically included and excluded facilities, and an exception process to add or remove specific facilities." The new BES definition is a huge improvement over the disastrous approach originally proposed by FERC. As Commissioner LeFleur observed, the BES definition "illustrates the success" of FERC's "new paradigm" for reliability standards development, which employs NERC's industry-centered process rather than "unduly prescriptive" FERC mandates, to find the most efficient and effective solutions for meeting reliability goals.

NEW OPTIONS FOR PUBLIC POWER

Under Order No. 773 and existing NERC rules, public power agencies now have several options for reducing reliability compliance burdens. Choosing the best options will depend on each utility's specific circumstances. The available procedures include:

1. Phase II of the BES Definition Standards Development Process.
As it developed the new BES definition, the Standards Drafting Team identified many issues that could not be resolved in the limited time allowed by FERC. These issues were deferred to Phase II of the standards drafting process, which is now underway. Phase II will examine several questions of great importance to public power and refine the BES definition accordingly. These questions include, for example, how the new definition will affect functional registrations, the technical justification for the 100-kV threshold in the "core" definition, the appropriate capacity thresholds for classifying generators as BES, and the points of demarcation between BES and non-BES facilities. Western public power agencies should focus as closely on Phase II as they did on Phase I, and NWPPA should continue its critical coordination function.

2. Petition for Deregistration.
Entities are responsible for complying with reliability standards based on their registration in one or more of fifteen NERC-defined functional categories, ranging from "Distribution Provider" to "Balancing Authority." In the West, the initial registration process generally assumed a very broad definition of the BES, with the result that many purely local distribution utilities were inappropriately registered as Transmission Owners, Transmission Operators, or under other functions that assume ownership of BES facilities. If the new BES definition means that a utility no longer owns or operates BES facilities, the utility can, on the strength of the new BES definition, file a Petition for Deregistration with WECC seeking to deregister from transmission-related functions (e.g., "Transmission Owner" and "Transmission Operator") .


3. Exceptions Process.
In addition to approving the BES definition, Order No. 773 approved a new "Exception Process," which allows utilities inappropriately categorized as BES under the definition to file an "Exception Request." If the utility can demonstrate, based on technical studies, that its facilities are "not necessary for the Reliable Operation of the interconnected bulk-power transmission system," NERC will reclassify the facilities as non-BES. If the utility successfully pursues an Exception Request, it may then be able to deregister from transmission-related functions. The Exception Process can also be used to demonstrate that specific utility-owned facilities are non-BES, thereby removing those facilities from the obligation to comply with BES-related reliability standards.

4. Petition for Declaration That A System is "Used for Local Distribution."
In the most surprising aspect of Order No. 773, FERC imposed a new procedure requiring owners of local distribution facilities to petition FERC directly if they believe their facilities are "used in the local distribution of electric energy," and are therefore excluded from the BES under Section 215(a)(1) of the Federal Power Act. In making this determination, FERC will focus on the function of the system, in contrast to the system's material reliability impacts that would be examined in an Exception process. FERC will use, among other factors, the "Seven Factor Test," developed in the 1990s to distinguish local distribution from transmission as traditional industry structures were changing. This procedure gives local distribution utilities a chance to escape BES classification even if they cannot do so under the BES definition or the Exception process. The procedural path is likely to be less time-consuming and expensive than the Exception process because utilities can petition FERC directly rather than having to go first to WECC and NERC, and the issues to be resolved by FERC are likely to be less technical and fact-intensive than in the Exception process.

5. Facility-Specific Notification to WECC.
In addition, Order No. 773 allows a utility to notify WECC if it determines that specific facilities it owns are no longer classified as BES under the new BES definition. The procedure is simple - nothing more than a notification is required. Reclassification in this manner could significantly reduce a utility's compliance burden because removing facilities from the BES will reduce or eliminate the obligation to comply with reliability standards applicable to BES owner/operators.

6. Standard-by-Standard Negotiation.
Following earlier FERC precedent, Order No. 773 FERC invites utilities to bargain with NERC for exemption from reliability standards that do not make sense in a utility's specific circumstances, which could substantially reduce compliance burdens. NWPPA could serve a valuable function in this regard by organizing a group of its members to analyze and develop a list of reliability standards that should not apply to specific types of utilities (i.e, full-requirements customers of Bonneville Power Administration, utilities with no scheduling function) and assist in helping members seek exemptions from unnecessary requirements.

7. Agreed Transfer of Responsibilities.
Finally, individual utilities may be able to transfer compliance obligations to other entities by agreement. NERC rules allow reliability obligations to be transferred to, for example, joint action agencies, G&T cooperatives, or other entities with appropriate functional registrations. A utility transferring compliance responsibilities in this way could deregister from specific functions, or even completely deregister. NWPPA could render assistance in this area by, for example, exploring whether economies of scale can be achieved by transferring compliance responsibilities to a joint entity or negotiating with Bonneville Power Administration to take responsibility for its customers' transmission-related compliance obligations.

CONCLUSION
After Order No. 773, public power managers interested in reducing the cost of reliability compliance can choose from a menu of options. In making this choice, managers will need to carefully evaluate the specific circumstances of their utility. But Order No. 773 substantially increases the chances that meaningful reductions in compliance obligations can be achieved by NWPPA members.