MEMORANDUM

TO: Regulatory Affairs Committee
       Power Marketers Working Group
       Legislative Affairs Committee

FROM: Jim Steffes, Regulatory Affairs Committee Chair
            Bob Reilley, Power Marketers Working Group Chair
            Scott Weiner, Legislative Affairs Committee Chair
            Mark Bennett, Senior Manager of Policy
            Donn Salvosa, Manager of Government Affairs

DATE: August 16, 2001

RE: Reliability Legislation

We are providing you with this memo to provide some information and perspective on the important issues relating to federal legislation in advance of our August 20th joint Regulatory Affairs and Legislative Affairs meeting on reliability legislation.

Reliability Legislation

S. 2071

S. 2071, sponsored by Sen. Slade Gorton (R-WA), was approved by the Senate in the last Congress.  The House of Representatives did not act on the bill.  S. 2071 represents the only consensus bill to be approved by either chamber.  

This legislation would establish a national electric reliability organization (ERO) with the authority to establish and enforce mandatory reliability standards.  

FERC would have primary jurisdiction over:

? the electric reliability organization (ERO);

? all Affiliated Regional Reliability Entities (entities to which authority would 
  be delegated to enforce compliance with reliability standards); 

? all system operators; and 

? all users of the bulk-power system. 

The bill prescribes procedural guidelines for FERC approval of applications competing for status as the ERO and ERO standards. It would also require all users of the transmission system to comply with such standards.

What causes us some concern are a number of provisions in the legislation that would delegate authority to different entities.  The bill would:

? Allow the ERO, subject to FERC approval, to delegate authority to a 
  requesting regional entity to implement and enforce compliance with 
  standards.  

? Include a broad savings clause which preserves state authority to "ensure 
  the safety, adequacy and reliability of electric service within each state." 

? Not ensure that the boundaries of ARREs and RTOs are the same, 
  although it would instruct ARREs to cooperate with RTOs to ensure 
  enforcement of standards. 

A similar bill - H.R. 2602 - was introduced in the House last session by Rep. Albert Wynn (D-MD). No action was taken on this bill.  The same language is included in the comprehensive energy bill introduced by Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM).  

Other Developments
 
Last year, in response to failed attempts by the Congress to pass comprehensive electricity legislation, a number of groups headed by NERC, sent a letter to House Speaker J. Dennis Hastert (R-IL), calling for the passage of stand alone reliability legislation.  The letter is attached.  A number of groups, including public power groups, the California ISO, Edison Electric Institute, NARUC and the National Rural Electric Cooperative Association all signed the letter.  

EPSA was strongly pressured to sign the letter to add more weight and credibility to the effort.  However, we did not sign the letter.  While we stated that we did not oppose the letter, EPSA's position at the time was the advocacy for comprehensive federal legislation. 

Last month, a number of groups with interests in reliability legislation met in Washington in an attempt to forge an agreement on legislation that can be supported by industry stakeholders.  Efforts were made to shorten the existing legislation similar to the bill introduced by Rep. Albert Wynn without changing the intent of provisions in the language.  In addition to EPSA, other groups in attendance included NARUC, the Pennsylvania PUC, Entergy, PJM , Public Power Groups, Consumer Groups, ELCON, Mirant and Enron.  The meeting produced a realization among the participants on the wide difference of opinions on how best to proceed.  The state PUCs lobbied for a continued state role in reliability language.  Entergy supported the original language contained in the Bingaman bill.  Still, a number of other groups favored the shorter PJM version.  

PJM Proposal

PJM recently circulated condensed reliability language.  The 4-page bill would give enforcement authority to FERC.  If you would like a copy faxed to you, please contact Michael Reddy (mreddy@epsa.org) at EPSA.  Additionally, FERC would establish reliability standards and will maintain primary jurisdiction.  FERC would designate a national reliability entity composed of a number of regional entities for the purpose of developing reliability standards for the transmission system.  

Some concerns over the PJM language include:

? Formation of regional entities that would be a "bottoms up" organization. 
  These entities would have no regard to how they conform with RTOs. 

? Reliability standards would be developed as voluntary consensus 
  standards

? The regions and the national entity would be on equal ground.

Revised NERC language

Just last Thursday NERC convened another meeting for the purposes of attempting to shorten the original NERC language.  Working off of the language found in the Wynn bill, the new language was shortened to 16 pages.  The red-lined version is attached.  Among the noteworthy changes:

? p. 6, applications for approval to become the ERO, strikes language to 
  specify funding mechanisms and requirements.  

? p. 13, changes in filings of funding and funding procedures, language 
  deleted on specifics on changes to funding.

? p. 21, additional language added to state that neither the ERO nor FERC 
  will have the authority to order construction of additional generation or 
  transmission if it determines a need.

? p. 22, language on coordination with RTOs deleted.

Status and Prospects of Legislation

The Republican House and the leadership of the House Energy and Commerce Committee, chaired by Rep. W.J. "Billy" Tauzin (R-LA) and Subcommittee on Energy and Air Quality Chairman Joe Barton (R-TX) has maintained the position that electricity should be addressed in a comprehensive fashion.  This is a continuation of the position held by Former House Commerce Chairman Tom Bliley (R-VA).   Staff for Chairman Tauzin are in the process of developing electricity provisions during the August recess.  It is likely that one of the titles will be on reliability.   

The Senate, with its recent switch in control, remains uncertain on the overall view of stand alone reliability legislation.  In its present version, Senate Energy Chairman Bingaman's bill contains the same reliability provisions found in the Wynn bill.  Chairman Bingaman also plans to markup legislation in the Fall.  

Regulatory/NERC/GISB Developments

While the timing and details of reliability legislation remain uncertain, NERC has continued its effort to transition to NAERO.  When first envisioned several years ago, the legislative objective was to establish NAERO as a self-regulatory organization with authority to enforce mandatory reliability standards.  Legislative delays, however, led the NERC Board to take unilateral steps to advance the transition, beginning with its governance structure. 

Last February, the 38 member board was replaced by a new board of ten independent board members.  Members of the former board then were reconstituted as the new Stakeholder Committee with an advisory role, in addition to authority to participate in funding, board member changes and a few other general matters.  Also, the board implemented a compliance program based upon contracts to be executed by the Regional Reliability Councils.  Funding for NERC, presently administered by the regions, remains an extremely problematic, open question, as is the continued dominance of transmission providers in the current NERC Standing Committee voting structure.

The GISB proposal to include a wholesale electric quadrant in the new Energy Industry Standards Board (EISB) has provided an alternative that didn't exist at the time the NAERO concept, and related legislative effort, began.  The EISB model, which would combine the development of gas and electric retail and wholesale standards, initially viewed as a remote prospect when it was floated in early 2000, has gained substantial momentum.  

During FERC's June 19th technical conference on Function 8 and interregional coordination, the Commissioners compared the circumstances in the gas industry that led to the formation of GISB with those of the electric industry today.  In separate letters to GISB Executive Director Rae McQuade dated August 13th, Commissioners Massey, Wood and Brownell observed the need to develop uniform rules and standards and expressed enthusiastic support for a new EISB to do it.  Those letters were distributed during an industry conference hosted by the Department of Energy (DOE) on August 14 - 15th, further contributing to the credibility of the EISB proposal.

Meanwhile, the pressure that the EISB proposal is generating clearly appears to have become part of the overall context for NERC's reform effort, as well as the reliability legislation.  A task force set up by the NERC Stakeholder Committee is reviewing how to make the three Standing Committees more "open and inclusive," including possible recommendations to change the voting structure from the current 50/50 (transmission provider/transmission customer) to a sector approach.  The NERC board may receive those recommendations, and other possible NERC reforms, including a new Organization Standards Process, when it meets in October.  

The effort to launch an EISB is expected to come to a head when the GISB board meets on September 19th.  There are indications that the board will approve going forward with the proposal.  Such action would considerably raise the stakes for the NERC board, and present challenging issues regarding how to set up the voting sectors within the wholesale electric quadrant.  

Additionally, the industry will need to consider how to more precisely define the types of standards the new organization would develop.  The emergence of a new EISB, if it occurs, could potentially diverge from legislation that presumes that NERC/NAERO will be the only standard setting organization.  Granting a new NAERO authority over "reliability" will beg serious questions regarding its scope of activities, and create the specter of multiple organizations that many hope to avoid.