Update on APPA’s FERC Advocacy Activities Susan N. Kelly Vice President, Policy Analysis and General Counsel 2006 APPA Legal Seminar October 2006

The Energy Policy Act of 2005 APPA spent considerable resources in 2005/2006 on comments/rehearings in FERC proceedings implementing various sections of EPAct 2005’s Electricity Title, including: –Reliability –Long-term transmission rights –Transmission rate Incentives –Market manipulation authorities –Backstop transmission siting –PUHCA 2005/Amended FPA Section 203 –FERC-Lite (in context of OATT Reform)

Reliability New FPA Section 215 calls for new electric reliability organization (ERO) to develop and enforce mandatory reliability standards FERC moved swiftly to issue regulations for certification of an ERO, and then to approve (with conditions) NERC’s Application to be the ERO in Docket No. RR on 7/20/06 NERC is submitting compliance filings to address certain “hang over” issues, e.g. governance, and criteria for imposing penalties Still to come: “Delegation Agreements” between NERC and “Regional Entities” (“REs”) that will enforce reliability regime “on the ground”

“Entity Registration” Reliability regime applies to all “users, owners and operators of the bulk-power system” Regime does not apply to distribution facilities Many of our distribution members fall into grey area: they do not own or operate transmission but they could be considered “users”; they also operate under-frequency load shedding relays that could affect reliability of the bulk power system, or own on-site generation NERC and REs currently in process of “registering” those entities they think will be subject to the new reliability regime

Compliance by Agreement APPA/NRECA raised with NERC the idea that JAAs/G&Ts could take on reliability compliance responsibilities for their members NERC has OK’ed this approach, “provided the entity registered accepts the reliability responsibilities through agreement or other mechanisms” Notification sent to Legal List Serv; looking for volunteer attorneys to assist in developing a template “agreement”; have also raised this with NRECA

Mandatory Reliability Standards NERC filed in April 2006 in Docket No. RM over 100 proposed reliability standards (“Version Zero”); later supplemented with new cybersecurity standards FERC took preliminary comments on Version Zero standards this summer; APPA commented Now awaiting full FERC NOPR on reliability standards; APPA is counting on members to assist us in preparing our comments; seeking volunteers for technical work group

Mandatory Regime is Coming By next summer/fall, mandatory reliability standards are scheduled to be in effect Many of our members not currently subject to NERC’s/RE’s current voluntary standards will need to comply with them FERC/NERC will assess monetary penalties for violations; they could be quite substantial Public power must take this very seriously; we are doing everything in our power to make the regime more “user-friendly,” but big changes are in store

Infrastructure Development DOE can designate “national interest electric transmission corridors” under new FPA Section 216(a) after conducting a congestion study FERC can issue construction permit under FPA Section 216(b) for transmission facilities in such corridors if a state does not have authority or withholds approval for more than one year FPA Section 216 could change the siting equation; it is a definite threat to state authority

FERC Siting Regulations FERC issued NOPR in Docket No. RM with proposed regulations to implement FPA Section 216(b); APPA filed comments on 8/25/06; comments are pending FERC proposed extensive pre-filing procedures to flesh out application prior to “real” filing FERC ducked entire question of interrelationship with prior state proceedings: what showing applicants must meet, and timing of federal filing NARUC wants states to control timetable…

APPA Siting Comments Sought clarification as to showing applicants must make to meet Section 217(b)(1) standards Sought ruling that “non-wires” alternatives will not have to be considered multiple times (best dealt with “up front” in planning process) Argued “public interest” showing should be presumed if facilities result from an inclusive regional planning process and/or feature joint ownership by diverse group of Load Serving Entities (LSEs)

Native Load Provisions New FPA Section 217(b) affirms LSEs are entitled to use existing transmission rights (by ownership or contract) to meet their service obligations to native load Section 217 (b)(4) directs FERC to use its FPA authorities to facilitate planning and expansion of transmission to meet needs of LSEs for firm transmission required to support long-term power supply arrangements

Long-Term Transmission Rights EPAct Section 1233(b) deals with Long- Term Transmission Rights (LTTRs) in “organized markets” (read RTOs) Requires FERC to implement LTTRs in RTOs with organized markets through a rulemaking within 1 year of enactment Of great interest to APPA members in RTOs with “Day 2” Markets

FERC LTTR Rulemaking FERC issued NOPR on LTTRs in Docket No. RM ; APPA filed supportive initial and reply comments FERC issued Order No. 681 on July 20, 2006; it generally comported with APPA’s position with two big exceptions: –Expanded preference for LTTRs from LSEs with long- term power supply arrangements to ALL LSEs –Ruled “out of region” LSEs would get no preference in LTTR allocation

LTTR Rehearing APPA sought rehearing of these two issues on 8/21/06, while making clear it otherwise supports the LTTR Final Rule PJM responded to APPA and TAPS rehearings on these points—an unauthorized response APPA and TAPS jointly responded to PJM, moving to strike its pleading but also responding to its opposition; SMUD filed motion to strike Now awaiting FERC action on rehearing, but locus of action is moving to the RTOs as they begin to implement the Final Rule

Transmission Rate Incentives New FPA Section 219 required FERC within one year to establish incentive-based rate treatments for transmission, including rates of return that “attract new investment in transmission facilities” FERC issued NOPR in Docket No. RM APPA filed 1/11/06 comments supporting incentives that reduce risk (e.g., CWIP) but not those that only increase costs (e.g., incentive ROE, accelerated depreciation)

Transmission Rate Incentive Smorgasbord FERC issued its Final Rule in Order No. 681 on 7/20/06 FERC laid out the rate incentive smorgasbord; public utility must meet vague “nexus” test to get an incentive but there is no cost/benefit requirement FERC rejected conditioning of incentives on opportunities for joint transmission ownership; it “encourages” but does not require it

APPA/NRECA Joint Rehearing on Transmission Rate Incentives APPA and NRECA joined forces for 8/25/06 rehearing, although they had filed separate comments Both decried FERC’s lack of restraint in allowing incentives and the consequent adverse impact on consumers’ pocketbooks Asked for incentives to be conditioned on joint planning and joint ownership opportunities Rehearing is now pending

Market Manipulation Prohibition New FPA Section 222 prohibits “any entity” from using any “manipulative or deceptive device or contrivance” in connection with sales or transmission transactions “subject to the jurisdiction of the Commission” FERC promulgated regulation in Docket No. RM ; APPA filed comments Will be covered in later presentation

PUHCA 2005 PUHCA 2005 is a “books and records” statute; FERC can require holding companies and their affiliates to produce data and records needed to review jurisdictional rates FERC implemented in Docket No. RM (Order Nos. 667, et al.); implementation was lackluster and uneven; in Order No B it effectively exempted as “single state holding companies” major entities like FP&L! (APPA and NRECA sought rehearing)

Amended FPA Section 203 EPAct 2005 amended FPA Section 203; allows FERC to review generation acquisitions and to consider cross-subsidization issues in mergers FERC implemented authorities in Docket No. RM (Order Nos. 669 and 669-A) FERC was generous with the blanket authorizations, but stingy with cross- subsidization protections; APPA/NRECA sought rehearing and got a few more teeth added to the showing of no-cross-subsidization in merger cases

FPA Section 211A — “FERC-Lite” New FPA Section 211A gives FERC limited authorities over transmission service provided by larger public power systems (selling more than 4 million MWh per year) FERC can implement by rule or order, or not at all – “may” not “shall” FERC in Docket No. RM has proposed to act case-by-case, at least for now….issue is still pending

OATT Reform NOPR FERC proposing to reform the Order No. 888 Open Access Transmission Tariff (OATT) in Docket No. RM Notice of Inquiry followed by 2006 NOPR; APPA filed Initial Comments on 8/7/06 and Reply Comments on 9/20/06 Technical Conference to be held on 10/12/06; Nick Henery to appear on panel on Available Transfer Capability (ATC)

APPA’s OATT Comments Generally supportive of FERC’s incremental approach to improving tariff Did member survey to get input on many specific questions FERC asked Supported coordinated planning requirement Did not support either conditional firm service or redispatch service Opposed “backdoor” SMD-Lite in reply comments

Market-Based Rates FERC in May 2006 finally issued NOPR in Docket No. RM on its market-based rate (MBR) policy; it proposed to simplify/codify what it has been doing on an interim basis APPA filed initial and reply comments jointly with TAPS on 8/7/06 and 9/20/06 We were generally supportive of FERC’s approach; tried to fend off EEI attacks on generation market power screens, argue for mitigation with real teeth

Reminder re New PURPA Requirements If your system has total calendar year retail sales of electric energy of more than 500 million kw hrs, it must “consider” smart metering, net metering, interconnection of distributed generation under EPAct 2005 Amendments to PURPA Consideration of these standards should already be underway! APPA/NRECA/EEI/NARUC Handbook

The New, Beefed Up FERC As of August 2006, FERC finally back to five members FERC Chairman Joseph Kelliher (R) Commissioner Phil Moeller (R) Commissioner Marc Spitzer (R) Commissioner SueDeen Kelly (D) Commissioner Jon Wellinghoff (D)

What We Are Seeing from This FERC… Closer communication between Hill and FERC Closer attention to the FPA’s legal requirements Abandonment of the prior “RTOs or Bust” transmission policy (but see CAISO MRTU Order) More incremental approach to issues

We Work Best As A Team To do our jobs most effectively, we need to know your systems’ concerns and issues –Participate in APPA’s Listservs (FERC, NERC/NAESB, Legal) –Keep APPA Staff informed of concerns in your regions –There is a wealth of information at www. appanet.org