2. Reliability and the Market Place Perfect Together The Transition from NERC to NAERO Baltics Working Group June 6, 2001 Princeton, NJ The Transition from NERC to NAERO Baltics Working Group June 6, 2001 Princeton, NJ

3. Regional Councils

4.  Northeast Blackout November 9, 1965  Industry creates voluntary organization (NERC) to promote reliability of bulk power systems  10 Regional Councils are members  Set standards for operating and planning  Compliance with standards is MANDATORY, but not ENFORCEABLE NERC History

5. What Has Changed?  More players, more transactions  1995 - 20,000 transactions, 1999 - 2,000,000 transactions  Transmission everywhere loaded  Economic pressure to bend reliability rules  Totally unacceptable behavior unpunished!

6. Loss of system control  Many CAs not confirming with the Sending Control Area, only with their neighbors  Notification takes 10 -20 minutes where it once took 1-3 minutes  Confirming only net schedules  Remember when - firm and non-firm?  1st question - Who’s going to pay for it?  3 options - curtail, redispatch, shed load

7. Transmission not keeping pace  Loadings increasing  More long-distance transfers – weather and $$  More curtailments required  Not designed for current levels and directions of transfers  Less wire – more special devices

8. More Transmission Congestion  Networks are being over subscribed  Increase in the number of curtailments required  Some areas managing congestion, but not much transmission being built

9. Transmission vs. Generation and Demand Growth 18% Increase 5% Increase

10. Market-Reliability Interface  Difficult to separate Reliability from Market Practices  Must consider impact of reliability standards on markets, and …  Impacts of market practices on reliability

11. Future Role of NERC Study - 1997  Conditions changing  Can no longer rely on voluntary system of compliance  Assembled “Blue Ribbon Panel” of experts for recommendations

12. Electric Reliability Panel’s Guiding Propositions  “A new electric oversight system is needed.”  “Essential competencies should be preserved.”

13. NAERO Concepts Coordinated Grant of Authority Delegation of authority to implement Assure obligations to government Participation by stakeholders, interested parties, and the public U.S. Mexico Canada Self-Regulating Reliability Organization RROs

14. Membership Principles  “MUST” Belong to NAERO: –System operator organizations  “MAY” Join NAERO: –Entities with direct physical or commercial interactions (including customers) –Public interest groups –Regulators - State, Provincial and Federal

15. Organization  10-member independent board  3 Standing Committees (33)  Operating  Planning  Market Interface  Stakeholders Committee (36)  Technical staff (40)

16. NAERO Committees Standards Process Coordinator (Staff) Market Interface Committee Operating Committee Adequacy (Planning) Committee Compliance Enforcement Program BOARD Stakeholders Committee

17. Market Interface Committee  Address reliability standards from commercial perspective  Address impacts of new and evolving market practices on reliability  Commercial standards by others

18. Operating Committee  Develop Operating Standards –Ensure security or short-term reliability of interconnected systems  Retain several functions of former Operating Committee 7:007:207:40 8:00 100 MW

19. Operating Policies 1. Generation Control and Performance 2. Transmission 3. Interchange 4. System Coordination 5. Emergency Operations 6. Operations Planning 7. Telecommunications 8. Operator Personnel and Training 9. Security Coordinator Procedures

20. www.nerc.com/~/oc/opermanl.html

21. Planning Committee  Develop Planning Standards –Ensure reliability of interconnected systems  Assess and report on long-term adequacy  Retain several functions of former Engineering Committee

22. Planning Standards I. System Adequacy and Security II. System Modeling and Data Requirements III. System Protection and Control IV. System Restoration

23. Compliance Enforcement Program  Separate and independent from Standing Committees  Three key functions: –Compliance review process –Enforcement process (including a penalty structure) –System Operator Certification Process

24. Compliance Program  Monitoring compliance with NERC and Regional Standards  Being implemented in phases  Reporting results to Regions  No penalties or sanctions  Regions carry out 80% of program

25. Reliability Standards  “Rules of the Road” for operating and planning reliable interconnected bulk power systems  Supply and demand balance in real time  1 st contingency operation  Future systems able to meet prescribed simulated performance tests

26. Reliability Standards and Implementation Practices Core Reliability Standards Reliability Implementation Practices Market-Reliability Interface Practices Market Practices

27. New Standards Process  Open, public process  Involves 1,000s from all sectors of the industry  3 standing committees approve standards before going to Board  Process to be accredited by ANSI  Field testing before implementation  Board to approve in October 2001

28. New Reliability Model  Based on “functions” instead of organizations  Security Authority  Balancing Authority  Interchange Authority  Transmission Provider  Board to approve in June 2001  Transition to new “Organization Standards” over next several years

29. Why is Reliability Model needed today?  The Control Area is no longer the basic operating organization  NERC Operating Policies do not reflect the new organizations or merchant functions that are forming  Need to define the basic functions and “roll up” into organizations ISOs RTOs Transcos Security Balancing Interchange Transmission

30. Defining Reliability Functions Control Area

31. NERC Organization Security Authority Generator Transmission Service Provider Load-Serving Entity Purchasing- Selling Entity Operating Functions Interchange Authority Compliance Monitor Balancing Authority Transmission Owner Transmission Operator Distribution Provider Service Functions Standard Setting Security Merchant Functions Merchant Function Independent Function Reliability Model

32. Relationship between NAERO and RTOs  NAERO sets and enforces rules for reliable operation  RTOs are critical stakeholders  RTOs perform control area functions  RTOs perform security coordinator functions  RTOs may or may not be affiliated regional reliability entities

33. Rolling Up into Organizations RTO1 Security Authority Transmission Service Provider

34. Rolling Up into Organizations RTO2 Security Authority Transmission Service Provider Balancing Authority Interchange Authority

35. Rolling Up into Organizations Control Area Balancing Authority Interchange Authority

36. Reliability Legislation  Legislative language approved by NERC Board February 1999 (43-2)  Introduced as part of comprehensive electric restructuring legislation in first session of 106 th Congress - 1999  Introduced as stand alone reliability legislation in 2000  Passed by Senate in June, but died “at the desk” in the House

37. Transition Plan  NERC will aggressively pursue legislation  Look to industry CEOs for help  But can’t wait for legislation  Increasing violations of rules  Rules are already “mandatory” but must be made “enforceable”  NERC must continue to evolve

38. Plan B  Approved by Board on March 30, 2001  Governance by 10-member independent board  Create new Stakeholders Committee  Compliance-by-contract model  New funding principles

39. Compliance Agreement  Agreement among NERC and Regional Councils  Signed by 7 Regions so far  Start with 3 NERC Standards – CPS1, CPS2, and DCS  Compliance Agreement Participants Group

40. Sanctions Matrix  Based on level of non compliance and number of occurrences  Progressive sanctions  Letters to CEOs  Letters to regulators  Financial penalties  Maximum is greater of $10,000 or $10/MW