FERC Issued Order No. 773-A on Rehearing and Clarification of NERC Bulk Electric System Definition and Exceptions Process under Rules of Procedure

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Maximilian Sullivan
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1 To: From: Winston & Strawn Clients Raymond B. Wuslich Roxane E. Maywalt Date: Subject: FERC Issued Order No. 773-A on Rehearing and Clarification of NERC Bulk Electric System Definition and Exceptions Process under Rules of Procedure Revisions to Electric Reliability Organization Definition of Bulk Electric System and Rules of Procedure, Docket Nos. RM and RM In an order issued April 18, 2013, the Federal Energy Regulatory Commission ( FERC or Commission ) denied rehearing in part, granted rehearing in part, and clarified certain provisions of its December 20, 2012, Order No Order No. 773 approved modifications to the then-currently-effective definition of bulk electric system (or BES ) developed by the North American Electric Reliability Corporation ( NERC ), the Commission-certified Electric Reliability Organization. The BES definition approved in Order No. 773 is based on a brightline test of elements that are 100 kv or higher, with lists of Inclusions, such as transformers, certain sizes and types of generators, reactive power systems, and Exclusions, such as local distribution networks and certain radial facilities. Order No. 773 also approved NERC s revisions to its Rules of Procedure creating an Exceptions Process to add elements to, or remove elements from, the bulk electric system on a case-by-case basis and established a process pursuant to which an entity can seek a determination by the Commission whether facilities are used in local distribution as set forth in the Federal Power Act. Following issuance of Order No. 773, several parties requested rehearing or clarification of the Commission s rulings therein, including whether the Commission had adequately supported its approval of the new BES definition with substantial evidence and technical justification of the 100 kv bright-line threshold. The Commission denied rehearing, and affirmed its decision to accept the new BES definition, citing several prior orders and analyses it performed as sufficient evidence and technical justification in support. FERC reaffirmed that determinations for treatment of specific facilities were appropriate for the exceptions process and beyond the scope of the proceeding for approval of the general BES definition. FERC emphasized repeatedly in Order No. 773-A that elements that are newly-included in the bulk electric system due to the revised definition will only become subject to relevant Reliability Standards twenty-four (24) months after the effective date of the revised definition. FERC also emphasized that during the 24-month transition period, NERC expects that entities

2 Page 2 with newly-included elements will file exception requests and the Regional Entities and NERC will make determinations on those exception requests. FERC noted repeatedly that if an element that is already deemed part of the bulk electric system and subject to relevant Reliability Standards today is included by application of the revised definition of bulk electric system, but an entity seeks an exclusion exception of the element, the element will remain subject to the relevant Reliability Standards during the pendency of the exception process. Conversely, if an element is excluded from the bulk electric system by application of the revised definition, but a different entity with a reliability oversight obligation seeks to include the element in the exception process, the element will not be subject to Reliability Standards during the exception process. FERC further denied rehearing of its decision for treatment of looped facility configurations connected below 100 kv and the corresponding directive to NERC to modify the local network exclusion (Exclusion E3 under the BES definition) to remove the 100 kv minimum operating voltage, and its further directive to implement the exclusions for radial systems (Exclusion E1) and local networks (Exclusion E3) so that they do not apply to tie-lines (i.e., generator interconnection facilities) for bulk electric system generators identified in Inclusion I2 (generating resources). In Order No. 773, FERC held that radial systems with elements operating at 100 kv or higher in a configuration that emanate from two or more points of connection cannot be deemed radial if the configuration remains contiguous through elements that are operated below 100 kv. Among others seeking rehearing, NERC argued that FERC s directive to revise Exclusion E3 to remove the phrase or above 100 kv would require burdensome evaluation of significantly more facilities. On rehearing, FERC disagreed with NERC and stated that, in examining a looped network, it is unreasonable to characterize lines as radial by ignoring facilities below 100 kv, and instead that it is reasonable to find these looped configuration lines as non-radial and then consider whether they should be excluded as a local network or through the exception process. FERC found that NERC has the flexibility under the new Exceptions Process to determine which, if any, looped configurations should be excluded from the bulk electric system. NERC also sought rehearing and clarification of the Commission s directives in Order No. 773 to implement Exclusion E1 (radial systems) and Exclusion E3 (local networks) so that they do not apply to generator interconnection facilities for BES generators identified in inclusion I2. NERC was concerned with whether such implementation applies to Phase 1 or Phase 2 (of NERC s standards development process) or how implementation would be effectuated without a change to the definition of bulk electric system, and how this directive is to be reconciled with the plain language of the exclusions. Other parties questioned whether the Commission was seeking to directly modify the definition or the exclusions with respect to generator tie-lines. In Order No. 773-A, FERC granted rehearing and clarified that NERC was being directed to modify Exclusions E1 and E3 to ensure that generator interconnection facilities at or above 100 kv connected to BES generators identified in inclusion I2 are not excluded from the bulk electric system. FERC also stated that the NERC Phase 2 standard development process is an appropriate means to address this directive. FERC denied rehearing on arguments that it did not give due weight on this issue to NERC s technical justification, finding that NERC s DC:

3 Page 3 rationale did not support excluding generator interconnection facilities operated at or above 100 kv connecting BES generators to the bulk electric system and that there were other technical potentialities that could cause an adverse reliability impact from these generator interconnection facilities that NERC did not address. FERC also addressed arguments requesting modifications of the BES definition s Inclusions and Exclusions, as follows: Inclusion I4 (Dispersed Power Producing Resources): American Wind Energy Association argued that FERC s approval of Inclusion I4 was not based on sufficient evidence to show that inclusion of the defined facilities would result in any material reliability benefit. FERC denied rehearing, finding that Inclusion I4 provides useful granularity in the BES definition and was supported by sufficient evidence, agreeing with NERC that this Inclusion s purpose is to include variable generation (e.g., wind and solar resources). FERC found that evidence supported inclusion of these resources because certain geographical areas depend on these generators for the reliable operation of the interconnected transmission network. Generator Thresholds in Exclusions E1 and E3: The City of Holland, Michigan ( Holland ) argued that the generator thresholds in Exclusions E1 and E3 should be modified to ensure that they do not inappropriately include local distribution networks, and to base the limits therein on net generation. Holland also took issue with FERC s conclusion with respect to the meaning of emanates from a single point of interconnection in Exclusion E1. FERC denied rehearing on these issues, finding that NERC s technical expertise sufficiently supported its findings that it was appropriate to subject elements in a radial system to the Reliability Standards where the power generated on that radial system would be delivered to load within that radial system and injected into the bulk electric system in limited quantities. FERC found NERC s explanations for the generator thresholds limitations in Exclusions E1 and E3 reasonable and noted that if an entity believes its facility is a local distribution facility but its facility is not excluded under the BES definition, the entity may apply to the Commission to determine whether a facility is used for local distribution. FERC also denied rehearing on the language regarding facilities emanating from a single point of interconnection, finding that it had previously addressed Holland s arguments in Order No Exclusion E3(b) and Power Flows: Exclusion E3(b) specifies that, to qualify for the local network exclusion, power can only flow into the local network and the local network does not transfer energy originating outside the local network for delivery through the local network. Several parties sought rehearing of this exclusion language, arguing that Exclusion E3 should apply even if some power flowed from the local network to the bulk electric system and that the Commission s interpretation of local network under this Exclusion could subject facilities used in local distribution to FERC jurisdiction. FERC denied the rehearing requests, finding that NERC s explanations for the applicability of Exclusion E3(b) were reasonable and did not result in a presumption that such facilities perform a transmission function. In denying rehearing, FERC reiterated that reversals of power flows from the local network, in any circumstances, even emergency or

4 Page 4 temporary, would not qualify that network under this exclusion, but noted that parties can raise their concerns during Phase 2 of NERC s standards development process. FERC also addressed requests for rehearing on NERC s Exceptions Process and Commission determinations of local distribution. Addressing requests for rehearing as to whether FERC s order results in duplicative processes (i.e., the NERC Exceptions Process and FERC s process for making local distribution determinations) for determining whether certain facilities are part of the bulk electric system, FERC stated that it believed parties misconstrued the function of these two processes and expanded upon how those processes will function. FERC stated that the two processes are separate, not concurrent, and will be used for different determinations. FERC reiterated that the new BES definition together with the Exclusions should provide a reasonable means to accurately and consistently determine on a generic basis whether those facilities are part of the bulk electric system. If, after applying the BES definition and Exclusions, an entity believes its facility is used in local distribution, it must petition FERC for a determination and FERC will apply its Seven Factor test as a starting point for making the determination. FERC noted that this is a distinct process not made in connection with review of NERC exception process decisions. However, if an inquiry does not involve a question of whether a facility is used in local distribution (i.e., whether or not a facility is or is not part of the bulk electric system), those inquiries are to be presented through the NERC Exceptions Process. The Commission also denied several entities arguments on rehearing that the Seven Factor test is not suitable for use in the reliability context, and that state regulatory entities should be involved in the NERC exceptions process, which relies upon the technical expertise of NERC, but noted that state regulators are not excluded from involvement in a Commission proceeding involving a local distribution determination and that NERC Exceptions Process will provide public notice of general information of Exceptions Process requests, allowing third parties, including state regulators, adequate opportunity to provide comments without formally participating in the process. The Commission also addressed rehearing and clarification requests on how a registered entity must inform a Regional Entity that it has excluded an element from the bulk electric system, what process the Regional Entity must use to include a facility if it disagrees with the registered entity s self-declaration that a specific facility is not part of the bulk electric system and whether, if FERC decides on its own to designate an element as part of the bulk electric system, should it consult state regulatory authorities. FERC found that a registered entity must inform the Regional Entity if the registered entity applies the new BES definition and determines an element is not part of the bulk electric system, unless NERC disagrees, and if the Regional Entity disagrees, it must file an Exceptions request to NERC seeking to include the element. FERC denied rehearing on the question of whether FERC must consult state regulatory authorities when FERC elects to designate an element as part of the bulk electric system, finding that there was insufficient support for parties arguments that state regulators should have a greater role that is already provided to all interested parties through notice and an opportunity for comment.

5 Page 5 Finally, FERC denied clarification of the term non-retail generation used in Exclusion E3, finding that the phrase is sufficiently clear, but noting that entities make pursue further clarification from NERC, such as during NERC s Phase 2 project.

BES Definition Implementation Guidance

BES Definition Implementation Guidance August 25, 2014 3353 Peachtree Road NE Suite 600, North Tower Atlanta, GA 30326 NERC BES Definition Implementation Guidance June 23, 2014 404-446-2560 www.nerc.com