Agreement with Arizona Public Service Company Suggests More to Come
On July 7, 2014, the Federal Energy Regulatory Commission (FERC) issued the first, but likely not the last, Enforcement Order addressing the events of the September 8, 2011 Southwest Regional Blackout. As described by the Commission in its new release, “[t]he agreement marks the first settlement stemming from the FERC-[North American Electric Reliability Corporation (NERC)] joint investigation into the outage, which left more than 5 million people in Southern California, Arizona and Baja California, Mexico without power for up to 12 hours.” The Order approves a Stipulation and Consent Agreement between FERC Enforcement, NERC, and Arizona Public Service Company (APS) and assesses a $3.25 million civil penalty, $1.25 million of which is in the form of an offset for the cost of remediation and mitigation under the Agreement. See Arizona Public Service Company, 148 FERC ¶ 61,009 (2014) (Order). In describing the events in the Southwest on September 8, 2011, the Commission identifies a series of cascading failures that lead to outages that began with a three-phase fault which led to the loss of APS’ Hassayampa-N.Gila 500kV transmission line (H-NG). The H-NG line is part of the Southwest Power Link (SWPL), which is a major transmission corridor transporting power east-west from generators in Arizona, through the Imperial Irrigation District (IID), into Southern California. The failure of the H-NG line rendered the SWPL ineffective and resulted in the re-distribution of power throughout the Pacific Southwest and Southern California. Ultimately, approximately 2.7 million customers were without power, some for multiple hours extending into the next day.
Following the outage, FERC and NERC announced a joint inquiry into the event, to determine why the outage occurred and to make recommendations regarding ways to prevent future, similar outages. On May 1, 2012, the inquiry team published its report Arizona-Southern California Outages on September 8, 2011, Causes and Recommendations (Report) discussing the causes of the cascading outages. The Report provides a detailed timeline and sequence of the events on September 8, 2011 and makes 27 recommendations related to next-day planning, seasonal planning, near and long-term planning, situational awareness, consideration of bulk electric system equipment, System Operating Limits (SOLs) and Interconnection Reliability Limits (IROLs), and protection systems.
The Report became the basis upon which FERC Enforcement and NERC initiated several non-public investigations of entities, including the investigation of APS that lead to the July 7 Order Approving Stipulation and Agreement.
The July 7 Order relays findings by FERC Enforcement and NERC that APS violated NERC Reliability Standard TOP-002-2a, R4, R6 and 11. These requirements governed Normal Operations Planning and applied to the Balancing Authority, Transmission Operator, Generator Operator, Load Serving Entity and Transmission provider functions. R4 required that each Balancing Authority and Transmission Operator coordinate (where confidentiality agreements allowed) its current-day, next-day, and seasonal planning and operations with neighboring Balancing Authorities and Transmission Operators and with its Reliability Coordinator, so that normal Interconnection operation could proceed in an orderly and consistent manner.
R6 required that each Balancing Authority and Transmission Operator plan to meet unscheduled changes in system configuration and generation dispatch (at a minimum N-1 Contingency planning) in accordance with NERC, Regional Reliability Organization, subregional, and local reliability requirements.
R11 required that the Transmission Operator perform seasonal, next-day, and current-day Bulk Electric System studies to determine SOLs. Neighboring Transmission Operators were required to utilize identical SOLs for common facilities. The Transmission Operator was required to update these Bulk Electric System studies as necessary to reflect current system conditions; and make the results of Bulk Electric System studies available to the Transmission Operators, Balancing Authorities (subject to confidentiality requirements), and to its Reliability Coordinator. Of note, since the September 2011 Event, in a subsequent version of TOP-002 (TOP-002-2.1b), NERC and FERC adopted an interpretation of R11, which attempts to clarify that a Transmission Operator need not generate a “unique” study each day, that the requirement does not mandate any particular type of study, and that the Transmission Operator has discretion regarding when to look for new SOLs and when to rely on existing SOLs.
FERC Enforcement staff and NERC found that APS violated TOP-002-2a R4 by failing to perform a unique next-day study for September 8, 2011 (or to properly assess whether a unique next-day study was required based on current system conditions) and by failing to coordinate its next-day studies with neighboring Transmission Operators, including the IID and the California ISO. APS violated TOP-002-2a R6 by failing to adequately plan for unscheduled changes in system configuration, specifically following the loss of the H-NG, and it violated TOP-002-2a R11 by failing to perform a unique next-day study or current day study for September 8, 2011 (or to properly assess whether a unique next-day or current-day study was required based on current system conditions) to correctly determine SOLs.
The Order and Agreement also find that APS violated TOP-008-1, R2.. R2 requires each Transmission Operator to operate to prevent the likelihood that a disturbance, action, or inaction will result in an IROL or SOL violation in its area or another area of the Interconnection. In instances where there is a difference in derived operating limits, the Standard requires that the Transmission Operator always operate the Bulk Electric System to the most limiting parameter. FERC Enforcement and NERC found that APS violated TOP-008-1 R2 by not operating in a manner to prevent the likelihood that a disturbance would result in IROL or SOL violations.
The Stipulation Agreement outlines in greater detail the impact of the outage and FERC Enforcement Staff’s and NERC’s finding that the violations undermined the reliability of the Bulk Power System and contributed to the September 8 outage.
Among the mitigation measures included in the Agreement is APS’ commitment to coordinate with other entities on Seasonal, Next-day and Current-day planning and to report any difficulties in obtaining the necessary data from other entities to support the coordination commitment to both FERC Enforcement and to NERC. The $2.0 million portion of civil penalty that will not be abated is to be paid to the U.S. Treasury and to NERC divided in equal amounts. The additional $1.25 million will be abated through investments in reliability enhancements APS has already begun and are expected to exceed greatly the $1.25 million credit APS will receive. APS will also provide semi-annual reports to FERC Enforcement and to NERC for one year following the effective date of the Agreement.
Aside from this being the first settlement stemming from the September 2011 Southwest Blackout Inquiry, there are a number of interesting observations to be drawn from this settlement — particularly for entities not directly involved in the event or the FERC/NERC inquiry:
- Timing – This settlement comes three years after the event, and just over two years after FERC and NERC concluded their inquiry in the Report. Much like recent FERC-led reliability audits that we’ve reported on1, the issuance of a staff report on a compliance inquiry by NERC and FERC does not provide any conclusive determination of whether any possible or alleged violations of NERC Reliability Standards have occurred. As explained in the Report on this event,
The purpose of the inquiry was not to determine whether there may have been violations of applicable regulations, requirements, or standards subject to the Commission’s jurisdiction. Thus, while this report describes conduct which may warrant future investigations under Part 1b of the Commission’s regulations, or actions by NERC under its Compliance Monitoring and Enforcement Program, it draws no conclusions about whether violations occurred.
Report at 10 (footnotes omitted). Apparently, while NERC and FERC provided its Report within a few months of the event and while FERC issued a notice alleged violations identifying several other entities (CAISO, IID, SCE, WAPA, and WECC) that may be subject to penalties arising out of this event, several years may elapse from the time an event occurs to the time when the full extent of the possible violations of NERC Reliability Standards arising out of the event are ultimately revealed.
- Description of the Facts – Although the description of the event in the Report, Stipulation and Consent Agreement, and Order is quite extensive, there is only a single paragraph describing APS’s role in the event. When compared to other settlements reached with FERC and NERC involving NERC Reliability Standards, this settlement falls in the middle in terms of the level of detail disclosed about the conduct FERC and NERC find in violation of the NERC Reliabiltiy Standards. This settlement is more detailed than the settlement reached with Florida Power & Light Co. in Docket No. IN08-5-000, which did not identify the specific Reliability Standards that were alleged to have been violated. However, this settlement is far less detailed than the settlement reached with PacifiCorp in Docket No. IN11-6-000, which included more than 10 pages describing PacifiCorp’s conduct.
- Application of the Penalty Guidelines – There is little guidance in the Stipulation and Consent Agreement or the Order on how FERC applied its Penalty Guideline (or how NERC applied its Sanction Guideline) in this case to arrive at the $2 million civil penalty or the $1.25 million in required reliability enhancements. The Order generally references APS’s “prior history of violations,” its “full cooperation during the course of the investigation,” its willingness to “avoid a trial-type hearing,” and its “effective compliance program,” but the Commission does not explain the extent to which these factors mitigated the potential penalties, nor does it explain how serious these violations are relative to others.
- Compliance Culture – Despite the lack of any precise description of how FERC and NERC derived the penalty amounts, the Stipulation and Consent Agreement does provide fairly specific guidance on what FERC and NERC found favorable about APS’s culture of compliance. APS was the first entity involved in the September 2011 blackout that attempted to settle potential violations without litigation. APS also voluntarily made improvements in its planning and operating procedures in response to the Report, including improvements to its switching procedures, to its communications with other transmission operators, and to its situational awareness.
- Effective Compliance Program – The Stipulation and Consent Agreement also noted specific aspects of the APS compliance program that FERC and NERC staffs found effective: dedicated staff; regular executive-level committee oversight; direct access to APS’s CEO and APS’s parent company’s board of directors; required review by all lines of business of policies, standards, procedures and guidelines to reflect changes in NERC Reliability Standards; regular compliance training of new employees and subject matter experts; annual certifications of compliance by subject matter experts; and a written program document that addresses risk assessment, controls, and development of compliance evidence. The Stipulation and Consent Agreement describes these as “criteria for an effective compliance program,” and registered entities should take note of this guidance.
- Other Unalleged Violations? – The description of the mitigation activities in the Stipulation and Consent Agreement appear to reveal other violations that the FERC and NERC staffs might have pursued in this case but decided not to assert. Aside from the operational planning issues for which FERC and NERC alleged violations, the Stipulation and Consent Agreement reflects mitigation measures related to long term planning, emergency operations, relay loadability, voltage control and modeling. It is unusual for a settlement to provide for mitigation measures that are unrelated to the alleged violations upon which the penalty was based. Whether various other possible violations were dismissed on substantive grounds or as part of the settlement process is unclear.