In 2005, Congress amended the Federal Power Act (FPA) to create a federal role in ensuring the reliable operation of the nation’s interstate electric transmission grid. The Energy Policy Act of 2005 amended the FPA to provide for the first time a system of mandatory, enforceable reliability standards to be established by a designated Electric Reliability Organization (ERO) and overseen by the Federal Energy Regulatory Commission (FERC). The transition from a voluntary, industryregulated reliability regime to a mandatory system ultimately overseen by FERC has not been rapid; almost three years later this process is not yet completed. Nor have the exact contours of the relationship between FERC and the ERO in implementing this new regulatory regime been fully fleshed out. However, with the issuance of FERC’s June 19, 2008 order conditionally approving Violation Severity Levels for all approved reliability standards, 1 the initial transition stage to the full application of the new reliability enforcement standards and their contemplated penalty guidelines is almost done. In the process, FERC has continued to inform the ERO and the industry regarding the level of lasting oversight it will exercise over reliability issues.
In 2006, FERC selected the North American Electric Reliability Corporation (NERC), the former industry-established, voluntary reliability organization, as the ERO, and NERC thereafter set about codifying and implementing mandatory reliability standards. In Order No. 693, Mandatory Reliability Standards for the Bulk-Power System, 2 FERC approved 83 mandatory reliability standards. Many of the approved reliability standards previously had been voluntary standards established by NERC prior to its designation as the ERO. But a key difference in the transition to mandatory standards lay in enforcement and penalties; under the amended FPA established by EPAct 2005, Congress granted FERC and the ERO authority to assess enforcement penalties for the violation of reliability standards. Having established the mandatory reliability standards themselves, the next task for NERC and FERC was to determine consistently applicable enforcement penalties for the violation of these standards.
Under the penalty approach developed by NERC and approved by FERC, the penalty for a violation of a mandatory reliability standard is established using a matrix of Base Penalty Amounts that is later subject to adjustment to take into account individualized factors. 3 This penalty matrix is composed of three Violation Risk Factors (“Lower,” “Medium,” or “High”) and four Violation Severity Levels (“Lower,” “Moderate,” “High,” or “Severe”), with the intersection of the two establishing the penalty. Violation Risk Factors assess the potential reliability risk a violation of a particular reliability standard poses to the reliable operation of the grid, whereas Violation Severity Levels are a post-violation measurement of the degree to which an individual reliability standard itself was violated. The higher the Violation Risk Factor and Violation Severity Level, the greater the Base Penalty Amount.
In a June 2007 order, FERC required NERC to submit to it, by no later than March 3, 2008, Violation Severity Levels for each of the 83 approved reliability standards so that the full enforcement penalty matrix could be implemented for the Summer 2008 period. 4 On March 3, 2008, as amended March 4, 2008, NERC submitted its proposed Violation Severity Levels for each of the approved reliability standards for FERC review and approval. Now, in FERC’s June 19 Order, FERC has conditionally approved the submitted Violation Severity Levels, and in the process has announced four guidelines to assist NERC both in revising the existing Violation Severity Levels and in establishing any future Violation Severity Levels for new reliability standards.
FERC’s first guideline is that Violation Severity Level assignments should not have the unintended consequence of lowering the current level of compliance. 5 FERC’s concern here is that NERC’s establishment of a Violation Severity Level should take into consideration past compliance under the voluntary standards and should not establish a new categorization in the Violation Severity Level that would invite lesser industry compliance than that historically in place. To gauge compliance with this guideline, FERC mandated that NERC take into account historical performance data in establishing the Violation Severity Levels. As an example, FERC noted that for certain mandatory reliability standards, NERC proposed that entities that were in a range from 1% non-compliant to 25% noncompliant were to be treated as being in the “Lower” Violation Severity Level, irrespective of the industry’s level of historical compliance with that requirement. 6 In order to prevent weakening of existing compliance on this basis, FERC in the June 19 Order directed NERC to supply a report within six months analyzing for each reliability standard for which historical information is available “whether the Violation Severity Level assignments allow for a level of compliance lower than the historical performance.” 7 FERC left it to NERC’s discretion, however, as to the appropriate historical data to use for each reliability standard and the timeframe of historical data to use. 8
FERC’s second guideline states that Violation Severity Level assignments should ensure uniformity and consistency in the determination of penalties. 9 FERC expressed concern with two categories of Violation Severity Levels in this respect: those involving binary “pass”/“fail” requirements and those containing ambiguous language. For the binary category of Violation Severity Levels, FERC found that a “fail” finding in some situations was categorized as a “Lower” Violation Severity Level and in other situations was a “High” or “Severe” Violation Severity Level. FERC found no justification for having variation in the Violation Severity Level between reliability standards on this basis since it is the Violation Risk Factor that should measure risks, whereas the Violation Severity Level merely measures compliance, in which a failure is a failure. 10 FERC expressed a preference for a gradated approach to Violation Severity Levels wherever possible, but stated that where binary requirements are still to be used they should be used consistently and have the same Violation Severity Level.
The Commission’s concern with ambiguous language as part of this second guideline pointed to a lack of definition in certain subjective words used in several of the various reliability standard Violation Severity Levels. As an example, certain reliability standards determined whether a violation was “Lower” or “Moderate” depending upon whether the lack of compliance was in a “minor area” or in a “significant area,” neither of which term was defined. 11 FERC cautioned that “in general, relative and subjective language is subject to multiple interpretations that could result in inconsistent application of the Violation Severity Levels.” 12 FERC thus required NERC to revise its Violation Severity Levels within six months to make binary requirements either consistent or subject to increased gradation, and to eliminate ambiguities wherever possible.
FERC’s third guideline found that the Violation Severity Level should establish reasonable parameters of the degree of compliance, but should not redefine or undermine the requirement itself. 13 In this respect, FERC pointed to a standard requiring certain data collection for which the Violation Severity Levels introduced a “material impact” requirement as a qualifier for the type of data to be requested. 14 Another reliability standard included failure to comply with certain required elements of a vegetation management plan as a Violation Severity Level category, but omitted the situation in which a plan was compliant but never implemented. 15 FERC instructed that these inconsistencies be eliminated to ensure that the reliability standards are applied correctly.
FERC’s fourth and final guideline for NERC stated that Violation Severity Levels should at all times be based on a single violation rather than on a cumulative number of violations. 16 In FERC’s view, each instance of non-compliance is a separate violation of a mandatory reliability standard. To FERC, this requirement parallels its authority to issue penalties on a per violation, per day basis consistent with section 316A of the FPA. Thus, FERC directed NERC to revise its Violation Severity Levels to base the severity on a single violation.
Through these four guidelines, FERC has articulated a coherent and enduring system of oversight of NERC’s Violation Severity Levels. Even as FERC continues to leave the substantive details of reliability requirements to NERC because of NERC’s long-standing technical expertise, FERC has not hesitated to apply a process-based reasoned analysis to the standards and their Violation Severity Levels. The uncertain regulatory partnership between NERC and FERC thus looks to continue for the foreseeable future, and FERC gives little indication of relaxing its current approach in favor of greater non-technical deference to NERC.