FERC clarifies the standards of conduct for natural gas and electric transmission providers to establish rules that not only better achieve their public purpose, but also facilitate enforcement and compliance.

On October 16, 2008, the Federal Energy Regulatory Commission (FERC) issued a final rule on standards of conduct for natural gas and electric transmission providers (Final Rule). FERC’s goal with this actions is to clarify the rule to make both compliance and enforcement easier.

FERC found its Order No. 2004, the prior Standards of Conduct, difficult to enforce and apply, and therefore reformed the standards to establish rules that focus on the areas where there is the greatest potential for abuse, and that make both compliance and enforcement easier. Most importantly, the Final Rule eliminates both the concept of energy affiliates and the corporate separation approach. Instead, the Final Rule employs the employee functional approach that was used in Order Nos. 497 and 889, which commenters enthusiastically endorsed.

Elimination of Energy Affiliates

The Final Rule eliminates the concept of energy affiliates. Order No. 2004 defined an energy affiliate, subject to certain exclusions, as an affiliate of a transmission provider that: (1) engages in or is involved in transmission transactions in U.S. energy or transmission markets; (2) manages or controls transmission capacity of a transmission provider in U.S. energy or transmission markets; (3) buys, sells, trades or administers natural gas or electric energy in U.S. energy or transmission markets; or (4) engages in financial transactions relating to the sale or transmission of natural gas or electric energy in U.S. energy or transmission markets. Order No. 2004 further required that transmission employees of a transmission provider must function independently from both the company’s marketing affiliates and its energy affiliates, and may not give either type of affiliate preferential treatment. In response to the U.S. Court of Appeals for the District of Columbia Circuit’s finding that there was no evidence of the abuses by energy affiliates that FERC feared for the natural gas industry, FERC has revised the Standard of Conduct in this Final Rule to eliminate the concept of energy affiliates.

Clarification of the Employee Functioning Approach

Under the Final Rule’s employee functioning approach, the relevant consideration is the function performed by the individual employee, not the business unit. Therefore, the category of employees who must function independently from transmission function employees are those who actively and personally engage in marketing functions. Transmission functions are defined as “the planning, directing, organizing or carrying out of day-to-day transmission operations, including the granting and denying of transmission service requests.” The Final Rule defines a transmission function employee as “an employee, contractor, consultant or agent of a transmission provider who actively and personally engages in transmission functions.”

FERC provided separate definitions for marketing functions for the electric and natural gas industries in an effort to clarify the definitions and remove confusion due to terms that are used in both industries, but have separate meanings for each (i.e., “capacity”). The Final Rule also removes “bids-to-buy” from the category of marketing functions in both definitions to ensure that only sales, not purchases, are included. The Final Rule defines marketing function employees as “an employee, contractor, consultant or agent of a transmission provider or an affiliate of a transmission provider who actively and personally engages in marketing function on a day-to-day basis.”

In sum, the Final Rule makes the following important changes to the Employee Functioning Approach:

  • Clarifies that “transmission functions” refers to day-to-day operation of the transmission system
  • Separately defines marketing functions for electric and gas companies
  • Clarifies that marketing function employees must engage in marketing functions “day-to-day”
  • Removes “bids to buy” from the definition of marketing functions

Revisions to the No Conduit Rule and the Transparency Rule

The Final Rule revises the No Conduit Rule and the Transparency Rule, two important facets of the Standards of Conduct. FERC modified the No Conduit Rule to eliminate redundancies and the prohibition against marketing function employees receiving non-public transmission function information from any source, in light of commenters concerns that such receipt could be inadvertent.

The important changes made by the Final Rule to the No Conduit Rule and the Transparency Rule include the following:

  • Eliminates posting requirements for tariff-approved exercises of discretion and for discounts
  • Eliminates as redundant the prohibition against receipt of non-public transmission function information by marketing function employees
  • Adds Critical Energy Infrastructure Information (CEII) as a category of non-public transmission function information

The Final Rule takes effect 30 days after publication in the Federal Register, and transmission providers must be in full compliance with the Standards of Conduct by that date, with the exception of the posting and training requirements, with which transmission providers must be in full compliance no later than 60 days from publication in the Federal Register.