On October 16, 2008, the Federal Energy Regulatory Commission (FERC or the Commission) issued Order No. 717, Standards of Conduct for Transmission Providers, 125 FERC ¶ 61, 064 (2008), a final rule revising the Standards of Conduct (Standards) as promulgated in Order No. 2004 and revised on an interim basis by Order No. 690. Order No. 717 was issued pursuant to the Notice of Proposed Rulemaking (NOPR) issued March 27, 2008. Standards of Conduct for Transmission Providers, 73 Fed. Reg. 16,228 (Mar. 27, 2008), FERC Stats. & Regs. ¶ 32,630 (2008). The Standards impose behavioral rules to prevent discrimination by open access providers of interstate transmission of natural gas and electricity (Transmission Providers) in favor of their marketing affiliates and apply only to Transmission Providers transacting with their marketing affiliates. The new Standards apply the “employee functional approach” used in earlier versions of the Standards promulgated pursuant to Order Nos. 497 and 889 (for gas and electric transmission providers, respectively) rather than the more sweeping “corporate separation” approach applied in the Standards promulgated pursuant to Order No. 2004.
For an overview of the new Standards, please click here.
Applicability of the Standards
Consistent with Order No. 2004 and the revisions proposed in the NOPR, the new rules will apply to both natural gas pipelines and electric transmission providers. However, the Commission did not include pipelines providing service solely under Part 157 within the scope of the rules. Since pipelines operating under Part 157 are restricted to serving only the shippers specified in their certificates, such pipelines do not have the discretion available under an open access tariff that would permit them to discriminate in favor of non-affiliates. (P 15). Further, the Commission acknowledged that a Transmission Provider that does not engage in transmission transactions with its marketing affiliates does not raise the issues of discrimination that the Standards are designed to address. (P 20 and 23). Accordingly, the revised rules apply to:
- Any interstate natural gas pipeline that transports gas for others under Subparts B or G of 18 CFR Part 284 and that conducts transmission transactions with an affiliate that engages in marketing functions. (18 CFR § 358.1(a); see 18 CFR § 358.3(k)(2)). Natural gas storage providers authorized to charge market-based rates are not considered transmission providers. (18 CFR § 358.3(k)(3); P 283).
- Any public utility that owns, operates or controls interstate transmission facilities and conducts transmission transactions with an affiliate that engages in marketing functions. (18 CFR § 358.1(b); see 18 CFR § 358.3(k)(1)).
Affiliate is defined for purposes of the Standards to include a person that controls or is under common control with the Transmission Provider or a division of the Transmission Provider that operates as a functional unit. (18 CFR § 358.3(a)(1)). The Standards do not apply to Independent System Operators (ISO) or Regional Transmission Organizations (RTO) and the Commission will consider granting waivers “for good cause.” (18 CFR §§ 358.1(c), (d)). The Commission clarified that an entity that has previously been granted a full or partial waiver may continue to rely on it, but also noted that many waivers granted in the past will no longer be needed under the revised Standards. (P 32).
Consistent with the Commission’s determination that the Standards need only apply to a Transmission Provider that is transacting with a marketing affiliate, the Standards will not apply to a Transmission Provider until the date on which it begins transacting with a marketing affiliate. (P 26; 18 CFR § 358.8(a)). In reaching this conclusion, the Commission rejected the NOPR proposal to make the Standards applicable on the earlier of the date on which the Transmission Provider placed a rate on file with the Commission or the date on which it commenced transmission transactions. (P 24).
Transmission Providers are required to comply with four General Principles set forth in Section 358.2 of the Standards (see our Energy Update article to read these General Principles). The General Principles relate to (1) non-discrimination, (2) independence, (3) non-disclosure, including through the use of conduits, and (4) transparency. These principles are further elucidated in Sections 358.4 through 358.7 of the new Standards, which are discussed below.
1. Non-Discrimination (18 CFR § 358.4)
The Non-Discrimination provisions of the new Standards require Transmission Providers to enforce all tariff provisions, if the provisions do not permit the use of discretion, and to apply all tariff provisions in a fair, impartial and not unduly discriminatory manner, if the tariff provisions permit the use of discretion. They bar the granting of undue preference and require a Transmission Provider to “process all similar requests for transmission in the same manner and within the same period of time.” These relatively straight-forward requirements engendered little comment in the rulemaking.
2. Independent Functioning Rule (18 CFR § 358.5)
The revised Standards continue the requirement that transmission function employees and marketing function employees must function independently. A transmission function employee may not conduct marketing functions and a marketing employee may not conduct transmission functions or have access to the control center or other transmission facilities that differs from the access available to others. The most important changes with respect to the independent functioning requirement (and the no conduit requirement discussed below) relates to the employees subject to the requirement.
Transmission Function Employees
The Commission provided the following definitions relating to transmission function employees:
Transmission means electric transmission, network or point-to-point service, ancillary services or other methods of electric transmission, or the interconnection with jurisdictional transmission facilities, under part 35 of this chapter; and natural gas transportation, storage, exchange, backhaul, or displacement service provided pursuant to subparts B or G of part 284 of this chapter. (18 CFR § 358.3(f)).
Transmission functions means the planning, directing, organizing or carrying out of day-to-day transmission operations, including the granting and denying of transmission service requests. (18 CFR § 358.3(h)).
Transmission function employee means an employee, contractor, consultant or agent of a transmission provider who actively and personally engages on a day-to-day basis in transmission functions. (18 CFR § 358.3(i)).
Of significance, the Commission clarified in Order No. 717 that its definition of transmission functions “is directed at short-term real time operations, including those decisions made in advance of real time but directed at real time operations.” (P 40). Examples of the types of actions included within the scope of “day-to-day operations” of a Transmission Provider, in addition to “granting and denying of transmission service requests” are: “coordinating the actual physical flows of power or gas, balancing load with energy or capacity, isolating portions of the system to prevent cascades, imposing transmission loading relief, and the like.” (P 122). Rate design is not considered a transmission function. (P 276). The Commission further clarified that long-range transmission planning and functions such as integrated resource planning and the preparation of system impact studies are not transmission functions, although persons that engage in such activities may be transmission function employees if they also perform transmission functions. (P 146-147). With respect to “transmission,” it clarified that the inclusion of “ancillary services” within the definition “refers to the use of an integrated public utility’s own generation or demand response resources to provide ancillary services, and does not refer to the sale for resale of generation or demand response resources for ancillary services purposes.” (P 263).
The defined terms “transmission function information” and “transmission service” were given correlative meanings. However, given the narrowing of the definition of transmission functions, the definition of transmission function information was similarly narrowed. The Commission provided the following non-exclusive examples of transmission function information: “available transmission capability, price, curtailments, storage, and balancing.” (P 275).
The inclusion of the phrase “actively and personally engaged” as well as “day-to-day” further help narrow the categories of covered employees. The Commission explained that field, maintenance and construction workers, as well as engineers and clerical workers, would not normally be considered to be engaged in day-to-day operations of the transmission system. (P 46). Similarly, balancing authority employees, not otherwise engaged in transmission functions, would not be included. (P 48).
Marketing Function Employees
One of the most significant changes in the Standards is the elimination of the concept of “Energy Affiliates.” Consistent with its determination to focus on employees and abandon the broadly sweeping corporate separation approach used in Order No. 2004, the revised Standards seek only to wall off marketing function employees. Further, the definitions of marketing functions and marketing function employees have been restated in more clearly defined terms than those proposed in the NOPR. Although generally the Standards provide a uniform approach to regulation of both electric transmission providers and natural gas transportation providers, the Commission determined that it was necessary to define marketing functions separately for the two industries to avoid creating confusion through the use of concepts that have different meanings in each industry or are used in one industry but not the other, such as “capacity,” “virtual” and “financial transmission rights.” (P 75 and 78).
Marketing functions means:
(1) in the case of public utilities and their affiliates, the sale for resale in interstate commerce, or the submission of offers to sell in interstate commerce, of electric energy or capacity, demand response, virtual transactions, or financial or physical transmission rights, all as subject to an exclusion for bundled retail sales, including sales of electric energy made by providers of last resort (POLRs) acting in their POLR capacity; and
(2) in the case of interstate pipelines and their affiliates, the sale for resale in interstate commerce, or the submission of offers to sell in interstate commerce, natural gas, subject to the following exclusions:
(i) Bundled retail sales,
(ii) Incidental purchases or sales of natural gas to operate interstate natural gas pipeline transmission facilities,
(iii) Sales of natural gas solely from a seller’s own production,
(iv) Sales of natural gas solely from a seller’s own gathering or processing facilities, and
(v) Sales by an intrastate natural gas pipeline, by a Hinshaw interstate pipeline exempt from the Natural Gas Act, or by a local distribution company making an on-system sale.
Marketing function employee means an employee, contractor, consultant or agent of a transmission provider or of an affiliate of a transmission provider who actively and personally engages on a day-to-day basis in marketing functions.
With respect to both the natural gas and the electric industries, the “marketing functions” definition is revised from that proposed in the NOPR, and distinguished from the definition of “energy affiliates” presently in effect, by eliminating references to purchases or offers to buy. Marketing activities pertain only to “sales for resale.” For electric utilities, the Commission observed that this change will facilitate integrated resource planning by removing barriers between transmission providers and employees engaged in procurement. Further, it is consistent with the Commission’s jurisdictional reach and, consistent with the elimination of the concept of “energy affiliate” (which includes persons engaged in purchasing), the new approach addresses the concerns raised by the U.S. Court of Appeals for the District of Columbia in National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831 (D.C. Cir. 2006) where the court struck down application of the Standards promulgated under Order No. 2004 as applied to energy affiliates of natural gas transmission providers. (P 1 and 84).
Several commenters were concerned that the language first proposed in the NOPR could be understood to label persons engaged in fashioning demand response programs for electric utility customers as “marketing function employees” and thereby inhibit the ability of integrated utilities from acquiring transmission information necessary to develop demand response resources in appropriate locations. The Commission clarified that “inclusion of the term ‘demand response’ in this definition is not intended to interfere with demand response programs that a load-serving entity (LSE) has established for its customer.” (P 78 and 149).
The Commission also clarified that the sale for resale of ancillary services, for example, into a market established by an ISO or RTO for ancillary services, is a marketing function. However, it distinguished such sales from “an integrated public utility’s actions in calling on its own generation or demand response resources for ancillary services purposes.” (P 78). Scheduling transmission service is also not identified as a marketing function, although the Commission noted that an employee that schedules transmission service is often involved in activities that would otherwise cause that employee to be deemed a marketing function employee. (P 79). In response to specific comments, the Commission affirmed that generating operator personnel, forecasters and employees engaged in strategic planning and regulatory services are not marketing function employees unless they are actively and personally involved on a day-to-day basis in the sale for resale of the products identified in the definition. (P 106).
For the gas industry, the Commission refined and clarified the list of exclusions included in the regulatory text. It rejected requests to include an exclusion for off-system sales by an affiliated Local Distribution Company (LDC) on non-affiliated pipelines, but noted that “if the LDC in question does not conduct transmission transactions with an affiliated interstate pipeline, its off-system sales on an unaffiliated pipeline are irrelevant insofar as the Standards are concerned.” (P 91). If a pipeline or LDC contracts with an asset manager to make its off-system sales, “it would be the employees of the asset manager, acting as agents or contractors for the pipeline or LDC, rather than employees of the pipeline or LDC, who would qualify as marketing function employees.” (P 97).
Employees that do not meet the definition of either a transmission function employee or a marketing function employee, including the employees that were formerly classified as shared employees, are not covered by these Standards except to the extent that the no conduit rule (discussed below) would continue to bar the use of such employees to transmit information that is otherwise subject to non-disclosure rules.
Senior Officers and Directors
One of the most significant areas of concern under the existing Standards is whether, or which, supervisory and management personnel were to be considered marketing affiliate employees or transmission function employees. Prior interpretations of the existing Standards suggested that senior managers that executed contracts related to power procurement or sales could be considered marketing affiliate employees, even if such activity constituted a de minimis portion of their duties. Order No. 2004-A at P 131 (citing Ameren Servs. Co., 87 FERC ¶ 61,145 at 61,600 (1999)). This imposed on senior managers and officers the nearly impossible task of executing their fiduciary duties, with full knowledge of all relevant factors, without violating the Standards.
In Order No. 717, the Commission very clearly removes this impediment. In the first instance, it sought to address the issue in the regulatory text by inclusion of the phrases “actively and personally engaged” and “day-to-day.” Almost as critically, it included extensive discussion and examples in Order No. 717. Specifically the Commission stated:
[I]f an employee regularly carries out or supervises the details of the activities in question, he or she is actively and personally engaged in them; if he or she merely signs off on the activities without having directed or organized the activities, he or she is not personally engaged in them. (P 117).
With respect to contract negotiations, the Commission clarified:
Thus, for example, supervisors who are not involved in the negotiation of a gas or electric energy sale, and who do not oversee or provide input into the details of the negotiations being carried out by another employee (e.g., by editing and revising material elements of a contract), but rather simply approve the contract governing the sale, are not marketing function employees. Furthermore, as we noted in the preamble of the NOPR, de minimis involvement in transmission and marketing functions will not render a person a transmission or marketing function employee. Therefore, a supervisor who on rare occasions has tangential involvement in a negotiation, such as being called in to meet the negotiating parties from the other side, is not thereby rendered a marketing function employee. (P 117).
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Likewise, upper level management personnel who review contracts over a certain dollar amount are not converted into deal-makers themselves, simply by virtue of that review. This is also true for other personnel, such as attorneys, accountants and other advisors who may examine a contract for its conformity to legal, accounting or other requirements. Such review does not render them marketing function employees. (P 119).
However, a manager or supervisory employee is not exempted from the rule per se but rather the test is whether the person meets the definition: “the closer the supervisory employee is to the trading activity, the more likely it is that he will be overseeing and providing input into the trades, and not simply signing off on a deal, and thus would be considered a marketing function employee. . . . We suggest that if a situation truly does appear to be a close call, that in itself should be a red flag that suggests conservatism in applying the rule. In this area, it is best to err on the side of caution.” (P 120-121). The Commission also noted that guidance could be sought from the Commission or Commission staff. (P 121 n.133).
Application of the Independence Requirement
The new narrower definitions of transmission functions, marketing functions and the corollary terms make the independence requirement much easier for Transmission Providers to apply. While a Transmission Provider and its affiliates are barred from coordinated operations of their sales activities and transmission activities, the revisions restore the ability of a corporation to otherwise function as a corporate whole, with appropriate levels of oversight by senior management and coordinated long-term planning. However, the Commission points out that the revised Standards are not exhaustive and are not its exclusive means for regulating discriminatory conduct. For example, “[i]t is possible that an entity might embark on a course of conduct not contemplated by the Standards, which could be found upon investigation to constitute a violation of the statutory undue preference prohibitions.” (P 294). Further, with respect to long-term planning, although integrated utilities may now coordinate their procurement and long-term transmission planning to create an integrated plan, compliance with the Standards does not relieve Transmission Providers from also complying with Order No. 890’s open transmission planning procedures.
3. No Conduit Rule (18 CFR § 358.6)
The new Standards continue the prohibition on use by a Transmission Provider of a third party as a conduit to transmit non-public transmission function information to a marketing function employee. The prohibition also extends to the employees, contractors, consultants or agents of a Transmission Provider or its affiliates.
The sweeping changes described above that eliminate the corporate separation approach and narrow the scope of employees that are within the purview of the Standards puts added importance on the no conduit provisions. As discussed below, the new rules will require training of “transmission function employees, marketing function employees, officers, directors, supervisory employees, and any other employees likely to become privy to transmission function information.” (18 CFR § 358.8(b)(2) (emphasis added)). In order to effectively implement and enforce the no conduit rule, Transmission Providers will have to give careful consideration to how extensively they must train “other employees,” within which category they have substantial discretion.
4. Transparency Rule (18 CFR § 358.7)
The new Standards continue to require that if non-public transmission function information is disclosed to a marketing function employee in contravention of the no conduit rule, then the information must be immediately publicly posted. (18 CFR § 358.7(a)(1) (the “contemporaneous disclosure” requirement)). However, the new Standards include a special provision for disclosure of non-public transmission customer information, critical energy infrastructure information or other information that the Commission has determined is subject to restrictions on its dissemination. (18 CFR § 358.7(a)(2)). In the event of an unauthorized disclosure of such information, notice of the disclosure, rather than the actual information, must be posted. Id. The Commission observed that “[p]osting the information does not change the fact that a violation occurred, but it would be a vital consideration that the Commission would certainly take into account in deciding whether any remedy or sanction would be appropriate.” (P 295). In recognition that not all Transmission Providers have OASIS sites, the posting is to be made to the Transmission Provider’s Internet website. (P 247). Notwithstanding the contemporaneous disclosure requirements, discussions between a Transmission Provider and an affiliated marketing function employee with respect to the marketing function employee’s specific request for transmission service is not prohibited, and a transmission customer may consent to voluntary disclosure of its non-public transmission information. (18 CFR §§ 358.7(b)-(c)).
The new Standards also require Transmission Providers to post the following information: procedures for implementing the standards of conduct; the names and addresses of affiliates that employ marketing function employees; a list of employee-staffed facilities shared by the Transmission Provider’s transmission function employees and marketing function employees; any potential merger partners as affiliates that may employ or retain marketing function employees (within seven days of announcement of the merger); job titles and job descriptions of transmission function employees; and information as specified by the Commission regarding employee transfers among its transmission and marketing functions.
The new Standards include an exception that allows transmission function employees to share with marketing function employees certain non-public transmission information pertaining to compliance with reliability standards, necessary to maintain or restore operations of the transmission system or generating units or that may affect dispatch of the units, subject to maintenance of a record of such exchanges. (18 CFR § 358.7(h)). The Commission permits recordation by means of hand-written or typed notes, electronic records, recorded telephone exchanges, etc. Id. The Commission observed that it expected that with the narrower definitions of marketing function employees and transmission function employees, the “legitimate need” for communications between transmission function employees and marketing function employees should be “greatly reduced” particularly because “in the critical areas of reliability and generation dispatch, . . . it is rarely marketing function personnel who engage in these activities.” (P 174). The Commission seems to believe the exception is needed only by smaller utilities that may have employees performing multiple job functions. (P 175). Indeed, it specifically states: “[i]t can readily be seen that limiting the restriction on interactions to marketing function employees virtually eliminates the need for the exclusion itself.” (P 182).
The Commission’s expectation that this provision will be so narrowly applied raises some concern. For example, the Commission does not appear to contemplate that a load-serving entity’s marketing function employees (who engage in both purchases and sales in short-term markets) might be called upon to replace power from a unit lost due to a transmission outage, possibly within a time frame shorter than that required for posting of the transmission outage information. Although use of the exception would appear to be appropriate because it “may affect the dispatch of generating units” (P 176), the Commission was quite emphatic that “commenters have assumed the Commission meant the exclusion to cover some broader situation. That is not the case. It was intended only for those rare instances, such as with smaller utilities, where some overlap of duties might exist.” (P 175).
Other Implementation Requirements
Each Transmission Provider must distribute the written procedures that it posts on its website to all of its transmission function employees, marketing function employees, officers, directors, supervisory employees, and any other employee likely to become privy to transmission function information and train these employees annually on the Standards. The obligation of a Transmission Provider to have a Chief Compliance Officer (CCO) and to post the name of the CCO on its website continues. Further, a Transmission Provider must maintain its books and records separately from those of its affiliates that employ or retain marketing function employees.
The revised Standards provide a much simpler, narrower regulatory scheme than the existing Standards. While the simplicity will likely facilitate implementation and compliance by Transmission Providers, it also facilitates enforcement. The industry should not take lightly the fact that the revised Standards were issued on the same day as a Policy Statement on Compliance. FERC’s initiation of audits specifically addressing compliance with the Standards implemented by Order No. 2004 declined significantly after the years 2005-2006, as the difficulties and complexities of the Standards became apparent. However, with the implementation of clearer Standards, consistent with the Commission’s emphasis on “firm but fair” enforcement, it is reasonable to expect that the Commission’s enforcement activity may become more proactive and compliance strictly enforced.
Click here for Order No. 717