The Electric Reliability Organization Mandatory Reliability Standards

1. The Electric Reliability OrganizationMandatory Reliability Standards Gerry Cauley Vice President and Director of Standards

2. Electric Reliability Organization Overview Canada NEB, Alberta, British Columbia, Manitoba, Ontario, New Brunswick, Nova Scotia, Quebec, and Saskatchewan United States Federal Energy Regulatory Commission Mexico Comision Reguladora de Energia Reliability Standards Government Oversight Compliance Enforcement Electric Reliability Organization Regional Entities Reliability Assessment Other ERO Members Bulk Power System Owners, Operators, Users

3. NERC Organization 69 FTE budgeted today to total 80 FTE in 2007

4. Funding • Funding for ERO and regional delegated functions allocated to load-serving entities • Bulk electric system users • Based on Net Energy for Load (NEL) • ERO will fund regions for delegated functions • Use practical collection mechanisms

5. Regional Delegation Agreements • General terms for interconnection-wide and non-interconnection-wide • Delegated functions (region exhibits) • Compliance • Standards • Organization registration and certification • Reliability assessment • Reliability readiness and improvement • Key is consistency!!!

6. ERO application and 102 V0 standards filed NERC certified as ERO ERO and regional budgets filed 16 new and 11 revised standards filed ERO certification compliance filing Standards NOPR FERC approves 2007 ERO/region budgets File regional delegation agreements File compliance elements, risk factors File standards work plan FERC approves ERO compliance filing FERC approves standards FERC approves delegation agreements Mandatory standards with financial penalties 4/4/06 7/20/06 8/25/06 8/28/06 10/18/06 10/19/06 10/19/06 11/06 11/06 11/06 1/07 3/07 3/07 6/07 ERO Timeline

7. ERO Standards Process • ANSI-accredited process • Registered ballot body (RBB) of stakeholders • Elected standards committee • Recent changes • Risk factors and compliance elements • Vote weight capped at 1% per entity (or person) • Split RRO/REs into 10th segment • Remands/directives • Urgent and emergency actions • No automatic expiration of urgent/emergency actions

8. April 2005 April 2006 August 2006 October 2006 November 2006 December 2006 90 Version 0 standards go into effect 102 standards filed for approval 16 new/11 revised standards filed FERC issues standards NOPR 3 new/20 revised standards filed 3-year standards work plan filed Brief History of NERC Standards Pending – Cyber Security Standards Pending further information “good utility practice” 24 83 8 Proposed for Approval Pending – System Limits Standards 3

9. What Does the FERC NOPR Propose? • Approve 83 standards for enforcement in the U.S. by June 2007 • Of those, direct improvements to 62 through the standards process • Hold 24 as pending further information • Regional ‘fill-in-the-blank’ standards • Expect compliance as good utility practice • Suggest priorities

10. Why NERC Believes It’s a Really Good NOPR • Avoids reliability gap • Most important thing NERC does is mitigate, not penalize performance • Entity rights protected by due process and flexibility of NERC and regions to act fairly • Gives due weight to technical expertise of industry and NERC • Refers improvements to open, balanced, inclusive stakeholder process • Avoids a remand

11. Standards Approval Decision Options Approved Proposed Approve (21) Approve and direct revisions (62) Hold pending further information (24) Remand (0)

12. BPS-BES Jurisdictional Issue ERO will register each entity to be monitored for compliance and subject to ERO penalty: Debate of jurisdiction boundary and bulk power system vs. bulk electric system • Registration is practical • Gives up one penalty, one time • Not helpful to determine the margins now Registration

13. What NERC Will Ask FERC to Do • Direct all NOPR comments specific to standards go through NERC process • Put responsibility on ERO • Business plan, work plan, and results to date indicate we can deliver on high expectations • Avoid framing directive to require a single solution, specific language, or metric • Reconsider trial penalty period or at least recognize need for discretion • We can remove RRO from standards • We understand value of filing Functional Model; treat as reference only

14. The Climb To Really Excellent Reliability Standards Camp ‘Version 0’

15. Excellent Reliability Standards Shall do what? To what result or outcome? Under what conditions Who How? Prescribe elements Technical adequacy Clear, focused applicability Unambiguous requirements

16. Standards Work Plan: Overview • Filed 12/1/06 in U.S. and 12/7/06 in Canada • Dynamic management tool • Communicate vision • Coordinate work • Measure progress • 31 projects grouped by subject matter • Aggressive but achievable schedule • Detailed project descriptions listing ‘to dos’ • More efficient use of drafting teams • Integrates ‘fill-in-the-blank’ plan

17. Representative Changes to Standards • Concise title/purpose with a reliability value • Applicability • More specific with regard to entity, facilities, and responsibilities • Changes from Functional Model, V3 • Remove RRO (RE remains compliance monitor) • Compliance elements • Measures; violation severity levels; risk factors; time horizons; etc.

18. Level 1: mostly compliant with minor exceptions Level 2: mostly compliant with significant exceptions Level 3: marginal performance or results Level 4: poor performance or results Violation Severity Levels

19. Other Improvements • Review technical adequacy and performance metrics • Address ‘fill-in-the-blank’ standards • Reorganize, streamline standards • Merge in organization certification standards • References • Variances

20. Vision for Regional Standards NERC Reliability Standards Today • ERO Vision: • NERC & regional • standards are • Consistent • Congruent • Complete • Excellent C Region A F B E D H NERC Reliability Standards G Regional Reliability Standards A C H E D G B F Regional Criteria and Procedures