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It’s hard to ignore 50 million Americans without electric power. A massive blackout that spread across eight states in the summer of 2003 spurred federal legislation to ensure that the lights and computers and everything else will stay on. This month, Congress’ solution — new mandatory reliability standards for the electric industry — kicks in. These too are hard to ignore. The new standards apply not just to traditional electric utilities, but also to most facilities in the bulk-power system. Failure to comply with the standards could lead to substantial penalties — up to $1 million per day. And the Federal Energy Regulatory Commission has made it clear that mandatory means mandatory. The turn toward stricter standards and enforcement has seemed almost inevitable since Aug. 14, 2003. The blackout that day was one of the worst in U.S. history. Electric transmission systems were hit hard from Ohio to New England and north into Canada. TV cameras showed thousands of workers stranded in New York, unable to return home because of disruptions to the trains and traffic signals. A subsequent report said that problems began to spread, in part, after one overloaded power line in Ohio sagged and made contact with a tree. Combine that surprise summer blackout with continued concerns raised about our nation’s security in the aftermath of Sept. 11, 2001, and you can understand why government leaders led the way in exploring means to avoid another electric mishap. CASCADING TROUBLE Two days after the blackout, President George W. Bush and Jean Chr�tien, then the Canadian prime minister, commissioned a joint task force to investigate the causes of the blackout and ways to reduce the possibility of future outages. The task force’s final report, issued in April 2004, noted that the blackout lasted up to four days in some parts of the United States and cost the U.S. economy between $4 billion and $10 billion. Canada experienced a net loss of 18.9 million work hours, and manufacturing shipments in Ontario were down $2.3 billion (Canadian). The task force determined that the blackout that started in Ohio cascaded for a number of reasons. These include inadequate vegetation management around transmission lines; inadequate operator training; failure to ensure operations stayed within appropriate limits; failure to maintain adequate “reactive” power support; failure to identify emergency conditions and communicate those conditions to neighboring systems; and inadequate “visibility” at the regional level. Specifically, operators at a relatively new transmission organization, the Midwest Independent System Operator, were not aware of some of the initial outages in Ohio because the lines were not in Midwest ISO’s footprint. Key generation resources were out of service that day. And problems in controlling voltage soon resulted in severe system-support failures, affecting a much larger region and millions of customers. Not surprisingly, the task force further concluded that the system for ensuring that electric industry facilities met certain reliability standards was inadequate. Partially because of concerns raised by the 1965 Northeast blackout, a national reliability organization — the North American Electric Reliability Corp. — was formed in 1968, along with a number of regional councils. But the system was largely voluntary. And the task force found, in its published blackout report, that enforcement depended too much on “reciprocity, peer pressure and the mutual self-interest of all those involved to ensure compliance with reliability requirements.” The task force recommended a switch to mandatory standards, with penalties for noncompliance. It also called for strengthening the institutional framework for reliability management in North America. A BROAD RESPONSE About a year after the 2003 blackout, Congress added a new section to the Federal Power Act, a section otherwise known as the Energy Policy Act of 2005 or EPAct. The new law directed that FERC, the federal body that oversees the energy industries, designate an electric reliability organization (ERO) to establish and enforce new reliability standards under FERC’s oversight. Last summer, the North American Electric Reliability Corp. was designated as that ERO, and the organization has been developing the new standards based on previous voluntary standards and on specific recommendations of the blackout report. In addition, penalties for violating the Federal Power Act, including the new reliability standards, were raised from $10,000 to $1 million per day. An April FERC order clarified that multiple violations of the standards on the same day will each be eligible for the maximum $1 million penalty. The reliability standards, which will take effect on June 18, reach very broadly, extending to virtually every “user, owner, or operator” of the bulk power system. These standards affect owners, operators, and users of electric generation plants, transmission lines, interconnection systems, and associated equipment generally operated at voltages of 100 kV or higher. It does not include local distribution facilities. Even owners and operators of alternative energy facilities favored under federal law — such as wind, hydro, geothermal, and electric-thermal cogeneration — are subject to the new standards. The ERO proposed 107 specific standards. Through a March 2007 order, FERC certified and approved 83 of them. At the same time, FERC has sent 56 of the 83 standards back to the ERO for significant improvements (with respect to scope, levels of noncompliance, evaluation criteria and procedures, etc.) These 83 standards will be in effect as written and are subject to the specific clarifications and improvements sought by FERC. These changes, FERC noted in its March order, are needed to ensure that the recommendations of the blackout report are met. The remaining 24 standards remain pending until additional data and information are provided by the ERO and regional reliability entities. The new standards cover a range of generation and transmission operations. Besides addressing reliability in particular service areas, they also consider issues of power-flow management, voltage and reactive power controls, and distribution measures across a wider region of interconnected utility systems. Many of the standards submitted by the ERO had been developed by the North American Electric Reliability Corp., the regional councils, and their member utilities in anticipation of the new regulatory regime and then were revised in light of EPAct. About 90 of the 107 standards submitted by the ERO were the same or similar to the voluntary provisions. Revisions to these standards and the brand-new standards address recommendations in the blackout report and expand the reach of the voluntary standards. Eight regional entities will be the first line of enforcement, through delegation agreements that FERC recently approved. (Just as the ERO is the North American Electric Reliability Corp., a number of these entities existed as the regional councils before EPAct.) These entities will investigate any claims of noncompliance, as well as any mishaps or problems in the electric delivery system. Anticipating the work needed to comply with the 83 approved standards, a number of commenters have urged FERC to delay subjecting parties to penalties for infractions until late in 2007. The commission decided, however, that the standards should go into effect this month, although the regional entities have discretion as to how strictly the standards will be enforced, especially with regard to the 56 standards still awaiting improvement and refinement. Both the regional entities and the ERO have the authority to order facilities to correct violations of reliability standards and to impose penalties for such violations. Enforcement actions and related penalties are subject to FERC review. FERC Chairman Joseph Kelliher has stated that he will exercise the commission’s enhanced authority aggressively. Although he was not specifically addressing reliability standards, he noted in January that the commission will impose penalties for violations of the Federal Power Act, even if the violations were inadvertent, the violators did not profit from them, and no one was harmed by them. FERC has also confirmed that any violations committed as an “economic choice” will result in increased penalties. In an April order, FERC reconfirmed its position that if an entity “refrains from taking actions that are necessary to comply with the requirements of a Reliability Standard in order to save money, especially where such violation results in injury or outage . . . the Commission endorses application of the expanded penalty provisions applicable to an economic choice decision.” The best proof of FERC’s intent, however, is the fact that it has already assessed penalties well in excess of $1 million for violations of the Federal Power Act, although not in the reliability area. Power companies, as well as other electric generation and transmission owners and operators, are busy readying their systems and internal control and management structures to comply with the new standards. In addition, a number of utilities subject to the reliability standards have operating, management, or similar agreements with other utilities or third-party service companies or suppliers, entered into long before the new reliability regime. These agreements must be reviewed to determine if they clearly allocate responsibility for implementing the new standards, including obtaining necessary information and keeping appropriate records. The new focus on reliability has produced one of the most comprehensive federal regulatory structures to ever affect the electric power industry. With any luck, successful implementation of this program, including wise enforcement decisions, will keep the lights on for years to come.
William D. DeGrandis is a partner in the D.C. office of Paul, Hastings, Janofsky & Walker and a member of the global projects practice group. He represents energy industry clients in contract negotiations and in proceedings before state and federal regulators. He thanks Karen Mallan for her assistance with this article.

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