agenda minutes and highlights … · · 2012-12-19introductions and chairman’s remarks *2. ......

Phone 609-452-8060 + Fax 609-452-9550 + URL www.nerc.com

N O R T H A M E R I C A N E L E C T R I C R E L I A B I L I T Y C O U N C I L P r i n c e t o n F o r r e s t a l V i l l a g e , 1 1 6 -3 9 0 V i l l a g e B o u l e v a r d , P r i n c e t o n , N e w J e r s e y 0 8 5 4 0 -5 7 3 1

SPECIAL MEETING OF THE BOARD OF TRUSTEES

March 30, 2001 — 11 a.m.–12 p.m. The Hotel Sofitel Rosemont, Illinois

AGENDA

1. Introductions and Chairman’s Remarks

*2. Minutes of the February 12–13, 2001 Meeting — Approve

3. Status Report on Compliance Agreement

*4. Resolution Adopting Revisions to Bylaws — Approve

*5. Resolution on Certificate of Incorporation Amendme nts — Approve

6. Discussion of Summer Assessment

*Background material included

N O R T H A M E R I C A N E L E C T R I C R E L I A B I L I T Y C O U N C I L Pr ince ton Forres ta l Vi l lage , 116-390 Vi l lage Boulevard , Pr inceton, New Jersey 08540-5 7 3 1

Board of Trustees Meeting

February 12-13, 2001 Mountain Shadows Marriott

Scottsdale, Arizona

Minutes of the Meeting Monday, February 12, 2001 Introductions and Chairman’s Remarks Chairman Gary Neale convened a regular meeting of the North American Electric Reliability Council Board of Trustees on February 12, 2001 at 2:05 p.m., and a quorum was declared present. The meeting notice, agenda, and a list of attendees are attached as Exhibits A, B, and C, respectively. Chairman Neale announced the following proxies: John Q. Anderson, Independent Trustee, for Charles Henry (Independent Trustee) Richard Bulley, Executive Director, MAIN, for David Whiteley (MAIN)

Alec Dreyer, President of Generation, Dynegy, for Steve Bergstrom (Exempt Wholesale Generator) Mike Greene , President, Transmission Division, TXU Electric for Erle Nye (Past Chairman) Joseph Hartsoe, Vice President, Federal Regulatory Affairs, Enron Corp., for Jeff Skilling (Power Marketer) Lane Mahaffey, Director of Strategic Planning and Power Marketing, Seminole Electric, for Richard Midulla (Coop) Marty Mennes, Vice President, Transmission Operations and Planning, Florida Power & Light Company, for Walt Bussells (FRCC) David Penn, Deputy Executive Director, American Public Power Association, for Marvin Carraway (State/Municipal) Larry Wall, Vice President, Duke Energy North America, LLC for Jim Donnell (Exempt Wholesale Generator) Ken Wiley, Executive Director, FRCC, for Paul Evanson (FRCC)

Chairman Neale also introduced:

James Averweg, Vice President-Engineering and Operations Support, MidAmerican Energy Company, new MAPP representative


M R Gent

Agenda Item 2 Special Meeting of the Board of Trustees March 30, 2001

NERC Board of Trustees Minutes February 12–13, 2001

-2-

William Pascoe, Vice President-Transmission Services, The Montana Power Company, new WSCC representative W. Terry Boston, Executive Vice President, Transmission/Power Supply Group, Tennessee Valley Authority, nominee for federal sector

Consent Agenda NERC President Michehl Gent presented the consent agenda items, and the Board unanimously approved the:

• October 12–13, 2000 meeting minutes as amended. The amendment to the minutes is attached as Exhibit D, and the amended minutes are also posted on the NERC web site.

• Treasurer’s Report and Budget Comparisons. President Gent pointed out a math error in the

Treasurer’s Report that was included in the agenda background package; an amended report is attached as Exhibit E.

• amendment to the NERC 401(k) Savings and Investment Plan, which changes the current

eligibility requirements from one year of service with entry dates of January 1 and July 1 to three months of service with entry dates of January 1, April 1, July 1, and October 1. This amendment applies to both employee deferrals and employer contributions.

• replacements on NERC Standing Committees (Exhibit F).

Reports The Board agenda package contained the following reports for information only:

• Project Management Process and Schedules • Standing Committee Reports • NERC Compliance Enforcement Program • Standards Task Force • FERC Activities • Capacity Benefit Margin • Checklist of Inter-RTO Coordination Considerations • Winter Assessment • Future Meetings • NERC News

Resignation of Board Member President Gent informed the Board that Independent Trustee Elaine Chao had been confirmed as the new Secretary of Labor, and read portions of her letter of resignation to the Board.


-3-

Nominating Committee Report Mike Greene, Chairman of the Nominating Committee, on behalf of the Nominating Committee moved to:

• Elect Mr. W. Terry Boston, Executive Vice President, Transmission/Power Supply Group, Tennessee Valley Authority, to be an “additional Trustee” representing the federal segment, serving through June 2002.

• Re-elect John Q. Anderson, Thomas W. Berry, and Sharon L. Nelson to the Board for three-year

terms as Independent Trustees, through February 2004.

Upon second of the motion, the Board unanimously approved the elections stated above. NERC-NAERO Transition

Chairman Neale opened the discussion on the NERC-NAERO transition issue, stating that NERC was

working in the right direction to set up a truly Independent Board. He believed that the organization had not moved too quickly. He reminded the Board that two years ago the Board unanimously approved adding the Independent Trustees to the Board; in 1999, the legislative efforts began, and although the bill was not passed, he urged the Board to continue moving forward with its transition. A list of all three task group members is attached as Exhibit G. Chairman Neale then introduced Richard Drouin, Independent Trustee, and Chairman of the Governance Task Group.

Richard Drouin thanked the members of Governance Task Group and commended the group for its efforts. Mr. Drouin reviewed the scope of the task group “to recommend the details of how governance could be turned over to the NERC Independent Trustees with a stakeholders committee available to provide advice and recommendations.” Mr. Drouin reported that the group held a series of meetings, prepared a draft report that was posted for public comment, and its final report reflected comments received. The Governance Task Group report is attached as Exhibit H.

Chairman Neale called on Bob Harbour, Chairman of the Compliance Task Group. Mr. Harbour acknowledged the Compliance Task Group for their dedication in preparing its report “to recommend a contract-based model in which Regional Councils enforce compliance with selected NERC and Regional standards, including the imposition of monetary penalties and other sanctions. NERC would have responsibility for oversight, coordination, and assessment of effectiveness of Regional programs.” David Cook, NERC General Counsel, reviewed the details of the Compliance Report, and presented the group’s recommendations as presented in its report (Exhibit I).

Chairman Neale called on Tom Berry, Chairman of the Funding Task Group. Mr. Berry reviewed the Funding Task Group charge “to consider a new funding mechanism for NERC that would incorporate the concept of user fees.” He gave kudos to the task group members for their diligence in preparing the task group report (Exhibit J).

The Board engaged in a detailed discussion of the recommendations of the three task groups. Chairman Neale adjourned the meeting at 5:15 p.m. on Monday, February 12, 2001.


-4-

Tuesday, February 13, 2001

Chairman Neale reconvened the meeting at 8:05 a.m. He opened the floor to the Independent Trustees for their comments on the NERC-NAERO transition recommendations.

After all comments were heard, the NERC Board voted 38-3 to accept the reports and recommendations of its three Task Groups. The Board agreed that the Independent Board, once it is in place, should give due consideration to the following comments raised during the Board’s discussion on February 12, 2001:

• The issues of reliability and markets are intertwined; NERC should consider how reliability rules affect markets; prefer stronger recognition of market/reliability interface.

• NERC should restrict its activities to those directly related to and necessary for reliability and adequacy of the bulk electric systems of North America; NERC should not develop, implement, or enforce standards that relate to market structure or corporate organization.

• Consider not adding any additional standards to Annex B until the new, inclusive Stakeholders Committee is in place.

Chairman Neale announced that this meeting served as notice to the Board about the changes to the

Bylaws and Certificate of Incorporation, and he set March 30 as the date of a special meeting of the Board for final approval of the changes to the Bylaws and Certificate of Incorporation. Chairman Neale instructed Board members to provide a proxy if they were unable to attend the March 30th meeting.

The Board unanimously approved March 30 in Chicago for a special meeting of the Board. The full

Board will meet to vote on the changes to the Bylaws and Certificate of Incorporation followed by a special meeting of Members to approve changes to the Certificate of Incorporation. Following these meetings, the initial Stakeholders Committee and the new Independent Board will have separate organizational meetings. Flow Impact Study Tool

Gerry Cauley, NERC's Principal Consultant, explained the Flow Impact Study Tool (FIST) to the

Board, and a copy of his presentation is attached as Exhibit K.

The Board approved (WSCC abstained) moving ahead with the development of the FIST by summer 2001. The initial development cost of $366,000 plus $40,000 to cover two months of O&M will be provided from the NERC Fund Balance. The user fees collected by NERC beginning in August 2001 will be used to pay back all monies advanced from the NERC Fund Balance plus cover ongoing O&M costs. FIST is an extension to the existing Interchange Distribution Calculator, which provides: a) information before-the-fact (1 to 36 hours ahead) on the potential loading of energy interchange transactions on critical flowgates in the Eastern Interconnection; and b) a study mode that allows reliability and market personnel to study the impacts of hypothetical transactions.

The Board agreed that the money collected through user fees will be credited back to the eight Regions in the Eastern Interconnection to repay the amounts advanced by the same percentage as their contribution to the project and that these Regions will make up any shortfall between the total amount advanced from the NERC Fund Balance and what is recovered through user fees.


-5-

Market-Reliability Interface Collaborative Planning James Goodrich, Independent Trustee and Market-Reliability Interface Collaborative Planning Executive Team leader, presented the Market-Reliability Interface Collaborative Planning Initiative (Exhibit L) to the Board. The initiative was the result of an industry-wide collaborative planning process to develop long-term, market-oriented alternatives for congestion management and related market-reliability interface issues. The Board approved a set of recommended NERC actions in response to the Search Conference report, and directed the NERC standing committees and staff to:

•review the identified actions, •consider these actions as high priorities in setting their work goals, and •report results to the Board.

The Board agreed that any projects that cannot be completed in the course of normal committee activities would be subject to the NERC technical and financial approval process.

President Gent will write to the standing committee officers with the Board’s approved action plan. Comments by Observers Canadian Electricity Association — Hans Konow Mr. Konow conveyed his thoughts that the decisions taken at the Board meeting were seminal and marked an important step for the organization. He is delighted with the progress made, and CEA is strongly supportive of the Board’s actions. U.S. Department of Energy — Paul Carrier (for Margot Anderson) Mr. Carrier congratulated NERC on the actions taken at this meeting. He emphasized caution, recognizing that this is only an interim state. There is still a need for legislation; and he urged the Board not to let the newly approved contract-based approach get in the way of pursuing legislation. Mr. Carrier informed the Board that the new Secretary of Energy was engaged in reliability issues. The Vice President’s Energy Task Force is looking to produce an issues statement for a national energy strategy by the end of month, and an action plan in 60 days. Edison Electric Institute — Chris Forbes (for David Owens) Ms. Forbes echoed Mr. Konow’s comments, reiterating that the Board was sending the right message to the industry with appropriate actions. Electricity Consumers Resource Council — John A. Anderson Mr. Anderson commended the Board for agreeing to transition to an Independent Board, stating that the Board needs to send a strong message. He encouraged the Independent Board to take timely and definitive action on issues on settings standards critical to the markets, warning that GISB wants to move into the commercial side of standards. Electric Power Research Institute — Kurt E. Yeager EPRI supports the actions of the Board. Mr. Yeager reported that EPRI’s Board has created a new seat for ISOs, and they have nominated Bill Museler to that seat. EPRI has completed the first phase of its reliability initiative, and thanked NERC for its support. It is moving to Phase 2 in April with new capabilities for security coordinators. Mr. Yeager also thanked Mike Greene for his guidance and support in the initiative. EPRI is also launching a new consortium to look at how the digital economy will impact the delivery system.


-6-

Electric Power Supply Association — Lynne H. Church Ms. Church congratulated NERC and the Board for taking an important first step. She looks forward to working with NERC in the future. Federal Energy Regulatory Commission — Kevin Kelly Mr. Kelly offered his congratulations to the Board on the steps taken at its meeting, stressing the importance of moving to an Independent Board. Mr. Kelly acknowledged agenda item 3e, which covers FERC activities. National Association of Regulatory Utility Commissioners — Marsha H. Smith Ms. Smith is pleased to see NERC move forward with its transition. She suggested that the Board take a look at the work WSCC has done on contract-based agreements, to see if there is a platform to be used to save time. She urged the Board to include federal and state policy makers in its stakeholders committee. National Rural Electric Cooperative Association — Ron Greenhalgh NRECA is supportive of the Board’s deliberations. He stated that the parallel path to legislation development was simply a set-back; and was confident that NERC would continue to work hard this year on getting reliability legislation passed. Legislation Update Chairman Neale called on NERC Vice President Dave Nevius to update the Board on the continued efforts to push forward for reliability legislation. Mr. Nevius reported that NERC had already launched its lobbying effort this year with the assistance of Linda Stuntz, NERC’s Washington Counsel. He added that NERC relied heavily on a broad coalition of industry and state organizations to help with legislation. Mr. Nevius said NERC will look to the Regional Council chairmen for help in getting their members to support legislation this year. He urged everyone to put this issue at the top of their priority list. Comments by Board Members Chairman Neale asked for any additional comments from Board members. Additional comments include: ECAR — Arthur R. Garfield

Arthur R. Garfield reported that the ECAR Inadvertent Settlement Tarriff process was triggered for the first time since the tariff went into effect in May 2000 on February 5, 2001. The Tariff is “triggered” when the Eastern Interconnection average frequency dips below 59.97 Hz for the hour ending 08:00. Once triggered, the ECAR Inadvertent Tariff remains in effect until the average frequency is greater than 59.98 Hz. Since the average frequency was not greater than 59.98 until the hour ending 10:00 EST, the ECAR Inadvertent Settlement Tariff will also be in effect for the hour ending 09:00 EST. During this three-hour period, the Eastern Interconnection was in a time correction for fast time and the scheduled frequency was set to 59.98 Hz to correct for the fast time.

MAIN — Robert K. Harbour

Mr. Harbour reported that the MAIN-MAPP merger was voted down on January 25; stating that the

time wasn’t right due to the uncertainty of the Midwest ISO.


-7-

Robert Harris, MAPP representative, added that MAPP is currently going through a strategic session to see if it should go through organizational changes on its own. Electricity Customer — Carol H. Guthrie

Ms. Guthrie offered her congratulations to NERC for moving forward. She urged the Independent Trustees to take a learning journey out west to talk to a variety of people (system operators, customers, and participating entities) for what she believed would be a significant learning opportunity. Adjournment

There being no further business to be brought before the Board, Chairman Neale adjourned the meeting at 10:40 a.m.

Michehl R. Gent Assistant Secretary-Treasurer



December 12, 2000 TO: BOARD OF TRUSTEES Ladies and Gentlemen: Board of Trustees Meeting — February 12–13, 2001

The next NERC Board of Trustees meeting is February 12–13, 2001 in Scottsdale, Arizona at the Mountain Shadows Marriott Resort. The hotel is 12 miles from the Phoenix Sky Harbour International Airport. Taxis cost about $22 one way.

The Board meeting on February 12 runs from 2 to 6 p.m. A reception and dinner will follow. The meeting reconvenes on February 13 at 8 a.m., and ends at noon. A continental breakfast will be available at 7:30 a.m. on Tuesday. Dress is casual for all meetings. A jacket and tie are not required for dinner.

To make your room reservation, call the Marriott at 800-782-2123 or direct 480-948-7111. NERC’s room block is listed under North American Electric Reliability Council, and the rate is $193 single/double occupancy. The hotel has set January 9, 2001 as the cut-off for room reservations. I cannot guarantee availability beyond that date.

Summary of meetings:

February 12, 2001 February 13, 2001

Regional Managers 8 a.m.–noon Continental Breakfast 7:30 a.m. Executive Committee 10 a.m.–1 p.m. (lunch) Board of Trustees 8 a.m.–noon Board of Trustees 2–6 p.m. Reception/Dinner 6:30 p.m. Please call me if you have any questions.

Sincerely,

Julie Morgan Julie Morgan Executive Assistant

cc: Board Observers

Technical Steering Committee Regional Managers

Tom Noel Paul Carrier Karl Stahlkopf James A. Byrd

Exhibit A


BOARD OF TRUSTEES MEETING

February 12, 2001 — 2–6 p.m. February 13, 2001 — 8 a.m.–12 noon

Marriott Mountain Shadows Scottsdale, Arizona

AGENDA Monday, February 12, 2001 — 2 p.m. *1. Introductions and Chairman’s Remarks 2. Consent Agenda — Approve *a. Amended Minutes of October 12–13, 2000 Meeting *b. Treasurer’s Report and Budget Comparison *c. Amendment to 401(k) Savings and Investment Plan *d. Staffing of NERC Standing Committees 3. Reports *a. Project Management Process and Schedules *b. Standing Committees’ Reports *c. Compliance Enforcement Program *d. Standards Task Force *e. FERC Activities *f. Capacity Benefit Margin *g. Checklist of Inter-RTO Coordination Considerations *h. Winter Assessment *i. Future Meetings *j. NERC News *4. Nominating Committee Report — Elect Trustees NERC-NAERO Transition *5. Task Group Recommendations — Approve *a. Governance Task Group *b. Compliance Task Group *c. Funding Task Group


Exhibit B

Tuesday, February 13, 2001 — 8 a.m. Policy Issues *6. Independence Considerations for Entities Performing Reliability Functions *7. Flow Impact Study Tool — Approve *8. Market-Reliability Interface Collaborative Planning Initiative

Administrative 9. Comments by Board Members 10. Comments by Observers

Other Business


Exhibit C

List of Attendees Board of Trustees Meeting

February 12–13, 2001

Officers Chairman Gary L. Neale Secretary-Treasurer James J. Jura Vice Chairman Howard Hawks President Michehl R. Gent

Regional Representatives

ECAR Arthur R. Garfield MAPP Robert J. Harris Patrick J. Mulchay James Averweg ERCOT John J. Stauffacher NPCC Charles J. Durkin, Jr. Mike Greene Robert A. Hiney FRCC J. Ken Wiley for Paul J. Evanson SERC Jerry J. Saacks C. Martin Mennes for Walt Bussells William K. Newman MAAC P.R.H. Landrieu SPP Gary Voigt Phillip G. Harris Tom Grennan MAIN Robert K. Harbour WSCC Jack Davis Richard Bulley for David A. Whiteley William A. Pascoe

Independents

John Q. Anderson James M. Goodrich Thomas W. Berry Sharon L. Nelson Richard Drouin William H. White Michael Enthoven

Additional Representatives

Canada David Goulding State/Municipal Dave Penn for Marvin L. Carraway Canada Ronald J. Threlkeld State/Municipal Roy Thilly Power Marketer Paul F. Barber Electricity Customer Sonny Popowsky Power Marketer Joseph Hartsoe for Electricity Customer Carol Guthrie Jeffrey K. Skilling EWG Alec Dreyer for Stephen W. Bergstrom Federal W. Terry Boston EWG Larry A. Wall for James M. Donnell Federal Michael S. Hacskaylo Cooperative Lane Mahaffey for Richard J. Midulla

Technical Steering Committee

Planning Committee Chairman Harlow R. Peterson Operating Committee Vice Chairman Derek R. Cowbourne NERC Vice President David R. Nevius

Regional Managers

ECAR Brantley H. Eldridge SERC James N. Maughn ERCOT Sam Jones for Tom Sweatman SPP John J. Marschewski, Jr. MAPP Richard B. Bulman WSCC Dennis E. Eyre NPCC Edward A. Schwerdt

Observers

Canadian Electricity Association Hans R. Konow Edison Electric Institute Christina Forbes for David K. Owens Electric Power Research Institute Kurt E. Yeager Electric Power Supply Association Lynne H. Church Electricity Consumers Resource Council John A. Anderson Federal Energy Regulatory Commission Kevin Kelly National Rural Electric Cooperative Association Ron Greenhalgh National Energy Board of Canada Julian Emanuel National Association of Regulatory Utility Commissioners Marsha Smith U.S. Department of Energy Paul Carrier for Margot Anderson

NERC Staff Donald M. Benjamin David W. Hilt Gerry W. Cauley Julie Morgan David N. Cook Virginia C. Sulzberger Robert W. Cummings

Guests

James A. Byrd, Vice President, Transmission Grid Management, TXU, and Control Area Criteria Task Force Chairman Paul Cafone, Manager System Operations, Public Service Electric & Gas Company Michael Gildea, Senior Policy Analyst, Duke Energy North America Craig Glazer, Attorney, PJM Interconnection, L.L.C. Richard Ingersoll, Vice President, ENRON Power Marketing Carl A. Monroe, Vice President Operations, Southwest Power Pool, and Resources Subcommittee Chairman

Exhibit D

Amendment to Minutes of October 12–13, 2000 Meeting

The October 12–13, 2000 Board of Trustees minutes were amended as follows. The revised minutes are posted on the NERC web site. “Security Coordinator Standards of Conduct David N. Cook, NERC General Counsel, reported that 18 of the 21 Security Coordinators had signed the Security Coordinator Standards of Conduct, and the remaining signatures were reported to be forthcoming. He re-emphasized that the term “independence” in the Standards of Conduct did not mean corporate separation. State/Municipal representative Roy Thilly raised concerns about the language in the Standards of Conduct being considerably more narrow and suggested that the retail merchant function needed a new definition. His amendment to the motion for approval of the Standards of Conduct to include his concerns failed. Mr. Thilly stated his view that the definition of ‘retail’ included in the Standards of Conduct omitted important aspects of the independence issue. Mr. Neale pointed out that the Security Coordinators had signed the Standards of Conduct with the current definition of ‘retail’ and that changing the definition would require renegotiation of the Standards of Conduct with each of the Security Coordinators. Mr. Thilly proposed an amendment to the motion to approve the Security Coordinator Standards of Conduct to amend the definition of ‘retail’ in the Standards of Conduct to track the CACTF definition and include dispatch, generation, and ancillary services. The motion to amend the motion failed 16 to 18. Subsequently, the Board approved, with two opposing votes, the Security Coordinator Standards of Conduct. Chairman Neale assured Mr. Thilly that in the spirit of his amendment, NERC staff would work on his concerns.”

Actual Budget $ Over Budget

Income

Rental 3,252$ 4,770$ (1,518)$ Internet 114,817 105,000 9,817 Interest 137,099 35,000 102,099 Copying 35 200 (165) Reports 88,794 30,250 58,544 Services & Software 65,664 85,000 (19,336) Miscellaneous 2,623 - 2,623 Total Income 412,282$ 260,220$ 152,062$

Expenses

Rent & Improvements 263,539$ 362,890$ (99,351)$ Office Costs 385,663 324,500 61,163 Furniture & Equipment 7,125 14,500 (7,376) Report Expenses 231,015 95,250 135,765 Computer 210,814 104,000 106,814 Travel & Meetings 756,951 614,000 170,951 Services 203,225 134,450 68,775 Programs (3,083) 18,000 (21,083) Total Non-Personnel 2,055,249$ 1,667,590$ 415,659$

Salaries 3,315,614$ 3,291,441$ 24,173$ Employee Costs 507,314 468,777 38,537 Savings & Retirement Plans 220,805 117,674 103,131 Total Personnel 4,043,732$ 3,877,892$ 165,840$

Total Expenses 6,098,981$ 5,545,482$ 581,499$

Total General Budget (Net) 5,686,699$ 5,285,262$ 429,437$

Special Budget

Certification (136,694)$ (33,074)$ (103,620)$ Transaction Management 1,876,369 1,875,761 608 ISN 110,874 160,380 (49,506) Standards 63,331 202,900 (122,069) Compliance 661,754 697,300 (35,546) Reorganization 509,630 820,000 (310,370) Y2K 60,423 101,256 (40,833) Critical Infrastructure Protection 6,433 47,800 (41,367) Long Term Planning to Address Market-Reliability Interface Issues 231,917 249,500 (17,583)

Total Special Budget 3,384,038$ 4,121,823$ (720,285)$

Total Budget 9,070,737$ 9,407,085$ (290,848)$

Note: Final report is subject to change based on results of audit by Druker, Rahl, & Fein

North American Electric Reliability CouncilTreasurer's Report and Budget Comparison

Comparison of Actual and Budgeted Expenses for the Period 1/1/00-12/31/00

End to Year

M R Gent

(Amended)

M R Gent

Exhibit E

M R Gent

Replacements on NERC Standing Committees1

(Approved: February 12–13, 2001 NERC Board Meeting)

Committee Former Member New Member MIC Lloyd T. Kuczek (Canada)

Manitoba Hydro (change in company position)

A. Dave Cormie (Canada) Manitoba Hydro

MIC Lydia B. Vollmer (Power Marketer) PECO Energy Power Team (company merger)

Jason Cox (Power Marketer) Constellation Baltimore, MD

MIC Louis Bolullo (Regulator - Provincial (Canada)) Régie de l’énergie, Québec (Executive Director) (change in Commission responsibilities)

Caroline Dupuis (Regulator - Provincial (Canada)) Régie de l’énergie, Québec

MIC H. Daniel Nix (Regulator - State (Western)) California Energy Commission (Staff) (resigned from the Commission)

Wally Gibson (Regulator - State (Western)) Northwest Power Planning Council (Staff)

OC Steven B. Corneli (Customer) Minnesota Attorney General’s Office (resigned from Attorney General’s Office)

Ryan Kind (Customer) Missouri Office of Public Counsel

PC Donald R. Volzka (RRO-MAIN) Wisconsin Electric Power Company (change in Regional committee membership)

Karl E. Kohlrus (RRO-MAIN) City Water Light and Power Springfield, IL

PC Sean McGoldrick (RRO-Canada West) ESBI Alberta Ltd. (change in company position)

Eamonn Duggan (RRO-Canada West) ESBI Alberta Ltd.

PC C.V. (Clarence) Thio (Canada) Manitoba Hydro (deceased)

Vic J. Stecuik (Canada) Manitoba Hydro

MIC, OC, PC Steve Kirchoff (Observer - NRECA) NRECA (resigned from NRECA)

Ron Greenhalgh (Observer-NRECA) NRECA

1To complete the terms of the former members, through June 30, 2001

Exhibit F

Members of NERC-NAERO Transition Plan Task Groups

The NERC Board members and others appointed by NERC Chairman Gary Neale to serve on the three NERC-NAERO Transition Plan Task Groups are listed below. Substitutes are listed in parentheses. Independent Trustees are shown with an asterisk.

Governance

* Richard Drouin, Chairman Jim Donnell (Steven Gilliland) Howard L. Hawks Jeffrey K. Skilling (Joseph R. Hartsoe) * Sharon L. Nelson Charles J. Durkin, Jr. * Elaine L. Chao Judi Johansen (Steven G. Hickok) Phillip G. Harris Paul J. Evanson (J. Ken Wiley) David Goulding Mike Greene

Compliance Robert K. Harbour, Chairman Patrick J. Mulchay * John Q. Anderson Edward A. Schwerdt Ronald J. Threlkeld Dennis E. Eyre

Funding * Thomas W. Berry, Chairman Arthur R. Garfield * Charles J. Henry Richard A. Bulley James J. Jura Jack Davis Sonny Popowsky P.R.H. Landrieu (Jeffrey C. Mueller) William K. Newman

M R Gent

Exhibit G

M R Gent

M R Gent

Governance Task Group Report 01/19/01

1

GOVERNANCE TASK GROUP REPORT I. The Board of Trustees’ Charge to and the Activities of the Governance Task Group

The Governance Task Force was created by action of the Board of Trustees at its October 12–13, 2000 meeting and was charged “to develop specific recommendations for consideration at the February 2001 meeting” with the following scope:

Governance — To recommend the details of how governance could be turned over to the NERC independent Trustees with a stakeholders committee available to provide advice and recommendations.

The charge of the Board of Trustees to the Governance Task Group was one of several actions taken

by the Board as part of its initiative to move NERC toward the end-state organization, “NAERO,” envisioned by NERC’s pending consensus federal reliability legislation, in the absence of any expectation of passage of that legislation in the near term. A number of the key concepts embodied in the pending legislation, and thus in the end-state NAERO model, were adopted by the NERC Board of Trustees at its July 9–10, 1998 special session. The Governance Task Group recognized the Mission of NAERO adopted by the Board of Trustees in July 1998 as fundamental principles guiding the Task Group’s work:

Mission of NAERO

n Develop, promote, and enforce standards for a reliable North American bulk electric system.

n Only industry self-regulating organization with responsibility for oversight of bulk

electric reliability of the interconnected grids in North America.

As the result of action taken by the NERC Board of Trustees in July 1998, the NERC Board was expanded in January 1999 by the election of nine independent Trustees. The following definition of “independent Board member” was added to the NERC Bylaws (Article III, §2(b)):

An independent Board member is a person who is not an officer or employee of an entity that would reasonably be perceived as having a direct financial interest in the outcome of Board decisions, and who does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Governance Task Group held a series of meetings and conference calls from October 2000 to

January 2001. A draft report of the Task Group, including proposed amendments to the NERC Certificate of Incorporation and Bylaws, was posted on the NERC web site for public comment from December 15, 2000 through January 5, 2001. The Governance Task Group reviewed the public comments at meetings on January 9–10, 2001, and this report reflects the Task Group’s consideration of those comments.

M R Gent

Exhibit H


2

II. The Governance Task Group Recommends a Two-Stage Approach to Moving NERC to the “NAERO” End-State Structure

The Governance Task Group concluded that the short time period between the October 2000 and

February 2001 Board meetings was not sufficient to allow for development of recommendations for comprehensive, long-term changes to NERC’s governance and operations, circulation of those recommendations to the NERC Members and other interested entities, receipt of feedback, and development of a final set of recommendations for comprehensive long-term changes to the Board for action at the February 2001 meeting. The Governance Task Group concluded, instead, that a two-stage approach should be adopted.

Accordingly, the Governance Task Force developed a set of specific recommendations (along with proposed amendments to the NERC Certificate of Incorporation and Bylaws that could be acted on by the Board at its February 2001 meeting) for an “Interim State.” The recommendations for the Interim State are presented and discussed in Section III below. The Governance Task Group also developed a set of recommendations, more conceptual in nature, for the End State, in which NERC would be more fully transformed into NAERO, even without legislation, but with organizational attributes consistent with those contemplated by the pending consensus legislation. The recommendations for the End State are presented in Section IV below. III. Recommendations of the Governance Task Group for the Interim State In the Interim State, the NERC Bylaws would be amended to constitute the Board of Trustees as consisting solely of nine independent Trustees plus the NERC President; and a new “Stakeholders Committee” would be formed to provide advice and recommendations to the independent Board. The initial Stakeholders Committee would consist of the “non-independent” members of the NERC Board at the time of the amendments to the NERC governance documents. The owners of NERC (called the “Members” in the Certificate of Incorporation and Bylaws) would continue to be the ten Regional Councils, as provided in the current Certificate of Incorporation.

The recommendations of the Governance Task Group with respect to governance during the Interim State are set forth below. The proposed amendments to the NERC Bylaws, and conforming amendments to the NERC Certificate of Incorporation, are included as Appendix 1 to this report. The proposed amendments to these documents are shown in both clean and black-line form in Appendix 1.

This report does not discuss each and every proposed amendment to the Certificate of Incorporation

and Bylaws. Refer to Appendix 2 for a section-by-section explanation of the proposed amendments. Appendix 3 to this report summarizes the public comments that were received on the Governance Task Group’s draft report, and the manner in which the Task Group addressed the comments. A. Recommendations for the Interim State

1. Composition and Election of the Board of Trustees

a. The Board of Trustees will consist solely of nine independent Trustees and the President of NERC. The initial nine independent Trustees will be the nine independent Board members at the time of the amendments to the NERC governance documents.


3

b. The Stakeholders Committee will elect the nine independent members of the Board

of Trustees as their terms expire, in accordance with the procedure set forth in Recommendation 1.c.

c. Independent members of the Board of Trustees will be elected each year through the

following process as the staggered three-year terms of incumbent Trustees expire, or to fill a vacancy created by the departure of an incumbent Trustee prior to expiration of his/her term:

i. The Board of Trustees will appoint a Nominating Committee to recommend

a slate of candidates for the Trustee positions to be elected at the upcoming annual election.

ii. Members of the Stakeholders Committee, the Regional Councils, and

members of the Regional Councils may recommend candidates for consideration by the Nominating Committee.

iii. The Stakeholders Committee will vote to approve or reject each candidate

in the slate recommended by the Nominating Committee.

iv. In order to be elected, a candidate must receive the votes of two-thirds of the members of the Stakeholders Committee present and voting (in person or by proxy) at the meeting for election of Trustees, assuming a quorum is present.

v. Other details of the procedures for election of independent members of the

Board of Trustees will be established by the Board of Trustees.

2. Composition of the Stakeholders Committee

a. The initial Stakeholders Committee will be composed of the non-independent members of the NERC Board of Trustees at the time of the amendments to the NERC governance documents. The Chairman of NERC immediately prior to the effective date of the amendments will chair the initial meeting of the Stakeholders Committee.

b. The initial Stakeholders Committee will not be self-perpetuating. The initial

Stakeholders Committee will be responsible to develop and recommend the composition, governance, and voting structure for an inclusive Stakeholders Committee. The Stakeholders Committee should develop a proposal on these topics and report to the Board by June 2001, and should take into account the public comments that were received on the Governance Task Group draft report with respect to the composition and governance of the Stakeholders Committee.


4

3. Budgets and Funding (Assessments)

a. The Board of Trustees will approve the annual NERC budgets, with input and advice from the Stakeholders Committee and from the NERC standing committees.

b. The Stakeholders Committee and standing committees will have the opportunity to

review and comment on the proposed budget before final approval by the Board.

c. The Board of Trustees will develop proposed assessments to the Regional Councils, taking into account other sources of funding available to NERC. The Regional Councils will have the opportunity to review and comment on the Boards’ final proposed assessments.

d. The Board of Trustees will approve the assessments to the Regional Councils.

e. If one or more Regional Councils objects to the assessment to that Region, as

approved by the Board of Trustees, within ten days after the assessments have been published by the Board, then:

i. The Chair of the Board of Trustees will convene the chairs of all of the

Regional Councils to discuss the assessments.

ii. Regional Councils will be given the opportunity to make presentations to the Board of Trustees, and, at the discretion of the Board, other interested entities may be allowed to make presentations to the Board (in each case limited to the issues raised by the objections that have been submitted to the assessments), before the Board makes its final decision on the Regional assessments.

iii. If the Board and the Regional Councils are unable to reach unanimous

agreement on the assessments within 30 days, the Board of Trustees will make a final decision as to the amount of assessments to each Regional Council. The Board may ratify the same assessments it originally approved, or may make adjustments based on consideration of information presented during the interaction with the Regional Councils.

4. Amendments to NERC Governance Documents

a. Amendment of the NERC Certificate of Incorporation will require the

recommendation of the Board of Trustees (a requirement of New Jersey law) and the unanimous vote of the Regional Councils. Although a conforming amendment to this portion of the Certificate is recommended, the resulting amendment procedure will be substantively the same as the amendment procedure specified in the current Certificate.

b. Approval of an amendment to the Bylaws requires majority votes of both the Board

of Trustees and the Stakeholders Committee.


5

c. In accordance with New Jersey statutory law, the Members (Regional Councils) retain the right to alter, amend or repeal Bylaws adopted by the independent Board and the Stakeholders Committee, and to adopt new Bylaws. A two-thirds vote of the Regional Councils should be required to amend the Bylaws.

5. Selection of Officers of NERC

a. The Board of Trustees will hire the President of NERC. The President will be the

Chief Executive Officer of NERC. The President will serve at the pleasure of the Board.

b. The President will have authority to hire and dismiss the other management officers

of NERC, subject to approval by the Board of Trustees.

6. Role of Board of Trustees in Alternative Dispute Resolution Procedures

a. The independent Board of Trustees will be responsible for examining the NERC ADR process comprehensively, taking into account the needs and requirements of the contract-based Regional Compliance and Enforcement Program.

b. Existing NERC ADR systems and processes will remain in place (excepting such

revisions as result directly from adoption of the contract-based Regional Compliance and Enforcement Program) until a new proposal, if any, is made by the Board of Trustees, and adopted.

7. Annual Review of NERC Governance: The Board of Trustees will conduct an annual

review of the NERC governance structure, and will include a statement of the conclusions of its review, and any recommendations for revisions, in the NERC annual report.

B. Discussion of Recommendations for Interim State

Prior to discussing the individual recommendations, the Governance Task Group calls to the Board’s attention the preamble to the NERC Bylaws which the Task Group proposes as part of the recommended amendments to the Bylaws. The preamble is intended to manifest NERC’s recognition of the changing nature of the electric industry and the complexities it creates; of the interests of other entities in the industry (including federal, state, and provincial governments) that are impacted by the changing industry and that may be affected by or interested in NERC’s performance of its principal mission of promoting the reliability of the bulk electric power systems of North America; of the need to achieve appropriate governance for NERC; and of the ongoing need for amendments to the Bylaws to effectively carry out NERC’s mission in the context of ongoing changes affecting the industry.

1. Composition and Election of the Board of Trustees 2. Composition of the Stakeholders Committee

The Board of Trustees’ charge to the Governance Task Group presumed that (1) the Board should be

reconstituted to consist of only independent Trustees, and (2) a Stakeholders Committee should be formed to provide advice and recommendations to the independent Board. These changes are incorporated in Recommendations 1.a and 2.a.


6

During the Interim State, the Board of Trustees would retain the typical powers of a not-for-profit

corporate board over the operation of the corporation. The powers of the Board of Trustees would include hiring the President of NERC, approving the other management officers hired by the President of NERC, approving NERC’s budgets, approving NERC’s assessments to the Regional Councils, and voting on proposed amendments to the Bylaws. The Board would also approve the appointment of persons to the Standing Committees of NERC, and would approve NERC Standards that are proposed for adoption through a process for developing and approving NERC Standards. (The Governance Task Force is not recommending any changes to the current Standing Committee composition and structure or to the current standards development process. However, the proposed Bylaws include a new Article that codifies the requirement for “an open, transparent, public process which gives entities with dissenting views the opportunity to present their concerns.”) The powers recommended for the independent Board are consistent with the scope of authority of the typical not-for-profit corporate board of directors, which normally is vested with a broad range of discretion over the management of the affairs of the corporation.

The principal powers of the Stakeholders Committee (which is not a standing committee of NERC) during the Interim State would be to elect candidates to fill open positions on the Board of Trustees, to vote on proposed amendments to the Bylaws, to participate in the budgeting process, and to provide advice and recommendations to the Board of Trustees.

The Governance Task Group concluded that the most efficient way to move quickly to an independent Board would be for the nine independent Board members to become the independent members of the “new” NERC Board. The nine members would serve until expiration of their staggered terms. As the term of each independent Trustee expires, that Trustee position would be filled through the election process set forth in Recommendation 1.c. In addition, the Task Group concluded that the President of NERC should be a member of the Board of Trustees, particularly in light of the Task Group’s recommendation that the President should become the Chief Executive Officer of NERC. (The Chair of the independent Board would become a non-executive Chair.) The Task Group believes that it will be important to NERC’s operation to have its Chief Executive Officer on the Board, especially given the reformulation of the Board to consist of members who do not have day-to-day involvement in the electric utility industry.

The Governance Task Group determined that while a Stakeholders Committee should be formed (as directed by the Board of Trustees at its October 2000 meeting), the actual membership in (and ownership of) NERC should not be expanded in the Interim State. Therefore, during the Interim State, the Members (owners) of NERC should continue to be the ten Regional Councils.

The Governance Task Group determined that the most efficient way to form the initial Stakeholders

Committee is to designate as its membership the non-independent members of the Board of Trustees at the time of the amendments to the NERC governance documents. The non-independent members of the Board include representatives of transmission providers; independent transmission system operators; electric utility and non-utility generators; power marketers; municipal, state, Canadian provincial, and federal (U.S.) utilities and power marketing entities; cooperatives; and representatives of residential and non-residential end-use electricity consumers. Thus, the composition of the initial Stakeholders Committee, as recommended by the Governance Task Group, would reflect a broad range of stakeholder interests in the North American interconnected bulk power system (Recommendation 2.a). The resultant Stakeholders Committee would, at the outset, consist of approximately 37 members.


7

The Governance Task Group concluded that neither the independent members of the Board of Trustees, nor the members of the Stakeholders Committee, should elect their own replacements, i.e., neither of these entities should be self-perpetuating. The Task Group concluded that in the Interim State, as the staggered terms of the independent members of the Board expire, those positions should be filled through the election process set forth in Recommendation 1.c and described below.

The Task Group has not made recommendations as to the composition of the Stakeholders

Committee (other than its initial composition), its governance or voting structure, or the process for selecting members for the Stakeholders Committee. Rather, the Task Group recommends that the initial Stakeholders Committee be charged with the responsibility to develop and recommend (to the Board, and ultimately to the Members and other interested stakeholders in NERC) the composition, governance, and voting structure for an open, inclusive Stakeholders Committee (Recommendation 2.b). The Task Group recommends that the Stakeholders Committee be charged to develop a proposal with respect to these issues and report to the Board by June 2001. The Stakeholders Committee’s proposal should take into account the comments that were received during the public comment period regarding the composition, selection of members, voting structure and governance of the Stakeholders Committee.

The Governance Task Group further urges the Stakeholders Committee to study and provide

recommendations concerning the roles of independent system operators, regional transmission organizations, public interest groups, and federal, state, and provincial regulators, in the NERC membership and governance structures. The Task Group also urges the Stakeholders Committee to consider and provide recommendations concerning the composition and structure of the NERC Standing Committees.

The Governance Task Group recommends the process for election of independent members of the

Board of Trustees that is set forth in Recommendation 1.c, during the Interim State. A Nominating Committee would be appointed by the Board to identify and recommend a slate of candidates for the Trustee positions to be voted on at the upcoming annual election. It is anticipated that the members of the Nominating Committee will be independent Trustees. The Nominating Committee would consider (among other sources of information) suggestions from the Stakeholders Committee, the Regional Councils, and members of the Regional Councils for candidates for the slate. The Task Group anticipates that the Nominating Committee would also work with a professional executive search firm to identify and review the credentials of potential candidates. The Stakeholders Committee will then vote to accept or reject each candidate on the proposed slate. To be elected, a candidate will be required to receive the votes of two-thirds of the members of the Stakeholders Committee present and voting (in person or by proxy) at the meeting for election of Trustees (assuming a quorum is present). If a candidate does not receive the required two-thirds vote, it would be necessary for the Nominating Committee to propose a replacement candidate(s), until a candidate is elected to that Trustee position by two-thirds vote.

The Governance Task Group considered several methods of electing Trustees that could result in contested elections, but decided not to recommend any such approach. The Task Group’s principal concern with approaches that could result in contested elections is that this could make it difficult to attract qualified “independent” individuals to stand for election, and serve, as members of the NERC Board of Trustees. In addition, contested elections could result in an independent Board that lacks one or more of the areas of expertise specified in the current Bylaws.

The Governance Task Group recommends that for purposes of the Interim State, the independent Board of Trustees be charged with determining other details of the procedures for the election of independent members of the Board, consistent with the overall process set forth in Recommendation 1.c. These details


8

would include such matters as the composition of the Nominating Committee, the dates (relative to the date of the election) by which the Nominating Committee must be appointed and by which it must announce its slate of candidates, and similar matters.

The Governance Task Group believes that the independent Board of Trustees should develop

processes for insuring the independence of Trustees and the absence of conflicts of interest, such as procedures for screening Trustee candidates by the Nominating Committee, annual internal reviews of the financial interests of sitting Trustees, and procedures for addressing allegations of non-independence.

In addition to Bylaws amendments to implement the recommendations summarized above relating to composition and responsibilities of the Board of Trustees and the Stakeholders Committee, the Governance Task Group proposes an amendment to Article SECOND of the NERC Certificate of Incorporation to add another “Purpose” to the purposes of the Corporation. This “Purpose” is based on language in the proposed federal legislation but recognizes that, in the absence of legislation, NERC’s actions to develop mechanisms to enforce compliance with NERC standards must focus on contract-based arrangements:

“to develop, implement and, consistent with executed agreement(s) with Regional Councils, enforce standards that provide for an adequate level of reliability of the bulk power systems of North America.”

3. Budgets and Funding (Assessments)

The Governance Task Group recommends that the newly-constituted Board of Trustees retain

responsibility and authority for approval of the NERC budgets (both the Management Budget and Projects Budget), with significant input from both the Stakeholders Committee and from the NERC Standing Committees (Recommendations 3.a, b, and d). The Task Group also recommends that in the Interim State, the Board of Trustees be given ultimate authority to approve the assessments to the Regional Councils, with significant input from the Regions (Recommendations 3.c, d, and e).

The Governance Task Group concluded that the Board of Trustees should develop and approve assessments to the Regional Councils, taking into account the NERC budget, the other sources of funding or revenues available to NERC, and the remaining “net” amount of the budget that must be funded by assessments to the Regions. The Regional Councils would be given the opportunity to review and comment on the assessments before they are approved. The Task Group also recommends adoption of a procedure for resolution of disputes over the Board’s approved Regional assessments. Within ten days after the Board of Trustees publishes its Regional assessments, any Regional Council may register an objection to the assessments. If a timely objection is received, the Chair of the Board of Trustees will convene the chairs of all of the Regional Councils to discuss the assessments. If this council does not produce unanimous agreement within 30 days, then the Board of Trustees will make a final decision as to the amount of assessment to each Region. However, before the Board makes its final decision, it will allow any Regional Council to make a presentation to the Board, and may in its discretion allow any other interested entity to make a presentation, concerning the final assessment (limited to issues raised by the objections that were submitted) (Recommendations 3.c, d, and e).

The Governance Task Group considered other approaches under which the Stakeholders Committee or the Members of NERC would have full or partial authority to develop, or to approve or reject, the proposed Regional assessments. The Task Group concluded, however, that giving final authority over the


9

assessments to the independent Board of Trustees in the Interim State is a necessary and timely step toward the End State. The Task Group determined that to give any entity other than the Board of Trustees final authority to determine the Regional assessments would compromise the independence of the Board and its authority over other aspects of NERC’s operations (such as the amount of resources available to be devoted to the Compliance Enforcement Program or to the development of new NERC Standards).

4. Amendments to NERC Governance Documents

Consistent with its conclusion that the membership (ownership) of NERC should not be changed at this time, the Governance Task Group recommends that during the Interim State, amendment of the Certificate of Incorporation continue to require (i) recommendation of the Board of Trustees (this is a requirement of New Jersey law), and (ii) the unanimous vote of the ten Regional Councils (Recommendation 4.a). The Task Group notes that because there will no longer be Regional representatives on the Board of Trustees, Article TENTH of the Certificate of Incorporation, which presently requires unanimous vote of those Trustees who are representatives of Members in order to amend the Certificate, should be amended. The proposed amendment to the Certificate will preserve the substance of the current requirement that amendment of the Certificate requires unanimous approval by the Regional Councils.

Consistent with the creation of an independent Board of Trustees and of a Stakeholders Committee, and the objective of commencing movement toward an End State in which NAERO would have an open, inclusive membership, the Governance Task Group concluded that the Bylaws should be amended to provide that future amendments will require majority votes of both the independent Board of Trustees and the Stakeholders Committee (Recommendation 4.b). However, in accordance with New Jersey statute, the Bylaws will provide that the Members of NERC retain the rights to alter, amend, or repeal any Bylaws passed by the independent Board and the Stakeholders Committee, and to adopt additional Bylaws. The Task Group recommends that a two-thirds vote of the Members (i.e., 7 of 10 Regional Councils) be required for the Members to amend the Bylaws (Recommendation 4.c).

5. Selection of Officers of NERC

The Governance Task Group recommends that the independent Board of Trustees hire the President of NERC, who should serve at the pleasure of the Board. The President should be the Chief Executive Officer of NERC. This would be a change from the current Bylaws, under which the Chair of the Board is the CEO of NERC. The Task Group believes that this change is appropriate in light of the movement to a smaller Board consisting of nine independent Trustees and the President, with a Board Chair who will no longer be employed full-time in the electric utility industry (Recommendation 5.a).

The Task Group also recommends that the President have authority to hire and dismiss the other management officers of NERC, subject to Board approval (Recommendation 5.b). The Secretary-Treasurer and the Assistant Secretary-Treasurer would be management employees of NERC, rather than members of the Board of Trustees as is the case today. In addition, the independent Board would continue to elect the Chair and Vice Chair of the Board, as the NERC Board does under the current Bylaws. This structure is consistent with typical corporate practice and with NERC’s current structure.

6. Role of Board of Trustees in Alternative Dispute Resolution Procedures

The Governance Task Group recommends that the independent Board of Trustees be charged with

responsibility to undertake a comprehensive examination of the NERC ADR process, and provide


10

recommendations for any modifications or additions necessary or appropriate in transitioning to the End State. The Board should take into account, among other things, the needs and requirements of the contract-based Regional Compliance and Enforcement Program, as recommended by the Compliance Task Group (Recommendation 6.a). The existing NERC ADR systems and processes should remain in place (except for those revisions necessitated by adoption of the contract-based Regional Compliance and Enforcement Program) until any new proposals are made by the Board of Trustees and implemented (Recommendation 6.b).

After considering various options for administration of ADR programs, the Governance Task Group concluded that the End-State requirements for ADR should be reviewed in a holistic manner, and that it is not necessary to develop, in a constrained time frame, significant revisions to existing ADR processes for action by the Board of Trustees at the February 2001 meeting and implementation during the Interim State. The Governance Task Group urges the Board, as part of its comprehensive review of the NERC ADR process, to attempt to define what matters should be subject to the NERC ADR process and what matters should be within the discretion of the Board.

7. Annual Review of NERC Governance

The Governance Task Group considered whether the Interim State governance structure it is recommending should have a sunset date which would terminate this structure if pending legislation to enable NAERO is not enacted within a reasonable time. The Task Group concluded that a sunset date was not warranted. A sunset date could create difficulties in the ongoing administration and operation of NERC by, among things, necessitating maintenance of a “parallel” organizational structure to go into effect should the sunset occur. Further, establishment of a sunset date for the Interim State governance structure is inconsistent with the objective of moving to an End State model having the organizational attributes of NAERO as envisioned in the pending consensus legislation, regardless of whether that legislation is enacted.

However, the Governance Task Group also concluded that regular reviews of the need for changes to the organization’s governance structure are appropriate. Accordingly, the Task Group recommends that the independent Board of Trustees have the responsibility to conduct an annual review of the NERC governance structure, and to include a statement of the conclusions of its review and any recommendations for revisions in the NERC annual report (Recommendation 7). The Governance Task Group urges the Board of Trustees to solicit the views of the Regional Councils and the Stakeholders Committee as part of its annual review of the governance structure. IV. Recommendations of the Governance Task Group for the End State

In accordance with the charge from the Board of Trustees at its October 2000 meeting, the Governance Task Group focused on development of recommendations that could be acted upon by the Board at its February 2001 meeting, and implemented soon thereafter. As described above, the Task Group concluded that a two-stage approach should be followed. The Task Group accordingly concentrated its efforts on the Interim State recommendations that are presented in Section III.

The Governance Task Group, however, also developed a more conceptual set of recommendations as

to what the governance structure of NAERO should be in the End State. These recommendations are set forth below. These recommendations represent the final, End State structure of NAERO based on implementation of both (i) the steps needed to reach the proposed Interim State structure and (ii) additional steps needed to reach the End State structure. As such, some repetition of the Interim State recommendations


11

will be apparent. The Task Group recommends that these conceptual End State Recommendations be used as a framework for the development of NAERO’s End State governance.

1. Membership/Ownership of NAERO

a. NAERO should be created as a new non-stock, not-for-profit corporation. NERC

should be merged into NAERO.

b. Membership in NAERO should be open to all entities with an interest in the operation of the North American bulk power system. Potential members could include (without intending to be limiting) the following:

i. Transmission owners/providers

ii. Utility and non-utility generators

iii. Governmentally-owned (municipal, state/provincial, federal) utilities and

power suppliers

iv. Electric cooperatives

v. Power marketers

vi. ISOs, RTOs, and Transcos

vii. Existing or reconstituted Regional Councils

viii. End-use customers and representatives of end-use customer groups

ix. Environmental groups and other public interest groups

x. Federal and State regulatory agencies

xi. States and provinces

c. Members of NAERO should be classified into classes or sectors for voting purposes.

d. The Members of NAERO should have the following rights, which should be

exercised through sector voting in the manner described in Recommendation 2.e below:

i To elect the members of the independent Board of Trustees

ii. To approve amendments to the NAERO Certificate of Incorporation

iii. To amend the NAERO Bylaws


12

e. The Interim State Stakeholders Committee should be abolished in light of the membership structure described above. This would not preclude the Board of Trustees from creating or appointing such advisory committees or task groups as the Board deems advisable from time to time.

2. Composition and Election of the Board of Trustees of NAERO

a. The Board of Trustees should continue to be composed of nine independent

members plus the President of NAERO.

b. The terms of the independent Board members should continue to be staggered so that three Board members are elected each year.

c. Candidates for election to the Board should continue to be selected by a Nominating

Committee appointed by the Board, based on consideration of (among other information) recommendations from Members of NAERO.

d. Criteria relating to (i) areas of expertise and (ii) geographic distribution of Board

members should be developed to help guide the Nominating Committee in the selection of candidates.

e. The Members of NAERO should vote to elect or reject the candidates proposed by

the Nominating Committee. Election of a candidate should require a two-thirds vote of the Members voting, based on weighted sector voting in which each sector’s vote is weighted as 1.00 but is split based on the percentage of “Yes” and “No” votes for the candidate cast by the Members in the sector.

f. The Board should elect its Chair and Vice Chair from among its members

(excluding the President of NAERO).

3. Powers and Responsibilities of the Board of Trustees of NAERO

a. The Board should be responsible for approving the annual operating budgets for NAERO as well as any budgets for special projects.

b. The Board should have ultimate responsibility for approving assessments, user fees,

and other fees and charges to be paid by Members, users of the bulk power system, and other persons and entities, to cover NAERO’s funding requirements.

c. A formalized process should be implemented for the provision of input by Members

of NAERO in the development of budgets, assessments, and fees. This process could include establishment of a Finance Committee comprised of representatives of the various Member sectors.

d. The Board should hire the President of NAERO, who should serve at the pleasure of

the Board. The Board should appoint the other management officers of NAERO, based on the recommendations of the President, who would hire the other officers.


13

e. The Board should have the power to approve amendments to the NAERO Bylaws,

subject to the right of the Members of NAERO to override any amendments or to adopt other amendments.

f. The Board should make appointments to NAERO Standing Committees, based on

consideration of (among other information) recommendations from the Standing Committees and from Members of NAERO.

g. The Board should be responsible for approving adoption of proposed NAERO

Standards and proposed variances, and for approving deletion or amendment of existing Standards and variances, based on the recommendation(s) of the applicable Standing Committee or Committees.

h. The Board should be responsible for approving agreements, or amendments to

agreements, with Regional entities for implementation of Regional Compliance Enforcement Programs.

i. The Board should establish procedures for open conduct of its meetings including

procedures allowing representatives of Members of NAERO and others to attend Board meetings as observers, subject to reasonable and non-discriminatory restrictions based on (i) space limitations and (ii) avoidance of disclosure of confidential or proprietary information.

j. The Board should have other normal powers, authorities, and responsibilities of a not-

for-profit corporate board under the laws of its state of incorporation, including the powers to form committees (e.g., Executive, Audit, Human Resources, and Finance Committees), to commit NAERO to commercial contracts, etc.

Certificate of Incorporation – Clean Version 01/19/01

1

Appendix 1 – Clean Version CERTIFICATE OF INCORPORATION OF THE NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL

The undersigned do hereby associate themselves into a Corporation for a lawful purpose other than for pecuniary profit under and by virtue of Title 15 of the New Jersey Statutes and pursuant thereto, do hereby certify:

FIRST: The name of the Corporation is NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL.

SECOND: The purposes for which the Corporation is formed are:

a. to promote the reliability and adequacy of bulk electric supply by the electric systems of North America;

b. to develop, implement and, consistent with executed agreement(s) with Regional

Councils, enforce standards that provide for an adequate level of reliability of the bulk power systems of North America;

c. to conduct interregional studies that relate to the reliability and adequacy of the bulk

electric systems and to make information appropriately available;

d. to encourage and assist the development of interregional reliability arrangements among Regional Electric Reliability Councils (Regional Councils) and their members;

e. to exchange information with respect to planning and operating matters relating to

the reliability and adequacy of bulk electric supply;

f. to review periodically Regional and interregional activities on reliability and adequacy;

g. to provide independent reviews of interregional matters referred to it by the

Regional Councils; and

h. to provide a voluntary, industry-based alternative dispute resolution mechanism for resolving disputes, especially reliability-related disputes, referred to it by any Regional Council or by its Board of Trustees.


2

The Corporation is a business league within the meaning of Section 501(c) (6) of the United States Internal Revenue Code of 1954.

THIRD: The Corporation will conduct its activities within the State of New Jersey and without the State of New Jersey as the Board of Trustees may determine from time to time.

FOURTH: The business, property, and affairs of the Corporation, subject to the Bylaws, shall be managed and conducted by a Board of Trustees of which there shall be that number of Trustees, not less than three, which shall be fixed by the Bylaws. The Trustees shall be appointed or elected as the Bylaws provide and their terms of office shall be two years, or such other terms as the Bylaws may provide, and until their successors are elected, except that the names and post office addresses of the Trustees selected for the first year of the Corporation’s existence are: NAME POST OFFICE ADDRESS S.C. Schaffer 435 Sixth Avenue

Pittsburgh, Pennsylvania 15219 B.J. Yeager 139 East 4th Street

Cincinnati, Ohio 45202 L.S. Turner, Jr. 1506 Commerce Street

Dallas, Texas 75201 B.B. Hulsey, Jr. 7th & Lamar

Ft. Worth, Texas 76101 H.L. Collins Two North 9th Street

Allentown, Pennsylvania 18101 Frank J. Ficadenti 1600 Pacific Avenue

Atlantic City, New Jersey 08404 J.G. Quale 231 West Michigan Street

Milwaukee, Wisconsin 53201 E.K. Dille One Memorial Drive

St. Louis, Missouri 63166 T.J. Ayers One First National Plaza

Chicago, Illinois 60690 DE. Schaufelberger 2504 14th Street

Columbus, Nebraska 68102 J.L. Wilkins 1623 Harney Street

Omaha, Nebraska 68102


3

NAME POST OFFICE ADDRESS J.R. Lyon 823 Walnut Street

Des Moines, Iowa 50303 T.J. Brosnan 300 Erie Boulevard ‘W’

Syracuse, New York 13202 H.A. Smith 620 University Avenue

Toronto 2, Canada W.J. Matthews 555 Wayside Drive

Indianapolis, Indiana 46260 J.M. Farley 600 North 18th Street

Birmingham, Alabama 35291 A.H. Hines, Jr. 3201 Thirty-Fourth Street, South

St. Petersburg, Florida 33733 William McCollam, Jr. 317 Baronne Street

New Orleans, Louisiana 70160 R.O. Newman 600 South Main Street

Tulsa, Oklahoma 74119 R.F. Walker 5900 East 39th Avenue

Denver, Colorado 80201 John J. Bugas Woodgate Road

Montrose, Colorado 81401 Hugh L. Spurlock Route 1 B Lexington Road

Winchester, Kentucky 40391 Donald P. Hodel 1002 N.S. Halladay

Portland, Oregon 97208 William B. McGuire Route 2, Box 857

Denver, North Carolina 28037 Floyd L. Goss 4100 Dundee Drive

Los Angeles, California 90027 J.E. Watson Sixth and Market Streets

Chattanooga, Tennessee 37401


4

FIFTH: The name and post office address of the resident agent of the Corporation upon whom process against the Corporation may be served is Michehl R. Gent, 116-390 Village Boulevard, Princeton, New Jersey 08540-5731.

SIXTH: The Members of the Corporation shall be the various Regional Councils as provided in the Bylaws. The Bylaws may also provide for non-voting Affiliate memberships.

SEVENTH: No Trustee, Officer, or Member of the Corporation shall as such receive or become entitled to receive at any time any part of the net income of the Corporation, nor shall any part of the net earnings of the Corporation inure to the benefit of any person, except as reasonable compensation for services rendered and reimbursements for expenses actually incurred in conducting its affairs and carrying out its purposes.

EIGHTH: (a) A representative or representatives of the United States government and the government of Canada may be designated by the Board of Trustees from time to time as Observers of meetings of the Board of Trustees.

(b) The Board of Trustees may invite other federal or Canadian agencies or national organizations whose interests and activities are concerned with bulk electric supply to designate an individual to observe meetings of the Board of Trustees upon determination that such action would enhance the effectiveness of the Corporation in attaining the purposes for which it is formed.

NINTH: Upon dissolution, after payment of all debts, no part of the remaining assets may be distributed to any Trustee of the Corporation, but shall be distributed as the Bylaws may direct in accordance with law, provided, however, that the distribution must conform to the distribution requirements of Section 501 (c) (6) of the United States Internal Revenue Code.

TENTH: No amendment, change, or alteration of this Certificate of Incorporation shall be made without the unanimous approval of the Members at any annual or special meeting of the Members or the unanimous written consent of the Members acting without a meeting. Written notice of the proposed amendment, change, or alteration of this Certificate of Incorporation shall be included in the notice of the annual or special meeting or the call for action without a meeting of Members given to each Member in accordance with the Bylaws.

ELEVENTH: No Trustee or Officer of the Corporation shall be personally liable to the Corporation for damages for breach of any duty owed to the Corporation, except for liabilities arising from breach of any duty based upon an act or omission (1) in breach of the duty of loyalty owed to the Corporation, (2) not in good faith or involving a knowing violation of law, or (3) resulting in receipt by such Trustee or Officer of an improper personal benefit. Neither the amendment or repeal of this paragraph ELEVENTH, nor the adoption of any provision of this Certificate of Incorporation inconsistent with paragraph ELEVENTH, shall eliminate or reduce the protection offered by this paragraph ELEVENTH to a Trustee or Officer of the Corporation in respect to any matter which occurred, or any cause of action, suit or claim which but for this paragraph ELEVENTH would have accrued or arisen, prior to such amendment, repeal, or adoption.


5

IN WITNESS WHEREOF, we have hereunto set our hands and seals this 21st day of August 1974. EAST CENTRAL AREA RELIABILITY ELECTRIC RELIABILITY COUNCIL COORDINATION AGREEMENT OF TEXAS B.J. Yeager L.S. Turner, Jr. Chairman, Executive Board Chairman MID-ATLANTIC AREA COUNCIL MID-AMERICA INTERPOOL NETWORK H.L. Collins J.G. Quale Chairman Chairman, Executive Committee MID-CONTINENT AREA RELIABILITY NORTHEAST POWER COORDINATING COORDINATION AGREEMENT COUNCIL D.E. Schaufelberger T.J. Brosnan Chairman Chairman SOUTHEASTERN ELECTRIC RELIABILITY SOUTHWEST POWER POOL COUNCIL William McCollam, Jr. J.M. Farley Chairman Chairman, Executive Board WESTERN SYSTEMS COORDINATING COUNCIL R.F. Walker Chairman

Bylaws – Clean Version 01/19/01

1

Appendix 1 – Clean Version BYLAWS OF THE NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL WHEREAS, the electric systems of North America comprise an interconnected network of systems and facilities that provide electricity for the welfare of the public; and WHEREAS, the principal mission of the North American Electric Reliability Council, hereinafter referred to as the Corporation, is to promote the reliability and adequacy of electric supply by the electric systems of North America, including through standards that provide for an adequate level of reliability of the bulk electric power systems of North America; and WHEREAS, the transition of the electric industry to new structures is complex due to the physics of electricity, the varying states of development, jurisdictional issues, commercial considerations, and public interest requirements; and WHEREAS, the Corporation recognizes that its actions must be carried out in an open and inclusive manner, and consistent with applicable federal, state, and provincial laws; and WHEREAS, to achieve a higher order of sophistication in addressing these complexities and maintain the reliability of the bulk electric power systems of North America, it is necessary that the Corporation move forward in a proactive way and adapt, as circumstances dictate, to achieve appropriate governance for the Corporation; and WHEREAS, the Bylaws of the Corporation are intended to meet these needs and to be complementary to and consistent with the requirements of the various constituent interests that may be affected thereby, while promoting the reliability of the bulk electric power systems of North America; and WHEREAS, it is anticipated that the Bylaws of the Corporation will be amended from time to time as necessary to meet the requirements of a reliable bulk electric power system consistent with the prevailing states of technology, law, regulation, and commercial endeavor necessary to provide electricity for the public good.


2

ARTICLE I Membership Section 1 -- Categories -- The Members of the North American Electric Reliability Council, hereinafter referred to as the “Corporation,” are the following Regional Electric Reliability Councils (Regional Councils): East Central Area Reliability Coordination Agreement, Electric Reliability Council of Texas, Florida Reliability Coordinating Council, Mid-Atlantic Area Council, Mid-America Interconnected Network, Inc., Mid-Continent Area Power Pool, Northeast Power Coordinating Council, Southeastern Electric Reliability Council, Southwest Power Pool, and Western Systems Coordinating Council. Membership may be amended from time to time in accordance with this Article I. Section 2 -- Member Qualifications -- Membership in the Corporation is voluntary and open to any Regional Electric Reliability Council (Regional Council), wherein that Regional Council meets the following qualifications of full membership:

a A Regional Council shall be comprised of members from one or more sectors of the electric industry including, but not limited to, the (i) federal, (ii) investor-owned, (iii) rural electric cooperative, (iv) state/municipal, (v) exempt wholesale generator, (vi) power marketer, and (vii) customer sectors (each a “Sector” and, collectively, the “Sectors”). A member of a Regional Council may also be a member of one or more other Regional Councils, if permitted by the said Regional Councils.

b. A Regional Council shall be comprised of two or more contiguous bulk electric systems, each

of which is electrically interconnected by two or more transmission lines with one or more other contiguous member systems within that Regional Council.

A bulk electric system is defined as that portion of an electric utility system, which encompasses the electrical generation resources, transmission lines, interconnections with neighboring systems, and associated equipment, generally operated at voltages of 100 kV or higher.

c. The Regional Council shall be electrically interconnected by two or more transmission lines

with one or more other contiguous Regional Councils.

d. The total net energy for load of all members located within a Regional Council’s boundaries shall be at least 100 million MWh per year.

Section 3 -- Obligations -- A Member, on behalf of its members, shall agree, in writing, to accept the responsibility to promote, support, and comply with the purposes and policies of the Corporation as set forth in its Certificate of Incorporation, Bylaws, and Planning and Operating Policies that from time to time may be amended, adopted, or approved. In addition, it shall provide for its share of the financial support of the Corporation in a timely manner. Section 4 -- Application -- A Regional Council shall apply for membership in the Corporation by filing its request, in writing, with the Chairman of the Board of Trustees and with a copy to the President of the Corporation. Section 5 -- Approval -- A Regional Council shall be admitted as a Member of the Corporation by the Members and the Board of Trustees by a two-thirds vote of the Members and of the Trustees present and voting at


3

respective meetings of the Members and of the Board at which a quorum of the Members and of the Board, respectively, entitled to vote is present. Section 6 -- Term -- Membership in the Corporation shall be retained as long as a Member meets its respective qualifications and obligations of membership as set forth in Article I, Sections 2 and 3. Section 7 -- Removal -- The Members and the Board may terminate the membership of a Member if in the judgment of the Members and the Board that Member has violated its obligations and responsibilities to the Corporation. This termination shall require a two-thirds vote of the Members and of the Trustees present and voting at respective meetings of the Members and of the Board at which a quorum of the Members and of the Board, respectively, entitled to vote is present. The Member in question shall be excluded from any termination vote by the Members. ARTICLE II Meetings of Members Section 1 -- Annual Meeting of Members -- The Annual Meeting of Members for the transaction of such business as shall come before the meeting shall be held at 9 a.m. on the second Tuesday of February of each year, or if that day is a legal holiday, on the next succeeding business day, at the principal office of the Corporation, or such other time, date, and place as shall be specified in the written notice of the time, date, place, and purposes of the meeting given to the Members not less than ten nor more than sixty days prior to the date of the meeting. Section 2 -- Special Meetings of Members -- Special meetings of Members may be called for any purpose or purposes by the Chairman or by any two Members. Special meetings shall be held at the principal office of the Corporation or at such other place as shall be specified in the notice of meeting. Special meetings shall be called upon written notice of the time, date, place, and purposes of the meeting given to all Members not less than ten nor more than sixty days prior to the date of the meeting. Section 3 -- Waivers of Notice of Meetings of Members; and Member Meeting Adjournments -- Notice of a meeting of Members need not be given to any Member who signs a waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any Member at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice of the meeting by such Member. When any meeting of Members is adjourned to another time or place, it shall not be necessary to give notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and if at the adjourned meeting only such business is transacted as might have been transacted at the original meeting. Section 4 -- Action Without a Meeting of Members -- Any action, required or permitted to be taken at a meeting of Members, may be taken without a meeting if all the Members entitled to vote on the action consent to the action in writing. The call for action without a meeting of Members may be initiated by the Chairman or by any two Members. The Members shall receive written notice of the results within ten days of the action vote, and all written responses of the Members shall be filed with the minutes of proceedings of Members.


4

ARTICLE III Board of Trustees Section 1 -- Board of Trustees -- The business and affairs of the Corporation shall be managed by a Board of Trustees (the “Board”). The Board shall consist of ten members (the “Trustees”). Nine of the Trustees shall be “independent” Trustees nominated and elected in accordance with the procedures specified in Sections 2, 3, 4 and 5 of this Article III (the “Independent Trustees”). The remaining Trustee shall be the person elected by the Board of Trustees, in accordance with Article VII, Section 1, of these Bylaws, to serve as president of the Corporation (the “Management Trustee”). Each Trustee, including the Management Trustee, shall have one vote on any matter brought before the Board for a vote. All Trustees are expected to serve the public interest and to represent the reliability concerns of the entire North American electric grid system. Section 2 -- Independent Board Members -- The Independent Trustees shall be elected, shall have the qualifications specified, and shall serve in the manner provided in this section. a. The terms of the Independent Trustees elected for three-year terms at the January 1999 meeting of the

Board shall expire at the Annual Meeting of the Stakeholders Committee to be held in 2002. The terms of the Independent Trustees elected for four-year terms at the January 1999 meeting of the Board shall expire at the Annual Meeting of the Stakeholders Committee to be held in 2003. The terms of the Independent Trustees elected for three-year terms at the February 2001 meeting of the Board shall expire at the Annual Meeting of the Stakeholders Committee to be held in 2004. Thereafter, Independent Trustees shall be elected to terms expiring at the third succeeding Annual Meeting of the Stakeholders Committee after their election.

b. An Independent Trustee is a person who is not an officer or employee of the Corporation or of any entity

that would reasonably be perceived as having a direct financial interest in the outcome of Board decisions and who does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a Trustee.

c. Independent Trustees shall be nominated, appointed and elected pursuant to the nomination and election

procedures specified in Sections 3, 4 and 5 of this Article III. d. The Board must at all times include at least one Independent Trustee with appropriate knowledge and

experience of the industry, regulatory, and legal systems in the U.S. and at least one Independent Trustee with similar knowledge and experience in Canada. When Mexico is ready to provide for an appropriate grant of authority to a self-regulating reliability organization (SRRO) to set standards, enforce compliance, and collect funds, this Board composition requirement will be expanded to include Mexico.

Section 3--Vacancies on the Board. Any vacancies on the Board of Trustees arising from the death, resignation, retirement, disqualification, or removal from office of any Trustee or other cause shall be filled only by a majority vote of all of the Trustees then in office, though less than a quorum. Any Trustee so chosen shall serve until the next annual meeting of the Stakeholders Committee. Section 4 – Nominating Committee --The Board of Trustees shall appoint, on an annual basis, a nominating committee (the “Nominating Committee”) to recommend candidates (a) to succeed the Independent Trustees whose terms expire at the next annual meeting of the Stakeholders Committee to be held that year and (b) to serve the remainder of the term of any Independent Trustee who ceased to serve as a Trustee in the preceding


5

year. The Nominating Committee shall consist of such number of persons with such qualifications as the Board of Trustees shall specify. The Board of Trustees shall establish, by resolution, the procedures to be followed by the Nominating Committee in identifying and recommending candidates to serve as Independent Trustees; provided, however, that such procedures shall include a means of permitting members of the Stakeholders Committee, the Member Regional Councils and their members to recommend to the Nominating Committee candidates for consideration as nominees for Independent Trustees. The Nominating Committee shall endeavor to nominate candidates for election to the Board of Trustees consistent with the objectives that the Board as an entirety reflects expertise in the areas of technical electric operations and reliability, legal, market, financial and regulatory matters, and familiarity with Regional system operation issues; and reflects geographic diversity and the international nature of the Corporation. Section 5 -- Election of Independent Trustees -- The members of the Stakeholders Committee shall elect the persons (a) to succeed those Independent Trustees whose terms expire at each annual meeting of the Stakeholders Committee and (b) to serve the remainder of the term of any Independent Trustee who ceased to serve as a Trustee in the preceding year. Each member of the Stakeholders Committee shall have one vote on each position to be filled. All Independent Trustees shall be elected from one or more slates of nominees proposed by the Nominating Committee. A nominee shall be elected an Independent Trustee if such person receives the affirmative vote of two-thirds of the members of the Stakeholders Committee who are present in person or by proxy, and voting, at an annual or special meeting of the Stakeholders Committee at which a quorum is present. Each nominee receiving the necessary two-thirds vote of the Stakeholders Committee shall take office immediately upon election. In the event that the Stakeholders Committee fails to elect a nominee to fill one or more of the positions of Independent Trustee to be filled at a meeting of the Stakeholders Committee, the meeting shall be adjourned until such time as the Nominating Committee shall have considered and proposed an additional nominee for that position for election by the Stakeholders Committee. Section 6 -- Appointment of Management Trustee -- The president of the Corporation shall be appointed a Trustee of the Corporation, effective as of the date of his or her election by the Board as president of the Corporation in accordance with Article VII, Section 1, of these Bylaws, to serve until such time that he or she ceases to hold the position of president. No action of the Stakeholders Committee or the Members shall be required in connection with the appointment of the President as a Trustee of the Corporation. ARTICLE IV Meetings of the Board of Trustees Section 1 -- Regular Meetings of the Board -- A regular meeting of the Board for such business as may come before the meeting shall be held without notice immediately following the Annual Meeting of the Stakeholders Committee at the same place as the Annual Meeting of the Stakeholders Committee. By resolution adopted at any meeting of the Board, the Board may provide for additional regular meetings that may be held without notice. Section 2 -- Special Meetings of the Board -- Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman or by any two Trustees. Such meetings may be held upon notice given to all Trustees not less than five days prior to the date of the meeting. Such notice shall specify the time, date, place, and purpose or purposes of the meeting and may be given by telephone, telegraph or other electronic media, or by express delivery. Section 3 – Meetings of the Board to be Open – Notice to the public of the dates, places and times of meetings of the Board, and all non-confidential materials provided to the Board, shall be posted on the Corporation’s web site at the same time that notice is given to the Trustees. Meetings of the Board shall be open


6

to the public, subject to reasonable limitations due to the availability and size of meeting facilities; provided, that the Board may meet in or adjourn to closed session to discuss matters of a confidential nature, including but not limited to personnel matters, litigation, or commercially sensitive information of any entity. Section 4 -- Waivers of Notice of Board Meetings; and Board Meeting Adjournments --Notice of a Board meeting need not be given to any Trustee who signs a waiver of notice, in person or by proxy, whether before or after the meeting, or who attends the meeting without protesting, prior to the conclusion of the meeting, the lack of notice of such meeting. Notice of an adjourned Board meeting need not be given if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and if the period of adjournment does not exceed ten days. Section 5 -- Action Without a Meeting -- Any action, required or permitted to be taken at a meeting of the Board or of any committee thereof, may be taken by the Board or by the committee without a meeting if all the Trustees or members of the committee, as the case may be, entitled to vote on the action consent to the action in writing. The call for action without a meeting of the Board may be initiated by the Chairman or by any two Trustees. The call for action without a meeting of a committee of the Board may be initiated by the Chairman or by any two members of the committee. The Trustees or members of the committee shall receive written notice of the results within seven days of the action vote. All written responses of the Trustees shall be filed with the minutes of the Corporation, and all written responses of members of a committee shall be filed with the minutes of such committee, Any or all of the Trustees, or members of a committee, may participate in a meeting of the Board, or a meeting of the committee, respectively, by means of a communications system by which all persons participating in the meeting are able to hear each other. ARTICLE V Stakeholders Committee Section 1 -- Stakeholders Committee --The Corporation shall have a Stakeholders Committee that shall have the following rights and obligations:

a. to elect the Independent Trustees, in accordance with Article III, Section 5; b. to vote on amendments to the Bylaws, in accordance with Article XI, Section 1;

c. to participate in the budgeting process, in accordance with Article X, Section 1; and

d. to provide advice and recommendations to the Board on other matters.

The initial Stakeholders Committee shall consist of those persons who were members of the Board of Trustees of the Corporation as of [insert date of adoption of the amendments to the Bylaws] and who do not qualify as Independent Trustees under Article III, Section 2 or as the Management Trustee under Article III, Section 6. Each member of the Stakeholders Committee shall have one vote on any matter brought before the Stakeholders Committee. The Stakeholders Committee shall not be a standing committee of the Corporation. Section 2-- Vacancies on the Stakeholders Committee. In the event that any member of the Stakeholders Committee ceases to serve as a member of the Stakeholders Committee as a result of his or her death,


7

resignation, retirement, disqualification, or removal or other cause, the remaining members of the Stakeholders Committee shall appoint a new member to replace the member of the Stakeholders Committee who ceases to serve. Any new member of the Stakeholders Committee so appointed shall be from the same Member or Sector as the member of the Stakeholders Committee that he or she replaces; provided, that each Member shall have the right to designate the person who is to replace any designee of such Member who ceases to serve on the Stakeholders Committee.

ARTICLE VI Meetings of the Stakeholders Committee Section 1 -- Annual Meeting of the Stakeholders Committee-- The Annual Meeting of the Stakeholders Committee to elect the Independent Trustees and conduct such other business as may come before the meeting shall be held without notice immediately following the Annual Meeting of Members at the same place as the Annual Meeting of Members. By resolution adopted at any meeting of the Stakeholders Committee, the Stakeholders Committee may provide for additional regular meetings that may be held without notice. Section 2 -- Special Meetings of the Stakeholders Committee -- Special meetings of the Stakeholders Committee for any purpose or purposes may be called by any five members of the Stakeholders Committee, and require notice given to all members of the Stakeholders Committee not less than seven days prior to the date of the meeting. Such notice shall specify the time, date, place, and purpose or purposes of the meeting and may be given by telephone, telegraph or other electronic media, or by express delivery. Section 3 – Meetings of the Stakeholders Committee to be Open – Notice to the public of the dates, places and times of meetings of the Stakeholders Committee, and all non-confidential materials provided to the Stakeholders Committee, shall be posted on the Corporation’s web site at the same time that notice is given to the Stakeholders Committee. Meetings of the Stakeholders Committee shall be open to the public, subject to reasonable limitations due to the availability and size of meeting facilities; provided, that the Stakeholders Committee may meet in or adjourn to closed session to discuss matters of a confidential nature, including but not limited to personnel matters, litigation, or commercially sensitive information of any entity. Section 4 -- Waivers of Notice of Meetings of the Stakeholders Committee; and Meeting Adjournments --Notice of a meeting of the Stakeholders Committee need not be given to any member of the Stakeholders Committee who signs a waiver of notice, in person or by proxy, whether before or after the meeting, or who attends the meeting without protesting, prior to the conclusion of the meeting, the lack of notice of such meeting. Notice of an adjourned meeting of the Stakeholders Committee need not be given if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and if the period of adjournment does not exceed ten days. Section 5 -- Action Without a Meeting of the Stakeholders Committee -- Any action required or permitted to be taken at a meeting of the Stakeholders Committee may be taken by the Stakeholders Committee without a meeting if all the members of the Stakeholders Committee entitled to vote on the action consent to the action in writing. The call for action without a meeting of the Stakeholders Committee may be initiated by any five members of the Stakeholders Committee. The members of the Stakeholders Committee shall receive written notice of the results within seven days of the action vote, and all written responses of members of the Stakeholders Committee shall be filed with the minutes of the Corporation.


8

Any or all members of the Stakeholders Committee may participate in a meeting of the Stakeholders Committee by means of a communications system by which all persons participating in the meeting are able to hear each other. Section 6 – Other Procedures of the Stakeholders Committee – The Chairman of the Board in office on [the day before the date that the amended Bylaws take effect] shall preside at the initial meeting of the Stakeholders Committee. The Stakeholders Committee may adopt such additional procedures, not inconsistent with these Bylaws, as it deems appropriate; provided, however, that in any matter as to which the procedure to be followed by the Stakeholders Committee is not expressly set forth in these Bylaws, the Stakeholders Committee shall follow as closely as circumstances permit the procedures prescribed for the Board of Trustees.

ARTICLE VII Officers Section 1 -- Officers -- At its regular meeting following the first Annual Meeting of Members and annually thereafter, the Board shall elect a Chairman, a Vice Chairman, a President, a Secretary-Treasurer, an Assistant Secretary Treasurer, and such other officers (collectively, the “Officers”) as it shall deem necessary. The Chairman and the Vice Chairman must each be Independent Trustees prior to their election to such offices. The Chairman, Vice Chairman, and President shall each be nominated and elected by the Board. All of the remaining Officers shall be appointed or removed by the Board based upon the recommendation of the President. The duties and authority of the Chairman, the Vice Chairman and the President shall be determined from time to time by the Board, and the duties and authority of the other Officers of the Corporation shall be determined from time to time by the President. Subject to any such determination, the Officers shall have the following duties and authority: a. The Chairman shall preside at all meetings of the Members and at all meetings of the Board. The

Chairman, in consultation with the other Trustees, shall be responsible for the efficient operation of the Board and its committees. The Chairman shall be an ex officio member of each committee of the Board. The Chairman may delegate from time to time any or all of the aforesaid duties and authority to the Vice Chairman, the President or any other Officer.

b. The Vice Chairman shall have such duties and possess such other powers as may be delegated to him or

her by the Chairman. The Vice Chairman shall act as the Chairman at such times as the Chairman may request. In the event the Chairman is unable to discharge the duties and powers of that office by reason of incapacity and during any vacancies in the office of the Chairman, the Vice Chairman shall act as Chairman until the cessation of such incapacity or the filling of such vacancy.

c. The President shall be the Chief Executive Officer of the Corporation. He or she shall be responsible

for the day-to-day ongoing activities of the Corporation and shall have such other duties as may be delegated or assigned to him or her by the Chairman. The President may enter into and execute in the name of the Corporation contracts or other instruments not in the regular course of business that are authorized, either generally or specifically, by the Board.

d. The Secretary-Treasurer shall have custody of the funds and securities of the Corporation; shall keep or

cause to be kept regular books of account for the Corporation; shall cause notices of all meetings to be served as prescribed in these Bylaws; shall keep or cause to be kept the minutes of all meetings of the Members and the Board; and shall have charge of the seal of the Corporation. The Secretary-Treasurer shall perform such other duties and possess such other powers as are incident to his or her office or as


9

shall be assigned to him or her by the President. e. The Assistant Secretary-Treasurer shall have such duties and possess such other powers as may be

delegated to him or her by the President.

ARTICLE VIII Committees Section 1 -- Committees -- The Board of Trustees shall by resolution appoint all standing committees of the Corporation; and may in addition by resolution appoint such committees and task forces as the Board deems necessary to carry out the purposes of the Corporation, including (without limiting the generality of the foregoing) an executive committee, an audit committee, a human resources committee, a finance committee and a governance committee; provided, that the Management Trustee shall not be a member of the audit committee or of the human resources committee, if any. The Board shall appoint standing committees of the Corporation that are representative of Members, interested parties and the public, and that include members with outstanding technical knowledge and experience. All committees and task forces shall have such duties, not inconsistent with law, as are determined by the Board.

ARTICLE IX Quorums and Voting

Section 1 -- Quorums and Voting -- The quorum necessary for the transaction of business at meetings of the Board, of the Members, or of the Stakeholders Committee shall be a majority of those Trustees, Members or members of the Stakeholders Committee entitled to be present and to vote at the respective meetings. Except as otherwise expressly provided in these Bylaws or applicable law, actions by the Board shall be approved upon receipt of the affirmative vote of a majority of the Trustees present and voting at any meeting at which a quorum is present. Except as otherwise expressly provided in the Corporation’s Certificate of Incorporation, these Bylaws or applicable law, actions by the Members or the Stakeholders Committee shall be approved upon receipt of the affirmative vote of a majority of the Members or members of the Stakeholders Committee present and voting at any meeting at which a quorum is present.

ARTICLE X Fiscal Matters

Section 1 -- Compensation of the Board and Stakeholders Committee -- The Board shall have the right to fix from time to time, by resolution adopted by a majority of the Independent Trustees then serving as trustees, the amount of the annual retainer fee or other compensation to be paid to the Independent Trustees for their services to the Corporation, including any fees to be paid for each meeting of the Board or any Board committee attended by an Independent Trustee. No compensation shall be paid to the Management Trustee for his or her services on the Board, other than the compensation paid to the Management Trustee for services as president of the Corporation. No compensation shall be paid by the Corporation to the members of the Stakeholders Committee for their services on the Stakeholders Committee. Section 2 --- Adoption of Budgets--The Board shall prepare or cause to be prepared an annual budget for the administrative and other expenses of the Corporation and a special budget for any special projects undertaken by the Corporation, upon consultation with the members of the Stakeholders Committee. Each annual budget and any


10

special budget shall be approved by the Board at a regular meeting or a special meeting of the Board duly called for that purpose. The Stakeholders Committee, and any standing committee appointed by the Board pursuant to Article VIII, Section 1, of these Bylaws, shall have the right to review and comment on the final draft of each annual or special budget proposed by the Board at a reasonable time before the date of its proposed adoption by the Board. Section 3 -- Approval of Assessments--The Board shall determine, or cause to be determined, the amount of the proposed assessments to be paid by the Members in connection with any annual budget or special budget proposed to be adopted by the Board. The Members shall have the right to review and comment on the final draft of the proposed assessments to be paid by the Members at a reasonable time before the date of the proposed approval of such assessments by the Board. Section 4 -- Procedures for Resolving Disputes Relating to Assessments -- Any Member that objects to the amount or manner of determining the assessment approved by the Board pursuant to the procedures specified in Section 3 of this Article X shall give written notice of its objection to the Board of Trustees, together with a reasonably detailed statement of the basis of the objection, no later than ten days after such Member has received written notice of the assessment from the Board (the “Assessment Objection Period”). In the event that the Board receives one or more notices of objection, the Chairman of the Board of Trustees shall convene a meeting of the chairpersons of each of the Members or their designated representatives to review and reevaluate the assessments approved by the Board of Trustees (the “Assessment Reevaluation Meeting”) as promptly as reasonably possible after the last day of the Assessment Objection Period. Any Member shall have the opportunity to make a presentation to the Board, and, at the discretion of the Board, any other interested entity may be allowed to make a presentation to the Board, concerning the assessments and any objections thereto, at a special meeting of the Board called for that purpose, at the request of such Member or other interested entity; provided, that any such presentations shall be limited to the subject matter of any objections submitted by Members during the Assessment Objection Period. No later than 30 days following the end of the Assessment Objection Period, the Board shall either (1) approve revised assessments, based on its consideration of the information provided at the Assessment Reevaluation Meeting and in any presentations made to the Board in accordance with the preceding sentence, or (2) ratify the assessments previously approved by the Board. Any such action by the Board shall be final and binding on all of the Members. Section 5 -- Withdrawal of Members -- Upon thirty days’ written notice to the Board, any Member may withdraw from membership; provided, however, any such withdrawing Member shall remain liable for all expenses to be borne by such Member as set forth in Article X, Sections 3 and 4, to the extent incurred prior to the effective date of such withdrawal. Section 6 -- Dissolution -- Upon dissolution of the Corporation, in accordance with paragraph NINTH of the Certificate of Incorporation, the assets shall be distributed to the Members of the Corporation, to the extent consistent with Section 501(c) (6) of the Internal Revenue Code, in proportion to the amounts contributed by such Members.

ARTICLE XI Amendments to the Bylaws Section 1 -- Amendments to the Bylaws -- These Bylaws may be altered, amended, or repealed by a majority vote of both the Board and the Stakeholders Committee at respective meetings of the Board and the Stakeholders Committee at which a quorum is present; provided, however, that Article II of the Bylaws may be amended only by the Members. Written notice of the subject matter of the proposed changes to the Bylaws shall


11

be provided, as appropriate, to the Trustees or to the Stakeholders Committee not less than ten nor more than sixty days prior to the date of the meeting of the Board of Trustees or of the Stakeholders Committee at which the vote is to be taken. Notwithstanding the provisions of Section 1 of this Article XI, the Members shall have the right to alter, amend or repeal Bylaws adopted by the Board and the Stakeholders Committee and to adopt new Bylaws, provided that any such alteration, amendment, or repeal of such Bylaws or the adoption of new Bylaws is approved by a two-thirds vote of the Members at an annual or special meeting called for that purpose. ARTICLE XII Annual Review of Governance Structure Section 1-- Annual Review by the Board. The Board shall conduct a review of the governance structure of the Corporation on an annual basis and shall include a statement of its conclusions and of its recommendations for any modifications of the structure in the Corporation’s annual report to its Members.

ARTICLE XIII Process for Development of Standards Relating to Reliability Section 1 – Process for Development of Standards Relating to Reliability. – The Corporation shall develop, implement and, consistent with executed agreement(s) with Regional Councils, enforce standards that provide for an adequate level of reliability of the bulk power systems of North America. Such standards shall be developed and approved pursuant to an open, transparent, public process which gives entities with dissenting views the opportunity to present their concerns. Any entity may challenge the approval of any standard through a separate dispute resolution process internal to the Corporation and thereafter by appeal to the Federal Energy Regulatory Commission or other applicable authorities as allowed by law. Nothing in this Article shall be deemed to invalidate any standard of the Corporation which was in effect [date of amendments]. ARTICLE XIV

General Section 1 -- Indemnification -- The Corporation shall indemnify its Officers and Trustees to the full extent from time to time permitted by the New Jersey Nonprofit Corporation Act and other law. Such right of indemnification shall inure to the benefit of the legal representative of any such person. The foregoing indemnification shall be in addition to, and not in restriction or limitation of, any privilege or power that the Corporation may have with respect to the indemnification or reimbursement of its Trustees, Officers, or employees. Section 2 -- Parliamentary Rules -- Robert’s Rules of Order, Newly Revised, shall apply in all cases to which they are applicable in the absence of specific provisions in these Bylaws.

Certificate of Incorporation – Blackline Version 1 01/19/01

Appendix 1 – Blackline Version CERTIFICATE OF INCORPORATION OF THE NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL





b. to develop, implement, and, consistent with executed agreement(s) with

Regional Councils, enforce standards that provide for an adequate level of reliability of the bulk electric power systems of North America;



c d. to encourage and assist the development of interregional reliability arrangements among Regional Electric Reliability Councils (Regional Councils) and their members;

d e. to exchange information with respect to planning and operating matters relating to


e f. to review periodically Regional and interregional activities on reliability and adequacy;

f g. to provide independent reviews of interregional matters referred to it by the


g h. to provide a voluntary, industry-based alternative dispute resolution mechanism for resolving disputes, especially reliability-related disputes, referred to it by any Regional Council or by its Board of Trustees.

The Corporation is a business league within the meaning of Section 501(c) (6) of the United

States Internal Revenue Code of 1954.



FOURTH: The business, property, and affairs of the Corporation, subject to the Bylaws, shall be managed and conducted by a Board of Trustees of which there shall be that number of Trustees, not less than three, which shall be fixed by the Bylaws, one of whom shall be a resident of New Jersey. The Trustees shall be appointed or elected as the Bylaws provide and their terms of office shall be two years, or such other terms as the Bylaws may provide, and until their successors are elected, except that the names and post office addresses of the Trustees selected for the first year of the Corporation’s existence are: NAME POST OFFICE ADDRESS S.C. Schaffer 435 Sixth Avenue











Omaha, Nebraska 68102 J.R. Lyon 823 Walnut Street

Des Moines, Iowa 50303


NAME POST OFFICE ADDRESS T.J. Brosnan 300 Erie Boulevard ‘W’






















TENTH: Any resolution of the Board of Trustees declaring that an No amendment, change, or alteration of this Certificate of Incorporation is advisable, shall be passed only upon the unanimous vote of all those Trustees who are representatives of Members as provided in the Bylaws. Any such resolution of the Board of Trustees may be voted at any meeting of the Board provided shall be made without the unanimous approval of the Members at any annual or special meeting of the Members or the unanimous written consent of the Members acting without a meeting. Written notice of the proposed amendment, change, or alteration of this Certificate of Incorporation was submitted in writing at the previous meeting of the Board shall be included in the notice of the annual or special meeting or the call for action without a meeting of Members given to each Member in accordance with the Bylaws.

ELEVENTH: No Trustee or Officer of the Corporation shall be personally liable to the

Corporation for damages for breach of any duty owed to the Corporation, except for liabilities arising from breach of any duty based upon an act or omission (1) in breach of the duty of loyalty owed to the Corporation, (2) not in good faith or involving a knowing violation of law, or (3) resulting in receipt by such Trustee or Officer of an improper personal benefit. Neither the amendment or repeal of this paragraph ELEVENTH, nor the adoption of any provision of this Certificate of Incorporation inconsistent with paragraph ELEVENTH, shall eliminate or reduce the protection offered by this paragraph ELEVENTH to a Trustee or Officer of the Corporation in respect to any matter which occurred, or any cause of action, suit or claim which but for this paragraph ELEVENTH would have accrued or arisen, prior to such amendment, repeal, or adoption.

Bylaws – Blackline Version 1 01/19/01

Appendix 1 – Blackline Version BYLAWS OF THE NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL WHEREAS, the electric systems of North America comprise an interconnected network of systems and facilities that provide electricity for the welfare of the public; and WHEREAS, the principal mission of the North American Electric Reliability Council, hereinafter referred to as the Corporation, is to promote the reliability and adequacy of electric supply by the electric systems of North America, including through standards that provide for an adequate level of reliability of the bulk electric power systems of North America; and WHEREAS, the transition of the electric industry to new structures is complex due to the physics of electricity, the varying states of development, jurisdictional issues, commercial considerations, and public interest requirements; and WHEREAS, the Corporation recognizes that its actions must be carried out in an open and inclusive manner, and consistent with applicable federal, state, and provincial laws; and WHEREAS, to achieve a higher order of sophistication in addressing these complexities and maintain the reliability of the bulk electric power systems of North America, it is necessary that the Corporation move forward in a proactive way and adapt, as circumstances dictate, to achieve appropriate governance for the Corporation; and WHEREAS, the Bylaws of the Corporation are intended to meet these needs and to be complementary to and consistent with the requirements of the various constituent interests that may be affected thereby, while promoting the reliability of the bulk electric power systems of North America; and WHEREAS, it is anticipated that the Bylaws of the Corporation will be amended from time to time as necessary to meet the requirements of a reliable bulk electric power system consistent with the prevailing states of technology, law, regulation, and commercial endeavor necessary to provide electricity for the public good. ARTICLE I Membership Section 1 -- Categories -- The Members of the Corporation, North American Electric Reliability Council, hereinafter referred to as the “Corporation,” shall have two categories of membership, Member and Affiliate Member. a. Members -- The Members are the following Regional Electric Reliability Councils (Regional Councils): East Central Area Reliability Coordination Agreement, Electric Reliability Council of Texas, Florida Reliability Coordinating Council, Mid-Atlantic Area Council, Mid-America Interconnected Network, Inc.,


Mid-Continent Area Power Pool, Northeast Power Coordinating Council, Southeastern Electric Reliability Council, Southwest Power Pool, and Western Systems Coordinating Council. Membership may be amended from time to time in accordance with this Article I. b. Affiliate Members -- The Alaska Systems Coordinating Council is an Affiliate Member. Affiliate membership may be amended from time to time in accordance with this Article I. Section 2 -- Member Qualifications -- Membership in the Corporation is voluntary and open to any Regional Electric Reliability Council (Regional Council), wherein that Regional Council meets the following qualifications of full membership:

a A Regional Council shall be comprised of members from one or more segments sectors of the electric industry as defined in including, but not limited to, Article III, Section 1 a of these Bylaws the (i) federal, (ii) investor-owned, (iii) rural electric cooperative, (iv) state/municipal, (v) exempt wholesale generator, (vi) power marketer, and (vii) customer sectors (each a “Sector” and, collectively, the “Sectors”). A member of a Regional Council may also be a member of one or more other Regional Councils, if permitted by the said Regional Councils.

b. The Regional Council members shall be engaged in the generation, transmission, distribution, or marketing of electric energy to wholesale or retail electric customers.

c b. A Regional Council shall be comprised of two or more contiguous bulk electric systems, each of which is electrically interconnected by two or more transmission lines with one or more other contiguous member systems within that Regional Council.


d c. The Regional Council shall be electrically interconnected by two or more transmission lines


e d. The total net energy for load of all members located within a Regional Council’s boundaries shall be at least 100 million MWh per year.

Section 3 -- Affiliate Member Qualifications — A Regional Council that does not meet one or more of the qualifications for full membership as set forth in Article I, Section 2 may be admitted as an Affiliate Member of the Corporation. Affiliate membership entitles that Regional Council to have one non-voting representative who may attend all regular meetings of the NERC Board. Section 4 -- Obligations -- A Member or Affiliate Member Regional Council, on behalf of its members, shall agree, in writing, to accept the responsibility to promote, support, and comply with the purposes and policies of the Corporation as set forth in its Certificate of Incorporation, Bylaws, and Planning and Operating Policies that from time to time may be amended, adopted, or approved. In addition, it shall provide for its share of the financial support of the Corporation in a timely manner.


Section 5 4 -- Application -- A Regional Council shall apply for membership in the Corporation by filing its request, in writing, with the Chairman of the Board of Trustees and with a copy to the President of the Corporation. Section 6 5 -- Approval -- A Regional Council shall be admitted as a Member or Affiliate Member of the Corporation by the Members or and the Board of Trustees (Board) by a two-thirds vote of the Members and of the Trustees present and voting at respective meetings of the Members or and of the Board at which a quorum of the Members or and of the Board, respectively, entitled to vote is present. Section 7 6 -- Term -- Membership in the Corporation shall be retained as long as a Member or Affiliate Member meets its respective qualifications and obligations of membership as set forth in Article I, Sections 2, 3, and 4 3. Section 8 7 -- Removal -- The Members or and the Board may terminate the membership of a Member or an Affiliate Member if in the judgment of the Members or and the Board that Member or Affiliate Member has violated its obligations and responsibilities to the Corporation. This termination shall require a two-thirds vote of the Members or the Board and of the Trustees present and voting at respective meetings of the Members or and of the Board at which a quorum of the Members or and of the Board, respectively, entitled to vote is present. The Member in question or its Trustees shall be excluded from the any termination vote by the Members. ARTICLE II Meetings of Members Section 1 -- Annual Meeting of Members -- The Annual Meeting of Members for the transaction of such business as shall come before the meeting shall be held at 9 a.m. on the second Tuesday of May February of each year, or if that day is a legal holiday, on the next succeeding business day, at the principal office of the Corporation, or such other time, date, and place as shall be specified in the written notice of the time, date, place, and purposes of the meeting given to the Members not less than ten nor more than sixty days prior to the date of the meeting. Section 2 -- Special Meetings of Members -- Special meetings of Members may be called for any purpose or purposes by the Chairman or by any two Members. Special meetings shall be held at the principal office of the Corporation or at such other place as shall be specified in the notice of meeting. Special meetings shall be called upon written notice of the time, date, place, and purposes of the meeting given to all Members not less than ten nor more than sixty days prior to the date of the meeting. Section 3 -- Waivers of Notice of Meetings of Members; and Member Meeting Adjournments --Notice of a meeting of Members need not be given to any Member who signs a waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any Member at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice of the meeting by such Member. When any meeting of Members is adjourned to another time or place, it shall not be necessary to give notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and if at the adjourned meeting only such business is transacted as might have been transacted at the original meeting.


Section 4 -- Action Without a Meeting of Members -- Any action, required or permitted to be taken at a meeting of Members, may be taken without a meeting if all the Members entitled to vote on the action consent to the action in writing. The call for action without a meeting of Members may be initiated by the Chairman or by any two Members, and requires written notice to all Members of the subject matter for action not less than ten nor more than sixty days prior to the date on which action is to be voted. The Members shall receive written notice of the results within ten days of the action vote, and all written responses of the Members shall be filed with the minutes of proceedings of Members. ARTICLE III Board of Trustees Section 1 -- Board of Trustees -- The business and affairs of the Corporation shall be managed by the Board of Trustees (Board). The Board shall be comprised of two representatives (the Trustees of the Board, hereinafter referred to as “Trustees”) of each Member, who shall be elected or appointed by such Member and who shall serve for such term as each Member may determine, and the additional Trustees as provided hereinafter. a Board of Trustees (the “Board”). The Board shall consist of ten members (the “Trustees”). Nine of the Trustees shall be “independent” Trustees nominated and elected in accordance with the procedures specified in Sections 2, 3, 4 and 5 of this Article III (the “Independent Trustees”). The remaining Trustee shall be the person elected by the Board of Trustees, in accordance with Article VII, Section 1, of these Bylaws, to serve as president of the Corporation (the “Management Trustee”). Each Trustee, including the Management Trustee, shall have one vote on any matter brought before the Board for a vote. a. Should the Board so selected at any time not include at least two representatives (Trustees) from Canada or not include at least two representatives (Trustees) of each segment of the electric industry (i.e., (a) federal, (b) investor-owned, (c) rural electric cooperative, (d) state/municipal, (e) exempt wholesale generator, (f) power marketer, and (g) customer), the Board shall elect from a list provided for this purpose by the Members, an additional Trustee or Trustees, and shall fill vacancies of such Trustee or Trustees, as may be required to effect such representation. Such additional Trustees shall serve until the second succeeding Annual Meeting of the Members. All Trustees are expected to serve the public interest and to represent the reliability concerns of the entire North American electric grid system. Section 2 -- Independent Board Members -- The Independent Trustees shall be elected, shall have the qualifications specified, and shall serve in the manner provided in this section. a. The terms of the Independent Trustees elected for three-year terms at the January 1999

meeting of the Board shall expire at the Annual Meeting of the Stakeholders Committee to be held in 2002. The terms of the Independent Trustees elected for four-year terms at the January 1999 meeting of the Board shall expire at the Annual Meeting of the Stakeholders Committee to be held in 2003. The terms of the Independent Trustees elected for three-year terms at the February 2001 meeting of the Board shall expire at the Annual Meeting of the Stakeholders Committee to be held in 2004. Thereafter, Independent Trustees shall be elected to terms expiring at the third succeeding Annual Meeting of the Stakeholders Committee after their election.

b. Each Trustee, except the additional Trustees for the customer segment, shall be a representative of a Member or a participant in a Member.


c. The Chairman, Vice Chairman, Secretary-Treasurer, the immediate Past Chairman, and the President shall, by reason of their office, be Trustees. d. A Member, whose representative (Trustee) is elected to serve as Chairman or Vice Chairman or is the Past Chairman, must elect or appoint a replacement for that representative (Trustee), as such an elected Officer may not serve as a Member representative (Trustee) during the term of such office. e. At least one Trustee shall be a resident of New Jersey. Section 2 -- Independent Board Members -- In addition to the members of the Board elected or appointed under Section 1, the Board shall include nine independent members who shall be elected and will serve in the manner provided in this section. a. Nine independent members will be elected at the meeting of the Board to occur in January 1999. Of the nine independent members elected in January 1999, three shall be elected to two-year terms, three shall be elected to three-year terms, and three shall be elected to four-year terms. Thereafter, independent members shall be elected to three-year terms. b. An independent Board member b. An Independent Trustee is a person who is not an officer or employee of an the Corporation or of

any entity that would reasonably be perceived as having a direct financial interest in the outcome of Board decisions, and who does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director Trustee.

c. Independent Board members Trustees shall be nominated, appointed and elected pursuant to a

the nomination and election process adopted by the Board. procedures specified in Sections 3, 4 and 5 of this Article III.

d. Each independent Board member shall have one vote on any matter coming for vote before the Board and in all other respects shall have same rights and responsibilities as other Board members. e. All Board members are expected to serve the public interest and represent the reliability concerns of the entire North American electric grid system. The Board should reflect in its membership commitment to the public interest as well as expertise in the following areas: technical electric operations and reliability; legal, market, financial, and regulatory matters; and familiarity with Regional system operations issues. Members should reflect geographic diversity as well as the international nature of NERC. f. The independent members of the d. The Board must at all times include at least one member Independent Trustee with appropriate

knowledge and experience of the industry, regulatory, and legal systems in the U.S. and at least one member Independent Trustee with similar knowledge and experience in Canada. When Mexico is ready to provide for an appropriate grant of authority to a self-regulating reliability organization (SRRO) to set standards, enforce compliance, and collect funds, this Board composition requirement will be expanded to include Mexico.

Section 3--Vacancies on the Board. Any vacancies on the Board of Trustees arising from the death, resignation, retirement, disqualification, or removal from office of any Trustee or other cause shall be filled only by a majority vote of all of the Trustees then in office, though less than a quorum. Any Trustee so chosen shall serve until the next annual meeting of the Stakeholders Committee.


Section 4 – Nominating Committee --The Board of Trustees shall appoint, on an annual basis, a nominating committee (the “Nominating Committee”) to recommend candidates (a) to succeed the Independent Trustees whose terms expire at the next annual meeting of the Stakeholders Committee to be held that year and (b) to serve the remainder of the term of any Independent Trustee who ceased to serve as a Trustee in the preceding year. The Nominating Committee shall consist of such number of persons with such qualifications as the Board of Trustees shall specify. The Board of Trustees shall establish, by resolution, the procedures to be followed by the Nominating Committee in identifying and recommending candidates to serve as Independent Trustees; provided, however, that such procedures shall include a means of permitting members of the Stakeholders Committee, the Member Regional Councils and their members to recommend to the Nominating Committee candidates for consideration as nominees for Independent Trustees. The Nominating Committee shall endeavor to nominate candidates for election to the Board of Trustees consistent with the objectives that the Board as an entirety reflects expertise in the areas of technical electric operations and reliability, legal, market, financial and regulatory matters, and familiarity with Regional system operation issues; and reflects geographic diversity and the international nature of the Corporation. Section 5 -- Election of Independent Trustees -- The members of the Stakeholders Committee shall elect the persons (a) to succeed those Independent Trustees whose terms expire at each annual meeting of the Stakeholders Committee and (b) to serve the remainder of the term of any Independent Trustee who ceased to serve as a Trustee in the preceding year. Each member of the Stakeholders Committee shall have one vote on each position to be filled. All Independent Trustees shall be elected from one or more slates of nominees proposed by the Nominating Committee. A nominee shall be elected an Independent Trustee if such person receives the affirmative vote of two-thirds of the members of the Stakeholders Committee who are present in person or by proxy, and voting, at an annual or special meeting of the Stakeholders Committee at which a quorum is present. Each nominee receiving the necessary two-thirds vote of the Stakeholders Committee shall take office immediately upon election. In the event that the Stakeholders Committee fails to elect a nominee to fill one or more of the positions of Independent Trustee to be filled at a meeting of the Stakeholders Committee, the meeting shall be adjourned until such time as the Nominating Committee shall have considered and proposed an additional nominee for that position for election by the Stakeholders Committee. Section 6 -- Appointment of Management Trustee -- The president of the Corporation shall be appointed a Trustee of the Corporation, effective as of the date of his or her election by the Board as president of the Corporation in accordance with Article VII, Section 1, of these Bylaws, to serve until such time that he or she ceases to hold the position of president. No action of the Stakeholders Committee or the Members shall be required in connection with the appointment of the President as a Trustee of the Corporation.

ARTICLE IV Meetings of the Board of Trustees Section 1 -- Regular Meetings of the Board -- A regular meeting of the Board for such business as may come before the meeting shall be held without notice immediately following the Annual Meeting of the Stakeholders Committee Members at the same place as the Annual Meeting of the Stakeholders Committee Members. By resolution adopted at any meeting of the Board, the Board may provide for additional regular meetings that may be held without notice.


Section 2 -- Special Meetings of the Board -- Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman or by any three two Trustees. Such meetings may be held upon notice given to all Trustees not less than seven five days prior to the date of the meeting. Such notice shall specify the time, date, place, and purpose or purposes of the meeting and may be given by telephone, telegraph or other electronic media, or by express delivery prepaid mail deposited in the U.S. or Canada mails. Section 3 – Meetings of the Board to be Open – Notice to the public of the dates, places and times of meetings of the Board, and all non-confidential materials provided to the Board, shall be posted on the Corporation’s web site at the same time that notice is given to the Trustees. Meetings of the Board shall be open to the public, subject to reasonable limitations due to the availability and size of meeting facilities; provided, that the Board may meet in or adjourn to closed session to discuss matters of a confidential nature, including but not limited to personnel matters, litigation, or commercially sensitive information of any entity. Section 4 -- Waivers of Notice of Board Meetings; and Board Meeting Adjournments --Notice of a Board meeting need not be given to any Trustee who signs a waiver of notice, in person or by proxy, whether before or after the meeting, or who attends the meeting without protesting, prior to the conclusion of the meeting, the lack of notice of such meeting. Notice of an adjourned Board meeting need not be given if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and if the period of adjournment does not exceed ten days. Section 4 5 -- Action Without a Board Meeting -- Any action, required or permitted to be taken at a meeting of the Board or of any committee thereof, may be taken by the Board or by the committee without a meeting if all the Trustees or members of the committee, as the case may be, entitled to vote on the action consent to the action in writing. The call for action without a meeting of the Board may be initiated by the Chairman or by any three two Trustees., and requires written notice to all Trustees The call for action without a meeting of a committee of the Board may be initiated by the Chairman or by any two members of the committee, of the subject matter for action not less than seven days prior to the date on which action is to be voted. The Trustees or members of the committee shall receive written notice of the results within seven days of the action vote, and all. All written responses of the Trustees shall be filed with the minutes of the Corporation, and all written responses of members of a committee shall be filed with the minutes of such committee. Any or all of the Trustees, or members of a committee, may participate in a meeting of the Board, or a meeting of the a committee, respectively, by means of a conference telephone call or other communication communications system by which all persons participating in the meeting are able to hear each other. ARTICLE V Officers Section 1 -- Officers -- At its regular meeting, following the first Annual Meeting of Members and biennially thereafter, the Board shall elect a Chairman, a Vice Chairman, a President, a Secretary-Treasurer, an Assistant Secretary-Treasurer, and such other Officers as it shall deem necessary. The Chairman and the Vice Chairman must be Trustees prior to election to such offices. The remaining Officers need not be Trustees


prior to election to such offices. The duties and authority of the Officers shall be determined from time to time by the Board. Subject to any such determination, the Officers shall have the following duties and authority: a. The Chairman shall be Chief Executive Officer of the Corporation. He or she shall have general charge and supervision over and responsibility for the affairs of the Corporation. He or she shall preside at all meetings of the Members and at all meetings of the Board. Unless otherwise directed by the Board, all other Officers shall be subject to the authority and the supervision of the Chairman. The Chairman may enter into and execute in the name of the Corporation contracts or other instruments not in the regular course of business that are authorized, either generally or specifically, by the Board. The Chairman may delegate from time to time any or all of the aforesaid duties and authority to any other Officer. b. The Vice Chairman shall have such duties and possess such other powers as may be delegated to him or her by the Chairman. The Vice Chairman shall act as the Chairman at such times as the Chairman may request. In the event the Chairman is unable to discharge the duties and powers of that office by reason of incapacity and during any vacancies in the office of the Chairman, the Vice Chairman shall act as Chairman until the cessation of such incapacity or the filling of such vacancy. c. The President shall be the Chief Operating Officer of the Corporation. He or she shall be responsible for the day-to-day ongoing activities of the Corporation and shall have such other duties as may be delegated or assigned to him or her by the Chairman. d. The Secretary-Treasurer shall have custody of the funds and securities of the Corporation; shall keep or cause to be kept regular books of account for the Corporation; shall cause notices of all meetings to be served as prescribed in these Bylaws; shall keep or cause to be kept the minutes of all meetings of the Members and the Board; and shall have charge of the seal of the Corporation. The Secretary-Treasurer shall perform such other duties and possess such other powers as are incident to his or her office or as shall be assigned to him or her by the Chairman or the Board. e. The Assistant Secretary-Treasurer shall have such duties and possess such other powers as may be delegated to him or her by the Chairman, the Secretary-Treasurer, or the Board. ARTICLE VI Committees Section 1 -- Committees -- There shall be an Executive Committee and such other committees and task forces as the Board may appoint as it deems necessary to carry out the purposes of the Corporation. The Executive Committee shall be comprised of the Chairman, Vice Chairman, immediate Past Chairman, President, Secretary-Treasurer, and two additional Trustees, who shall be selected by the Chairman. Between meetings of the Board, the Executive Committee shall have and may exercise all the powers of the Board in the management of the business and affairs of the Corporation, including the employment of and the fixing of salaries (including bonuses) for management personnel to conduct the business and affairs, provided that the Executive Committee shall not make, alter, or repeal any Bylaw, resolve to amend the Certificate of Incorporation, elect Trustees to fill vacancies, elect or appoint any Officers, or amend or repeal any resolution of the Board. A majority of the Executive Committee shall constitute a quorum for the transaction of business. The Executive Committee shall keep minutes of its meetings, which shall be submitted at the next meeting of the Board at which a quorum is present and any action taken by the Board in respect thereto shall be entered in the minutes of the Board. Meetings of the Executive Committee may be held between meetings of the


Board, and shall be subject to the call of the Chairman on such notice as he or she may deem reasonable. The Chairman may call upon any other Trustee to act as a member of the Executive Committee in the place of any absent member of the Executive Committee. All other committees and task forces shall have such duties as determined by the Board. ARTICLE VII Observers of the Board of Trustees Section 1 -- Observers -- At each regular meeting at which Officers are elected, the Board may designate and invite such Observers permitted under Article EIGHTH of the Certificate of Incorporation as it shall deem appropriate. The term of each such Observer shall be two years. Such Observers may be permitted to participate in the meetings of the Board and of any committee the Board may deem appropriate, but in no event shall an Observer have the power to vote on any matter. No Observer shall be considered a Trustee, Member, or Affiliate Member of the Corporation. This provision is not a limitation of the power of the Board to otherwise act pursuant to Article EIGHTH of the Certificate of Incorporation. ARTICLE VIII

ARTICLE V Stakeholders Committee

Section 1 -- Stakeholders Committee --The Corporation shall have a Stakeholders Committee that shall have the following rights and obligations:




The initial Stakeholders Committee shall consist of those persons who were members of the Board of Trustees of the Corporation as of [insert date of adoption of the amendments to the Bylaws] and who do not qualify as Independent Trustees under Article III, Section 2 or as the Management Trustee under Article III, Section 6. Each member of the Stakeholders Committee shall have one vote on any matter brought before the Stakeholders Committee. The Stakeholders Committee shall not be a standing committee of the Corporation. Section 2-- Vacancies on the Stakeholders Committee. In the event that any member of the Stakeholders Committee ceases to serve as a member of the Stakeholders Committee as a result of his or her death, resignation, retirement, disqualification, or removal or other cause, the remaining members of the Stakeholders Committee shall appoint a new member to replace the member of the Stakeholders Committee who ceases to serve. Any new member of the Stakeholders Committee so appointed shall be from the same Member or Sector as the member of the Stakeholders Committee that he or she replaces; provided, that each Member shall have the right to designate the person who is to replace any designee of such Member who ceases to serve on the Stakeholders Committee.



ARTICLE VII Officers Section 1 -- Officers -- At its regular meeting following the first Annual Meeting of Members and annually thereafter, the Board shall elect a Chairman, a Vice Chairman, a President, a Secretary-Treasurer, an Assistant Secretary Treasurer, and such other officers (collectively, the “Officers”) as it shall deem necessary. The Chairman and the Vice Chairman must each be Independent Trustees prior to their election to such offices. The Chairman, Vice Chairman, and President shall each be nominated and elected by the Board. All of the remaining Officers shall be appointed or removed by the Board based upon the recommendation of the President. The duties and authority of the Chairman, the Vice Chairman and the President shall be determined from time to time by the Board, and the duties and authority of the other Officers of the Corporation shall be determined from time to time by the President. Subject to any such determination, the Officers shall have the following duties and authority: a. The Chairman shall preside at all meetings of the Members and at all meetings of the Board.

The Chairman, in consultation with the other Trustees, shall be responsible for the efficient operation of the Board and its committees. The Chairman shall be an ex officio member of each committee of the Board. The Chairman may delegate from time to time any or all of the aforesaid duties and authority to the Vice Chairman, the President or any other Officer.

b. The Vice Chairman shall have such duties and possess such other powers as may be delegated

to him or her by the Chairman. The Vice Chairman shall act as the Chairman at such times as the Chairman may request. In the event the Chairman is unable to discharge the duties and powers of that office by reason of incapacity and during any vacancies in the office of the Chairman, the Vice Chairman shall act as Chairman until the cessation of such incapacity or the filling of such vacancy.

c. The President shall be the Chief Executive Officer of the Corporation. He or she shall be

responsible for the day-to-day ongoing activities of the Corporation and shall have such other duties as may be delegated or assigned to him or her by the Chairman. The President may enter into and execute in the name of the Corporation contracts or other instruments not in the regular course of business that are authorized, either generally or specifically, by the Board.

d. The Secretary-Treasurer shall have custody of the funds and securities of the Corporation;


shall keep or cause to be kept regular books of account for the Corporation; shall cause notices of all meetings to be served as prescribed in these Bylaws; shall keep or cause to be kept the minutes of all meetings of the Members and the Board; and shall have charge of the seal of the Corporation. The Secretary-Treasurer shall perform such other duties and possess such other powers as are incident to his or her office or as shall be assigned to him or her by the President.

e. The Assistant Secretary-Treasurer shall have such duties and possess such other powers as

may be delegated to him or her by the President.

ARTICLE VIII Committees Section 1 -- Committees -- The Board of Trustees shall by resolution appoint all standing committees of the Corporation; and may in addition by resolution appoint such committees and task forces as the Board deems necessary to carry out the purposes of the Corporation, including (without limiting the generality of the foregoing) an executive committee, an audit committee, a human resources committee, a finance committee and a governance committee; provided, that the Management Trustee shall not be a member of the audit committee or of the human resources committee, if any. The Board shall appoint standing committees of the Corporation that are representative of Members, interested parties and the public, and that include members with outstanding technical knowledge and experience. All committees and task forces shall have such duties, not inconsistent with law, as are determined by the Board. ARTICLE IX Quorums and Voting Section 1 -- Quorums and Voting -- The quorum necessary for the transaction of business at meetings of the Board, or at meetings of the Members, or of the Stakeholders Committee shall be a majority of those Trustees or Members , Members or members of the Stakeholders Committee entitled to be present and to vote at the respective meetings. Actions Except as otherwise expressly provided in these Bylaws or applicable law, actions by the Board shall be approved upon receipt of the affirmative vote of a majority of those the Trustees present and entitled to vote voting at any meeting in at which a quorum is present. Except as otherwise expressly provided in the Corporation’s Certificate of Incorporation, these Bylaws or applicable law, actions by the Members or the Stakeholders Committee shall be approved upon receipt of the affirmative vote of a majority of the Members or members of the Stakeholders Committee present and voting at any meeting at which a quorum is present. ARTICLE X ARTICLE IX Fiscal Matters Section 1 -- Expenses -- The expenses of each Trustee, each member of a committee or task force, the Secretary-Treasurer and the Assistant Secretary-Treasurer, unless employed to work full time on the affairs of the Corporation, Compensation of the Board and Stakeholders Committee -- The Board shall have the right to fix from time to time, by resolution adopted by a majority of the Independent Trustees then serving as trustees, the amount of the annual retainer fee or other compensation to be paid to the


Independent Trustees for their services to the Corporation, including any fees to be paid for each meeting of the Board or any Board committee attended by an Independent Trustee. No compensation shall be paid to the Management Trustee for his or her services on the Board, other than the compensation paid to the Management Trustee for services as president of the Corporation. No compensation shall be paid by the Corporation to the members of the Stakeholders Committee for their services on the Stakeholders Committee. shall be borne by the party by whom he or she is regularly employed, or the Member or Affiliate Member of which such party is a representative or in which such party is a participant.. Administrative expenses of the Corporation shall be authorized by the Board through the adoption of an annual budget at a meeting Section 2 --- Adoption of Budgets--The Board shall prepare or cause to be prepared an annual budget for the administrative and other expenses of the Corporation and a special budget for any special projects undertaken by the Corporation, upon consultation with the members of the Stakeholders Committee. Each annual budget and any special budget shall be approved by the Board at a regular meeting or a special meeting of the Board duly called for that purpose or at a regular meeting of the Board. Fifty percent of such administrative expenses in each year shall be borne by the Members and Affiliate Members in proportion to the total actual net energy for load of the reporting electric utility systems within their Regional boundaries for the year preceding the previous calendar year, and the remaining fifty percent of such expenses shall be borne by the Members and Affiliate Members in equal shares. Each Member’s or Affiliate Member’s net energy for load shall be the value reported in the NERC annual Electricity Supply & Demand report. The Board may waive any portion of the assessment or establish a minimum (or lesser) assessment for Affiliate Members.. The Stakeholders Committee, and any standing committee appointed by the Board pursuant to Article VIII, Section 1, of these Bylaws, shall have the right to review and comment on the final draft of each annual or special budget proposed by the Board at a reasonable time before the date of its proposed adoption by the Board. Section 2 Section 3 -- Approval of Assessments--The Board shall determine, or cause to be determined, the amount of the proposed assessments to be paid by the Members in connection with any annual budget or special budget proposed to be adopted by the Board. The Members shall have the right to review and comment on the final draft of the proposed assessments to be paid by the Members at a reasonable time before the date of the proposed approval of such assessments by the Board. Section 4 -- Procedures for Resolving Disputes Relating to Assessments -- Any Member that objects to the amount or manner of determining the assessment approved by the Board pursuant to the procedures specified in Section 3 of this Article X shall give written notice of its objection to the Board of Trustees, together with a reasonably detailed statement of the basis of the objection, no later than ten days after such Member has received written notice of the assessment from the Board (the “Assessment Objection Period”). In the event that the Board receives one or more notices of objection, the Chairman of the Board of Trustees shall convene a meeting of the chairpersons of each of the Members or their designated representatives to review and reevaluate the assessments approved by the Board of Trustees (the “Assessment Reevaluation Meeting”) as promptly as reasonably possible after the last day of the Assessment Objection Period. Any Member shall have the opportunity to make a presentation to the Board, and, at the discretion of the Board, any other interested entity may be allowed to make a presentation to the Board, concerning the assessments and any objections thereto, at a special meeting of the Board called for that purpose, at the request of such Member or other interested entity; provided, that any such presentations shall be limited to the subject matter of any objections submitted by Members during the Assessment Objection Period. No later than 30 days following the end of the Assessment Objection Period, the Board shall either (1)


approve revised assessments, based on its consideration of the information provided at the Assessment Reevaluation Meeting and in any presentations made to the Board in accordance with the preceding sentence, or (2) ratify the assessments previously approved by the Board. Any such action by the Board shall be final and binding on all of the Members. Section 5 -- Withdrawal of Members -- Upon thirty days’ written notice to the Board, any Member or Affiliate Member may withdraw from membership; provided, however, any such withdrawing Member or Affiliate Member shall remain liable for all expenses to be borne by such Member or Affiliate Member as set forth in Article IX, Section 1 X, Sections 3 and 4, to the extent incurred prior to the effective date of such withdrawal. Section 3 6 -- Dissolution -- Upon dissolution of the Corporation, in accordance with paragraph NINTH of the Certificate of Incorporation, the assets shall be distributed to the Member organizations Members of the Corporation, to the extent consistent with Section 501(c) (6) of the Internal Revenue Code, in proportion to the amounts contributed by such Members. ARTICLE XI X Amendments to the Bylaws Section 1 -- Amendments to the Bylaws -- These Bylaws may be altered, amended, or repealed by the Members or the Board by a two-thirds vote a majority vote of both the Board and the Stakeholders Committee at respective meetings of the Members or the Board Board and the Stakeholders Committee at which a quorum of the Members or the Board entitled to vote are is present; provided, however, that Article II of the Bylaws may be amended only by the Members. Written notice of the subject matter of the proposed changes to the Bylaws shall be provided, as appropriate, to the Members Trustees or to the Stakeholders Committee not less than ten nor more than sixty days prior to the date of the meeting of Members, or to the Trustees at a previous meeting of the Board. the Board of Trustees or of the Stakeholders Committee at which the vote is to be taken. Any Bylaw adopted, amended, or repealed by the Members may be amended or repealed by the Board, unless the resolution of the Members adopting such Bylaw expressly reserves the right to amend or repeal it to Notwithstanding the provisions of Section 1 of this Article XI, the Members shall have the right to alter, amend or repeal Bylaws adopted by the Board and the Stakeholders Committee and to adopt new Bylaws, provided that any such alteration, amendment, or repeal of such Bylaws or the adoption of new Bylaws is approved by a two-thirds vote of the Members at an annual or special meeting called for that purpose the Members.

ARTICLE XI XII Annual Review of Governance Structure Section 1-- Annual Review by the Board. The Board shall conduct a review of the governance structure of the Corporation on an annual basis and shall include a statement of its conclusions and of its recommendations for any modifications of the structure in the Corporation’s annual report to its Members.


ARTICLE XIII Process for Development of Standards Relating to Reliability Section 1 – Process for Development of Standards Relating to Reliability. – The Corporation shall develop, implement, and, consistent with executed agreement(s) with Regional Councils, enforce standards that provide for an adequate level of reliability of the bulk electric power systems of North America. Such standards shall be developed and approved pursuant to an open, transparent, public process which gives entities with dissenting views the opportunity to present their concerns. Any entity may challenge the approval of any standard through a separate dispute resolution process internal to the Corporation and thereafter by appeal to the Federal Energy Regulatory Commission or other applicable authorities as allowed by law. Nothing in this Article shall be deemed to invalidate any standard of the Corporation which was in effect [date of amendments.]. ARTICLE XIV General Section 1 -- Indemnification -- The Corporation shall indemnify its Officers and Trustees to the full extent from time to time permitted by the New Jersey Nonprofit Corporation Act and other law. Such right of indemnification shall inure to the benefit of the legal representative of any such person. The foregoing indemnification shall be in addition to, and not in restriction or limitation of, any privilege or power that the Corporation may have with respect to the indemnification or reimbursement of its Trustees, Officers, or employees. Section 2 -- Parliamentary Rules -- Robert’s Rules of Order, Newly Revised, 1990 edition, shall apply in all cases to which they are applicable in the absence of specific provisions in these Bylaws.


1

Appendix 2

SECTION-BY-SECTION DESCRIPTION OF PROPOSED AMENDMENTS TO THE NERC CERTIFICATE OF INCORPORATION AND BYLAWS

This document describes the substantive amendments to the NERC Certificate of Incorporation (COI) and Bylaws that are proposed by the Governance Task Group. Proposed amendments that make only non-substantive conforming changes, conforming revisions to cross-references, etc., are not summarized in this document. References to Section numbers in this document are to the Section numbers in the proposed amended Bylaws. Amendments to the Certificate of Incorporation Article SECOND

This amendment (new subsection b) adds to the purposes of the Corporation the development, implementation and, consistent with executed agreements with Regional Councils, enforcement of standards that provide for an adequate level of reliability of the bulk electric power systems of North America. This “purpose” is based on language in Section 215(d)(4)(A) of the proposed NAERO legislation (S. 2071), but recognizes that, in the absence of legislation, NERC’s actions to develop mechanisms to enforce compliance with NERC standards must focus on contract-based arrangements. Article FOURTH

This amendment deletes the requirement that at least one Trustee be a resident of New Jersey. This is a clean-up amendment. New Jersey law formerly required that at least one director of a New Jersey not-for-profit corporation be a resident of the State, but this requirement has been removed from the New Jersey statute. Article TENTH

The COI currently provides that an amendment to the COI requires (1) the recommendation of the Board of Trustees (this is a requirement of New Jersey law), including the unanimous vote of the Trustees who are the representatives of the Members (i.e., the Regional Councils), and (2) affirmative vote of the Members. Since the current COI does not require a super-majority vote of the Members to amend the COI, a majority vote of the Members is required as specified in the New Jersey statute. The practical effect of the current provisions is that unanimous approval of the Regional Councils is required to amend the COI.

With the change to an independent Board, there will no longer be any Trustees who are representatives of Members. Therefore, this amendment (1) removes the requirement that proposed amendments to the COI must be unanimously approved by those Trustees who are representatives of Members, and (2) requires that a proposed COI be unanimously approved by vote of the Members. The practical effect of this amendment is to preserve the current requirement for unanimous approval of the Regional Councils (i.e., the Members) in order to amend the COI.


2

Amendments to the Bylaws Preamble The amendments add a preamble to the Bylaws. The preamble is intended to manifest NERC’s recognition of the changing nature of the electric industry and the complexities it creates; of the interests of other entities (including federal, state and provincial governments) that are impacted by the changing industry and that may be affected by or interested in NERC’s principal mission of promoting the reliability of the bulk electric power systems of North America; of the need to achieve appropriate governance for NERC; and of the ongoing need for amendments to the Bylaws to effectively carry out NERC’s mission in the context of ongoing changes affecting the industry. Article I - Membership

Section 1. This amendment eliminates the provision for Affiliate Members. There are currently no Affiliate Members. (The Alaska Systems Coordinating Council, for which the Affiliate Member category was originally created, withdrew its membership several years ago.)

Section 2. This amendment transfers to this Section (from Article III, Section 1) the list of industry sectors. It also eliminates the requirement that members of a Regional Council be engaged in the generation, transmission, distribution or marketing of electric energy. This requirement is inconsistent with the list of industry sectors from which Regional Council members can be comprised, which includes customers.

Section 3. This amendment deletes provisions relating to Affiliate Member Qualifications.

Section 5. This amendment clarifies that admission of a Regional Council as a Member requires two-thirds votes of both the Board of Trustees and the Members.

Section 7. This amendment clarifies that termination of a Regional Council as a Member requires two-thirds votes of both the Board of Trustees and the Members. The amendment also eliminates reference to the Trustees of the Member in question being excluded from the meeting at which the vote to terminate occurs, as the Board will no longer include representatives of Members. Article II – Meetings of Members

Section 1. This amendment changes the date of the annual meeting of Members from May to February. The annual meeting of the Stakeholders Committee, at which the Independent Trustees are to be elected, is to take place on the same date as, and immediately following, the annual meeting of Members. (See Article VI, Section 1). By moving both annual meetings to February, NERC will be able to continue its current practice of electing Independent Trustees in February. Section 4. This amendment eliminates the requirement that there be advance notice of a proposed action by written consent of the Members. Its purpose is to simplify the process by which written consents are solicited. Since the Bylaws require that any action by written consent of the Members be unanimous, no Member will be prejudiced if the Corporation fails to provide advance notice of its intent to solicit a consent. Any Member that objects to, or believes that it has been given insufficient time to evaluate a proposed action, can effectively veto the action by failing to return a written consent.


3

Article III – Board of Trustees

Section 1. This amendment changes the composition of the Board to consist solely of nine “independent” Trustees and the President of NERC. It eliminates representatives of Members and of other sectors of the industry on the Board of Trustees. The list of industry sectors, currently found in this Section, is moved to Article I, Section 2.

Section 2. This amendment provides that the staggered terms of the two groups of Independent Trustees elected in January 1999 and of the Independent Trustees to be elected in February 2001 will expire at the annual meetings of the Stakeholders Committee in 2002, 2003 and 2004, respectively, and that thereafter Independent Trustees will be elected to terms expiring at the third annual meeting of the Stakeholders Committee after their election.

This amendment also eliminates the requirements (i) that all Trustees (except the customer segment Trustees) be representatives of a Member or participants in a Member, (ii) that the Chairman, Vice Chairman, Secretary-Treasurer and immediate Past Chairman of NERC shall be Trustees, and (iii) that at least one Trustee shall be a resident of New Jersey (see description of amendment to Article FOURTH of the COI).

Finally, this amendment provides that Trustees will be nominated, appointed and elected by the procedures specified in amended Sections 3, 4 and 5 of Article III, rather than through a “process adopted by the Board.”

Section 3. This amendment provides that if a Trustee ceases to serve during his or her term, the vacancy may be filled by majority vote of the remaining Trustees, with the replacement Trustee to serve until the next annual meeting of the Stakeholders Committee.

Section 4. This amendment provides for the Board to appoint a Nominating Committee each year to nominate candidates for election to succeed Independent Trustees whose terms are expiring, or to serve the remaining term of an Independent Trustee who ceased to serve during the preceding year. The amendment specifies that procedures shall be established to permit members of the Stakeholders Committee, the Regional Councils, and members of the Regional Councils to recommend candidates for consideration by the Nominating Committee.

This amendment also specifies that the Nominating Committee shall endeavor to nominate candidates consistent with the objectives that the Board as an entirety reflect expertise in the areas of technical electric operations and reliability, legal, market, financial and regulatory matters, and familiarity with Regional system operational issues; geographic diversity; and the international nature of NERC.

Section 5. This amendment provides for election of Independent Trustees at a meeting of the Stakeholders Committee by two-thirds vote of its members present and voting.

Section 6. This amendment provides that the President of NERC shall be a member of the

Board of Trustees.


4

Article IV – Meetings of the Board of Trustees

Section 1. This amendment provides that the annual meeting the Board shall be held immediately following the Annual Meeting of the Stakeholders Committee.

Section 2. This amendment provides that special meetings of the Board may be called by the

Chairman or by any two (currently three) Trustees, and that at least five (currently seven) days notice of a special meeting must be given to the Trustees. Notice may be given by telephone, telegraph, or other electronic media, or by express delivery, but not by mail. These changes are consistent with the changes to a smaller Board (i.e., ten Trustees vs. forty-plus Trustees). Section 3. This amendment provides for meetings of the Board to be open to the public, except in certain circumstances in which closed sessions are appropriate for discussion of topics such as personnel matters, litigation, or commercially-sensitive information. The amendment also provides for notice to the public of Board meetings, and all non-confidential materials provided to the Board, to be posted on the NERC web site at the same time that notice is given to the Trustees.

Section 5. This amendment provides that a call for action without a meeting by the Board or by a Board committee may be made by the Chairman or by any two (currently three) Trustees or members of the committee. These changes are consistent with the changes to a smaller Board (i.e., ten Trustees vs. forty-plus Trustees). This amendment simplifies the process by which written consents may be solicited by eliminating the requirement that there be advance notice of a proposed action by unanimous written consent. This amendment also expands the provision allowing Trustees or committee members to participate in meetings by conference telephone to permit the use of other means of communication so long as all participants can hear each other. Article V – Stakeholders Committee

As amended, this Article contains provisions relating to the Stakeholders Committee. Provisions relating to the Officers of NERC are moved to Article VII.

Section 1. This amendment provides for a Stakeholders Committee to initially consist of all Trustees on the Board on the effective date of the amendments to the Bylaws, other than the Independent Trustees and the NERC President. The amendment specifies the rights and obligations of the Stakeholders Committee. It also states that the Stakeholders Committee is not a standing committee of NERC.

Section 2. This amendment provides that in the event a member ceases to serve on the Stakeholders Committee, the remaining members shall appoint a replacement. Any replacement member is to be from the same Regional Council or Sector as the member being replaced. If a representative of a Regional Council ceases to serve on the Stakeholders Committee, that Regional Council will be entitled to designate the replacement member. Article VI – Meetings of the Stakeholders Committee

As amended, this Article contains provisions relating to meetings of the Stakeholders Committee. Provisions relating to Committees of the Board of Trustees are moved to Article VIII.


5

Section 1. This amendment provides for the annual meeting of the Stakeholders Committee to occur immediately following the Annual Meeting of Members.

Section 2. This amendment provides for special meetings of the Stakeholders Committee. Special meetings may be called by any five members of the Stakeholders Committee, and require at least seven days notice. Notice may be given by telephone, telegraph, or other electronic media, or by express delivery, but not by mail.

Section 3. This amendment requires meetings of the Stakeholders Committee to be open to the public, with closed sessions permitted for discussions of confidential matters such as personnel matters, litigation, or commercially sensitive information. The amendment also provides for notice to the public of Stakeholders Committee meetings, and all non-confidential materials provided to the Stakeholders Committee, to be posted on the NERC web site at the same time that notice is given to the Stakeholders Committee.

Section 4. This amendment provides for procedures by which members of the Stakeholders Committee can waive receipt of the required notice of meetings.

Section 5. This amendment establishes procedures by which the Stakeholders Committee may take action without a meeting. A call for action without a meeting may be made by any five members of the Stakeholders Committee, and requires at least seven days notice. This amendment also allows members of the Stakeholders Committee to participate in meetings by means of a communications system that permits all participants to hear each other.

Section 6. This amendment provides that the person holding the office of Chairman of the Board immediately prior to the effective date of the amendments to the Bylaws shall preside at the initial meeting of the Stakeholders Committee. This amendment further provides that the Stakeholders Committee may adopt additional procedures not inconsistent with the Bylaws, although, in adopting those procedures, the Stakeholders Committee is required to follow as closely as circumstances permit the procedures prescribed for the Board of Trustees. Article VII – Officers

As amended, this Article contains provisions relating to the Officers of NERC. The provisions of current Article VII relating to Observers of the Board of Trustees are eliminated, as amended Article IV, Section 3 provides for all Board meetings to be open to the public.

As amended, this Article provides for the Officers of NERC to be a Board Chairman and Vice-Chairman, and a President, a Secretary-Treasurer and an Assistant Secretary-Treasurer. Only the Chairman and the Vice-Chairman are required to be Trustees (the President is also a Trustee by virtue of Article III, Section 1.) The Chairman, Vice-Chairman and President are to be nominated and elected by the Board, while the other Officers are to be appointed or removed by the Board based on the recommendation of the President. The practical effects of these amendments are that the Officers of NERC other than the Chairman, Vice-Chairman and President will be hired by the President; and that the Secretary-Treasurer and Assistant Secretary-Treasurer will be management employees of NERC, not Trustees as is currently the case.

This amendment specifies specific duties for each of the named Officers; provides that the Chairman, Vice-Chairman and President shall have such other duties as determined by the Board; and provides that the


6

other Officers shall have such other duties as determined by the President. The Chairman, in consultation with the other Trustees, is responsible, among other things, for the efficient operation of the Board and its committees and is designated an ex officio member of each committee of the Board. This amendment also makes the President the Chief Executive Officer of NERC, which is a change from the current structure under which the Chairman of the Board is the CEO. Article VIII – Committees

This amendment provides that the Board will appoint the standing committees of NERC. Appointments to the standing committees are to be representatives of Members, interested parties and the public, and should include appointees with outstanding technical knowledge and expertise. The Board also may appoint such other committees and task forces as it deems necessary. The President of NERC may not be a member of the audit committee or the human resources (compensation) committee, should the Board form such committees.

The amendments delete the provisions of current Article VI of the Bylaws that establish an Executive Committee. Article IX – Quorums and Voting

As amended, this Article provides that a majority of the Board, the Members, or the Stakeholders Committee entitled to be present and to vote at a meeting shall constitute a quorum. It further provides that except as otherwise provided in the COI, the Bylaws or applicable law, actions by the Board, the Members or the Stakeholders Committee shall be approved by majority vote of those present and voting at a meeting. Article X – Fiscal Matters

Section 1. This amendment provides that the Board shall fix the annual retainer or other compensation to be paid to the Independent Trustees and that no compensation is to be paid by the Corporation to members of the Stakeholders Committee.

Section 2. This amendment provides that the Board shall prepare the NERC budgets, and that

the Stakeholders Committee and standing committees shall have the right to review and comment on the final drafts of budget before they are approved by the Board.

Section 3. This amendment provides that the Board shall determine the assessments to be paid by the Regional Councils; and that the Regional Councils shall have the right to review and comment on the final drafts of assessments before they are approved by the Board. The provisions in Article IX, Section 1 of the current Bylaws that specify that assessments shall be allocated to the Regions 50% per capita and 50% on the basis of net energy for load (NEL), are deleted.

Section 4. This amendment provides that within 10 days following receipt of written notice of the approval of Regional assessments by the Board, any Member may submit a written objection to the assessments. Should an objection be filed: (i) the Chairman of the Board is to convene a council of the chairpersons of the Regions to attempt to resolve the objection; (ii) if the council is unable to reach agreement on the assessments within 30 days, the Board shall make a final determination as to the assessments; and (iii) any Member will be allowed to make a presentation to the Board, and, in the discretion of the Board, any


7

other interested entity may be allowed to make a presentation to the Board, on the proposed assessments (in each case limited to the subject matter of any objections that have been filed) before the Board finally determines the assessments. Article XI – Amendments to the Bylaws

This amendment provides that amendments to the Bylaws require a majority vote of both the Board and the Stakeholders Committee, other than amendments to Article II of the Bylaws (governing the meetings of Members), which may be amended only by the Members. The amendment also preserves the right of the Members, by two-thirds vote, to amend the Bylaws. It is a requirement of New Jersey law that the Members of a not-for-profit corporation have the right to amend the Bylaws of the corporation. Article XII – Annual Review of Governance Structure

This amendment requires the Board to conduct an annual review of NERC’s governance structure, and to include a statement of its conclusions, and its recommendations for any modifications of the structure, in NERC’s annual report to the Members.

Article XIII- Process for Development of Standards Relating to Reliability This amendment requires the Corporation to develop, implement and, consist with executed agreements with Regional Councils, enforce reliability standards. It further requires the Corporation to develop and approve such standards pursuant to an open, transparent, public process which provides dissenting entities the opportunity to present their concerns, and which includes procedures by which any participant may challenge the approval of a standard through a dispute resolution process internal to the NERC and thereafter by appeal to FERC or to other applicable authorities, as allowed by law.


1

Appendix 3

RESPONSES TO COMMENTS ON GOVERNANCE TASK GROUP DRAFT REPORT

This Appendix 3 discusses the comments which the Governance Task Group received on its

December 15, 2000 draft Report and Recommendations, including the proposed amended Certificate of Incorporation (“COI”) and Bylaws. For discussion purposes the Task Group has grouped the comments, to the extent possible, by Task Group Recommendation and by the COI or Bylaws provision to which each comment primarily pertains. I. Comments on Interim State Recommendations

Recommendation 1 – Composition and Election of the Board of Trustees

Southwest Power Pool (“SPP”) commented that the present Board should be reduced to a 30-person Board consisting of 10 independent Trustees, 10 representatives of transmission owners, and 10 representatives of transmission users, with each Regional Council to have two representatives on the Board and with a mix of industry sectors represented within the transmission owners and transmission users categories. Southern Company commented that it is premature to move to independent governance of NERC while the Regional Councils are still the “owners” of the Corporation. The Governance Task Group was charged by the NERC Board of Trustees to “recommend the details of how governance could be turned over to the NERC independent Trustees with a stakeholders committee available to provide advice and recommendations.” Any deviation from this action would be outside the scope of the Board’s charge to this Task Group. The Governance Task Group also believes that NERC should move to a fully-independent Board at this time. The Task Group notes that the Stakeholders Committee will be tasked to promptly develop a plan for an open, inclusive membership and governance structure for the Stakeholders Committee, which may transition to the membership of NAERO in the End State.

A group of commentators including the American Chemistry Council, American Iron and Steel Institute, American Public Power Association, Coral Power LLC, Dynegy, the Electricity Consumers Resource Council, Enron, the Electric Power Supply Association, Ontario Power Generation and the Steel Manufacturers Association (“ACC”), as well as PJM, commented that the independent Trustees of NERC should meet the same “independence” requirements demanded with respect to regional transmission organizations (“RTOs”) in FERC Order No. 2000. The proposed Bylaws use the definition of independence found in the consensus federal reliability legislation to establish NAERO, i.e., “An Independent Trustee is a person who is not an officer or employee of the Corporation or of any entity that would be reasonably perceived as having a direct financial interest in the outcome of Board decisions and who does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a Trustee” (Art. III, Sec. 2(b)), and thus is most appropriately used in the amended Bylaws. Recognizing the importance of moving to and maintaining a truly independent Board, the Governance Task Group has stated in its Report that the Board should develop processes for insuring the independence of Trustees and the absence of conflicts of interest, such as procedures for screening Trustee candidates by the Nominating Committee, annual internal reviews of the financial interests of sitting Trustees, and procedures for addressing allegations of non-independence.


2

Manitoba Hydro commented that the President of NERC should not be a member of the Board of Trustees. As stated in its Report, the Governance Task Group believes that it is important for the President to be a member of the Board, in light of the facts that (i) the President will be the Chief Executive Officer of the Corporation, and (ii) the other Trustees will not be full-time employees of NERC, nor engaged in occupations in the electric utility industry. The Task Group also notes that Article VIII, Section 1 of the proposed Bylaws prohibits the President from membership on the audit or human resources (i.e., compensation) committees of the Board.

Wisconsin Public Power, Inc. (“WPPI”) suggested that the Bylaws could more specifically provide for the composition of the Trustee Nominating Committee, and that if the Nominating Committee is to include Stakeholder representatives, there should be a sector balance requirement. Entergy commented that the Nominating Committee should be required to consist of at least 5 members. The Governance Task Group believes that the Bylaws should not provide specific requirements for the (minimum) number of members, or composition, of the Nominating Committee, but rather should leave the composition of the Nominating Committee each year to the sound judgment of the independent Board. However, the Task Group anticipates that the Nominating Committee will be comprised of independent Trustees.

WPPI also commented that the Bylaws should require that two candidates be nominated for each Trustee vacancy to be filled at an annual election. In developing its recommendations, the Governance Task Group considered providing for contested elections, and determined that this approach was inadvisable, for the reasons stated in its Report. The Task Group also notes that the proposed Bylaws require that a Trustee candidate receive a two-thirds vote of the members of the Stakeholders Committee present (in person or by proxy) and voting in order to be elected, and therefore that less than a majority of Stakeholders (i.e., one-third plus one) can cause a candidate to be defeated, which in turn requires the Nominating Committee to propose another candidate for that Trustee vacancy. (Article III, Sec. 5)

WPPI commented additionally that term limits of two or three terms should be imposed for members of the independent Board. The Governance Task Group does not believe that term limits are appropriate. The Task Group notes that a Trustee who wishes to continue to hold office must be re-nominated and stand for election every three years, and can be rejected for re-election by vote of one-third plus one of the Stakeholders Committee. (Article III, Sec. 4 and 5)

Recommendation 2 – Composition of the Stakeholders Committee

PJM Interconnection, L.L.C. (“PJM”) commented that the initial Stakeholders Committee should be open to all affected parties, that the composition of the Stakeholders Committee should include representatives from all market participants and from regulatory commissions, and that the Stakeholders Committee should have weighted sectoral voting. ACC commented that the proposed initial Stakeholders Committee is disproportionately biased towards incumbent, vertically-integrated utilities. The American Public Power Association, the Electricity Consumers Resource Council, and Enron Power Marketing, Inc. (“APPA/ELCON/EPMI”), as well as Exelon, commented that the Stakeholders Committee will be dominated by the Regional Councils, and should be more balanced. Finally, Entergy suggested that the proposed Bylaws provide insufficient detail concerning the Stakeholders Committee, and that more specificity is needed with respect to procedures for nominating and electing persons to the Stakeholders Committee, procedures for filling vacancies on the Stakeholders Committee, and term limits.

The Governance Task Group believes that the initial Stakeholders Committee itself should be responsible for developing a proposal for the composition, governance and voting structure for an open,


3

inclusive Stakeholders Committee. In its final report to the Board, the Task Group specifically urges the Stakeholders Committee to take into account the comments that were received regarding the composition, selection of members, voting structure and governance of the Stakeholders Committee; and to provide recommendations concerning the roles of independent system operators, RTOs, public interest groups, and federal, state and provincial regulators, in the NERC membership and governance structures.

Recommendation 3 – Budgets and Funding (Assessments)

Manitoba Hydro commented that the Members (Regional Councils), not the independent Board, should have final authority over assessments. WPPI commented that the Stakeholders Committee should have authority to reject budgets approved by the Board, by two-thirds vote, and that Stakeholders other than the Regional Councils should be allowed to address the Board on assessment issues. APPA/ELCON/EPMI commented that the Stakeholders Committee should have the right to reject the budget adopted by the independent Board, and should have the right to object to assessments. The Governance Task Group believes that it is critical to the truly independent functioning of the Board that it have final authority over both budgets and assessments. The Task Group also believes that so long as the bulk of NERC’s funding is based on Regional assessments, only the Regions should have the right to object to the Board’s proposed assessments and thereby trigger the process specified in Article X, Section 4 of the proposed Bylaws. However, the Task Group has revised Article X, Section 4 to recognize that if the objection process is triggered, the Board may, in its discretion, allow interested entities other than Regional Councils to make presentations to the Board within the scope of the objections.

Entergy commented that the Regional Councils should be included in the budget consultation process. Exelon commented that other industry participants should have reasonable access to the independent Board with respect to the budget process. The Pennsylvania and Delaware Commissions commented that the proposals regarding the budget process do not provide for adequate consultation or input by end-use customers or a sufficiently open and democratic process. The Governance Task Group believes that both Regional Councils and other industry participants should be able to participate effectively in the budget consultation process through their participation on the Stakeholders Committee (and with respect to the Regional Councils, their members’ participation on the Stakeholders Committee)and on standing committees. Further, the Task Group anticipates that the Stakeholders Committee will develop a proposal for an even broader, more inclusive composition, governance and voting structure of the Stakeholders Committee, thereby increasing the ability of all participants to provide input in these matters.

The Pennsylvania and Delaware Commissions commented that the proposals regarding budgets and assessments lacks adequate budgetary protocols to assure that project costs are properly assigned to beneficiaries. The Governance Task Group notes that the Funding Task Group is specifically addressing the topic of how the costs of special projects, including new tools, services and products developed and made available by NERC, should be paid for by those entities which support development of such projects or which voluntarily make use of them.

WPPI commented that assessments (with certain exceptions) should be based on net energy for load (NEL.) The Governance Task Group notes that the NERC Board has previously approved and put into place a transition plan which will result in Regional assessments for the annual budget being based 100% on NEL beginning in 2003, i.e., there is only one more open year (2002) in which assessments will not be based 100% on NEL. Regional Councils presumably are planning on this transition being completed as designed. Accordingly, the Governance Task Group believes that the existing transition plan to 100% NEL should be followed.


4

Recommendation 4 – Amendments to NERC Governance Documents

ACC commented that under the proposed COI and Bylaws, the independent Board is not fully independent of the Stakeholders Committee and the Regions because the latter have effective veto power over the Board’s authority to amend the COI and the Bylaws. WPPI commented that the Regions will have the authority to override decisions of the independent Board and the Stakeholders Committee to amend the Bylaws, and that a unanimous vote of the Regions should be required for such actions. APPA/ELCON/EPMI also commented that a unanimous vote of the Regions should be required to amend the Bylaws. On the other hand, Entergy commented that a two-thirds vote of both the Board and the Stakeholders Committee should be required to amend the Bylaws.

The Governance Task Group believes that requiring a majority vote of the Stakeholders Committee,

as well as of the independent Board, to amend the Bylaws is a further step towards open governance. Requiring two-thirds votes of the independent Board and the Stakeholders Committee would unduly restrict the Board’s ability to continue to make proactive amendments to the Bylaws consistent with the philosophy expressed in the Preamble to the proposed Bylaws. The Task Group believes it is important to require only majority votes of the independent Board and the Stakeholders Committee while requiring super-majority votes of the Regional Councils for COI and Bylaws amendments. The Task Group notes that New Jersey law requires that the owners of the corporation have certain rights to amend the COI and Bylaws. However, under the proposed COI, a unanimous vote of the Regions would be required to amend the COI, meaning that there will need to be consensus to adopt proposed amendments. Similarly, a two-thirds vote of the Regional Councils will be required to amend the Bylaws, meaning that a super-majority agreement among the Regions will be necessary to undo a By-Law amendment passed by the Board and the Stakeholders Committee, or to add or amend a Bylaws provision in a way that restricts the authority of the independent Board. The Task Group believes that a two-thirds vote requirement for the Members is a sufficiently high hurdle to place on action by the Regions.

Recommendation 5 – Selection of Officers of NERC

Manitoba Hydro commented that the President of NERC should have the authority to hire and fire other employees without obtaining authorization by the Board. The Governance Task Group believes that Board authorization should be required for the hiring and dismissal of the first line of senior management, and that this is consistent with typical corporate governance.

Recommendation 6 – Role of Board of Trustees in ADR Procedures

WPPI commented that NERC’s ADR documents need to clearly define what matters are subject to

the NERC ADR process and what matters are subject to the independent Board’s discretion. The Governance Task Group has stated in its final report that in its comprehensive review of the NERC ADR process pursuant to Recommendation 6, the independent Board should attempt to define what matters should be subject to the NERC ADR process and what matters should be within the discretion of the Board.

Recommendation 7 – Annual Review of NERC Governance

Manitoba Hydro commented that it is inappropriate for the Board to examine its own governance; rather, such a review should be performed by the Members. The Governance Task Group believes that conducting periodic reviews of the organization’s governance structure is an appropriate Board function. Further, the fact that the Board is charged with conducting annual reviews of the organization’s governance


5

does not preclude the Regions or the Stakeholders Committee from making recommendations for changes in the governance structure, on their own initiatives. The Task Group’s report states that the Board should solicit the views of the Regional Councils and the Stakeholders Committee as part of its annual reviews of the governance of the organization. II. Comments on Specific Certificate and Bylaws Amendments

Certificate Article SECOND, Item b

PJM commented that the proposed new Purpose provision in the COI (Item b) does not define the scope of NERC’s and the independent’s Board’s authority to develop and enforce “standards” to provide for an adequate level of reliability, particularly in relation to the Regions and to RTOs. In response to these and other comments, the Governance Task Group has added the phrase “consistent with executed agreement(s) with Regional Councils” to Article SECOND, item b. In addition, the Task Group believes that the Preamble that has been added to the Bylaws is responsive to PJM’s comments.

Entergy commented that the proposed new Item b of Article SECOND should be deleted. The Governance Task Group believes that the purpose stated in Item b, which is taken directly from the proposed reliability legislation, is fundamental to NERC’s mission. The Task Group notes that Item b has been modified as stated above in response to PJM’s comments.

Bylaws – Definitions

Entergy commented that a definitions section should be added to the Bylaws. The Governance Task Group reviewed the proposed Bylaws with this comment in mind, and concluded that terms requiring definition are appropriately defined throughout the Bylaws.

Bylaws Article I – Membership

WPPI commented that NERC should be transformed at this time into a direct stakeholder membership organization, with a contractual relationship with the Regions. APPA/ELCON/EPMI commented that provision should be made now for direct stakeholder membership. The Task Group believes that the manner and timing of movement to direct, broad-based, open stakeholder membership is one of the longer-term governance issues on which the Stakeholders Committee should develop proposals. Further, the Governance Task Group believes that movement away from ownership by the Regional Councils cannot be accomplished without relieving the Regions from funding responsibility. To this end, the Governance Task Group notes that the Funding Task Group is recommending that NERC should immediately pursue a coordinated strategy at the federal, state, and provincial levels to gain wider recognition and support, and obtain the necessary approvals to allow recovery of, NERC’s costs that are not already included in current rates, and that NERC and the Regions should look to the recent PJM filing at FERC to recover MAAC costs through the PJM tariff as a possible model for cost recovery. Nevertheless, it may not be possible in all cases to assign funding responsibility to direct members of NERC or end users of electricity without legislation.

Manitoba Hydro commented that the associate membership category discussed by the Funding Task Group is not provided for in the proposed Bylaws and that the provisions regarding affiliate membership are being removed from the Bylaws. The Governance Task Group notes that the Funding Task Group has eliminated the discussion of “associate members” in its final report.


6

Bylaws Article III – Board of Trustees

PJM commented that Article III, Section 2(b) should be modified to make the definition of “independence” more specific and consistent with FERC Order No. 2000. See the discussion of this point under Recommendation 1, above.

Manitoba Hydro commented that Article III, Section 2(d) should expressly require at least one member of the Board of Trustees be from each of Canada, the United States and Mexico. The Governance Task Group believes that the requirements expressed in Article III, Sections 2(d) of the proposed Bylaws on this topic as written are sufficient, i.e., (i) “The Board must at all times include at least one Independent Trustee with appropriate knowledge and experience of the industry, regulatory and legal systems in the U.S. and at least one Independent Trustee with similar knowledge and experience in Canada;” “The Nominating Committee shall endeavor to nominate candidates for election to the Board of Trustees consistent with the objectives that the Board . . . reflect geographic diversity and the international nature of the Corporation;” and “When Mexico is ready to provide for an appropriate grant of authority to a self-regulatory reliability organization (SRRO) to set standards, enforce compliance, and collect funds, this Board composition requirement will be expanded to include Mexico.”

Entergy commented that a quorum of the Board should be required for a vote to elect a Trustee to fill a vacancy on the Board until the next annual election. The provision in Article III, Section 3 of the proposed Bylaws that a vacancy on the Board can be filled until the next annual election “by a majority vote of all of the Trustees then in office, although less than a quorum”, has been included to enable the remaining Trustees to fill vacancies in this manner in the event that sufficient Trustees resign that a quorum can no longer be assembled.

Bylaws Article IV – Meetings of the Board of Trustees

Entergy commented that either the minimum notice for special meetings of the Board should be increased to 10 days (from 5 days), or the option of notice by U.S. mail should be dropped. The Governance Task Group agrees with this comment and has eliminated from Article IV, Section 2 the proposed Bylaws the option to give notice of Board meetings by U.S. mail. The option to give notice by “express delivery” has been added.

Bylaws Article V – Stakeholders Committee

WPPI commented that procedures should be added to the Bylaws for the sectors to propose or nominate candidates for vacancies on the Stakeholders Committee. The Governance Task Group intends that these procedures should be developed by the Stakeholders Committee as part of its initial proposal for composition, governance and voting structure. The Task Group notes that proposed Article V, Section 2 does provide that vacancies are to be filled from the same Region or sector as the departing Stakeholder Committee member.

Bylaws Article VI --Meetings of the Stakeholders Committee

PJM commented that the Bylaws should require notice to outside participants of meetings of the Stakeholders Committee and that materials provided to the Stakeholders Committee should be posted on the NERC web site. Based on this comment, the Governance Task Group has modified the first sentence of Article VI, Section 3 to state: “Notice to the public of the dates, places and times of meetings of the


7

Stakeholders Committee, and all non-confidential materials provided to the Stakeholders Committee, shall be posted on the Corporation’s web site at the same time that notice is given to the Stakeholders Committee.” The Task Group has made a similar modification to Article IV, Section 3 of the proposed Bylaws concerning meetings of the Board of Trustees and materials provided to the Board.

Entergy commented that the Bylaws should be revised to provide for the annual meeting of the Stakeholders Committee (at which independent Trustees are elected) to be held before the annual meeting of the Board of Trustees. The Governance Task Group agrees and has revised Article VI, Section 1 and Article IV, Section 1 of the proposed Bylaws to provide that the annual meeting of the Stakeholders Committee will be held immediately following the annual meeting of Members (Regional Councils) and that the annual meeting of the Board of Trustees will be held immediately following the annual meeting of the Stakeholders Committee.

Entergy commented that either the minimum notice for special meetings of the Stakeholders Committee should be increased to 10 days (from 7 days), or the option of notice by U.S. mail should be dropped. The Governance Task Group agrees with this comment and in its final report has eliminated from Article IV, Section 2 of the proposed Bylaws the option to give notice of Stakeholders Committee meetings by U.S. mail. The option to give notice by “express delivery” has been added.

Bylaws Article VII – Officers

Manitoba Hydro commented that there is no need to provide for an annual election of the president of NERC since he or she is a hired employee and can be dismissed at any time that the Board decides. The Governance Task Group believes that it is appropriate, and consistent with normal corporate governance, to provide for formal appointment of the president and the other officers identified in Article VII, once per year at the first Board meeting following the election of Trustees.

Bylaws Article VIII – Committees

PJM commented that this Article should be modified to clarify that the independent Board does not appoint members of the Stakeholders Committee or otherwise dictate its makeup. On review of this comment, the Task Group realized that the draft Bylaws could be read as providing that the Stakeholders Committee is a “standing committee” of NERC. This is not the Task Group’s intent. In order to clarify this matter, the Task Group has added the following sentence to Article V, Section 1: “The Stakeholders Committee shall not be a standing committee of the Corporation.”

The NERC Personnel Subcommittee commented that the Bylaws should create an independent governing body, under the independent Board, for the NERC System Operator Certification Program. The Governance Task Group notes that the scope of the Operator Certification program is not yet fully resolved within NERC. Further, the Task Group did not believe it could fully understand the issues involved in this comment and make a recommendation in the time available. The Task Group also notes that under proposed Article VIII, the independent Board can appoint such standing committees as it deems appropriate; therefore, the Board could appoint a standing committee to oversee the Operator Certification program, if the Board decides that such a committee is necessary or appropriate. Until that time, the Personnel Subcommittee will serve as the “governing body” for the Operator Certification Program.


8

Bylaws Article IX – Quorums and Voting Entergy commented that the quorum and voting requirements should be two-thirds of the

membership of the Members, Board and Stakeholders Committee, as applicable. The Governance Task Group considered the pros and cons of various approaches to quorum and voting requirements, and concluded that the provisions of proposed Article IX are the most appropriate for these topics. The Task Group notes that basing quorum and voting requirements on the full membership of the Members, Board or Stakeholders Committee can enable members to prevent the body from transacting business, or to defeat proposals, simply by not coming to meetings or by abstaining from voting. The Task Group also notes that the Stakeholders Committee may consider and propose different requirements for its quorum and voting requirements as part of its development of a proposal for its governance and voting structure.

Bylaws Article X – Fiscal Matters WPPI commented that a Member of NERC should only be allowed to withdraw from NERC at the

start of a budget year, and on six months notice. The Governance Task Group considered this provision (Article X, Section 5) but concluded that proposing to amend it might be viewed as outside the scope of the Task Group’s charge from the Board. However, the independent Board, and/or the Stakeholders Committee, will be free to revisit this provision.

Bylaws Article XIII – Process for Development of Standards Relating to Reliability

WPPI commented that the meaning of the phrase that an entity may challenge the approval of a standard “through a process internal to the Corporation” is unclear and suggests that an objecting party can challenge the Board’s adoption of a standard through a process internal to NERC that may undercut the Board’s authority. The Governance Task Group notes that under NERC’s existing Process for Developing and Approving NERC Standards, after the Board approves a new or revised standard, a party that continues to object may request use of NERC’s ADR process, and also retains the right of appeal to other authorities as the law allows. Therefore, the language of Article XIII is consistent with NERC’s existing policies. The Governance Task Group hopes that such challenges to a standard that has been through NERC’s standards development process, and duly approved by the Board of Trustees, will be infrequent. The intent of Article XIII is that the standards development process must give entities the opportunity to object to a proposed standard, and be heard, as part of that development and approval process. Ideally, a party should raise its objection and present its views before the proposed standard is presented to the Board for final approval. The objector’s views, and how they were considered in the process, should be presented to the Board as part of the package of materials the Board considers in determining whether to adopt the proposed standard. Finally, the Task Group notes that it is recommending (Recommendation 6) that the independent Board of Trustees will be responsible to examine the NERC ADR process comprehensively, taking into account the needs and requirements of the contract-based Regional Compliance and Enforcement Program.

PJM proposed specific language revisions to Article XIII. The Governance Task Group has

incorporated a portion of PJM’s proposed language into proposed Article XIII. In addition, the Task Group believes that the Preamble which it has added to the proposed Bylaws is responsive to the concerns reflected in PJM’s comments.


9

Bylaws Article XIV – General

The Pennsylvania and Delaware Commissions commented that the reference in Section 2 to the 1990 edition of Robert’s Rules of Order Newly Revised should be eliminated so that the most current version of Robert’s Rules of Order will be applicable as it is issued, without the need for a By-Law amendment. The Governance Task Group has incorporated this change in its final proposed Bylaws. III. Comments on Recommendations for the End State

The Governance Task Group notes that a few comments were received with respect to its conceptual set of recommendations for the End State. SPP commented that the End State governance recommended by the Board in July 1998 should be reviewed to determine if it is still appropriate. The Governance Task Group believes that this can be considered by the Board in its periodic reviews of NERC’s governance, but that NERC should move to and continue with an independent Board under foreseeable conditions.

WPPI commented that in the End State, the membership stakeholder advisory group should include transmission-dependent utilities as a sector. The Governance Task Group has recommended that in the End State, “Membership in NAERO should be open to all entities with an interest in the operation of the North American bulk power system”, which would include transmission-dependent utilities. The listing of representative sectors for End-State membership in NAERO was not intended to be limited, as clearly stated in End State Recommendation 1.b.

Exelon commented that a firm timetable should be established for the transition from the Stakeholders Committee to a Members Committee composed of industry participants. Entergy commented that the Bylaws should include a provision for conversion of the Interim State model into the End State model, and a sunset provision for the Interim State. The Task Group believes that the timetable for transition to the End State, including the specific composition of the membership of NAERO in the End State, are issues that should be considered by the Stakeholders Committee, as well as by the independent Board in its periodic reviews of governance. However, the Task Group believes that it is premature, and that there are too many unknown future events, to establish a firm timetable for this transition at this time. The Task Group believes that it is inappropriate to include a sunset provision for the Interim State governance model, for the reasons stated in its report.

Manitoba Hydro commented that the proposed Bylaws do not reflect the statement in item 2d of the End State Recommendations, that “The Board of Trustees should always be required to have one member from Canada.” This statement has been deleted from the Report. The Governance Task Group believes the requirements of Article III, Section 2(d) of the proposed Bylaws on this topic are sufficient, i.e., (i) “The Board must at all times include at least one Independent Trustee with appropriate knowledge and experience of the industry, regulatory and legal systems in the U.S. and at least one Independent Trustee with similar knowledge and experience in Canada;” and “The Nominating Committee shall endeavor to nominate candidates for election to the Board of Trustees consistent with the objectives that the Board . . . reflect geographic diversity and the international nature of the Corporation.” IV. Other Comments

The Pennsylvania and Delaware Commissions commented that through the proposed revisions, NERC is attempting to take on a quasi-governmental role without the backing of law; that there is no assurance that the NERC model reflected in the proposed COI and Bylaws will not conflict with open access


10

or competitive wholesale and retail markets; that the proposed structure provides inadequate due process and judicial review safeguards; that the proposed governance structure is self-perpetuating and lacks openness and adequate participation by states and end use customers; that there has been no demonstration that the existing voluntary standards setting process is ineffective; that the proposed model of private central control of standards is in conflict with Order 2000 and does recognize the role of RTOs; and that there may be potential conflicts where an RTO covers more than one Region. The New York Public Service Commission commented that a states’ savings clause should be added to the proposed Agreement for Regional Compliance and Enforcement Programs and to the other proposed documents.

The Governance Task Group believes that the adoption and implementation of a contract-based compliance and enforcement program among consenting parties is appropriate and does not usurp governmental functions. The Task Group expects that the contract-based compliance and enforcement program will be conducted in accordance with applicable laws and regulations. With respect to the voluntary standards setting process, the Governance Task Group is not proposing any changes to the existing process, although it has proposed a new Article XIII of the Bylaws that recognizes that process. What is being added are mechanisms to enforce the standards set by the voluntary process, through contractual arrangements. The Task Group notes that NERC has underway a review of the structure of its standards and the process by which these standards are developed and approved.

The Governance Task Group also notes that the proposed Interim State governance is intended to be part of a transition to an open, inclusive membership and governance structure in the End State, whether or not as a result of federal legislation. The Task Group notes that its recommendations call for the Stakeholders Committee to be tasked to develop a proposal for an open, inclusive composition, governance and voting structure, which the Task Group anticipates will take into account the interests of states and end-use customers and the role of RTOs. Finally, the Governance Task Group believes that the Preamble which the Task Group has added to the proposed Bylaws is responsive to the concerns expressed by the Pennsylvania, Delaware and New York Commissions, and manifests NERC’s recognition of the need to be cognizant of those concerns.

Public Service Electric & Gas Company questioned whether NERC has the legal right to perform a compliance and enforcement role, and also commented that some Regions will not have the incentive to create independent compliance arms. The Governance Task Group believes that NERC and the Regions have the right to enter into the proposed compliance and enforcement program by contract. The Task Group also notes that each of the Regions presently has a compliance arm. Finally, the Task Group notes that the proposed Agreement for Regional Compliance and Enforcement Programs proposed by the Compliance Task Group will only be effective if entered into by at least six Regional Reliability Councils.

Compliance Task Group Report 1 01/19/01

COMPLIANCE TASK GROUP REPORT I. The Board of Trustees’ Charge to the Compliance Task Group

The Compliance Task Group was created by action of the Board of Trustees at its October 12–13, 2000 meeting and was charged “to develop specific recommendations for consideration at the February 2001 meeting,” with the following scope:

Compliance Enforcement — to recommend a contract-based model in which Regional Councils enforce compliance with selected NERC and Regional standards, including the imposition of monetary penalties and other sanctions. NERC would have responsibility for oversight, coordination, and assessment of effectiveness of Regional programs.

The charge of the Board of Trustees to the Compliance Task Group was one of several

actions taken by the Board as part of an initiative to move NERC toward the end-state organization, “NAERO,” envisioned by NERC’s pending consensus federal reliability legislation, in the absence of any expectation of passage of that legislation in the near term.

II. Context for a Contract-Based Regional Compliance Enforcement Program NERC and the Regional Reliability Councils have developed a comprehensive set of policies, standards, and procedures to assure the reliable operation of North America’s interconnected bulk electric system. NERC’s existing Bylaws require each Regional Reliability Council to agree, on behalf of its members, to comply with those policies, standards, and procedures, as follows:

Obligations — A Member or Affiliate Member Regional Council, on behalf of its members, shall agree, in writing, to accept the responsibility to promote, support, and comply with the purposes and policies of the Corporation as set forth in its Certificate of Incorporation, Bylaws, and Planning and Operating Policies that from time to time may be amended, adopted, or approved. In addition, it shall provide for its share of the financial support of the Corporation in a timely manner. (Article I, Section 4.)

It is essential that those responsible for operation of the bulk electric system, as well as those who make use of the bulk electric system, continue to comply with those policies, standards and procedures. NERC is seeking legislation within the United States to make the necessary policies, standards, and procedures legally binding and enforceable for all users of the bulk power system, but it appears that enactment of such legislation will not occur in the near term. In the absence of legislation, NERC and the Regional Reliability Councils must pursue alternative courses of action to do what is possible within the current legal framework to assure the continuing reliable operation of North America’s interconnected bulk electric system. Therefore, the Compliance Task Group recommends that NERC and the Regional Reliability

M R Gent

Exhibit I


Councils develop a contract- or agreement-based program in which the Regional Council and its members will jointly agree in advance that specified sanctions will be imposed by the Regional Council for violations of certain identified standards. The Regional Reliability Councils and their members are already obligated by the NERC Bylaws to comply with the NERC standards. What the agreement-based program adds is an enforcement mechanism. III. Recommendation of the Compliance Task Group

The Compliance Task Group makes the following recommendation to the NERC Board of Trustees: That all Regional Reliability Councils and NERC enter into the proposed “Agreement for Regional Compliance and Enforcement Program” (the Agreement, which is Appendix 1 to this Report). The Agreement includes three key elements:

1. That each Regional Reliability Council commit to develop, implement, and enforce a contract- or agreement-based Regional Compliance and Enforcement Program (RCEP) meeting certain minimum criteria and having certain essential attributes (including provision for monetary penalties and other sanctions).

2. That NERC oversee the development, coordinate the implementation, and assess

the effectiveness of each Regional Reliability Council’s RCEP.

3. That the initial reliability standards and measures subject to the RCEPs would be Control Performance Standard 1 (CPS1), Control Performance Standard 2 (CPS2), and the Disturbance Control Standard (DCS). Additional NERC standards and measures would be included in the NERC-wide RCEP upon unanimous agreement of all signatories to the Agreement (NERC and the Regional Councils) and ratification by the NERC Board of Trustees.

Implementation of this recommendation is not a substitute for NERC’s legislative proposal. This proposal depends upon the agreement of the Regional Reliability Councils and their members. Neither NERC nor the Regional Councils have the present ability to compel an entity to agree to a program of financial penalties for violations of the reliability standards. However, implementation of this recommendation does move NERC and the Regions a step closer to having a full-fledged compliance and enforcement program and does establish a basis for sanctioning entities that are not in compliance with basic reliability standards. IV. Overview of the Proposed Agreement for Regional Compliance and

Enforcement Programs

The purposes of the Agreement for Regional Compliance and Enforcement Programs are:

(a) To provide for the development and implementation by the Regional Reliability Councils of Regional Compliance and Enforcement Programs for certain specified reliability standards that NERC and the Regional Reliability Councils agree from time to time are appropriate for such programs;


(b) To provide procedures and a forum for the exchange of information among the Regional Reliability Councils in order to increase the effectiveness of the Regional Compliance and Enforcement Programs; and

(c) To authorize NERC to oversee the development, coordinate the implementation,

and assess the effectiveness of the Regional Compliance and Enforcement Programs and to establish the necessary processes and procedures for doing so.

The Agreement builds on the work that the Western Systems Coordinating Council has

done to implement its contract-based Reliability Management System, which has been approved by FERC. Under the Agreement, each Regional Reliability Council would undertake to develop its own contract- or agreement-based compliance and enforcement program with its own members. Each Regional program would be have a common set of essential attributes and would include a common set of NERC reliability standards. NERC would oversee the development, coordinate the implementation, and assess the effectiveness of each Regional Council’s efforts.

A Compliance Agreement Participants Group (“CAPG”), reporting to the NERC Board of Trustees, would be the administrative body for implementation of the NERC/Regional Council Agreement. NERC and each Regional Council would have one representative on the CAPG. The NERC representative would be the Chair of the CAPG.

The NERC Director of Compliance would periodically assess the Regional programs and

report to the CAPG and the NERC Board of Trustees. This activity of the Director of Compliance is separate from NERC’s ongoing, general compliance program for the standards that are not subject to the RCEP. NERC’s general compliance program would be outside the scope of the Agreement and the CAPG.

The Compliance Task Group recommends that the Agreement take effect once NERC

and at least six of the Regional Reliability Councils have signed the Agreement. While the CTG strongly believes that all Regional Reliability Councils should participate in this program, a delay by a few Regional Reliability Councils should not hold up the general implementation of the program. By the same token, unless a significant number of Regions will participate, then the CTG does not believe that NERC should go forward with the program. If NERC’s program does not go forward, individual Regions could pursue their own programs, as did the WSCC.

Annex A to the Agreement sets out the list of essential attributes for an effective contract-

based Regional compliance enforcement program. NERC would evaluate the extent to which a regional program incorporates those essential attributes as part of its assessment function.

Annex B to the Agreement contains the reliability standards and measures that would be

included in the initial phase of the program. The CTG is recommending that CPS1, CPS2, and DCS be the first standards included in the program. The Agreement would not preclude a Regional Council from including additional standards in its own agreement with its members. Annex B will also set out the sanction matrix that applies to the standards.

The standards eligible for inclusion in Annex B standards will be the NERC standards that are developed through the NERC “Process for Developing and Approving NERC Standards,” as they may be revised from time to time. Annex B would be revised as necessary to reflect any changes in the NERC standards, so that there would be no difference between Annex B standards and the corresponding NERC standards. Those standards should also include any specific


Regional differences that are authorized through the standards development process. For example, the time period specified in the DCS standard for the Eastern Interconnection is now 15 minutes, approved by the NERC Operating Committee on an interim basis. NPCC intends to continue to adhere to a 10-minute time period for DCS. In this connection, the CTG recommends that NERC develop a procedure for including appropriate Regional variations within a standard as it is promulgated. The NERC Standards Task Force may be the appropriate group to work on that issue as part of its current review of the NERC standards development process.

The CTG recognizes that the DCS standard is currently being revised. The CTG requests

that the Board of Trustees direct the Operating Committee to complete work on the DCS standard as soon as possible, so that the most current version of the standard can be ready for the start of the program.

The first phase of the contract-based program would include only a small portion of the

comprehensive set of policies, practices, and procedures necessary for maintaining reliable system operations. The small set of standards included in the first phase of the program would be enforced through the agreed sanctioning procedure. Compliance with the remainder of the NERC and Regional policies, standards, and procedures would continue to be pursued through the monitoring and peer pressure efforts that NERC and the Regional Reliability Councils have used through the years. As circumstances evolve, and especially if legislation continues to be delayed, then the contract-based program would be expanded to include additional policies, standards, and procedures. A standard could be added or deleted to Annex B only by unanimous vote of the signatories to the Agreement (NERC and the Regional Councils) and ratification by the NERC Board of Trustees. Whether or not particular standards are included in the program, it is vital that all interested parties continue to follow all the established policies and procedures.

The WSCC has already developed a contract-based compliance and enforcement

program, and the NPCC has made significant progress in developing such a program. The Agreement provides for the CAPG to work with regions that already have contract-based programs to develop a timetable for making the changes necessary to bring those programs into conformance with the Agreement. The CTG believes that such a transition period is appropriate and that small differences between existing programs and the requirements of the Agreement should not be a hindrance to those regions executing the Agreement.

V. Discussion of Significant Comments

A draft of this report was posted for comment on December 15, 2000. Based on the

several significant comments received, the CTG has modified this report and the Agreement for Regional Compliance and Enforcement Programs in a number of respects. The most significant of those will be discussed here. Responses to all the comments are contained in Appendix 2 to this report. One significant comment that could not be accommodated was the dissatisfaction mentioned by several commenters (APPA, ELCON, Wisconsin Public Power) that the proposal did not go further and that the NERC Board of Trustees does not have the power to make a standard mandatory. In the absence of legislation, NERC does not have the authority to impose a decision on the Regions or their members. The Regional Reliability Councils are NERC’s only members and its owners. The scope and strength of the program are only that which the Regional Reliability Councils, and in turn their members, are willing to agree to.

Several commenters (Entergy, Exelon, ECAR, Public Service Electric & Gas, Florida

Reliability Coordinating Council) raised questions about the standards included in Annex B. One


concern was that the Annex B standards could get out of “synch” with NERC’s standards, leading to inconsistent or conflicting standards. Another concern was that the standards included in Annex B would not have gone through an open, inclusive development process. A third concern was over the process by which any appropriate Regional variations might be included. This report and the Agreement have been revised to make clear that this program is for enforcing standards, not developing standards. The standards that are included in Annex B will be only standards that have been approved by the NERC Board of Trustees, through the NERC standards development process. Annex B will be revised as necessary, so that the most up-to-date version of a standard is included. This should also reduce the concern about many different Regional variations of a standard. Where Regional variations are appropriate, the CTG is recommending that the Regional variation be developed through the NERC standards development process. The CTG is further recommending that this issue be included in the ongoing review of the NERC standards-development process.

Issues relating to the relative roles of what the draft report called the “Compliance

Agreement Coordinating Committee,” the NERC Board of Trustees, and the NERC Director of Compliance were raised by a number of commenters (Wisconsin Public Power, APPA/ELCON, ECAR). The proposed Agreement has been revised to establish a “Compliance Agreement Participants Group,” or “CAPG,” instead of a “Compliance Agreement Coordinating Committee.” The task of the CAPG is to administer the Agreement among NERC and the Regions. The CAPG includes only representatives of the signatories to the Agreement. The Agreement has been modified in several respects to strengthen the involvement of the NERC Board of Trustees. As mentioned above, the standards eligible for inclusion in Annex B will be the standards approved by the NERC Board of Trustees. In addition, before a decision by the CAPG to add or delete a standard from Annex B or adopt a procedural rule becomes effective, it must be ratified by the NERC Board of Trustees. A further revision now has the NERC Director of Compliance submitting reports of assessments of Regional programs directly to the NERC Board of Trustees as well as to the CAPG, with a right in the CAPG to file formal comments on those assessments. Finally, the annual compliance plan submitted by the NERC Director of Compliance and approved by the CAPG, as well as any changes that the CAPG requires in that plan, must be ratified by the NERC Board of Trustees.

Issues surrounding the process by which standards are added to Annex B were raised by a

number of commenters (Wisconsin Public Power, APPA/ELCON, Exelon, ECAR, Public Service Electric & Gas). Some questioned the requirement for a unanimous vote of the parties to the Agreement to add or delete a standard. Some asked that all NERC standards considered important be included in the program from the beginning. Others asked for more specification of the process by which standards are to be added or deleted. The most fundamental aspect of the program is that it is agreement-based — it involves participants in the industry agreeing in advance that if they violate certain standards, then a financial penalty may be assessed to them. The unanimity requirement exists because, in the absence of authorizing legislation, there is no current way for a private organization to impose a financial penalty. The CTG believes that including all important standards at the beginning of the program would simply be too large an undertaking. The WSCC implemented its Reliability Management System in stages. The CTG expects that this program will also expand over time to add additional standards. The Agreement has been modified to add additional detail on the process by which standards are added or deleted. Most importantly, any entity may propose the addition or deletion of a standard. In keeping with the contractual nature of the program, there is a provision for a Regional Reliability Council to leave the program if standards are added that it, or its members, do not agree to be


added. Whether or not a standard is included in the program, the Regional Councils and their members are still obligated to comply with the standard.

Several commenters (APPA/ELCON, Wisconsin Public Power, Entergy, ECAR) raised

confidentiality issues. The issue of confidentiality arises in several different respects. One concerns the confidentiality of information that an entity subject to the program may submit to a Regional Council to demonstrate compliance or non-compliance. Such information may contain commercially sensitive information and is properly maintained as confidential. A different answer applies to facts about whether a particular entity may have violated a standard and the nature of that violation. Commenters properly note that publicity about such non-compliance may be part of an effective compliance program. The Agreement has been modified to make that clear. The third way confidentiality arises concerns the annual assessment, or audit plans, of the NERC Director of Compliance. The CTG believes that it is not necessary, and may be harmful, to require disclosure of the details of the assessment program. If an entity knew that only certain issues were to be examined, or that the entity was not subject to assessment at all during the current period, it might lead to inattentiveness and non-compliance.

The last significant issue raised concerns the level of participation in the program that is

necessary for NERC to proceed. As stated above, the CTG believes that at least six Regional Reliability Councils should be willing to undertake the effort before NERC should go forward. The CTG strongly believes that all ten Councils should participate, but the absence of a few should not stifle the good that can come from the program. Certain commenters (Southern, Entergy) state that unless there is universal participation by all market participants, then it may not be feasible to proceed. Public Service Electric & Gas questions whether enough people will participate or whether it is wise to give parties the ability to opt out of the program. The experience of the WSCC is that significant improvements can be made with widespread, but not universal, participation. The WSCC Reliability Management System has the participation of control areas representing approximately 90% of the load in WSCC. The CTG believes it is possible to gain widespread participation in the other Regions as well, but that insistence on universal participation sets the bar too high. The ability of an entity to opt out of the program is simply a recognition of the fact that under a contract-based regime, mandatory participation is not an option.

VI. Diagram of Relationships

The attached diagram indicates the relationships that would be established under the

NERC/Regional Council Agreement.


DIAGRAM OF RELATIONSHIPS CREATED BY

AGREEMENT FOR REGIONAL COMPLIANCE AND ENFORCEMENT PROGRAMS

NERC Director of Compliance Non-RCEP activity

Regional Reliability Council A

Regional Reliability Council B

NERC Board of Trustees

Compliance Agreement Participants Group [one representative from each RRC that signs the Agreement and NERC]

Compliance Managers Committee [NERC Director of Compliance and one representative from each RRC]

NERC President

More Regional Reliability Councils

The Agreement among NERC and the Regional Reliability Councils would establish the relationships shown within the heavy dashed lines. The CAPG would generally be responsible for administering the Agreement. The existing Compliance Managers Committee and NERC staff would do much of the day-today work of implementing the Agreement, as well as continue the ongoing compliance work that is outside the Agreement. Each Region would develop its own program with its members.

Agreement for Regional Compliance and Enforcement Programs 01/19/01

1

APPENDIX 1

AGREEMENT FOR REGIONAL COMPLIANCE AND ENFORCEMENT PROGRAMS

THIS AGREEMENT FOR REGIONAL COMPLIANCE AND ENFORCEMENT PROGRAMS (the “Agreement”) is entered into between and among the North American Electric Reliability Council (“NERC”) and the following Regional Reliability Councils (each, a “Regional Council” or “RRC”): East Central Area Reliability Council, Electric Reliability Council of Texas, Florida Reliability Coordinating Council, Mid-Atlantic Area Council, Mid-America Interconnected Network, Inc., Mid-Continent Area Power Pool, Northeast Power Coordinating Council, Southeastern Electric Reliability Council, Southwest Power Pool, and Western Systems Coordinating Council; the foregoing named entities is each a “Party” and collectively are the “Parties.”

WHEREAS, there is a need to promote the reliability and adequacy of the international, interconnected bulk power systems in North America in a restructured competitive electric utility industry; and

WHEREAS, with the transition of the electric industry to a more competitive structure, NERC is the appropriate industry-wide organization to establish, through an open, inclusive process, mandatory broad-based reliability standards that are implemented and enforced through the RRCs; and

WHEREAS, in order to promote the reliability and adequacy of the international, interconnected bulk power systems in North America in a restructured competitive electric utility industry, it is desirable for each Regional Reliability Council to develop and implement a Regional Compliance and Enforcement Program, having the essential attributes set forth in Annex A to this Agreement and in conformance with the other requirements of this Agreement, to assess and enforce compliance with the Designated Reliability Standards included in Annex B to this Agreement, as Annex B may be amended from time to time; and

WHEREAS, it is desirable for the RRCs to authorize NERC to oversee the development, coordinate the implementation, and assess the effectiveness of, the Regional Compliance and Enforcement Programs; and

WHEREAS, this Agreement, and the Regional Compliance and Enforcement Programs to be implemented in accordance with this Agreement, are intended to supplement, and not to displace, any compliance and enforcement programs and agreements already in place within any Regional Reliability Council;


2

NOW THEREFORE, the Parties agree as follows:

1.00 PURPOSES OF AGREEMENT

The purposes of this Agreement are:

(a) To provide for the development and implementation by the RRCs of Regional Compliance and Enforcement Programs, having the essential attributes set forth in Annex A, which shall apply to those Designated Reliability Standards which the Parties agree from time to time are appropriate for such programs, as set forth in Annex B to this Agreement;

(b) To provide procedures and a forum for the exchange of information among the

Regional Reliability Councils relating to practices, experiences, and lessons learned in the implementation of the RRCs’ respective Regional Compliance and Enforcement Programs, in order to increase the effectiveness of those programs; and

(c) To authorize NERC to, and to establish the processes and procedures by which

NERC will, oversee the development, coordinate the implementation, and assess the effectiveness of each Regional Reliability Council’s Regional Compliance and Enforcement Programs.

2.00 DEFINITIONS

For purposes of this Agreement, the following terms shall have the meanings set forth below:

“Compliance Agreement Participants Group” or “CAPG” means the group established pursuant to Section 4.00 of this Agreement. “Designated Reliability Standards” means the standards set forth in Annex B to this Agreement, as Annex B may be amended from time to time. “Participating Compliance Entity” means an entity which is a party to an RRC’s Regional Compliance and Enforcement Program agreement and which is obligated to take specified actions, to maintain specified conditions, and/or to report specified data in accordance with one of the Designated Reliability Standards.

“Regional Compliance and Enforcement Program” or “RCEP” means a program developed and implemented by a Regional Reliability Council, through means of an


3

agreement or agreements with its members and other entities using the bulk-power electric system, having the essential attributes set forth in Annex A to this Agreement and conforming with the other requirements of this Agreement.

“RRC Governing Body” means the board of trustees, board of directors, board of managers, or comparable governing body of each Regional Reliability Council, as established by the Regional Reliability Council’s certificate of incorporation, bylaws, limited liability company agreement, membership agreement, operating agreement, or comparable governance document.

3.00 OBLIGATIONS OF THE PARTIES

3.01. Obligations of the Regional Reliability Councils.

(a) Each RRC agrees to develop and implement a Regional Compliance and Enforcement Program that shall (i) contain the essential attributes set forth in Annex A to this Agreement and (ii) include each Designated Reliability Standard (including without limiting the foregoing, the data collection and reporting requirements, the enforcement procedures and the schedule of sanctions included in each such Designated Reliability Standard). This Agreement does not preclude a Regional Reliability Council from including additional reliability standards and measures in its Regional Compliance and Enforcement Program, so long as they are not inconsistent with Designated Reliability Standards.

(b) Each RRC agrees to have in place an agreement with its members establishing a

program to enforce the Designated Reliability Standards. Such program shall satisfy the minimum criteria set forth in Section 5.01 and Annex A of this Agreement.

(c) Each RRC agrees to submit to, participate in, and cooperate in the conduct of

evaluations and other reviews conducted by NERC to assess the effectiveness of the RRC’s Regional Compliance and Enforcement Program.

(d) Each RRC agrees to consult and exchange information with NERC and other

Regional Reliability Councils relating to the development and implementation of their respective Regional Compliance and Enforcement Programs so that RRCs may have the benefit of experience gained or lessons learned by other RRCs.

3.02. Obligations of NERC.

(a) NERC agrees to carry out activities to assess the effectiveness of Regional

Compliance and Enforcement Programs, as provided in this Agreement.


4

(b) NERC agrees to provide such administrative and overhead support as is reasonably necessary for the administration of this Agreement.

4.00 COMPLIANCE AGREEMENT PARTICIPANTS GROUP

4.01. Formation of Compliance Agreement Participants Group. A Compliance Agreement Participants Group shall be formed for the purpose of administering this Agreement. The CAPG shall report to the NERC Board of Trustees.

4.02. Composition of the Compliance Agreement Participants Group. The CAPG shall consist solely of one representative designated by each Regional Reliability Council that is a Party and one representative of NERC, who shall be appointed by the NERC Board of Trustees. At no time shall the members of the CAPG include more than one designee of an RRC, nor include more than one employee, director, or officer of an RRC. Each member of the CAPG shall serve a two-year term. A Party may designate its representative to serve successive terms, without limitation. If a member of the CAPG resigns, is withdrawn by the RRC which designated him or her, or otherwise becomes unable to serve on the CAPG, the RRC which designated such member shall designate a successor representative as soon as possible.

4.03. Chair and Vice Chair of the Compliance Agreement Participants Group. The NERC representative on the CAPG shall be the Chair of the CAPG. Members of the CAPG shall select a Vice Chair from among its other members. The Vice Chair shall serve a two-year term. The members of the CAPG may select the same person to serve as Vice Chair for successive terms, without limitation.

4.04. Procedures for the Compliance Agreement Participants Group.

(a) The CAPG shall observe the following procedures in the conduct of its meetings

and other activities, unless otherwise provided in this Agreement:

(i) A majority of the members of the CAPG shall constitute a quorum for purposes of voting on matters brought before the CAPG.

(ii) The affirmative vote of two-thirds of the members of the CAPG present in

person or by proxy and voting shall be required for approval of any recommendation or proposal submitted to, or action to be taken by, the CAPG.

(iii) Any or all of the members of the CAPG may participate in a meeting of

the CAPG by means of a communications system by which all persons participating in the meeting are able to hear each other.

(iv) A substitute or proxy representative of a member of the CAPG may attend

and vote at meetings of the CAPG, provided the absent member of the


5

CAPG gives advance written notice by letter, facsimile, or e-mail, to the Chair or Vice Chair of the CAPG.

(b) The CAPG may adopt, subject to ratification by the NERC Board of Trustees,

such other rules or procedures, not otherwise inconsistent with the provisions of this Agreement, as may be necessary to conduct its business in a fair and efficient manner.

4.05. Subcommittees and Task Forces of the Compliance Agreement Participants

Group. The CAPG may from time to time form such subcommittees and task groups as it deems necessary or appropriate to carrying out its responsibilities.

4.06. Duties and Responsibilities of the Compliance Agreement Participants Group. The CAPG shall have the following duties and responsibilities:

(a) The CAPG shall agree with the representatives of each RRC on a timetable pursuant to which the RRC will develop and implement its Regional Compliance and Enforcement Program or, if a contract-based compliance and enforcement program already exists for an RRC, then a timetable pursuant to which the RRC shall make whatever modifications are necessary to conform to the requirements of this Agreement.

(b) The CAPG shall make periodic reports, not less frequently than every six months,

to the NERC Board of Trustees and to each RRC Governing Body, on the progress of each RRC in developing and implementing its Regional Compliance and Enforcement Program.

(c) The CAPG shall provide formal notification to the NERC Board of Trustees and

to each RRC Governing Body when the CAPG determines that a Regional Reliability Council has fully implemented a Regional Compliance and Enforcement Program containing the essential attributes set forth in Annex A and conforming to the other provisions of this Agreement.

(d) The CAPG shall (i) review and approve the annual program plan submitted by the

NERC Director of Compliance for evaluations, analyses and other reviews to assess the effectiveness of the Regional Compliance and Enforcement Programs, and any revisions thereto proposed by the NERC Director of Compliance, and (ii) shall monitor the activities undertaken by the NERC Director of Compliance to assess the effectiveness of the Regional Compliance and Enforcement Programs.

(e) The CAPG shall consider and vote on the addition or deletion of Designated

Reliability Standards to Annex B to this Agreement, as provided in Section 8.02 of this Agreement.


6

(f) The CAPG may provide formal comments to the NERC Board of Trustees and to each RRC Governing Body concerning the results of assessments conducted by the NERC Director of Compliance of the effectiveness of a Regional Compliance and Enforcement Program.

(g) The CAPG shall encourage and facilitate consultation and exchanges of

information between and among Regional Reliability Councils relating to the development and implementation of their respective Regional Compliance and Enforcement Programs so that RRCs may have the benefit of experience gained or lessons learned by other RRCs.

(h) The CAPG shall make such other recommendations and suggestions to the NERC

Board of Trustees and to one or more RRC Governing Bodies from time to time as the CAPG deems appropriate for improving the effectiveness of any or all of the Regional Compliance and Enforcement Programs.

(i) The CAPG shall perform such other duties and take such other actions, not

otherwise inconsistent with the provisions of this Agreement, as the CAPG deems necessary or appropriate for the administration of this Agreement.

4.07. Compensation and Reimbursement of CAPG Members. Each Party shall be

responsible for the compensation of its representative to the CAPG and for the reimbursement of any expenses incurred by the Party’s representative in the representative’s performance of his or her duties as a member of the CAPG. 5.00 ENFORCEMENT PROCEDURES FOR REGIONAL COMPLIANCE AND

ENFORCEMENT PROGRAMS

5.01. Minimum Requirements. Each Regional Reliability Council shall adopt for purposes of its Regional Compliance and Enforcement Program enforcement procedures that shall, at a minimum, satisfy the requirements of this paragraph 5.01 and Annex A.

(a) Each Participating Compliance Entity within the RRC shall be obligated to

comply with, and collect and submit the data required of it by, each Designated Reliability Standard in accordance with the applicable schedules and frequencies specified in each Designated Reliability Standard.

(b) The RRC’s enforcement procedures shall include sanctions for non-compliance,

including provisions for financial penalties. The RRC’s enforcement procedures may include a pilot period during which financial penalties shall not apply.


7

(c) The RRC’s enforcement procedures shall include provisions concerning late submittal of, or failure to submit, data in accordance with Designated Reliability Standards, which provisions shall include the imposition of sanctions on a Participating Compliance Entity for late submittal or failure to submit data in accordance with one or more Designated Reliability Standards.

5.02. Additional Enforcement Procedures. A Regional Reliability Council may

include in its Regional Compliance and Enforcement Program additional enforcement procedures that supplement, and do not conflict with or diminish, the minimum requirements specified in Section 5.01 and Annex A of this Agreement.

5.03. Confidentiality of Data Submissions.

(a) Except as otherwise expressly provided in a Designated Reliability Standard, or as

provided in Section 5.03(b) or Section 5.03(c), all data submitted to an RRC by a Participating Compliance Entity in accordance with the RRC’s enforcement procedures shall be treated as confidential data by the RRC, and shall not be disclosed to any third party without the prior written consent of the Participating Compliance Entity.

(b) Notwithstanding the provisions of Section 5.03(a):

(i) The RRC shall provide data submitted by a Participating Compliance

Entity in accordance with the RRC’s enforcement procedures to NERC, as requested by the NERC Director of Compliance, in connection with analyses, evaluations, or other reviews to assess the effectiveness of the RRC’s Regional Compliance and Enforcement Program. NERC agrees that NERC, the NERC Director of Compliance, and any other employees or agents of NERC coming into possession of any such data shall be obligated to follow the provisions of Section 5.03(a) and Section 5.03(c).

(ii) Nothing in Section 5.03(a) shall be deemed to prohibit a Regional

Reliability Council from notifying or disclosing to the NERC Board of Trustees, the RRC Governing Body of any other RRC, a state regulatory authority or Canadian or Mexican regulatory authority having jurisdiction over the Participating Compliance Entity, the chief executive (or his or her designee) or the legislative body (or a member or committee or subcommittee thereof) of any unit of government in which the Participating Compliance Entity resides or does business, or FERC:

(A) whether the Participating Compliance Entity has been determined

to have been in non-compliance with a Designated Reliability Standard,


8

(B) the Designated Reliability Standard as to which the non-compliance occurred,

(C) the severity and/or frequency of the non-compliance, and (D) the type and amount or extent of the sanction, if any, imposed on

the Participating Compliance Entity for such non-compliance.

A copy of any such notification or disclosure shall be provided to the Participating Compliance Entity.

(iii) Nothing in Section 5.03(a) shall be deemed to prohibit a Regional

Reliability Council, the CAPG, or NERC, from making publicly available aggregate data, statistics or information, concerning implementation of an RRC’s Regional Compliance and Enforcement Program or implementation of or compliance with a Designated Reliability Standard or Standards, on a basis which does not permit the identification of data submitted by an individual Participating Compliance Entity. Such publicly available information may include:

(A) whether the Participating Compliance Entity has been determined

to have been in non-compliance with a Designated Reliability Standard,

(B) the Designated Reliability Standard as to which the non-

compliance occurred,

(C) the severity and/or frequency of the non-compliance, and (D) the type and amount or extent of the sanction, if any, imposed on

the Participating Compliance Entity for such non-compliance.

A copy of any such notification or disclosure shall be provided to the Participating Compliance Entity.

(c) If a Regional Reliability Council is requested or required, by subpoena, oral

deposition, interrogatory, request for production of documents, administrative order, or other legal or regulatory process, to disclose any data of a Participating Compliance Entity that was submitted to the RRC in accordance with the RRC’s enforcement procedures, the RRC shall immediately notify the Participating Compliance Entity, in writing, of the request or requirement so that the Participating Compliance Entity may, if it so chooses and at its own expense, challenge the request or requirement for disclosure or seek an appropriate protective order. The RRC shall reasonably cooperate, at the Participating


9

Compliance Entity’s expense, with any efforts by the Participating Compliance Entity to limit or avoid disclosure of the requested data, or to obtain an appropriate protective order or otherwise preserve the confidentiality of any data that is ultimately required to be disclosed.

6.00 ASSESSMENTS OF THE EFFECTIVENESS OF REGIONAL COMPLIANCE

AND ENFORCEMENT PROGRAMS

6.01. Assessments by the NERC Director of Compliance.

(a) The NERC Director of Compliance shall prepare an annual program plan to conduct analyses, evaluations, and other reviews to assess the effectiveness of the Regional Compliance and Enforcement Programs. The annual program plan shall be submitted to the CAPG for approval in accordance with Section 4.06 of this Agreement. The NERC Director of Compliance may also propose revisions to an approved program plan, which revisions shall be submitted to the CAPG for approval in accordance with Section 4.06 of this Agreement. The annual program plan approved by the CAPG and any changes directed by the CAPG in the annual program plan during the course of the year shall be submitted to the NERC Board of Trustees for ratification.

(b) The NERC Director of Compliance shall carry out the annual program plan,

including any approved revisions thereto, as approved by the CAPG.

(c) The NERC Director of Compliance shall conduct such other activities as the CAPG may direct from time to time for the purpose of assessing the effectiveness of the Regional Compliance and Enforcement Program or Programs of one or more RRCs.

(d) The NERC Director of Compliance shall report at least annually to the NERC

Board of Trustees and the CAPG on the results of the assessments of effectiveness of the Regional Compliance and Enforcement Programs.

6.02. Assessments of Effectiveness of Regional Compliance and Enforcement

Programs.

(a) Assessments of the effectiveness of Regional Compliance and Enforcement Programs shall at a minimum address the following topics:

(i) Whether the Regional Compliance and Enforcement Program contains the

essential attributes set forth in Annex A to, and conforms to the other requirements of, this Agreement.


10

(ii) Whether the RRC is in compliance with its Regional Compliance and Enforcement Program and is implementing its Regional Compliance and Enforcement Program in accordance with its terms.

(iii) Whether the Regional Compliance and Enforcement Program is improving

or maintaining compliance and reliability within the RRC.

(iv) Whether the Regional Compliance and Enforcement Programs of the various RRCs are being implemented and applied on a consistent basis.

(b) In addition, the assessments may include:

(i) Comparisons among, and assessments of the comparative effectiveness of,

the Regional Compliance and Enforcement Programs of two or more RRCs, and

(ii) Recommendations to enhance the effectiveness of the Regional

Compliance and Enforcement Programs of one or more RRCs. 7.00 DISPUTES AND FAILURE TO PERFORM OBLIGATIONS

7.01. Use of NERC Dispute Resolution Process. Disputes arising (i) between or among NERC and one or more Regional Reliability Councils, or (ii) between or among two or more Regional Reliability Councils, relating to the development, implementation, or assessments of the effectiveness of one or more Regional Compliance and Enforcement Programs, or to any other matter within the scope of this Agreement, shall be resolved through the NERC Dispute Resolution Process.

7.02. Failure by a Regional Reliability Council to Perform Obligations.

(a) If the NERC Director of Compliance determines that a Regional Reliability Council has failed or is failing to perform its obligations under this Agreement, the Director shall notify the CAPG and the RRC in writing.

(b) The RRC shall have thirty days following receipt of such notice to (i) contest the

determination by providing information to the CAPG or (ii) identify how it will cure its failure to perform, including a timeline for doing so.

(c) If the RRC contests the determination of the NERC Director of Compliance, the

CAPG will review the information provided by the RRC and notify the NERC Board of Trustees and the RRC that the CAPG either agrees or disagrees that the RRC has failed or is failing to perform its obligations under this Agreement.


11

(d) If the RRC submits a mitigation plan, CAPG will either accept the plan or suggest changes.

(e) If, within the thirty days following receipt of notice from the CAPG that the

CAPG agrees that the RRC has failed or is failing to perform its obligations under this Agreement, the RRC fails to either (i) identify how it will cure its failure to perform or (ii) invoke the NERC Dispute Resolution Process, the CAPG may, by two-thirds vote of its members excluding the RRC failing to perform its obligations under this Agreement, recommend to the NERC Board of Trustees and the RRC Governing Bodies that this Agreement be terminated as to such RRC.

(f) Upon a recommendation of the CAPG that this Agreement be terminated as to an

RRC failing to perform its obligations under this Agreement, and after making such known to the NERC Board of Trustees and seeking an opinion from the NERC Board of Trustees, the Parties, other than such RRC may vote on whether to terminate this Agreement as to such RRC. A two-thirds vote of the Parties other than the RRC failing to perform its obligations under this Agreement shall be required to terminate this Agreement as to such RRC.

8.00 AMENDMENTS TO THIS AGREEMENT

8.01. Amendments to Provisions of Agreement Other Than Section 8.02 and Annex B. Any provision of this Agreement other than Section 8.02 and Annex B may be amended by a vote of two-thirds of the Parties.

8.02. Additions to and Deletions from Annex B.

(a) The following process shall be followed in determining whether to add a Designated Reliability Standard to Annex B or delete a Designated Reliability Standard from Annex B.

(i) Any entity may propose to the CAPG the addition of a Designated

Reliability Standard to or the deletion of a Designated Reliability Standard from Annex B.

(ii) A Designated Reliability Standard proposed for inclusion in Annex B

must be a standard that has been approved by the NERC Board of Trustees, including any Regional differences that are part of that standard.

(iii) Prior to action by the CAPG, the proposal to add a Designated Reliability

Standard to, or delete a Designated Reliability Standard from, Annex B,


12

including the text of the Designated Reliability Standard, shall be posted on the NERC web site for public comment for at least 30 days.

(iv) The CAPG shall consider the proposal and shall vote on whether to add

the Designated Reliability Standard to, or delete the Designated Reliability Standard from, Annex B. A unanimous vote of the members of the CAPG shall be required for the addition of a Designated Reliability Standard to, or the deletion of a Designated Reliability Standard from, Annex B.

(v) The decision of the CAPG to add a Designated Reliability Standard to or

delete a Designated Reliability Standard from Annex B shall not be effective until 30 days after it has been ratified by the NERC Board of Trustees.

(b) This Section 8.02 may be amended only by unanimous vote of the Parties.

8.03 Revisions to Designated Reliability Standards. Whenever the NERC Board of Trustees approves a revision to a Designated Reliability Standard that is included in Annex B, Annex B shall be revised, and this Agreement shall be deemed amended, to incorporate that revision. 8.04 Revisions to Regional Compliance and Enforcement Programs. Each RRC shall incorporate in its RCEP changes to Annex B adopted pursuant to Section 8.02 or 8.03 to be effective upon receipt of any required regulatory approvals or authorizations. 9.00 EFFECTIVE DATE; WITHDRAWAL; TERMINATION

9.01. Effective Date. This Agreement shall be effective on the date that it is executed by NERC and at least six Regional Reliability Councils.

9.02. Withdrawal by a Party. (a) Any Party may withdraw from this Agreement on twelve months written notice to

the other Parties. (b) Upon the addition of a Designated Reliability Standard to Annex B pursuant to

Section 8.02, or the modification of a Designated Reliability Standard in Annex B pursuant to Section 8.03, any Party may withdraw from this Agreement on 30 days written notice to the other Parties.

(c) By entering into, and agreeing to perform its obligations under, this Agreement, a

Regional Reliability Council does not agree to become a public utility subject to the jurisdiction of the Federal Energy Regulatory Commission (“FERC”), any


13

state utility regulatory authority, or any Canadian or Mexican utility regulatory authority. If at any time the FERC, a state utility regulatory authority, or a Canadian or Mexican utility regulatory authority issues an order asserting jurisdiction over an RRC as a public utility on the basis of this Agreement, the Parties shall attempt in good faith to renegotiate the terms of this Agreement to eliminate the putative basis for such assertion of jurisdiction. If the Parties are unable to agree on amendments to this Agreement that will eliminate the putative basis for the assertion of jurisdiction within 60 days following issuance of the order by the FERC, state utility regulatory authority or Canadian or Mexican utility regulatory authority, the RRC that is the subject of such order may thereafter withdraw from this Agreement on 30 days written notice to the other Parties.

9.03. Termination. This Agreement may be terminated by majority vote of the Parties.

10.00 NO RIGHTS CREATED IN THIRD PARTIES

This Agreement creates rights and obligations solely between and among NERC and the Regional Reliability Councils. Nothing in this Agreement shall create, between or among any Parties, (i) any obligation or liability whatsoever, other than as expressly set forth in this Agreement, or (ii) any duty or standard of care whatsoever. Nothing in this Agreement shall create any obligation, duty, liability, or standard of care whatsoever as to any third parties. No third party shall have any rights whatsoever with respect to enforcement of any provision of this Agreeme nt. 11.00 GOVERNING LAW; INTERPRETATION

11.01. Governing Law. This Agreement shall be governed by the laws of the State of New Jersey, including any choice of law rules.

11.02. Section Headings Not Part of Agreement. Section and subsection headings and

captions in this Agreement are for convenience of reference only and are not part of, and shall not affect the interpretation of, this Agreement. References in this Agreement to Sections and Annexes are, unless the context otherwise requires, references to Sections of and Annexes to this Agreement. 12.00 NOTICES

Any notice required to be given to a Party under this Agreement shall be given to that Party’s representative at the address set forth on Annex C to this Agreement. A Party may change its representative and address for receipt of notices by written notice to the other Parties.


14

13.00 COUNTERPARTS

This Agreement may be executed by the Parties in counterparts with the same force and effect as though each Party had executed the same document. Each counterpart shall have the same force and effect as an original.

IN WITNESS WHEREOF each Regional Reliability Council and NERC has caused this Agreement to be executed by its duly authorized representative. [SIGNATURE BLOCKS]

Agreement for Regional Compliance and A–1 Enforcement Programs 01/19/01

ANNEX A

Essential Attributes of Regional Compliance and Enforcement Programs I. Reliability Standards and Obligations

A. Identification of Reliability Standards included in program.

B. Identification of entities required to comply with each Reliability Standard, including collection and submittal of data.

C. Statement of obligation of entities to comply with Reliability Standards.

D. Statement of obligations of entities to collect and submit data on a timely

basis. II. Methods for Securing Commitment to and Participation in Program

A. Statement of basis by which members of the Regional Reliability Council commit to the program (e.g., by amendment to the RRC agreement, or by separate agreements among the RRC and its members).

B. Statement of basis by which obligations are extended to non-members of

the RRC (e.g., by contractual commitments of members to include provisions in their contracts or tariffs with third parties requiring such third parties to participate in and comply with the program).

III. Provisions for Maintaining Confidentiality of Data IV. Procedures for Determining Compliance or Non-Compliance

A. Written procedures for determining compliance or non-compliance.

B. Identification of persons or entities responsible to review data and to make preliminary and final determinations of compliance or non-compliance.

C. Written notice of tentative or preliminary findings of non-compliance.

D. Opportunity to respond to preliminary findings of non-compliance,

including by submission of supplemental or additional data.

E. Opportunity for hearing by impartial decision-maker before final determination of non-compliance.

Agreement for Regional Compliance and A–2 Enforcement Programs 01/19/01

V. Sanctions

A. Identification of sanctions for non-compliance.

B. Sanctions take account of the seriousness and frequency of non-

compliances.

C. Sanctions include provisions for financial penalties (program may include pilot program periods during which financial penalties will not apply).

D. Statement that acceptance of sanction does not constitute authorization for

non-compliance. VI. Appeals Process

A. Statement of right to appeal.

B. Identification of body that will hear appeal.

C. Procedures and timetables for appeals. VII. Identification of Any Necessary Regulatory Approvals VIII. Procedure for Amending or Revising Program or Any Agreements with

Participants IX. Term and Termination of Program

A. Length of program/agreements.

B. Methods for terminating or withdrawing from program/agreements.

C. Residual responsibilities of RRC, members and other participants after termination.

Agreement for Regional Compliance and B–1 Enforcement Programs 01/19/01

Annex B

NERC Standards and Measures

Reporting Requirements and Process This Annex describes those NERC Standards and Measures, the reporting requirements, and the penalties and sanctions associated with those Measures, that have been included as Designated Reliability Standards within the Regional Compliance and Enforcement Programs by agreement of NERC and the Regional Reliability Councils. Annex B will be revised as necessary so that these Designated Reliability Standards will be the same as the standards approved by the NERC Board of Trustees, as they may be revised from to time.

A. Control Performance Standards One and Two

Control Performance Standards (CPS) One and Two are designed to monitor a Control Area’s control performance within NERC’s criteria. CPS1 is a statistical measure of Area Control Error (ACE) variability. It measures ACE in combination with an Interconnection’s frequency error. CPS1 is intended to provide a Control Area with a frequency sensitive evaluation of how well the Control Area is meeting its demand requirements. CPS2 is a statistical measure of ACE magnitude. It is designed to limit a Control Area’s unscheduled power flows that could result from large ACE values. CPS2 is designed to limit the magnitude of ACE.

1. Criterion

Each Control Area shall monitor its control performance on a continuous basis against the following standards:

Control Performance Standard One (CPS1). Over a year, the average of the clock-minute averages of the Control Area’s ACE divided by -10*β (β is Control Area Frequency Bias) times the corresponding clock-minute averages of the Interconnection’s frequency error shall be less than a specific limit (a constant derived from a targeted frequency bound reviewed and set as necessary by the NERC Resources Subcommittee). See the NERC “Performance Standard Training Document.”

Control Performance Standard Two (CPS2). The average ACE for each of the six ten-minute periods during the hour (i.e., for the ten-minute periods ending at 10, 20, 30, 40, 50, and 60 minutes past the hour) must be within specific limits, referred to as L10. See the “Performance Standard


Training Document,” Section B.1.1.2 for the methods for calculating L10.

2. Compliance Template The following compliance template describes the measuring process, levels of non-compliance and penalties and sanctions.


Compliance Templates P1 T1 NERC Operating Standards

Principle

Frequency must be controlled within defined limits through balancing of load, generation and interchange schedules.

Section Policy 1 Section A, Control Performance Standard

Performance Standard Training Document, Section B Performance Standard Training Document, Section C, Calculation of Compliance

Brief Description Control Performance Standard, load and generation matching, and

frequency control Applicable to:

Any entity that operates a Control Area Standard

CPS1 and CPS2 Control Performance Standards Monitoring Responsibility Regional Reliability Councils (RRCs) Measuring Processes Compliance with the CPS1 standard shall be measured on a percentage basis as set forth in the NERC Performance Standard Training Document. Periodic Reporting

Control Areas must have achieved the minimum compliance level and must send one completed copy of the CPS1 and CPS2 form “NERC Control Performance Standard Survey-All Interconnections” each month to the Regions as per established dates.

A summary document reporting compliance with CPS1 and CPS2 for the Regional Control Areas must be sent each month by the Regional Reliability Councils to NERC no later than the 20th day of the following month.


Periodic Compliance Monitoring Compliance for CPS1 and CPS2 will be evaluated and penalties and sanctions applied for each reporting period.

Reporting Period One calendar month Full (100%) Compliance Requirements

The Control Area meets the CPS1 and CPS2 Control Performance standards, CPS1 greater than or equal to100% and CPS2 greater than or equal to 90%

Levels of Non-Compliance CPS1 and CPS2 non-compliance is evaluated separately and penalties and sanctions are applied individually. CPS1 Level 1: One instance during a calendar month in which the Control Area’s value

of CPS1 is less than 100% but greater than or equal to 95%. Level 2: One instance during a calendar month in which the Control Area’s value


of CPS1 is less than 90% but greater than or equal to 85%.

Level 4: One instance during a calendar month in which the Control Area’s value of CPS1 is less than 85%.

CPS2

Level 1: One instance during a calendar month in which the Control Area’s value




of CPS2 is less than 75%.


Compliance Assessment Notes

Verification of compliance will be done through established periodic monitoring processes.

Penalties/sanctions

The dollar penalty/sanction will be the larger of the fixed dollar amount shown in the Enforcement Table or the calculated dollar amount using the $/MW value shown in the table times the larger of the previous year’s:

(1) average annual generation (MWh generated divided by hours in year) or

(2) average annual load (MWh delivered divided by hours in year)

Reset Period One calendar month without a violation


B. Disturbance Control Standard

The Disturbance Control Standard is used by each Control Area or reserve-sharing group to monitor control performance during recovery from disturbance conditions (see the “Performance Standard Training Document,” Section B.2). Control Areas are to submit completed Disturbance Control Standard (DCS) forms on at least a quarterly basis. Compliance assessments will be calculated based on quarterly performance.

1. Criterion

Each Control Area shall monitor its control performance on a continuous basis following a disturbance against the following standard. Disturbance Control Standard (DCS). The Area Control Error (ACE) must return either to zero or to its pre-disturbance level within fifteen (15) minutes following the start of the disturbance. NPCC Regional Specific Implementation: The ACE must be returned to zero or its pre-disturbance level within ten (10) minutes following the start of the disturbance.

2. Compliance Template The following compliance template describes the measuring process, levels of non-compliance and penalties and sanctions.


Compliance Templates P1 T2 NERC Operating Standard Policy Principle

Frequency must be controlled within defined limits through balancing of load, generation and interchange schedules.

Section Policy 1, Section B, Disturbance Control Standard

Performance Standard Training Document, Section B, Performance Standard Performance Standard Training Document, Section C, Calculation of Compliance

Brief Description Disturbance Control Standard Applicable to

Any entity that operates a Control Area and is not part of a Reserve Sharing Group, and Reserve Sharing Groups

Standard

ACE must be returned to zero or to its pre-disturbance level within the Disturbance Recovery Period (fifteen minutes unless a shorter time is agreed upon by Regional standard) following the start of a disturbance greater than or equal to eighty percent (80%) of the Control Area’s or Reserve Sharing Group’s most severe single contingency loss or a lower reporting threshold as selected by the Regional Reliability Council. NPCC Regional Specific Implementation The ACE must be returned to zero or its pre-disturbance level within 10 minutes following the start of the disturbance.

Monitoring Responsibility Regional Reliability Councils (RRCs). Measuring Processes

Compliance with the Disturbance Control Standard (DCS) shall be measured on a percentage basis as set forth in the NERC Performance Standard Training Document.


Periodic Reporting

Control Areas and/or Reserve Sharing Groups must return one completed copy of DCS form “NERC Control Performance Standard Survey-All Interconnections” each quarter to the Region as per set dates.

A summary document reporting compliance with DCS for the Regional Control Areas must be sent by the Regional Reliability Council to NERC quarterly, no later than the 20th day of the month following the end of the quarter.

Periodic Compliance Monitoring Compliance for DCS will be evaluated and penalties and sanctions applied for each reporting period.

Reporting Period One calendar quarter Full (100%) Compliance Requirements

Control Area or Reserve Sharing Group returned the ACE to zero or to its pre-disturbance level within the Disturbance Recovery Period following the start of all reportable disturbances.

Levels of Non-Compliance

Level 1: One instance during a calendar quarter in which the Control Area’s or

Reserve Sharing Group’s value of DCS is less than 100% but greater than or equal to 95%.






Reserve Sharing Group’s value of DCS is less than 85%.

Compliance Assessment Notes

Verification of compliance will be done through established periodic monitoring processes.


Reset Period

The reset period for the penalty or sanction is defined in Policy 1 as one calendar quarter without a violation.

Penalties/Sanctions

The dollar penalty/sanction will be the larger of the fixed dollar amount shown in the Enforcement Table or the calculated dollar amount using the $/MW value shown in the table times the larger of the previous year’s:

(1) average annual generation (MWh generated divided by hours in year) or (2) average annual load (MWh delivered divided by hours in year)

In addition, NERC Policy 1 requires a Disturbance Control Performance Adjustment which requires that each CONTROL AREA or RESERVE SHARING GROUP not meeting the Disturbance Control Standard during a given calendar quarter shall increase its CONTINGENCY RESERVE obligation for the calendar quarter (offset by one month) following the evaluation by the Region and/or the NERC Resources Subcommittee.

NPCC Regional Specific Implementation: In addition to the penalty/sanction described in the penalty/sanction matrix, the following will also be required for instances of non-compliance: For each calendar quarter in which the average DCS is less than 100 percent, the Control Area shall be required to increase its operating reserves, for the first calendar quarter beginning after a final determination of non-compliance, to a level equal to the product of (i) the Control Area’s required operating reserves in the quarter of measurement (including any increased reserves due to a prior incident of non-compliance with this criterion), multiplied by (ii) a factor equal to 2 minus the average percentage DCS (expressed as a decimal) for the quarter of measurement. If the average percentage DCS is equal to 100 percent for a calendar quarter, required operating reserves would be set at the appropriate level without consideration of any prior non-compliance.


C. Data Retention Requirements

The following tables provide data retention details for data to be saved by the Control Areas and Reserve Sharing Groups.

1. Control Area Data to be Retained for CPS1

The following data are to be retained in electronic form for at least a one-year period. If the CPS1 data for a Control Area are undergoing a review to address a question that has been raised regarding the data, the data are to be saved beyond the normal retention period until the question is formally resolved. Additional details regarding the data listed below may be found in the NERC Performance Standard Training Document.

CPS1 DATA Description Retention Requirements

ε1 A constant derived from the targeted frequency bound. This number is the same for each Control Area in the interconnection.

Retain the value of ε1 used in CPS1 calculation.

ACEi The clock-minute average of ACE.

Retain the 1-minute average values of ACE (525,600 values).

Bi The frequency bias of the Control Area.

Retain the value(s) of Bi used in the CPS1 calculation.

FA The actual measured frequency.

Retain the 1-minute average frequency values (525,600 values).

Fs Scheduled frequency for the Interconnection.

Retain the 1-minute average frequency values (525,600 values).


2. Control Area Data to be Retained for CPS2

The following data are to be retained in electronic form for at least a one-year period. If the CPS2 data for a Control Area are undergoing a review to address a question that has been raised regarding the data, the data are to be saved beyond the normal retention period until the question is formally resolved. Additional details regarding the data listed below may be found in the NERC Performance Standard Training Document.

CPS2 DATA Description Retention Requirements V Number of incidents per

hour in which the absolute value of ACE is greater than L10.

Retain the values of V used in CPS2 calculation.

ε10 A constant derived from the frequency bound. It is the same for each Control Area within an Interconnection.

Retain the value of ε10 used in CPS2 calculation.

Bi The frequency bias of the Control Area.

Retain the value of Bi used in the CPS2 calculation.

Bs The sum of frequency bias of the Control Areas in the respective Interconnection. For systems with variable bias, this is equal to the sum of the minimum frequency bias setting.

Retain the value of Bs used in the CPS2 calculation. Retain the 1-minute minimum bias value (525,600 values).

U Number of unavailable ten-minute periods per hour used in calculating CPS2.

Retain the number of 10-minute unavailable periods used in calculating CPS2 for the reporting period.


3. Control Area Data to be Retained for DCS

The following data are to be retained in electronic form for at least a one-year period. If the DCS data for a Control Area are undergoing a review to address a question that has been raised regarding the data, the data are to be saved beyond the normal retention period until the question is formally resolved. Additional details regarding the data listed below may be found in the NERC Performance Standard Training Document.

DCS DATA Description Retention Requirements MW loss The MW size of the

disturbance as measured at the beginning of the loss.

Retain the value of MW loss used in DCS calculation.

ACEA The pre-disturbance ACE. Retain the value of ACEA used in DCS calculation.

ACEM The maximum algebraic value of ACE measured within ten minutes following the disturbance event.

Retain the value of ACEM used in the DCS calculation.

ACEm The minimum algebraic value of ACE measured within ten minutes following the disturbance event.

Retain the value of ACEm used in the DCS calculation.

Date of incident The date the incident occurred.

Retain the date.

Time of incident The time of the incident in hours, minutes, and seconds.

Retain the time as precise as possible.

Description of incident Describe the incident in sufficient details to define the incident.

Retain sufficient details to define the incident, i.e. name and MW output of unit that tripped. Cause of incident.

Recovery Time Duration The duration of time of the incident in hours, minutes, and seconds to have the ACE return to 0.

Retain the incident time as precise as possible.


D. ASSESSMENT OF SANCTIONS Sanctions for non-compliance with respect to each criterion in Section II shall be assessed pursuant to the following table. The sanction for non-compliance may be modified above this level if it is determined that an entity would benefit financially through non-compliance with measures included in this program. Number of Occurrences at a Given Level within Reporting Period Level of Non-Compliance

1 2 3 4 or more

Level 1 Letter (A) Letter (B) Letter (B) and $1,000 or $1 per MW

Letter (B) and $2,000 or $2 per MW

Level 2 Letter (B) Letter (B) and $1,000 or $1 per MW



Level 3 Letter (B) and $1,000 or $1 per MW




Level 4 Letter (B) and $2,000 or $2 per MW




Note: All monetary penalties will be the greater of the amount shown above. Letter (A): Letter to Participant’s Chief Executive Officer informing Participant of non-

compliance, with copies to Regional Council board members, NERC Director of Compliance, and NERC’s Compliance Agreement Participants Group.

Letter (B): Identical to Letter (A), with additional copies to (i) state or provincial

regulatory agencies with jurisdiction over Participant, and, in the case of U.S. entities, FERC and the Department of Energy.

Sanctions shall be assessed for all instances of non-compliance within a Reporting Period. For example, if a Participant had two instances of Level 1 non-compliance and one instance of Level 3 non-compliance for a specific criterion in the first Reporting Period, it would be assessed the sanction from Column 2 of the Level 1 row, and the sanction from Column 1 of the Level 3 row. If the Participant fails to comply with a given criterion for two or more consecutive Reporting Periods, the sanctions assessed at each level of non-compliance for the most recent Reporting Period shall be the sanction specified in the column immediately to the right of the indicated sanction. For example, if a Participant fails to comply with a given


criterion for two consecutive Reporting Periods, and in the second Reporting Period the Participant has one instance of Level 1 non-compliance and two instances of Level 3 non-compliance, it would be assessed the sanction from Column 2 of the Level 1 row, and the sanction from Column 3 of the Level 3 row. If the sanction assessed at the highest level is the sanction in Column 4, no such modification of the specified sanction shall occur. The sanctions assessed would reset based on the Reset Period. The Reset Period will be one Monitoring Period without a violation unless otherwise indicated. NPCC Regional Specific Implementation:

Policy on Lateness

Sanctions shall be applied if a complete report is not received by CMAS after a grace period of seven days has expired. CMAS shall assess the following level of non-compliance for lateness: Level 1 After 7- day grace period Level 2 After 30 days following due date Level 3 After 60 days following due date Level 4 After 90 days following due date or report never received

Compliance Task Group Report 01/19/01

1

APPENDIX 2

Responses to Comments on CTG Draft Report [The CTG Report to the NERC Board of Trustees includes discussion of a number of significant issues raised in the comments. This document includes brief responses to all of the comments received. Responses are in italics. The CTG has not included a response to each suggested individual word change. Each suggestion was carefully considered, and edits were made where the CTG agreed with the commenter.]

Report [WPPI, APPA, ELCON] We are particularly concerned with the compliance model proposed. It is possible that legislation may not be adopted for years. Therefore, it is very important that the alternative compliance model be carefully structured to be effective and inclusive and to provide legitimacy. As discussed below, this Task Force's recommendations appear to vest critical powers in the Regions, rather than in the NERC Board. This is not appropriate.

The action or inaction of one or more regions may frustrate the fair and consistent adherence to all of NERC’s planning and operating standards by all industry segments throughout the United States, Canada and northern Mexico.

Generally, we agree that, in the absence of legislation conferring enforcement authority on NERC (or its successor), a contract-based model is the only means available for achieving some level of ability to enforce at the Regional Council level uniform NERC reliability standards.

The Task Group invites the Regional Councils to "include additional standards in its own agreement with its members." We believe that there must be some determination at the NERC level that any such additional reliability standards are uniform within an interconnection and otherwise not inconsistent with any NERC reliability standards. Moreover, as was contemplated in the stakeholder proposal to the 106th Congress, the proponent of any standard in addition to a NERC standard should bear the burden of justifying the need for the additional or different standard. Regional standards should be justified as consistent with or superior to the NERC standard before they are put in place.

Response: The fundamental nature of the program is that it is agreement-based and relies on the consent of those upon whom penalties would be assessed for non-compliance. The Agreement does not place a limitation on the additional actions that an individual Regional Reliability Council may take to achieve compliance within its Region.

[Exelon] We endorse the establishment of a Contract Based Regional Compliance program. Our concern is the possibility of Regional “customization” of NERC Compliance Contracts. We have concerns that some of the basic policy objectives may be lost, and the possibility of confusion with any policy revisions and/or updates if the Policy, Compliance Templates, and Compliance Contracts are not “in synch”. We recommend that NAERO Compliance contracts remain standardized


2

among the ten Regions and any Regional differences be addressed through addendums to the contracts. Although the proposed structure is to be temporary until legislation is enacted the future roles of NERC/NAERO versus the Regional Councils and RTOs should be addressed. The process for increasing the number of standards and measures that will require compliance should be addressed.

Response: The Agreement has been modified to make clear that only standards that have been approved by the NERC Board of Trustees, through the NERC standards development process, are eligible for inclusion in Annex B. Annex B will be changed as necessary to assure that the current version of a standard is included. This should eliminate conflicting or inconsistent reliability standards.

[ECAR] This proposal appears to be satisfactory when taken at face value. The devil is in the details. This agreement should not be expected until it is clear what standards must be met by the various participants. Standards like “maintaining compliance and reliability” and “comparative effectiveness” need to be fleshed out. There appears to be nothing in this document that requires the standards in Annex B to be based on approved operating policies and planning standards, either NERC or regional. Furthermore, if the measures added to Annex B are not operating policies or planning standards, there is nothing in this document to insure that the adopted measure has been through some form of due process scrutiny. Response: Only standards that have been approved by the NERC Board of Trustees, through the NERC standards development process, are eligible for inclusion in Annex B. 1. This wording appears throughout this document. The language in this document often suggests that the NERC must take some action. It is not NERC staff because of the definitions provided earlier and because the NERC staff would have been clearly spelled out. My understanding is that the NERC is the sum of the ten individual regions. [Page 1, Item II, second paragraph, first line, “NERC and the Regional Reliability Councils”] Response: “NERC” refers to the New Jersey not-for-profit corporation, acting through its Board of Trustees, management and staff, as appropriate. 2. This is not a “must;” rather, it is what the industry desires to do. A “must” is something that has to be done even if you do not want to do it. In this case, the industry does want to do it. It is a “want”, albeit a high priority “want.” [Page 1, Item II, second paragraph, first line, “must”] Response: The CTG believes this program is one the industry needs to take on in the absence of legislation. 3. Nowhere in this document is there a discussion of what an agreed sanction procedure is. A “sanction procedure” is more than a sanction matrix – it is a full procedure. The word “agreed” appears to mean that all regions must have the same procedure. [Page 1, Item II, second paragraph, last line on page, “agreed sanctioning procedure”] Response: Annex A to the Agreement is a list of essential attributes that each Regional program must include. Even though the Regions may not all have the same procedure, there should be a strong convergence on the central features.


3

4. Again, who is the NERC? Who gets to cast the vote on behalf of the NERC to add a new standard? Isn’t an individual selected by the ten regional councils to represent the NERC? [Page 2, third line from end of first paragraph, “NERC and the Regional Councils”] Response: The NERC representative on the Compliance Agreement Participants Group, which votes on adding standards to Annex B, will be appointed by the NERC Board of Trustees. 10. This document should spell out how regional variations occur. Who is authorized to propose them? What is the due process for reviewing them? Are there any technical restrictions on what a regional variation can be? It seems that this topic should have its own section. [Page 3, fourth paragraph, fifth line, “any regional variation”] Response: The Agreement has been modified to clarify that only standards that have been approved by the NERC Board of Trustees, through the NERC standards development process, including any Regional variations that are included in those standards, are eligible for inclusion in Annex B. The CTG is recommending that the process for addition of Regional variations to the standards be addressed in the ongoing review of the NERC standards development process. 11. This wording makes it sound as though the application of sanctions involves a judgment call in which a sanction is selected from within a range of sanctions. This poses a whole series of questions about the process of administering discretionary sanctions. [Page 3, fourth paragraph, “range of sanctions that could be applied for a violation”] Response: Annex B will include the penalty matrix. 12. This phrase should say maintain the reliability and adequacy. To “promote” would imply the development of more stringent reliability standards. [Page 5,second paragraph, “promote the reliability and adequacy”] Response: The phrase is taken directly from the corporate purposes in NERC’s Certificate of Incorporation. [Entergy] NERC proposes a contract-based model in which Regional Councils enforce compliance with selected NERC and Regional standards, including the imposition of monetary penalties and other sanctions. First and foremost, Entergy wishes to emphasize that reliability standards must be fairly developed and fairly applied. In theory, Entergy agrees with NERC that a contract-based Regional Reliability Compliance Program can be an effective tool in improving reliability. In practice, however, a compliance program will not be effective until all entities (including non-jurisdictional entities) agree to participate. Accordingly, Entergy is reluctant to fully support a contract-based compliance program until such time as all jurisdictional and non-jurisdictional participants in the Eastern Interconnection commit to take part in such compliance program. Furthermore, under NERC’s proposal, Regional Councils and NERC may include additional standards, remove standards, and modify the range of sanctions in Annex B to the Agreement for Regional Compliance Enforcement Programs. Entergy is concerned about the future adoption of new reliability standards, measures, templates and sanctions. Reliability standards and templates should receive federal regulatory approval before implementation. Accordingly, Entergy proposes that NERC adopt and implement procedures that provide all Compliance Program Participants


4

with reasonable notice and an opportunity to comment on all proposed standards, templates and sanctions and obtain regulatory approval. Response: The CTG expects widespread participation in this program, but believes that holding out for universal coverage or participation is unrealistic. It would place veto power in the hands of a few. The WSCC has had good success with its contract-based Reliability Management System and has achieved the participation of control areas with over 90 % of the load within the WSCC. The standards eligible for inclusion in Annex B are those standards that have been approved by the NERC Board of Trustees, through the NERC standards development process. That process features notice and broad industry participation. At present there is no regulatory body with clear, comprehensive jurisdiction over reliability matters that could approve the standards. [Southern Company] Southern Company also has some concern regarding the recommendations of the compliance task group. While Southern Company supports the task group’s proposal for the regional councils to develop, implement and enforce contract-based standards to ensure minimal reliability criteria, any such requirements must be universally applied and followed by all market participants. NERC should take steps in developing and adopting these compliance standards to ensure that they will be universally followed in a fair and consistent manner. If NERC does not take such steps to ensure acceptance and compliance across the board, then it may not be feasible for those participants that otherwise support NERC’s efforts to execute an agreement. Response: See prior response. [NYPSC] I. Any federal rules should not prevent states from requiring additional standards based on local needs. The NYPSC recognizes that there may be a need for national baseline reliability standards. Any such national standard would have to be set at a “least common denominator,” or safety net level, which would need to be augmented to meet the reliability needs of each region. Each state and each region of the country has different needs based upon its own unique physical transmission network configuration and different operating criteria that reflect those differences. Regional organizations, sub-regional organizations, ISO’s, and individual states should be left to promulgate more specific or more stringent reliability rules or standards. Those entities are best situated to determine the most effective way to implement broad, national reliability related criteria and determine implementation strategies appropriate to local system designs. Although states have a vested interest and considerable expertise in the reliable operation of the bulk power system, NERC’s proposal does not expressly mention the authority of states to set standards. In order to acknowledge state authority to impose additional reliability standards based on local needs, a clause should be added to NERC’s Transition Plan Documents, and to all contracts between parties adhering to the standards, which states as follows:

Nothing in this section shall be construed to preempt the authority of the states to take action to ensure the reliability, adequacy, or safety of electric facilities within a state.

Historically, New York has taken an active role in maintaining the reliability of the electric system. For example, New York has implemented approximately 100 standards with which the New York utilities must comply under the New York Independent System Operator. It is not feasible for a national organization to become familiar with the intricacies of local system design


5

and the needs of the many disparate areas within each of the contiguous 48 states. Reliability and competitive market needs must be balanced, and such balancing should be performed at the local level by those most familiar with the local system. New York will continue to exercise their authority to ensure the reliability of the electric system under the emerging competitive market and we urge NERC to support that effort. F.n. – Pub. Serv. L. §§ 65 and 66. Response: The CTG expects that Regional Reliability Councils, with state participation, will continue to play an important role in the reliability of electric service to customers. Because this program consists of a series of private contracts, it cannot pre-empt any state authority that exists. Thus, inclusion of a savings clause to avoid preemption is inappropriate. [PJM] The Compliance Task Group’s Report is a well-reasoned balanced set of recommendations. The task group has appropriately defined the role of NERC in terms of compliance oversight, has specified a well-defined set of standards to be focused on (CPS I and II and DCS) and provides a critical role for the regional councils prior to expansion of the standards the council’s are charged with enforcing. PJM urges the Board’s adoption of this balanced, focused and clearly defined plan to achieve enforcement of critical standards necessary for the maintenance of reliability in North America. As noted above, changes need to be made to the Certificate of Incorporation to ensure that it is in harmony with the defined role of NERC set forth in the Compliance documents. Response: The Governance Task Group is considering the provisions of the Certificate of Incorporation. [Pennsylvania and Delaware Commissions] The proposed plan of NERC to transition to a private, self-governing organization is flawed in the following respects: 1. NERC is seeking to assume a quasi-governmental role in governing the bulk power system without obtaining necessary authority from national or regional governmental entities. While, of necessity, NERC has sought to do this through a web of contractual obligations, private contracts cannot substitute for the legitimacy of law conferred by legislation and the democratic process. To the extent that issues arise which place NERC’s standards in conflict with governmental policy, such standards will be subject to revision or nullification by national or regional governmental authorities. 2. NERC’s proposed model of private central control of bulk power standards either ignores or is in actual conflict with the reliability and market development role of regional transmission organizations under FERC Order 2000. 3. NERC’s proposed model fails to ensure that reliability standards will not conflict with open access to the bulk power grid or the continuing development of competitive bulk wholesale and retail competitive market design. 4. NERC has not demonstrated that the existing voluntary standards-setting process is ineffective. 5. The plan creates a complex and cumbersome private bureaucratic structure unaccompanied by adequate due process and judicial review safeguards ordinarily applicable to the exercise of governmental powers. Response: The CTG agrees that a legislative solution would be preferable to a contract-based program for assuring compliance with the reliability standards. The CTG believes that, in the absence of legislation, the industry must take what steps it can to strengthen compliance with


6

reliability standards. The NERC Blue Ribbon Panel and the Secretary of Energy Advisory Committee’s Task Force on Electric Reliability both concluded that the past voluntary system for assuring compliance will not be adequate in light of the changes taking place in the electric industry. The proposed contract-based compliance and enforcement program is fully consistent with FERC’s Order 2000 and the development of regional transmission organizations. FERC said that RTOs should carry out their short-term reliability functions consistent with the reliability standards set by NERC or its successor. FERC also directed that the RTOs report to FERC any inconsistencies between NERC standards and the open access tariffs. This would provide an opportunity for any inconsistencies to be resolved. [Public Service Electric & Gas] It is not yet clear what NERC's perceived role in the area of compliance and enforcement is. NERC/NAERO is perceived to be an Organization which develops, through an open inclusive process, the Standards by which the High Voltage Interconnected System will be planned and operated. In the absence of Legislation, does this Organization have the legal right to perform a Compliance and Enforcement Role? In summary, although this is a comprehensive effort and report, and there is no doubt that we should continue to strive to attain the ability to have all participants develop, implement, and comply with Industry Standards as well as be exposed to enforcement in the event of non-compliance, this report is simply too much too soon. Response: The CTG believes this is a necessary step to take in the absence of legislation. The authority to establish a compliance and enforcement program comes through the contractual agreement of the participants. Recommendation 1 [Public Service Electric & Gas] In recommendation 1, the report uses the concept of contractual or agreement based programs to implement the C&E activity. It also cites the use of a similar concept in the WSCC. As the report places the responsibility for the development, negotiation, and implementation of these contractual-Agreement programs on each Regional Reliability Council, what is the perceived success ratio of occurrence? The information I have heard indicates that less than 25% of the "participants" in the WSCC have actually completed legal contracts or Agreements binding them to comply. Response: The WSCC has had good success with its contract-based Reliability Management System and has achieved the participation of control areas with over 90 % of the load within the WSCC. WSCC has a number “participants,” such as state regulatory bodies, who are not covered by reliability standards. That may account for the relatively low percentage included in the comment. Recommendation 2 [Public Service Electric & Gas] In recommendation 2, it identifies the initial Reliability Standards as CPS1, CPS2, and the DCS. These Standards apply specifically to Control Area Operators. How are all of the other myriad participants brought under the umbrella of C&E? How does a Control Area encourage/force all


7

participants to be "responsible" for their activities that directly relate to the results of the three Standards identified? Response: Under the program, each Regional Reliability Council would develop and implement an agreement-based compliance and enforcement program with its members. As standards are added to Annex B, those standards will be included in each Regional program. One of the essential attributes identified in Annex A to the Agreement is a specification of the means by which the reliability standards will be extended to those who have not executed the Regional agreement. WSCC members have agreed to include appropriate provisions in any new interconnection agreements they sign and also to seek appropriate amendments to existing interconnection agreements. [ECAR] 5. This term does not appear to be defined anywhere. [Page 2, Item III, Recommendation No. 2, “RCEP”] Response: The term has been defined in Section 2.00 of the Agreement. [APPA, ELCON]

The CACC is to consider and make recommendations to the parties, which include NERC, on the addition of designated reliability standards to the compliance program. The Stakeholder Committee appears to be left out of the process. Mandatory standards can only be added by the unanimous consent of all signatories to the agreement, so that the NERC Board of Trustees does not have the power to make a standard mandatory and any participating Region has a veto. This is not an appropriate model for a national industry standard-setting organization.

By designating initially only two Control Performance Standards (CPS1 and CPS2) and the Disturbance Control Standard (DCS) as subject to the Agreement for Regional Compliance and Enforcement Programs, the Task Group may be implicitly saying to the industry that other reliability standards are not equally important. To the contrary, we believe that any reliability-related standard worth having in the first place is important and should be included in the Agreement for Regional Compliance and Enforcement Programs in order to ensure uniformity among the Regional Councils.

Response: The provision for unanimous consent of the signatories reflects the contract-based nature of this program. The NERC Board of Trustees does not have the present authority to mandate that particular standards be followed. The program will begin with three important standards, and others will be added as the program develops. The CTG does not believe it realistic to include all necessary standards at the outset of the program. Whether standards are in the program or not, the NERC Bylaws still obligate the Regional Reliabi lity Councils to have their members comply with all standards. [FRCC, Linda Campbell] Recommendation No. 2 includes CPS1, CPS2 and DCS as the initial reliability standards for the contract or agreement based Regional Compliance and Enforcement Program. FRCC supports CPS1 and CPS2, but has some concern regarding DCS being included initially. DCS was one of the first compliance measures in Phase I of NERC's Pilot Compliance Program. At that time, there were several concerns and questions raised by FRCC and others regarding the penalty for not meeting this measurement. These questions were mostly in the form of phone calls


8

and emails to NERC staff and others. No formal written comments were made by FRCC at the time. A large part of the concern centered around much of the details being part of NERC's "Performance Standard Training Document" rather than in Policy 1. In November 1999, the NERC OC approved the Performance Subcommittees recommendation to extend the DCS recovery period from 10 minutes to 15 minutes. This was done on an Interim basis. At this time, the Performance Subcommittee was asked to go back and review Policy 1 completely and come back to the OC with suggested changes to Policy. In March 2000, the NERC OC approved continuing the 15-minute recovery time period on an interim basis for the next 4 months. This was not a unanimous approval, but it passed by majority. In November 2000, the NERC OC once again continued the interim approval of the 15-minute period through 3/29/2001. A revised Policy 1 was out for comment at the time (comments due 11/25/2000). This version of Policy 1 still contains references to the Performance Standard Training Document for calculating the contingency reserve adjustment; i.e. Penalty for non-compliance to DCS. After reviewing the comments currently posted to the revised Policy 1, it is clear that DCS still has a lot of unresolved questions. It may not be appropriate to include this standard in a mandatory compliance program until Policy 1 has been re-written and approved and the DCS questions answered. Response: The CTG agrees that the standards included in Annex B should be approved by the NERC Board of Trustees through the NERC standards development process. The Report and the Agreement have been modified to make that clear. The DCS standard is currently being revised. The CTG is recommending that the NERC Board of Trustees direct the Operating Committee to complete work on the DCS standard as soon as possible, so that an up-to-date version of the DCS standard may be included in the program. [ECAR] 1. P2 - Top Paragraph - "through the years", should say "during the last 2 years". Recomm. 2 - after "standards and measures" add "including regional specific operating criteria". Regions have some specific criteria that are agreed to within the region and may not be part of a NERC std. or policy. Regions may want to enforce compliance to these requirements also. Response: The CTG is recommending that any appropriate Regional variation to a standard in the program be incorporated in the standard during the standard development process (e.g., the current DCS time period in the Eastern Interconnection is 15 minutes on an interim basis; NPCC will continue with a 10-minute DCS standard). Recommendation 3 [Public Service Electric & Gas] Regarding recommendation number 3 for a Compliance Agreement Coordinating Committee (CACC). The role and responsibilities, as proposed, for the CACC is not clear versus the continuing roles of the existing CS, CMC and CRWG. The intent of establishing an additional committee which reflects the existing committees in membership as well as role / responsibility should be explained in detail. The changing nature of the business has brought many new players into the scope of the reliability standards, who are not familiar with the Reliability Standards development, implementation, compliance and enforcement processes.


9

In recommendation 3, an additional Standing Committee is recommended to be created, the Compliance Agreement Coordinating Committee. In the body of the report, additional roles and responsibilities are identified for this new Standing Committee. There are structural concerns with this concept as the development of Regional Compliance efforts entail strict concerns for "Independence" to insure comparability of implementation of Standards. Response: The Report and Agreement have been modified to make clear the intent of the CTG. The renamed Compliance Agreement Participants Group is set up to administer the Agreement among NERC and the Regional Reliability Councils, i.e., the signatories to the Agreement. It will not be a standing committee of the NERC Board of Trustees. The NERC Board of Trustees must ratify the important decisions of the CAPG before they can take effect. The role of the CAPG will be limited to administering the provisions of the Agreement. Because NERC and the Regional Reliability Councils have compliance programs that are outside the terms of the Agreement, the CTG expects that the existing CS, CMC, and CRWG will continue their efforts. The CTG expects that all of the compliance programs will continue to evolve. [ECAR] 6. How does the NERC “oversee … the effectiveness” of something? How does the NERC “coordinate … the effectiveness” of something? I do understand how it can “assess” the effectiveness of something. [Page 2, Item III, Recommendation No. 3, first three lines] Recomm. 3 - "oversee, coordinate" - very broad terms. We need to try to define these terms with regards to the authority NERC would have over the regions. These appear throughout the document. 2. P3 - (a) - Delete "from time to time", add at end "and subject to change periodically". Paragraph 2, last sentence - Delete it . It is redundant and doesn't fit paragraph. Annex B Paragraph - Next to last sentence - Adding or removing is for standards that NERC will "oversee", but not for requirements that the regions put in program as per recomm. 2 above. Response: The Agreement has been revised. NERC will oversee the development, coordinate the implementation, and assess the effectiveness of the RCEPs. The CAPG and NERC’s Director of Compliance will be directly involved in that effort. The particular tasks are likely to vary from Region to Region, because contract-based compliance and enforcement programs are in different states of development among the Regions. Recommendation 4 [Public Service Electric & Gas] In recommendation 4, it is proposed that NERC and the ten Regional Reliability Councils enter into the proposed "Agreement for Regional Compliance Programs". Suffice to state, this concept is premature. With the continuing change and flux within the Industry relating to the establishment of RTOs and ISOs, the continuing design, role, and functionality of the Regions is in question. A Region is intended to represent the interests of all participants within the respective Region, and as such, the issue of "independence" is undergoing considerable debate. With the obvious move towards RTOs and ISOs, which have as an integral basis for their existence "Independence", there is much work ahead of us in the Industry. Creating this Agreement at this time will result in the application of scarce resources towards an effort and goal which has a high probability of not producing the desired results. Is it prudent to move in this direction at this time?


10

Response: The CTG believes that development of contract-based compliance and enforcement programs in each of the regions is a necessary step at this time, given the uncertainty of the timing of any reliability legislation. Reliability issues should not be put on hold while other aspects of the industry are undergoing profound change. Serious attention to reliability issues is especially important as other institutions in the industry are evolving. Agreement, Preamble [Public Service Electric & Gas] In the preamble to the agreement (2nd WHEREAS), add "accredited" to the requirements for establishing mandatory reliability standards. i.e. ...through an open, inclusive, accredited process. This will assure that the standards have credibility with all participants. Response: The design of the standards development process is outside the scope of the CTG. The CTG has revised the Report and Agreement to make clear that the standards eligible for inclusion in Annex B are those standards that have been approved by the NERC Board of Trustees through the NERC standards development process. Agreement, Section 1 [ECAR] 7. How does one “provide for” the RCEP? Does this agreement simply provide a placeholder for RCEPs or, more likely, does it require that regional reliability councils develop and implement RCEPs? If this is a requirement, say so. [Page3, Item (a), “To provide for the development and implementation by the Regional Reliability Councils of Regional Compliance and Enforcement Programs”] Response: The Agreement among NERC and the Regional Reliability Councils calls for each Regional Reliability Council to develop a contract-based compliance and enforcement mechanism with its members. Annex A to the Agreement sets out what the essential attributes of such a regional program would be. 8. Same comment as No. 6. [Page 3, Item (c), “oversee, coordinate and assess”] 9. This sentence is redundant. [Page 3, first paragraph under (c), last sentence, “NERC would oversee, coordinate, and assess the effectiveness of each Regional Council’s efforts.”] 3. P6. Paragraph (b) - Delete it. The purpose of agreement is not to provide procedures and a forum......That should be an expected outcome of the agreement, but I will surely not write a procedure telling me how to exchange information with my neighbor regions, which we are already doing thru the CMC/CS/CRWG etc. Response: The CTG believes that the exchange of information among the Regional Reliability Councils may be an effective way to encourage development of a contract-based compliance and enforcement program in every Region. Agreement, Section 2 [none]


11

Agreement, Section 3 [Public Service Electric & Gas] Section 3.01(b) requires changed or new membership agreements. Approval of such an agreement could be blocked by voting members of a RRC. The Regional Representatives to a CACC would obviously be from the respective Region's C&E "arm". Although some Regions such as the WSCC and MAAC have initiated creation of such a group, will other Regions actually have the time and incentive to initiate this effort without a clear mandate to do so? In the description of the proposed "Agreement...", it is stated that a standard could be added or removed only by unanimous vote of NERC and each Regional Council. Is not this "veto" power destructive? Would this not lead to a continuing demonstration of the inability of the Industry to reach consensus? Consensus does not mean unanimity, it generally indicates that all concerns have been addressed, and a majority of participants agree. In 3.01(b) it is stated that each RRC agrees to amend its existing membership agreement...., this can be an extremely contentious issue, and will obviously take an extensive amount of time to complete without a clear governmental mandate to do so. Response: This comment highlights one of the shortcomings of the program, namely that it is agreement-based. The CTG believes that this is the only mechanism possible at the present time, given the absence of legislation. There is no current way for a private organization to impose a system of financial sanctions, except by the consent of those upon whom the sanctions would be assessed. In 3.02 it defines the Role of the NERC Director of Compliance and the provision of administartive and overhead support. Will the NERC Director of Compliance be the NERC representative on the CACC? Does the use of NERC staff prevent the retention of outside services to perform this task? Where is the ability for the participants to request an outside audit of the role, responsibilities, and activities of the NERC Compliance efforts? Response: The NERC Board of Trustees will appoint the NERC representative to the CAPG. It will be up to the NERC Board of Trustees to decide how to deploy the staff resources and whether to retain outside consultants. [ECAR] 13. Why does the ECAR membership agreement have to be modified when mandatory enforcement can readily be a part of this agreement? Are the mandatory enforcement provisions in this agreement weakened by failure to change the membership agreement? There probably is a reason. I simply do not know what it is. [Page 7, Item 3.00, under 3.01 (b) first two lines] Response: How a Regional program is developed may vary from Region to Region. Some Regions may choose to amend existing membership agreements to add the necessary additional provisions. That is the course being taken by NPCC. Other Regions may develop new agreements with their members, as did the WSCC when it developed its Reliability Management System.


12

Agreement, Section 4 [APPA, ELCON, WPPI]

The recommendations of the Compliance Task Force appear to give the Regional Councils effective control over the compliance process and the designation of mandatory standards and to deprive the Stakeholder Committee of meaningful participation on these key matters. The agreement also appears to give very little authority to the Board of NERC. Section 4.01 does state that the Compliance Agreement Coordinating Committee (CACC) will report to the NERC Board of Trustees, but it is unclear what this provision means. The CACC is given a great deal of responsibility under the agreement and it is unclear if the Board can do anything when it disagrees with the CACC.

The CACC is proposed to be comprised of one representative from each Council that is a party and one representative from NERC representing the Board. Thus, under Section 4.01 NERC and the Board are reduced to the same status as a single region. There also is no requirement of any sector balance on the CACC. The Regional Councils may each appoint a vertically integrated, investor-owned utility that operates a control area to this group that will oversee compliance by, in large part, the same sector. With only one member on the CACC, NERC will have little input into the decisions of the CACC and most stakeholders may be excluded. Further, it is proposed that actions of the CACC require a two-thirds vote, which means there must be substantial consensus for any action to occur. The CACC is to review and approve the annual program plans of the NERC Compliance Director. This is inappropriate. The NERC Board, not the Regional Council-controlled CACC should approve the compliance program. As currently proposed, the CACC is responsible for monitoring the activities of the NERC Compliance Director. We believe the NERC Compliance Director should be responsible solely to the NERC Board of Trustees.

Response: The Report and Agreement have been modified in several respects. The CTG has changed the name to “Compliance Agreement Participants Group” to more accurately reflect the CAPG’s role of administering the Agreement that NERC and the Regional Reliability Councils have signed. The NERC Board of Trustees must ratify significant decisions by the CAPG before they become effective. The NERC Director of Compliance is responsible to the NERC Board of Trustees and will submit assessments of the Regional programs to the NERC Board of Trustees. The NERC Director of Compliance also has ongoing responsibility, independent of involvement with the CAPG, for those compliance efforts that are not within the scope of the Agreement. Stakeholders may participate in standards development through the NERC standing committees and the NERC standards development process. The process for adding standards to Annex B has been revised to allow any stakeholder to recommend additions, and proposals to add to or delete from Annex B will be posted for public comment. Opportunities for the Stakeholders Committee to provide advice and recommendations to the NERC Board of Trustees are outlined in the Report of the Governance Task Group. Finally, stakeholders will be involved with each Regional Reliability Council in developing that Region’s own RCEP.

[Public Service Electric & Gas] Section 4.01 establishes the CACC as a Standing Committee. When Reliability Legislation is approved, will this committee be eliminated? Section 4.02 talks about representation of each Regional Council "that is a party...." Does this provide an opt-out provision for one or more Regional Councils?


13

Response: The CAPG will not be a standing committee of NERC. The CTG expects that the CAPG will exist as long as the Agreement exists. Passage of legislation undoubtedly will entail revisions in how compliance and enforcement are handled. Because the program depends upon the consent of each Region to participate, each Region does have the ability to opt out. It is the strong recommendation of the CTG that each Regional Reliability Council take on, if it has not already done so, the development of an RCEP. [ECAR] 4. P7. Paragraph (c) - "annual program plans approved by the CACC." This should mean only the NERC level Plan. Regional plans should not be reviewed by CACC, one do I see a need to have an annual program plan. Once we get this program established, the only thing to change yearly will be the list of items being measured and I do not see that changing much from year to year. Response: The CAPG will not be reviewing Regional plans except as may be necessary to evaluate an assessment of a Regional program by NERC’s Director of Compliance. Paragraph (d) - Very broad scope to be giving NERC. Do we want NERC to have this much carte blanc authority to take action. Who will judge reasonably necessary or appropriate? The CACC?! Response: NERC’s authority is limited by the terms of the Agreement overseeing the development, coordinating the implementation, and assessing the effectiveness of RCEPs for each Region that agrees to give NERC that authority. Para. (iv) - last words " along with reasons for the absent....." DELETE this. It is nobody's business why an individual cannot make a meeting!!! If they send a rep with letter or other, that's it. I do not know why they even need the letter. If someone is representing another person and that person later challenges the reps presence, then we have a problem. But, in a professional environment, if I attend a meeting for a person indicating I am representing him, I think we should be accepting that on face value. Stop letter nonsense. Response: The provision has been deleted. Para 4.06 (a) - Why do CACC and Regional reps have to meet??? Have 10 less meetings and let Regional CACC member present timetable to CACC and defend or bring back necessary change to Region. Eliminate 9 meetings!!! Response: The provision has been revised to delete the requirement for meetings. The CAPG will work out with the participating Regional Reliability Councils how best to organize the effort. 7. P10. Paragraph (d) - Last sentence. Why would annual plan be maintained as confidential?? Makes no sense. That's the document that the industry would want to see!!?? Response: The provision has been revised. The NERC Director of Compliance may wish to hold confidential particular details of which elements of a program will be examined, or what the schedule of assessments may be. (h) Will CACC be assessing regions plan or will it actually be done by NERC Comp Director? Hope the letter so as not to bring in again another independent body!


14

Response: The assessments will be done by the NERC Director of Compliance and reported to the NERC Board of Trustees. The CAPG will have an opportunity to submit formal comments on the assessments. 5. P8. 4.03 - Vice-Chair one year term. Change this to a two year term. Two years gives someone time to be effective and allows for less bureaucracy in processing in a new change every year. Response: The term of the Vice Chair has been changed to two years. Paragraph (i) and (ii) - State the majority is 6 of 11 members to satisfy a quorum. Two-thirds of what for an affirmative vote? The 6 that show up to make a quorum, then two thirds which is then 4??!! I don't want 4 of 6 present determining my fate nor that of the program or setting policy. For voting I recommend that we require 6 of the 11 members to pass a vote as a minimum. 4 of 6 is unacceptable. Response: The CTG has not revised the voting requirements. Given the nature of the CAPG and its responsibilities, the CTG believes it highly unlikely that significant decisions will be made by a small number of members. The NERC Board of Trustees must also ratify significant decisions of the CAPG before they become effective. 14. What is a Rule of Procedure? [Page 9, Item 4.04 “Rules of Procedure”] Response: These are the procedures by which the CAPG carries out its work. The NERC Board of Trustees must ratify them before they become effective. 15. Do these reports to the Board of Directors stop when regional implementation is done? Should RRC be a defined term? [Page 10, first line, “progress of each RRC”] Response: The CTG expects the reports to continue for the duration of the program. 16. Why is this confidentiality needed? I would think the program plan would be widely distributed. Shouldn’t it also be posted on the web site? [Page 10, Item(d), last sentence] Response: The Agreement has been modified to provide for public disclosure of whether an entity has been found in non-compliance. What would remain confidential is any commercially sensitive information the entity may have furnished during the course of a compliance assessment. 17. The term “Parties” is not defined. Who are they? [Page 10, Item (e), first line, “Parties”] Response: “Parties” refers to the signatories to the Agreement. See page 1 of the Agreement. [Entergy] In Section 4.06(d) of the Agreement for Regional Compliance and Enforcement Programs, NERC describes procedures to monitor and evaluate the effectiveness of the Regional Compliance and Enforcement Programs. Under these procedures, the NERC Director of Compliance is supposed to prepare an annual program compliance plan. Pursuant to section 4.06(d), “the annual program plan of the NERC Director of Compliance shall be maintained on a confidential basis.” Entergy


15

asserts that this annual plan should be available for public review and not maintained on a confidential basis. Response: The provision has been revised. The NERC Director of Compliance may wish to hold confidential particular details of which elements of a program will be examined, or what the schedule of assessments may be. [Public Service Electric & Gas] In 4.02 the Chair's term is unstated, yet the Vice-Chair will have a one year term. Why are they not comparable? Response: The Chair is appointed by the NERC Board of Trustees and serves at the pleasure of the Board. The term of the Vice Chair has been extended to two years. In 4.04 ii, there is reference to a two thirds vote, this is quite different than a unanimous vote. Response: Most decisions of the CAPG require a two-thirds vote. A unanimous vote is required to amend Annex B to add or delete a standard and to amend the provision in the Agreement that establishes the unanimous voting requirement. In 4.04 (b), The CACC may adopt other rules...., who will "approve" these rules? Response: The NERC Board of Trustees must ratify procedural rules adopted by the CAPG before they become effective. In 4.06 (e) The CACC shall consider and make recommendations on Standards... Is this not usurping the role of all participants in an open inclusive process in the development, modification, or elimination of Standards? Response: The CAPG will not be usurping the standards development process. The Report and the Agreement have been revised to make clear that the standards eligible for inclusion in Annex B are the standards that are approved by the NERC Board of Trustees through the NERC standards development process. Any entity may propose that standards be added to or deleted from Annex B. Agreement, Section 5 [ECAR] 8. P11. 5.01 (a) This paragraph does not belong as part of Enforcement Protocol. Unless, at the end of it you state, " or be subject to enforcement protocols.

Response: Section 5.01 of the Agreement sets out the terms of the basic undertaking of each Regional Reliability Council, namely, to have in place a contract-based RCEP, with provisions for financial penalties. Section 5.00 of the Agreement and Annex A describe essential features of an acceptable RCEP. The CTG believes this strikes an appropriate balance between having a rigid, one-size-fits-all RCEP and allowing Regions to develop their own programs, yet


16

maintaining a strong degree of consistency from Region to Region. The term “protocol” has been changed to “procedures.”

[APPA, ELCON, WPPI]

In Section 5.01(b), regional enforcement protocols must include sanctions for non-compliance and financial penalties. It appears that the Regions can have different sanctions and different financial penalties for the same standard. In other words, no uniformity is required even within an interconnection. This seems inappropriate for national standards. The NERC Board of Trustees should establish uniform sanctions and financial penalties for national standards. Regional variations are inappropriate here.

Response: Annex B will include a common matrix of financial penalties. The Agreement recognizes that a Region and its members may wish to provide for a pilot period before financial penalties are actually assessed. That is the approach that was used in WSCC.

We believe that the most effective sanction for a violation may be making the violation public. There appears to be no provision for this action. There is an exception to the confidentiality requirement in order to notify a state regulatory authority, but apparently not FERC, of a violation. However, there is no provision for publicly publishing violations and sanctions. If the only sanction is a financial penalty, it may be in the financial interest of an entity to violate a standard on a cost-benefit basis. Being publicly identified as having been sanctioned by the national reliability organization provides an important counterweight. We recommend that any imposition of a sanction or penalty, and all findings of violations of mandatory standards, be publicized on the NERC website.

Also, with respect to confidentiality, the Bylaws establish no basis for NERC to determine whether information that has been submitted has a bona fide reason for being treated as confidential. The burden should be placed on the entity supplying information to establish that the data merits confidential treatment, not on NERC to support disclosure. NERC should establish strict standards favoring disclosure of reliability information, including violations of NERC standards.

Response: The confidentiality provisions in the Agreement have been revised to permit making public whether an entity has been found in non-compliance. The CTG believes that commercially sensitive information that an entity may have submitted as part of a compliance and enforcement proceeding should remain non-public.

[MEAG] Subsection 5.03 (b) (ii) (A) as follows. It is suggested that the first word of the Subsection be changed from "that" to "whether." As drafted, the provision of information for Participating Compliance Entities which ARE in compliance would appear to be prohibited, i.e., the wording only allows for providing information for those Entities which are non-compliant and anything else (by omission) could be assumed to be prohibited. It may be desirable or necessary to provide (at least) a list of those Entities which have achieved compliance. Response: The change has been made. [Public Service Electric & Gas] Section 5.01(a) talks about "participating compliance entity within the RRC...." This appears to indicate that some members of an RRC could be non-participating. If that is the intent, please so


17

state. Several participating "compliance entities" are members of more than one RRC. Are they required to duplicate report for each RRC. If so, the added cost for reporting will become an issue of fairness and competition. Section 5.03(a) states the RRC shall not disclose compliance data to "any third party" without prior written consent. Records of poor compliance results will certainly not be agreed to for release, yet these will be the exact records that Regulatory Agencies will demand and perhaps subpoena. This could create a chilling effect on the willingness of entities to participate. Response: Because the program depends upon the consent or agreement of an entity in order to assess sanctions for non-compliance, there may be entities that do not participate. If a Participating Compliance Entity does business in more than one Region, it may be required to report to more than one Regional Reliability Council. That will not be duplicate reporting, but rather reporting on an entity’s activities within each RRC to the appropriate RRC. The confidentiality provisions of the Agreement have been modified as discussed above and in the Report. Agreement, Section 6 [APPA, ELCON, WPPI]

Section 6.01(c) provides the NERC Director of Compliance will conduct such other activities as the CACC may direct from time to time for the purpose of assessing regional compliance and enforcement. Again, the NERC Board, not a committee of the Regions, should direct the activities of the NERC staff. Under Section 6.01(c), the Board appears to be powerless to require remedial action if the NERC Board believes that a Region is in default, but a two-thirds vote of the CACC is not attainable on that default. The bottom line is that we do not agree with the CACC structure. In many ways, it looks like a return to the past.

Response: The Agreement has been revised. The NERC Director of Compliance is under the direction of the NERC Board of Trustees, acting through NERC’s President. The NERC Director of Compliance will report assessments of RCEPs to the NERC Board of Trustees. Because the whole basis of the program rests on the consent of the participants, NERC’s Board of Trustees does not have the authority to mandate action by a particular Region. Its authority is limited to peer pressure and other means of persuasion. In the absence of legislation, NERC has no basis for asserting additional authority.

[ECAR] 20. How is due process accomplished for these revisions? [Page 13, Item 6.00,under Item 6.01 (b), “including any approved revisions thereto, as approved by the CACC”] Response: The Agreement has been revised to make clear that the CAPG will not be approving standards or revising standards. The standards eligible for inclusion in Annex B will be the NERC standards approved by the NERC Board of Trustees through the NERC standards development process. 21. This title is too soft. The provisions of this section should set the standards for the RCEP programs in a way that is absolutely clear to everybody. Perhaps “criteria” would be a better term than “subject matter.” [Page 14, Item 6.03,“Subject Matter”] 22. How would a determination of whether a given RCEP is “maintaining compliance and reliability” be made? This question should be answered before this contract is approved by the


18

Board of Trustees. A region should not be cited for failing to “maintain compliance and reliability” unless it knows exactly why it is receiving this citation. [Page 14, Item 6.03, (iii)] 23. Again, there needs to be a standard for determining that programs are “being implemented and applied on a consistent basis.” How different can the various regional programs be without being cited for inconsistency? [Page 14, Item 6.03,(iv)] 24. Again, how are the regional programs to be compared with one another? Effectiveness is hard enough to measure. To do this on a comparative basis would be even worse. [Page 14, Item 6.03, (b) (i), “comparative effectiveness”] 9. P14. 6.03 (a) (iii) - Compliance can be measured by looking at the number data. How do you vision how the reliability within my region will be measured and whether it is improving and being maintained???? Not sure how you can do this. Until it can be quantified and recognized as a meaningful measure, NERC can not be assessing regions and determining how we are doing in region. Big issue that I believe can be figured out and must be before this can work. (iv) AND (b)(i) - How are we going to determine consistent basis? Is it critical that we are compared to each other and then how are you going to determine comparative effectiveness??? This section may be difficult to do and what is the value added? If you say one is better then another, do we all need to change? Response: The CTG believes these are details that will need to be developed as the program goes forward. The Agreement sets out the undertakings of each Regional Reliability Council to develop an RCEP. The essential attributes of an RCEP are included in section 5.00 and Annex A of the Agreement. An assessment of a Regional Reliability Council’s RCEP will be against those undertakings. Agreement, Section 7 [ECAR] 25. How is failure defined? How many aspects of the program need to be considered inadequate before the program is deemed to have failed? Is it possible for a very robust program to be cited as “failed” because it missed a noncompliance under unusual circumstances? [Page 15, Item 7.02, (a), “has failed or is failing”] 26. What is a default? If ten discrepancies constitute program failure, how many have to be fixed before the default incurred? Default, to me, means that something was not completed as it should have been. I am not sure how “something” is defined here. [Page 15, Item 7.02, (c), “cure its default”] Response: The CTG believes these are details that will need to be developed as the program goes forward. The Agreement sets out the undertakings of each Regional Reliability Council to develop an RCEP. The essential attributes of an RCEP are included in section 5.00 and Annex A of the Agreement. Whether a Regional Reliability Council has failed to perform its obligations under the Agreement will be evaluated against those undertakings. 10. P15. Paragraph (b) - After (i) add "identify how it will fix it's default and what time frame".... There is no way anyone is going to fix these issues in 30 days. Give them opportunity to develop a mitigation plan. Response: The Agreement has been revised to add this provision. (c) "that this agreement be terminated" - SO!!! Will this be looked at as positive or negative punishment? The objective should be to get regions and companies in compliance with the rules.


19

Terminating agreement does nothing that is obvious. Why not set up some financial penalty, negative regional publicity, notification of CEO's of region and give the region 6 months to resolve their problems, possibly with increased management oversight from the NERC BOT/ CACC or others. Just terminating agreement is of no value. (a) "failed or is failing" - Is there a good way to measure this versus a judgment of the reviewer.? Is default and failure the same? Be consistent. Can you call problems failure to satisfy the requirements of the regions program or of NERC program? Tough to quantify. (d) Again make it 6 of 11 members! Response: By the terms of the Agreement, it takes a two-thirds vote of the Parties other than the RRC that has failed to perform its obligations under the Agreement to terminate the Agreement as to that RRC. Whether or not to terminate the Agreement as to a particular RRC is discretionary. The CTG believes that terminating the Agreement with respect to an RRC is an extreme measure, but one that may be appropriate in some circumstances. Measures that stop short of termination may well be more effective in promoting the reliability of the bulk power system. Agreement, Section 8 [ECAR] 27. Same as Comment 10. What is the process for identifying and dealing with regional differences? Does the acceptance of regional differences involve due process? It would seem that this issue would be very important since there are likely to be a lot of regional differences. [Page 16, Item 8.02, (ii)] Response: The CTG is recommending that any appropriate Regional variations to be included in Annex B be developed in conjunction with the development of standards through the NERC standards development process. [Public Service Electric & Gas] Paragraph 8.02(b) creates veto power for any single entity, which includes NERC, to change this section. Please discuss the necessity for this restriction. Response: The requirement for a unanimous vote to add standards to, or delete standards from, Annex B reflects the consensual nature of this program. It depends upon the consent of those on whom penalties would be assessed. Without that consent, there can be no assessment. A unanimous vote is also required to eliminate the requirement for a unanimous vote. That provision is not uncommon in such circumstances, because it preserves the authority of every party to the Agreement. Agreement, Section 9 [WPPI] Section 9.03 allows a Region to withdraw if FERC asserts jurisdiction over a Region as a public utility on the basis of the compliance agreement. In a recent MAPP proceeding regarding MAPP's initial attempt to adopt sanctions, FERC specifically required that any financial penalties be filed with FERC and determined to be just and reasonable. Isn't this going to happen for other Regions? Why should NERC propose a mandatory reliability system that has an opt-out if there is an assertion of jurisdiction by FERC over sanctions? Is it more important to avoid FERC


20

jurisdiction over Regions than have mandatory reliability standards? If FERC asserts jurisdiction, wouldn't FERC review help legitimatize sanctions and penalties and also provide antitrust protection? Response: The program is based on the voluntary participation of Regional Reliability Councils. If they are not now jurisdictional as a public utility and do not wish to become so, the concern over potential jurisdictional consequences of their actions may keep them from participating. Agreement, Section 10 [WPPI] Section 10.00 states that nothing in the agreement, �that is, in the establishment and enforcement of a mandatory national reliability standard, �shall create any duty or standard of care whatsoever. Why? If these standards are essential, shouldn't they at least arguably establish a duty and standard of care? We would delete this provision. NERC should not be party to attempting to insulate an entity from liability for damages arising from a failure to comply with a NERC reliability standard. Response: This provision does not insulate an entity from liability. It only states, as among the Parties, what their rights and responsibilities are to each other. The CTG is concerned that, without such a provision, some Regional Reliability Councils may choose not to participate. Agreement, Section 11 [ECAR] 27. I do not understand how this could work. How can the laws in the State of New Jersey govern the conduct of the utility in the State of Michigan, Ohio or anywhere else for that matter? [Page 17, Item 11.01] 11. P17. Just Jersey? Do we need to cover the laws of the states regional offices are in or the companies themselves??? This could be real confusing. Response: This provision is a common choice of laws provision for a contract among parties who reside in different jurisdictions. It only identifies how to choose what laws govern interpretation of the Agreement. The laws of any particular jurisdiction will apply to the activities of entities within that jurisdiction, according to their terms. Annex A [ECAR] 12. P A-2 - IV.A. - Regional plan does not need written procedure to determine comp or non comp. The comp is determined by the requirements in the templates. Do not want procedure to tell how to read template. Program will say use template to determine comp. Response: Each RCEP should include a description of what procedures and procedural rights are available to an entity alleged to be in non-compliance.


21

Annex B [ECAR] 13. p B-3 - Use updated templates when issued. One instance on non compliances is not correct. New template has correct requirement. Response: The CTG intends that updated templates be used in Annex B. It will be the responsibility of the CAPG to revise Annex B when standards or templates are changed through the NERC standards development process.

Funding Task Group Report 01/19/01

1

FUNDING TASK GROUP REPORT I. Background

A. The Board of Trustees’ Charge to the Funding Task Group

The Funding Task Group was created by action of the Board of Trustees at its October 12–13, 2000 meeting and was charged “to develop specific recommendations for consideration at the February 2001 meeting” with the following scope:

Funding — To consider a new funding mechanism for NERC that would incorporate the concept of user fees.

The charge to the Funding Task Group was made in the context of the Board of Trustees’

consideration of a plan to transition NERC to the end-state “NAERO” model envisioned in the pending federal reliability legislation, assuming the legislation does not pass in the near term. Therefore, the Funding Task Group has premised its analyses and recommendations on the assumption that the federal legislation enabling NAERO (including funding for NAERO) is not enacted.

B. Funding Objectives and Changes to NERC Funding Mechanisms Adopted by the Board in February 2000

Following the September 1999 meeting of the NERC Board of Trustees, Board Chairman Gary

Neale tasked a small group to review the following question raised by the Board at the September 1999 meeting:

What funding approach should the NERC Board of Trustees approve to meet NERC/NAERO funding requirements starting with the NERC 2001 Budget?

As set forth in its report to the Board of Trustees at the Board’s February 2000 meeting, the group

developed the following set of objectives to be addressed in developing funding recommendations:

q Command widespread acceptance within the industry. q Equitably align expenses to consider all users and associated beneficiaries. q Recognize the limitations of current funding tariffs. q Be flexible and robust enough to address further changes expected as the industry

continues to deregulate. q Provide adequate funding programs that can transition to the post-legislation

funding method.

M R Gent

Exhibit J


2

q Can be supported by a simplified, yet timely, billing, collection, and audit process that has minimal impact on all parties involved.

The NERC Board, at its February 2000 meeting, also agreed to a new funding mechanism in which

Regional Council funding for the NERC General Budget will be transitioned from a per-capita basis to a Net Energy for Load (NEL) basis on the following schedule:

2000: 50% per capita, 50% NEL




The Funding Task Group considered the funding objectives adopted by the Board in February 2000 to be relevant in developing longer-term funding strategies for NERC and, ultimately, NAERO. In developing its recommendations, the Funding Task Group also acknowledged and accepted the schedule for transition from a per-capita basis to an NEL basis as adopted by the Board.

C. NERC 2001 Budget and Assessments

At its October 12–13, 2000 meeting, the Board of Trustees approved a NERC base Budget of $11,600,825 and Regional assessments of $12,513,096. The Board also agreed that any additional or pending projects not included in the Budget should be subjected to a rigorous cost/benefit analysis at the Regional or committee level, and that funding for any such projects, once approved by the Board, would be provided from existing funds (no additional Regional assessments.) The Board also approved formation of a new Cost/Benefit Analysis and Allocation Task Force to establish the requirements for the kind of cost/benefit analysis that will be necessary for the standing committees to develop, prior to approval of a project by a committee, in submitting projects to the Board for approval. A summary of the NERC 2001 Budget is shown in Exhibit 1. The Regional assessment allocation percentages are shown in Exhibit 1-A. II. Recommendations of the Funding Task Group

A. In the interim state, the costs of performing NERC’s core bulk power system reliability functions should be funded through assessments collected by the Regional Councils that are allocated to the Regions on an NEL basis, in accordance with the phase-in plan approved by the Board in February 2000.

B. NERC provides certain services, programs, and products to the industry and others,

which should be managed so as to minimize or eliminate their impact on the Regional funding assessments.


3

1. The fully-allocated costs of these services, programs, and products should be determined, including appropriate allocations of NERC’s Administrative and General (A&G) Expenses and other overhead costs.

2. NERC should manage and charge for these services, programs, and

products to attempt to recover, at a minimum, their fully-allocated costs. 3. Charges for these services, programs, and products should be billed for and

collected by NERC directly from the user/purchaser in connection with the transaction.

C. NERC should seek outside funding from state, federal, and provincial government

agencies where appropriate.

1. NERC should consider requesting co-funding where government agencies, such as the U.S. DOE or FERC, request NERC’s assistance or participation in special projects or activities.

2. NERC should seek, where appropriate, grants or similar funding from

government agencies, such as DOE, where the agency’s budget includes provision for funding outside entities to conduct activities consistent with their program mission and that are currently conducted by NERC or that could be conducted by NERC and which would be consistent with NERC’s mission and purpose. (Some of the special project activities discussed in Recommendation E are potential candidates for such external funding.)

D. NERC should develop a structure of membership fees for the end-state.

E. Several of NERC’s projects, programs, and services that have both reliability

benefits and commercial value, and which have been developed as “special projects,” should generally be paid for by “user fees” charged to the users of those projects, programs, and services. NERC should bill the users through the Regional Councils or by direct billing of users where NERC management determines this to be more efficient and effective. Certain special projects are more central to NERC’s mission, and these costs should likely continue to be recovered on as broad a basis as possible.

F. NERC should work to develop federal, state, and provincial government support

and authorization for a system of charges that would be reflected in rates to recover NERC’s and the Regions’ costs to perform their core reliability functions. In the interim state, NERC should immediately pursue a coordinated strategy at the federal, state, and provincial levels to gain wider recognition and support, and obtain the necessary approvals to allow recovery of, NERC’s costs that are not already included in current rates. NERC and the Regions should look to the recent PJM filing at FERC to recover MAAC costs through the PJM tariff as a possible model for cost recovery.


4

III. Discussion of Recommendations of the Funding Task Group

A. In the interim state, the costs of performing NERC’s core bulk power system reliability functions should be funded through assessments collected by the Regional Councils that are allocated to the Regions on an NEL basis, in accordance with the phase-in plan approved by the Board in February 2000.

NERC performs certain core functions associated with promoting the reliability, adequacy, and

security of the North American bulk electric power system.1 The Funding Task Group concluded that the costs of performing these core functions should, at least in an interim state, continue to be recovered through assessments collected by NERC’s members, the Regional Councils, to the extent that these costs are not covered by net revenue contributions from the revenue sources described in Recommendations B through E. From a functional or task-based budgeting perspective, these core functions include (or are expected to include in the near term):

n Board of Trustees and other governance activities (including, in the near term, costs for the Stakeholders Committee);

n Standing Committees and associated subgroups, NERC Standards development,

maintenance of the NERC Operating Policies and Planning Standards, and Standing Committees Organizational Manual;

n Compliance Enforcement Program, an independent program to oversee Regional

implementation and enforcement of NERC Standards; n Assessing and reporting regularly on current and future reliability; n Review of Bulk Power System disturbances for lessons learned;

1 From the NERC Certificate of Incorporation, as it is proposed to be modified, the purposes for which the Corporation is formed are:

a. to promote the reliability and adequacy of bulk electric supply by the electric systems of North America; b. to develop, implement and, consistent with executed agreement(s) with Regional Councils, enforce

standards that provide for an adequate level of reliability of the bulk power systems of North America; c. to conduct interregional studies that relate to the reliability and adequacy of the bulk electric systems and to

make information appropriately available; d. to encourage and assist the development of interregional reliability arrangements among Regional Electric

Reliability Councils (Regional Councils) and their members; e. to exchange information with respect to planning and operating matters relating to the reliability and

adequacy of bulk electric supply; f. to review periodically Regional and interregional activities on reliability and adequacy; g. to provide independent reviews of interregional matters referred to it by the Regional Councils; and h. to provide a voluntary, industry-based alternative dispute resolution mechanism for resolving disputes,

especially reliability-related disputes, referred to it by any Regional Council or by its Board of Trustees.


5

n Response to requests from government entities. The Funding Task Group concluded that, in the interim state, the net revenues needed to cover the costs of the core functions should be recovered through assessments collected by the Regional Councils, allocated to the Regions on an NEL basis, as approved by the Board in February 2000.

The Regions are responsible for recovering the amounts billed within their respective Regions. Each Region would have the ability and authority to determine how best to recover its assessment amount from its members and/or other industry participants within the Region. The Task Group concluded that to assist the Regional Councils in making these determinations, NERC should provide more detailed billing statements to the Regions than is currently the case. Specifically, the assessment to each Region should be broken down on a program or functional basis. The more detailed billing statements will give the Regional Councils additional information to use in determining how to recover their respective assessments from their members and other industry participants within the Region. A sample Regional invoice, representative of the new, more detailed format, is attached as Exhibit 2.

B. NERC provides certain services, programs, and products to the industry and others, which should be managed so as to minimize or eliminate their impact on the Regional funding assessments.

1. The fully-allocated costs of these services, programs, and products

should be determined, including appropriate allocations of NERC’s Administrative and General (A&G) Expenses and other overhead costs.

2. NERC should manage and charge for these services, programs, and

products to attempt to recover, at a minimum, their fully-allocated costs.

3. Charges for these services, programs, and products should be billed

for and collected by NERC directly from the user/purchaser in connection with the transaction.

NERC currently provides a number of services, programs, and products that are widely used by

industry participants (including members of Regional Councils) as well as other entities. These services, programs, and products can be grouped into three categories:

q Data and Information — GADS, ES&D, Transmission Line Maps, etc. q System Operator Testing and Certification q Education and Training — workshops, seminars, tutorials, etc.

Some of the services, programs, and products require substantial effort by NERC staff as well as

significant direct costs. NERC generally provides these services, programs, and products at no charge or minimal charge to members of Regional Councils and government entities, and to others at prices that may


6

not cover all fully-allocated costs. As such, the provision of these services, programs, and products places an additional funding burden on the Regional Councils.

Some of the services, programs, and products are of significant value in the commercial marketplace, well beyond the prices charged by NERC. The GADS program is a prime example of this. The Funding Task Group identified several services and products that are currently provided at or below cost by NERC, but are purchased by third parties (e.g., consultants, manufacturers, and other vendors) who use these services and products in profit-making activities.

Examples of the types of services, programs and products that NERC currently provides include:

n The Generating Availability Data System (GADS) Database — a voluntary program for owners of generation who wish to maintain confidential operating and performance data on their generating units in a common, industry-standard data format (ANSI/IEEE Standard 762). GADS has been in service since the late 1970s. A single person now maintains GADS with part-time administrative assistance for data entry, workshop management, and secretarial help. GADS houses data for over 3,600 generating units in North America and provides value to the users through pc-G.A.R., a pc program that allows participants to compare their units to like units without divulging the identity of the units. GADS also performs special analyses on request and is a substitute for filing generating unit data with the FERC. NERC is charging members of Regional Councils for GADS special analyses, but at a rate less than that charged to non-members.

n Operator Certification Programs and Testing — initiated following the Board of Trustees approval of Operating Policy 8C which establishes that, after December 31, 2000, certification is required of all control area personnel conducting real time interconnected operations. This program is self-funding over a five-year cycle that is consistent with the validation period of the Certificate, and should remain that way.

n Transmission Map and Electricity Supply & Demand Database —NERC printed a new

Transmission Line Map in 2000. The income from the sale of maps will be spread over approximately three years. The ES&D database is produced each year from data submitted by the Regional Councils. By NERC maintaining this database, Regions and their members are not required to supply the data individually to the DOE Energy Information Administration. NERC charges non-Regional members a nominal fee for the data and accompanying software package.

The Funding Task Group believes that NERC should attempt to identify other services, programs,

and products of this type, that are consistent with NERC’s overall mission, purpose, and core functions, which NERC could offer at prices that would allow it to recover, at a minimum, the fully-allocated costs of these services, programs, and products. The new pricing structure for each service, program, or product should allow flexibility and discretion for discounts or even “no charge” options for certain entities, as deemed appropriate, as long as the total fully-allocable costs are recovered.

A preliminary analysis of the fully-allocated costs of selected major services, programs, and products,

including the current revenue collected and estimated revenue potential, is attached as Exhibit 3. The


7

Funding Task Group recommends that NERC staff conduct a rigorous and more complete analysis to develop the fully-allocated costs of all major services, programs, and products presently provided by NERC. NERC staff should also conduct an evaluation of the market for, and the typical users/purchasers of, each service, program, or product to evaluate whether certain of them can be charged for on a “market” basis. Special attention should be paid to those cases in which data and information collected and made available by NERC is used by entities not affiliated with NERC Regional Council members to conduct profit-making activities.

On the basis of these analyses and information, determinations should be made as to whether each of these services, programs, and products should be charged for (i) at cost, (ii) at “market” price, or (iii) at less than cost. The Funding Task Group recognized that there may be some services, programs, and products which should be provided at less than cost, based on the broader interests of NERC as an organization. For example, some services and programs may be viewed as important in achieving NERC’s overall mission and purpose, as having educational benefits for the industry, or as having public relations benefits for NERC.

The Funding Task Group recognizes that since the certification of system operators is a requirement established by NERC, the System Operator exams should not be charged for at a “market price” which may well exceed fully-allocated costs. System Operator Certification exams should continue to be charged for at fully allocated cost.

Changes in the pricing of NERC services, programs, and products will normally be made as part of

the NERC Budget process. Changes in prices at other times during the year will require Board authorization. C. NERC should seek outside funding from state, federal, and provincial

government agencies where appropriate.

1. NERC should consider requesting co-funding where government agencies, such as the U.S. DOE or FERC, request NERC’s assistance or participation in special projects or activities.

2. NERC should seek, where appropriate, grants or similar funding from

government agencies, such as DOE, where the agency’s budget includes provision for funding outside entities to conduct activities consistent with their program mission and that are currently conducted by NERC or that could be conducted by NERC and which would be consistent with NERC’s mission and purpose. (Some of the special project activities discussed in Recommendation E are potential candidates for such external funding.)

On a number of occasions, NERC has been requested by agencies such as DOE and FERC to

participate in projects, collect information, conduct surveys, etc., to assist the government agency in carrying out a project or activity. These activities require NERC staff time or other resources that, absent adequate lead time, have not been budgeted. They also divert staff attention from performing NERC core functions, and put added pressure on Regional funding requirements. One notable example was the request in 1999 by the U.S. Department of Energy for NERC to serve as the electric industry’s coordinator for Y2k readiness. This activity, which was not budgeted in the 1999 NERC Budget, cost NERC (and therefore the Regional Councils that fund NERC) a total of $250,000 in direct costs over the 1999–2000 period. Some additional costs were


8

incurred for which DOE did provide some co-funding. Currently, NERC is serving, also at DOE’s request, a similar industry coordinator role for the Critical Infrastructure Protection (CIP) program called for in Presidential Decision Directive 63. NERC has not requested and is not receiving any co-funding for this project from DOE or any other government agency. The 2001 Budget includes about $50,000 of direct costs to support CIP activities.

The Funding Task Group concluded that when such requests are received, NERC should evaluate whether to request, and should request where appropriate, funding support from the agency making the request. The Funding Task Group recognized, of course, that certain circumstances may dictate that NERC not request co-funding from the agency. For example, participants in NERC and in Regional Councils who are regulated by FERC may not wish to have NERC request funding from FERC, except under special circumstances. Or, a particular project may be one for which participation is beneficial to NERC; e.g., because of the opportunity to advance the mission and purpose of NERC, to provide a value-added service to the industry, or to participate in agency policymaking.

Government agencies, such as DOE, may have funds in their budgets for making grants to entities to perform services, conduct research or studies, support the development of tools and systems to enhance reliability and facilitate bulk-power markets, or engage in other activities which may be either activities already performed by NERC, or natural extensions of current NERC activities (e.g., relating to bulk power system reliability and the reliability/market interface). The Funding Task Group concluded that NERC should be alert to, and should pursue, opportunities to receive such grants and other government funding. As is typical in government grants and contracts, such funding could, at a minimum, provide a contribution to covering NERC’s A&G Expenses and other overhead costs, and thus reduce pressure on the funding requirements for NERC core functions that must be funded through assessments collected by the Regional Councils.

D. NERC should develop a structure of membership fees for the end-state. The Funding Task Group concluded that direct membership fees in NERC are not appropriate in the interim state, primarily because NERC’s only members would continue to be the Regional Reliability Councils (see Governance Task Group report). NERC should delay the establishment of membership fees until the end-state when the Regional Councils are no longer members of NERC, and system operators, other bulk-power system users, and public interest groups comprise NERC’s total membership.

The Funding Task Group concluded that, as membership in NERC evolves from its present form (i.e., Regional Councils only) to the end-state NAERO membership envisioned by the pending legislation (i.e., system operators, other bulk-power system users, and public interest groups), NERC should develop a structure of membership fees. This would enable some of the costs of operating NERC to be borne by this broader membership on a fixed, per-capita or other basis, and would provide a reasonably consistent and predictable annual revenue base. The Funding Task Group further concluded that membership fees should be (i) high enough to attach some cost consequence to the decision to become a member of NERC (NAERO), (ii) not so high as to discourage membership in NERC by entities which should, in the overall best interests of NERC and the industry, be members, and (iii) scaled, as appropriate, to the size and nature of the entity. For example, it may be appropriate to waive or charge only nominal fees to public interest groups as defined in the NAERO legislation. Certain benefits or privileges would accrue to dues-paying NERC members, such as discounts on NERC services, programs, and products as described in Recommendation B.


9

The Funding Task Group does not have a recommendation as to the appropriate level of membership

fees for the end state that would be consistent with the objectives stated above. The Task Force recommends that the NERC Board be prepared to evaluate, for the end state, the potential for direct membership fees in NERC, the potential revenue that could be generated, and include its recommendations in conjunction with the appropriate NERC Budget.

E. Several of NERC’s projects, programs, and services that have reliability benefits and commercial value, and which have been developed as “special projects,” should generally be paid for by “user fees” charged to the users of those projects, programs, and services. NERC should bill the users through the Regional Councils or by direct billing of users where NERC management determines this to be more efficient and effective. Certain special projects are more central to NERC’s mission, and these costs should likely continue to be recovered on as broad a basis as possible.

NERC has developed, and it is expected will continue to develop, a number of projects, programs,

and services that have been funded through its “Special Projects” budget. Some of these projects have been undertaken and developed at the behest of, or for the benefit of, particular segments or entities in the industry; e.g., Security Coordinators, transmission providers, control areas, purchasing-selling entities, and even FERC. All of these projects, approved by the NERC Board, help promote reliability in North America, and are consistent with NERC’s mission. Some of these projects provide only reliability benefits, while others provide both reliability benefits and commercial value.

The costs of these special projects have been allocated in a manner intended to assign cost

responsibility to the Regions (or directly to entities) in proportion to the estimated benefit of the project.

Some examples of such NERC special projects are:

n Interchange Distribution Calculator (IDC)

n Interregional Security Network (ISN)

n Market Help Desk n Flow Impact Study Tool (FIST) — pending approval

n Transaction System Information Network (TSIN) Registry

n Multiregional Modeling Working Group/System Dynamics Database Working Group

(MMWG/SDDWG)

n Security Coordinator Hotline

Some of these projects, programs, and services have (i) up-front development or capital costs, which may or may not have been fully amortized and recovered at this time, and (ii) ongoing operating and


10

maintenance costs. Others are simply “flow through” billings where NERC serves as the billing and collection agent, with zero net impact on the NERC Budget (e.g., MMWG/SDDWG.)

The Funding Task Group concluded that for those projects, programs, and services with up-front development costs and on-going O&M charges, NERC should charge users of those projects, programs, and services an amount that allows NERC to recover at least its fully-allocated costs. Where appropriate, charges to some users (such as those that are not full members of Regional Councils or those that have “for-profit” commercial interests) could be “market-priced” to help reduce Regional funding requirements. This pricing structure should, to the extent possible, differentiate between those entities that are required to use a particular tool or service to perform a reliability function (e.g., Regional Security Coordinators) and those that would use the tool and service for commercial gain.

The Funding Task Group believes that each project proposal coming to the Board for approval

should include a cost/benefit analysis and an analysis of the project’s “financial feasibility” (i.e., whether expected revenue that is reasonably likely from use of the program or service will, at a minimum, cover its fully-allocated costs.) Proposals should include an estimate of the number of users likely to subscribe to use the service or program, the fees that such users would be charged, an evaluation of options for project financing or joint ventures to minimize how much up-front money NERC needs to provide, options for NERC to recoup some or all of its costs via royalties or licensing fees paid by the vendor, etc. The Funding Task Group also believes that NERC should consider, where appropriate, having outside partners help in the development and funding of projects.

Currently, the allocation of costs among Regions for special projects is recommended by the Budget

Committee’s Cost Allocation Subcommittee, which is comprised primarily of Regional Managers. The Funding Task Group also discussed, as an alternative to this approach for determining the allocation of project costs, having Project User Groups, comprised of members of Regional Councils, self determine the cost allocation formula for certain programs and services. (PJM uses this approach for determining the formula for each of the cost schedules by which it charges its members for the costs of operating the Office of the Interconnection.)

NERC management should have discretion to bill users directly or to combine fees along Regional

lines and assess through the Regions, whichever it determines is more efficient and effective for a given project.

The Funding Task Group concluded that revenues from these programs and services should be used in the following ways: first, to cover the annual maintenance cost of the program or service; second, to reimburse those Regional Councils or members of Regional Councils who provided developmental and capital funding for the service or program in accordance with the “special projects” budget; and third, to help offset the costs of NERC’s core functions, as determined by the Board.

F. NERC should work to develop federal, state, and provincial government

support and authorization for a system of charges that would be reflected in rates to recover NERC’s and the Regions’ costs to perform their core reliability functions. In the interim state, NERC should immediately pursue a coordinated strategy at the federal, state, and provincial levels to gain wider recognition and support, and obtain the necessary approvals to allow recovery


11

of, NERC’s costs that are not already included in current rates. NERC and the Regions should look to the recent PJM filing at FERC to recover MAAC costs through the PJM tariff as a possible model for cost recovery.

The Funding Task Group concluded that in the long-term or end-state model, NERC’s (NAERO’s)

costs to perform its core bulk power system reliability functions should be recovered through rates that would ultimately be reflected in the charges to end-use customers. .

The Funding Task Group believes that one of the strong points that should be emphasized in immediate efforts to gain wider recognition and support for allowing recovery of NERC costs through rates is the extremely low cost on a per-kWh basis. For example, the cost per kWh of the current NERC Budget on a North American (U.S. and Canada) basis is less than 0.0005 cents, or less than a nickel per year for the average residential customer using about 10,000 kWh per year. Assuming the full development of ISOs or RTOs, NAERO could assess these entities for all relevant reliability charges. An ISO or RTO would, in turn, recover these charges through its tariff under whatever cost schedule it determines is appropriate. PJM currently has such a proposal before FERC for recovering through its tariff the costs of MAAC, which include NERC’s Regional funding assessment to MAAC. Excerpts from MAAC’s filing with FERC are shown in Exhibit 4. Absent the existence of such Regional tariffs throughout North America, NERC members are faced with seeking inclusion of appropriate charges in the rates they charge their customers. The Funding Task Group concluded that NERC should immediately pursue a coordinated strategy at the federal, state, and provincial levels to gain wider recognition and support, and obtain the necessary approvals to allow recovery of, NERC’s costs that are not already included in current rates. This charge could also be used to recover the costs of each Region’s Compliance and Enforcement Program.

Currently, as a result of legislative or state commission-developed restructuring programs, many

utilities are operating under retail rates that are frozen, capped, or limited as to the reasons for which increases may be requested. Similarly, the fuel cost or power supply cost adjustment tariffs of many electric utilities have been eliminated, frozen, or capped. These rate freezes or caps vary on a state-to-state basis, but may be in effect for a number of years into the future. Therefore, even though as a matter of law, FERC-imposed or approved reliability charges included in transmission tariffs would be a recoverable cost-of-service item in retail rate cases before state commissions, many utilities would have limited, or no, ability to request a retail rate increase to recover such reliability charges that were not already reflected in current rates. Further, the annual cost of the reliability charges to an individual utility will likely not be large enough to warrant the expense and risk of filing a retail rate increase case with the state commission. Where electric utilities have already included in current rates their Regional Council expenses, including the NERC assessments to the Regions, a reliability charge for the full amount of the NERC/Regional assessment must not result in double charging customers for the current level of NERC/Regional funding.

The Funding Task Group reviewed current proposals for, and recent experience with, recovery of similar types of costs through tariff-based charges. A summary is attached as Exhibit 5.


12

IV. Responses to Comments on Draft Funding Task Group Report

Appendix 1 to this report summarizes the public comments that were received on the Funding Task Group’s December 15, 2000 draft report, and the manner in which the Task Group addressed the comments.

Exhibit 1

Summary of NERC 2001 Budget

Category Expense Category Allocation Amount ($)

MANAGEMENT BUDGETGeneral

Standards 10 Region % 888,653$ Reorganization 1,343,558$ GADS 201,294$ Other Expenses (Non personnel) 1,114,164$ Committees & Staff Support 2,247,385$ Consultant Employees 215,000$

Total 6,010,054$

CEPCertification 10 Region % 209,328$ Compliance 10 Region % 1,285,997$ Help Desk 8 Region % 224,600$

Total 1,719,925$

Information ServicesStaff Support 10 Region % 358,084$ Computer Hardware 10 Region % 144,000$

Total 502,084$

TOTAL MANAGEMENT BUDGET 8,232,063$

PROJECTS BUDGETSCMS

10-Region Group1 10 Region % 762,950$ 8-Region Group2 8 Region % 452,484$ IDC IDC % 1,743,328$ NERCnet NERCnet % 410,000$

Total 3,368,762$

TOTAL BUDGET 11,600,824$ FUND BALANCE 912,272$ TOTAL ASSESSMENT 12,513,096$

1 10-Region Group: SCMS General (CIP & Training)Info Services (On-line systems for SCs and Market Participants)Transaction Information System (TIS)OASIS Support

2 8-Region Group: Data Services (MMWG, SDDWG)Telecommunications and Infrastructure (EI Hotline)

Report Exhibit 1-ANERC 2001 Budget Allocation

Defined Shares NERCnet Fund Balance1999 NEL NEL % Equal (10) Net % 1999 NEL NEL% Equal (8) Net % IDC % CAS Recom. Pro-rata

ECAR 547,846 13.7% 10.0% 12.2% 547,846 18.3% 12.5% 16.0% 20.0% 15.3% 13.1%ERCOT 268,622 6.7% 10.0% 8.0% - 0.0% 0.0% 0.0% 0.0% 0.0% 6.1%FRCC 188,598 4.7% 10.0% 6.8% 188,598 6.3% 12.5% 8.8% 8.0% 0.0% 7.0%MAAC 255,741 6.4% 10.0% 7.8% 255,741 8.6% 12.5% 10.1% 10.0% 7.0% 8.3%MAIN 262,524 6.5% 10.0% 7.9% 262,524 8.8% 12.5% 10.3% 11.0% 6.6% 8.5%MAPP 170,205 4.2% 10.0% 6.5% 170,205 5.7% 12.5% 8.4% 5.0% 4.0% 6.8%NPCC 613,760 15.3% 10.0% 13.2% 613,760 20.5% 12.5% 17.3% 12.0% 8.2% 13.9%SERC 768,408 19.2% 10.0% 15.5% 768,408 25.7% 12.5% 20.4% 25.5% 54.3% 17.9%SPP 180,237 4.5% 10.0% 6.7% 180,237 6.0% 12.5% 8.6% 8.5% 2.3% 6.9%WSCC 754,430 18.8% 10.0% 15.3% - 0.0% 0.0% 0.0% 0.0% 2.2% 11.6%

4,010,371 100.0% 100.0% 100.0% 2,987,319 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

10 Region % 8 Region %

Exhibit 2

Sample Regional Invoice - ECAR 2001 Assessment

Category Expense Category Allocation Amount ($)

MANAGEMENT BUDGETGeneral

Standards 10 Region % 108,384$ Reorganization 163,866$ GADS 24,551$ Other Expenses (Non personnel) 135,888$ Committees & Staff Support 274,101$ Consultant Employees 26,222$

Total 733,012$

CEPCertification 10 Region % 25,531$ Compliance 10 Region % 156,846$ Help Desk 8 Region % 35,944$

Total 218,321$

Information ServicesStaff Support 10 Region % 43,674$ Computer Hardware 10 Region % 17,563$

Total 61,237$

TOTAL MANAGEMENT BUDGET 1,012,570$

PROJECTS BUDGETSCMS

10-Region Group1 10 Region % 93,052$ 8-Region Group2 8 Region % 72,413$ IDC IDC % 278,932$ NERCnet NERCnet % 62,914$

Total 507,311$

TOTAL BUDGET 1,519,881$ FUND BALANCE See Note 3 119,521$ TOTAL ASSESSMENT 1,639,402$

1 10-Region Group: SCMS General (CIP & Training)Info Services (On-line systems for SCs and Market Participants)Transaction Information System (TIS)OASIS Support

2 8-Region Group: Data Services (MMWG, SDDWG)Telecommunications and Infrastructure (EI Hotline)

3 Pro rata share of total Budget


1

Exhibit 3

Preliminary Analysis of Potential Revenue Available by Raising Prices of NERC Services, Programs, and Products

The Funding Task Group agreed that NERC services, programs, and products could logically be divided into three categories — Data and Information; System Operator Testing and Certification; and Education and Training. Following are several representative samples of activities that fall into these categories, and preliminary analyses of the potential revenue available through increasing the charges for these services, programs, and products. I. Data and Information.

GADS

A. The GADS program is comprised of three major activities: pc-G.A.R., Manufacturers’ Support System (MSS), and Special Studies.

B. The pricing structure in effect in 2000 is expected to produce revenues to cover

approximately 2/3 of the $300k fully-allocated costs of the GADS program. Projected revenues from each of the three activity areas are: pc-G.A.R. — $135k; MSS — $50k; Special Studies — $15k.

C. Revised pricing for pc-G.A.R. is being put into place to coincide with the new Windows-

based release in 2001, which will replace the current DOS version. There is expected to be an increase in the revenue stream but time is needed to evaluate this pricing change.

Regional Members o Existing pricing: $495 per copy; $150 per update o New pricing:

- New users: $750; $375 each additional copy - Current users with up-to-date version of pc-G.A.R. — $200 (contributing to

GADS); $400 (not contributing to GADS) - Current users with older version of pc-G.A.R. — $300 (contributing to GADS);

$600 (not contributing to GADS)

Non-Regional member Organizations (like consulting groups, PUC, etc.) o Existing pricing: $1,495 per copy; $300 per update o New pricing:

- New users: $2,000; $750 each additional copy. - Current users with up-to-date version of pc-G.A.R.— $600 - Current users with older version of pc-G.A.R. — $900

D. Pricing for MSS is 10k per client per year. Currently there are five clients, which appears

to be the market saturation level for this service. E. Pricing for Special Studies is on an hourly basis: $160/hr for non-Regional members;

$98/hr for Regional members. In 1999, about $15k of revenue was received for Special


2

Studies based on the 1998 data set. This is expected to increase when the new data sets are released for 1999 and 2000.

ES&D A. The ES&D program annually compiles data supplied by the Regional Councils, collected

by them from their members, on existing and future electricity supply and demand, and makes these data available each year on diskette.

B. Total annual fully-allocated costs are $30k ($25k personnel time and $5k materials).

C. All Regional Council members and government agencies receive ES&D data and

software free; others are charged $149.

D. In 1999, 126 units sold for a revenue of $18,774; in 2000 YTD, 133 units sold for a revenue of $19,817. (About nine of ten copies are provided free of charge.)

E. ES&D could be fully self funded by raising price to $250. TRANSMISSION LINE MAPS A. Produce Transmission Line Map once every three years. B. 4,000 maps are produced at a cost of $20 per map (including shipping).

C. Personnel costs allocated to the development are approximately $10k (incurred in first

year only).

D. Maps are sold for $50, but about nine of ten maps are provided free to Regional members.

E. If all maps were sold at a price of $50, it would produce an average annual revenue

stream of $35k (net).

F. Other entities produce and sell similar maps for $150 (Pennwell Publishing) to $495 (RDI).

II. System Operator Testing and Certification

System Operator Test

A. Program is currently priced to be a zero-effect on budget over a five-year span. B. Currently charging $350 per test.

C. Approximately 1,200 tests are given each year.


3

D. Charges for these tests should recover the fully allocated costs of conducting this program.

III. Education and Training

Workshops A. NERC currently conducts 10–15 “pay-to-attend” workshops per year. B. Current pricing is a cost-based methodology. Due to some rather large turnouts at some

of these workshops, the pricing structure produced a positive cash flow. (In 1999, there was a net revenue of $20k)

C. NERC staff concerns are that the cost-based structure is well suited because the goal of

these workshops is two-fold. Workshops are held to educate but to also receive feedback.

Partial list of workshop revenue in 2000:

Workshops Attendees Workshop

Fee Revenue Hotel Cost Net

Revenue E-TAG (2) 229 $100 $22,900 $16,358 $6,542 CPSMP (1) 39 $75 $2,925 $927 $1,998 CACTF (5) 374 $150 $56,100 $28,829 $27,271 Total $81,925 $35,811


1

Exhibit 4

Excerpts from MAAC Filing with FERC The proposed new MAAC Agreement generally establishes that MAAC’s expenses will be collected by PJM under an appropriate schedule of PJM’s Tariff (Agreement § 5.31.) … a stakeholder process will determine how best to implement that cost recovery. The specific cost recovery mechanism will be the subject of a future filing. As a general matter, the principle that MAAC’s costs, after restructuring, will be recovered through PJM’s tariff is reasonable. Under the MAAC Agreement, all of PJM’s jurisdictional service customers, i.e., all of the PJM Members, will become MAAC Members. They all will obtain voting rights in the new MAAC governance structure. Moreover, the reliability issues addressed by MAAC affect all users of the system. MAAC is intended to benefit all users of the system, not just those entities that currently bear most of MAAC’s expenses. Therefore, the general principle of broader recovery of MAAC’s costs is consistent with the broad stakeholder involvement in MAAC’s governance, as provided by the new MAAC Agreement. The Commission will have the opportunity to review the specific rate schedule when it is filed later this year. … if the new rate schedule is not filed by the end of this year, MAAC requests that the Commission approve the new MAAC Agreement but defer its effective date to the date on which the Commission makes the later-filed cost recovery charge effective. FERC Action of December 13, 2000 At its meeting on December 13, 2000, FERC concluded that the MAAC agreement "need not be filed" with FERC, and therefore FERC rejected it. However, the PJM Members Committee voted on December 14, 2000 to approve procedures for allocating all MAAC costs under the PJM Operating Agreement. Because the Operating Agreement is a FERC document, FERC is expected to accept these changes and likely affirm the cost recovery procedures that have been agreed to in conjunction with the revised MAAC agreement, when the changes are filed with FERC. Proposed Schedule 10 of the PJM Open Access Transmission Tariff is attached.

1 Article 5 – Expenses

5.1 The fiscal year shall coincide with the calendar year. 5.2 The Regional Manager shall prepare an annual budget of expenditures for the subsequent

year, which, after review by the M AAC M embers Committee, shall be provided to the Administrative Board for approval.

5.3 MAAC expenses will be collected by PJM under an appropriate schedule of the PJM Open Access Transmission Tariff.

PJM Interconnection, L.L.C. Open Access Transmission TariffOriginal Sheet No. 87V

Revised: December __, 2000Effective: January 1, 2001

SCHEDULE 10

MID-ATLANTIC AREA COUNCIL CHARGE

MAAC is one of the regional reliability councils of NERC. MAAC’s purpose isto ensure the reliability of the interconnected bulk power system in the MAAC region.The monthly costs and expenses of MAAC shall be allocated and billed to TransmissionCustomers in the same proportions that each Transmission Customer’s use of theTransmission System, on a megawatt hour basis, bears to the total of such use in the samemonth, as follows:

Monthly Charge = MAAC Monthly Expense * Customer Allocation

Where:

MAAC Monthly Expense is the monthly costs and expenses of MAAC; and

Customer Allocation is the monthly transmission use of the TransmissionCustomer divided by the total transmission use, i.e., the actual total quantity inMWhs of energy delivered under Point-to-Point or Network IntegrationTransmission Service by all customers during the month for which the monthlycharge is being calculated.


1

Exhibit 5

Summary of Current and Recent Experience with Recovery of Costs Through Tariff Mechanisms

Ø MAAC/PJM tariff proposal — In mid-September 2000, the PJM

Interconnection, L.L.C., on behalf of the Mid-Atlantic Area Council, filed for FERC approval a new MAAC operating agreement. Included in the filing is a proposal whereby MAAC’s operating costs will be recovered through a charge or charges that will be added to PJM’s FERC-jurisdictional tariff.

Ø FERC ACA charges — Under federal law, FERC assesses electric utilities,

natural gas pipeline companies, and oil pipeline companies for the costs associated with FERC’s regulatory programs applicable to these entities. Recently, in Order No. 641, FERC changed the basis for assessment of these charges to electric utilities, to provide for the annual charge assessments (ACA) to be “based on the MWh of unbundled transmission service (both wholesale as well as retail) and on bundled wholesale power sales (which, by definition, include a transmission component, assuming that the public utility is not separately reporting the transmission component as unbundled transmission.)” It should be noted that this approach does not result in any allocation of the ACA directly to bundled retail power sales.

Order No. 641 also addressed the recovery of ACAs from ISOs or RTOs that have members who retain ownership of transmission facilities. To avoid double counting, FERC will assess the ACA to each public utility that provides transmission service.

However, Order No. 641 does not address how transmission providers are to recover the ACAs from their customers. In contrast, FERC’s regulations permit natural gas pipelines to make a limited tariff filing (i.e. — not a full rate case) to recover ACA charges from their customers.

Ø Recovery of Gas Research Institute costs — The Gas Research Institute has a long history of providing R&D funding for projects benefiting the gas industry. The methods used to recover GRI’s costs through interstate pipeline rates have been agreed to by settlement at FERC. The currently effective settlement provides for recovery through both a demand and commodity surcharge in pipeline rates.

Local gas distribution companies have varied as to how they are allowed to recover the pipeline surcharges from their end-use customers: Some LDCs have been allowed to recover these surcharges along with the cost of gas as part of gas cost adjustment charges; while other LDCs have had to recover these costs through their base rates, meaning that if the GRI surcharge went up, the LDC could not recover the higher cost without filing a base rate case.


2

In addition, as the natural gas industry became more competitive, some pipelines withdrew from GRI to save money. Those pipelines that did not withdraw were unwilling to remit funds to GRI unless their customers paid the surcharge. This eventually led to the rule that when a pipeline discounts its rates to a customer, the GRI surcharge is the first item discounted, and the pipelines will remit to GRI only those surcharge funds actually collected. This “discounting” rule has, in turn, led to dissatisfaction among the pipelines’ customers, since those customers or regions paying discounted pipeline rates did not fund GRI while those paying full rates did fund GRI.

Funding Task Group Report 01/19/01 1

Appendix 1

Responses to Comments on Funding Task Group DRAFT Report

Recommendation A — Funding NERC’s Core Functions. Accelerate phase-in to 100% pro-rata NEL assessments [APPA/ELCON/EPMI] The decision to phase in to 100% pro-rata NEL assessments, as approved by the Board in February 2000, was designed to minimize the impacts of cost shifting. This is normal practice in transitioning from one model to the next, which even FERC has recognized in its orders. Since the phase in will be complete beginning with the 2003 Budget and assessments, the Funding Task Group recommends against further change at this time. Proposed funding mechanism fails to sufficiently decouple funding from and control of NERC by the Regions. [ACC, AISI, APPA, Coral, Dynegy, ELCON, EPSA, Enron, EPSA, OPG, SMA] As described in the Governance Task Group report and in Article X of the proposed NERC Bylaws, the Independent Board, not the Regions, will have final authority over budgets and assessments, with the opportunity for the Stakeholders Committee to participate in the budget process and, along with the standing committees, have an opportunity to review and comment on the final draft of each annual budget. NERC’s Members (the Regional Reliability Councils) will have the right to object to the assessments, and to directly address the Board regarding their concerns. Other stakeholders may, at the discretion of the Board, be afforded the opportunity to address the Board on any filed objections raised by a Region. Intent is for the budget process to be open and inclusive, with an opportunity for genuine stakeholder input. Also, stakeholders increasingly have input into Regional positions on budgets and assessments because of their more inclusive memberships. Recommendation B — NERC should attempt to recover, at a minimum, the fully-allocated costs of programs and services. Pricing of Corporation services, programs, and products should require Board authorization after recommendation from Stakeholders Committee (report page 8) [PJM] The following change was made in the report [new page 8] in response to this comment: “Changes in the pricing of these NERC services, programs, and products will normally be made as part of the NERC budget process. If required, the Board may need to authorize changes in prices at other times during the year. “ Conflict of interest could arise if NERC is too involved in day-to-day details of how Standards are implemented by RTOs or in the development of products and services that relate to compliance with Standards [PJM] The Funding Task Group report refers to increasing the prices, where appropriate, for those programs and services that NERC has already developed. Any new programs and services will be consistent with the NERC mission and require Board approval. The Board will have


responsibility and authority to determine the appropriate level of staff involvement in these programs and services, and how NERC charges for them. Any services, programs, or products identified by the Board for development by NERC should be quantified and documented on NERC web site (Report page 7) [PJM] NERC’s available products and services and their prices are already listed on the NERC web site. Board approval of any additional products and services and their prices will be posted on the NERC web site. Authority for setting the price for NERC Operator Certification Exams should remain with the independent governing body of the Certification Program, which is now the Personnel Subcommittee of the NERC OC [NERC OC Personnel Subcommittee] NERC Operator Certification Program should remain self funding, and not be used to subsidize other NERC programs [Exelon] The following change was made in the report [new page 8] in response to this comment, along with a conforming change in Exhibit 3, Item II: “System Operator Certification Exams should continue to be charged for “at fully allocated cost.” The Funding Task Group recognizes that since the certification of system operators is a requirement established by NERC, the System Operator Exams should not be charged for at a “market price” which may well exceed fully-allocated costs. Recommendation C — Outside Funding for NERC. No comments received. Recommendation D — Membership fees. Associate member category discussed by FTG is not provided for in Bylaws [Chapman - Manitoba Hydro] Reference to associate membership removed from report. Membership fees small; scaled to size of organization [APPA/ELCON/EPMI [Thilly – WPPI] This point is already mentioned in the report [page 9]. Membership fees should not be part of NERC funding. [DENA] This is an end-state funding issue that will be addressed by the Independent Board.


Recommendation E — User Fees. Only voluntary users of NERC projects, programs, and services (beyond those related to setting and enforcement of standards) should be responsible for costs (Report page 11, 3rd paragraph) [PJM] The Funding Task Group agrees. The report states: “This pricing structure should, to the extent possible, differentiate between those entities that are required to use a particular tool or service to perform a reliability function (e.g., Regional Security Coordinators) and those that would use the tool and service for commercial gain.” User fees limited to recover costs of programs [Exelon] The Funding Task Group agrees with respect to fees for special projects that are required by NERC standards, but does not agree with respect to fees charged to voluntary users. Members Committee to approve all projects not strictly related to development and enforcement of Standards; cost/benefit evaluation required for all such projects [Exelon] Projects that are recommended to the Board by the standing committees will include cost/benefit analysis and financial feasibility analysis. Board will get further input from the Stakeholders Committee on the overall budget, and from the Regional Reliability Councils on assessments. The Board has the right to seek input from others. Board decides if project is something NERC should do or if it should be done by others. If the Board approves NERC doing the project, it will decide how the project will be funded (e.g., assess Regions, charge user fees, solicit grants, etc.). Recommendation F — Cost recovery through rates. Add “reliability fee” to existing ancillary service charges for transmission in lieu of Regions funding NERC. [DENA] This suggestion is consistent with an approach such as the PJM/MAAC proposal as noted in the Funding Task Group’s recommendation. Exhibits Exhibit 3 — Drop Sections II D. and E. from report Exhibit 3 [NERC OC Personnel Subcommittee] The Funding Task Group agrees. Deleted Sections II. D. and E. and added the following as new Section II D: “Charges for these tests should recover the fully allocated costs of conducting this program.”

1

Flowgate Impact Study Tool Proposed IDC Function

Board of TrusteesFebruary 13, 2001

Exhibit K

February 13, 2001

Core Problems IdentifiedDifficulty of inter-regional ATC coordinationSimultaneous, uncoordinated commitment of reservations and schedules that will flow on parallel systemsIncomplete picture of conditions on other systemsIncomplete picture of actual flow impacts until after-the-factRemedy (TLR) is after-the-fact

February 13, 2001

Number of TLRs by YearTLR Log Progression

0

25

50

75

100

125

150

175

200

225

250

1 2 3 4 5 6 7 8 9 10 11 12Month

Num

ber

of L

ogs

2000199919981997

2000

1999

1998

1997February 13, 2001

Proposed SolutionProvide advanced information on potential impacts of schedules on key flowgatesInformation available to SCs, TPs, CAs, PSEsLeverage from existing IDC capabilitiesn Build on Reallocation Method

n Coordinate with IDC Study Mode

Apply same models to analyze transaction schedules that are used for TLRApply to Eastern Interconnection

2

February 13, 2001

Proof of ConceptDemonstration

Prepared by MAINFlowgate 3413 selectedn Coffeen-Roxford for loss of Newton-

Mt. Vernon 345 kV

Datan 10:00 to 14:00 CST September 2n TLR level 2C & 3 called starting 11:34n Actual tag and IDC data used

February 13, 2001

Proof of ConceptFlowgate 3413 COFFN-ROXFD IP FOR NEWTN-MT VRNON 345

Actual Projected at Tag Summaries1015 1115 1215 1315 Actual Projected

MW Time 1015 1115 1215 1315

1000 Flow 924 971 991 1033

900 1 33.5 14.0 14.0 14.0

800 2 25.0 15.7 15.7 15.7

700 3 0.0 0.0 0.0 0.0

600 4 7.5 7.5 7.5 7.5

500 5 5.7 5.7 9.3 5.7

400 6 64.2 61.1 61.1 61.1

300 7 307.6 292.5 294.0 294.7

200 R 322.8 308.4 303.7 306.4

100 NNT 528.5 554.8 572.2 615.7

0 CF -370.6 -288.2 -286.5 -287.8

-100 Projected values

-200 R - Residual transactions < threshold

-300 NNT - Net Non-Transactional Flow

CF - Counterflow Transactions

TLR Level 2C at 11:34 CST - Cut 50 MW


TLR Level 3 at 13:45 CST - Cut 66 MW

2-Sep-00Time (CST)

1015

1-NS2-NH

3-ND4-NW

5-NM6-NN

7-FR

NNTCF

OSL=1054 MW

February 13, 2001

Proof of ConceptFlowgate 3413 COFFN-ROXFD IP FOR NEWTN-MT VRNON 345


MW Time 1115 1215 1315 1415

1000 Flow 972 1029 1054 1075

900 1 25.1 14.0 14.0 14.0

800 2 15.7 18.4 18.4 18.4

700 3 0.0 0.0 0.0 0.0

600 4 7.5 7.5 7.5 7.5

500 5 5.7 9.3 5.7 5.7

400 6 64.2 61.1 61.1 61.1

300 7 292.9 295.3 296.0 297.2

200 R 343.0 310.8 310.5 306.1

100 NNT 568.8 598.8 628.8 658.8

0 CF -350.9 -286.1 -287.7 -294.0



-300 NNT - Net Non-Transactional Flow

CF - Counterflow Transactions

TLR Level 2C at 11:34 CST - Cut Pri 1-5

TLR Level 3 at 13:45 CST - Cut Pri 5,6

2-Sep-00Time (CST)

1115

1-NS

2-NH3-ND

4-NW

5-NM6-NN

7-FR

NNTCF

Offset

OSL=1054 MW

February 13, 2001

Proof of ConceptFlowgate 3413 COFFN -ROXFD IP FOR NEWTN-MT VRNON 345


MW Time 1215 1315 1415 1515

1000 Flow 998 1020 1042 1029

900 1 7.0 0.0 0.0 0.0

800 2 9.1 9.1 9.1 9.1

700 3 0.0 0.0 0.0 0.0

600 4 0.0 0.0 0.0 0.0

500 5 1.8 1.8 1.8 1.8

400 6 64.2 61.1 61.1 61.1

300 7 295.3 296.0 297.2 297.4

200 R 358.8 351.0 312.8 305.6

100 NNT 608.7 650.0 670.0 670.0

0 CF -346.9 -349.1 -309.7 -316.0



-300 NNT - Net Non -Transactional Flow

CF - CounterflowTransactions




2-Sep-00Time (CST)

1215

TLR1-NS2-NH3-ND4-NW5-NM6-NN7-FRNNTCF

OSL=1054 MW

3

February 13, 2001

Proof of ConceptFlowgate 3413 COFFN -ROXFD IP FOR NEWTN-MT VRNON 345


MW Time 1315 1415 1515 1615

1000 Flow 1052 1066 1029 1033

900 1 0.0 0.0 0.0 0.0

800 2 0.0 0.0 0.0 0.0

700 3 0.0 0.0 0.0 0.0

600 4 0.0 0.0 0.0 0.0

500 5 1.8 1.8 1.8 1.8

400 6 64.2 64.2 61.1 61.1

300 7 296.0 303.3 297.4 297.4

200 R 371.6 355.9 317.5 312.9

100 NNT 670.9 670.9 670.9 670.9

0 CF -352.9 -330.6 -319.3 -311.1



-300 NNT - Net Non -Transactional Flow

CF - CounterflowTransactions




2-Sep-00Time (CST)

1315

TLR1-NS2-NH3-ND4-NW5-NM6-NN7-FR

NNTCF

OSL=1054 MW

February 13, 2001

Tag Information TablesP r i o ri t y

S i n kS C

T a g I D S o u r c e S i n k P S E M WA m o u n t

A m t o nF l o w g a t

T D F( % )

1 - N S M A I N A L T E _ W P P I 0 1 0 0 1 2 2 1 3 _ W P S A L T E W P S W P P I 2 0 . 2 1 12 - N H M A I N C E _ W P S M 0 1 A A A 2 2 0 1 _ W P S C E W P S W P S M 1 0 0 1 7 . 7 1 7 . 72 - N H M A P P N S P _ T E A 0 1 T E C 1 8 7 7 _ N P P D N S P N P P D T E A 5 0 6 . 3 1 2 . 72 - N H M A P P M P _ U G P M 0 1 0 0 0 2 9 4 9 _ W A U E M P W A U E U G P M 7 5 6 . 3 8 . 42 - N H M A P P O T P _ C R G L 1 A 0 0 0 2 6 7 A _ P P W O T P P P W C R G L 1 0 0 . 7 6 . 82 - N H M A P P O T P _ C R G L 1 A 0 0 0 2 4 4 E _ I P C O O T P I P C O C R G L 3 5 2 . 3 6 . 52 - N H M A P P M H E B _ O T P W 0 1 2 1 7 G 2 2 9 _ O T P M H E B O T P O T P W 3 0 1 . 6 5 . 32 - N H M A P P M H E B _ O T P W 0 1 2 1 7 G 2 3 0 _ O T P M H E B O T P O T P W 3 8 2 5 . 33 - N D M A P P O T P _ C R G L 1 A 0 0 0 2 4 4 F _ I P C O O T P I P C O C R G L 1 2 0 . 8 6 . 55 - N M M A P P N S P _ P S C M P S 0 0 1 0 1 3 1 _ P S C O N S P P S C O P S C M 5 0 6 1 2 . 15 - N M M A P P D P C _ S J L M P S J U L 0 0 5 3 _ S J L P D P C S J L P S J L M 2 5 2 . 8 1 1 . 15 - N M M A P P D P C _ S J L M P S J U L 0 0 5 2 _ S J L P D P C S J L P S J L M 2 5 2 . 8 1 1 . 15 - N M S W P P G R E _ W R G S R T 0 0 1 6 9 2 0 _ W R G R E W R W R G S 1 0 0 1 2 . 8 1 2 . 85 - N M S W P P G R E _ S R E P M 0 0 0 8 3 3 4 _ M P S G R E M P S S R E 1 0 0 1 2 . 7 1 2 . 76 - N N M A I N N S P _ W P S M 0 1 A A A 2 0 9 6 _ W P S N S P W P S W P S M 1 4 0 4 1 . 76 - N N M A I N N S P _ W E P M 2 4 0 0 0 1 5 5 K _ W E C N S P W E C W E P M 8 6 2 6 . 4 3 0 . 76 - N N M A I N A L T W _ A L T M A 1 0 0 0 7 2 9 5 _ A L T E A L T W A L T E A L T M 7 1 . 1 1 5 . 56 - N N M A I N N S P _ A L T M A 1 0 0 0 7 3 9 7 _ A L T W N S P A L T W A L T M 5 0 7 . 6 1 5 . 26 - N N M A I N D P C _ A L T M A 1 0 0 0 7 4 5 6 _ A L T W D P C A L T W A L T M 7 5 7 . 7 1 0 . 36 - N N M A I N C E _ A L T M A 1 0 0 0 7 4 5 5 _ A L T E C E A L T E A L T M 3 0 0 2 0 . 1 6 . 76 - N N M A I N C E _ W P P I 0 1 0 0 1 2 3 7 9 _ W E C C E W E C W P P I 2 5 1 . 7 6 . 67 - F M A I N O P P D _ A E M C 0 1 0 1 2 7 8 7 5 _ I P O P P D A E M C I P 1 0 0 . 9 8 . 67 - F T V A W A U E _ A E M C 0 1 0 1 2 7 9 5 3 _ T V A W A U E A E M C T V A 5 0 6 . 7 1 3 . 47 - F M A I N W A U E _ A L T M A 1 0 0 0 5 6 8 7 _ A L T E W A U E A L T M A L T E 1 4 4 3 2 . 2 2 2 . 37 - F M A I N A L T W _ A L T M A 1 0 0 0 5 8 0 4 _ A L T E A L T W A L T M A L T E 1 1 5 1 7 . 9 1 5 . 57 - F M A I N A L T W _ A L T M A 1 0 0 0 0 2 5 3 _ A L T E A L T W A L T M A L T E 3 5 5 . 4 1 5 . 57 - F M A I N M P _ A L T M A 1 0 0 0 7 1 8 0 _ A L T W M P A L T M A L T W 5 5 8 . 4 1 5 . 27 - F M A I N M P _ A L T M A 1 0 0 0 7 3 4 1 _ A L T W M P A L T M A L T W 7 5 1 1 . 4 1 5 . 2

Pri

ori

ty

Sin

k S

ecu

rity

Co

ord

ina

tor

Ta

g I

D

So

urc

e

Sin

k

PS

E

MW

Am

ou

nt

of

Ta

g

MW

Am

ou

nt

on

Flo

wg

ate

Dis

trib

uti

on

Fa

cto

r

February 13, 2001

-200

-100

0

100

200

300

400

500

600

Se

p 1

19

98

12

:00

AM

Se

p 2

19

98

12

:00

PM

Se

p 4

19

98

12

:00

AM

Se

p 5

19

98

12

:00

PM

Se

p 7

19

98

12

:00

AM

Se

p 8

19

98

12

:00

PM

Se

p 1

0 1

99

8

12:0

0AM

Se

p 1

1 1

99

8

12:0

0PM

Se

p 1

3 1

99

8

12:0

0AM

Se

p 1

4 1

99

8

12:0

0PM

Se

p 1

6 1

99

812

:00A

M

Se

p 1

7 1

99

812

:00P

M

Se

p 1

9 1

99

812

:00A

M

Se

p 2

0 1

99

812

:00P

M

Se

p 2

2 1

99

8

12:0

0AM

Se

p 2

3 1

99

8

12:0

0PM

Se

p 2

5 1

99

8

12:0

0AM

Se

p 2

6 1

99

8

12:0

0PM

Se

p 2

8 1

99

812

:00A

M

Se

p 2

9 1

99

812

:00P

M

Time of Day

Etc

(M

W)

ActualForecast

MAPP Demonstration of Base Flow Forecasts

Base Flow Estimate

Actual flow last hourHistorical projections

February 13, 2001

Reliability BenefitsView of flow impact of all transactions in EI, in advancenAggregated/by transaction

Earlier/better information on potential over-subscriptionMore time for TLR alternatives may allow redispatch or reconfiguration

4

February 13, 2001

Reliability Benefits (Cont.)Better coordination of reservations and schedulesImproved ATC coordination - shows remaining capacity on a flowgateDistinguishes flowgate loading by priority and PTP v. network usesOpportunity for market participants to proactively help reliability by responding to congestion conditions voluntarily

February 13, 2001

Market Benefits

More information for transmission risk management

Reduce curtailment financial impactsAbility to study hypothetical transactions

February 13, 2001

Development and Operating Costs

Determined through vendor proposal$366,000 developmentn Hardware, development, integration

$20,000 per month operating, maintenance costs assuming 200 user entities with 3 IDs per entityUser fees will be structured to recover all NERC costs over 3 years

February 13, 2001

Cost-Benefit AnalysisFIST Costs and Financial Benefits

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Jan-0

1Ma

r-01

May-0

1Ju

l-01

Sep-0

1No

v-01

Jan-0

2Ma

r-02

May-0

2Ju

l-02

Sep-0

2No

v-02

Jan-0

3Ma

r-03

May-0

3Ju

l-03

Sep-0

3No

v-03

Month

Cost

($)

Development

Maintenance

Total Cost

Cumulative Benefit

Benefit

StartOperation

BenefitsPay Back

5

February 13, 2001

Cash Flow AnalysisFIST - Return of Capital Projection

-$200,000

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Jan-0

1Mar-

01May-

01Ju

l-01

Sep-01

Nov-01

Jan-0

2Mar-

02May-

02Ju

l-02

Sep-02

Nov-02

Jan-0

3Mar-

03May-

03Ju

l-03

Sep-03

Nov-03

Jan-0

4Mar-

04May-

04Ju

l-04

Total InvestmentTotal Revenue

Net Investment

February 13, 2001

Project Schedule2/2001: BOT approve Phase 1

3/2001: Hardware and software complete

5/2001: Testing and training complete6/2001: Phase 1 start

8/2001: User fees begin

February 13, 2001

Requested Board ActionThe Board of Trustees approves the development of a Flow Impact Study Tool by summer 2001 in accordance with the specification in Attachment 7-1. The cost of development and maintenance of this tool shall be recovered by NERC through user fees over a three-year period ending August 2004.

February 13, 2001

Questions?

1

Market-Reliability Interface Collaborative Planning Initiative

NERC Action Plan

February 13, 2001

Exhibit L

MAMAACAC

FRCFRCCC

Chicago Chicago May 2May 2--44

MAIMAINN

MAPMAPPP

San Francisco San Francisco May 9May 9--1111

SPSPPP

WSWSCCCC

NPCNPCCCMAMA

PPPP

Dallas, TX Dallas, TX April 25April 25 --2727

ERCOTERCOT

SPSPPP SERSER

CC

M AM AININ

ERCOTERCOT

MAACMAAC

PhiladelphiPhiladelphia April 17a April 17 --

1919

E C A RE C A R

NPCCNPCC

F R C CF R C C

Atlanta Atlanta April 12April 12 --

1414

WSCCWSCC

S E R CS E R C

E C AE C ARR

MAACMAAC

F R C CF R C C

Toronto Toronto May 31May 31-- June June

22

M A PM A PPP

W S CW S CCC

SPSPPP

E C AE C ARRMAIMAI

NN

ERCOTERCOTS E R CS E R C

N P C CN P C C

IntegrationConferenceLas VegasJune 26-27

Search Conference Report Presented to Board October 2000

lDevelop plan of specific actions within NERC scopelPresent to Board in February

2001

Board Directive toExecutive Team

How Much of Search Conference Report is in NERC’s Scope? How Much is New?

Investment Incentives

ReliabilityStandards

CongestionManagement

CommonPractices

IndependentRTOs

RegulatoryFramework

NERC Outside NERC

NewWork

Already inProgress

2

Congestion Managementl Identify congestion management

approaches being used or plannedlDevelop map of congestion

approaches and reference librarylAssist RTOs in interregional

coordination of congestion management approacheslProvide transmission status

informationlModify NERC TLR as needed to adapt

to RTO congestion approaches

RTOs

lPublish RTO coordination considerations checklist (Done)lFollow up to validate checklist and

review results

Common PracticeslMarket Interface Glossary of TermslMarket interface practices needed to

implement CACTF reliability modell Improved standards for

transmission model data exchangel Identify issues with transmission

facility ratings and data element accuracylNERC standards training program

Requested Board Action

lApprove outline of recommended actions derived from Search Conference ReportlDirect committees to review action

plan and incorporate assigned actions into their agendas

• Requires no new funding• All work can be completed within existing committees

Agenda Item 4 Special Meeting of the Board of Trustees

March 30, 2001

RESOLUTION OF BOARD OF TRUSTEES ADOPTING REVISIONS TO BYLAWS

RESOLVED, that the Bylaws of the North American Electric Reliability Council, as revised September 10, 1999, are furthe r revised as indicated in “Appendix 1 — Blackline Version,” attached to this resolution (additions are marked with bold face type and deletions are marked with strikethrough). RESOLVED FURTHER, that the revisions to the Bylaws set out in Appendix 1 — Blackline Version shall take effect immediately upon the adjournment of the meeting of the Board of Trustees in which the revisions to the Bylaws are adopted.


Appendix 1 – Blackline Version BYLAWS OF THE NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL WHEREAS, the electric systems of North America comprise an interconnected network of systems and facilities that provide electricity for the welfare of the public; and WHEREAS, the principal mission of the North American Electric Reliability Council, hereinafter referred to as the Corporation, is to promote the reliability and adequacy of electric supply by the electric systems of North America, including through standards that provide for an adequate level of reliability of the bulk electric power systems of North America; and WHEREAS, the transition of the electric industry to new structures is complex due to the physics of electricity, the varying states of development, jurisdictional issues, commercial considerations, and public interest requirements; and WHEREAS, the Corporation recognizes that its actions must be carried out in an open and inclusive manner, and consistent with applicable federal, state, and provincial laws; and WHEREAS, to achieve a higher order of sophistication in addressing these complexities and maintain the reliability of the bulk electric power systems of North America, it is necessary that the Corporation move forward in a proactive way and adapt, as circumstances dictate, to achieve appropriate governance for the Corporation; and WHEREAS, the Bylaws of the Corporation are intended to meet these needs and to be complementary to and consistent with the requirements of the various constituent interests that may be affected thereby, while promoting the reliability of the bulk electric power systems of North America; and WHEREAS, it is anticipated that the Bylaws of the Corporation will be amended from time to time as necessary to meet the requirements of a reliable bulk electric power system consistent with the prevailing states of technology, law, regulation, and commercial endeavor necessary to provide electricity for the public good. ARTICLE I Membership Section 1 -- Categories -- The Members of the Corporation, North American Electric Reliability Council, hereinafter referred to as the “Corporation,” shall have two categories of membership, Member and Affiliate Member. a. Members -- The Members are the following Regional Electric Reliability Councils (Regional Councils): East Central Area Reliability Coordination Agreement, Electric Reliability Council of Texas, Florida Reliability Coordinating Council, Mid-Atlantic Area Council, Mid-America Interconnected Network, Inc.,