Agenda

Finance and Audit Committee Meeting November 15, 2013 | 10:30-11:30 a.m. Eastern Conference Call

DIAL-IN: 800-735-5968 Introductions and Chair’s Remarks NERC Antitrust Compliance Guidelines Agenda

1. NERC 2014 Business Plan and Budget - FERC Compliance Filing - Proposed Clarifying Amendment to Working Capital and Operating Reserve Policy* ― Review and Recommend Board of

Trustees Approval

*Background materials included.

Antitrust Compliance Guidelines I. General It is NERC’s policy and practice to obey the antitrust laws and to avoid all conduct that unreasonably restrains competition. This policy requires the avoidance of any conduct that violates, or that might appear to violate, the antitrust laws. Among other things, the antitrust laws forbid any agreement between or among competitors regarding prices, availability of service, product design, terms of sale, division of markets, allocation of customers or any other activity that unreasonably restrains competition. It is the responsibility of every NERC participant and employee who may in any way affect NERC’s compliance with the antitrust laws to carry out this commitment. Antitrust laws are complex and subject to court interpretation that can vary over time and from one court to another. The purpose of these guidelines is to alert NERC participants and employees to potential antitrust problems and to set forth policies to be followed with respect to activities that may involve antitrust considerations. In some instances, the NERC policy contained in these guidelines is stricter than the applicable antitrust laws. Any NERC participant or employee who is uncertain about the legal ramifications of a particular course of conduct or who has doubts or concerns about whether NERC’s antitrust compliance policy is implicated in any situation should consult NERC’s General Counsel immediately. II. Prohibited Activities Participants in NERC activities (including those of its committees and subgroups) should refrain from the following when acting in their capacity as participants in NERC activities (e.g., at NERC meetings, conference calls and in informal discussions):

• Discussions involving pricing information, especially margin (profit) and internal cost information and participants’ expectations as to their future prices or internal costs.

• Discussions of a participant’s marketing strategies.

• Discussions regarding how customers and geographical areas are to be divided among competitors.

• Discussions concerning the exclusion of competitors from markets.

• Discussions concerning boycotting or group refusals to deal with competitors, vendors or suppliers.

NERC Antitrust Compliance Guidelines 2

• Any other matters that do not clearly fall within these guidelines should be reviewed with NERC’s General Counsel before being discussed.

III. Activities That Are Permitted From time to time decisions or actions of NERC (including those of its committees and subgroups) may have a negative impact on particular entities and thus in that sense adversely impact competition. Decisions and actions by NERC (including its committees and subgroups) should only be undertaken for the purpose of promoting and maintaining the reliability and adequacy of the bulk power system. If you do not have a legitimate purpose consistent with this objective for discussing a matter, please refrain from discussing the matter during NERC meetings and in other NERC-related communications. You should also ensure that NERC procedures, including those set forth in NERC’s Certificate of Incorporation, Bylaws, and Rules of Procedure are followed in conducting NERC business. In addition, all discussions in NERC meetings and other NERC-related communications should be within the scope of the mandate for or assignment to the particular NERC committee or subgroup, as well as within the scope of the published agenda for the meeting. No decisions should be made nor any actions taken in NERC activities for the purpose of giving an industry participant or group of participants a competitive advantage over other participants. In particular, decisions with respect to setting, revising, or assessing compliance with NERC reliability standards should not be influenced by anti-competitive motivations. Subject to the foregoing restrictions, participants in NERC activities may discuss:

• Reliability matters relating to the bulk power system, including operation and planning matters such as establishing or revising reliability standards, special operating procedures, operating transfer capabilities, and plans for new facilities.

• Matters relating to the impact of reliability standards for the bulk power system on electricity markets, and the impact of electricity market operations on the reliability of the bulk power system.

• Proposed filings or other communications with state or federal regulatory authorities or other governmental entities.

Matters relating to the internal governance, management and operation of NERC, such as nominations for vacant committee positions, budgeting and assessments, and employment matters; and procedural matters such as planning and scheduling meetings.

Agenda Item 1 FAC Conference Call November 15, 2013

NERC 2014 Business Plan and Budget - FERC Compliance Filing

Proposed Clarifying Amendment to Working Capital and Operating Reserve Policy Action

Review and recommend Board of Trustees approval of Policy Amendment. Background

In prior years and in connection with the preparation of NERC’s budget and as previously described in quarterly budget variance reports, the company, when calculating the balance in working capital and operating reserves1, included the entire balance of deferred rent under the company’s two real estate leases as a current liability. The balance in deferred rent was historically relatively low ($165,559 in 2010), and represented the difference between recording rent expense on a straight‐line basis over the life of the lease and the actual rent paid to the landlord, which increases over time due to escalations. In 2011 and 2012, the balance in deferred rent increased significantly due to (i) the abatement of rent associated with the lease of NERC’s offices in Atlanta, (ii) the cash contribution received from the landlord of the new Washington, D.C. office space which was negotiated as part of the lease to offset liabilities associated with difference in prime and sublease rent under the prime lease and sublease agreements for the company’s former Washington, D.C. office location, and (iii) refunds of excess tenant improvement allowances associated with both the Atlanta and new Washington, D.C. leases. These transactions also resulted in a higher cash balance. Due to the significant increase in the balance of the deferred rent liability and because the balance will be amortized over the life of the leases, which extend to the year 2023, during 2013 management reviewed the balance to determine the current and noncurrent portion of the deferred rent liability and calculated the beginning balance in working capital and operating reserves by including only the current portion of the deferred rent liability in the calculation. As a result of this change and as described in the company’s May 2013 quarterly budget variance report, management, in consultation with its outside auditors, adjusted the beginning working capital and operating reserve balance to include the non-current portion of deferred rent liability so that funds needed to offset future liabilities were not expended in the current year and were subject to the controls and oversight under the Company’s Working Capital and Operating Reserve Policy (the “Policy”). Management further indicated that it would evaluate the balance in working capital and operating reserves necessary to manage NERC’s ongoing operations in connection with the development of the company’s 2014 Business Plan and Budget. The Policy provides that the company’s working capital requirement shall be the amount necessary to satisfy projected annual cash flow and cash balance requirements. Annual cash flow and cash balance requirements shall be determined based on a review of (a) the company’s projected cash flow needs over the applicable year and (b) cash balances required to satisfy any covenant under the terms of any loan, credit or other agreement to which the company is a party (emphasis added). To the extent that during the year the cash balances required to satisfy covenant obligations under the terms of any loan, credit or other agreement are reduced, such excess cash balance will be transferred to the company’s operating reserve for unforeseen contingencies described below.

1 The GAAP defines Working Capital as current assets minus current liabilities.

In its 2014 business plan and budget the company’s classified funds that have been received and are being retained to satisfy future leasehold liabilities as being within the definition of working capital set forth in the Policy, since these funds are directly related to a future obligation (i.e., covenant) to pay rent under the lease agreements for the company’s Atlanta and Washington D.C. offices, including its former office location in Washington, D.C. The use of the phrase “restricted” in the Working Capital and Operating Reserve Exhibit to the business plan and budget was only intended to convey that these funds were intended to be utilized to satisfy these future liabilities as opposed to funding current operations, in conformance with the company’s current and previous financial reporting and approach. FERC accepted NERC’s 2014 Business Plan and Budget and directed the company to submit a compliance filing indicating how NERC will allocate the $3.8[sic] million2 the company has included in working capital for the above-described lease obligations in a manner consistent with the Policy. NERC believes that the supplemental information set forth above makes it clear how these funds fit within the definition of working capital in the Policy. Notwithstanding the forgoing, NERC management has prepared a proposed form of Policy amendment to further clarify what management believes is the intent of the current Policy. Proposed amended and restated Policy is attached, together with a marked comparison to the current Policy. The proposed amendment makes it clear that future covenant, financial and other obligations under any loan, credit or lease agreements may be taken into account in setting working capital reserve levels. It also memorializes the company’s existing practice of segregating such funds and makes certain conforming changes to the Guidelines and Authorities Applicable to Expenditure of Working Capital and Operating Reserves.

2 The FERC budget order refers to the amount as $3.8M but the actual amount included in NERC’s 2014 business plan and budget was $3.6M. See NERC 2014 Business Plan and Budget, Exhibit E.

Working Capital and Operating Reserve Policy    1 Approved by Board of Trustees: August 16, 2012 Amended and Approved by Board of Trustees November __, 2013

Working Capital and Operating Reserve Policy This policy governs the determination of the company’s annual working capital and operating reserve  requirements which are  included  in  the  company’s annual business plan and budget and the authorization of management to access these funds. 

 The company’s working capital requirement shall be the amount necessary to satisfy projected cash  flow and cash balance requirements.   Cash  flow and cash balance requirements shall be determined  based  on  a  review  of  projected  (a)  cash  flow  needs  and  (b)  cash  balances reasonably necessary to meet current and  future obligations under any covenant,  financial or other obligation under the terms of any loan, credit, or lease agreement to which the company is a party. To the extent that during the year the working capital cash balances maintained to satisfy any covenant, financial or other obligations under the terms of any loan, credit or lease agreement  are  reduced,  such  excess  cash  balance  will  be  transferred  to  the  company’s operating  reserve  for unforeseen contingencies and  subject  to  the guidelines and authorities applicable to expenditures thereof set forth below.  The  company’s  operating  reserves  shall  include  (1)  an  amount  necessary  to  satisfy  known contingencies where the specific timing and amount is uncertain, (2) an amount available to be utilized  for  unforeseen  contingency  and  (3)  excess  funds  applicable  to  the  Personnel Certification and Operator Training Program.   The  amount  of  the  company’s working  capital  and  operating  reserves,  by  category,  shall  be separately  identified and quantified each year  in  the business plan and budget  submitted  to and approved by the Board of Trustees. Transfers of working capital to operating reserves and transfers of operating reserve funds between categories shall require approval of the Board of Trustees, after review and recommendation by the Finance and Audit Committee.  The following guidelines shall apply to the determination of the company’s operating reserves.    

1. Known Contingencies Where the Amount and Timing Are Uncertain This  category  of  operating  reserves  represents  estimated  funding  reserves  known contingencies where the timing and amount of funding to satisfy the contingency when it materializes  is uncertain. An example would be the need  for additional resources to address  a  requirement  or  process  where  regulatory  or  other  governmental authorizations or directives are pending or anticipated but an order has not yet been issued  so  the  amount  of  the  impact  and  timing  is  uncertain,  but management  has nevertheless concluded that additional resources are likely to be required. 

2. Unforeseen Contingencies This  category  of  operating  reserves  represents  a  funding  reserve  for  unknown contingencies which were not anticipated at the time of preparation and approval of the business  plan  and  budget.  Examples  of  unforeseen  contingencies  might  include supplemental  resources  required  to  assist  in  the  evaluation  of  significant  unforeseen events affecting the bulk power system, such as the February Cold Weather Event and Southwest Outage or to address unforeseen regulatory directives.  

   

Working Capital and Operating Reserve Policy    2 Approved by Board of Trustees: August 16, 2012 Amended and Approved by Board of Trustees November __, 2013

3. Excess Funds applicable to the Personnel Certification and Operator Training Program In  the event  the company  realizes higher  levels of  funding  from operator certification and  training  above  incurred  expenses,  this  excess  funding  shall  constitute  a  separate category  of  operating  reserve  and  shall  be  used  solely  for  operator  training  and certification  needs,  as  determined  by  the  company  and  the  Personnel  Certification Governance  Committee.  This  is  consistent with  the  intent  of  Section  604.4.10  of  the Rules of Procedures. 

Guidelines  and  Authorities  Applicable  to  Expenditures  of Working  Capital  and  Operating Reserves The  following  guidelines,  limitations  and  authorities  shall  apply  to  expenditures  of working capital and operating reserves. 

1. The  Chief  Financial  and  Administrative  Officer  shall  have  the  authority  to  draw  on budgeted working capital reserves to the extent necessary to satisfy daily cash flow and cash balance  requirements. To  the extent necessary  to meet projected cash  flow and cash  balance  requirements,  any  such  draws  of working  capital  reserves  shall  to  the extent possible be promptly replenished from future excess cash flow. 

2. For  expenditures  of  operating  reserves  for  budgeted  known  contingencies,  the company’s president and chief executive officer  is authorized to expend such reserves up to the amount set forth in the company’s budget. 

3. For budgeted expenditures of excess  funds associated with the Personnel Certification and Operator Training Program, the company’s president and chief executive officer  is authorized  to  expend  such  reserves  up  to  the  amount  set  forth  in  the  company’s budget. 

4. For  expenditures  of  operating  reserves  budgeted  for  unforeseen  contingencies, including  the expenditure of excess working  capital  reserves which are  transferred  to the  company’s  operating  reserve  for  unforeseen  contingencies,  and  for  unbudgeted expenditures of excess  funds associated with the Personnel Certification and Operator Training Program:  

i. The president and chief executive officer shall have authority to make expenditures up to $250,000; 

ii. For expenditures greater than $250,000 but less than $500,000 prior approval of the Finance and Audit Committee is required; and  

iii. For expenditures in excess of $500,000 approval of the Board of Trustees is required, after notice to and recommendation by the Finance and Audit Committee. 

5. To the extent that working capital reserves  include reserves to satisfy  future  financial, covenant or other obligations, the company shall segregate such  funds to ensure they are available  for use  in  satisfying  such  future  financial, covenant or other obligations; provided however  that  such  funds  shall also be available  to  satisfy any  coverage and liquidity  requirements under  the  terms of any  loan or  credit agreement  to which  the company is a party.  

6. Any  expenditure  of  funds  in  excess  of  the  company’s  approved  budget,  inclusive  of budgeted working  capital  and  operating  reserves,  requires  the  prior  approval  of  the 

Working Capital and Operating Reserve Policy    3 Approved by Board of Trustees: August 16, 2012 Amended and Approved by Board of Trustees November __, 2013

Board  of  Trustees,  after  notice  to  and  recommendation  of  the  Finance  and  Audit Committee.  

All  expenditures  of  contingency  funds  are  subject  to  other  applicable  company  policies  and procedures,  including  currently  effective  procurement  policies  and  delegations  of  authority, and shall be separately reported in the budget variance reports prepared by management and included in the quarterly Finance and Audit Committee agenda materials, which are posted on the company’s website.  The procedures set forth in Section 1108 of the Rules of Procedure, including Board of Trustees and  FERC  approval,  shall  continue  to  apply  in  circumstances  where  the  company  requires funding between normal annual budget cycles in excess of amounts available through approved assessments, working capital and operating reserve resources.   

Guidelines  and Authorities Required  to Reallocate Budgeted Expenditures on an  Intra‐year Basis During the course of the year events may unfold such that some approved budget areas may run below budget, making  funds available  to satisfy other  resource needs based on changing priorities.    In  the  event  such  under  runs  occur,  these  excess  funds  shall  be  added  to  the unforeseen contingency operating  reserve and  the president and chief executive officer  shall have  the  authority  to  expend  such  funds,  and  management  shall  also  be  responsible  for reporting  such  expenditures,  in  the  same  manner  as  the  expenditure  of  funds  for  other unforeseen contingencies set forth above.  Addition of Unbudgeted FTE or Headcount Additions Any FTE or headcount additions, regardless of the source of and availability of funding, which are  in  excess  of  the  total  FTEs  or  total  headcount,  respectively,  set  forth  in  the  company’s approved business plan and budget for the applicable budget year shall require approval of the Board of Trustees, after review by the Corporate Governance and Human Resources Committee and the Finance and Audit Committee.

Approved by Board of Trustees August 16, 2012November __, 2013

Working Capital and Operating Reserve Policy

This policy governs the determination of the company’s annual working capital and operating reserve requirements which are included in the company’s annual business plan and budget and the authorization of management to access these funds.

The company’s working capital requirement shall be the amount necessary to satisfy projected annual cash flow and cash balance requirements. Annual cashCash flow and cash balance requirements shall be determined based on a review of (a) the company’s projected (a) cash flow needs over the applicable year and (b) cash balances requiredreasonably necessary to satisfy meet current and future obligations under any covenant under the terms of any loan, credit, financial or other obligation under the terms of any loan, credit, or lease agreement to which the company is a party. To the extent that during the year the working capital cash balances requiredmaintained to satisfy any covenant, financial or other obligations under the terms of any loan, credit or otherlease agreement are reduced, such excess cash balance will be transferred to the company’s operating reserve for unforeseen contingencies described below. and subject to the guidelines and authorities applicable to expenditures thereof set forth below. The company’s operating reserves shall include (1) an amount necessary to satisfy known contingencies where the specific timing and amount is uncertain, (2) an amount available to be utilized for unforeseen contingency and (3) excess funds applicable to the Personnel Certification and Operator Training Program. The amount of the company’s working capital and operating reserves, by category, shall be separately identified and quantified each year in the business plan and budget submitted to and approved by the Board of Trustees. Transfers of working capital to operating reserves and transfers of operating reserve funds between categories shall require approval of the Board of Trustees, after review and recommendation by the Finance and Audit Committee. The following guidelines shall apply to the determination of the company’s operating reserves.

(1) Known Contingencies Where the Amount and Timing Are Uncertain This category of operating reserves represents estimated funding reserves known contingencies where the timing and amount of funding to satisfy the contingency when it materializes is uncertain. An example would be the need for additional resources to address a requirement or process where regulatory or other governmental authorizations or directives are pending or anticipated but an order has not yet been issued so the amount of the impact and timing is uncertain, but management has nevertheless concluded that additional resources are likely to be required.

(2) Unforeseen Contingencies This category of operating reserves represents a funding reserve for unknown contingencies which were not anticipated at the time of preparation and approval of the

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Approved by Board of Trustees August 16, 2012November __, 2013

business plan and budget. Examples of unforeseen contingencies might include supplemental resources required to assist in the evaluation of significant unforeseen events affecting the bulk power system, such as the February Cold Weather Event and Southwest Outage or to address unforeseen regulatory directives.

(3) Excess Funds applicable to the Personnel Certification and Operator Training Program In the event the company realizes higher levels of funding from operator certification and training above incurred expenses, this excess funding shall constitute a separate category of operating reserve and shall be used solely for operator training and certification needs, as determined by the company and the Personnel Certification Governance Committee. This is consistent with the intent of Section 604.4.10 of the Rules of Procedures.

Guidelines and Authorities Applicable to Expenditures of Working Capital and Operating Reserves The following guidelines, limitations and authorities shall apply to expenditures of working capital and operating reserves.

1. The Chief Financial and Administrative Officer shall have the authority to draw on budgeted working capital reserves to the extent necessary to satisfy daily cash flow requirements. Anyand cash balance requirements. To the extent necessary to meet projected cash flow and cash balance requirements, any such draws of working capital reserves shall to the extent possible be promptly replenished from future excess cash flow.

2. For expenditures of operating reserves for budgeted known contingencies, the company’s president and chief executive officer is authorized to expend such reserves up to the amount set forth in the company’s budget.

3. For budgeted expenditures of excess funds associated with the Personnel Certification and Operator Training Program, the company’s president and chief executive officer is authorized to expend such reserves up to the amount set forth in the company’s budget.

4. For expenditureexpenditures of operating reserves budgeted for unforeseen contingencies, including the expenditure of excess working capital reserves which are transferred to the company’s operating reserve for unforeseen contingencies, and for unbudgeted expenditures of excess funds associated with the Personnel Certification and Operator Training Program:

i. The president and chief executive officer shall have authority to make expenditures up to $250,000;

ii. For expenditures greater than $250,000 but less than $500,000 prior approval of the Finance and Audit Committee is required; and

iii. For expenditures in excess of $500,000 approval of the Board of Trustees is required, after notice to and recommendation by the Finance and Audit Committee.

Approved by Board of Trustees August 16, 2012November __, 2013

5. To the extent that working capital reserves include reserves to satisfy future financial, covenant or other obligations, the company shall segregate such funds to ensure they are available for use in satisfying such future financial, covenant or other obligations; provided however that such funds shall also be available to satisfy any coverage and liquidity requirements under the terms of any loan or credit agreement to which the company is a party.

5.6. Any expenditure of funds in excess of the company’s approved budget, inclusive

of budgeted working capital and operating reserves, requires the prior approval of the Board of Trustees, after notice to and recommendation of the Finance and Audit Committee.

All expenditures of contingency funds are subject to other applicable company policies and procedures, including currently effective procurement policies and delegations of authority, and shall be separately reported in the budget variance reports prepared by management and included in the quarterly Finance and Audit Committee agenda materials, which are posted on the company’s website. The procedures set forth in Section 1108 of the Rules of Procedure, including Board of Trustees and FERC approval, shall continue to apply in circumstances where the company requires funding between normal annual budget cycles in excess of amounts available through approved assessments, working capital and operating reserve resources.

Guidelines and Authorities Required to Reallocate Budgeted Expenditures on an Intra-year Basis During the course of the year events may unfold such that some approved budget areas may run below budget, making funds available to satisfy other resource needs based on changing priorities. In the event such under runs occur, these excess funds shall be added to the unforeseen contingency operating reserve and the president and chief executive officer shall have the authority to expend such funds, and management shall also be responsible for reporting such expenditures, in the same manner as the expenditure of funds for other unforeseen contingencies set forth above. Addition of Unbudgeted FTE or Headcount Additions Any FTE or headcount additions, regardless of the source of and availability of funding, which are in excess of the total FTEs or total headcount, respectively, set forth in the company’s approved business plan and budget for the applicable budget year shall require approval of the Board of Trustees, after review by the Corporate Governance and Human Resources Committee and the Finance and Audit Committee. Formatted: Default, Justified