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FERC’s Adoption of Revised Definition of Bulk Electric System Warrants Fresh Look at Company Compliance Programs

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The Federal Energy Regulatory Commission (“FERC”) ended the year 2012 by approving a major new rule affecting electric industry compliance with mandatory reliability standards.  Specifically, on December 20, 2012, FERC issued a final rule revising the definition of the Bulk Electric System (“BES”) — which is a cornerstone for compliance obligations under hundreds of reliability standard requirements enforced by FERC, the North American Electric Reliability Corporation (“NERC”), and regional reliability entities across the country.  In the final rule, FERC approved a filing by NERC that modifies the existing BES definition to: (1) eliminate discretion accorded previously to regional entities to define this term; and (2) establish a bright-line threshold for the inclusion of all facilities operated at or above 100 kV.  The new definition provides illustrations of specific categories of facilities and configurations that would be included and excluded. The definition is important because it triggers compliance obligations by owners, users and operators of facilities included therein.

The intent of FERC’s final rule is provide greater clarity and consistency, on a national basis, with respect to which facilities do and do not fall within the BES definition.  Along with the revised definition, FERC also approved an exception process, whereby facilities with voltage levels below 100 kV may be added to the BES and facilities with voltage levels at or above 100 kV may be removed from the BES on a case-by-case basis.  Typically, regional entities and electric industry participants would be expected to use the exception process to add or remove a specific facility from the BES definition, subject to review and approval by NERC.   But, significantly, FERC, for the first time, found that FERC too can designate sub-100 kV facilities as part of the BES, so long as FERC provides an opportunity for notice and comment.  This ruling is part of a growing trend of FERC taking a more active and direct role in the development, implementation and enforcement of reliability standards, including in technical matters historically handled by NERC and regional entities.

In the rulemaking proceeding, many commenters — including state regulatory commissions and industrial generators — expressed concern that the revised BES definition does not adequately differentiate between local distribution and transmission facilities or reflect statutory limits on FERC’s authority under section 215 of the Federal Power Act.  In that section, Congress limited FERC’s authority by stating that the bulk-power system “does not include facilities used in the local distribution of electric energy.” (16 U.S.C. § 824o(1)).  The Commission concluded that the core BES definition proposed by NERC, along with the identification of specific excluded categories of facilities and configurations, such as local networks, was consistent with the section 215 exclusion of local distribution facilities.  The Commission also held, for the first time, however, that the Commission itself would make case-by-case jurisdictional determinations of whether a facility is a transmission or local distribution facility.  The Commission found that it was more appropriate for it, rather than NERC, to make such legal determinations regarding jurisdiction. For this purpose, the Commission plans to use the seven factor test developed previously when the Commission promulgated its landmark open access transmission rule in Order No. 888.  The seven factors are: (1) local distribution facilities are normally in close proximity to retail customers; (2) local distribution facilities are primarily radial in character; (3) power flows into local distribution systems; it rarely, if ever, flows out; (4) when power enters a local distribution system, it is not reconsigned or transported on to some other market; (5) power entering a local distribution system is consumed in a comparatively restricted geographical area; (6) meters are based at the transmission/local distribution interface to measure flows into the local distribution system; and (7) Local distribution systems will be of reduced voltage.

The final rule will not take effect until 60 days after it is published in the Federal Register.  Following the effective date of the revised BES definition, companies will have 24 months to bring themselves into compliance with reliability standards for all newly-identified elements that fall within that revised definition.  Thus, in 2013, it will be important for companies in the electric industry to take a fresh look at their facilities and compliance programs for all such facilities that may fall within the revised BES definition.

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