April 2008
Federal Energy Regulatory Commission Seeks to Revamp the
Standards of Conduct for Transmission Providers
By Bill DeGrandis and Emily Abbott
On March 21, 2008, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued a notice of proposed rulemaking (“NOPR”) on the Standards of Conduct for Transmission Providers (“Standards of Conduct NOPR”). Specifically, the Standards of Conduct NOPR would modify the standards of conduct applicable to electric utilities and interstate natural gas pipelines. According to FERC, the goal of this NOPR is to enhance compliance and enforcement by clarifying and streamlining the standards and to aid in the detection of undue discrimination by increasing transparency in affiliate transactions, particularly in areas where there is the greatest potential for affiliate abuse. Generally, FERC’s proposal amounts to a return to an approach that relies on “functional,” as opposed to “corporate” (or “structural”), separation of employees within a corporate family. The proposed standards are built around three broad “rules” that address the greatest prospect for undue preference: the Independent Functioning Rule, the No‐Conduit Rule and the Transparency Rule. In addition to providing a brief background on the development of the Standards of Conduct, the following highlights certain key aspects of the proposed rules. As discussed below, the proposed revised standards represent a significant change from those in effect currently. Transmission providers likely will view the changes as a much‐needed streamlining of those rules. Transmission customers will see some significant changes to the standards to which they have become accustomed. Comments on the proposed changes are due by May 12, 2008.
STANDARDS OF CONDUCT BACKGROUND
The Standards of Conduct are intended to prevent electric utilities and natural gas pipelines from providing preferential access to service or information to affiliated entities. The recently issued Standards of Conduct NOPR retreats from FERC’s previous expansion of the standards, as instituted by Order No. 2004. Order No. 2004, issued in 2003, expanded the scope of the Standards of Conduct to govern relation‐
ships between transmission providers and their energy affiliates. But in 2006, the D.C. Circuit Court of Appeals vacated and remanded Order No. 2004 as it applied to natural gas pipelines, finding that FERC had not justified expanding the standards of conduct to non‐
marketing affiliates. Accordingly, FERC issued Order No. 690 in January 2007 to provide interim Standards of Conduct for natural gas pipelines. Also in January 2007, FERC issued a NOPR to revise its Standards of Conduct applicable to both gas and electric transmission providers (“2007 NOPR”). Consistent with the interim standards, the 2007 NOPR proposed to cover only pipelines’ relationships with marketing affiliates. With respect to electric utilities, FERC proposed to continue to apply the Standards of Conduct to energy affiliates, but proposed certain modifications to facilitate integrated resource planning and competitive procurement of power for a utility’s bundled retail load. With the recently issued Standards of Conduct NOPR, which supersedes the 2007 NOPR, FERC proposes a return to its 1990s vintage functional separation model of Order No. 497 (natural gas) and Order No. 889 (electric power), eliminating both Order No. 2004’s concept of “energy affiliates” and its emphasis on corporate separation. 18 Offices Worldwide | Paul, Hastings, Janofsky & Walker LLP | www.paulhastings.com
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INDEPENDENT FUNCTIONING RULE
Function information to Marketing Function Employees, FERC proposes to prohibit Market Function Employees from receiving non‐public Transmission Function information from any source. Moreover, in addition to the current prohibition against a transmission provider using anyone as a conduit for the improper disclosure of non‐
public Transmission Function information, FERC proposes to prohibit both an employee of a transmission provider and also an employee of an affiliate engaged in Marketing Functions from disclosing non‐public Transmission Function information to Marketing Function Employees. This expansion of the “No‐Conduit” Rule is designed to reach all sources of prohibited informational exchanges. As a “safety valve,” subject to certain conditions, FERC proposes to include an exemption that permits the exchange of information to perform generation dispatch or to maintain or restore operation of the transmission system. FERC also proposes to retain various requirements regarding employee training and overall management of compliance with the Standards of Conduct. This rule provides that “Transmission Function Employees” must function independently of “Market Function Employees,” whether employed within the corporate structure of the transmission provider or by an affiliate of the transmission provider. If a person spends anything but a de minimis amount of time engaged in “Transmission Functions” or “Marketing Functions,” then the NOPR proposes to treat that person as a Transmission Function Employee or Marketing Function Employee, respectively. “Transmission Functions” are defined as the conduct of transmission system operations and the planning, directing, organizing or carrying out of transmission operations, including the granting and denying of transmission service requests. “Marketing Functions” are defined as the sale for resale in interstate commerce, or the submission of offers or bids to buy or sell natural gas or electric energy or capacity, demand response, virtual electric or gas supply or demand, or financial transmission rights in interstate commerce, all as subject to certain exemptions. Exceptions are made for supervisors, officers and directors, if the individuals are not engaged in decision‐making relating to such transmission or marketing activities. TRANSPARENCY RULE
Subject to certain modifications, FERC proposes to retain many of its existing rules to address transparency. In the event that prohibited information is inadvertently passed to a prohibited employee, the violation can be cured by immediately posting such information on the transmission provider’s Open Access Same‐Time Information System (OASIS), in the case of the electric industry, or on its Internet website, in the case of the natural gas industry. However, if the unauthorized disclosure includes non‐public transmission customer information (a subset of Transmission Function information), FERC proposes that the posting consist only of a notice that such information has been disclosed, in order to preserve its confidentiality and prevent further potential harm to that customer. Similar to the existing standards, FERC recognized that higher level executives in companies may have some overall responsibility for the transmission and marketing areas, but are not involved in the day‐to‐day decisions in each area. Employees such as attorneys, accountants, risk management personnel and rate design employees do not fall within the scope of the independent functioning rule, so long as they are acting in their respective roles; however, they remain subject to the No‐Conduit Rule (discussed below). FERC does not propose to alter the exemptions that existed in Order No. 2004 for the definition of marketing (e.g., incidental purchases or sales of natural gas to operate interstate natural gas pipeline transmission facilities). FERC also proposes to continue the general prohibition against Marketing Function Employees conducting Transmission Functions or having discriminatory access to the transmission provider’s system control center. Moreover, FERC proposes to add the converse prohibition, i.e., that a Transmission Function Employee may not conduct Marketing Functions. FERC also proposes to continue the exceptions in the existing regulations for a marketing employee’s specific requests for transmission service and for situations where a transmission customer voluntarily consents to the release of its information. In those cases where, despite the Independent Functioning Rule, Transmission Function Employees must interact with Marketing Function Employees, as where the latter are also responsible for the maintenance and dispatch of generating units or need to be involved in maintaining reliability, FERC proposes to NO-CONDUIT RULE
In addition to the current prohibition against Transmission Function Employees disclosing non‐public Transmission 2
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website. FERC also retains many of the other posting requirements, including the posting of written implementation procedures for the Standards of Conduct, certain merger information (modifying the information to account for the deletion of the concept of energy affiliates), and employee transfer information. require the contemporaneous recording of such conversations, so that FERC may ascertain that no prohibited information was passed in the course of otherwise permissible discussions. FERC is also proposing to retain the existing regulation that a log be kept of any exercises of discretion or acts of waiver on the part of transmission providers. Similarly, FERC proposes to retain the existing requirement that any offer of a discount must be posted on the transmission provider’s OASIS or Internet Comments on the Standards of Conduct NOPR are due by
May 12, 2008.
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If you would like to discuss the Standards of Conduct NOPR in further detail or the potential consequences for future
compliance at the company level, please contact either of the following Paul Hastings Washington, D.C. attorneys:
William D. DeGrandis
202-551-1720
billdegrandis@paulhastings.com
18 Offices Worldwide
Emily B. Abbott
202-551-1822
emilyabbott@paulhastings.com
Paul, Hastings, Janofsky & Walker LLP
www.paulhastings.com
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