[Federal Register: March 27, 2008 (Volume 73, Number 60)] [Proposed Rules] [Page 16228-16243] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr27mr08-14] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF ENERGY Federal Energy Regulatory Commission 18 CFR Part 358 [Docket No. RM07-1-000] Standards of Conduct for Transmission Providers March 21, 2008. AGENCY: Federal Energy Regulatory Commission, DOE. ACTION: Notice of Proposed Rulemaking. ----------------------------------------------------------------------- SUMMARY: The Federal Energy Regulatory Commission (Commission) is proposing to revise its Standards of Conduct for transmission providers to make them clearer and to refocus the rules on the areas where there is the greatest potential for affiliate abuse. By doing so, we will make compliance less elusive and facilitate Commission enforcement. We also propose to conform the Standards to the decision of the U.S. Court of Appeals for the D.C. Circuit in National Fuel Gas Supply Corporation v. FERC, 468 F.3d 831 (D.C. Cir. 2006). On January 18, 2007, the Commission issued a Notice of Proposed Rulemaking (initial NOPR), and received both initial and reply comments from interested persons. After giving consideration to these comments and to our own experience in enforcing the Standards, the Commission believes it to be necessary and appropriate to modify the approach proposed in the initial NOPR. The Commission is therefore issuing a new NOPR, and invites all interested persons to submit comments in response to the regulations proposed herein. DATES: Comments are due May 12, 2008. ADDRESSES: You may submit comments, identified by docket number by any of the following methods: Agency Web Site: http://ferc.gov. Documents created electronically using word processing software should be filed in native applications or print-to-PDF format and not in a scanned format. Mail/Hand Delivery: Commenters unable to file comments electronically must mail or hand deliver an original and 14 copies of their comments to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street, NE., Washington, DC 20426. FOR FURTHER INFORMATION CONTACT: Kathryn Kuhlen, Office of Enforcement, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, Kathryn.Kuhlen@FERC.gov, (202) 502-6855. Table of Contents Paragraph No. I. Introduction............................................. 1 II. Background.............................................. 6 III. Discussion............................................. 11 A. The Need for Reform..................................... 11 B. The Independent Functioning Rule........................ 22 C. The No Conduit Rule..................................... 46 D. The Transparency Rule................................... 50 E. Miscellaneous........................................... 56 IV. Applicability of the Proposed Rule and Compliance 65 Procedures................................................. V. Information Collection Statement......................... 67 VI. Environmental Analysis.................................. 73 VII. Regulatory Flexibility Act............................. 74 VIII. Comment Procedures.................................... 75 IX. Document Availability................................... 79 Appendix A: Table of Commenters and Abbreviations for Commenters................................................. Appendix B: Comparison of Current and Proposed Regulatory Text....................................................... I. Introduction 1. The Federal Energy Regulatory Commission is proposing to reform its Standards of Conduct for Transmission Providers. The primary purpose of our proposed reforms is to strengthen the Standards by making them clearer and by refocusing the rules on the areas where there is the greatest potential for affiliate abuse. By doing so, we also will make compliance less elusive and subjective for regulated entities, and facilitate enforcement of the Standards by the Commission. We also propose to reform our regulations to comply with the U.S. Court of Appeals for the D.C. Circuit decision in National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831 (D.C. Cir. 2006). 2. On January 18, 2007, the Commission issued a Notice of Proposed Rulemaking (initial NOPR) to modify the Standards. The primary purpose of the initial NOPR was to remedy the defects identified by the D.C. Circuit in National Fuel, particularly the court's rejection of the Standards' treatment of Energy Affiliates of natural gas pipelines. The Commission also sought to remedy other specific flaws in the Standards, such as by removing impediments to integrated resource planning. In proposing these reforms we did not, however, undertake a broader review of the Standards to determine whether they were continuing to prevent affiliate abuse in the manner most likely to foster compliance and enhance enforcement. Based on comments received on the NOPR, as well as the comments received at our recent [[Page 16229]] enforcement conference,\1\ we now believe that such a broader review is necessary. We therefore propose further reforms herein and seek comment on them from all interested persons. --------------------------------------------------------------------------- \1\ Conference on Enforcement Policy, Docket No. AD07-13-000 (Nov. 16, 2007) (enforcement conference). --------------------------------------------------------------------------- 3. Our revised NOPR proposes to combine the best elements of the Standards adopted in Order Nos. 497 and 889 with those adopted by the Commission in Order No. 2004.\2\ Order Nos. 497 \3\ and 889 \4\ established a functional separation between transmission and merchant personnel for natural gas and electric transmission providers that was relatively clear and that worked well for many years. Order No. 2004 altered this approach in three main ways: (i) First, to expand the scope of the Standards to include Energy Affiliates, (ii) second, to adopt a corporate separation approach to accommodate the addition of Energy Affiliates, and (iii) third, to adopt a single set of standards applicable to both natural gas and electric industries. The National Fuel court rejected the first reform as applied to the natural gas industry and, by doing so, undercut the need for the second reform. The court did not upset the third reason for reform and we continue to believe there is no reason why separate standards should apply to each industry, although our proposed regulations do take into account differences between the industries in discrete areas. --------------------------------------------------------------------------- \2\ Standards of Conduct for Transmission Providers, Order No. 2004, FERC Stats. & Regs., Regulations Preambles 2001-2005 ] 31,155 (2003), order on reh'g, Order No. 2004-A, FERC Stats. & Regs., Regulations Preambles 2001-2005 ] 31,161 (2004), order on reh'g, Order No. 2004-B, FERC Stats. & Regs., Regulations Preambles 2001- 2005 ] 31,166 (2004), order on reh'g, Order No. 2004-C, FERC Stats. & Regs., Regulations Preambles 2001-2005 ] 31,172 (2004), order on reh'g, Order No. 2004-D, 110 FERC ] 61,320 (2005), vacated and remanded as it applies to natural gas pipelines sub nom. Nat'l Fuel Gas Supply Corporation v. FERC, 468 F.3d 831 (D.C. Cir. 2006); Standards of Conduct for Transmission Providers, Order No. 690, 72 FR 2427 (Jan. 19, 2007), FERC Stats. & Regs ] 31,237, order on reh'g, Order No. 690-A, 72 FR 14235 (Mar. 27, 2007), FERC Stats. & Regs. ] 31,243 (2007); see also Standards of Conduct for Transmission Providers, Notice of Proposed Rulemaking, 72 FR 3958 (Jan. 29, 2007), FERC Stats. & Regs. ] 32,611 (2007). \3\ Inquiry Into Alleged Anticompetitive Practices Related to Marketing Affiliates of Interstate Pipelines, Order No. 497, 53 FR 22139 (1988), FERC Stats. & Regs., Regulations Preambles 1986-1990 ] 30,820 (1988); Order No. 497-A, order on reh'g, 54 FR 52781 (1989), FERC Stats. & Regs., Regulations Preambles 1986-1990 ] 30,868 (1989); Order No. 497-B, order extending sunset date, 55 FR 53291 (1990), FERC Stats. & Regs., Regulations Preambles 1986-1990 ] 30,908 (1990); Order No. 497-C, order extending sunset date, 57 FR 9 (1992), FERC Stats. & Regs., Regulations Preambles 1991-1996 ] 30,934 (1991), reh'g denied, 57 FR 5815 (1992), 58 FERC ] 61,139 (1992); aff'd in part and remanded in part sub nom. Tenneco Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992) (collectively, Order No. 497). \4\ Open Access Same-Time Information System (Formerly Real-Time Information Network) and Standards of Conduct, Order No. 889, 61 FR 21737 (May 10, 1996), FERC Stats. & Regs., Regulations Preambles Jan. 1991-June 1996 ] 31,035 (Apr. 24, 1996); Order No. 889-A, order on reh'g, 62 FR 12484 (Mar. 14, 1997), FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ] 31,049 (Mar. 4, 1997); Order No. 889-B, reh'g denied, 62 FR 64715 (Dec. 9, 1997), 81 FERC ] 61,253 (Nov. 25, 1997) (collectively, Order No. 889). --------------------------------------------------------------------------- 4. Nevertheless, we believe this single set of standards should more closely resemble the functional approach that was adopted in Order Nos. 497 and 889. Our experience with implementing and enforcing the Standards, as well as the record of this proceeding, demonstrates that this approach is the one most likely to foster compliance and strengthen enforcement of the Standards. The ``corporate separation'' adopted by Order No. 2004 has not proven workable and was adopted to facilitate the regulation of Energy Affiliates,\5\ a step that is no longer appropriate given the decision in National Fuel. --------------------------------------------------------------------------- \5\ Order No. 2004 at P 92. --------------------------------------------------------------------------- 5. In addition to combining the best elements of Orders 497, 889 and 2004, we also, as explained below, propose to simplify and streamline the Standards to facilitate compliance and enhance enforcement. With our new civil penalty authority, we are mindful of the fact that our regulations must be as clear as possible, as participants in the enforcement conference repeatedly noted. We also propose to strengthen enforcement of the Standards by proposing additional transparency to aid in the detection of affiliate abuse. Although we believe many of the existing elements of the Standards should be retained, the reforms we are proposing, together with the simplification and clarification we believe to be imperative, necessitate reissuing the entire part 358 of the Code of Federal Regulations as a stand-alone document. II. Background 6. The Commission first adopted Standards of Conduct in 1988, in Order No. 497. These initial Standards prohibited interstate natural gas pipelines from giving their marketing affiliates or wholesale merchant functions undue preference over non-affiliated customers. Citing demonstrated record abuses, the U.S. Court of Appeals for the D.C. Circuit upheld these Standards in 1992.\6\ The Commission adopted similar Standards for the electric industry in 1996, in Order No. 889, prohibiting public utilities from giving undue preference to their marketing affiliates or wholesale merchant functions. Both the electric and gas Standards sought to deter undue preference by: (i) Separating a transmission provider's employees engaged in transmission services from those engaged in its marketing services, and (ii) requiring that all transmission customers, affiliated and non-affiliated, be treated on a non-discriminatory basis. --------------------------------------------------------------------------- \6\ Tenneco Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992) (Tenneco). --------------------------------------------------------------------------- 7. Changes in both the electric and gas industries, in particular the unbundling of sales from transportation in the gas industry and the increase in the number of power marketers in the electric industry, led the Commission in 2003 to issue Order No. 2004, which broadened the Standards to include a new category of affiliate, the Energy Affiliate.\7\ The new Standards were made applicable to both the electric and gas industries, and provided that the transmission employees of a transmission provider \8\ must function independently not only from the company's marketing affiliates but from its Energy Affiliates as well, and that transmission providers may not treat either their Energy Affiliates or their marketing affiliates on a preferential basis. Order No. 2004 also imposed requirements to publicly post information concerning a transmission provider's Energy Affiliates. --------------------------------------------------------------------------- \7\ The new Standards defined an Energy Affiliate as an affiliate of a Transmission Provider that (1) engages in or is involved in transmission transactions in U.S. energy or transmission markets; or (2) manages or controls transmission capacity of a Transmission Provider in U.S. energy or transmission markets; or (3) buys, sells, trades or administers natural gas or electric energy in U.S. energy or transmission markets; or (4) engages in financial transactions relating to the sale or transmission of natural gas or electric energy in U.S. energy or transmission markets. 18 CFR 358.3(d). Certain categories of entities were excluded from this definition in following subsections of the regulations. \8\ A Transmission Provider was defined as (1) any public utility that owns, operates or controls facilities used for transmission of electric energy in interstate commerce; or (2) any interstate natural gas pipeline that transports gas for others pursuant to subpart A of part 157 or subparts B or G of part 284 of the same chapter of the regulations. 18 CFR 358.3(a). --------------------------------------------------------------------------- 8. On appeal by members of the natural gas industry, the U.S. Court of Appeals for the D.C. Circuit overturned the Standards as applicable to gas transmission providers, on the grounds that the evidence of abuse by Energy Affiliates cited by the Commission was not in the record.\9\ The court noted that the dissenting Commissioners in Order No. 2004 had expressed the concern that the Order would diminish industry [[Page 16230]] efficiencies without advancing the FERC policy of preventing unduly discriminatory behavior.\10\ --------------------------------------------------------------------------- \9\ National Fuel at 841. \10\ Id. at 838. --------------------------------------------------------------------------- 9. The Commission issued an Interim Rule on January 9, 2007,\11\ and set about developing new Standards that would cure the defects identified by the D.C. Circuit in National Fuel. On January 18, 2007, the Commission issued its initial NOPR,\12\ requesting comment on whether the concept of Energy Affiliates should be retained for the electric industry, proposing the creation of two new categories of employees denominated as Competitive Solicitation Employees and Planning Employees, carrying over the Interim Rule's new definition of marketing to cover asset managers, and making numerous other proposals. The Commission received thousands of pages of both initial and reply comments from some 95 individuals, companies, and organizations, which are listed in Appendix A. --------------------------------------------------------------------------- \11\ Standards of Conduct for Transmission Providers, Order No. 690, 72 FR 2427 (Jan. 19, 2007); FERC Stats. & Regs. ] 31,237 (Jan. 9, 2007) (Interim Rule); clarified by, Standards of Conduct for Transmission Providers, Order No. 690-A, 72 FR 14235 (Mar. 27, 2007); FERC Stats. & Regs. ] 31,243 (2007) (Order on Clarification and Rehearing). \12\ Standards of Conduct for Transmission Providers, 72 FR 3958 (Jan. 29, 2007), FERC Stats. & Regs. ] 32,611 (2007) (initial NOPR). --------------------------------------------------------------------------- 10. As noted above, consideration of these comments, coupled with our own experience in administering the Standards, has persuaded us to modify the approach advanced in the initial NOPR. For that reason, we now issue a new NOPR, and invite comment both on its general approach and on its specific provisions. III. Discussion A. The Need for Reform 11. The purpose of this revised NOPR is to strengthen the Standards by making our rules clearer and refocusing them on the areas where there is the greatest potential for affiliate abuse. In so doing, we will facilitate compliance by regulated entities and enhance Commission enforcement. We propose to accomplish this objective by combining the best elements of Order Nos. 497 and 889, on the one hand, and Order No. 2004, on the other. In particular, we propose to return to the approach of separating, by function, the transmission personnel from the marketing personnel that was adopted in Order Nos. 497 and 889 and worked well for many years, while also retaining a single set of standards for both natural gas and electric industries, as envisioned by Order No. 2004. We also propose to further clarify and streamline the Standards to enhance compliance and enforcement of our rules, and to increase transparency in the area of transmission/affiliate interactions to aid in the detection of any undue discrimination. 12. We believe these broader reforms are superior to the incremental reforms proposed in our initial NOPR for two principal reasons. First, we propose to return to the functional separation of transmission and merchant personnel adopted in Order Nos. 497 and 889, because it worked well for many years. Although Order No. 2004 abandoned this approach in favor of a ``corporate separation,'' it did so because of jurisdictional concerns created by the addition of Energy Affiliates to our regulations, not because the functional approach had proven inadequate in preventing affiliate abuse.\13\ --------------------------------------------------------------------------- \13\ The Commission stated: ``While it may be less costly for some companies to implement the [functional] approach * * * the Commission is concerned that it does not have the jurisdiction to direct unregulated Energy Affiliates on how to structure their functions, operations and communications.'' Order No. 2004 at P 93. --------------------------------------------------------------------------- 13. Now that the D.C. Circuit has rejected the addition of Energy Affiliates for lack of evidence (and no commenter has provided sufficient evidence to reinstate it), it is no longer appropriate to retain the corporate separation approach adopted in Order No. 2004. Furthermore, there is good reason to rescind it. The corporate separation approach has proven so difficult to implement that it has generated scores of ``waiver'' requests (most of which were granted) and has otherwise frustrated compliance by diverting the industry's focus from the very reason why the Standards were necessary in the first place--the conflict of interest between the functions of transmission and merchant activities. 14. The initial NOPR was itself evidence of the problem we now seek to remedy. Since the adoption of Order No. 2004, the corporate separation approach had, as we found in the initial NOPR, impeded legitimate integrated resource planning and competitive solicitations.\14\ To address this problem, we proposed there to create two new exemptions for these activities. Yet, by failing to address the underlying cause of that problem--the corporate separation approach-- we, again, created additional exemptions and complexity to a rule already burdened with so many waivers, exemptions and complexity that both compliance and enforcement have been frustrated. By proposing to return to the functional approach that had proven effective prior to Order No. 2004, we can accommodate such legitimate activities without creating yet another set of exemptions. --------------------------------------------------------------------------- \14\ Southern Company Services, Inc., among other commenters in the Order No. 2004 docket, described the difficulties that arise when all the employees of a marketing affiliate, including its planning employees, are prohibited from receiving transmission information: ``Planning new generation and transmission capacity requires selecting the right combination and location of both generation and transmission. Coordinated and integrated planning is required because the siting of new generation is integrally related to transmission considerations and vice versa * * *. Accordingly, the costs, characteristics and locations of generation and transmission must be considered together in order to ensure the provision of service to customers on a reliable and least cost basis.'' Comments of Southern Company Services, Inc., Docket No. RM01-10-000 at p. 16 (Dec. 20, 2001). --------------------------------------------------------------------------- 15. Second, we believe this broader reform of our existing Standards is necessary to make them clearer in an era where the Commission possesses substantial civil penalty authority. Soon after the adoption of the Energy Policy Act of 2005 (EPAct 2005),\15\ the Commission heard significant concerns from the regulated community that the existing Standards contained so many ambiguities that they impeded compliance and left companies--including those with the best cultures of compliance--exposed to significant civil penalties. We responded to those concerns by holding a public technical conference in Phoenix, Arizona, attended by all of the Commissioners serving at the time. The consistent message from regulated entities at this conference was best captured by an energy attorney who stated that ``there is no area [besides the Standards] where I practice law where there is a greater number of times I am asked the question and I don't have the answer, and that is a real problem when you are talking about corporate governance.'' \16\ --------------------------------------------------------------------------- \15\ Pub. L. No. 109-58, 119 Stat. 594 (2005). \16\ Standards of Conduct Conference and Workshop (April 7, 2006), transcript at p. 61. --------------------------------------------------------------------------- 16. Nearly two years later, we heard the same concerns at our enforcement conference in Washington, DC. Several panelists expressed concern about the ambiguities in our Standards. These concerns were also supported in comments submitted on behalf of six industry trade groups, who placed the Standards at the top of their list of ambiguous rules that hinder compliance.\17\ As these six groups and another trade association emphasized, a ``[l]ack of clarity sows confusion, creates unnecessary risk and chills legitimate [[Page 16231]] market behavior because market participants are reticent to engage in certain types of transactions where the rules are unclear.'' \18\ --------------------------------------------------------------------------- \17\ Comments at 20, submitted by The American Gas Association, Edison Electric Institute, Electric Power Supply Association, Independent Petroleum Association of America, Interstate Natural Gas Association of America, and Natural Gas Supply Association, Docket No. AD07-13-000 (Dec. 17, 2007). \18\ White Paper at 6, submitted by The American Gas Association, Edison Electric Institute, Electric Power Supply Association, Independent Petroleum Association of America, Interstate Natural Gas Association of America, Natural Gas Supply Association and Process Gas Consumers Group, Docket No. AD07-13-000 (Nov. 14, 2007). --------------------------------------------------------------------------- 17. We agree, and we have more than an adequate record to support the conclusion that the existing Standards are too complex to facilitate compliance or support our enforcement efforts. Since issuance of the NOPR in Order No. 2004, the Commission has held no less than four conferences devoted to explication and discussion of the Standards.\19\ Of the ten requests for No Action Letters submitted to the Commission since 2005, seven have involved the Standards.\20\ And Commission staff has received so many calls regarding the interpretation and application of the Standards, that the Commission has posted on its public Web site a 30-page document entitled ``Frequently Asked Questions about Order No. 2004.'' --------------------------------------------------------------------------- \19\ May 21, 2002 in Washington, DC; May 10, 2004 in Houston, Texas; May 6, 2005 in Chicago, Illinois; and April 7, 2006 in Scottsdale, Arizona. \20\ No Action Letters can be sought for matters involving the Standards of Conduct, Codes of Conduct (now Affiliate Restrictions), Market Behavior Rules, and the Anti-Manipulation Rules. --------------------------------------------------------------------------- 18. The complexity and unworkability of the current Standards is also evident in the fact that since issuance of Order No. 2004, the Commission has received 107 requests for waiver from various aspects of the Standards, the vast majority of which have been granted. Interpretation of the Standards has thus consumed thousands of hours of staff time. It has also proven so elusive to the industry that it has engendered numerous conferences by law firms and trade associations, greatly outstripping comparable areas of Commission compliance in resources and money. 19. The complexity and over breadth of the current Standards has also made it more difficult for transmission providers to reasonably manage their business, an effect which the Commission never intended. As the court in Tenneco noted, vertical integration can produce efficiencies of operation, and advantages given to an affiliate are not improper if they do not amount to exercises of market power.\21\ Unnecessarily balkanizing employees one from another and erecting barriers to the free flow of information can thwart perfectly legitimate efficiencies, a consequence which disadvantages not only the companies involved but ultimately consumers as well, in the form of higher rates. Executives of transmission providers can also be impeded in making necessary business decisions for fear they may transgress the Standards by assembling needed data or by meeting to discuss the merits of potential investments. This fear has been exacerbated by the Commission's civil penalty authority, granted by Congress in EPAct 2005. As we explained above, the regulated community has consistently argued that the Standards are too ambiguous to facilitate compliance, particularly in an era where significant civil penalties may attach to violations. --------------------------------------------------------------------------- \21\ Tenneco at 1201. --------------------------------------------------------------------------- 20. Therefore, in this NOPR we take the approach of structuring the Standards to establish per se rules that address the greatest prospect for undue preference. However, this streamlined approach does not diminish our ability to rectify and sanction, where necessary, instances of undue discrimination and preference.\22\ The core prohibitions against undue preference are rooted in sections 205 and 206 of the FPA and sections 4 and 5 of the NGA,\23\ and the Commission possesses the full panoply of statutory remedies to address violations of these statutes, whether or not they are specifically addressed in the per se regulations of the Standards. Since enforcement of both the Standards and the statutory prohibitions against undue discrimination and preference will be greatly assisted by transparency, we also include in the proposed Standards provisions to make apparent any instances of communication and undue preference between transmission function employees and marketing function employees. These provisions require either the public posting of information regarding such communications or the maintenance of contemporaneous records for review by the Commission. --------------------------------------------------------------------------- \22\ Whereas failure to comply with a per se rule of the Standards automatically establishes a sanctionable violation, an alleged violation of the Federal Power Act (FPA), 16 U.S.C. 824d- 824e (2000) or the Natural Gas Act (NGA), 15 U.S.C. 717c-717d (2000) would require an investigation into both the facts and the surrounding circumstances to determine if, in fact, an undue discrimination occurred. \23\ Sections 205 and 206 of the FPA state that no public utility shall make or grant an undue preference with respect to any transmission or sale of electric energy subject to the Commission's jurisdiction. Similarly, sections 4 and 5 of the NGA state that no natural gas company shall make or grant an undue preference or advantage with respect to any transportation or sale of natural gas subject to the Commission's jurisdiction. --------------------------------------------------------------------------- 21. We propose regulations that adopt the three core elements which we believe to be appropriate for per se rules: The independent functioning rule, the no conduit rule, and the transparency rule. We address these below. B. The Independent Functioning Rule 22. Order No. 2004 continued the policy, established in Order Nos. 497 and 889, of requiring transmission providers to function independently from their marketing employees or marketing affiliates. This practice has been well-established for close to twenty years, and it is our sense that both pipelines and public utilities understand the general concept of independent functioning. We continue to believe this policy is the most effective manner of preventing undue preference by a transmission provider, and we will carry forward the requirement of independent functioning in these proposed Standards.\24\ --------------------------------------------------------------------------- \24\ See proposed 18 CFR 358.5(a). --------------------------------------------------------------------------- 23. Nevertheless, we believe a basic alteration in its methodology is warranted. The Standards' existing method for separating transmission function employees from marketing function employees relies on the corporate functional approach,\25\ under which a transmission provider must function independently from an affiliate which engages in marketing.\26\ This is a departure from the method adopted in Order Nos. 497 and 889. Order No. 497 required that interstate natural gas pipelines, to the maximum extent practicable, ensure that their operating employees and the operating employees of their marketing affiliates function independently of each other.\27\ Order No. 889 required that, except in emergency circumstances, the employees of the transmission provider engaged in transmission system operations must function independently of its employees, or the employees of any of its affiliates, who engage in wholesale merchant functions (i.e., wholesale sales and purchases of electric energy).\28\ Thus, the prohibition keyed off the job function of the employee, rather than by whom he or she was employed. --------------------------------------------------------------------------- \25\ Order No. 2004 designates this approach as the Energy Affiliate approach. Order No. 2004 at P 92-94. \26\ Id. P 92-94. \27\ Order No. 497, formerly codified at 18 CFR 161.3(g). \28\ Order No. 889, formerly codified at 18 CFR 37.4(a). --------------------------------------------------------------------------- 24. This approach was altered in Order No. 2004, which required transmission function employees to function independently of personnel employed by the transmission provider's marketing affiliates or Energy [[Page 16232]] Affiliates.\29\ Because there are many individuals employed by transmission providers' marketing affiliates who are not involved in the core activities that give rise to the potential for undue preference, we have over the years exempted whole categories of employees from this restriction and allowed them to be shared between the transmission provider and its marketing affiliate. These include officers and members of the board of directors, support employees, field and maintenance employees, and risk management employees.\30\ We observed that these employees are not generally in a position to give a marketing affiliate an undue preference, and that the sharing of these employees has allowed the transmission provider to realize efficiencies not otherwise available to it.\31\ Carrying forward this approach in the initial NOPR, we suggested the creation of two new categories of exempted employees, the Planning Employee and the Competitive Solicitation Employee.\32\ --------------------------------------------------------------------------- \29\ Order No. 2004, formerly codified at 18 CFR 358.4(a)(1). In its comments, Edison Electric Institute describes the difficulty with this approach: ``The corporate functional approach * * * uses the evaluation of individual employees to determine what a whole corporation (or division, etc.) does. If an employee performs Energy or Marketing Affiliate Activities, the whole corporation (or division) is deemed an Energy or Marketing Affiliate, and every other employee within the corporation is then subject to the rules by association, regardless of what they do and the function they perform, unless they fit into an exempt category. Because these exempt categories are vague and difficult to implement the corporate-functional approach ends up with restrictions that apply to more employees than necessary to meet the objectives of the rules.'' Comments of the Edison Electric Institute, Docket No. RM07- 1-000 at pp. 20-21 (Mar. 30, 2007). \30\ Much debate has also been engendered as to whether employees such as lawyers, accountants, and rate design personnel should be exempted. See initial NOPR at P 278-98. \31\ See, e.g., Order No. 2004 at P 97. \32\ Initial NOPR at P 42 and 54. --------------------------------------------------------------------------- 25. This proliferation of exemptions has had the unfortunate side effect of removing the certainty that might otherwise be enjoyed as to which persons an employee may properly interact with and which persons he or she may not. Furthermore, it undermines the legitimacy of the Standards, as employees may find nonsensical the prohibition against interacting with personnel who have nothing to do with sensitive marketing or transmission information. 26. The crux of the problem is that currently the prohibited category of marketing affiliate includes all employees of the affiliate, whether engaged in sales or not. To avoid such broad inclusion, many commenters have proposed that the Commission adopt an ``employee functional approach'' rather than a corporate functional approach, whereby the Standards would apply to each individual employee based on that employee's job function, not on the company or division where the employee is employed.\33\ --------------------------------------------------------------------------- \33\ See EEI at 19 for a discussion of this approach. EEI was supported by Tucson Electric at 4, APS at 3, PSC of New Mexico at 1- 2, Entergy at 1-2, E.ON at 7, Portland General at 1, Northwestern at 1. Other commenters support a similar functional approach: Idaho Power at 3, Southern Co. Services at 4-8, Keyspan at 3-4, SCE at 3- 5, Western Utilities Compliance Group at 2-3. TAPS is in accord, providing the meaning of marketing is expanded. TAPS Reply at 7-8. --------------------------------------------------------------------------- 27. This proposal was also advanced by commenters in Order No. 2004. It was rejected at that time because the Standards were being expanded to cover Energy Affiliates, and it was felt that the employee functional approach might require a shared responsibility on the part of potentially non-jurisdictional entities.\34\ That reason no longer exists. We believe the D.C. Circuit's reason for overturning the prohibitions relating to natural gas Energy Affiliates applies equally to electric Energy Affiliates, and we propose abandoning the concept of Energy Affiliate, as discussed more fully below. Therefore, the concerns of Order No. 2004 regarding jurisdictional access to Energy Affiliates are rendered moot. --------------------------------------------------------------------------- \34\ Order No. 2004 at P 92. --------------------------------------------------------------------------- 28. The employee functional approach accomplishes directly the goal of identifying which employees ought not to interact with one another, whereas the corporate functional approach attempts to accomplish that objective indirectly, by focusing on the nature of the employing entity. This casts too wide a net and ensnares employees who do not perform sensitive functions. Commission staff has expended much effort in attempting to clarify for companies which employees may interact with one another and which may not. In one case, for example, coordination of generation dispatch and transmission service reservations were both conducted out of the same system operating center, in order to realize cost and communication efficiencies. This necessitated a series of orders by the Commission to deal with employee classification problems under the Standards.\35\ In another instance, marketing affiliate employees who ran a generating plant needed access to a transmission substation but were barred from doing so under the Standards, even though they performed no marketing functions. A waiver was needed in this case,\36\ and questions as to precisely which employees were covered by the waiver consumed a good deal of staff's attention.\37\ Personnel in the nuclear power industry were so confused about permitted communications that the Commission, in order for companies to comply with the requirements of the U.S. Nuclear Regulatory Commission, had to issue an order granting permission for transmission providers to communicate with affiliated nuclear power plants.\38\ The Commission has also expended considerable effort in clarifying for companies whether given entities qualify as Energy Affiliates, a status that barred their employees from interacting with transmission function employees.\39\ --------------------------------------------------------------------------- \35\ See Audit of Standards of Conduct, Code of Conduct, OASIS & Transmission Practices, Duke Energy Corporation, Docket No. PA03-15- 000 at pp. 6-8 (Jan. 21, 2005). \36\ Algonquin Gas Transmission, L.L.C., 111 FERC ] 61,099, at P 21-32 (2005). \37\ See Audit of Standards of Conduct, Code of Conduct, and Open Access Transmission Tariff Requirements at Florida Power and Light Company, Docket No. PA05-7-000 at pp. 6-10 (May 12, 2006). \38\ Interpretive Order Relating to the Standards of Conduct, 114 FERC ] 61,155 (2006) (Interpretive Order), clarified in 115 FERC ] 61,202 (2006). \39\ See, e.g., Alcoa Power Generating Inc., 108 FERC ] 61,243, at P 29-35, 42-56, 136-46 (2004), reh'g granted in part as to unrelated issue, Nat'l Fuel Gas Supply Corp., 116 FERC ] 61,048 (2006); High Island Offshore System, L.L.C., 116 FERC ] 61,047, at P 59-68 (2006). --------------------------------------------------------------------------- 29. The employee functional approach, by pinpointing precisely which employees need to function independently one from another, has the added benefit of making the purpose of the prohibition more readily apparent. It should also make it easier for employees to comply with the Standards, since they will likely know an individual's job function, whereas they may not know by which subsidiary of an umbrella organization a given individual is employed. 30. Therefore, we propose adopting the employee functional approach, and define the two groups of employees who must function independently of each other as ``transmission function employees'' \40\ and ``marketing function employees'' \41\ (whether employed within the corporate structure of the transmission provider or by an affiliate of the transmission provider). The definitions of these terms are discussed in the following sections. We also propose to continue the general prohibition against marketing function employees conducting transmission functions, or having discriminatory access to the transmission provider's system control center.\42\ Furthermore, we add the converse prohibition, that a [[Page 16233]] transmission function employee may not conduct marketing functions.\43\ --------------------------------------------------------------------------- \40\See proposed section 358.3(i). \41\See proposed section 358.3(d). \42\See proposed 18 CFR 358.5(c)(1). \43\See proposed 18 CFR 358.5(c)(2). --------------------------------------------------------------------------- 1. Transmission Function Employee 31. We propose defining a transmission function employee as an employee, contractor, consultant or agent of a transmission provider who engages in transmission functions.\44\ ``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.\45\ --------------------------------------------------------------------------- \44\ See proposed 18 CFR 358.3(i). \45\ See proposed 18 CFR 358.3(h). --------------------------------------------------------------------------- 32. We believe this definition, when coupled with the definition of ``marketing functions'' discussed below, addresses the concerns raised by the industry regarding the obstacles the Standards place in the way of system planning. We stressed in Order Nos. 890 and 890-A not only the critical importance of long-range planning, but also the desirability of a coordinated and open planning process.\46\ Unnecessary restrictions on employee interactions militate against that objective. However, because we are returning to the functional separation approach adopted in Order No. 889, and because a marketing function employee is one who is actively and personally engaged in marketing activities, an employee who performs merely a planning function and is not ``engaged in'' making wholesale offers, bids or sales does not fall within the prohibited category. He or she is therefore free to discuss system planning, including state-mandated Integrated Resource Planning, with transmission function employees. --------------------------------------------------------------------------- \46\ Preventing Undue Discrimination and Preference in Transmission Service, Order No. 890, FERC Stats. & Regs. ] 31,241, at P 425 (2007), order on reh'g and clarification, Order No. 890-A, FERC Statutes and Regulations ] 31,261, at P 171 (2007). --------------------------------------------------------------------------- 33. With respect to employee interactions regarding reliability functions, we deem it the first order of business on the part of a transmission provider to ensure reliability of operations. Indeed, pursuant to Congressional mandate in EPAct 2005, Reliability Standards have been promulgated by the Commission-certified Electric Reliability Organization \47\ and approved by the Commission, violation of which can subject a transmission provider to substantial civil penalties of up to $1 million a day.\48\ Several Reliability Standards require an electric transmission provider to coordinate operations with entities that may include marketing affiliates and, thus, marketing function employees.\49\ We therefore provide an exception to the independent functioning rule for the exchange of information necessary to maintain or restore operation of the transmission system. Exchanges of information pursuant to this exception should be made only to the same extent that a transmission provider would exchange information with similarly situated marketing function employees of a non-affilated entity. We also propose requiring that a contemporaneous record be made of exchanges pursuant to this exception, except in emergency situations, when a record may be prepared after the fact.\50\ Furthermore, transmission function employees will still be subject to the no conduit rule discussed below, and thus will be required to distinguish between information concerning reliability activities and other transmission function information. --------------------------------------------------------------------------- \47\ The North American Electric Reliability Corporation was certified as the Electric Reliability Organization, pursuant to section 215 of the FPA, in North American Electric Reliability Corp., 116 FERC ] 61,062, order on reh'g and compliance, 117 FERC ] 61,126 (2006). \48\ Mandatory Reliability Standards for the Bulk-Power System, Order No. 693, FERC Statutes and Regulations ] 31,242 (2007), order on reh'g, Order No. 693-A, 120 FERC ] 61,053 (2007), codified at 18 CFR part 40. \49\ See, e.g., Reliability Standard TOP-003-0 (balancing authorities, transmission operators and generator operators shall plan and coordinate scheduled outages of system voltage regulating equipment and telemetering and control equipment); Reliability Standard TOP-002-2 (generator operator shall coordinate current-day, next-day and seasonal operations with its host balancing authority and transmission service provider). \50\ See proposed section 358.7(h). --------------------------------------------------------------------------- 34. If an employee spends any but a de minimis amount of time engaged in transmission functions, he or she will be considered a transmission function employee. However, a supervisor, officer or director who is not actively and personally engaged in transmission functions will not be considered a transmission function employee.\51\ Such an individual will, of course, have access to transmission function information, and will be barred from sharing it with marketing function employees under the no conduit rule discussed below. Inasmuch as different organizations use different titles for the same job function, we decline to propose a cutoff for supervisory personnel based on job title, and instead propose a functional approach based on actual involvement in the activities themselves. For instance, if a transmission department supervisor is charged with the general responsibility of overseeing system control center personnel, but does not himself engage in system operations or grant or deny transmission service requests, he would not be a transmission function employee. But if he is involved in system operations or the processing of transmission service requests, or engages in decision-making regarding system operations or the processing of transmission service requests, he would be a transmission function employee even if he also has supervisory responsibilities. --------------------------------------------------------------------------- \51\ See proposed 18 CFR 358.3(i). --------------------------------------------------------------------------- 2. Marketing Function Employee 35. The current Standards do not contain a definition of marketing function employee, although they do define ``marketing affiliate,'' ``marketing, sales or brokering,'' and ``marketing or brokering.'' We propose to simplify these concepts and, in accordance with our employee functional approach, eliminate the definition of marketing affiliate. We propose to define a marketing function employee as an employee, contractor, consultant or agent of a transmission provider or of an affiliate of a transmission provider who engages in marketing functions.\52\ ``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.\53\ We also propose to revise the existing definition of ``affiliate'' to conform to the current definition set forth in 18 CFR 35.43(a)(1).\54\ --------------------------------------------------------------------------- \52\ See proposed 18 CFR 358.3(d). \53\ See proposed 18 CFR 358.3(c). This definition is a variant of a suggestion by TAPS. We note that it is unnecessary to include in the list of products another item mentioned by TAPS, that of ancillary services, as these are included in the definition of sales of electric energy. TAPS Reply at 8. We decline to include the suggested category of sites for generating capacity, as this category is far afield from the concept of marketing energy. \54\ See proposed 18 CFR 358.3(a). This definition was promulgated in Cross-Subsidization Restrictions on Affiliate Transactions, Order No. 707, 73 Fed. Reg. 11,013 (Feb. 29, 2008), FERC Stats. & Regs. ] 31,263 (2008). --------------------------------------------------------------------------- 36. In the past, the following categories have been exempted from the definition of marketing: (i) Bundled retail sales, (ii) incidental purchases or sales of natural gas to operate interstate natural gas pipeline transmission facilities, (iii) sales of natural gas solely from the transmission provider's own production, (iv) sales of natural gas solely from the transmission provider's [[Page 16234]] own gathering or processing facilities, or (v) sales by an intrastate natural gas pipeline or local distribution company making an on-system sale. The comments did not suggest deleting these exemptions, and we propose to carry them forward in this reissued NOPR.\55\ --------------------------------------------------------------------------- \55\ See proposed 18 CFR 358.3(c)(1)-(5). --------------------------------------------------------------------------- 37. We also note that a question has arisen whether providers of last resort (POLR), which are transmission providers that are charged with serving retail customers when the customers choose not to purchase from other suppliers, should likewise be exempted. We declined to accord POLRs a generic exemption in Order No. 2004-C, instead stating we would consider their status on a case-by-case basis. Commenters supporting the exemption pointed out that POLR service constitutes bundled retail sales, and thus should fall within the exemption for that category.\56\ Commenters opposing the exemption presented theoretical instances of abuse, but not actual instances.\57\ In the absence of actual evidence of abuse, we believe the general exemption for bundled retail sales should also apply to transmission providers acting as POLRs, and therefore propose to include POLRs in the list of exempt marketing functions.\58\ --------------------------------------------------------------------------- \56\ Northwestern at 5-6, Ameren at 25-28. \57\ Illinois Commerce Commission Reply at 6-7, Retail Energy Supply Association at 5-7. \58\ See proposed 18 CFR 358.3(c)(1). --------------------------------------------------------------------------- 38. Similarly as with respect to transmission function employees, if an employee spends any but a de minimis amount of time engaged in marketing functions, he or she will be considered a marketing function employee. However, a supervisor, officer or director who is not actively and personally engaged in marketing functions will not be considered a marketing function employee.\59\ For instance, if a manager has supervisory responsibility over employees engaged in making offers or sales of electric energy or natural gas, but does not engage in making offers or sales himself, he would not be a marketing function employee. However, if he both supervises others and engages in making offers or sales himself, or engages in decision-making regarding offers or sales, he would be a marketing function employee. --------------------------------------------------------------------------- \59\ See proposed 18 CFR 358.3(d). --------------------------------------------------------------------------- 39. We note that our revised approach to the independent functioning rule resolves the question of whether asset managers should be subject to the Standards. In the initial NOPR, the Commission proposed expanding the definition of ``marketing, sales or brokering'' to include entities that manage or control transmission capacity, such as asset managers or agents. A number of comments were received on this subject, and several commenters noted that no evidence of abuse by asset managers had been presented in the initial NOPR record. These commenters point out that in the absence of such evidence, inclusion of asset managers in the category of proscribed affiliates would run afoul of the infirmity noted in National Fuel regarding Energy Affiliates.\60\ --------------------------------------------------------------------------- \60\ Nevada Companies at 13, citing P 21 of the NOPR. See also National Fuel Companies at 5-6, Spectra at 10-13, Williston at 9-10, Sequent at 4-5. --------------------------------------------------------------------------- 40. It is not necessary to reach this issue under our proposal, as our definition of marketing function employee reaches only those employees of an asset manager, whether that asset manager is a contractor, consultant, agent or affiliate, who may be directly engaged in wholesale marketing. Therefore, it is only those specific employees of an asset manager who must function independently of a transmission provider's transmission function employees. This simplification regarding asset managers illustrates another advantage to our proposed employee functional approach. If a company finds it more efficient to have fewer subsidiaries and combine multiple functions in a given affiliate, it need not avoid doing so simply to shield the affiliate's non-marketing employees from the restrictions imposed by the Standards. 3. Shared Employees 41. 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 roles as attorneys, accountants, risk management personnel or rate design employees, rather than as transmission function employees or marketing function employees. Thus, there is no longer a need for the concept of ``shared employees.'' Of course, as discussed below, such employees remain subject to the no conduit rule and may not pass non-public transmission function information to marketing function employees. 42. Furthermore, field employees will no longer need to be exempt from the independent functioning rule, as such employees, while qualifying as transmission function employees by virtue of being engaged in transmission system operations, will not be in a position to interact with marketing function employees. In those rare cases where marketing function employees may also operate generation and need to confer with transmission function employees, we propose a specific exception to the no conduit rule, as discussed below. 4. Permitted Interactions 43. We recognize, based on lengthy experience of our Audits and Investigations staff in the Office of Enforcement, that there may be instances where transmission function employees must communicate with marketing function employees.\61\ For instance, it is not infrequently the case that the merchant function of a public utility not only engages in marketing the company's electric power, but also operates its generating plants. Under our proposal, the number of operational employees who would qualify as marketing function employees will be greatly reduced. However, it is possible, as noted above, that there may be some overlap between sales and operations. In such cases, it is essential that the employees who supervise the operation of the generating plants be able to discuss the plants' operational status with transmission function employees, as such information will affect flows and availability on the company's transmission system. Therefore, for these occasions as well as for the reliability situations discussed above, we include an exception to the independent functioning requirement for communications between transmission function employees and marketing function employees.\62\ Exchanges of information pursuant to this exception, as in the case of exchanges regarding reliability, should be made only to the same extent that a transmission provider would exchange information with similarly situated marketing function employees of a non-affiliated entity. In order to prevent and monitor for potential abuse, we also include a requirement that contemporaneous records of such dispatch or reliability communications between transmission function employees and marketing function employees be maintained by the company and made available to Commission staff on request, as described in our discussion below on the transparency rule.\63\ It will be the responsibility of the Chief Compliance [[Page 16235]] Officer to ensure that such records are made and retained. --------------------------------------------------------------------------- \61\ As noted, we have already provided for necessary communications between employees of a transmission provider and its affiliated nuclear power plant in the Interpretive Order. \62\ See proposed 18 CFR 358.5(b). \63\ See proposed 18 CFR 358.7(h). --------------------------------------------------------------------------- 5. Energy Affiliates 44. The concept of Energy Affiliates was added to the Standards in Order No. 2004. In that Order, we required pipelines and public utilities to function independently from their Energy Affiliates as well as from their marketing affiliates, and restricted the sharing of information by transmission providers with their Energy Affiliates. It was this addition which led the court in National Fuel to vacate the order with respect to the gas industry, on the grounds there was no record evidence of abuse by Energy Affiliates. 45. Our proposed adoption of the employee functional approach renders moot the question of whether the concept of Energy Affiliates should be retained for the electric industry. We no longer propose separating employees from transmission activities by virtue of their being employed by either a marketing affiliate or an Energy Affiliate, but rather by their job as a marketing function employee. Moreover, we note that commenters who supported retention of the concept of Energy Affiliates did not provide the Commission with evidence of actual abuse. That being the case, the same reasoning as was employed in National Fuel with respect to the natural gas industry would likely prevail on appeal of any order that restricted communications between public utilities and their Energy Affiliates. For that reason as well, we decline to apply the concept of Energy Affiliates to the electric industry. C. The No Conduit Rule 46. We propose strengthening the proscriptions against the exchange of prohibited information in several ways. In addition to the current prohibition against transmission function employees disclosing non- public transmission function information to marketing function employees,\64\ we propose prohibiting marketing function employees from receiving non-public transmission function information from any source.\65\ And 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, we propose prohibiting 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.\66\ The expansion of the no conduit rule \67\ is designed to reach all sources of a prohibited informational exchange. It also encompasses many employees who do not fall within the scope of the independent functioning rule. For instance, although under our proposal there is no requirement that lawyers employed by a transmission provider need to function independently of the company's marketing function employees, such lawyers must avoid serving as a conduit for passing transmission function information to a marketing function employee. --------------------------------------------------------------------------- \64\ The current Standards prohibit transmission provider's employees from disclosing non-public information about the transmission system to marketing or Energy Affiliates. 18 CFR 358.5(b). \65\ See proposed Sec. 358.6(a)(2). \66\ See proposed Sec. 358.6(a)(4). \67\ In the current Standards, the no conduit prohibition refers only to the use of another person by the transmission provider or its employees to pass prohibited information to a marketing affiliate or Energy Affiliate. 18 CFR 358.5(b)(7). In the proposed Standards, the term ``no conduit rule'' refers to the entire set of prohibitions on informational exchanges, including transmission provider employees, marketing affiliate employees and employees of other entities. --------------------------------------------------------------------------- 47. As a safety valve, we also include an exemption to the no conduit rule that parallels the exemption provided under the independent functioning rule. Thus, the exchange of transmission function information with marketing function employees is permitted where the information regards generation necessary to perform generation dispatch, or is necessary to maintain or restore operation of the transmission system.\68\ In such cases, a contemporaneous record is to be made of the exchange, except in emergency circumstances, when the record can be made after the fact.\69\ --------------------------------------------------------------------------- \68\ See proposed 18 CFR 358.6(b). \69\ See proposed 18 CFR 358.7(h). --------------------------------------------------------------------------- 48. Compliance with proscriptions on the exchange of information should be greatly facilitated by the existing requirement that transmission providers designate a Chief Compliance Officer. Such officers are responsible, in the first instance, for fielding any questions from employees regarding the nature of transmission function information or the persons to whom it may be passed, for preventing prohibited exchanges of information, and for curing any prohibited exchanges by public posting of the information. We proposed in the initial NOPR that a transmission provider post the name of its Chief Compliance Officer on its OASIS or Internet Web site, due to difficulties Commission staff had experienced in identifying the Chief Compliance Officers of several transmission providers. We carry forward that proposal here.\70\ --------------------------------------------------------------------------- \70\ See proposed 18 CFR 358.8(c)(2). --------------------------------------------------------------------------- 49. We also propose retaining from the existing regulations the requirement that transmission providers tra