In an order issued on December 16, 2010, the Federal Energy Regulatory Commission (FERC) affirmed that federal entities are subject to the North American Electric Reliability Corporation (NERC) Reliability Standards. At the same time, FERC declined to rule whether it could enforce monetary penalties against federal entities in the event of violations of the Reliability Standards. While FERC’s action is consistent with prior rulings in this area, the December 16 order differs in that FERC provides a roadmap for what federal entities must do to fund reliability compliance efforts, thus opening the door to the possible future imposition of monetary fines against them.

Background

NERC, the FERC-approved Electric Reliability Organization (ERO) for the United States electric grid, is charged with developing and enforcing Reliability Standards that are applicable to users, owners and operators of the Bulk-Power System. NERC has delegated its enforcement authority to the eight Regional Entities. Any penalty assessment made by NERC or a Regional Entity for a Reliability Standard violation must be submitted to FERC, via a Notice of Penalty (NOP) filing, for review and approval.

At issue in the December 16 order in Docket No. NP10-160-000, North American Electric Reliability Corp., 133 FERC ¶ 61,214 (2010), was a NOP submitted by NERC proposing a zero dollar ($0) penalty against the Army Corps of Engineers, Tulsa District (the Corps) for alleged violations of the Reliability Standards. The Corps requested FERC’s review of the NOP, specifically seeking reversal of FERC’s previous determination that the Reliability Standards apply to federal entities or, alternatively, affirmation that federal entities are not subject to monetary penalties for Reliability Standard violations.

Prior FERC Ruling on Jurisdiction over Federal Entities

In 2009, FERC determined that it has jurisdiction over federal entities to enforce the Reliability Standards. In that proceeding, which addressed another NOP proposing a $0 penalty against the Corps for a Reliability Standard violation, FERC concluded that federal entities must comply with the Reliability Standards if they use, own, or operate the Bulk-Power System. FERC rejected the Corps’ sovereign immunity arguments based largely on the statutory text: Section 215(b)(1) of the Federal Power Act (FPA) requires that “[a]ll users, owners and operators of the Bulk-Power System shall comply with [FERC-approved] reliability standards.” No exception is made for federal entities. Although federal entities are generally exempt from the full panoply of FERC public utility regulation, FPA Section 201(f) specifically subjects them to the reliability requirements of Section 215. Additionally, FERC found that jurisdictional authority over federal entities was necessary to prevent a “significant gap” in reliability oversight.