profile: NERC

Kathleen Davis, associate editor

In March, I spoke with four of NERC’s executives: Michehl Gent, president and CEO; David Cook, vice president and general counsel; David Hilt, vice president of compliance; and David Nevius, senior vice president. In the first part of this profile, Gent and Cook talked about reliability (see April 2004 EL&P).

In this second installment, David Hilt and David Nevius discuss some of NERC’s more unique aspects.

David Hilt, vice president of compliance

KD: How was the experience of NERC’s blackout investigation?
DH: We worked very, very closely to provide the U.S.-Canada task force the technical details that were required. There’s still quite a bit of modeling activity, and that’s likely to take several months yet to complete. Plus, we’re just now getting engaged in the restoration process. We want to see if there are any additional lessons or any new issues that we need to bring forth. And, as we’re talking about the blackout investigation, I’d like to thank the hundreds of volunteers that I had. I was heading up the investigation, and we had a lot of help from the industry and some very good technical experts.

KD: What recommendations does NERC have to prevent future blackouts?
DH: There are four strategic initiatives. The first strengthens the compliance program and the reporting that goes with that—to make compliance violations more visible. The second initiative, which is very aggressive, is to go out and audit all of the control areas and reliability coordinators in North America on a three-year cycle.

KD: Do you have the manpower for that?
DH: We are adding the manpower; right now, I’m working with contract manpower in addition to NERC staff, and the audits are already under way. We picked the largest 20 control areas to do by June 30.

The third initiative has to do with tracking the implementation of the recommendations that result from this blackout investigation. The fourth one is to develop a vegetation management reporting system. Obviously, vegetation was a problem in this blackout, as it has been in many others. So, we want to track and make public the performance of outages that affect major facilities to ensure that people are paying attention to vegetation management.

KD: The specific initiatives on auditing and tracking recommendations, are those laying the groundwork for NERC enforcement policies down the road?
DH: Certainly we’re taking steps, and what we’re doing, we believe, will ultimately fit well with legislative authority. We are moving in that direction.

KD: Of all the recommendations, which are the most important, in your opinion?
DH: The audits. We call them readiness audits because we’re not trying to be incredibly punitive with them. We’re trying to help this industry to move itself back towards a state of excellence.

The second most important recommendation is the program to track these recommendations to make sure that everyone follows through on them. A number of lessons should have been learned from the outages in ’96 in the West. When we looked at all these previous outages, and the findings that resulted from them, it was the same old line, “Those that fail to learn from history are doomed to repeat it.”

KD: Of the technical recommendations, do you think NERC will get a lot of flak about how expensive they might be?
DH: Well, certainly people will be concerned about the costs of some of the recommendations, but our hope is that people are focused on reliability. However, there was also a very large cost associated with the unreliable situation that we had last year.

KD: Will enforcement become part of your compliance program if reliability legislation is passed?
DH: Yes, it will, and certainly we’ve anticipated that for a number of years—hoping every year to have legislation.

What we need now is the teeth to make it enforceable so that we can identify the noncompliant entities and take action to make sure those violations are corrected.

KD: You’ve run simulations on what to charge for a particular violation?
DH: Yes, we’ve simulated penalties. We currently issue a letter that states, “You’ve been found noncompliant in this area, and, if the program had penalties, this is what your sanction could have been.”

KD: And, in the future, it will say “This is what your penalty is.”
DH: Assuming the action has financial penalties associated with it. Some levels of noncompliance may garner a simple notification. Obviously, as the violation becomes more significant in terms of reliability or repetition, then the sanctions and penalties will come into play.

KD: If you do start collecting fines and penalties, will that money go back into NERC’s budget or elsewhere?
DH: That has yet to be determined, and it’s somewhat related to the overall NERC funding issue and how that is resolved. In the areas where the regions do collect penalties and sanctions, at the moment it does go back into funding that organization.

Dave Nevius, senior vice president

KD: Now is there any myth about NERC floating around the industry that you would like to dispel?
DN: Recently, there has been a lot of talk about what NERC’s standards are and what they are not. Some have referred to them as “squishy,” least-common-denominator standards. When people refer to them as least-common-denominator standards, they are complaining because the standards apply universally throughout all of North America. By nature, there are some local conditions that need to be addressed differently in different parts of North America, and the standards that exist at the regional council level—our 10-member regional councils each have their own set of standards—they get into more detail.

I look at both NERC and regional standards as an integrated set of reliability standards. Under the legislation, regional standards and variances will become a formal part of the standards that are developed by NERC and approved by FERC.

KD: Certainly, legislation that would give you enforcement authority would allow you to be less “squishy.”
DN: Absolutely. The standards would be much more specific, much more measurable. They’ll address things at a North American level all the way down to individual, regional and local levels. And, they’ll all be part of this integrated set of enforceable reliability standards. Right now, while it’s an integrated set of standards, they are voluntary and not enforceable.

KD: Are there unknown areas of NERC that deserve more attention than they currently get?
DN: Well, there are a couple of areas that come to mind. One is in the critical infrastructure protection area. Since 9/11, we have re-doubled our efforts in this area.

The other area that is not very well known is our very detailed database activities related to the performance of electric generating equipment. We started this quite some time ago, back in the late 1970s. Very few people—besides those who use it— know about it. But, it’s an important element in the whole scheme of bulk electric system reliability.

KD: That’s a lot of data to work with.
DN: It’s tremendous. We’ve modernized the databases and analytical tools to the point where people can actually get a copy of the database and work with it firsthand. For example, if I have certain type of super-critical fossil unit, I can look at the performance of similar units of that class to see if I’m doing better or worse than others, and in what specific areas I could achieve the most improvement.

KD: Is it broken down by equipment per plant; is it also broken down by manufacturer?
DN: The data is broken down every which way. There are some limitations on who can see what parts of the data, but, other than that, we can look at groups of units of a similar size, a similar type and then be able to judge whether the unit that I’m operating is up to industry standards or falling below those standards.

KD: Do you have a database for the T&D side?
DN: No. It’s interesting you ask. Recently, there has been some renewed interest in doing that, but it would be just a lot of miles to cover and a lot of nuts and bolts, and the designs are so different from area to area. It would take probably years to get a similar system up and running for T&D equipment as exists as in the generation area.

KD: I appreciate NERC being willing to all get on the phone and talk to me for almost two hours now.
DN: Well, this is what we do: Keep the industry and the public informed. Some of us have been here a long time. I am here on a two-year loan assignment that began in 1977. It’s been a little more than two years. There have been a couple of blackouts since then, and I’ve seen NERC evolve from a small organization with a few staff people and a couple of committees to a very, very robust and active organization that is now in the limelight.

With the enactment of reliability legislation, I think we can take that next big step. It’s an exciting one; it’s also frustrating waiting for Congress to act.

We’re still hopeful that something will be passed this year. In the meantime, we’re looking for ways to encourage and to enforce compliance. One step at a time.

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Profile: NERC

Kathleen Davis, Associate Editor

[Editor’s note: In EL&P’s May/June issue, we’ll be introducing a few new features along with our new look. This feature, “Profile,” will take a close look at an industry player: company, agency, association, or individual. What follows is the first installment of a two-part series on NERC—a preview of the new EL&P.]

On March 18, I spoke with four of NERC’s leaders: Michehl Gent, president and CEO; David Cook, vice president and general counsel; David Hilt, vice president of compliance; and David Nevius, senior vice president. We discussed NERC’s place in the industry, the organization’s goals for the future, and Michehl Gent’s autographed baseball collection, which he was carefully packing during our interview (the offices were being repainted).

I got so much great information from the interviews that I had difficulty whittling it down to fit in one article—until I had the brilliant idea to split it in two.

In this installment, Michehl Gent and David Cook talk about reliability.

Click here to enlarge image

Michehl Gent,
president and CEO

KD: What’s your “pie-in-the-sky” vision of NERC’s future—in a perfect world, let’s say?
MG: In a perfect world, we probably wouldn’t have a role because everyone in the industry would behave in a proper way.

NERC’s job, in this imperfect world we have now, is to see that fairness, technical efficiency and economic efficiency are all accommodated without someone being unduly injured.

The way we’re doing that is through reliability rules and a compliance program that sees that those rules are followed. And, when the rules aren’t followed, we do something about it. When the rules are insufficient, we also step in and do something about it by creating new rules. That’s sort of the “pie-in-the-sky” type look at what NERC should be doing. Sometimes it’s just not that easy.

KD: So, that’s what NERC should be doing, but, in this imperfect world, how do you see NERC developing in the next five years or so?
MG: We have a plan that involves reliability legislation that’s now before Congress. I believe that there is no real debate over its value, but, after everyone agreed that this legislation is needed, they’ve gone on to ‘Christmas tree’ it with other items. So, we’re quite frustrated that we’ve had a bill before the House or Senate—or both—for the last six years and no action has been taken yet.

KD: Beyond the reliability legislation, what other areas are you expanding on?
MG: There seems to be a need for greater, faster, surer communications. So, we have several projects in which we are a type of “provider of last resort.” For example, we have a continent-wide frame relay system, which is a bit like the Internet, that is used by industry participants to exchange operating data. It’s a messaging system that is hooked directly into the government for national security issues, and it is fairly secure.

There’s also PKI, which stands for Public Key Infrastructure. It’s a way of communicating electronically that contains a security certificate that is attached to your communication and authenticates to the person that’s receiving it that you are who you say you are. It takes away all the ambiguity of communicating electronically, and it provides encryption and security. We’re developing that for the entire industry, and it will be used for all means of communication.

KD: When will the PKI system become viable for the industry?
MG: This year sometime.

KD: That quickly?
MG: It was supposed to be ready to implement at the beginning of this year, but we ran into a few folks that took a little convincing that PKI was the right thing to do. And, in the interest of fairness, we let them have their say. Now we’re back on track.

As the “provider of last resort,” issues like this fall to us because we do involve all of the industry in the U.S. and Canada in these projects or technical services.

We don’t like to maintain the responsibility for them, but we’ve done that from time to time, too. For instance, if you want to participate in the electricity marketplace, you have to register with us. We have the registration system for that, by default.

This registration will also put you into the ETAG system. We’re currently working to transfer the business aspects of ETAG to NAESB [North American Energy Standards Board]. Some years ago, when we brought in new participants, some people were uncomfortable with having the same individuals that did the technical reliability standards do the business rules. So, we exported the business rules to another organization that was formed originally to deal with natural gas business rules [the Gas Industry Standards Board, which became NAESB when it expanded to cover electricity, too]. They report to FERC. So, we’re gradually moving all the business stuff we can to NAESB. It’s working out very well. It wasn’t always thought that it would work out so well, but it has.

KD: They thought you’d be at each other’s throats?
MG: Most people thought, including me, that there would be some difficulties. But, that hasn’t come about, which is a tribute to the people involved.

KD: So, you have a lot of items on your plate.
MG: Yes. Somebody recently asked me, “What have you done in the last four years?” And, the pile of stuff is just incredible when you look back. We’ve remodeled the entire organization. We have a new independent board. We have a whole revamped committee structure; we have a prominent role in national security now, where we’ve been able to put all the industry together into our critical infrastructure protection committee. We serve as registrar for all industry market players.

KD: Do you find it common that people don’t really know what NERC does?
MG: It’s always a problem when somebody says, “Who’s NERC?” And, this is one of the prices you pay for being successful. On the microcosm scale, for example, take the system operator. His job is to be available and to act during an emergency. So, he’s essentially sitting there waiting for an emergency, and he’s not heralded until something goes wrong. Similarly, rarely do people want to sing NERC’s praises until something goes wrong.

We have a modest PR arm which Ellen [Vancko, their director of communications and government affairs] manages. I, jokingly, get on her about committing me to make too many speeches. Publicity hasn’t been our strong suit. Instead, we really try to see that the industry stakeholders get the credit, and they really deserve it. This organization is an incredible experience, and there’s nothing like it out there.

KD: What’s been your greatest accomplishment helming this organization?
MG: Keeping all levels of the industry together from the CEO down to the people actually responsible for operating the power system. We don’t want the industry to get fragmented on all the different issues. With all of the restructuring, it’s been very difficult to get people to focus on the things that are working. After the blackout, we have everyone’s support and attention though. Everyone wants to rebuild the public’s confidence in the industry, and we certainly want to be part of that. Right now reliability is king; we need to put something in place—namely legislation—to keep it there.

David Cook, vice president
and general counsel

KD: What is NERC doing to bring about reliability legislation this year?
DC: Several years ago we formed a broad coalition of the investor-owned utilities, the public utilities, the co-ops, customers, regulators, and Canadian utilities. All of us have been working together to get legislation through Congress. The reliability legislation that we’re supporting is in the conference report that the House approved in the comprehensive energy bill. It is also in Sen. Domenici’s slimmed-down version. So, we’ve been making sure that our language is in every bill that has a possibility of moving.

KD: Do you think it will get through this year?
DC: We believe it will because it’s the right thing to do now. We need to take these steps. It’s really a question of figuring out whether it will happen within the energy bill or, if that falters, whether it will get broken out and done on a stand-alone basis.

KD: Do you see anything hindering the process this year? It has had some problems in the past.
DC: For three or four years now, it’s been caught up in the broader issues around the comprehensive energy bill. We are hopeful that Congress can figure out a way to get it passed this year.

KD: What specific “reliability language” is NERC supporting?
DC: The bill establishes mandatory and enforceable rules; it makes them legally binding on all owners, operators, and users of the electric system in the U.S. Second, it gives FERC explicit jurisdiction over reliability matters. Third, the bill authorizes FERC to certify an industry self-regulatory organization that would have the authority to set and enforce these standards.

KD: Would that be a new organization, or will that be you?
DC: We will apply to FERC to be certified as that organization. And I don’t know of any other organization interested in taking that on. The legislation provides that FERC can certify only one such organization, and it has to be nationwide in scope.

Going back to the “reliability language,” the bill also authorizes a delegation of enforcement authority to regional entities and acknowledges that the grid is international, spanning borders. So, it directs this reliability organization to take steps to develop equivalent relationships and implementation in those other jurisdictions. That’s important because right now NERC is an international organization. We have a strong presence of Canadian participation, and it’s vital that we continue that.

KD: Will you be increasing participation from Mexico?
DC: I think over time that will happen. Right now, there’s only a small portion of the Mexican system that is connected into the U.S. and the rest of the North American grid, specifically below California. There are portions of Texas connected intermittently, but it’s not overall. I can imagine over time—the next decade or so—that may change, and there may be more electricity trade across the border that would justify tying the Mexican grid more into the U.S. grid. The legislation does recognize that.

KD: It leaves the door open.
DC: Exactly. And, additionally, one of the other things the legislation will do, is it will shift the funding base. Right now, NERC is owned by the ten regional reliability councils, and we get our funding from them. They get their funding from the utilities, co-ops, etc., that make up their membership. Under the new legislation, we will be getting funding more directly from all of the participants in the industry as part of the FERC oversight of the electric reliability organization’s activities in the U.S., which includes oversight of the budgeting function and how the costs are allocated across the grid.

KD: That’s an interesting change.
DC: I don’t know if you’re familiar with the Gas Research Institute, but they have a mechanism where they file their budget with FERC. And, FERC authorizes a small increment to be attached to the bills of the natural gas pipelines when they transport gas. And that funds research. We’re envisioning something similar to that, although the specific details haven’t been worked out. But, we would be filing our budget with FERC.

KD: Would that mean more money for you?
DC: Well, I think, given that we will be taking on more functions and an enforcement role, I would expect that there would be some additional amount in the budget. We also make tremendous use of industry volunteers. There are hundreds, perhaps thousands, who work on our committees. They do a lot of the work of this organization, and I would expect that to continue under the new regime as well.

KD: In what ways—and with what authority—can you push on issues like reliability?
DC: At this point, we have the agreement of the participants in the industry to follow the rules. It’s voluntary. We use peer pressure. There are parts of the grid where they have developed a contract-based enforcement mechanism. In the West, most utilities have agreed to subject themselves to fines if they violate the standards, and that is having some effect. They have seen substantial improvement in compliance with the rules. It’s not complete because signing the compliance agreement is voluntary, and not everyone has signed up for it. By and large, this is still a consent-based approach.

KD: If the legislation passes, what will you be able to do beyond voluntary compliance?
DC: For one, the law will require that the rules be followed. It will be a legal requirement. And that will apply regardless of jurisdictional status. Munis and co-ops aren’t now subject to FERC jurisdiction, for example. For reliability, everyone would be subject to that jurisdiction. And then we would be able to take enforcement action: investigate, fine, develop sanctions.

KD: Do you think the blackout of last year and the subsequent spotlight on NERC will give your organization more power in future regulatory dealings?
DC: There’s no question that right now the blackout has given us much higher visibility. We’re getting very strong support from all segments of the industry. It’s very clear that right now people are focused on this issue. My guess is, as with most things, over time priorities may shift, memories will fade, other issues will come to the fore. So, it will be more difficult, as we get farther into the future, to sustain the level of interest and support we have for reliability right now, unless we can institutionalize ways to keep reliability as a high priority item. The legislation is clearly one very strong way to do that. The board actions adopted in February—with readiness audits, clearer standards, compliance reporting, and follow-up on recommendations—is another way to keep that issue in the forefront of everyone’s thinking.

Part II in this series will be available in the May/June issue of EL&P and will feature interviews with David Hilt and David Nevius. EL&P would like to thank the staff at NERC for working so diligently to make this extensive interview happen.