In a new Final Rule issued December 20, 2012, the Federal Energy Regulatory Commission (FERC) approved changes to the definition of the “bulk electric system” (BES) that will be used by the North American Electric Reliability Corporation (NERC) for electric reliability purposes.  With few modifications, the Final Rule adopts changes that had been proposed by NERC in response to FERC Order No. 743, issued November 18, 2010.  [See our November 22, 2010 VNF Alert on Order No. 743.] 

The new BES definition is important because it establishes the process by which NERC and FERC will determine which elements of the electric system will be subject to and which elements will be exempted from mandatory electric reliability standards.  The final rule approved changes to the NERC procedures and implementation plan for granting exemptions from the BES definition.

The most significant change the final rule made to NERC’s proposed definition of the BES was to reserve for FERC a case-by-case determination of which facilities are “used in local distribution,” and thereby excluded from FERC jurisdiction under Section 215 of the Federal Power Act (FPA).  The final rule takes effect 60 days after publication in the Federal Register.

The new definition of “bulk electric system” includes any transmission element operated at 100 kV or above, and any real power and reactive power resources connected to the grid at 100 kV or higher, subject to an inclusion and exclusion process.  However, the final rule also makes clear that electric facilities and system elements that operate below 100 kV will also be included if they are “necessary for the operation of the interconnected transmission network.”  The new BES definition and the inclusion and exclusion process removes most of the discretion that regional reliability entities have in designating which electric system facilities are required to comply with electric reliability standards. 

The final rule identifies certain facility configurations as included within the BES that otherwise might not be self-evident.  These include:  transformers with primary terminals and at least one secondary terminal operated at or above 100 kV, generation facilities (including dispersed power facilities like wind and solar plants) with gross nameplate capacity above 75 MVA connected at 100 kV or above, and any blackstart resources identified in the transmission operator’s restoration plan (regardless of capacity or connection voltage).  The final rule clarified that generator tie-lines of 100 kV and above from generators with gross nameplate capacity above 75 MVA would also fall within the definition of the BES, and would not be excluded under the “radial system” or “local network” exclusions (see below). 

The exclusions focus on configurations serving radial and retail uses.  Among those system elements that will be excluded from the BES are: certain radial transmission systems that operate at 100 kV or above and primarily serve retail load; small to mid-sized behind-the meter generation resources, “local networks” that are not intended to facilitate power transmission beyond the local load area being served, and reactive power devices owned and operated by retail customers for their own use. 

The final rule rejected NERC’s proposed exclusion from the BES for generation facilities connected to radial systems, and FERC instead found that the radial system exclusion applies only to “transmission elements,” not generation elements in radial systems.  Significantly for wind farms and similar generation configurations, FERC disagreed with NERC that collector systems below 100 kV that deliver aggregated generation to the BES should be considered local distribution facilities, but did not require categorical inclusion of such collector systems in the BES definition.  In addition, the final rule clarified that transmission elements that qualify for the “radial system” exclusion may have only one point of interconnection to the grid; systems with more than one point of interconnection would not qualify as “radial.”  

The final rule approved a new process through which NERC-registered entities may request that certain facilities or elements be included in or excluded from the BES.  Under the new process, registered entities would identify “all facilities, including sub-100 kV elements, that are necessary for operating the interconnected transmission network” and submit those designations to NERC.  NERC would also be authorized to act independently to request a regional entity or other person to propose inclusion of specific facilities (including sub-100 kV facilities) in the list of BES facilities.  In rare cases (for example, after a system disturbance makes clear that an unlisted facility is necessary for BES reliability), FERC would also be able to require facilities to be included in the BES, after providing the opportunity for public notice and comment. 

The final rule clarified that registered entities must notify their regional reliability entity whenever they determine that one of their system elements is no longer a part of the BES.  Thus, the new process established by the rule envisions that NERC would formally keep a registry of system elements, and registered entities would designate specific facilities and system elements to be included in the BES registry. 

The final rule provides for a 24-month implementation period, which will begin upon the publication of the rule in the Federal Register.  This implementation period will allow owners and operators to plan for, register, and seek exemptions for facilities under the new definition.

The final rule found inadequate NERC’s proposed process for excluding facilities that are “used in local distribution” and therefore beyond FERC and NERC jurisdiction under the FPA.  According to FERC, NERC’s proposed process would not “adequately differentiate[] between local distribution and transmission facilities.”  Therefore, FERC reserved to itself the responsibility for determining, on a case-by-case basis, which facilities are used in local distribution. 

The rule suggests that FERC anticipates few cases to determine whether a facility is “used in local distribution,” because of the detailed process established by the new BES definition and the inclusion and exclusion process.  In such cases, however, the Final Rule requires regulated entities to petition FERC for a factual determination if there is a question as to whether a particular facility is “used in local distribution.”  To make such determinations, FERC will begin its analysis using the same “Seven Factor Test” established under Order No. 888 (which dealt with open access to transmission lines) to determine whether a facility is “used in local distribution” consistent with the jurisdictional limits of FERC and NERC authority established by Section 215 of the FPA.

The new BES definition provides clearer national guidance as to which elements of transmission, generation, or other facilities will be subject to reliability rules.  After the final rule is published in the Federal Register, the regional entities and NERC will have 24 months to create a more detailed NERC compliance registry and to apply the new BES definition, inclusion, and exclusion process to electric facilities and system elements.  During this period, owners and operators of facilities that are no longer included as a part of the BES may seek to deregister to end their federal reliability compliance obligations.  Other facilities will become defined BES elements for the first time, and will need to register with NERC and become compliant with all applicable reliability standards by the end of the 24-month implementation period.

With NERC and FERC retaining some discretion to determine whether system elements must be included in the BES, the new definition and exemption process do not establish absolute or “bright-line” criteria for all system elements.  Registered entities with facilities that are used in local distribution but that also may be determined to be necessary for the operation of the interconnected transmission network may wish to begin engineering studies and assessments to determine whether to petition FERC for exclusion of such facilities.

In addition, generators with tie-lines above 100 kV that connect a generation facility to the grid, but which are not currently considered “transmission facilities,” should determine whether the tie-line facilities must be included as BES transmission elements under the new rule, and if so, what new requirements would apply to the transmission owner(s) and operator.  FERC has previously determined that regional reliability entities and NERC have case-by-case discretion to determine which reliability standards apply to such tie-lines.  However, the process of making such determinations can be lengthy. 

In several places, the final rule states FERC’s intention that all facilities that are necessary for the operation of the interconnected transmission network be included as BES elements.  Applying such a rule to facilities that are both used in local distribution and are also “necessary for the operation of the interconnected transmission network,” however, may conflict with judicial decisions that have interpreted the phrase “used in local distribution” under Section 201(b)(1) of the FPA to preserve state jurisdiction over distribution facilities, even if those facilities also serve some transmission functions.  If reviewing courts find that the plain language of the phrase “used in local distribution” in Section 215 of the FPA similarly preserves state jurisdiction over local distribution facilities, FERC’s jurisdiction may be more limited than the final rule suggests. 

Van Ness Feldman will continue to monitor NERC and regional reliability entity developments preparing to apply the new BES definitions and processes, and is prepared to assist clients to understand and comply with the new BES definition and resulting compliance obligations.