In a time of increasing compliance requirements and enhanced regulatory scrutiny of power trading activities, a recent Federal Energy Regulatory Commission (“FERC”) order brought some compliance relief to power traders and marketers. In a March 19, 2015, order in Docket No. RR15-4-000, FERC approved a proposal by the North American Electricity Reliability Corporation (“NERC”) to remove the Purchasing-Selling Entity (“PSE”) function from NERC’s Compliance Registry and to no longer subject PSEs to compliance with mandatory Reliability Standards. As the PSE function was the only NERC compliance function directly related to commercial trading activities, removal of the PSE function will eliminate NERC compliance obligations directly arising out of trading activities.
Background NERC operates as the FERC-certified Electric Reliability Organization and, subject to FERC oversight, develops and enforces mandatory Reliability Standards applicable to users, owners, and operators of the Bulk Electric System (“BES”). NERC, working with its eight Regional Entities, registers entities that use, own, or operate elements of the BES for specific designated functions, depending on such entities’ activities. The functions for which an entity is registered determine what Reliability Standards will apply to such entity. Prior to FERC’s March 19, 2015, order, there were 15 functional categories, including the PSE function.
NERC’s Proposal In December 2014, NERC, as part of its Risk-Based Registration Initiative, proposed several changes to its Rules of Procedure and Compliance Registry. The proposed changes included, among other things, the removal of certain registered functions, including the PSE function (the other functions NERC proposed to remove – Load-Serving Entity and Interchange Authority – do not directly relate to commercial trading activities).
NERC’s Compliance Registry had defined a PSE as “[t]he entity that purchases, or sells, and takes title to, energy, capacity, and Interconnected Operations Services,” and stated that PSEs “may be affiliated or unaffiliated merchants and may or may not own generating facilities.” PSEs had been subject to compliance with four NERC Reliability Standards.
NERC’s basis for proposing to remove PSEs as a functional category subject to NERC registration and compliance requirements was that PSEs are commercial in nature and perform a market-driven function rather than a reliability-driven function. To that end, NERC explained that removing PSEs from the Compliance Registry would pose little to no reliability risk.
FERC’s Decision and Its Consequences In its March 19, 2015, order, FERC accepted NERC’s rationale that the PSE function is primarily market-driven and has minimal reliability impacts. FERC therefore approved NERC’s proposal to remove the PSE function from its Compliance Registry.
FERC’s approval of NERC’s proposal to remove the PSE function is significant because many entities (including many power marketing and trading entities) were only subject to NERC registration and compliance requirements because of their status as PSEs. In its December 2014 filing with FERC, NERC indicated that nearly 200 entities were subject to registration with NERC only as a result of their status as PSEs. These entities will now be deregistered and will no longer have NERC compliance obligations. PSEs that were registered for other NERC functions likely will continue to be subject to NERC registration and compliance requirements, but will no longer be subject to compliance requirements directly arising out of their trading activities. For example, entities that own or control BES-interconnected electric generation facilities and that also trade power will still be subject to registration for the Generator Owner or Generator Operator NERC functions, but will no longer be subject to registration as PSEs.
Client Alert 2015-075