The Federal Energy Regulatory Commission issued Order No. 717, in which it adopted significant changes to its Standards of Conduct regulations, on October 16, 2008.[1] On October 15,2009, FERC issued Order No. 717-A in which it generally reaffirmed its determinations in Order No. 717, but granted rehearing on and clarified certain provisions of the Standards of Conduct regulations.[2] On November 16, 2009, FERC issued Order No. 717-B in which it further clarified the applicability of the Standards of Conduct to employees who draft or redraft a contract without making business decisions.[3] The changes and clarifications that the Commission adopted in Order Nos. 717-A and 717-B are summarized below.

I. The Standards of Conduct Are Not Applicable to Transmission Providers with no Transactions with Marketing Affiliates.

Order No. 717-A clarified that the term “marketing function employee” of a transmission provider, as defined in § 358.3(d), does not include an employee of an affiliate that does not engage in transmission transactions on the affiliated transmission provider’s transmission system (P 16). This clarification does not change the applicability of the rule because, as FERC noted, Section 358.1(b) limits the applicability of the Standards of Conduct to transmission providers that conduct transmission transactions with an affiliate that engages in marketing functions (P 16). Consistent with that clarification, FERC confirmed that an employee who makes sales of electric energy is performing a marketing function only if the employee works for a public utility transmission provider or a company that is affiliated with such a provider (P 17). FERC also reminded the industry that a public utility transmission owner that is in a FERC-approved RTO or that is part of a FERC-approved ISO and has access to non-public transmission function information remains subject to the Standards of Conduct unless it has obtained a waiver (P 18). See 18 C.F. R. § 358.1(c).

II. The Independent Functioning Rule Does Not Apply to Employees Who Are Engaged in Balancing Activities.

Order No. 717-A corrected a statement at P 122 of Order No. 717 that day-to-day operation of the transmission system includes “balancing load with energy or capacity.” In the rehearing order, FERC stated that personnel who balance load with energy or generating capacity are not by virtue of those activities classified as transmission function employees (P 24). Of course, if the employee performs balancing functions and also performs transmission functions, the employee is a transmission function employee (P 24).

III. Employees Who Perform System Impact Studies are Transmission Function Employees.

In an important modification of the Standards of Conduct, Order No. 717-A held that the term “transmission function employee” includes employees who perform system impact studies or determine whether the transmission system can support a request for transmission service. In Order No. 717, FERC had clearly limited the scope of “transmission function employees” to persons who are involved in the actual day-to-day operation of the transmission system and who grant and deny transmission service requests, and it stated that persons who perform system impact studies are not thereby transmission function employees. See Order No. 717, P 122 and 147 and 18 C.F.R. § 358.3(h). Many in the industry had interpreted the order and regulations as indicating that the personnel who perform the system impact studies are not transmission function employees, but the employees who operate the OASIS and process the transmission requests are transmission function employees. However, in Order No. 717-A, FERC reversed itself, terming the change in policy a “clarification”, without any explanation of why it was changing its policy (P 27). This issue is the subject of pending requests for rehearing.

This “clarification” may have significant implications for some transmission providers. In some instances, the persons who perform system impact studies are the same persons who engage in strategic and long-range planning or integrated resource planning. Those planning personnel had been excluded from the “transmission function employee” definition by Order No. 717, thus eliminating one of the principal problems with the Order No. 2004 Standards of Conduct, which were widely perceived as interfering with efficient utility operations. Under Order No. 717-A, those planning personnel would be transmission function employees if they also perform system impact studies, and therefore could be prohibited from working with marketing function employees in the course of system planning.

FERC’s inclusion of system impact studies within the scope of transmission functions also creates uncertainty as to whether personnel who perform facilities studies are transmission function employees. Since the determination of the scope and cost of transmission upgrades needed to accommodate a transmission request is as important to the customer as the decision as to whether upgrades are needed in the first place, a conservative interpretation of the Standards of Conduct, as modified by Order No. 717-A, would be that personnel who perform facilities studies also are transmission function employees. Of course, this interpretation would be even more likely to result in classifying persons engaged in long-range transmission system planning as transmission function employees.

IV. FERC Clarified that Resales of Transmission Service Are Marketing Functions but Rejected Requests to Broaden the Scope of the Term.

Order No. 717-A held that any sale of transmission service under an open access transmission service or a pre-Order No. 888 grandfathered agreement constitutes a transmission function, but any resale or reassignment of such service is a marketing function (P 33).

FERC rejected several requests to roll back the improvements that it had made in Order No. 717. It denied requests to broaden the scope of “marketing function” to include purchases, retail sales and sales by Providers of Last Resort (PP 35-39).

V. FERC Did Not Adequately Clarify Whether Sales of Energy by G&T Cooperatives to Their Member Cooperatives Are Marketing Functions.

FERC responded positively in Order No. 717-A to a request for clarification that sales by G&T cooperatives to their members are not marketing functions, but it did not provide the clarification that was sought. The rehearing request asserted that the role of a G&T cooperative in making sales to its members (i.e., its distribution cooperatives) is nearly identical to the role of a vertically integrated investor-owned utility in making sales to its retail load, and that the G&T cooperatives should have the same access to transmission and generation information that vertically integrated investor-owned utilities have (P 32). FERC stated that it was clarifying the Standards of Conduct as had been requested. However, it held that if an employee of a G&T cooperative simply serves retail load, and does not engage in marketing functions as defined in the Standards, the employee is not a marketing function employee. The problem with the FERC’s statement is that G&T cooperatives generally do not engage in retail sales, but instead make wholesale sales to their distribution cooperatives. Therefore, a strict interpretation of the Standards of Conduct would lead to the conclusion that sales by a G&T cooperative to its member cooperatives are sales for resale that are marketing functions. This does not appear to be the result that the FERC intended. Several cooperatives have requested rehearing on this issue.

VI. FERC Rejected a Request for Clarification of Whether Sales of Gas by an Electric Utility Constitute Marketing Functions.

An electric utility requested the FERC to hold that an electric public utility employee who purchases and sells natural gas for generation or local distribution company functions is not a marketing function employee. In Order No. 717-A, FERC held that the issue of purchases was moot because Order No. 717 had excluded gas purchases from the definition of “marketing function” (P 70).[4] It rejected the request as it pertained to sales of gas, stating that the request was not adequately supported (P 74). However, since Order No. 717 modified the Order No. 2004 Standards of Conduct to provide that for public utilities, only sales of electricity (and not sales of gas) constitute marketing functions, it appears that the rehearing request was unnecessary and FERC’s rejection of the request has no impact on the electric industry.

VII. Persons Who Engage in Drafting Contract Terms for Power Sales are Not Marketing Employees if they Implement, but Do Not Make, the Business Decisions.

In Order No. 717-A, FERC stated that an employee in the legal, finance or regulatory division of a jurisdictional entity whose intermittent day-to-day duties include the drafting and redrafting of non-price terms and conditions of, or exemptions to, umbrella agreements is a marketing function employee (P 80). This constituted a reversal of long-standing FERC precedent. Under Order Nos. 889 and 2004, the industry had generally concluded that legal personnel were not covered by the “separate operations” requirement, so long as they were not directly involved in contract negotiations. This conclusion was buttressed by statements in FERC orders that attorneys who draft documents to conform to concepts developed by marketing function employees are not themselves marketing function employees. Under Order No. 717, it seemed clear that legal personnel who are involved in drafting model documents, but who are not involved in the actual negotiations, are not marketing function employees because they are not engaged in actual sales or face-to-face negotiations. See, e.g., the definition of “marketing functions” at 18 C.F.R. § 358.3(c) and Order No. 717, P 117, which emphasizes that only persons who are actively and personally engaged in marketing and contract negotiations are marketing function employees. However, in Order No. 717-A, FERC held that drafting of non-price terms of a contract constitutes a marketing function, pointing out that delivery terms or hub locations in a contract could be used to benefit an affiliate, and that any negotiated terms could be used to favor an affiliate. FERC also stated that it would consider waiver requests concerning employees whose intermittent duties involve drafting non-price terms and conditions (P 52). FERC’s expansion of the scope of marketing function employees could have had significant implications for utilities, and in particular smaller utilities that do not have legal, financial and regulatory personnel who are separately dedicated to the marketing function or the transmission function.

Against this backdrop and several expedited rehearing requests, FERC issued Order No. 717-B in which it essentially reversed itself on this issue. The Commission held that: (1) P 80 of Order No. 717-A was intended to state that an employee making business decisions about non-price terms and conditions can be considered a “marketing function employee” because that employee is actively and personally engaged in marketing functions; (2) an employee who simply drafts or re drafts a contract, including non-price terms and conditions, without making business decisions is not a “marketing function employee”; and (3) the findings in P 80 in Order No. 717-A did not intend to depart from the findings in Order No. 717 on this issue.

This means that attorneys, finance and regulatory personnel who provide advice concerning contracts, including drafting contract provisions at the request of marketing function employees, are not themselves marketing function employees. As has always been the case, if an attorney or other person actually makes the business decisions concerning a contract, such as determining the price or quantity of a power sale, that person is a marketing function employee. In short, Order No. 717-B restores the rules that have been in effect since the Commission issued Order No. 889 in 1996. It also seems reasonable to assume that the statement in Order No. 2004-A, P 157, that an attorney may implement a marketer’s business decision by negotiating contract provisions without becoming a marketing function employee, also continues to be valid. The validity of that statement is demonstrated by the Commission’s distinction in Order No. 717-B between persons who make the business decisions and those who implement them.

VIII. FERC Clarified the Role of Supervisors in Contracting.

Order No. 717-A provided useful clarification of the permissible role of supervisory personnel and managers in developing power sales and transmission contracts. It reiterated its holding in Order No. 717 that a supervisor is not engaged in the marketing function if that supervisor is simply signing off on a deal negotiated or proposed by someone else, and is not providing input into the negotiations. In Order No. 717-A, it expanded on that holding by clarifying that a supervisor also may approve or disapprove a contract and explain the basis for the decision without becoming a marketing function employee (P 83).

IX. Joint Meetings of Transmission and Marketing Employees Are Permitted, Provided that They Do Not Relate to Transmission or Marketing Functions and no Non-Public Transmission Information Is Disclosed.

Order No. 717-A provided useful clarification concerning the scope of permissible meetings between transmission and marketing function employees. FERC held that meetings including both transmission function employees and marketing function employees are not barred under the Standards of Conduct as long as the meetings do not relate to transmission or marketing functions (P 89). It also held that joint meetings may be held to discuss the development of reliability standards, RTO and ISO matters, regulatory and compliance matters and disaster/outage preparedness, so long as non-public transmission function information is not disclosed (P 90-91). FERC also stated that it will consider on a case-by-case basis requests for waiver of the prohibition against joint meetings for disaster/outage preparedness training during which non-public transmission function information will be discussed (P 91), although it seems unlikely that such waivers would be granted.

X. FERC Confirmed the Broad Applicability of the “No Conduit” Rule.

Order No. 717-A confirmed that the No Conduit Rule prohibits disclosure of non-public transmission function information to any of the marketing function employees of the transmission provider or its affiliate (P 97). In doing so, it pointed out that although the No Conduit Rule applies by its terms only to marketing function employees of the transmission provider, the definition of marketing function employee includes employees of the transmission provider and its affiliates. FERC also confirmed the clear language of the No Conduit Rule, which applies to all persons, and not just transmission function employees (P 98).

XI. FERC Modified The Transparency Rule to Clarify the Circumstances in which Transmission Information Must Be Disclosed.

Order No. 717-A modified Section 358.2(d) of the Standards of Conduct to clarify that transmission providers may allow their transmission function employees to provide non-public transmission function information to non-marketing function employees without having to disclose it to all transmission customers (P 113). As previously written, the section could have been interpreted to require that transmission providers must provide equal access to non-public transmission function information to all customers following disclosure of non-public transmission function information to non-marketing function employees. FERC also modified Section 358.2(a) – (d) to clarify that the general principles stated in those sections are not intended to identify every exemption, and that the exemptions are more fully described in subsequent sections of the Standards of Conduct (P 114).

XII. Internet Posting Requirements May Be Satisfied by Postings on the Public Portion of the OASIS.

Order No. 717-A confirmed that for purposes of compliance with the Internet posting requirements under the Standards of Conduct it is acceptable to post information on a publicly accessible portion of OASIS that can be reached from a transmission provider’s website by Internet link (P 117).

XIII. Names of Employees Need Not Be Posted on the Internet.

Order No. 717-A eliminated a possible basis for confusion concerning the posting of employee names on the Internet. At P 246 of Order No. 717, the Commission had stated that the posting of job titles and names of transmission function employees should be consistent with the separation of functions requirements. In Order No. 717-A, FERC confirmed that a listing of job title and description is sufficient for Standards of Conduct compliance, stating that its reference in Order No. 717 to employee names was incorrect (P 123).

XIV. FERC Made Several Other Minor Clarifications.

Order No. 717-A clarified that a “functional unit” of a transmission provider that performs marketing functions is not required to keep its books separately from those of the transmission provider (P 124).

FERC also clarified that its specification in Section 358.7(h)(2) of information that may be exchanged with marketing function employees without being simultaneously disclosed to all customers, so long as a recordation of the exchange is made, does not mean that all information listed in Section 358.7(h)(2) is per se non-public transmission information. It clarified that the recordation rule only applies to information listed in that section if the information also is non-public transmission function information (P 131-132, 136).

FERC clarified that the requirement to contemporaneously make a record of permitted communications of non-public transmission information to market function employees is satisfied by recording names, date, time, duration, and subject matter of the exchange. FERC stated that transmission providers should record details that are clear enough to allow FERC to determine what non-public information was exchanged and why this exchange of information was necessary (P 134).

As it has in the past, FERC declined to create a general rule stating when non-public transmission information is sufficiently stale that it can be disclosed without compliance with the “simultaneous disclosure” requirement (P 135).

FERC also clarified that information about a planned transmission outage is transmission function information, no matter how far in the future the planned transmission outage will occur (P 135). Consequently, all transmission outage information must be disclosed simultaneously to all transmission customers if it is disclosed to a marketing function employee.

FERC clarified that it will not require public utilities to comply with the NAESB Business Practice Standards incorporated by reference by FERC that require information to be posted in a manner inconsistent with Order No. 717 until the Commission issues a new standard conforming to the changes in Order No. 717 (P 148).

XV. FERC Clarified the Training Obligations of Transmission Providers.

Order No. 717-A clarified that the training requirement applies to supervisory employees only if they supervise other employees who are subject to the Standards of Conduct or who may come in contact with non-public transmission function information (P 140).

FERC also clarified that the obligation to provide training to covered employees applies on a calendar year basis, and does not require employees to be trained at least once every 365 days (P 142).