What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from ANNUAL REPORT

Transcription

1 2013 ANNUAL REPORT Midwest Reliability Organization What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from. ~ T.S. Eliot

2 TABLE OF CONTENTS Letter to Members... 1 Vision/Why We Exist... 2 Who We Are Purpose/What We Do... 6 Clarity: Driving Consistency and Excellence Improving Regional Consistency on Audits... 7 Further Driving Consistency within MRO... 7 Improving the ERO s Processes Assurance: Assessing Risk and Improving System Security and Resiliency A Risk-Based Approach to Compliance Monitoring Development of the Entity Risk Assessment Identifying Risks to Reliability through Assessments and Modeling 2013 Power System Modeling Year in Review MRO Long Term Reliability Assessments Transitioning to the New Critical Infrastructure Protection (CIP) Standards Version Results: MRO Operations Finance and Human Resources Utilizing Stakeholder Feedback to Implement Improvements...20 Results: Improved Reliability by Bringing the Eastern Interconnection Closer Together Learning from Event Analysis Improving Frequency Response in the Eastern Interconnection Results: Working with Other Regional Entities in Looking Foward Upgrading the MRO Website Strategic Plan...26 Closing Thoughts The Path Forward

3 LETTER TO MEMBERS 2013 was an outstanding year for Midwest Reliability Organization (MRO). Jeffrey Gust Chairman From my perspective as the Chairman of the MRO board in both 2012 and 2013, MRO s key accomplishments in 2013 related to the leadership of Dan Skaar and his executive team in three key ERO areas. At the top of my list is the work that MRO has done to develop and promote the Reliability Assurance Initiative or RAI. In June 2012, MRO made a formal proposal to NERC and the Regional Entities for MRO to conduct an RAI pilot project and the seeds of this proposal spread rapidly across the ERO Enterprise. While 2012 was mired in theory and concepts, you can see from the various articles in this Annual Report that the MRO was much further along on implementing real changes. These proposed changes were in part the results of the good work that stakeholders in our Region have done over the years particularly the Performance and Risk Oversight Subcommittee (or PROS) led by Joe DePoorter of Madison Gas and Electric with the fervor of an evangelist preacher. The work of the PROS has been instrumental in building a foundational understanding of internal controls, allowing the stakeholders in our Region to readily embrace the RAI concepts. I would be remiss if I did not highlight the leadership of American Transmission Company (ATC), which volunteered to participate in the RAI pilot. Doug Johnson, Manager of Compliance led the ATC effort. He spoke to the MRO Board twice last year and to countless stakeholders at industry meetings sharing ATC s experiences with the pilot and testing the Entity Risk Assessment protocol which you can read about later in this Annual Report. Anyone who heard Doug speak left confident that MRO is on the right path in its development of the RAI concepts and protocols. As a result, the MRO is more prepared in 2014 to further implement changes in compliance and enforcement. MRO also took leadership positions in helping to define how the issues surrounding COM-002 should be resolved, taking a characteristically sound, technical and practical approach to the issues with the goal of improving reliability at the heart of MRO s positions. Similarly, MRO has worked and continues to work tirelessly to address how individual wind turbines will be considered under the new BES definition so that the ERO continues to stay focused on risk the reliable operations of the BES. Daniel Skaar President and CEO As President and CEO, I believe another milestone for us was the work we have been doing to bring the Eastern Interconnection closer by championing continent-wide, or at least interconnection-wide Reliability Standards. This year continued a trend that started in 2012 when the Regions stopped drafting regional Reliability Standards. In 2013, we saw regional UFLS standards pulled back in deference to the NERC standard. We also saw continued progress in the Event Analysis area implementing the cause coding structure designed by NERC and the Regions. Our stakeholders do an excellent job analyzing the causes of an event and implementing changes to address those causes. As important as the work we do to help shape how MRO and the Regional Entities conduct their work in the future, is our day-to-day work to run a world class organization--high performing, ethically driven, and vision forward. In 2013, we received the results of Federal Energy Regulatory Commission s (FERC) 2012 audit of our budget formulation, administration, and execution. Prior to the audit report being released, MRO completed the two recommendations suggested by FERC s audit staff, no further action or compliance filing was necessary. We were pleased to have this validation of the operational controls we have in place to execute our responsibilities under Section 215 of the Federal Power Act. 1 We place the same performance expectations on ourselves as we do those that operate and use the Bulk Power System. During 2013, we made significant upgrades and changes to our information technology systems to provide security, resiliency and the platform to support a new web site in 2014 which will address stakeholders needs. We also made significant investments in training for our staff and positioned ourselves to implement RAI across the ERO enterprise and MRO. In short, we are well positioned to execute our strategic objectives in 2014 with your engagement and help. We look forward to another outstanding year of progress. Jeffrey Gust, Chairman of the Board Vice President Compliance and Standards, MidAmerican Energy Company Daniel Skaar, President and CEO Midwest Reliability Organization 1 The report can also be found at: 1

4 VISION Maintain and improve the quality of life through a highly reliable regional Bulk Power System. WHY WE EXIST Mandatory Reliability Standards for the electric industry were implemented in the wake of the 2003 Northeastern Blackout. This historic event was the impetus of industry regulation and is the reason that the Electric Reliability Organization (ERO) 2 and Regional Entities like Midwest Reliability Organization (MRO) exist. The purpose of regulating the industry is assure reliable operations of the Bulk Power System and prevent uncontrolled, large scale blackouts. 2 The Federal Energy Regulatory Commission (FERC) designated the North American Electric Reliability Corporation (NERC) as the ERO in NERC s website can be found at com/pages/default.aspx 2

5 Who we are MRO is one of eight Regional Entities 3 in North America operating under delegated authority from regulators in the United States and in Canada, under a Memorandum of Understanding with SaskPower and the Reliability Standards Regulation in Manitoba. In our Region, MRO is responsible for: 1) assessing compliance with Reliability Standards; 2) providing seasonal and long-term assessments of the bulk power system; and 3) conducting technical analyses of matters impacting bulk power system reliability. The MRO Region covers roughly one million square miles spanning the provinces of Saskatchewan and Manitoba, the states of Iowa, North Dakota, Minnesota, Nebraska and the majority of the territory in the states of South Dakota and Wisconsin as well as portions of Illinois, Michigan and Montana. The region includes more than 100 organizations that are involved in the production and delivery of power to more than 20 million people. These organizations include municipal utilities, cooperatives, investor-owned utilities, a federal power marketing agency, Canadian Crown Corporations, independent power producers and others who have interests in the reliability of the Bulk Power System (BPS). MRO operates as a non-profit, and membership in MRO is voluntary and free; affording organizations the opportunity to participate in the technical activities and governance of the organization. The MRO Region has a tradition of working successfully on reliability matters despite the complexities in seams, diverse constituencies, and jurisdictions. Approximately half of the load in MRO is public power, including Canada. MRO is a vital link to maintaining and expanding existing reliability relationships among regulators, bulk electric users, owners, and operators. 3 The other Regional Entities include: Florida Reliability Coordinating Council (FRCC); Northeast Power Coordinating Council (NPCC); ReliabilityFirst Corporation (RFC); SERC Reliability Corporation (SERC); Southwest Power Pool, RE (SPP), Texas Reliability Entity (TRE), and Western Electricity Coordinating Council (WECC). 3

6 Who we are (continued) MRO is governed by a hybrid stakeholder board with two independent directors and seventeen directors elected from seven industry sectors. The board s primary role is to set MRO s strategic direction and assure the organization meets its requirements under its governance documents and bylaws, and performs its responsibilities with due care and in an efficient and effective manner. The governance structure assures that decisions and determinations are made without discrimination or bias and are in the public interest. Board Roster Name Sector Company Term Ends Bob Harris Federal Power Marketing Agency Western Area Power Administration 2015 Brad Cox Generator and/or Power Marketer Tenaska Power Services Co Chris Fleege Investor Owned Utility Minnesota Power 2014 Dr. Massoud Amin Independent Director University of Minnesota 2015 Technological Leadership Institute Gordon Pietsch Cooperative Great River Energy 2015 Jeff Gust, Chair Investor Owned Utility MidAmerican Energy Company 2016 John McKenzie Canadian Utility SaskPower 2014 Ken Goldsmith Investor Owned Utility Alliant Energy 2016 Larry Koshire Municipal Utility Sector Rochester Public Utilities 2014 Lorne Midford Canadian Sector Manitoba Hydro 2013 Micheline Casey Independent Director Federal Agency 2014 Mike Risan Cooperative Basin Electric Power Cooperative 2016 Mike Rowe Transmission System Operator American Transmission Company 2014 Ray Wahle Municipal Utility Sector Missouri River Energy Services 2016 Richard Doying Transmission System Operator Midcontinent Independent System Operator, Inc Rod Scheel Investor Owned Utility Otter Tail Power Company 2013 Shane Mailey (2014 member) Canadian Utility Manitoba Hydro 2015 Silvia Parada-Mitchell Generator and/or Power Marketer NextEra Energy 2015 Teresa Mogensen, Vice Chair Investor Owned Utility Xcel Energy 2014 Thomas Vitez Transmission System Operator ITC Holdings 2014 Tim Rogelstad (2014 member) Investor Owned Utility Otter Tail Power Company 2016 Board of Directors Back row: Larry Koshire, Micheline Casey, Gordon Pietsch, Ken Goldsmith Front row: John McKenzie, Jeff Gust (Outgoing Chair) Back row: Bob Harris, Brad Cox, Tom Vitez, Mike Risan, Mike Rowe Front row: Teresa Mogensen (Incoming Chair), Richard Doying (Incoming Vice Chair) Tim Rogelstad (2014 member), Dr. Massoud Amin, Chris Fleege, Shane Mailey (2014 member), Lorne Midford 4

7 Who we are (continued) We provide Clarity on expectations with regulatory requirements, Assurance to the public of a reliable Bulk Power System through Results that improve reliability. Similar to Nike s Just Do It or Like a Good Neighbor, State Farm is There, MRO s Clarity Assurance Results or CAR theme represents our passion in our work. It is a constant reminder to staff and stakeholders of what we are trying to accomplish together. Executive Staff Alone we can do so little; together we can do so much. ~ Helen Keller Back row: Dan Schoenecker, Sue Clarke, Sara Patrick, Dan Skaar (president and CEO), Tom Tierney Front row: Jim Burley, Miggie Cramblit PRINCIPLES We are accountable for results provide clarity and assurance of procedures, processes and controls to improve the reliability of the Bulk Power System. We deliver meaningful outcomes to those we serve and use our funding wisely. We embrace our public trust obligation to be independent and transparent. We are collaborative in approach and seek constructive solutions. To those ends we are: Principled. Responsive. Rigorous. Objective. Innovative. Effective. We do the right thing, the right way. We earn trust each day by treating every person with respect, fairness and integrity. We have a sense of urgency to act on the basis of facts, risks, and the needs of others. We are accurate, exacting, and demanding to improve the reliability of the Bulk Power System. We are intellectually honest, truthful, candid, and act without bias. We embrace new ideas and lead change to improve the future. We create value for those we serve. Approved by the MRO Board of Directors on: December 17,

8 PURPOSE Strive to assure each Bulk Power System owner and operator within our region is a Highly Effective Reliability Organization. WHAT WE DO MRO provides a transparent, effective, and efficient reliability organization across a broad geographic region with open meetings and inclusive stakeholder processes: 1. MRO has a long tradition of managing within and across complex, multiple seams including an interconnection seam, structured markets to bilateral market seams, and an international border. 2. MRO creates a common forum for the region without barriers to participation. 3. MRO has a tradition of working successfully on reliability matters despite the complexities in seams, diverse constituencies, and jurisdictions. Approximately half of the load in MRO is public power, including Canada. MRO is a vital link to maintain and expand existing reliability relationships among regulators, bulk electric users, owners, and operators. 4. Because of the unique power system technical configurations, such as very long distances between load and generator, stability-limited transmission, the large percentage of hydro generation, and the diversity of its constituency, the MRO has the ability and means to represent its own regional reliability interests for the benefit of the users, owners, and operators of the bulk electric system and the public it serves as a Cross Border Regional Entity (CBRE). 6

9 Clarity: Driving Consistency and Excellence Improving Regional Consistency on Audits Ken Gartner, CMEP Process Principal Over the last several years, the Regional Entities have made concerted efforts to more efficiently and effectively perform audits of Registered Entities--with each Region making improvements to its individual processes. At times, these changes did not drive consistency among the Regional Entities nor did they leverage best practices already in place at other Regions. Registered Entities, specifically those registered in multiple Regions, expressed concern regarding the inconsistencies within and across the Regions. In the fall of 2012, a third-party was hired by the Regional Entities and NERC to help identify ways to improve audit process consistency within the Electric Reliability Organization (ERO), and identify best practices already being used within the Regions. One of the third party s recommendations was to create an ERO-wide checklist of steps to be performed for each audit, along with the creation of a handbook to explain in more detail what is involved with each checklist step. The intended use of these tools is to drive consistency across Regions during the conduct of audits and to leverage best practices, not to define how to audit the NERC Standards and Requirements (guidance for application of the standards appears in other places like the Reliability Standards Audit Worksheets). During the first part of 2013, representatives from each of the eight Regions spent several weeks creating the ERO Auditor Checklist. After the checklist was reviewed and approved by the Regions, the process of creating the accompanying Auditor Handbook began. Representatives from each of the eight Regions have been working over the last few months to develop the Handbook, with the goal of having the first version finished by early Following publication of this initial version, ERO auditors will go through training on both the Auditor Checklist and Handbook, with the intent to use these tools later in Both documents will be living documents that will evolve as the ERO continues to work on ways to improve how audits are performed. Further Driving Consistency within MRO Dan Skaar, President and CEO MRO s compliance and enforcement work is designed to monitor, assess and enforce compliance with Reliability Standards approved by the Federal Energy Regulatory Commission in the United States and in Canada adopted through a Memorandum of Understanding with SaskPower and under the Reliability Standards Regulation in Manitoba. MRO is one of eight Regions with similar responsibilities; of the eight Regions, three Regions have cross-border responsibilities. Since our inception, MRO has worked continuously to improve the efficiency and effectiveness of our compliance and enforcement work and processes. This year, with the development and implementation of the Reliability Assurance Initiative (RAI), we established a new position to help implement the continued improvement efforts underway around the RAI and MRO s internal processes. With more than two and half years of experience performing compliance audits at MRO, and several years prior to MRO performing external, internal, financial, IT, Sarbanes-Oxley (SOX), and compliance audits and reviews, Ken Gartner moved into the role of Compliance Monitoring and Enforcement Program (CMEP) Process Principal reporting directly to me. Some of the current activities for Ken include helping to drive continued improvements around: scoping and executing audits; creating new audit report formats; processing audit findings; managing NERC Self-Reports and Self-Certifications; and performing internal MRO quality assurance activities to ensure MRO is following new internal processes. This level of internal oversight of MRO s compliance and enforcement procedures will help drive efficiencies and internal process improvements, help prevent undue discrimination, and provide assurance to Registered Entities that MRO will conduct its work consistently among audited entities. 7

10 Clarity: Driving Consistency and Excellence Improving the ERO s Processes Sara Patrick, Vice President Enforcement and Regulatory Affairs Throughout 2013, MRO has been actively focused on implementing a risk-based approach to our CMEP responsibilities. With regard to enforcement, the end state vision reserves the enforcement process for significant matters by creating a new path outside of the enforcement process for matters that do not pose significant risk to reliability of the BPS. This alternative path allows the Regional Entities to exercise appropriate discretion to determine whether to initiate an enforcement action or to address an issue outside of the enforcement process for matters that do not pose significant risk. Leveraging the successful implementation of the Find, Fix, Track and Report process (FFT), MRO has been leading efforts across the ERO to achieve this end state vision through improvements to the FFT processes. The FFT recognizes that not all instances of noncompliance require the same type of enforcement process. With FFT, a noncompliance matter is formally identified as a Possible Violation. As FFT continues to evolve, we anticipate we will arrive at the point where an instance of noncompliance that would have been processed as a violation under FFT does not trigger an enforcement action. Rather, the Regional Entity would have the discretion not to initiate an enforcement action. This is an essential component of the work the ERO is doing in the Reliability Assurance Initiative. With input from industry stakeholders, the ERO enterprise (NERC and the Regional Entities are defined as the ERO enterprise ) identified the need to expand and enhance the FFT program and improve the process by which self-reports are submitted by Registered Entities. MRO was asked to respond to this need with input from an Industry Focus Group comprised of six geographically and functionally diverse Registered Entities to ensure a greater understanding of the concerns. Between April 2013 and July 2013, MRO conducted meetings with enforcement staff from NERC, each Regional Entity, and the Industry Focus Group to clarify key issues associated with the FFT and self-report programs and identify solutions or enhancements. In addition to determining a common understanding of the concerns, the Industry Focus Group confirms that the efforts undertaken by MRO, NERC, and the Regional Entities are actually addressing the concerns. As a result of those meetings, there are a number of short-term solutions that NERC and the Regional Entities plan to implement by the end of the first quarter of 2014, including: Comprehensive ERO Self-Report User Guide: A Regional Project Team is developing a uniform, comprehensive user guide that will explain the type and quality of information that must be submitted in order to allow for a prompt evaluation. The intent of this effort is to improve the quality of information provided to assist the Regions in making prompt, informed enforcement determinations. The guide will cover the information needed for risk assessments and information about mitigation activities. This effort includes review and comment from the Industry Focus Group to better ensure clarity of the guidance. The Self Report User Guide is currently under review by the Industry Focus Group and is anticipated to be complete and available in January Early triage with off ramp for minimal risk issues: On average, within 60 days of discovery, the Regional Entities will review noncompliance and determine whether: there is enough information to support a finding of minimal risk; more information is required prior to determining the disposition; or the noncompliance needs to proceed under the formal enforcement process. This effort is intended to address concerns regarding timeliness of resolution of minimal risk issues and improve communication with the Registered Entities. As a practical matter, it is expected that over time there will be fewer minimal risk FFTs and more minimal risk issues addressed outside of a formal enforcement action, with FFT being reserved for certain moderate risk issues or issues with ongoing mitigation. All of the Regional Entities will implement the early triage process by January

11 Clarity: Driving Consistency and Excellence Improving the ERO s Processes (continued) Multi-Region Registered Entity (MRRE) Process: To address concerns of Registered Entities located in more than one Regional Entity footprint, NERC and the Regional Project Team are evaluating current practices that have been used to coordinate compliance, mitigation and enforcement responsibilities and will develop a process that reflects the current best practices and any necessary changes to current practices. This effort requires coordination with multiple groups within the ERO to identify and improve current practices throughout the entire CMEP process. The Regional Project Team anticipates completing the process in late 2013, with guidelines to be implemented in a coordinated manner in It is important to note that as the ERO works toward greater uniformity and standardized practices and procedures, there should be less need for a MRRE Process. In addition to these short-term initiatives, the July 2013 meetings with NERC, the Regional Project Team, and the Industry Focus Group culminated in a proposal to implement certain incremental changes to the technology systems used by NERC and the Regional Entities to store and process information associated with noncompliance. The changes include overall improvements to the current process, as well as an automated process for monitoring, tracking, and reporting instances of noncompliance outside the formal enforcement process. In working through this process, the Regional Project Team addressed the reporting needs expressed by NERC and the Industry Focus Group. Implementation of these system enhancements will support Regional Entities as they exercise increased discretion to resolve instances of noncompliance outside the formal enforcement process. Most notable for achieving the desired alternative path to a formal enforcement action, under MRO s leadership, two pilot programs have been developed and are being implemented to demonstrate the concepts underlying the end-state vision. Pilot Program for Aggregating Minimal Risk Issues: Beginning in October 2013, MRO was one of five Regional Entities (FRCC, MRO, NPCC, SERC, and Texas RE) that implemented the first phase of a pilot program for aggregation of minimal risk issues. This pilot allows a small number of Registered Entities with a demonstrated history of initiative and recognition of compliance obligations, reliable and accurate self-reporting of noncompliance, comprehensive internal compliance programs, and performance during regional compliance audits, to aggregate minimal risk issues that would otherwise be individually self-reported. The Registered Entities participating in the pilot will maintain a record of instances of noncompliance with individually specified NERC Reliability Standards, determined by the Registered Entity to pose a minimal risk to reliability of the BPS. The record will include the relevant standard and requirement, a description of the issue, an assessment of the risk to the BPS posed by the issue, and the actions taken to mitigate the issue and prevent recurrence. This information is compiled in a spreadsheet similar to the FFT spreadsheets that have been used since September The initial pilot period is October 1, 2013 through April 1, Pilot Program for Exercise of Enforcement Discretion: Beginning in November 2013, MRO implemented the first phase of the pilot program for Enforcement Discretion to identify minimal risk issues which would be recorded and mitigated without triggering an enforcement action. This pilot began with minimal risk issues discovered through the RAI internal control audit pilots being conducted by MRO. At this time, only issues with a minimal risk to the reliability of the BPS are eligible for inclusion in this pilot. The inclusion of moderate risk issues will be considered for future expansion of the pilot. Finally, MRO is leading a project designed to develop guidelines for exercise of greater discretion in identifying when noncompliance requires formal enforcement action. The goal of the project is to provide a clear understanding of what constitutes a serious and substantial risk that would make an issue ineligible to be addressed outside of the enforcement process. While there are criteria in place that are used today to identify serious and substantial risk issues 4, there is an opportunity for further refining and clarifying the criteria going forward. As we move into 2014, MRO will continue to lead efforts with NERC and the Regional Project Team to provide guidelines to inform the exercise of discretion in identifying instances of noncompliance that do not require a formal enforcement action. In April of 2014, NERC and the Regional Entities will evaluate the results of the initial pilots and develop a strategy for expanding these efforts. MRO anticipates that NERC will make a filing with FERC to review the results of the pilots and seek any necessary or desirable changes to existing rules during the fourth quarter of Serious and substantial risk issues generally involve or result in: (a) extended outages, (b) loss of load, (c) cascading blackouts, (d) vegetation contacts, (e) systemic or significant performance failures, (f) intentional or willful acts or omissions, (g) gross negligence, or (h) other misconduct. 9

12 ASSURANCE: Assessing Risk and Improving System Security and Resiliency A Risk-Based Approach to Compliance Monitoring Tom Tierney, Director of Compliance The Reliability Assurance Initiative (RAI) is intended to identify and implement changes to enhance the effectiveness of the ERO Compliance Monitoring Enforcement Program (CMEP). The RAI recognizes that it is not practical, effective, or sustainable for the ERO and Registered Entities to continue to monitor and administer all compliance-related matters to the same degree, regardless of risk, or to process all findings and discrepancies as compliance violations with the same degree of enforcement and evidentiary documentation. In 2013, MRO conducted a pilot audit with American Transmission Company (ATC) as part of the ERO-wide RAI. Through the pilot audit, MRO s goal was to develop and demonstrate procedures for: assessment of the inherent risk posed to the BPS by a given Registered Entity; identification and evaluation of the entity s management practices related to compliance with NERC Reliability Standards; development of regulatory compliance monitoring scope based on the entity s inherent risk and management practices; and assessment of risk associated with findings of non-compliance, reserving enforcement for the most significant matters. While developing its risk-based approach, MRO sought to meet five criteria: 1. All elements of MRO s regulatory approach are grounded in professional standards, e.g. the Government Accountability Office Yellow Book. 2. MRO s work is still directly tied to our jurisdiction under the Compliance Monitoring and Enforcement Program (CMEP) and to Registered Entities compliance with Reliability Standards. 3. The approach recognizes Registered Entities existing management practices around risks and Reliability Standards. 4. Processes are repeatable to ensure uniform application of risk-based concepts and prevent undue discrimination in MRO s work. 5. All monitoring and enforcement activities continue to maintain the public interest. With these criteria in mind, MRO staff developed three key tools: the Entity Risk Assessment (ERA) process, a Business Management Practices/Internal Controls survey, and additional categorizations for audit findings and accompanying changes to the audit reporting process. The ERA process is used to evaluate the inherent risk of a given Registered Entity, considering a variety of factors such as: BPS facilities owned or operated interconnection points, mitigation of past non-compliance, special protection systems, and more. The result of the process is a matrix identifying the Reliability Standards and requirements that are considered significant for the entity based on the areas in which the entity poses the most significant risk to the BPS. The Business Management Practices/Internal Controls survey provides a mechanism to gather information on a Registered Entity s management practices related to compliance with the identified Reliability Standards. 10

13 ASSURANCE: Assessing Risk and Improving System Security and Resiliency A Risk-Based Approach to Compliance Monitoring (continued) The ERA and the Registered Entity s management practices are considered together when determining the regulatory scope of compliance monitoring activities. Where management practices are deemed effective in preventing and/or detecting non-compliance, MRO may reduce its monitoring scope. As part of the ATC pilot audit, a limited number of management practices were evaluated as proof of the concept. Based on results of ATC s ERA, the COM Standard was entirely eliminated from the scope of the audit and testing related to the PRC Standards was scaled back significantly because MRO staff reasonably determined that the Registered Entity can be relied upon to self-monitor itself and take necessary corrective actions. The resulting scope for ATC s audit was similar in size, based solely on the number of standards and requirements, to the 2013 NERC Actively Monitored Standards list (AML): 31 standards were included in the revised scope compared to 33 standards on the AML. However, the particular standards and requirements that were included differed significantly, directly reflecting ATC s unique characteristics and the risks it poses to the BPS. Fieldwork for the audit was conducted in early November, and MRO staff is now working on the categorization of audit findings, which will support an improved audit report. Findings may be categorized as Possible Violations, which represent significant issues that will be subject to enforcement proceedings, or may be considered Compliance Exceptions. A Compliance Exception while still an instance of non-compliance, is deemed less significant because of the risk posed to the BPS and is documented as part of a Registered Entity s compliance history but is not subject to enforcement. Compliance Exceptions will be addressed through appropriate mitigation plans. Areas of Concern may also be identified, these are areas that are not currently considered to be non-compliant but that may result in future non-compliance if not addressed. The final categorizations will be captured in the audit report that is presented to the Registered Entity. Throughout the pilot effort, as the new tools and processes have been developed, MRO has leveraged its stakeholders to review and provide feedback, ensuring that the changes are well understood by Registered Entities and any concerns are addressed. Beyond ATC s direct feedback, all documentation was reviewed by the MRO Compliance Committee s Performance and Risk Oversight Subcommittee and presented to the MRO Board of Directors. As part of the pilot process, MRO staff has revised the tools and procedures and will be leveraging these tools as part of its CMEP implementation throughout Effective implementation of the RAI will deliver the results needed to scale our regulatory work around risk. Registered Entities will be able to resolve minor matters more effectively by setting self-monitoring programs consistent with High Reliability Organization 5 principles and becoming HEROs. 5 MRO adopted the concept and principles of High Reliability Organizations (HROs) 5, and this has become the foundation of our work. The five principles of HROs really capture the capacity to identify and contain risks to the reliable operations of the BES. They are: 1. Preoccupation with Failure. 2. Reluctance to Simplify. 3. Sensitivity to Operations. 4. Commitment to Resilience. 5. Deference to Expertise. Refer to Managing the Unexpected: Assuring High Performance in an Age of Complexity by Karl E. Weick and Kathleen M. Sutcliffe. 11

14 ASSURANCE: Assessing Risk and Improving System Security and Resiliency Development of the Entity Risk Assessment Richard Burt, Principal Risk Assessment and Mitigation Engineer Since the beginning of mandatory Reliability Standards, the ERO enterprise followed the zero tolerance regulatory approach outlined in the CMEP. This one size fits all approach expects perfection and does not consider the complexities of the grid, resulting in fines and enforcement actions for corrected minor findings that add administrative burden onto Registered Entities. MRO soon concluded that penalizing entities for correcting violations and self-reporting the problem was not consistent with an ethical organization. 6 Therefore, early on MRO implemented zero dollar penalties and strongly advocated for streamlined processes that included alternative paths to enforcement to resolve minor matters and matters that had been self-corrected. It seemed to MRO that the ERO enterprise was using the administrative-intensive enforcement process as a means to document all noncompliance matters, rather than scaling the process around risk. Recognizing how inefficient the existing regulatory approach was and that it was not a good use of resources for either the Regional Entities or the Registered Entities, MRO has been instrumental in the current RAI work. Added discretion exercised by MRO must include effective internal governance controls to assure that MRO s work is performed without discrimination and at a level of rigor that serves the public interest. One of MRO s first initiatives in 2009 was establishing an internal three-step process, which separates the regulatory functions of Compliance, Risk Assessment and Mitigation, and Enforcement. The purpose of this segregation of duties is to ensure independence between those making the findings, those assessing the risk, and those determining and negotiating penalties and sanctions. This organizational structure also provides Registered Entities assurance that MRO is accurate and consistent in its application of the NERC Reliability Standards. This three-step process ensured MRO was prepared to succeed with RAI. Additional internal controls will be embedded into our RAI processes. As part of the RAI, MRO is shifting its compliance monitoring processes to a risk-based approach. The purpose of a risk-based approach is to concentrate our efforts on areas that present the most risk to the reliability of the BPS; this allows movement towards a more focused, customized risk-based approach through the development of an Entity Risk Assessment (ERA), which MRO uses to scope our oversight plans. 6 See The Path Forward by President and CEO Dan Skaar at page XX of the 2013 Annual Report. 12

15 ASSURANCE: Assessing Risk and Improving System Security and Resiliency Development of the Entity Risk Assessment (continued) The ERA is created by analyzing specific Registered Entity data to determine the Registered Entity s inherent risk to the reliability of the BPS. The ERA includes both a summary document highlighting the specific high-risk areas, as well as a scoping document that MRO tailors to each Registered Entity. The summary document contains an overview of the Registered Entity and includes information such as functional registration, facility ownership and operation, geographical location, and any other unique characteristics that may impact the Registered Entity s inherent risk. The scoping document includes an analysis of each requirement that is applicable to the Registered Entity in order to develop a customized risk-based scope. Other factors that MRO includes when determining a Registered Entity s inherent risk is an entity s compliance history, BPS events, operating history, industry trends and previously completed mitigation plans. Based on its evaluation of these elements, MRO may remove certain requirements with low risk or administrative tasks from its monitoring scope in order to focus on the Reliability Standards that are most material to BPS reliability for the Registered Entity, leading to more effective compliance monitoring engagements and lessening the administrative burden on the Registered Entity. MRO would like to see a tighter, more formalized feedback loop between compliance monitoring and the Reliability Standards, so that the Reliability Standards which are never in scope for oversight because of the low risk (ex. duplicative, administrative only) can be deleted from regulation and deficiencies in the existing Reliability Standards can be addressed through better clarity. Changing to a risk-based approach is a more effective way to monitor Registered Entities compliance with Reliability Standards. Through the ERA process, a Regional Entity gains a thorough understanding of an entity s inherent risk to determine the scope of the Registered Entity s oversight using the CMEP. Additionally, a risk-based approach considers the important relationships and links between Reliability Standards and functions such as protection system maintenance (PRC-005) for Transmission Owners versus Distribution Providers. Even though MRO s compliance monitoring processes are changing, it does not change the Registered Entity s obligation to comply with the NERC Reliability Standards. In other words, just because Reliability Standards may not be in MRO s scope, Registered Entities are expected to comply with all Reliability Standards and MRO may use methods to randomly test compliance with these other Reliability Standards. All of these efforts demonstrate MRO s dedication to its vision to maintain and improve the quality of life through a highly reliable regional bulk power system. Because of this, MRO will continue to evolve and improve alongside of industry. Identifying Risks to Reliability through Assessments and Modeling 2013 Power System Modeling Year in Review Ben Lewiski, Staff Engineer Power system models are the foundation of almost all power system studies. They are used to calculate operating limits, to assess impacts of load growth and new resources, and to assess the performance of transmission systems. As the current Bulk Power System gets stretched to new limits due to new resources mixed with new technologies, new markets, and new responsible entities, it is critical that models are detailed and accurate and that the associated Reliability Standards are clear and strong. Model Building has had a considerable amount of activity and made significant progress over the past year, with the focal point being NERC s MOD-B project. The MOD-B project has been a year-long effort to revise Reliability Standards MOD-010 through MOD-015 in response to outstanding FERC directives 7 and suggestions from various industry technical groups, such as the NERC PC System Analysis and Modeling Subcommittee (SAMS) 8. Of the existing six MOD B standards, only two were approved by FERC in order 693. Four standards were not approved due to their fill-in-the-blank nature, with requirements applicable to the Regions. In early 2013, NERC began an informal development process to engage industry subject matter experts in achieving consensus while responding to the outstanding directives and suggestions. The informal development team held many outreach presentations through mid-2013, including a May conference in Bloomington, MN that was well attended by MRO members. 7 Consideration of Issues and Directives Project Modeling Data (MOD B) 8 NERC PC SAMS whitepaper, December 2012 Planning Committee agenda packet, item

16 ASSURANCE: Assessing Risk and Improving System Security and Resiliency Power System Modeling Year in Review (continued) The informal development process was the precursor to the efforts of the formal Standard Drafting Team, which posted MOD (Data for Power System Modeling and Analysis) and MOD (Steady-State and Dynamic System Model Validation) for an initial ballot and comment period in August. The two proposed Reliability Standards continued to be revised through the end of the year, with MOD posted for final ballot in December. The model validation standard is currently posted for an additional ballot and comment period ending mid-january. Ballot details and supplementary information can be found on the NERC website MOD-B project page 9. In addition to the MOD-B project, model improvement efforts were undertaken this year by both the Eastern Interconnection Reliability Assessment Group (ERAG) Multi-Regional Modeling Working Group (MMWG) and the MRO Model Building Subcommittee (MBS) to better align the frequency response of dynamic simulations with actual event data. The MMWG is focusing on creating three Frequency Representative near-term cases in its 2013 Dynamics Series by updating governor and load controller models. Similarly, the MRO MBS sent a data request to Generator Owners in August requesting a review of outdated governor models. The MBS request included instructions on how to model governors with standard software library models when detailed data is not available. Additionally, the MBS request included a short survey to assist the MMWG in determining each generator s expected response to frequency events. With the improvements made in 2013, the MMWG intends to create a complete set of frequency representative cases for the 2014 series. A final notable improvement made in 2013 has been the implementation and testing of the new System Dynamics Database at the MMWG level. The system, dubbed websddb, is a secure cloud-based repository capable of bulk upload, download, and validation of dynamics data. When member access is opened in 2014, MRO data representatives will be able to view, submit, edit, and validate dynamics data within the web-application. The database will also be capable of matching powerflow cases with dynamics models, and is expected to facilitate and expedite the model building process. MRO s model building activities will continue to be an important aspect of improving reliability in the MRO Region and bringing the Eastern Interconnection closer together by retiring the fill-inthe-blank standards and identifying the entities responsible for providing the modeling data and creating this foundation for future wide area power system studies. 9 NERC MOD-B - Project

17 ASSURANCE: Assessing Risk and Improving System Security and Resiliency MRO Long Term Reliability Assessments Salva Andiappan, Manager Reliability Assessments and Performance As part of its responsibility to support regional reliability of the BPS, MRO performs periodic seasonal and long-term reliability assessments of the BPS through studies of generation and transmission availability and reviews of forecasted system conditions. This process begins with data collection from the generation and transmission owners in the MRO Region and results in an assessment of expected present (summer and winter), near-term and long-term reliability. In addition to doing the assessments as required by the NERC Rules of Procedure and Regional Delegation Agreements, MRO is also one of the six Regions that participates on the Eastern Interconnection Reliability Assessment Group (ERAG) for the inter-regional reliability assessment studies and review of emerging issues for the entire Eastern Interconnection. In 2013, MRO and ERAG undertook a significant effort to improve the existing generator governor model data in an effort to better simulate the frequency response of the Eastern Interconnection. The change was initiated due to recommendations from the Eastern Interconnection Frequency Response Report that was jointly conducted by ERAG Regional Entity Staff and NERC. Such efforts and teamwork between the Regions and NERC are critical in resolving issues and providing the industry technical support to maintain and improve the reliability of the bulk power system. Highlights of the recently completed MRO Regional 2013 Long Term Reliability Assessment 10 include: Standing and emerging reliability issues such as: environmental or greenhouse gas regulation coordination outages for retrofits gas and electric interdependencies uncertainty in load forecast integration of variable energy resources transmission development delays critical infrastructure protection extreme weather events aging infrastructure Annual demand growth continues to increase as the economy improves and normalizes in the Midwest. A total of 12,723 MW of planned capacity additions will be added between 2014 and 2023 in the MAPP, MISO, Manitoba Hydro, SaskPower and SPP RTO Planning Coordinators footprints. Approximately 1,182 MW of announced planned unit retirements or suspensions is expected to take place in the same assessment period within the five MRO Planning Coordinator s footprint. MISO is projecting an additional 11 GW of existing capacity resource will be retired or suspended by Four of the five Planning Coordinators in the MRO Region are projecting adequate planning reserve margin over the next 10 years to meet its reserve margin requirements; however, MISO is projecting a shortfall of its Planning Reserve Margin requirements as early as The shortfall is primarily due to reduction of 11 GW of existing resources. Potential mitigations, such as assessing key components of the projected Anticipated Reserve Margin including, but not limited to, the potential for more Future-Planned additions, the potential for growth in Demand-Side Management, the additional support anticipated from the MISO Southern Region, the potential for transmission upgrades to mitigate current generation deliverability constraints, and the potential for transmission upgrades to convert current energy-only resources to network resources that could mitigate some of or the entire projected 2016 shortfall. Installation of new wind resources is beginning to slow and decline in the upper Midwest; approximately 569 MW of future planned nameplate wind generation will be installed by the end of This assessment can be found at 15

18 ASSURANCE: Assessing Risk and Improving System Security and Resiliency MRO Long Term Reliability Assessments (continued) A total of 7,449 circuit miles of planned transmission is planned to be built during the 10-year assessment period within the five MRO Planning Coordinators footprints. NERC has identified a majority of the bulk power systems in North America as having sufficient Planning Reserve Margins to maintain reliability through the long-term horizon. That said, there are significant challenges facing the electric industry that may shift industry projections which adds considerable uncertainty to the long term assessment. Future uncertainties include electricity market changes, fuel-prices (natural gas in particular), potential environmental regulations, and renewable portfolio standards. NERC has identified some key findings and issues the electric industry will face for the next 10 years. These include: Planning reserve margin deficiencies in ERCOT; more resources are needed quickly to minimize the risk of firm load shedding. Coal generation retirements in MISO resulting in reduced reserve margins could lead to stressed condition for the summer seasons as early as in 2015 if resources do not come online. Over 85 GW of aggregate projected long-term capacity lost for retirements, environmental control retrofits, and derates can impact reliability. Increased dependence on natural gas for electricity generation increases the need for additional planning and operational coordination to prevent potential natural gas supply and transportation issues. Renewable resource additions introduce new system planning and operational challenges. Increases in demand side management help offset future resource needs and provide more flexibility for system planners. The 2013 Long Term Reliability Assessment report is now posted on the NERC Reliability Assessments website at com/pa/rapa/ra/pages/default.aspx Over the next 10 years, the electric industry will face a number of important reliability issues. The anticipated retirement or suspension of coal generating plants due to environmental regulations is an issue that affects the MRO Region. Other challenges that face the electric industry with the potential to shift industry projections include the rapid change in resource mix as new power plants rely on natural gas and renewable portfolio standards. These issues add considerable uncertainty to the long-term assessment as compared to past reports. 16

19 ASSURANCE: Assessing Risk and Improving System Security and Resiliency Transitioning to the New Critical Infrastructure Protection (CIP) Standards-Version 5 Joseph Gay, CIP Audit Specialist Pursuant to Section 215 of the Federal Power Act, the Federal Energy Regulatory Commission (FERC) directed the North American Electric Reliability Corporation (NERC) to develop cybersecurity standards using the National Institute of Standards and Technology (NIST) standards as guidance for the continuous evolution of the NERC CIP standards. The electric industry is the only sector with mandatory security standards; the importance of constant improvement of the standards given the evolving nature of cyber threats cannot be understated. The urgency of securing the grid is also clearly evident from the Presidential Policy Directive issued in February establishing national policy on critical infrastructure security and resiliency. In the interest of improving the security and reliability of the bulk power system, NERC developed several versions of the CIP Standards. The most recent version of NERC s CIP Standards, Version 5, which was approved by FERC in November 2013, represents a significant change from the currently enforceable CIP Version 3 Standards by adopting new cybersecurity controls and extending the scope of the systems that are protected by the CIP Standards. As a result, NERC proposed that a Transition Study be performed to gain valuable insight and lessons learned about the transition from Version 3 to Version 5 from the perspective of a wide variety of Registered Entities in different Regions. There is one study participant from the MRO Region. The goals of the study are three-fold. First, the study seeks to determine the technical challenges and compliance issues that need to be addressed in order to comply with the CIP Version 5 Standards, which become enforceable on April 1, Second, the study seeks to develop a common understanding of the compliance and enforcement expectations for the industry during the transition from Version 3 to Version 5. Finally, the study seeks to improve the consistency, transparency and industry awareness of the requirements embodied in CIP Version 5 Standards by periodically communicating the progress and results of the Transition Study to various stakeholders. Due to the aggressive nature of the proposed schedule for the Transition Study which is set to be completed by April 1, 2014, the scope of the study was narrowed to focus on a subset of the participant s assets that likely have a High or Medium impact to the BES based on criteria identified within CIP It also focuses on the standards that are likely to be more difficult to apply due to their more technical nature: CIP-002-5, CIP-005-5, CIP-006-5, CIP-007-5, and CIP To periodically communicate the progress and results of the Transition Study to stakeholders, NERC has proposed creating several lessons-learned documents related to several topics important to the transition to CIP Version 5. We expect the first one to be published by the end of January These documents will be shared with the industry throughout the study as they are completed. NERC will also publish a final study report after all participants complete work related to the study. There are bi-weekly meetings scheduled with NERC, MRO and the study participant staff to discuss progress of the transition project plan, issues encountered, and any best practices/lessons learned along the way. All participants are eager to complete the study and share both challenges and triumphs to ensure that the transition from CIP Version 3 to Version 5 is as smooth as it can be for all stakeholders. 11 See 17

20 RESULTS: MRO Operations Finance and Human Resources Sue Clarke, Vice President Finance and Administration MRO s finance and administration department performs human resources, accounting, finance, budget, and treasury functions. MRO s accounting is performed by the Vice President of Finance and Administration and MRO accounting staff. MRO prepares an annual business plan and budget each calendar year. The business plan and budget is developed by MRO staff between March and June of the year preceding the budget year, with input from MRO s stakeholders and approval by the board. The business plan and budget is developed in conjunction with the business plans and budgets of the other Regional Entities and NERC to ensure consistency. Each year, MRO is audited by an independent auditor and the audit report is made available to the public on MRO s website. In addition, FERC conducted a performance audit of MRO in MRO was not required to do a compliance filing. The final audit report can be found on FERC s website at: Business Plan and Budget The overall funding from the 2013 to 2014 budget is a decrease of 3.82%; there is a 4.97% increase from the 2013 to 2014 budget Budget 2014 Budget Reliability Standards and Organization Registration Compliance Compliance Risk Assessment and Mitigation Compliance Enforcement Training and Education Situtation Awareness Infrastructure Security Administrative Services Reliability Assessments and Performance Analysis Program 2013 Budget 2014 Budget Variance 2014 Budget v 2013 Budget % of Change Reliability Standards and Organization Registration 543, ,358 (108,244) % Compliance Enforcement 6,135,726 6,697, , % Reliability Assessments and Performance Analysis 2,277,446 2,194,427 (83,019) -3.65% Training, Education and Operator Certification 229, , , % Situation Awareness and Infrastructure Security 97,348 84,283 (13,065) % TOTAL BUDGET 9,283,541 9,744, , % 18

21 RESULTS: MRO Operations Comparison of 2014 to 2013 Operating Budget $800, , Budget 2014 Budget 400, , Reliability Standards and Organization Registration Compliance Enforcement Reliability Assessments and Performance Analysis Training, Education and Operator Certification Situation Awareness and Infrastructure Security Human Resources Our Human Resources department focuses on culture and talent management initiatives that encourage an environment of engagement, productivity, and effective leadership based on MRO s Vision, Purpose, and Principles. Through culture and talent management, MRO facilitates employee training opportunities that improve the effectiveness and efficiency of MRO operations. In 2013, MRO staff invited well-known speakers to guide us in Ethical Leadership Development. Ron James, President of The Center for Ethical Business Culture, presented Linking Personal & Organizational Ethics. Mr. James guided MRO management through core ideology of an effective ethical business environment, taking cues from real-world examples and participating in exercises that uncovered the ethical mindset. Conversely, MRO staff was given principles to understanding compliance and how, in tandem with an ethical lens, leaders can educate and thereby prevent compliance issues before they occur (a key ingredient in risk management). Roy Snell, President of the Society of Corporate Compliance and Ethics, spoke at our September board meeting and annual compliance workshop on What Every Leader Should Know about Compliance and Ethics. Other activities include: Partnered with experts from both the Federal Bureau of Investigation and American Transmission Company to provide insights on SCADA EMS protection. Organization-wide, MRO staff participated in education and training centered on how to achieve job satisfaction while delivering maximum productivity. MRO staff learned lessons in how to identify what s right, and celebrating successes. MRO staff also attended NERC-led Crucial Conversations training 12 which focused attention on the key communication skills for diffusing an uncomfortable and tense conversation into one that produces positive results. MRO staff adopted the Seven Rules of Engagement 13 that aligns itself with the principles of a strong ethical culture understanding the intent behind candid discussion in order to make sound ethical decisions. Equipped with these fundamental tools of knowledge, MRO can continue to drive its strategies in the direction of solving challenges and succeed in tackling the complexities of managing risk across the Bulk Power System. Results stemming from these activities have generated new and fresh ideas among MRO staff and stakeholder which are included as part of the strategic planning process and operational improvements. 12 Crucial Conversations is training developed by VitalSmarts, see 13 The seven rules of engagement developed by Ron James, President and CEO of the Center for Ethical Business Cultures at the University of St. Thomas. include: (1) Engage, participate, be present; (2) Respect the point of view of your peers: (3) Listen fully, then acknowledge what your heard; (4) Agree to disagree; not all answers are right or wrong, just another path to the same direction; (5) If a consensus is not reached, table it and reconvene later; (6) Silence is not a form of acquiescence; (7) Candor is appreciated and so is politeness. 19

22 RESULTS: MRO Operations Utilizing Stakeholder Feedback to Implement Improvements Summary of MRO s 2013 Stakeholder Survey Jessica Mitchell, Executive Assistant and Office Manager Annually, MRO asks its stakeholders to provide feedback on MRO s performance; the quality of service, communication, leadership, training and education, as well as MRO s overall effectiveness as a Regional Entity. The primary purpose of the annual survey is to provide a basis for performance improvements using candid feedback from stakeholders, as well as to provide future performance metrics. The survey is sent to all MRO Members, Registered Entities and any organization that does business or is subject to the regulatory oversight of MRO. The questions for the annual survey remain the same year-over-year to ensure consistency, and the results are used to benchmark MRO s performance related to stakeholder satisfaction and to also identify areas for improvement. Respondents are asked to rate MRO on a 5 point scale of Excellent, Good, Average, Poor and Not Applicable, and to provide qualitative comments. The survey is conducted anonymously so participants can be open and honest in their responses. The initial Annual Satisfaction Survey was conducted in 2010 and serves as the starting benchmark for subsequent surveys. The 2013 survey was completed in December and reflected a strong uptick in stakeholder participation with a total of 82 respondents in 2013 (a 22% increase in total respondents from 2012 to 2013). The increases in responses occurred in three sectors: Generator/Power Marketer; Investor Owned Utility; and Municipal Utility. The responses to the 2013 survey continue to reflect high stakeholder satisfaction, with over 80% of the respondents rating MRO good or excellent on the following dimensions: MRO staff responds to questions about reliability matters in a timely, responsive manner MRO shares information to improve reliability Overall MRO leadership to improve reliability and address risks to the Bulk Power System The responses also reflected the desire for additional communication and training. Over 77% of stakeholders rated MRO good or excellent for effectively creating training and educational opportunities through committees and workshops. Comments such as would like to see MRO more active in organizing training opportunities for its members accounted for a 5% decrease in the good and excellent ratings from 2012 to MRO staff will complete a detailed review the results of the 2013 survey and recommended action plans with the board s Governance and Personnel Committee. The survey details will be reviewed with the MRO Board of Directors at its meeting in April and a summary of the survey will be posted on MRO s website. The annual Stakeholder Survey provides valuable input to MRO staff and we encourage all stakeholders to participate! 20

23 RESULTS: Improved Reliability Bringing Eastern Interconnection Closer Together Learning from Event Analysis Dan Schoenecker, VP Operations Analyzing system events using the NERC Event Analysis Process promotes reliability by encouraging Registered Entities to address risks, mitigate causes and causal factors, and share lessons learned; thereby enabling each entity to be a Highly Effective Reliability Organization, 14 or HERO. MRO staff reviews event analysis reports to ensure the analysis is complete, that the root cause has been identified and that follow up actions are taken to minimize the likelihood of a similar event in the future. Event analysis (EA) has come a long way since field trials began in October The EA Program was initiated to establish categories for identifying the significance of various types of events and expectations for timeliness and details of analysis and reports. The EA Program documentation included templates for preparing various types of event reports and for describing lessons learned. The ultimate goal of the EA Program has been to more rapidly disseminate the lessons learned from system events and trends to industry in order to enhance reliability. By integrating industry engagement and collaborative review of disturbances within the framework of the EA Program, it was anticipated that effectiveness, consistency, and timeliness in the event analysis process would be improved, and it has. While the EA Program has undergone process and documentation refinements in the last three years, it continues to follow the initial basic processes: 1. Events that fit into one of the five defined categories are reported by Registered Entities to the Regional Entity. 2. Registered Entities involved in the event collaborate to provide a report on what happened, what caused the event and what is being done to avoid recurrence. (The level of analysis and detail of the report for an event is based on the significance of the event.) 3. Any lessons learned from the event are then documented and shared with the industry via the EA Program process. Since 2010, MRO has actively participated in and helped mold the process of event reporting saw significant improvements and refinements to the EA Program, including: The original Event Analysis Working Group has evolved into an Event Analysis Subcommittee (EAS), reporting to the NERC Operating Committee. Membership includes NERC staff, a Regional Entity staff and a stakeholder representative from each Region. Additionally, in 2013 the EAS formed two subgroups, a Trends Working Group (TWG) to work with NERC staff on measures and metrics related to events and an Energy Management System Task Force (EMSTF) to focus on analysis of EMS events, trends, causes and lessons learned. Initially the EA Program had requirements for timely notification, analysis and reporting of events. The current EA Program focuses on the analysis and reporting processes. Notification is included in the new Standard PRC Event Reporting, which becomes effective on January 1, The category definitions have been clarified and a new Category 1h has been added to capture less significant EMS events than those defined in Category 2b, thereby allowing for better categorization of the seriousness of various EMS events. 14 See footnote 4, above. 21

24 RESULTS: Improved Reliability Bringing Eastern Interconnection Closer Together Learning from Event Analysis (continued) The process for determining the causes of an event has been expanded and follows a documented NERC Cause Code Assignment Process. The cause determination discussion takes place on a conference call between NERC, the affected Regional Entity, and impacted Registered Entity staff to ensure all of the subject matter experts are involved in the determination. Cause trends are identified by NERC staff and shared with the EAS and with the industry. The EAS has been collaborating with both the North American Transmission Forum and the North American Generation Forum on how to improve event analysis and expand on how lessons learned are shared and utilized. Finally, NERC is developing an integrated web based application called the Events Information Data System (EIDS) that will be used by: Registered Entities to enter event information and submit reports to Regional Entities; Regional Entities to review event reports and submit them to NERC; and NERC to review the reports. This events information data system will contain event information as well as cause coding data and reported lessons learned. The EIDS is scheduled to go live in early MRO will continue to work closely with NERC staff and the other seven Regional Entities to develop this highly successful program. We appreciate all efforts made by Registered Entities to prepare thorough event reports and participate in the cause determination conference calls. Improving Frequency Response in the Eastern Interconnection Bill Kunkel, Senior Engineer The Federal Energy Regulatory Commission (FERC) has raised concerns regarding the trend of declining frequency response in the Eastern Interconnection 15 (EI). Frequency response is the ability of the interconnection to arrest change in and recover and stabilize frequency due to loss of generation or load. While it has been determined that the EI has generally sufficient frequency response as a whole, there are clues that point to issues with generator governor settings see also 22

25 RESULTS: Improved Reliability Bringing Eastern Interconnection Closer Together Improving Frequency Response in the Eastern Interconnection (continued) In 2010 NERC conducted a generator governor survey. The results of the survey for generators in the EI were disappointing; approximately half of the respondents either provided no data or responses that did not provide the governor settings (e.g. Looking into or Researching this ). Of those that did respond, the majority of those responses reported governor settings outside the historical NERC Policy 1 recommended settings. Current standards do not have governor settings requirements and frequency response has deteriorated over the years as less than optimal governor settings have been utilized. The new BAL standard will require Balancing Authorities (BA) to provide a prorated share, based on load and generation, of the interconnection frequency response obligation. To help prepare for BAL a taskforce of the NERC Resource Subcommittee (RS), will be working with BAs on a voluntary basis in an effort to improve frequency response. Assuring proper and consistent governor settings will be the first step to improving frequency response in the EI. The initial focus of the taskforce is on the existing generator fleet with respect to 1) the completeness and accuracy of the data provided in the 2010 NERC Generator Survey 2) improving their frequency response capabilities, and 3) for Balancing Authorities and/ or Reliability Coordinators to install tool(s) to monitor individual generator performance within their authority of control and communicate performance results to the individual generators. The first goal of this voluntary initiative is to have EI BAs provide an updated Generator Survey Form from their existing generator fleet with confirmed generator data. The second goal is to set target dates for governors to have a common range of settings to assure that all generators initiate governor response at the same frequency deviation and in a manner that will not cause oscillatory reactions on the power system. It is also important that governor settings be coordinated so each generator provides its proportional share of frequency response and sustain that response. The third goal is to develop and share tools to measure individual generator performance during multiple frequency events and provide performance metric results to their generation fleet in an effort to continue to improve Frequency Response. To facilitate these efforts within MRO, MISO will be coordinating with the generators in its BA and SPP will be coordinating with the generators that will be in the new consolidated BA. MRO will be coordinating with those remaining generators in the other BAs, including Saskatchewan, Manitoba, and the Western Area Power Administration. 23

26 RESULTS: Working with Other Regional Entities in 2013 Coming together is a beginning. Keeping together is progress. Working together is success. ~ Henry Ford During 2013, the Regions accomplished much by working closely together on joint ERO initiatives. We held our second Annual Retreat which focuses on driving consistency across the Regions. Key accomplishments flowed from our decision to engage a third party to assess our audit practices. From that, we have generated a series of actions plans. Also in 2013, we completed an audit checklist and are in the final stages of producing an audit manual which will be used by all of the Regions in We completed a single Regional Entity 5 year selfassessment that will be part of the NERC July 2014 filing to FERC. We have continued to pursue consistency in the FFT process and in preparing for the BES exception process, and we established the Office of Coordinated activities to help drive our consistency and improve execution of joint activities. I believe that when we look back on our collaborative efforts of 2013, it will be a turning point for the Regions and we will accomplish much in

27 LOOKING FORWARD Upgrading the MRO Website Miggie Cramblit, VP General Counsel, Corporate Secretary and Director External Affairs For some time, our stakeholders have been telling us that we need to improve our website. Well, we heard you! Over the last two years we have been upgrading and installing the servers and systems necessary to update the older and out-of-date technology powering our current website. In 2013, we initiated two major projects that will lead to a new, significantly improved website in Chris Bankes, Business System Analyst, joined MRO last year and is leading the effort with support of the entire organization. Following the upgrade of our IT systems to support a new website, staff undertook the first project of designing the structure and look of the new website. MRO has been working with a local web design firm to create a structure that is easy for our members to navigate and will complete this work in early The website will be on a Microsoft SharePoint platform. The second project is setting up the back-end SharePoint system and transferring our documents and information into the new web design structure. This will include tagging our documents and information with the appropriate metadata to enable a robust search feature. Our goal is to complete this work and launch the new web site no later than third quarter During 2014 we will also be working on structuring our internal processes in SharePoint and creating an intranet; we anticipate significant efficiencies from this work. Watch for more information as we roll out the new website! 25

28 LOOKING FORWARD 2014 Strategic Plan Dan Skaar, President and CEO Every year in the fall, MRO executive staff meets with the board of directors and spends a day engaged in strategic planning. We begin by reviewing our VISION, PURPOSE and PRINCIPLES. Then we follow a classic format beginning with the assessment of our current state and our strengths, weaknesses, opportunities and threats. We conclude with the development of a draft of key strategic initiatives which the board reviews and finalizes at its December meeting. For 2014, many of our key strategic initiatives continue work that has been initiated and discussed in this Annual Report. Our 2014 Strategic Initiatives are: Develop the Compliance Monitoring Enforcement Program processes, procedures and practices to scope work around risk and reserve enforcement for significant matters. Closer coordination within the Eastern Interconnection. Establish key indicators of reliable and secure performance and reduction of risks with stakeholders. Address reliability risks and communicate lessons learned and trends form events, assessments, technical analysis, compliance, and enforcement activities analysis in a timely, transparent manner by working with stakeholders. Develop guidance for Registered Entities on Reliability Standards and model controls and procedures to assure compliance with the requirements through the MRO stakeholder processes. Closing Thoughts The Path Forward Dan Skaar, President and CEO Henry Ford said The only true test of values, either of men or of things, is that of their ability to make the world a better place in which to live. Embodied in this sentiment is MRO s Vision to Maintain and improve the quality of life through a highly reliable regional Bulk Power System. MRO staff and industry has worked hard over the past several years to build skills, gain mutual trust and develop the necessary balance between engagement and enforcement to support our vision. These efforts have laid the groundwork to support a paradigm shift in our regulatory approach that is more focused on identifying and mitigating risks to reliability. The ERO s Reliability Assurance Initiative (RAI) is a direct result of our work. The development and implementation of the RAI, which is discussed earlier in this report, was a key strategic initiative in 2013 and will continue to be a focus in 2014 and beyond. The RAI appropriately matches regulatory and compliance activities and tools with reliability risk, and reserves enforcement for material matters. This will enable Registered Entities to appropriately focus their efforts and prioritize their resources and investments on mitigating the higher risks advancing MRO s vision. In the simple, but profound model called the Golden Circle, author and public speaker Simon Sinek reveals that the most successful organizations focus on WHY they do what they do before addressing WHAT they do or HOW they do it. 16 As I reflect on the RAI and its purpose, it s clear that this initiative focuses on the WHY and is really about being an ethical organization. Ethical organizations always begin with the WHY. In the laws of conduct, ethics become most apparent in an organization s response to an adverse event. For instance, if you can, recall how Johnson & Johnson responded to the tainted Tylenol bottles in 1982 they cleared the shelves until the cause was determined. Why? Because the Johnson & Johnson Credo crafted in 1943 begins We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. While Johnson & Johnson lost millions in sales, its brand value increased far exceeding the lost sales of Tylenol and they set a new standard for integrity in packaging medicine. Johnson & Johnson fulfilled its WHY of helping people worldwide to lead happier, healthier lives. 16 See Simon Sinek s Golden Circle. 26

29 LOOKING FORWARD Closing Thoughts The Path Forward (continued) Contrast this example with British Petroleum and the Gulf Oil Spill. Following the spill, BP s stock dropped 30% sinking to a 13 year low. Ultimately, Tony Hayward was replaced as CEO and as of June this year, BP had paid $42.2 billion in cleanup costs, fines and compensation. Three American BP employees face an assortment of criminal charges. Clearly, there was a cloud over BP s WHY. The origin of MRO s WHY is found in Section 215 of the Federal Power Act, the bilateral principles between the United States and Canada, and in our shared vision and commitment to those we serve: to maintain and improve the quality of life through a highly reliable regional Bulk Power System by keeping the lights on to maintain a reliable, integrated system. To be successful, we must always begin with and stay focused on this WHY. To be specific, reliable operations of the Bulk Power System is defined in U.S. legislation as operating the elements of the bulk-power system within equipment and electric system thermal, voltage, and stability limits so that instability, uncontrolled separation, or cascading failures of such system will not occur as a result of a sudden disturbance, including a cybersecurity incident, or unanticipated failure of system elements. 17 Reliable operations can only be sustained when we identify, understand and address our risks in an environment of technical truth built on trust. The risks associated with real-time, interconnected systems, however, are complex. Errors are going to happen. Operating reliably, much like operating safely, depends upon mindfulness and keeping the errors small (in our industry, preventing a cascading event). To manage this kind of complex risk, the regulatory environment needs to promote industry engagement and be adaptive always externally focusing on the WHY. How? MRO does this through our Purpose which is to Strive to ensure that each Bulk Power System owner and operator within our Region is a Highly Effective Reliability Organization, or HERO 18. There are no easy answers but there are simple answers. We must have the courage to do what we know is morally right. We must be willing to change past regulatory approaches based on the present risks and circumstances and to develop the mechanisms to proactively account for and adapt to the complexity of the risks. What is the benefit? By definition, adaptive systems are resilient systems. MRO is able to be an adaptive regulator through high engagement with industry. We recognize that our best ideas come from our stakeholders. The trust in each other to share ideas is a result of our mutual efforts to seek high engagement. In order to be effective as an adaptive regulator, we must continue to build trust. Our Principles serve as guide posts for behavior and decision making. Our behaviors must contribute to this foundation of trust. Trust isn t blind: it s essence is understanding and it s based on a commitment to perform. Being accountable for results and delivering meaningful outcomes (in essence, doing the right things the right way), establishes a respectful, trustworthy relationship with our stakeholders. If we stay true to our Principles we will perform at a high level meeting and even exceeding our responsibilities. So for MRO, when the WHY is not aligned with what or the how, we have an ethical issue. The administrivia involved with the initial ERO compliance and enforcement approach was getting in the way of the WHY. The RAI is the antidote to that administrivia--it aligns the what and the how with the WHY. An ethical organization must have the courage to call out any misalignment with the WHY. 17 See 18 See footnote ~ Ronald Reagan