January 25, 2010
Previously published on January 2010
On December 17, 2009, the Federal Energy Regulatory Commission (“FERC”) approved the first smart grid proposal utilizing the interim rate policy for cost-recovery of investments in smart grid devices and systems (“Interim Rate Policy”), as set forth in FERC’s July 16, 2009 Smart Grid Policy Statement.1 In particular, FERC granted a petition for declaratory order (the “Petition”) filed by Pacific Gas and Electric Company (“PG&E”) on September 3, 2009, which sought cost recovery under Section 205 of the Federal Power Act (“FPA”) for investments in a regional synchrophasor project (the “Synchrophasor Project”).
FERC’s Smart Grid Policy Statement
Among other things, FERC’s Smart Grid Policy Statement included an Interim Rate Policy allowing for the recovery under Section 205 of the FPA of FERC-jurisdictional smart grid investments that are “used and useful.” To be eligible for cost recovery, a utility must demonstrate that: (1) the smart grid facilities will advance the goals of Section 1301 of the Energy Independence and Security Act of 2007, such as, for example, the deployment or realization of digital information and technology to improve reliability; (2) the smart grid technology will comply with cybersecurity and the NERC Reliability Standards; (3) the possibility of stranded investment costs is minimized by installing systems that can be upgraded to meet new interoperability standards; and (4) the applicant has shared information with the Department of Energy (“DOE”) Smart Grid Clearinghouse, provided for in the American Recovery and Reinvestment Act of 2009.
PG&E’s Smart Grid Cost Recovery
Request for Recovery of Smart Grid Investment
In its Petition, PG&E sought smart grid rate treatment in connection with the Synchrophasor Project, involving the installation or upgrading of approximately 25 synchrophasor measurement devices and their associated communication infrastructure. The Synchrophasor Project, developed in conjunction with the Western Electricity Coordinating Council (“WECC”), is intended to: (1) aid system reliability by providing time-synchronized measurements of system parameters to system operators; and (2) improve PG&E’s ability to integrate renewable energy resources.
PG&E’s cost burden associated with the Synchrophasor Project was estimated to be $50 million; however, PG&E only sought recovery of one-half of PG&E’s costs since WECC had previously sought and received $25 million in DOE grants to fund the remaining half. PG&E also requested assurance that it could recover this $25 million in transmission rates.
FERC’s Determination
FERC found that PG&E’s Synchrophasor Project met all four criteria for cost recovery set forth in the Smart Grid Policy Statement. Accordingly, FERC granted PG&E’s request for a declaratory order concerning project costs through PG&E’s electric transmission rates.
FERC offered a number of observations concerning the second criterion relating to reliability and cyber-security, however. In particular, FERC noted PG&E’s commitment to: (1) develop the project in accordance with NERC Reliability Standards; (2) designate the substations where phasor measurement units and data concentrators are located as critical assets under NERC’s Reliability Standard CIP-002; and (3) initially use synchrophasor data only for after-the-fact analysis. Due to these assurances, and noting that PG&E’s project will be “part of the necessary process to learn how to reliably and securely make use of synchrophasor data and communications to improve the reliability, security, and efficiency of the electric grid,” FERC determined that the second criterion for cost-recovery under the Smart Grid Policy Statement had been met.
Furthermore, FERC emphasized that its finding relating to the second criterion were “specific to the facts and circumstances of PG&E’s [P]etition,” and that “future applications will be assessed based on then-existing conditions.”
PG&E’s Request for Abandoned Plant Costs
In addition to general cost recovery, PG&E requested assurance that it may seek recovery of 100 percent of abandoned plant costs in the event the project is abandoned for reasons beyond PG&E’s control. Since PG&E’s Petition met the four showings set forth in the Smart Grid Policy Statement, FERC granted PG&E’s request, stating that PG&E may seek full recovery of abandonment costs if the Synchrophasor Project is abandoned for reasons beyond PG&E’s control.
Future Filings
In its Smart Grid Policy Statement, FERC permitted potential applicants to receive assurance of recovery of future smart grid costs by either seeking a declaratory order or by requesting a rate change under Section 205 of the FPA. In this order dispensing with the Petition, FERC clarified that it did not intend “to imply that by choosing the declaratory order process, a smart grid applicant for interim rate treatment could avoid the showings that any other [FERC-jurisdictional] entity seeking rate recovery must make under the FPA.” Accordingly, FERC emphasized that PG&E must submit a rate filing under Section 205 of the FPA in order to reflect project costs in rates and interested parties will have the opportunity to review and comment on the level of costs included in PG&E’s rates and the allocation of those costs at the time that PG&E makes a filing to recover them.
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1.On July 16, 2009, FERC issued its Final Policy Statement on Smart Grid, which largely adopted several key priorities for interoperability and cybersecurity standards development and the Interim Rate Policy, which were set forth in its Proposed Policy Statement on March 19, 2009. For more information on either the Proposed or Final Policy Statement, please visit http://www.blankrome.com/FERCpolicy.
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