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FERC Developments - Recovery of Smart Grid Costs and Demand Response Issues 

Deborah Swanstrom
Patton Boggs LLP - Washington Office

November 30, 2009

Previously published on November 25, 2009

Utility Recovery Of Smart Grid Costs -- When FERC issued its Smart Grid Policy Statement last summer, the Commission advised that it would allow utilities to make “single issue” rate filings to recover Smart Grid investment costs, without the burden of submitting a full-blown rate case covering other revenues and costs. FERC also established criteria that a rate applicant must meet for its costs to be eligible for recovery, including a demonstration that: (1) the Smart Grid facilities will advance the goals of Section 1301 of the Energy Independence and Security Act of 2007 (EISA); (2) the reliability and security of the bulk-power system will not be adversely affected by the deployment of the Smart Grid facilities; and (3) the rate applicant has minimized the possibility of stranded investment in Smart Grid equipment (particularly in view of the fact that final interoperability standards have not yet been adopted). In addition, FERC included a requirement that the applicant share information on its Smart Grid project with the DOE’s Smart Grid Clearinghouse.

Utilities are now beginning to take FERC up on its offer to allow recovery of Smart Grid costs in interstate transmission rates through “single issue” filings. In conjunction with their grant applications to DOE, utilities are asking FERC to declare that they can recover from transmission ratepayers 50 percent of the total Smart Grid project costs that must be matched by an applicant when a Smart Grid investment grant is awarded by DOE.

For example, in September of 2009, Pacific Gas and Electric Company (PG&E) submitted a petition asking FERC to declare that PG&E can recover, in interstate transmission rates, $25 million in investment costs for a Smart Grid synchrophasor project. These costs relate to the installation or upgrading of approximately 25 synchrophasor measurement devices, together with communication infrastructure. The synchrophasor technology uses time-synchronized measurement of critical system operating parameters to inform operators of potential wide-area reliability concerns, in real-time, and identify actions that can be taken to mitigate the impacts.

It is relatively common for utilities to submit filings with state regulatory commissions to recover the costs of “advanced” or “smart” meters in rates charged to retail customers. PG&E’s filing, however, is the first filing at FERC seeking regulatory assurance that it can recover Smart Grid costs in interstate transmission rates charged to wholesale customers. Strategically, there can be advantages to filing for cost recovery at FERC, rather than in the states. We expect this new trend to continue.

Proposed New FERC Regulations Incorporating Business Practice Standards for Demand Response Services and Products - It is common in the electric and natural gas industries for an organization, known as the North American Energy Standards Board (NAESB), to develop business practice standards related to common transactional formats and communication protocols. These standards typically are developed through a consensus-building process that takes into account the views of multiple companies in these industries.

Following the issuance of a Notice of Proposed Rulemaking (NOPR) and the receipt of industry comments, FERC is now poised to adopt new regulations incorporating business practice standards developed by the Wholesale Electric Quadrant of NAESB for demand response services and products. The standards are designed to categorize demand response products and services and support the measurement and verification of these products and services in wholesale electric markets.

FERC Seeks Comments On National Demand Response Plan - Pursuant to Section 529 of the EISA, FERC is developing a National Action Plan on Demand Response (National Plan). It recently released a “Discussion Draft” on possible elements of this plan, including proposed strategies and activities designed to:

  • provide technical assistance to the states -- such as conducting educational programs and training, building a panel of demand response experts, sponsoring technical papers and establishing demand response assistance and grant programs;
  • develop and implement a national communications program -- such as conducting market research, developing consumer-friendly terminology for demand response, developing consistent messaging that resonates with consumers and distributing materials to utilities and other demand response service providers to use in their own communication campaigns; and
  • provide tools and materials -- such as estimation tools, standards and protocols for demand response, as well as information on how to design a pilot demand response program and guidelines for dynamic pricing.

For purposes of developing this National Plan, FERC is interpreting the term “demand response” broadly to encompass a variety of consumer actions and technologies affecting load profiles. It would include customer responses to reliability or price signals sent electronically by electric system operators in near or real-time, including, for example, the use of “smart” appliances in offices or homes that enable customers to reduce their demands for electric energy. It also would encompass the deployment of devices that can manage demand, as needed, to integrate variable generation sources (such as wind farms and rooftop solar systems) and provide grid services (such as frequency regulation and operating reserves). FERC envisions that demand response can be used to, among other things, shift energy consumption from peak to off-peak hours and encourage nighttime charging of home energy storage systems, including electric vehicles. Not only may customers reduce their own consumption of electric energy, but electric energy may be drawn from storage devices, such as plug-in electric vehicle batteries, to provide grid services.

One of the cornerstones of FERC’s proposal is the establishment of a coalition of diverse stakeholders which would implement the National Plan. This coalition may include, for example, state and local government officials, utilities, regional and independent transmission system operators (known as RTOs and ISOs), demand response service providers, hardware and software service providers, residential, commercial and industrial customers, consumer groups and other types of non-profit organizations.

FERC held a technical conference on the proposed elements of this National Plan on November 19-20, 2009. For those interested in becoming more involved in this National Plan, written comments may be filed at FERC by December 4, 2009.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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