• FERC's Policy Statement Addresses Smart Grid Technology
  • August 4, 2009 | Authors: Nicholas A. Giannasca; Melanie J. Tambolas
  • Law Firms: Blank Rome LLP - New York Office; Blank Rome LLP - Philadelphia Office
  • On July 16, 2009, FERC issued its Final Policy Statement on smart grid, which adopted several key priorities for interoperability and cybersecurity standards development and an interim rate policy for cost-recovery of investments in smart grid devices and systems (“Interim Rate Policy”).

            Key Priorities for Interoperability Standards Development

    As background, Section 1305(d) of the Energy Independence and Security Act of 2007 (“EISA”) requires FERC to adopt, through a rulemaking, standards and protocols necessary to ensure smart grid functionality and interoperability1 in the interstate transmission of electric power and in regional and wholesale markets, provided sufficient consensus is first achieved through a process coordinated by the National Institute of Standards and Technology (“NIST”). In carrying out this mandate, FERC was particularly interested in the development of smart grid interoperability standards that address: (1) cybersecurity; (2) communication and coordination across inter-system interfaces; and (3) four key grid functionalities related to the integration of renewable resources into the electric grid, as described in more detail below.

    Cybersecurity and Reliability Standards

    In the Final Policy Statement, FERC directed NIST to undertake the necessary steps to assure that each standard and protocol that is developed as part of NIST’s interoperability framework is consistent with the overarching cybersecurity and reliability mandates of the EISA as well as with NERC’s Reliability Standards. FERC expects that NERC will monitor the compatibility of the smart grid standards with the FERC-approved critical infrastructure protection (CIP) standards and help identify any gaps or inconsistencies that are left unaddressed. While taking no position on specific technologies and technical configurations that are appropriate for particular smart grid standards, FERC encouraged NIST and NERC to pay special attention to the following issues when developing the smart grid standards: (1) the level of specificity in the cybersecurity requirements; (2) constraints on improvements; and (3) system resiliency and responsiveness to attacks.

    Communication and Coordination Across Inter-System Interfaces

    FERC identified standards for common information models for inter-system interfaces as a high priority for accelerated development. Specifically, FERC identified a core group of standards established by NIST—i.e., IEC 61970, IEC 61968 and IEC 61850—as priority standards for further development by the NIST of communications standards in order to promote interoperability and functionality.

    FERC noted that the development process to enable communications and coordination across inter-system interfaces should not cause premature dismantling of utility and Regional Transmission Organization (“RTO”) systems that currently function well. FERC encouraged RTOs to take a prominent role in defining system interfaces and further encouraged such entities, along with all other FERC-jurisdictional utilities, to engage in NIST’s standards development process.

    Four Key Grid Functionalities

    Given that many utilities are already beginning to deploy smart grid-related systems, and that Congress has provided substantial funding for smart grid deployments in the American Recovery and Reinvestment Act (“ARRA”), FERC provided for a targeted acceleration of four key grid functionalities that include:

    1. Wide-Area Situational Awareness. FERC concluded that wide-area situational awareness should be a key priority for the standards development process. Wide-area situational awareness is the visual display of interconnection-wide system conditions in near real time at the reliability coordinator level and above and is imperative for enhancing reliability of the Bulk-Power System because it allows for greater knowledge of the current state of available resources, load requirements and transmission capabilities.

    2. Demand Response. Noting that demand response should be a key priority for the standards development process because of its potential to help address several of the Bulk-Power System challenges, such as over-generation, FERC encouraged the identification and standardization of all possible “use cases and scenarios”, particularly with regard to: (a) dispatchable demand response; and (b) various forms of dynamic pricing.

    With respect to a dispatchable demand response program, FERC expects that a standard would support either a mandatory or voluntary program, as determined by the utility or retail regulator. As for dynamic pricing, FERC believes it is important to develop standards that offer an efficient means and incentive for large numbers of smaller customers to take appropriate demand response actions. FERC noted that is not intending to require the use of dynamic pricing in retail rates, but that it is encouraging utilities and states that choose this option to develop standard pricing terminology and methods for communicating pricing information. FERC also encouraged the further development of key standards that would enhance interoperability and communications between system operators, demand response resources, and the systems that support them.

    3. Electricity Storage. In reiterating that electric storage should be a key priority for the standards development process, FERC provided that if electricity storage technologies could be more widely deployed, they would present another important means of addressing some of the difficult issues facing the electric industry, including helping to address large-scale changes in the generation mix. FERC encouraged the identification and standardization of all possible electricity storage use cases at an early stage.

    4. Electric Transportation. While recognizing that the reliability of the Bulk-Power System could be affected by high levels of penetration by electric vehicles, FERC anticipates that a smarter grid will accommodate a wide array of advanced options for electric vehicle interaction with the grid. Although believing that the market will ultimately play the principal role in determining whether and when electric vehicle load will become significant for utility systems, FERC nonetheless encouraged the NIST’s process to focus on the early development of appropriate standards, or extensions to relevant existing standards, to permit some ability for distribution utilities to facilitate vehicle charging during off-peak load periods.

          Interim Rate Policy

    To offer some rate certainty and guidance regarding cost recovery issues, FERC adopted an Interim Rate Policy for the transition period until final interoperability standards are adopted through a FERC rulemaking.

    Rate Recovery

    FERC is requiring utilities to make the following four showings to demonstrate that smart grid investments are “used and useful” and, therefore, eligible for recovery under Section 205 of the Federal Power Act: (1) that the smart grid facilities will advance the goals of EISA Section 1301, such as, for example, the deployment or realization of digital information and technology to improve reliability; (2) that the smart grid technology will comply with cybersecurity and the NERC Reliability Standards; (3) that the possibility of stranded investment costs is minimized by installing systems that can be upgraded to meet new interoperability standards; and (4) because it will be important for early smart grid deployments, particularly pilot and demonstration projects, to provide feedback useful to the inter­operability standards development process, that the applicant has shared information with the DOE Smart Grid Clearinghouse, provided for in the ARRA.

    Incentives for Smart Grid Investments

    As part of its Interim Rate Policy, FERC will allow single issue rate treatment for the recovery of costs associated with smart grid investments. FERC will also allow single issue rate treatment of otherwise stranded costs for jurisdictional legacy systems being replaced by jurisdictional smart grid equipment, provided that proposals to recover these costs are supported by an equipment migration plan that minimizes the stranding of unamortized costs of legacy systems. Additionally, FERC will also permit utilities to request rate treatments such as accelerated depreciation and abandonment authority (whereby an applicant is assured of recovery of abandoned plant costs if the project is abandoned for reasons outside the control of the public utility) specifically tied to smart grid deployments. Finally, FERC found no need for special procedures for rate recovery filings for projects that also receive DOE grant funding. To view the Final Policy Statement, please click on the following link: http://www.ferc.gov/whats-new/comm-meet/2009/071609/E-3.pdf.


    1.  “Interoperability” is described as “the ability of a system or a product to work with other systems or products without special effort on the part of the customer….”