FERC Adopts Smart Grid Policy with Rules for Raising Rates

Developing a national smart grid is such a high priority for the Obama administration that regulators plan to let power providers who pioneer the technology pass their costs on to their customers – before national standards are approved and before analysts have determined the most cost-effective technologies.

The Federal Energy Regulatory Commission adopted its official Smart Grid Policy last night, setting priorities for the grid’s development that emphasize such areas as cybersecurity, dynamic pricing, and the need for technology that can facilitate off-peak charging for electric vehicles.

Most of FERC's priorities were expected, but the commission also added a controversial piece: It strayed from standard practice and approved an interim rate policy for early adopters.

Normally, utilities are only allowed to raise their rates to recover expenses involving technologies that have been proven to be cost-effective. The Massachusetts attorney general, among others, had argued in hearings before the commission that no smart grid costs should be eligible for rate recovery until guidelines had been developed to determine which technologies were cost effective.

FERC's explanation for including the interim rate policy reflects the government's concern about securing enough large-scale testing to provide feedback as the grid develops.

“Several commenters argue that having an interim rate policy for smart grid investments is premature, citing unresolved technical issues, such as interoperability standards,” the commission wrote.

“However, waiting for all technical issues to be resolved before beginning investment in smart grid deployment would frustrate the development of those very standards. Smart grid resources deployed with appropriate protections in the interim period could increase our body of knowledge and ultimately assist the standards development process.”

During commission meetings, power providers have been hesitant about the idea of implementing new smart grid technologies if they weren't allowed to raise their rates to begin recovering the cost, FERC Commissioner Suedeen Kelly explained. Some states are already moving ahead by approving cost recovery for retail-level projects, such as Boulder’s Smart Grid City, but wholesalers and systems that cross state lines need FERC’s approval for rate recovery, and most aren’t willing to take the risk without it.

Ed Legge of the Edison Electric Institute, which represents shareholder-owned utilities, explained the power provider's point of view:

“Cost recovery is going to become an important issue because we don’t have capital like in the old days – money costs a lot more, cash flow is very important, and getting cost recovery is very important. We have to consider, does it affect our shareholders? Does it affect our value?”

“That’s going to have an effect on early adopters because there has to be a business case for anything we do.”

If utilities invest in smart grid technologies without a way to recover their costs, they could end up adopting equipment that becomes obsolete, leaving shareholders to foot the bill. They can get assistance from the Department of Energy's $3.3 billion Smart Grid Investment Grant program, which offers up to $20 million for utility-scale project, but the grant would still require the company to match the federal contribution.

Without the interim rate policy, FERC wasn't likely to see any movement until those standards and the final rate recovery policy were set.

Having the federal policy encourages power providers to take the risk, which would give the government the feedback it needs. It also helps electric providers at the state level, Legge said, because “it’s federal support for us doing what needs to be done.”