FERC Adopts Smart Grid Policy with Rules for Raising Rates

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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.”

Under FERC’s interim rate policy, for a power provider to be allowed to recover its costs from ratepayers, it will have to meet four requirements: It must advance the goals of the Energy Independence and Security Act of 2007; demonstrate that the reliability and security of the bulk-power system will not be adversely affected; minimize stranded costs; and agree to provide feedback to the DOE that is useful to the development of the smart grid and its interoperability standards.

The AARP was unimpressed with those requirements, saying they were equivalent to "near automatic rate recovery" for any investment labeled "smart grid." The policy further strays from standard practice by allowing single-issue reviews for smart grid technology rate recovery requests rather than requiring the utility to open its entire rate base to commission review.

Several public interest organizations, including the Conservation Law Foundation and NRDC, and the Electricity Consumers Resource Council had urged FERC to add a fifth requirement that applicants perform cost-benefit analyses. FERC rejected the idea.

The FERC policy also doesn’t set out limits for recoverable costs or list technology that would be eligible for cost recovery, and the commission says it won’t attempt to do so.

The Energy Independence and Security Act of 2007 tasked FERC with adopting interoperability standards that will allow a national smart grid to function.

It’s a complicated chore. Making the smart grid work so it can be self-healing and can integrate diverse resources and improve efficiency and reliability will require seamless communications among different types of software – from new high-tech meters used in homes to large scale transmission equipment in place for decades – sharing information about available resources, energy demand, and transmission capability. As Kelly pointed out,

“The electrical grid faces daunting challenges that cannot be addressed by our existing technologies."

The FERC Smart Grid Policy released yesterday sketches a route for the National Institute of Standards and Technology to follow as its experts dig into the technical details to determine where standards are necessary and which standards would be best to apply on a national scale. NIST has been meeting with power operators, utilities, regulators, renewable energy and software developers, and other stakeholders, and hopes to have an initial formal set of protocols and model standards ready for FERC’s approval this fall.

In the policy, one of FERC’s top concerns is cybersecurity. The commission also makes clear that regulators are concerned about the impact of an increasing number of electric vehicles drawing power from the grid, saying that without technology and incentives for off-peak charging, EVs could affect the grid’s reliability. Such incentives would come in the form of dynamic pricing that allows customers to chose to use power when it is cheapest, often at night, rather than in the heat of the day. Electric storage is another key part of the smart grid and an FERC priority for the developing standards.

The FERC Smart Grid Policy and its interim rate policy go into effect 60 days after notice is published in the Federal Register. FERC Commissioner Kelly, meanwhile, will be updating Congress on the smart grid standards’ progress next week when she testifies before the House Committee on Science and Technology.

The Department of Energy has been stressing the importance and value of developing a national smart grid, from the need to upgrade aging transmission equipment to the potential for cutting greenhouse gas emissions simply by providing the right information and incentives.

According to DOE calculations, if the current power grid became just 5 percent more efficient, the energy savings and cuts in greenhouse gas emissions would equal the removal of 53 million cars from the road.


See also:

Smart Grid: Digging The Foundations

Overcoming Obstacles to a Smart Grid Future

Cisco Officially Enters Smart Grid Market: Why It Matters

What’s Next in Smart Grid? IBM Picks 5 Companies to Watch

China’s Smart Grid Ambitions Could Open Door to US-China Cooperation

(Photo: delgaudm via Flickr)