On July 16, 2009, the Federal Energy Regulatory Commission (FERC) adopted a Policy Statement to provide industry participants with guidance with regard to the development of, and recovery of costs associated with establishing, a smart grid.1 The Energy Independence and Security Act of 2007 (EISA) charged the National Institute of Standards and Technology (NIST) to develop protocols and standards to achieve interoperability among “smart grid” devices.2 The EISA charged the FERC to initiate a rulemaking to adopt standards “as may be necessary to insure smart grid functionality and interoperability in interstate transmission of electric power, and regional and wholesale electric markets.”3 The Policy Statement adopts an Interim Rate Policy (discussed below) that identifies means by which a public utility may recover FERC-jurisdictional smart grid costs until such time as the NIST interoperability protocols and standards are complete and adopted by the FERC in a future rulemaking. Although NIST is still developing these protocols and standards, the Policy Statement identifies six key standards and functionalities (discussed below) that the FERC views as the first level of work that must be undertaken in order to establish a smart grid.4 The FERC Policy Statement will become effective 60 days after publication in the Federal Register, which should be in September or October of 2009.

Interim Rate Policy

The FERC will provide a public utility assurance of rate recovery for future smart grid costs so long as, in addition to meeting the requirements of FPA section 205, the following four specific showings are made:

  • The smart grid facilities must advance the goals of EISA section 1301. The applicant must “describe the proposed investment (including the technologies, systems, and applications it entails) and how it is consistent with the policy and one or more of the goals Congress set forth in section 1301 of EISA.”5
  • The deployment of the smart grid facilities must not adversely affect the reliability and cybersecurity of the bulk-power system. The applicant must “describe how its proposed deployment of smart grid equipment will maintain compliance with [FERC]-approved Reliability Standards ... during and after the installation and activation of smart grid technologies so the reliability and cyber security of the bulkpower system will not be jeopardized.”6 The applicant also must address:

“(1) the integrity of data communicated (whether the data is correct), (2) the authentication of the communications (whether the communication is between the intended smart grid device and an authorized device or person), (3) the prevention of unauthorized modifications to smart grid devices and the logging of all modifications made, (4) the physical protection of smart grid devices, and (5) the potential impact of unauthorized use of these smart grid devices on the bulk-power system.”7

  • The possibility of stranded costs for smart grid equipment must be minimized. The applicant must address how it has “relied to the greatest extent practical on existing, widely adopted and open interoperability standards; and where feasible, relied on systems and firmware that can be securely upgraded readily and quickly.” 8 This showing is necessary because “such filings will predate adoption of interoperability standards.”9
  • The applicant must agree to share with the Department of Energy Smart Grid Clearinghouse the same information required by the Department of Energy for its grant program.10 The FERC explained that such information will “provide feedback useful to the interoperability development process.”11

A public utility can obtain this assurance either by submitting a petition for a declaratory order or a FPA section 205 filing demonstrating that it has satisfied the four showings. The FERC clarified that smart grid costs could be recovered through a public utility’s existing formula rate so long as the formula rate “already authorizes cost recovery of a particular type of investment.” 12 However, if a public utility “desires the assurance of cost recovery provided under the Interim Rate Policy, it must submit an FPA section 205 filing or a request for a declaratory order justifying such rate treatment by making the [four] demonstrations;” otherwise, “a smart grid-related cost automatically incorporated into a formula rate could be subject to future review and challenge.”13 If necessary, the FERC “will allow a public utility to file to amend a formula rate to recover such costs and to seek rate assurance under [the] Interim Rate Policy without reopening other elements of the formula rate.”14 Likewise, if a public utility does not have a formula rate, the FERC will allow “single issue rate treatment” for jurisdictional smart grid costs and thus protect such public utility from “having to open [its] entire rate base to [FERC] review.”15

The FERC also provided for certain specific rate treatments associated with smart grid facility deployment:

  • Single issue rate treatment of “otherwise stranded costs for jurisdictional legacy systems being replaced by jurisdictional smart grid equipment” will be considered so long as proposals “to recover these costs are supported by an equipment migration plan that minimizes the stranding of unamortized costs of legacy systems.”16
  • Accelerated depreciation and abandonment authority will be available for projects that are “specifically tied to smart grid deployments under [the FERC’s] FPA section 205 authority” if “the project is abandoned for reasons outside the control of the public utility.”17

The Interim Rate Policy will be in effect until interoperability standards are adopted by the FERC in its future rulemaking proceeding.

Six Key Standards and Functionalities Established by the FERC for the Development of Smart Grid Interoperability

  • Cybersecurity: The smart grid may involve communication among “millions of smart grid devices,” which provides an opportunity for the potential “to disrupt the proper functioning of the bulk-power system.” 18 Accordingly, the future EISA rulemaking proceeding will require a “demonstration that a proposed smart grid standard: (1) directly incorporates cybersecurity protection provisions, or (2) incorporates cybersecurity protection provisions from other smart grid standards or electric Reliability Standards approved by the FERC.”19
  • Inter-system communication: The FERC noted that the smart grid is “essentially a ‘system of systems,’” and it is necessary to develop “a common semantic framework and software models for enabling effective communication and coordination across the inter-system interfaces.”20
  • Wide-area situational awareness: This standard will provide a “visual display of interconnection- wide system conditions in near real time.”21 The FERC explained: “Wide-area situational awareness is imperative for enhancing reliability of the bulkpower system because it allows for greater knowledge of the current state of available resources, load requirements, and transmission capabilities.”22
  • Demand response: The FERC explained that this standard “play[s] an important role in maintaining system security ... [and] can be particularly helpful ... when production from variable generating resources has fallen.”23 Use cases, i.e., the modeling of “how a user will interact with a system of other actors and objects,” should be developed, including with regard to the use of “dispatchable demand response and various forms of dynamic pricing” and should “support the full range of customer types from large industrial customers through commercial and smaller residential customers.”24 Advanced metering systems applying “national interoperability standards” should “enable the use of direct load control, dynamic pricing, current tariff pricing or other program options that are approved by retail regulators.”25
  • Electric Storage: The FERC explained that electric storage includes “different forms of energy that may be beneficial to the bulk-power system” such as pumped hydroelectric storage that converts “the potential energy stored in a reservoir of water ... [by use of] a water turbine generator,” “a flywheel [that] stores kinetic energy to spin a generator, and batteries [that] convert chemical energy directly into electricity.” 26 The FERC noted that “there [also] are useful applications for stored energy (for example, thermal energy) that is not converted into electricity, but can substitute for electrical power by providing an end use.”27
  • Electric Vehicles: The FERC determined that “electric transportation is a key functionality of the smart grid” and noted that standards are needed “so that distribution utilities will be able to encourage customers to charge their vehicles during off-peak load periods.”28 Electric vehicles have the potential to provide ancillary services to the grid and thus “electrical interconnection issues must be dealt with along with potential expansion of communications ability.”29