On July 18, 2013, FERC issued Order No. 784, a final rule regarding Third-Party Provision of Ancillary Services and Accounting and Financial Reporting for New Electric Storage Technologies. The Commission revised certain aspects of its current market-based rate regulations, ancillary services requirements under the pro forma open-access transmission tariff ("OATT"), and accounting and reporting requirements in order to foster competition and transparency. In particular, the Commission revised the Avista policy governing sales of certain ancillary services to a public utility purchasing the ancillary service to satisfy its own OATT requirements to offer ancillary services to its own customers.

FERC established the Avista policy because ancillary service sales outside of organized regional markets (i.e., in individual utility balancing areas) often lack the depth and breadth of competitors to support market-based sales of these products, and may lack readily available data to perform rigorous market competition screen analyses. Under Avista, generators were permitted to sell generation-based ancillary services other than reactive power under certain conditions, as long as they did not sell them to transmission owning utilities for resale under their OATTs. The new rule lifts this prohibition against ancillary service sales while adopting certain protections against market power concerns.

First, FERC now allows sellers who pass the competitive screens for market-based energy and capacity sales to sell energy and generation imbalance and certain operating reserves services at negotiated rates within the same balancing authority area because the technical characteristics of generators providing these different services are similar. Sales of these services at negotiated rates across balancing authority areas will depend on those areas having implemented intra-hour scheduling for transmission service. FERC, however, found that regulation and frequency response and reactive supply services do not deserve similar treatment due to differences in the characteristics of generation used to provide these services. FERC said that it will establish a new proceeding further to explore the technical, economic, and market issues concerning the provision of these services.

Second, FERC provided two options for sellers to offer generation-based ancillary services if they are unable or unwilling to show that they pass the traditional screens for market-based power sales. These options are available for sales of all generation-based ancillary services, including regulation service and reactive supply service.

One option is to sell the service at rates subject to a price cap. When the sales are to a transmission owning utility to meet its OATT service obligation, the price cap will be the rate set in the purchasing utility's OATT for the applicable service. A second option permits applicants to engage in market-based sales of ancillary services to a public utility that is purchasing ancillary services to satisfy its OATT requirements where the sale is made pursuant to a competitive solicitation in which the solicitation is designed and administered by an independent third party. However, this third-party review requirement will not apply when none of the parties participating in a competitive solicitation are affiliated with the buying public utility transmission provider.

Under Order No. 784, each public utility transmission provider is now also required to add to its OATT Schedule 3 a statement that it will take into account the speed and accuracy of regulation resources in its determination of reserve requirements for Regulation and Frequency Response service. Each public utility transmission provider must also post one-minute and ten-minute Area Control Error data so that a customer can assess whether it can secure regulating reserves from third parties that will achieve similar performance. Transmission customers considering securing regulating reserves from third parties will have the option of securing a smaller amount of reserves but with faster response times, or a greater amount of reserves with slower response time.

Lastly, the Commission adopted reforms to its accounting and reporting requirements under its Uniform System of Accounts for public utilities and licensees and its forms, statements, and reports, contained in FERC Form No. 1, Annual Report of Major Electric Utilities, Licensees and Others, FERC Form No. 1-F, Annual Report for Nonmajor Public Utilities and Licensees, and FERC Form No. 3-Q, Quarterly Financial Report of Electric Utilities, Licensees, and Natural Gas Companies, to better account for and report transactions associated with the use of energy storage devices in public utility operations. These reforms add new electric plant and operation and maintenance expense accounts for energy storage devices in order to accommodate the increasing availability of these new resources for use in public utility operations. Public utilities are now required to forego previously issued accounting and reporting waivers in instances where the utility seeks to recover costs associated with operation of an energy storage asset simultaneously under market-based and cost-based rate recovery mechanisms. Additionally, for accounting purposes, utilities may now set initial rates for new energy storage assets based on manufacturer or utility estimated service lives that are supported by engineering, economic or other studies. Utilities should also use a single depreciation rate for an energy storage asset regardless of the number of functions to which the costs of the asset are allocated. Utilities subject to the accounting and reporting regulations must implement the new requirements as of January 1, 2013.

This rule will become effective 120 days after publication in the Federal Register.