FERC Releases Proposed Policy Statement on Smart Grid Policy

March 25, 2009

In the hopes of accelerating development of a "smart" electric transmission grid, the Federal Energy Regulatory Commission (FERC or Commission) on March 19, 2009 proposed a policy that will favor and incentivize investments in Smart Grid technology, which the Commission believes will advance the efficiency, security, reliability, and interoperability of the electrical grid. A Smart Grid is believed to be able to better manage the expected demand from plug-in vehicles and the expected variable output from renewable energy resources. The Commission invited comments from interested parties, due 45 days following publication of the proposed policy statement in the Federal Register (which will be approximately mid-May). 

The proposed policy statement sets forth interim guidelines to encourage the development and implementation of Smart Grid technology and proposes essential reliability and interoperability standards to focus the industry on the technical aspects of implementing a Smart Grid. Additionally, until final standards are adopted, the Commission proposes an interim rate policy to accept single-issue rate filings submitted by public utilities to recover the costs of Smart Grid deployments involving Commission-jurisdictional facilities provided that certain showings are made. In essence, the Commission will consider Smart Grid devices and equipment, including those in demonstration projects, to be "used and useful" for purposes of cost recovery. 

Background

The Energy Independence and Security Act of 2007 ("EISA") requires that FERC adopt standards and protocols to ensure the various sectors of the future Smart Grid can sufficiently interact. To achieve these goals, the Commission seeks in its proposed policy statement to ensure that the Smart Grid has adequate physical and cyber security, and that it is therefore sufficiently reliable. 

The Commission identified four functionalities essential to the development of the Smart Grid:

• Wide-area Situational Awareness – to ensure that the bulk power operators have a complete view of system operations;
• Demand Response – this flexibility would help the electrical system respond to instabilities introduced by renewable energy resources and with fluctuating demand;
• Electric Storage – power storage capacity aside from pump-storage facilities will help retain renewable power generated above demand; and
• Electric Transportation – many renewable power supplies are located in remote areas and new connection facilities will be required to bring these supplies to market.

Overarching Concerns that Must Be Addressed

The Commission identified two cross-cutting issues that must be addressed in order to promote a Smart Grid:  (1) cyber-security and other reliability-related issues; and (2) communications issues, particularly the need for a "common semantic framework and software models for enabling effective communication and coordination." To meet its reliability goals, the Commission proposes that an entity must maintain compliance with Commission-approved reliability standards, such as the Critical Infrastructure Protection Reliability Standards, when installing Smart Grid equipment. To address the second overarching issue, inter-system communications, the Commission is proposing to encourage development and use of common industry communication standards, which could be based on those already initiated by the Electric Power Research Institute ("Common Information Model" standards) or the National Rural Electrical Cooperative Association ("MultiSpeak" standards), although the Commission declined to mandate use of a particular set of communication standards.

Cost Recovery Guidelines

Recognizing the cost recovery will be imperative in order to incentivize public utilities to develop a Smart Grid, the Commission proposes that when evaluating expenses that qualify for cost-recovery, Smart Grid equipment will be classified as "used and useful" to allow cost recovery of this equipment.  The Commission proposed that cost recovery for Smart Grid equipment be conditioned on an applicant meeting certain conditions. These are:

• An applicant must show that the reliability and security of the system will not be adversely affected. This means an applicant must show:
  
  
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    • How the Smart Grid equipment will maintain compliance with reliability standards, such as the Critical Infrastructure Protection Reliability Standards;
    • How the integrity of data communicated will be preserved;
    • How communications will be authenticated;
    • How the equipment will prevent unauthorized modifications;
    • How the equipment will be protected physically; and
    • How unauthorized use of Smart Grid devices could impact the bulk-power system.
• An applicant must show it has minimized the possibility of stranded investment in Smart Grid equipment by designing for the ability to upgrade the equipment, and have made a good faith effort to comply with the EISA's provisions requiring optimizing asset utilization and operating efficiency. An applicant should also attempt to adhere to the principles of the Gridwise Architecture Council Decision-Makers Interoperability Checklist. In this regard, the Commission proposes to prioritize an applicant's reliance on existing, widely adopted, and open interoperability standards and use of firmware that can be upgraded quickly.
• Finally, the Commission proposes to direct an applicant to share information about use of Smart Grid equipment with the Department of Energy Smart Grid Clearinghouse. Information to be shared would include:
  
  
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    • Internal or external reviews;
    • Detailed data explaining improvements;
    • Detailed data explaining the expansion of the quantity of demand response resources resulting from the project and resulting economic effects;
    • Detailed data on improvements in the ability to integrate variable renewable sources;
    • Detailed data showing any achievement of greater system efficiency through a reduction of transmission congestion and loop flow;
    • Detailed data showing how the information infrastructure supports plug-in electric vehicles; and
    • Detailed data showing how the project enhanced energy storage.

The Commission may also allow applicants to file for recovery of otherwise stranded costs of legacy systems that would be replaced by Smart Grid equipment, though an applicant would have to show it was taking steps to minimize costs. Similarly, the Commission is proposing to entertain rate treatments for accelerated depreciation and abandonment authority for deployments specifically tied to Smart Grid equipment. 

Conclusion

The proposed policy statement seeks to encourage development and implementation of Smart Grid equipment under interim guidelines. In addition to proposing essential reliability and interoperability standards, this proposed policy statement also encourages the industry to focus on how the Smart Grid will accommodate technical problems associated with a policy focus on decreasing greenhouse gas emissions and increasing the use of renewable power supplies. These proposed policies include incentives for the construction of long-range transmission lines to bring remote renewable power to load centers, a focus on information-sharing capability to accommodate expected demand increases from plug-in electric vehicles, and a focus on technological remedies for the intermittent supply and varying frequency of renewable power supplies.