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Legal Update

FERC Issues Policy Statement to Clarify Permissible Concurrent Cost- and Market-Based Recovery for Electric Storage Resources

24 January 2017
Mayer Brown Legal Update

On January 19, 2017, the US Federal Energy Regulatory Commission (FERC) issued a policy statement to clarify its precedent and provide guidance on the ability of electric storage resources to recover their costs concurrently through both cost-based and market-based rates. FERC noted that electric storage resources have the ability both to charge and discharge electricity and can provide a variety of grid services simultaneously in multiple markets. By enabling electric storage resources to provide multiple services, FERC wants to ensure that the full capabilities of these resources can be realized, thereby maximizing their value for electric customers. In Western Grid Dev., LLC, 130 FERC ¶61,056 (2010), the energy storage applicant proposed to operate only as a transmission resource at cost-based rates and to forego any sales into organized wholesale electricity markets at market-based rates. FERC clarified that Western Grid should not be read to require other entities to forego market sales and provided guidance on how applicants seeking cost-based rate recovery for certain services while also providing separate services at market-based rates could address concerns related to the double recovery of costs, adverse market impacts and regional transmission organization (RTO)/independent system operator (ISO) independence.

The first concern noted by FERC is the potential for combined cost-based and market-based rate recovery to result in the double recovery of costs by the electric storage resource owner or operator to the detriment of cost-based ratepayers. To address this concern, FERC clarified that crediting any market revenues back to cost-based ratepayers is one possible solution. Alternatively, an upfront offset for market revenues can be included that reduces the amount of the revenue requirement used in the development of the cost-based rate. In other words, full cost recovery through cost-based rates may require full crediting of projected market revenues; no cost recovery through cost-based rates would require no crediting of projected or actual market revenues; and partial cost recovery through cost-based rates could require partial crediting of market revenues.

The second concern noted by FERC is the potential for cost recovery through cost-based rates to inappropriately suppress competitive prices in the wholesale electric markets to the detriment of other competitors that do not receive such cost-based rate recovery. However, FERC indicated that it did not share this concern. For example, FERC stated that many generation resources are paid a cost-based rate for providing reactive supply, even as they make market-based rate sales into organized wholesale electric markets. Further, a significant amount of generation in certain RTO/ISO markets is owned by vertically integrated public utilities that recover some or all of their costs through cost-based retail rates. (Commissioner Cheryl LaFleur, however, dissented over the policy statement's sweeping conclusions about the potential impacts of multiple payment streams on pricing in wholesale electric markets and argued that the policy statement provided no guidance on how FERC would evaluate whether a particular filing under Section 205 of the Federal Power Act successfully avoids adverse market impacts.)

The third concern noted by FERC is the level of control in the operation of an electric storage resource by an RTO/ISO that could jeopardize its independence from market participants. With respect to this concern, FERC clarified that coordination between the RTO/ISO and the electric storage resource owner or operator will be necessary especially for planning and reliability purposes. Nonetheless, while the RTO/ISO always performs the actual optimization of resources participating in the organized wholesale electric markets, during periods when the electric storage resource is not needed for the separate service compensated at cost-based rates, the RTO/ISO could rely on offer parameters provided by the electric storage resource owner or operator, just as the RTO/ISO does with other market participants. Thus, FERC clarified that there was nothing unreasonable about an RTO/ISO exercising some level of control over the resources it commits or dispatches where it can be shown that the RTO/ISO independence is not at issue.

Finally, FERC indicated that the policy statement is not intended to resolve the detailed implementation issues surrounding how an electric storage resource may concurrently provide services at cost-based and market-based rates. Instead, the policy statement is intended to clarify that providing services at both cost-based and market-based rates is permissible as a matter of policy, to provide guidance on some of the details and to allow entities to address these issues through stakeholder processes and in filings before FERC. However, as Commissioner LaFleur's noted dissent makes clear, there is a potentially significant “the Devil is in the details” issue with electric storage resources obtaining both cost-based and market-price recoveries and, as a practical matter, further FERC guidance may have to be provided or sufficiently developed in subsequent proceedings before market participants really can gauge what is/will be permissible recovery(ies).

Authors

  • J. Paul Forrester
    T +1 312 701 7366
  • Nadav C. Klugman
    T +1 312 701 8433
  • Andrew Young
    T +1 202 263 3272
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