By Michael Gergen and David E. Pettit
On January 19, 2017, the Federal Energy Regulatory Commission (FERC or Commission) issued a new policy statement entitled “Utilization of Electric Storage Resources for Multiple Services When Receiving Cost-Based Rate Recovery” (Storage Policy Statement or Policy Statement), which clarifies that electric storage resources may receive cost-based recovery for certain services, such as transmission or grid support services, while also receiving market-based revenues for separate services, such as selling electric energy, capacity and ancillary services in the organized wholesale markets, so long as adequate protections are in place to address potential abuses. The Storage Policy Statement suggests potential new revenue opportunities for electric storage resources that can provide multiple or stacked services, some of which are cost-based and some of which are market-based.
Storage Policy Statement Clarifies Prior Precedent
The Storage Policy Statement specifically aims to clarify questions left open by FERC’s prior decisions in Nevada Hydro and Western Grid. In Nevada Hydro, the Commission rejected a proposal by The Nevada Hydro Company, Inc. to treat an advanced pumped hydroelectric storage project as a transmission facility and allow its costs to be recovered through the California Independent System Operator’s (CAISO) transmission access charge. The company also proposed to have CAISO assume operational control over the project such that CAISO would have to determine when and how to charge and discharge electric energy from the storage project.
FERC rejected the proposal, finding that “it would not be appropriate to require CAISO to assume any level of operational control” because the company failed to show that doing so was reasonable or necessary. FERC also found that the project’s costs would not be properly recovered through CAISO’s transmission access charge because the purpose of that charge is to recover the costs of transmission facilities under CAISO’s control and not to recover costs associated with bundled services. This decision effectively left open the question of whether a storage facility could be treated as transmission for the purpose of cost-based rate recovery at all.
In Western Grid, the Commission issued a declaratory order confirming that certain battery storage projects proposed by Western Grid Development, LLC (Western Grid) could be treated as wholesale transmission facilities such that Western Grid could recover costs through the CAISO’s cost-based transmission access charge. However, Western Grid narrowly tailored its proposed operation of its prospective battery storage projects to mimic only a wholesale transmission function. Western Grid committed that its battery storage projects would only provide voltage support and thermal overload protection to help solve transmission reliability problems identified by CAISO and that it would credit any revenues from sales of electric energy in the CAISO’s wholesale markets to transmission customers. Further, Western Grid committed to retain responsibility for all operating functions associated with its battery storage projects (e.g., maintaining the necessary state of charge) and to operate its projects under CAISO’s direction, similar to how CAISO directs the operation of other transmission facilities under its operational control, such as capacitors or alternate transmission circuits.
The Commission found that Western Grid’s proposed operation of its prospective battery storage projects addressed concerns in Nevada Hydro related to CAISO’s independence as an independent system operator (ISO) or a regional transmission organization (RTO) and the possibility of CAISO becoming an energy market participant because Western Grid would operate the battery storage systems and credit incidental revenues from sales in the CAISO’s wholesale markets to transmission customers. While FERC was able to get comfortable with Western Grid’s narrow proposal, its limited decision left open questions of whether and how energy storage resources could be compensated for the variety of other services that they could provide to the grid.
Storage Policy Statement Suggests Potential New Revenue Opportunities
The Storage Policy Statement clarifies that Western Grid’s approach is not the only acceptable arrangement for electric storage resources and that such resources can potentially receive cost-based rate recovery and revenues from market-based rate sales. FERC makes clear that from its perspective, “the key question is not whether to allow multiple use applications for electric storage resources but how to allow and enable such applications.” The Commission goes on to identify three chief concerns that an electric storage resource would need to address to be allowed to recover costs through both cost-based and market-based rates concurrently:
- double recovery of costs to the detriment of cost-based ratepayers
- suppression of competitive prices in wholesale electric markets
- compromising the independence of RTOs and ISOs
The Storage Policy Statement explains that crediting market-based rate revenues back to cost-based ratepayers is “one possible solution” to issues related to double recovery and the potential for adverse impacts on market prices. For example, if an electric storage resource were to seek to recover all costs through cost-based rates, then any market-based rate revenues would potentially need to be credited to those cost-based ratepayers. If, however, there was no cost recovery through cost-based rates, then the electric storage resource would not need to credit any revenues from market-based rates. The Policy Statement FERC leaves open the possibility that if a portion (e.g., 25%) of an electric storage resource’s cost-of-service would be recovered through cost-based rates, then it is possible that only a corresponding portion of market-based rate revenues (e.g., 25%) would need to be credited back to cost-based ratepayers.
To address concerns related to RTO/ISO independence, the Storage Policy Statement provides that electric storage resources should remain under the control of the resource owner or operator rather than the RTO/ISO. However, FERC recognizes that RTOs/ISOs may have some degree of control over the dispatch of these electric storage resources, depending on how a market is structured and the parameters provided by the electric storage resource owner or operator, and thus leaves open the possibility of other approaches to address concerns related to RTO/ISO independence. The Policy Statement also clarifies that electric storage resource owners or operators would need to prioritize the state of charge so as to be able to provide cost-based rate services when necessary at the expense of being able to provide market-based rate services. In instances where the cost-based rate service is predictable, then the electric storage resource would be free to provide market-based rate services as long as such participation would not affect the resource’s ability to perform the cost-based rate service. However, the Policy Statement cautions that if the cost-based rate services provided by an electric storage resource are unpredictable, then the electric storage resource would as a practical matter only be able to provide the cost-based rate service.
Prior to being elevated to Acting Chairman on January 26, 2017, then-Commissioner Cheryl A. LaFleur wrote a dissent to the Storage Policy Statement based in part on the need, in her view, to consider its conclusions as part of a broader rulemaking process on integrating electric storage resources into organized markets. FERC issued the Policy Statement during the comment period for this proposed rulemaking, which closes on February 13, 2017. The fate of the rulemaking, however, is uncertain given the lack of a quorum at FERC left by the resignation of former Commissioner Norman C. Bay on February 3, 2017. Acting Chairman LaFleur’s dissent also means that FERC issued the Policy Statement with the support of only two Commissioners, only one of whom remains on the Commission. So while the Policy Statement provides helpful guidance for the time being, there are likely to be more developments with respect to the integration of electric storage resources in the organized wholesale markets at FERC in the months to come.
This post was prepared with the assistance of Peter Viola.
 The Nev. Hydro Co. Inc., 122 FERC ¶ 61,272 (2008) (Nevada Hydro).
 Western Grid Dev., LLC, 130 FERC ¶ 61,056 (2010) (Western Grid).
 Nevada Hydro at P 82.
 See generally Western Grid at PP 43–56.
 Utilization of Electric Storage Resources for Multiple Services When Receiving Cost-Based Rate Recovery, 158 FERC ¶ 61,051 at P 11 (2017) (“Policy Statement”).
 Policy Statement at PP 16, 22.
 Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators, Notice of Proposed Rulemaking, 157 FERC ¶ 61,121 (2016).
 Peter Viola is an associate in Latham and Watkins’ DC office and is licensed to practice law in New York only. All of his work is supervised by a member of the DC Bar.
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