FERC Issues Policy Statement on Electric Storage Cost Recovery

On January 19, 2017, FERC issued a Policy Statement providing guidance on the ability of electric storage resources to receive cost-based rate recovery for certain services, while also receiving market-based revenues for providing separate market-based rate services in Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”).

In its Policy Statement, FERC identified three primary issues that should be addressed if an electric storage resource seeks to recover its costs through both cost-based and market-based rates concurrently: (i) the potential for combined cost-based and market-based rate recovery to result in double recovery of costs by the electric storage resource owner or operator, to the detriment of cost-based ratepayers; (2) 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 who do not receive such cost-based rate recovery; and (3) the RTO’s/ISO’s level of control in the operation of an electric storage resource, which could jeopardize its independence from market participants.

First, with respect to avoiding double recovery of costs, FERC noted potential concerns with double recovery of costs borne by the relevant cost-based ratepayers for electric storage resources receiving cost-based rate recovery while concurrently receiving compensation for market-based rate services. To address this problem, FERC identified crediting of market revenues back to cost-based ratepayers as a possible solution. In applying this potential solution, FERC stated that 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. As an example of a partial recovery/partial crediting structure, FERC stated that “if the cost-based rate is based on 25 percent of the asset’s full cost-of-service, then perhaps only 25 percent of market revenues would need to be credited to cost-based ratepayers.”

Second, with respect to minimizing adverse impacts on wholesale electric markets, FERC noted that several commenters had expressed concern that permitting electric storage resources that receive transmission-based rate recovery to participate in the competitive organized wholesale electric markets could undermine competition and suppress market prices to sub-competitive levels. However, FERC dismissed these concerns, noting that many generators that participate in RTO/ISO markets already receive some form of cost-based rate recovery, and many public utilities across the country have both transmission assets with cost-based rate recovery and generation assets that receive market-based revenues.

Third, with respect to RTO/ISO independence, FERC described the potential risks if RTOs/ISOs had direct operational control over energy storage resources, and were responsible for purchasing power to energize the resources. FERC clarified that an electric storage resource should be maintained so that the necessary state of charge can be achieved to provide the service compensated through cost-based rates; however, assuming this priority need is “reasonably predictable as to size and the time it will arise each day,” the electric storage resource should be permitted to deviate from this state of charge at other times of the day in order to provide other market-based rate services. FERC stipulated, however, that when the circumstances leading to the need for the service compensated through cost-based rates arise, RTO/ISO dispatch of the electric storage resource to address that need should receive priority over the electric storage resource’s provision of market-based rate services. Lastly, FERC stated that the provision of market-based rate services should be under the control of the electric storage resource owner or operator, rather than the RTO/ISO, to ensure RTO/ISO independence.

A copy of the Policy Statement may be found here.