[Federal Register: July 27, 2009 (Volume 74, Number 142)]
[Rules and Regulations]
[Page 37097-37119]
[DOCID:fr27jy09-9]

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Part II

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Chapter I

Smart Grid Policy; Final Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Chapter I

[Docket No. PL09-4-000]

Smart Grid Policy

Issued July 16, 2009.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy statement.

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SUMMARY: This Policy Statement provides guidance regarding the
development of a smart grid for the nation's electric transmission
system, focusing on the development of key standards to achieve
interoperability and functionality of smart grid systems and devices.
In response to the need for urgent action on potential challenges to
the bulk-power system, in this Policy Statement the Commission provides
additional guidance on standards to help to realize a smart grid. The
Commission also adopts an Interim Rate Policy for the period until
interoperability standards are adopted by the Commission, which will
encourage investment in smart grid systems.

DATES: Effective Date: The Interim Rate Policy will become effective
September 25, 2009.

FOR FURTHER INFORMATION CONTACT:
David Andrejcak, Office of Electric Reliability, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Elizabeth H. Arnold, Office of General Counsel, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Ray Palmer, Office of Energy Policy and Innovation, 888 First Street,
NE., Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Dennis Reardon, Office of Energy Market Regulation, 888 First Street,
NE., Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Table of Contents

                                                               Paragraph
                                                                 Nos.

I. Background...............................................           2
II. Discussion..............................................           9
    A. Jurisdictional Concerns..............................          12
    B. Development of Key Standards.........................          29
        1. System Security..................................          30
        2. Communication and Coordination Across Inter-               46
         System Interfaces..................................
        3. Wide-Area Situational Awareness..................          55
        4. Demand Response..................................          63
        5. Electric Storage.................................          78
        6. Electric Vehicles................................          83
        7. Additional Priorities Suggested by Commenters....          92
    C. Interim Rate Policy..................................          95
        1. Scope and Duration...............................          96
        2. Additional Showings..............................         109
        3. Incentives Under the Interim Rate Policy.........         131
            a. Single Issue Ratemaking......................         132
            b. Recovery of Stranded Costs for Legacy Systems         138
            c. Additional Incentive Rate Treatments.........         142
        4. Potential Interplay With Department of Energy             150
         Funding Grants.....................................
III. Document Availability..................................         157
IV. Information Collection Statement........................         160
V. Effective Date and Congressional Notification............         169
Appendix A List of Commenters and Short Names...............

Before Commissioners: Jon Wellinghoff, Chairman; Suedeen G. Kelly,
Marc Spitzer, and Philip D. Moeller.

Policy Statement

Issued July 16, 2009.
    1. On March 19, 2009, the Commission issued a Proposed Policy
Statement and Action Plan to guide the development of key standards for
smart grid devices and systems.\1\ Many companies in the electricity
industry are designing and deploying such devices and systems with the
objective of achieving greater interoperability and functionality of
the nation's electric transmission grid. In the Proposed Policy
Statement, the Commission also put forth the notion of an interim rate
policy to guide rate recovery while interoperability standards are
adopted (Interim Rate Policy). Comments were invited on all aspects of
the Proposed Policy Statement. On May 19, 2009, the Commission issued a
notice requesting supplemental comments on one additional feature of
the Interim Rate Policy.\2\
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    \1\ Smart Grid Policy, 126 FERC ] 61,253 (2009) (Proposed Policy
Statement).
    \2\ Smart Grid Policy, 127 FERC ] 61,139 (2009) (Notice
Requesting Supplemental Comments).
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    This Policy Statement generally adopts the proposals enumerated in
the Proposed Policy Statement and provides additional guidance for
standards that will help realize a smart grid.

I. Background

    2. As the Commission explained in the Proposed Policy Statement,
the Commission's jurisdiction over the transmission system derives from
provisions of the Federal Power Act (FPA) relating to the transmission
of electric energy in interstate commerce by public utilities, and to
the reliable operation of the bulk-power system.\3\ An additional
responsibility was assigned by the Energy Independence and Security Act
of 2007 (EISA) \4\ directing the Commission to initiate a rulemaking
proceeding to adopt standards and protocols related to smart grid
functionality and interoperability.\5\
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    \3\ 16 U.S.C. 824, 824o (2006).
    \4\ Pub. L. 110-140, 121 Stat. 1492 (2007).
    \5\ EISA section 1305(d), to be codified at 15 U.S.C. 17385(d).
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    3. EISA lays out the policy of the United States with regard to
modernization of the nation's electricity transmission and distribution
system in order to maintain a reliable and secure electricity
infrastructure that can meet future demand growth and achieve a

number of goals characterizing a smart grid.\6\ EISA also directs the
National Institute of Standards and Technology (the Institute) to
coordinate the development of a framework to achieve interoperability
of smart grid devices and systems, including protocols and model
standards for information management.\7\ The Commission explained in
the Proposed Policy Statement that, in order to achieve the smart grid
characteristics and functions described in EISA, interoperability of
smart grid equipment will be essential.\8\
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    \6\ EISA section 1301, to be codified at 15 U.S.C. 17381. Among
these goals and characteristics are deployment or realization of:
Digital information and technology to improve reliability, security
and efficiency; cybersecurity; distributed resources and generation;
demand response; ``smart'' technologies for optimal grid operations
and distribution automation; ``smart'' appliances; electricity
storage; consumer information and control; and communication and
interoperability standards.
    \7\ EISA section 1305(a), to be codified at 15 U.S.C. 17385(a).
In this Policy Statement, we refer to the Institute's process as
both the coordination and the development of standards. The
Institute's primary function with regard to smart grid is to be a
coordinator for the variety of smart grid standards development
initiatives.
    \8\ Interoperability is described as exchanging meaningful
information between two or more systems and achieving an agreed
expectation for the response to the information exchange while
maintaining reliability, accuracy, and security. See GridWise
Architecture Council, Interoperability Path Forward Whitepaper,
http://www.gridwiseac.org/pdfs/interoperability_path_whitepaper_
v1_0.pdf.
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    4. Once the Commission is satisfied that the Institute's work has
led to ``sufficient consensus'' on interoperability standards, EISA
directs the Commission to ``institute a rulemaking proceeding to adopt
such standards and protocols as may be necessary to insure smart-grid
functionality and interoperability in interstate transmission of
electric power, and regional and wholesale electricity markets.'' \9\
In the Proposed Policy Statement, the Commission described some of the
Institute's efforts to date, as well as its projected work, to develop
a framework for interoperability standards, and sought comment on the
most effective and efficient ways for the Commission and the Institute
to interact in the ongoing standards development processes.
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    \9\ EISA section 1305(d).
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    5. In the Proposed Policy Statement, the Commission identified
several potential challenges to the reliable operation of the
Commission-jurisdictional bulk-power system and the smart grid
functions and characteristics that could help address those challenges.
The major challenges identified include: Existing cybersecurity issues
\10\; issues associated with changes to the nation's generation
mix,\11\ including an increasing reliance on variable renewable
generation resources;\12\ and issues that could arise with increased
and more variable electricity loads associated with transportation
technology.\13\ In addition to these challenges, we incorporated the
Institute's assessment that there is an overarching need for
standardization of communication and coordination across inter-system
interfaces.\14\
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    \10\ Proposed Policy Statement, 126 FERC ] 61,253 at P 13.
    \11\ On May 13, 2009, the Commission announced that it had
commissioned the Lawrence Berkeley National Laboratory to use
frequency response to help assess the potential for the reliable
integration of wind and other renewable energy resources into the
bulk-power system. The frequency study has three main objectives:
(1) Determining if frequency response is an appropriate metric to
assess the reliability effects of integrating renewables, (2) using
the resulting metric to assess the reliability impact of various
levels of renewables on the grid, and (3) identifying what further
work and studies are necessary to quantify and mitigate any negative
effects on reliability associated with the integration of
renewables.
    \12\ Proposed Policy Statement, 126 FERC ] 61,253 at P 17-20.
    \13\ Id. P 21-22.
    \14\ National Institute of Standards and Technology, Smart Grid
Issues Summary (2009), http://collaborate.nist.gov/twiki-sggrid/pub/
SmartGrid/TnD/Draft_NIST_Smart_Grid_Issues_Summary_
10March2009.pdf, at 1 and 4-5.
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    6. In response to the need for urgent action on these potential
challenges to the bulk-power system, the Commission identified and
asked for comments on several areas it proposed as deserving high
priority in the smart grid interoperability standards development
process, including two cross-cutting issues (cybersecurity and physical
security to protect equipment that can provide access to smart grid
operations, and a common information framework), and four key grid
functionalities (wide-area situational awareness, demand response,
electric storage, and electric transportation). The Commission also
proposed the Interim Rate Policy to encourage investment in smart grid
technologies intended to address potential challenges to the bulk-power
system through the advancement of efficiency, security, reliability,
and interoperability. The Interim Rate Policy provides that smart grid
investments that demonstrate system security and compliance with
Commission-approved Reliability Standards,\15\ the ability to be
upgraded, and other specified criteria will be eligible for timely rate
recovery and other rate treatments.
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    \15\ Adopted under FPA section 215, 16 U.S.C. 824o.
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    7. The May 19 Notice Requesting Supplemental Comments sought
additional input regarding potential actions that the Commission could
take to insure that public utilities may qualify for awards under
certain Department of Energy funding programs related to jurisdictional
facilities. On the same day of the issuance of our Proposed Policy
Statement, the Department of Energy announced $2.4 billion for electric
vehicle demonstration and deployment projects.\16\ On April 18, the
Department of Energy announced another $615 million for targeted
demonstrations programs; one of three targets is ``utility-scale energy
storage demonstrations.'' \17\
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    \16\ See March 19, 2009 Department of Energy news release,
President Obama Announces $2.4 Billion for Electric Vehicles, http:/
/apps1.eere.energy.gov/news/daily.cfm/hp_news_id=159. In this
Policy Statement, ``electric vehicle'' refers to a vehicle that
requires periodic re-charging of its propulsion battery from the
electric grid; such a vehicle may or may not also be a ``hybrid,''
additionally capable of re-charging with a fuel-driven generator or
by other mechanical means.
    \17\ See April 16, 2009 Department of Energy news release, Vice
President Biden Outlines Funding for Smart Grid Initiatives, http://
www.energy.gov/news2009/7282.htm.
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    8. The Commission notes from its review of a recent report that the
Institute is now using the Proposed Policy Statement to coordinate
development of interoperability standards.\18\
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    \18\ Don Von Dollen, Report to NIST on the Smart Grid
Interoperability Standards Roadmap, Electric Power Research
Institute (June 17, 2009) (Roadmap Report). See also Press Release,
Electric Power Research Institute (June 17, 2009). For example,
Chapter four reports on the collaborative work of the Institute, the
contractor, and its subcontractors, and attendees at two conferences
to develop use cases, interfaces, and requirements for the
Commission's four key grid functionalities identified in the
Proposed Policy Statement: Wide-area situational awareness, demand
response, electric storage, and electric transportation. Two
additional priority functionalities have also been identified that
relate to those proposed by the Commission: AMI systems that relate
to the need for metering standards are identified in the demand
response discussion of the Roadmap Report and distribution grid
management (related to distributed energy storage) is identified in
both the electric storage and electric transportation discussions.
In addition, Chapter five of the report is devoted to the cross-
cutting issue of cybersecurity identified by the Commission. Chapter
six addresses the Commission's second cross-cutting issue of a
prioritized need for common semantic models and other standardized
communication elements.
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II. Discussion

    9. Approximately 70 sets of comments were submitted from a broad
array of interested parties.\19\ In general, commenters support the
Proposed Policy Statement, including the establishment of key
priorities \20\

identified therein, and the need for focused leadership over the
process going forward. There is a greater diversity of comments on the
Interim Rate Policy. Sixteen supplemental comments were submitted,
exhibiting a split of opinion regarding whether to offer special
procedures for rate recovery filings for utilities seeking funding
through certain Department of Energy programs.
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    \19\ An alphabetical listing of all commenters and abbreviations
for each is found at the end of this document at Appendix A.
    \20\ An area considered to be a ``key priority'' is proposed as
the first level of work to be accomplished in the interoperability
standards-setting process. Proposed Policy Statement, 126 FERC ]
61,253 at P 27.
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    10. In this Policy Statement, the Commission adopts the key
priorities for standards development that were identified in the
Proposed Policy Statement. The Commission also adopts the Interim Rate
Policy, as discussed below, and finds that there is no need for special
procedures associated with rate recovery filings for projects that are
also receiving Department of Energy grant funding.
    11. A number of entities also comment on the standards development
process and the Commission's interactions with the Institute and other
bodies interested in the development of interoperability standards. The
Commission will address these topics separately.

A. Jurisdictional Concerns

    12. In the Proposed Policy Statement, the Commission noted that its
interest and authority in the area of smart grid derive from its
authority over the rates, terms and conditions of transmission and
wholesale sales in interstate commerce and its responsibility for
Reliability Standards for the bulk-power system, as well as from
EISA.\21\ Specifically, the Commission has jurisdiction over the
transmission of electric energy in interstate commerce by public
utilities pursuant to FPA section 201, and over the reliable operation
of the bulk-power system in most of the nation under FPA section
215.\22\ Section 1305(d) of EISA directs the Commission to initiate
rulemaking proceedings to adopt such standards and protocols as may be
necessary to insure smart grid functionality and interoperability in
interstate transmission of electric power, and in regional and
wholesale electricity markets.\23\
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    \21\ Id. P 1.
    \22\ 16 U.S.C. 824, 824o.
    \23\ EISA section 1305(d), to be codified at 15 U.S.C. 17385(d).
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Comments
    13. Many commenters note a tension that the Proposed Policy
Statement raises between Federal jurisdiction and State jurisdiction
and urge the Commission to clarify jurisdictional boundaries. Questions
center on both standards adoption and applicability and whether
deployed technology will be subject to State or Federal rate authority.
    14. A number of commenters maintain that EISA does not alter the
fundamental parameters of the Commission's authority.\24\ State
commissions, other State authorities, and several utilities remark that
the Commission should not encroach on traditional State
jurisdiction.\25\ The Michigan Commission maintains that implementing
smart grid functionality and interoperability at the distribution level
or in retail sales should be left to the states. Several entities are
concerned by statements in the Proposed Policy Statement that, to those
parties, indicate that the Commission may be extending its
jurisdictional scope. In particular, commenters take issue with the
suggestions that the potential reliability impacts of electric vehicles
may afford the Commission some authority over distribution facilities,
and certain devices related to the distribution system are eligible for
cost recovery in wholesale rates because of some tangential impact on
bulk-power operations due to interoperability issues.\26\
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    \24\ See, e.g., Michigan Commission Comments at 6-7, Maryland
Counsel Comments at 7-8, Ohio Commission Comments at 4, and Ohio
Partners Comments at 2-3.
    \25\ See, e.g., California Commission Comments at 6, Ohio
Commission Comments at 5-7, Massachusetts Attorney General Comments
at 4-5, and SDG&E Comments at 22-23.
    \26\ Michigan Commission Comments at 8 and Maryland Counsel
Comments at 5.
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    15. The Ohio Commission comments that, since interoperability
standards encompass areas that are outside of the Commission's
jurisdiction, the Commission should support the development of model
standards through the Institute's process, resolving any impasses
through the NARUC/FERC Smart Grid Collaborative, and that the
Commission and states should adopt model standards to be applied within
areas subject to their respective jurisdictions. In addition, states
should be responsible for ensuring compliance with Commission-imposed
guidelines and standards.\27\
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    \27\ Ohio Commission Comments at 5-7.
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    16. The Ohio Commission and North Carolina Agencies note that not
all states will want the same smart grid functionality deployed in the
same manner, and comment that standards should accommodate different
rate structures and policies. In contrast, NEMA and CURRENT appreciate
national standardization, noting that the lack of a consistent national
standard for interconnection has inhibited the development of
distributed generation. NEMA and CURRENT urge the Commission to pursue
nationwide standardization and encourage State commissions to develop
policies akin to those in the Proposed Policy Statement. The Kansas
Commission asks whether the Commission is suggesting that the Federal
government should implement guidelines governing the procedures for
charging electric vehicles at night as one method for storing
electricity.\28\
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    \28\ Kansas Commission Comments at 5-6.
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    17. Various commenters request clarification or guidance in certain
areas, notably (1) whether the Commission intends to implement
mandatory protocols ``in areas that are traditionally under State
jurisdiction, such as the distribution network and behind-the-meter
installations,'' \29\ (2) how the Commission intends to determine which
portions of a smart grid are part of the bulk-power system and those
which are part of the distribution system,\30\ (3) whether the
Commission has the authority to specify physical layer standards \31\
while preserving State ratemaking authority,\32\ and (4) whether the
Commission has the authority to mandate a nationwide meter
communications protocol.\33\
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    \29\ California Commission Comments at 6-7.
    \30\ Id. at 11.
    \31\ NEMA makes several references to physical connections and
standards in its comments, including interconnection for distributed
generation, and applications for intelligent customer energy
management equipment. It is not clear in NEMA's comments whether
this reference also applies to meters.
    \32\ NEMA Comments at 6.
    \33\ Id. at 7.
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    18. Many commenters ask the Commission to clarify the boundaries
between Federal and State jurisdiction for rate recovery purposes.
NARUC suggests that the approach should be to examine the location of
the deployed technology. If such a technology resides on a Commission-
jurisdictional line, then it should be regulated by this Commission. If
it resides on a line regulated by states, then it should be subject to
State oversight.\34\ EEI highlights the need for this clarification,
noting that specific smart grid equipment might be installed on either
or both transmission and distribution facilities.\35\ Indianapolis P&L
asserts that the Commission should apply the seven factor test, set
forth in Order No.

888,\36\ to delineate between Federal and State activities.\37\
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    \34\ NARUC Comments at 16, Maryland Counsel Comments at 5, and
Springfield Comments at 10-11.
    \35\ EEI Comments at 14-15.
    \36\ Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,
Order No. 888, FERC Stats. & Regs. ] 31,036, at 31,771 and 31,981
(1996), order on reh'g, Order No. 888-A, FERC Stats. & Regs. ]
31,048, order on reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997),
order on reh'g, Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in
relevant part sub nom. Transmission Access Policy Study Group v.
FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. New York v.
FERC, 535 U.S. 1 (2002).
    \37\ Indianapolis P&L Comments at 5-6.
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    19. NARUC is also concerned that the Commission's policies not
allow double cost recovery, or allow Commission-jurisdictional entities
to ``bootstrap cost recovery for projects implemented within State
jurisdiction.'' \38\ The California Commission asserts that the
Commission should acknowledge that State commissions are in the best
position to address concerns as they pertain to retail customers and
ratepayers.\39\
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    \38\ NARUC Comments at 13.
    \39\ California Commission Comments at 4, 12.
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    20. On the other hand, Ohio Commission states that cost recovery
for the initial deployment of a demand response program should be at
the State level. However, if such programs require later upgrading or
replacement in order to meet model demand response standards approved
by this Commission, then Ohio Commission argues that the associated
costs should be recovered on a socialized, national level in
Commission-jurisdictional rates.\40\
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    \40\ Ohio Commission Comments at 1, 10.
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    21. Finally, a number of entities encourage the Commission to work
together with the states, and in particular with the NARUC/FERC Smart
Grid Collaborative, to sort out jurisdictional boundaries. Maryland
Counsel and Ohio Partners comment that ongoing dialogues should include
consumer advocacy organizations.
Commission Determination
    22. The Commission agrees with those commenters who state that EISA
does not alter the FPA's jurisdictional boundaries between Federal and
State regulation over the rates, terms, and conditions of transmission
service and sales of electricity. EISA does not modify any of the
provisions of the FPA. Nevertheless, EISA does give the Commission new
responsibilities for the adoption of standards needed to insure smart
grid functionality and interoperability. The legislation specifically
directs the Commission to institute rulemaking proceedings to adopt
standards necessary to insure ``functionality and interoperability in
interstate transmission of electric power, and regional and wholesale
electricity markets.'' \41\ The Commission understands this mandate to
mean that the Commission has the authority to adopt a standard that
will be applicable to all electric power facilities and devices with
smart grid features, including those at the local distribution level
and those used directly by retail customers so long as the standard is
necessary for the purpose just stated.\42\ We reach this conclusion
because Congress does not exclude from the scope of EISA 1305(d)
facilities used in local distribution, or otherwise limit Commission
authority to approve standards. Further, other provisions in EISA
indicate that the smart grid interoperability framework is intended to
include all elements of the grid, including communications with the
ultimate consumer.\43\ EISA does not identify any segment of the
interoperability framework that is not within the scope of standards to
be promulgated. Accordingly, the Commission finds that EISA grants the
Commission the authority to adopt smart grid standards--such as meter
communications protocols or standards--that affect all facilities,
including those that relate to distribution facilities and devices
deployed at the distribution level, if the Commission finds that such
standards are necessary for smart grid functionality and
interoperability in interstate transmission of electric power, and in
regional and wholesale electricity markets.
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    \41\ EISA section 1301 and section 1305(d).
    \42\ For example, two-way communications are a distinguishing
characteristic of smart grid devices on both the transmission and
distribution systems. This two-way communications capability is
essential to the smart grid vision of interoperability, allowing the
transmission and distribution systems to communicate with each
other. They also affect the security and functionality of each
other.
    \43\ See, e.g., EISA section 1301 and section 1305(a) (stating
that the framework should ``enable all electric resources, including
demand-side resources, to contribute to an efficient, reliable
electricity network'') and section 1305(b).
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    23. EISA, however, does not make any standards mandatory and does
not give the Commission authority to make or enforce any such
standards. Under current law, the Commission's authority, if any, to
make smart grid standards mandatory must derive from the FPA.
Similarly, its authority to allow rate recovery of smart grid costs
must derive from the FPA. The authority to adopt standards under EISA
does not change the scope of the Commission's ratemaking or reliability
jurisdiction, as many commenters note.
    24. In order to determine whether particular facilities are subject
to State or Federal jurisdiction for purposes of rate recovery,
interested parties should refer to Commission precedent for
guidance.\44\ The Commission will evaluate particular facilities and
projects on a case-by-case basis. In response to commenters' concerns,
we recognize that it would be inappropriate for a utility to recover
the same costs for a smart grid project twice, through State-approved
retail rates and again in a proceeding before this Commission.
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    \44\ See, e.g., Detroit Edison Co., 95 FERC ] 61,415 (2001),
order on reh'g, 96 FERC ] 61,309 (2001). ``[T]o the extent that any
facilities, regardless of their original nominal classification, in
fact, prove to be used by public utilities to provide transmission
service in interstate commerce in order to deliver power and energy
to wholesale purchasers, such facilities are subject to this
Commission's jurisdiction and review.'' Id., 95 FERC ] 61,415, at
62,535. Accord, Northeast Utilities Service Co., 107 FERC ] 61,246,
at P 22 (2004).
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    25. As the EISA mandate to adopt interoperability standards does
not afford the Commission new economic regulatory authority over local
distribution facilities themselves,\45\ and does not provide any
authority or directive to mandate standards, the Commission does not
interpret EISA to allow it to direct states to implement any particular
retail customer policies or programs. To the extent the Commission does
adopt smart grid standards related to facilities outside the
Commission's jurisdiction under the FPA, we agree with the Ohio
Commission that states can insure compliance with any standards they
deem applicable to their jurisdictions.
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    \45\ Similarly, the Commission's previous actions approving
proposed North American Electric Reliability Corporation (NERC)
reliability standards applicable to distribution providers and load
serving entities to maintain the reliability and integrity of the
bulk-power system did not, in and of themselves, confer Commission
rate jurisdiction over those entities' local distribution
facilities.
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    26. In response to the question posed by the Kansas Commission
regarding whether the Federal government should have guidelines
governing the procedures for charging electric vehicles at night as one
method for storing electricity, the Commission does not intend to issue
policy guidelines for storing electric power by charging electric
vehicles during off-peak load periods. Nevertheless, if the Institute's
process results in a smart grid interoperability standard related to
storing electric power by charging electric vehicles, the Commission
would consider adoption of such a standard pursuant to EISA section
1305(d).
    27. The Commission recognizes that states have an interest in the

functionalities of smart grid technologies, as suggested by North
Carolina Agencies and the Ohio Commission, and we encourage states to
actively participate in the ongoing discussions being organized and
facilitated by the Institute to insure that their perspectives are
represented. We do not believe that Commission adoption of national
standards for smart grid technologies should interfere with a State's
ability to adopt whatever advanced metering or demand response program
it chooses. Nor will Commission adoption of national standards affect
the existing statutory framework for wholesale and retail pricing.
Interoperability standards should be designed flexibly enough to
support alternative programs and pricing policies being considered by a
particular State. Indeed, national standards adopted by the Commission
should enhance, not limit, the policy choices available to each State.
    28. We believe that it is appropriate for the Commission to have a
role in determining key priorities in the interoperability standards
development process. The Commission's leadership in this arena will
help to expedite the development of functionalities that are important
to Federal energy policy (e.g., wide-area situational awareness to
improve the reliability of the transmission grid) as well as to support
programs that have emerged in many states (e.g., integrating renewable
generation to permit utilities to meet State-mandated renewable
portfolio requirements). We see great benefit from collaborating
closely with states regarding flexibility in smart grid standards and
adapting to new technologies, and we expect to work with the states to
pursue these topics through the NARUC/FERC Smart Grid Collaborative.

B. Development of Key Standards

    29. The purpose of this Policy Statement, among other things, is to
prioritize the development of key interoperability standards to provide
a foundation for the development of many other standards. The Proposed
Policy Statement identified and requested comment on several key
priorities the Commission believed were necessary to address existing
and emerging challenges to the operation of the bulk-power system.
These challenges included existing cybersecurity issues, large-scale
changes in generation mix and capabilities, and large potential new
load from electric vehicles. The proposed key priorities for standards
development included two cross-cutting issues, system security and
inter-system communication, and four key grid functionalities: (1)
Wide-area situational awareness, (2) demand response, (3) electric
storage, and (4) electric transportation.\46\ Each of these topics is
discussed in detail in the following sections. The Commission urges the
Institute and interested parties to continue to focus their efforts on
these key priorities first in order to achieve interoperability in a
timely manner.
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    \46\ Proposed Policy Statement, 126 FERC ] 61,253 at P 28.
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1. System Security
    30. As explained below, the Commission adopts its Proposed Policy
Statement position that cybersecurity is essential to the operation of
the smart grid and that the development of cybersecurity standards is a
key priority. Cybersecurity and physical security are ongoing concerns
for both the Commission and the electricity industry and have received
heightened attention as part of the creation of recent mandatory and
enforceable Federal standards. We believe that implementation of smart
grid technology, which is designed to improve communication,
coordination, and interoperability, will require added attention to
cybersecurity standards.
    31. To date, eight mandatory cybersecurity and physical critical
infrastructure protection Reliability Standards (CIPS) have been
approved by the Commission pursuant to section 215 of the FPA. The fact
that a smart grid would permit two-way communication between the
traditionally regulated components of the electric system and a large
number of smart grid devices expected to be located beyond the
conventional boundaries of regulated entities suggests that
cybersecurity standards require special attention.
    32. The Commission sought comment regarding whether cybersecurity
should be considered a cross-cutting issue affecting interoperability
that must be included in smart grid standards.\47\ The Commission also
proposed harmonizing cybersecurity and Reliability Standards as a
precondition to the adoption of smart grid standards. The Commission
further proposed to advise the Institute to undertake the necessary
steps to assure that each standard and protocol that is developed as
part of the Institute's interoperability framework is consistent with
the overarching cybersecurity and reliability mandates of the EISA as
well as existing Reliability Standards approved by the Commission
pursuant to section 215 of the FPA.
---------------------------------------------------------------------------

    \47\ Id. P 12.
---------------------------------------------------------------------------

Comments
    33. Many commenters support system security as a priority.\48\ For
instance, APPA states that security-related concerns should be given
the highest priority and that they should be harmonized with the NERC
CIPS standards to avoid conflicts during the large-scale deployment of
smart grid installations, while ITC Companies assert that cybersecurity
is of paramount importance for the development of a smart grid.\49\
ELCON recommends that the Commission use a ``measured approach to smart
grid deployment'' so that relevant agencies and standards development
organizations have time to overcome cybersecurity related technical
issues.\50\
---------------------------------------------------------------------------

    \48\ NARUC Comments at 14, EEI Comments at 6, 11, NERC Comments
at 10, and ITC Comments at 6.
    \49\ APPA Comments at 12 and ITC Companies Comments at 5-6.
    \50\ ELCON Comments at 2.
---------------------------------------------------------------------------

    34. Some entities are concerned about whether there will be
sufficient coordination among the Institute and other relevant Federal
and State agencies, and whether there will be a broader application of
Federal Reliability Standards on distribution facilities.\51\ While
several entities state that an open connectivity protocol should be
developed through the Institute's standards coordination process to
insure interoperability of cyber-secure smart grid components, some
also support its development through a Commission-approved Reliability
Standard. Other entities assert that secure protocols already exist and
are available for adoption.\52\
---------------------------------------------------------------------------

    \51\ Michigan Commission Comments at 5-6, GridWise Alliance
Comments at 9-10, and National Grid Comments at 4.
    \52\ ITC Companies Comments at 5-6 and PSEG Comments at 6-8.
---------------------------------------------------------------------------

    35. On the matter of coordination with the Institute, EEI points
out that cybersecurity should be addressed early on in the development
and manufacturing process and that smart grid products should undergo
thorough interoperability and cybersecurity testing and certification
at all levels prior to installation and use by independent firms that
have been accredited by the Institute.\53\ NERC agrees that
cybersecurity for smart grid technologies should be a top priority and
advocates close coordination with the Institute to avoid jurisdictional
overlaps. NERC recommends adoption of Commission policies to encourage
the Institute to use its role, as the smart grid

standards proponent and coordinator, to build cybersecurity protections
into standards that affect the full span of smart grid systems and
devices, such as the distribution system, utilities' business systems,
customer appliances, and information technology systems, with an eye
towards aggregated impacts on the bulk-power system.\54\
---------------------------------------------------------------------------

    \53\ EEI Comments at 7.
    \54\ NERC Comments at 11-12.
---------------------------------------------------------------------------

    36. The Michigan Commission counsels that the Commission should
avoid being overly prescriptive in its standards until the Institute's
process is complete and should undertake a ``bottom up'' collaborative
process that includes the States, standards development organizations
and other private actors to identify, up front, the reliability and
security considerations that smart grid technologies must address while
respecting the traditional statutory distinctions between state and
Federal jurisdiction over electricity.\55\ NERC warns that the possible
aggregate effects of smart grid devices that reach into the
distribution system can have substantial impact on the security of the
bulk-power system.\56\
---------------------------------------------------------------------------

    \55\ Michigan Commission Comments at 5-6.
    \56\ Id. at 11-12, 15.
---------------------------------------------------------------------------

    37. With respect to sufficient specificity in the Proposed Policy
Statement, CPower asserts that the Commission's objective should be to
bar only significant gaps in cybersecurity.\57\ ELCON suggests that
more consistency and standardization are required with respect to
authentication standards, physical protection standards, and the impact
to the bulk-power system. GWAC argues that the Proposed Policy
Statement should be expanded to address system architectures, define
the classes of security requirements, and include risk management
aspects, such as costs and potential consequences, instead of directing
policy towards low-level details.\58\ B-D Research contends that the
definition of cybersecurity must be expanded to include matters such as
(1) non-disruptive events, (2) unauthorized access to, or modification
of, a critical system, (3) information leakage, and (4) system
compromise.\59\ E.ON offers that existing cybersecurity standards
should not serve as constraints on the adoption of improved and
potentially more secure technologies.\60\
---------------------------------------------------------------------------

    \57\ CPower Comments at 3.
    \58\ GWAC Comments at 13-15, 29-31.
    \59\ B-D Research Comments at 1-4.
    \60\ E.ON Comments at 4-6.
---------------------------------------------------------------------------

    38. The Ohio Commission requests that the Commission clarify its
neutrality towards specific configurations and/or technology and that
the common information model should not be too formulaic and thereby
provide easy opportunities to defeat the cybersecurity standards.\61\
The California Commission suggests that standards should protect the
grid from inadvertent and direct cyber attacks while approved
technologies should have the ability to: (1) Withstand direct cyber
attacks, (2) maintain resiliency in times of extreme stress and
congestion, and (3) automatically (or intelligently) respond to adverse
system conditions as they occur.\62\
---------------------------------------------------------------------------

    \61\ Ohio Commission Comments at 11-12.
    \62\ California Commission Comments at 7.
---------------------------------------------------------------------------

    39. On the matter of Commission-approved Reliability Standards,
Southern contends that the Commission should confirm that smart grid
installations do not automatically create mandatory Reliability
Standard compliance obligations and that they do not automatically
constitute critical cyber assets. In its view, smart grid technologies
and applications should be considered critical cyber assets only when
they would be designated as such under the requirements of Commission-
approved CIPS Reliability Standard CIP-002.\63\ NRECA suggests that a
number of NERC Reliability Standards may need to be developed or
revised concurrently with the implementation of smart grid technology.
---------------------------------------------------------------------------

    \63\ Southern Comments at 8-9.
---------------------------------------------------------------------------

Commission Determination
    40. The Commission adopts its proposed policy position that the
development of cybersecurity standards is a key priority in protecting
the electricity grid. The possibility that an adversary could access
any of potentially millions of smart grid devices and use this access
to disrupt the proper functioning of the bulk-power system creates new
challenges for the operation of the nation's electricity grid. These
challenges are a natural consequence of the extensive communications
network comprising the smart grid. Because cybersecurity becomes a
concern whenever one system communicates with another, it is important
to focus from the outset on cybersecurity as an essential feature of
the design of interoperability standards. There is strong support for
this focus from the commenters.
    41. Accordingly, consistent with our cybersecurity mandates under
EISA, the Commission will require a demonstration of sufficient
cybersecurity protections in proposed smart grid standards to be
considered in a rulemaking proceeding under EISA, including, where
appropriate, a proposed smart grid standard applicable to local
distribution-related components of smart grid. Specifically, there must
be a demonstration that a proposed smart grid standard: (1) Directly
incorporates cybersecurity protection provisions, or (2) incorporates
cybersecurity protection provisions from other smart grid standards or
electric Reliability Standards that are submitted to the Commission
concurrently, are already pending before the Commission, or have
previously been adopted or approved by the Commission under EISA or
section 215 of the FPA, respectively, provide cybersecurity protection
for the electric power system for the proposed standard.
    42. The Commission does not intend to preempt the development and
implementation of an interoperability smart grid framework with the
prioritization of cybersecurity and physical security. On the contrary,
given our reliability and security oversight mandates under EISA and
FPA section 215, we are attempting to promote and accelerate
development and implementation of cybersecurity elements that are
foundational to the smart grid, and which will also promote maintenance
of the integrity and reliability of the underlying bulk-power system.
Clearly, interoperability standards must support, and not conflict
with, critical efforts to improve the cybersecurity of electric power
systems.
    43. As noted, many of the commenters request collaboration between
the Institute and NERC on the development of smart grid standards. The
Commission agrees with this approach and encourages NERC, as the
Electric Reliability Organization certified by the Commission pursuant
to FPA section 215, along with the states and other Federal agencies,
to collaborate with the Institute in developing its interoperability
framework. We expect that NERC will monitor the compatibility of the
smart grid standards with the Commission-approved CIPS standards and
help identify any gaps or inconsistencies that are left unaddressed. To
the extent necessary, the Commission would direct NERC to submit to the
Commission a new or modified Reliability Standard as necessary or
appropriate to carry out the Commission's responsibilities under
section 215 of the FPA as they relate to the development of smart grid
standards.
    44. On the matter of Commission jurisdiction over standards, the
Commission notes, as discussed above, that the cybersecurity
characteristic of the smart grid is statutorily specified under EISA.
In EISA, Congress

envisions a smart grid with cybersecurity as a foundational element of
its system and provided for cybersecurity throughout the statute.\64\
Thus the Commission agrees with commenters such as NERC and CAISO that
the reliability of the bulk-power system hinges on insuring the
cybersecurity of all interconnections, including distribution system
interconnections, to the extent allowed by EISA.
---------------------------------------------------------------------------

    \64\ See EISA section 1301(2).
---------------------------------------------------------------------------

    45. With respect to comments regarding the level of specificity in
the cybersecurity requirements, constraints on improvements, and system
resiliency and responsiveness to attacks, the Commission agrees that
these concerns warrant the attention of the Institute, NERC, and others
who are working on proposed smart grid cybersecurity issues. The
Commission appreciates that the Roadmap Report highlights several
relevant cybersecurity requirements, including those required in the
Commission-approved CIPS standards.\65\ The Commission takes no
position here regarding specific technologies and technical
configurations that are appropriate for particular smart grid
standards. Finally, we agree that deploying smart grid technologies
does not, in and of itself, result in the need for compliance with
Reliability Standards. Compliance with Reliability Standards is
determined through other processes under FPA 215, such as the NERC
compliance registration process and the specific requirements of
Commission-approved Reliability Standards.
---------------------------------------------------------------------------

    \65\ See Roadmap Report at 7.
---------------------------------------------------------------------------

2. Communication and Coordination Across Inter-System Interfaces
    46. The Proposed Policy Statement suggested making the development
of standards for inter-system interfaces a key priority. It described
the issue as follows:

    The second cross-cutting issue is the need for a common semantic
framework (i.e., agreement as to meaning) and software models for
enabling effective communication and coordination across inter-
system interfaces. An interface is a point where two systems need to
exchange data with each other; effective communication and
coordination occurs when each of the systems understands and can
respond to the data provided by the other system, even if the
internal workings of each system are quite different.\66\
---------------------------------------------------------------------------

    \66\ Proposed Policy Statement, 126 FERC ] 61,253 at P 32.

    47. The Commission stated that IEC Standards 61970 and 61968
(together, Common Information Model), along with IEC 61850
(Communications Networks and Systems in Substations), could provide a
basis for addressing this issue.\67\ We clarified that we were not
proposing any Commission requirement that these standards be developed
further, but were identifying them for comment on whether these
standards should be considered as important elements in efforts to
realize significant early benefits of the smart grid.\68\
---------------------------------------------------------------------------

    \67\ Id.
    \68\ Id. P 33.
---------------------------------------------------------------------------

Comments
    48. Many commenters agree on the need for effective communication
and coordination across inter-system interfaces,\69\ as well as using
the Common Information Model standards as a starting place. Starting
with Common Information Model standards was mentioned positively by
GWAC, National Grid, NRG, Kansas Commission, Midwest ISO, and CAISO.
However, some commenters caution that the premature implementation of
standards for common information models for inter-system interfaces
might result in valuable existing information systems being deemed
inconsistent, requiring unnecessary replacement. They suggest a gradual
phasing in of new technologies as other systems are retired.\70\ NERC,
on the other hand, contends that development of inter-system interfaces
is one method whereby new and legacy control systems can be enabled to
communicate with each other, which should extend the life of such
legacy systems.\71\
---------------------------------------------------------------------------

    \69\ GWAC Comments at 16, Kansas Commission Comments at 3, Duke
Comments at 8, NEMA Comments at 5, Midwest ISO Comments at 3, CAISO
Comments at 7, ISO-NE Comments at 2, NRECA Comments at 17, NRG
Comments at 7, National Grid Comments at 2, GridWise Alliance
Comments at 1, and NERC Comments at 12.
    \70\ Kansas Commission Comments at 3 and SDG&E Comments at 19-
20.
    \71\ NERC Comments at 12.
---------------------------------------------------------------------------

    49. Silver Spring Networks suggests that the Commission also
include networking as a priority in smart grid standards
development.\72\ Silver Spring Networks and AT&T also strongly support
the use of Internet Protocol as a networking standard.\73\
---------------------------------------------------------------------------

    \72\ Silver Spring Networks Comments at 1.
    \73\ Id. at 3; AT&T Comments at 3.
---------------------------------------------------------------------------

    50. Regional transmission organizations that submitted comments
support the Commission's proposals and offer some suggestions. CAISO
suggests that communication across inter-system interfaces would be
essential for ``deep-area situational awareness'' and for demand
response.\74\ NYISO suggests that regional transmission organizations
(RTOs) and independent system operators (ISOs) should take a prominent
role in the development of inter-system interface definitions and data
communication protocols.\75\
---------------------------------------------------------------------------

    \74\ CAISO Comments at 7.
    \75\ NYISO Comments at 5.
---------------------------------------------------------------------------

Commission Determination
    51. The Commission adopts the proposed policy position that the
development of standards for communicating and coordinating across
inter-system interfaces is a key priority cross-cutting issue. We agree
with GWAC that the smart grid is essentially a ``system of systems''
and that standardized communications across the interfaces of these
systems is a critical enabler of smart grid functionality and
interoperability. The Commission recognizes that development of a
common semantic framework and software models for enabling effective
communication and coordination across the inter-system interfaces is
critical to supporting virtually all of the smart grid goals, such as
system self-healing, integration of diversified resources, and improved
system efficiency and reliability. We note that the Institute's
interoperability standards development process has already paid a
substantial amount of attention to this topic. The Institute's
preliminary list of sixteen standards \76\ identified for the smart
grid framework includes IEC 61968/61970 and IEC 61850, which had been
suggested by the Commission as part of a starting point for
communication across interfaces.\77\ The Roadmap Report document
indicates that much of the ongoing work in the Institute's process will
center on developing common semantic and information models.\78\
---------------------------------------------------------------------------

    \76\ See Initial List of Smart Grid Interoperability Standards,
Request for Comments, 74 FR 27288 (June 9, 2009).
    \77\ See Proposed Policy Statement, 126 FERC ] 61,253 at P 33.
    \78\ Roadmap Report at 90.
---------------------------------------------------------------------------

    52. The Commission agrees with the Kansas Commission that the
standards development process to enable communications and coordination
across inter-system interfaces should not cause premature dismantling
of utility and RTO systems that currently function well. Older software
systems should be able to continue in service during a transition
period by using translators or bridges of reasonable cost that enable
the outputs of such systems to be understood by newer higher
functionality systems.
    53. We agree with NYISO's suggestion that RTOs and ISOs should take
a prominent role in defining system

interfaces, and we encourage ISOs, RTOs and all other FERC-
jurisdictional utilities to engage in the Institute's standards
development process.
    54. With regard to networking standards and the potential use of
Internet Protocol, the Commission will consider the findings of the
Institute's standards development process in our rulemaking process.
3. Wide-Area Situational Awareness
    55. In the Proposed Policy Statement, the Commission placed
emphasis on wide-area situational awareness as another key priority for
the smart grid. Wide-area situational awareness is the visual display
of interconnection-wide system conditions in near real time at the
reliability coordinator level and above. The implementation of wide-
area situational awareness could help mitigate the effect of
reliability events by giving reliability entities an improved and
manageable high-level view of system conditions and parameters.
    56. Furthermore, the Commission identified increased deployment of
advanced sensors like Phasor Measurement Units as a tool to give bulk-
power system operators access to large volumes of high-quality
information about the actual state of the electric system. This
functionality could help a smart grid address transmission congestion
and system optimization. The Commission acknowledged that this
technology would present its own set of challenges in the form of
information processing and management and suggested that the Institute
should strive to identify the necessary advanced software and systems
that would be most useful to system operators in addressing
transmission congestion and reliability.\79\ The Commission recognized
the efforts undertaken by the North American SynchroPhasor Initiative
and encouraged RTOs to take a leadership role in coordinating such work
with the member transmission owners.\80\
---------------------------------------------------------------------------

    \79\ Proposed Policy Statement at P 36.
    \80\ Id. P 35.
---------------------------------------------------------------------------

Comments
    57. Commenters generally support the proposition that wide-area
situational awareness should be a key priority in the development of
Smart Grid interoperability standards. Many commenters agree with the
Proposed Policy Statement that advanced sensors like Phasor Measurement
Units will give bulk-power system operators access to large volumes of
high-quality information about the system.\81\ Furthermore, commenters
agree with the Commission that accessing that level of information will
require the development of advanced software and systems. Various
commenters note that further investigation regarding additional
features for Phasor Measurement Units is required. Furthermore, using
high quality information about the actual state of the system to
possibly switch from the current static transmission line rating system
to a dynamic transmission line rating system would require more
research.\82\ NERC, for example, notes that although there might be
additional uses for Phasor Measurement Units, their primary use should
be to improve and protect the reliability of the bulk-power system.
---------------------------------------------------------------------------

    \81\ See, e.g., Kansas Commission Comments at 4-5, Gridwise
Alliance Comments at 11, and Duke Comments at 11.
    \82\ See, e.g., Kansas Commission Comments at 4-5, Gridwise
Alliance Comments at 11, Open Secure Systems Comments at 4, NERC
Comments at 17, and American Transmission Comments at 8.
---------------------------------------------------------------------------

    58. Commenters agree with the Commission that coordination between
RTOs and the North American SynchroPhasor Initiative will play a key
role in the development of synchrophasor initiatives.\83\ Furthermore,
commenters agree that the Institute should identify the core
requirements for advanced software and systems that will gather large
volumes of data and present it in a useful manner to operators.
However, NERC states that such efforts have been underway for several
years under the guidance of the Department of Energy's visualization
and controls research and development program with contributions from
TVA, Bonneville Power Administration, and CAISO.\84\ NERC believes that
since these entities are already engaged on these issues, they, and not
the Institute, should be in charge of designing and implementing the
core requirements for software and hardware systems.
---------------------------------------------------------------------------

    \83\ See, e.g., CAISO Comments at 9-10, Gridwise Alliance
Comments at 11, and Midwest ISO Comments at 4.
    \84\ NERC Comments at 18.
---------------------------------------------------------------------------

    59. AWEA notes that hardware and software tools that will serve to
integrate wind should be considered vital smart grid technology. For
example, AWEA states that devices that will contribute to consolidating
balancing authorities, tools for faster-interval/dispatch scheduling,
and tools to better forecast wind energy should be considered smart
grid technology.\85\
---------------------------------------------------------------------------

    \85\ AWEA Comments at 7-11.
---------------------------------------------------------------------------

    60. Duke seeks clarification on the Proposed Policy Statement's
definition of wide-area situational awareness as ``the visual display
of interconnection-wide system conditions in near real time at the
reliability coordinator level and above.'' \86\ Duke believes that
wide-area situational awareness should be the responsibility of all
NERC-defined functional reliability entities, such as balancing
authorities, transmission operators, and so forth, and not just limited
to the reliability coordinator level and above. Furthermore, Duke
states that ``if the result of the Commission's term `reliability
coordinator and above' is that Duke Energy would be required to provide
to other parties information or data that is not Duke Energy specific
(i.e., information that pertains to other regional entities), this is
of concern, and would require new information-sharing and disclosure
protocols.'' \87\
---------------------------------------------------------------------------

    \86\ Duke Comments at 10.
    \87\ Id. at 11.
---------------------------------------------------------------------------

Commission Determination
    61. The Commission adopts its proposed policy position that wide-
area situational awareness should be a key priority for the standards
development process. Wide-area situational awareness is imperative for
enhancing reliability of the bulk-power system because it allows for
greater knowledge of the current state of available resources, load
requirements, and transmission capabilities. Increased situational
awareness could allow for additional system automation and quicker
reaction times to various reliability events. Given this concern about
the need for increased situational awareness, and in response to Duke's
request for clarification that the Commission's description of wide-
area situational awareness in the Proposed Policy Statement was not
intended to limit such responsibility to reliability coordinators only,
we clarify that this was not our intent.
    62. Regarding the development of wide-area situational awareness
standards, the Commission agrees with NERC that it would be reasonable
for the Institute to consider work done by the Department of Energy and
others as the Institute develops standards.
4. Demand Response
    63. In the Proposed Policy Statement, the Commission stated that
smart grid-enabled demand response is a key priority for standards
development because of its potential to help address several bulk-power
system challenges including reliably integrating unprecedented amounts
of variable generation resources into the electric grid. The Commission
stated that the

further development of key standards should enhance interoperability
and communications between system operators, demand response resources,
and the systems that support them.\88\
---------------------------------------------------------------------------

    \88\ See Proposed Policy Statement, 126 FERC ] 61,253 at P 37-
39.
---------------------------------------------------------------------------

    64. The Commission proposed the development of a series of demand
response use cases \89\ employing readily available tools in order to
achieve an appropriate level of standardization. The Commission
encouraged a particular focus on use cases for the key demand response
activities of dispatchable demand response load reductions to address
loss or unavailability of variable resources, and the potential for
dispatchable demand response to increase power consumption during over-
generation situations.
---------------------------------------------------------------------------

    \89\ As noted in the Proposed Policy Statement, the use case
approach is a concept from the software and systems engineering
communities whereby a developer, usually in concert with the end
user, attempts to identify all of the functional requirements of a
system. Each use case essentially describes how a user will interact
with a system of other actors and objects to achieve a specific
goal. The use case will identify the interfaces between different
elements and the information being exchanged.
---------------------------------------------------------------------------

    65. The Commission noted that considerable work has been done to
develop demand response standards (e.g., Open Automated Demand
Response) and further encouraged a focus on additional standardization
of the interfaces between systems on the customer premises and utility
systems, including addressing data confidentiality issues.
    66. The Commission encouraged the Institute and industry to work
together on further standards development, starting with the
Institute's suggestion of the harmonization of IEC standard 61850 and
several meter standards, namely ANSI C12.19 and C12.22. Finally, the
Commission requested comment from states and other parties on the
optimal approach to develop standards in the area of customer meters,
and stated that the Commission will pursue direct communications with
the states on this topic.
Comments
    67. Most comments recognize the importance of demand response for
helping to address the types of challenges listed in the Proposed
Policy Statement.\90\ NARUC supports working with the Commission to
further develop and expand demand response programs.\91\ That said,
NARUC and others stress the need to remember that demand response, and
the metering and retail pricing reforms that might be needed to fully
realize demand response's potential, require retail customer
involvement and are thus firmly State-jurisdictional matters.\92\
---------------------------------------------------------------------------

    \90\ See, e.g., NYISO Comments at 10, ISO-NE Comments at 4, and
ELCON Comments at 4-5.
    \91\ NARUC Comments at 8.
    \92\ See, e.g., NARUC Comments at 6-8, Ohio Commission Comments
at 7, Kansas Commission Comments at 5, and Wal-Mart Comments at 5.
---------------------------------------------------------------------------

    68. NARUC also emphasizes that demand response programs can and
have operated without smart grid capabilities.\93\ On the other hand,
there were several comments stressing the importance to demand response
of national standardization of certain supporting technologies, like
communication between customer equipment and utility systems and
national metering standards.\94\ These commenters state that the
development of metering standards at a national level would be helpful
to increase the use of the smart grid by demand response resources and
avoid implementing multiple, proprietary, non-compatible metering
standards across the country that raise the cost of doing business in
different markets.
---------------------------------------------------------------------------

    \93\ NARUC Comments at 8.
    \94\ See, e.g., NEM and Intelligent Energy Comments at 8 and
Wal-Mart Comments at 3-4.
---------------------------------------------------------------------------

    69. Another key issue for commenters involves the need to develop
measurement and verification standards for demand response. The demand
response aggregation industry believes that standards will open up new
markets for demand response (e.g., capacity or ancillary services
markets) and will leverage and enable demand response integration to
address variable generation needs.\95\ In addition, American
Transmission states that specific, concrete requirements will be key to
ensuring that committed demand response is available when needed
allowing utilities to reliably include demand response capabilities in
their transmission planning.\96\
---------------------------------------------------------------------------

    \95\ See, e.g., Comverge Comments at 1-2 and DRSG Coalition
Comments at 7-8.
    \96\ American Transmission Comments at 6.
---------------------------------------------------------------------------

    70. Several commenters focus on the Proposed Policy Statement's
discussion of dispatchable demand response, though their comments tend
to reflect different viewpoints.\97\ GWAC seems to interpret this
discussion as imposing demand response on some group of customers that
might be given no option but to respond to dispatch signals from system
operators regardless of whether they are able to or want to
participate.\98\ GWAC prefers voluntary response to dynamic pricing
signals. In contrast, some commenters support a focus on voluntary
dispatchable demand response programs.\99\ Black Hills Corporation
expresses concern with the additional investment required for ``time
sensitive'' rates for retail customers since ratepayers are already
paying higher rates due to recovery mechanisms for efficiency,
renewable portfolio, and carbon reduction standards in various
states.\100\
---------------------------------------------------------------------------

    \97\ As discussed in the Proposed Policy Statement,
``dispatchable'' demand response allows participants to adjust their
demand at the direction of a system operator. Proposed Policy
Statement, 126 FERC ] 61,253 at P 20.
    \98\ GWAC Comments at 4.
    \99\ See, e.g., Kansas Commission Comments at 4-5 and Black
Hills Corp. Comments at 3.
    \100\ Black Hills Corp. Comments at 3.
---------------------------------------------------------------------------

    71. Those commenters who speak to the issue seem to support the
focus on developing demand response use cases as a first step toward
interoperability standards.\101\ In a similar vein, some stress the
need to identify and support valuable opportunities for the use of
demand response; for example, to provide ancillary services.
---------------------------------------------------------------------------

    \101\ See, e.g., NYISO Comments at 10, Alcoa Comments at 5-6,
and CAISO Comments at 12.
---------------------------------------------------------------------------

    72. There are also comments stressing the importance to demand
response of providing appropriate access to information gathered from
advanced meters.\102\ However, NARUC also touches upon this topic in
discussing data confidentiality and other such issues. It emphasizes
that these issues are firmly within the jurisdiction of State
commissions and that a rulemaking targeting standards connected to the
customer premises will exceed the Commission's jurisdiction.\103\
---------------------------------------------------------------------------

    \102\ NEMA and Intelligent Energy Comments at 2, 4.
    \103\ NARUC Comments at 9.
---------------------------------------------------------------------------

    73. Wal-Mart argues that any environmental attributes (e.g., carbon
reduction allowances) associated with demand response equipment should
be retained by the customer in order to foster customer participation
and purchase of such equipment.\104\
---------------------------------------------------------------------------

    \104\ Wal-Mart at 5.
---------------------------------------------------------------------------

Commission Determination
    74. The Commission adopts its proposed policy position that the
development of standards for demand response is a key priority. We
agree with ELCON that smart grid technologies have considerable
potential to promote demand response, which can reduce wholesale prices
and wholesale price volatility and reduce potential generator market
power. We also agree with NERC that smart grid capability can enhance
the application of demand response to accommodate the integration of
variable generation. As NYISO also points out, demand response
resources play an

important role in maintaining system security, especially in
constrained areas. Moreover, demand response can be particularly
helpful in situations when production from variable generating
resources has fallen. We note that the Institute has identified demand
response as a key priority focus in its interoperability standards
development process.
    75. In order to achieve appropriate demand response standards, the
Commission also adopts its proposed policy position that emphasis
should be put on further development of use cases and scenarios for
demand response, particularly with regard to dispatchable demand
response and various forms of dynamic pricing. We agree with comments
by Alcoa and Wal-Mart recommending that the dispatchable demand
response interoperability standards effort should support the full
range of customer types from large industrial customers through
commercial and smaller residential customers. Furthermore, we expect
that a standard for a dispatchable demand response program would
support either a mandatory or voluntary program, as determined by the
utility or retail regulator. With regard to dynamic pricing, the
Commission agrees with GWAC that it is important to develop standards
that support dynamic pricing, which offers an efficient means and
incentive for large numbers of smaller customers to take appropriate
demand response actions. We clarify that it is not our intention to
require the use of dynamic pricing in retail rates. It is, important,
however, for utilities and states that choose this option to develop
standard pricing terminology and methods for communicating pricing
information.\105\
---------------------------------------------------------------------------

    \105\ The Jurisdictional Concerns section of this Policy
Statement contains a more extensive discussion of the boundaries
between Federal and State jurisdiction.
---------------------------------------------------------------------------

    76. The Commission notes that the early stages of the Institute's
interoperability standards development process included investigation
of standards for advanced metering systems. The Commission suggested in
the Proposed Policy Statement that the development of national
interoperability standards for meters may be appropriate.\106\ Such
standards could also lead to more communications among systems as well
as facilitate the transfer of a successful program to other systems.
National interoperability standards for meters should enable the use of
direct load control, dynamic pricing, current tariff pricing or other
program options that are approved by retail regulators. We stress,
however, that the development of national interoperability standards
for meters does not create an obligation for states or utilities to use
them or to offer any specific type of demand response program. The
Commission continues to recognize that State and local regulators have
jurisdiction over retail rates and cost recovery. Recovery of retail
jurisdictional costs will continue to be determined by State and local
regulators. The Commission will continue to pursue direct
communications with the states and other parties on the optimal
approach to develop interoperability standards in the area of customer
meters. It is with these understandings that we encourage the Institute
and its industry collaborators to continue investigating potential
national interoperability standards for meters.
---------------------------------------------------------------------------

    \106\ See Proposed Policy Statement, 126 FERC ] 61,253 at P 39.
---------------------------------------------------------------------------

    77. Several commenters state the importance of developing
measurement and verification standards for demand response. We agree.
However, the Commission need not further address this topic because
participants in several forums are doing so, including the North
American Energy Standards Board and in compliance filings before the
Commission resulting from Order No. 719.\107\ Finally, the Commission
finds that Wal-Mart's request that any environmental attributes (e.g.,
carbon reduction allowances) associated with demand response equipment
should be retained by the customer is outside the scope of this Policy
Statement.
---------------------------------------------------------------------------

    \107\ Wholesale Competition in Regions with Organized Electric
Markets, Order No. 719, 73 FR 61,400 (Oct. 28, 2008), FERC Stats. &
Regs. ] 31,281 (2008).
---------------------------------------------------------------------------

5. Electric Storage
    78. In the Proposed Policy Statement, the Commission stated that if
electricity storage technologies could be more widely deployed, they
would present an important means of addressing some of the difficult
issues facing the electric industry, including helping to address
large-scale changes in generation mix. The Commission noted that, to
date, the most significant bulk-electricity storage technology has been
pumped storage hydroelectric technology but that new types of storage
technologies are under development and in some cases are being
deployed, and could also potentially provide substantial value to the
electric grid.\108\ The Commission proposed that, while continued
research and development appeared necessary before any widespread
deployment of such newer technologies can take place, it is appropriate
to encourage the identification and standardization of all possible
electricity storage use cases at an early stage. While the suggested
prioritization of storage use cases was the Commission's only proposal
in this area, the Commission then went on to highlight certain existing
standards that may be relevant to further work on storage-related
interoperability standards.\109\
---------------------------------------------------------------------------

    \108\ For the purposes of this Policy Statement, electric
storage refers to the storage of different forms of energy that may
be beneficial to the bulk-power system. For example, while pumped
hydroelectric storage refers to the potential energy stored in a
reservoir of water, it is the conversion of that energy to
electricity by a water turbine generator that makes it useful.
Similarly, a flywheel stores kinetic energy to spin a generator, and
batteries convert chemical energy directly into electricity.
Moreover, there are useful applications for stored energy (for
example, thermal energy) that is not converted into electricity, but
can substitute for electrical power by providing an end use.
    \109\ Proposed Policy Statement, 126 FERC ]61,253 at P 40.
---------------------------------------------------------------------------

Comments
    79. GridWise Alliance describes the many benefits energy storage
may provide to the nation's grid, such as grid optimization for bulk-
power production; balancing in systems with variable renewable energy
sources; facilitation of integration of electric vehicles; deferring
investments in transmission and distribution infrastructure to meet
peak loads; and providing ancillary services to grid/market
operators.\110\ Many commenters agree that standards for electric
storage should be a priority. APPA agrees that standardization of use
cases, protocols and communications regarding new types of electricity
storage should be undertaken early to avoid a proliferation of
competing and incompatible deployments of storage system
technologies.\111\ National Grid and Public Interest Organizations
state that electric storage will enable system integration of greater
amounts of renewable energy as well as improve overall system
efficiency.\112\ NERC recommends that the Commission adopt standards
and protocols on electric storage, and states that NERC plans to work
collaboratively with the Commission and the Institute on electric
storage issues that could have an impact on bulk-power system
reliability.\113\
---------------------------------------------------------------------------

    \110\ GridWise Alliance Comments at 11.
    \111\ APPA Comments at 14.
    \112\ National Grid Comments at 5, and Public Interest
Organizations Comments at 3.
    \113\ NERC Comments at 20-21.
---------------------------------------------------------------------------

    80. Some commenters express reservations about establishing storage
standards at this time. NYISO recommends that the Commission allow more
time to develop experience with

integrating these devices and that standardization of uses should await
actual operating experience with these devices.\114\ CAISO indicates
that tariffs and not detailed standards would best shape storage
development and integration.\115\ Xcel voices a concern that early
standardization of storage could stifle innovation.\116\ CPower
questions the Commission's ability to properly delineate yet un-
developed storage use cases.\117\
---------------------------------------------------------------------------

    \114\ NYISO Comments at 11.
    \115\ CAISO Comments at 13-14.
    \116\ Xcel Comments at 5-6.
    \117\ CPower Comments at 5.
---------------------------------------------------------------------------

Commission Determination
    81. The Commission agrees with the comments of GridWise Alliance
and others that electricity storage can serve as a potentially valuable
resource providing a variety of services to the bulk-power system. We
adopt our proposed policy position that electric storage is a key
functionality of the smart grid, and standards related to storage
should be treated as a key priority by the Institute and industry in
the interoperability standards development process, subject to certain
reservations. However, the Commission appreciates the concerns of
commenters such as NYISO that have expressed reservations about the
premature establishment of electric storage standards. Indeed, it was
just such concern that led us, in the Proposed Policy Statement, to
suggest prioritization of the development of storage use cases at that
time. However, it is important to note that the Institute's
interoperability standards development process has already assembled a
limited number of storage use cases and identified a few standards that
could be a starting point for development of interoperability standards
for storage. Thus, we encourage the Institute and industry to continue
this effort for interoperability standards for storage.
    82. The Commission continues to believe that storage use case
development is an important step on the path to developing relevant
interoperability standards, and thus on the path to enabling the wider
deployment of storage. However, any initial identification of storage
use cases would not be exhaustive; if new use cases are identified in
the future, they can be added to the initially identified set of use
cases for storage at that time. Initial identification of use cases
should not impede future storage innovations.
6. Electric Vehicles
    83. The Commission also identified the integration of electric
transportation as a key priority of smart grid functionality. The
Commission stated that, to the extent that new electric transportation
options become more widely adopted in the near future, maintaining the
reliable operation of the bulk-power system will require some level of
control over when and how electric vehicles draw electricity off of the
electric system.
    84. The Commission explained its hope that smart grid
interoperability standards would ultimately accommodate a wide array of
advanced options for electric vehicle interaction with the grid,
including full vehicle-to-grid capabilities. However, as a first step,
the Commission decided only to request that appropriate standards be
made a high priority so that distribution utilities will be able to
encourage customers to charge their vehicles during off-peak load
periods.\118\
---------------------------------------------------------------------------

    \118\ Proposed Policy Statement, 126 FERC ] 61,253 at P 42.
---------------------------------------------------------------------------

    85. The Commission also noted that, for the potential provision of
ancillary services to the grid by electric vehicles, electrical
interconnection issues must be dealt with along with potential
expansion of communications ability and urged the Society of Automotive
Engineers and the automobile industry to plan upgradable data
communications systems between electric vehicles and the power system.
Finally, the Proposed Policy Statement urged the Institute to include
electric vehicles in its distributed energy resource standards
development.
Comments
    86. National Grid points out the benefits of electric
transportation as being a significant part of the solution to electric
storage, shaping demand, and providing ancillary services to maintain
reliability and operational efficiency of the electric delivery
system.\119\ NYISO agrees with the Commission's proposed approach
toward addressing the greater penetration of electric vehicles and
developing a common set of operating rules, market rules, and
communication standards.\120\ AWEA agrees with the Commission that
electric vehicles can improve the flexibility of the grid and provide
electricity storage solutions that help to address the potential for
over-generation in off-peak periods.\121\ Comverge agrees that electric
vehicles deserve particular attention with respect to interoperability,
smart charging, enhanced information processing, and high-speed
communications and control.\122\ NERC points out that the reliability
of the bulk-power system could be impacted by high levels of the
penetration of electric vehicles, changing the complexity of managing
demand and energy dramatically.\123\
---------------------------------------------------------------------------

    \119\ National Grid Comments at 5.
    \120\ NYISO Comments at 11.
    \121\ AWEA Comments at 10.
    \122\ Comverge Comments at 3.
    \123\ NERC Comments at 20-21.
---------------------------------------------------------------------------

    87. On the other hand, some commenters assert that either electric
transportation technology itself or the standards for its integration
should not be priority items. The most common reason stated is that
widespread adoption of electric vehicles is seen as occurring too far
into the future and that prioritization should be given to more
immediately beneficial functionalities.\124\ The early stage of
electric vehicle development is also cited by CAISO and NRECA as a
reason that it would be premature to develop standards for them.\125\
While NRECA indicates that standards development should be put off
until more research and analysis is done, CAISO indicates that
standards should only address basic, structural, competitive and
architectural issues. CAISO views electric vehicles as another resource
to be shaped by tariff incentives rather than technology standards.
---------------------------------------------------------------------------

    \124\ See, e.g., Illinois Commission Comments at 3-4, Maryland
Counsel Comments at 3-4, and Springfield Comments at 6.
    \125\ CAISO Comments at 13-14 and NRECA Comments at 19.
---------------------------------------------------------------------------

    88. Kansas Commission questions which mandates related to vehicle
charging and real time metering the Commission intends to implement.
Kansas Commission also asks the Commission to clarify what it believes
is the extent of its jurisdiction.\126\ Maryland Counsel similarly
expresses jurisdictional concerns when it asserts that, unless related
to wholesale and transmission functions, electric vehicles will fall
into the State's jurisdiction over distribution (and so costs related
to them should not be recoverable in Commission-regulated rates).\127\
---------------------------------------------------------------------------

    \126\ Kansas Commission Comments at 6.
    \127\ Maryland Counsel Comments at 4.
---------------------------------------------------------------------------

    89. Allegheny Companies indicate that electric vehicles should be
viewed like all pieces of equipment with demand response responsibility
and that while electric transportation standard development should not
be a priority, the grid must have flexible standards and protocols to
support electric vehicles.\128\ Ohio Partners view modifications to the
grid to support electric vehicles as a subsidy for electric

car makers to the harm of existing fuel retailers and at a cost to
customers.\129\
---------------------------------------------------------------------------

    \128\ Allegheny Companies Comments at 4.
    \129\ Ohio Partners Comments at 9.
---------------------------------------------------------------------------

Commission Determination
    90. The Commission adopts the proposed policy position that
electric transportation is a key functionality of the smart grid, and
standards relating to electric transportation should be treated as a
key priority by the Institute and industry in the process of developing
interoperability standards. We agree with NERC that the reliability of
the bulk-power system could be affected by the high levels of
penetration by electric vehicles. However, the ability of distribution
utilities to facilitate off-peak charging may be able to mitigate such
reliability concerns. Discussions at the Institute's recent conferences
indicate that certain metropolitan areas are likely to experience high
penetrations of electric vehicles more quickly than others. NYISO
suggests that environmental concerns could lead to relatively high
levels of electric vehicle penetration in New York by 2020.
    91. For these reasons, although the market will likely play the
principal role in determining whether and when electric vehicle load
will become significant for utility systems, we urge the early
development of technical requirements that can permit distribution
utilities to facilitate electric vehicle charging during off-peak load
periods. Such technical capability should provide the State commissions
with an additional tool to deal with any electric vehicle-related load
growth that they may see in the future. Interoperability standards that
support such a choice by states permitting the electric vehicle to, for
example, receive and respond appropriately to peak pricing signals
could greatly improve the success of such an effort. However, if
another State commission sees no need for such price signals in its
area, the mere existence of interoperability standards would in no way
require the State to adopt such a pricing policy. Accordingly, we see
no jurisdictional issues with this recommendation for prioritization.
7. Additional Priorities Suggested by Commenters
    92. In addition to the key priorities listed in the Proposed Policy
Statement, several commenters suggest additional priorities for
interoperability standards: Modernization of the communications and
control technologies in the grid; standards for existing resources
(legacy) equipment and cost effective integration of legacy equipment;
interfaces between utilities (with interfaces between utilities and
customers and other systems to be developed along with State and other
regulatory bodies); and limitations on access to and use of individual
customer power usage information. The Valley Group states that, because
standards for enabling technologies (rather than communications
standards) will provide the grid with immediate and tangible benefits,
these should also be a priority. AWEA lists several more general
matters that it suggests must be addressed before broad-based
deployment of smart grid technologies can fully utilize their potential
to better accommodate renewable power. These include investment in an
extra-high voltage backbone system, faster interval dispatch and
scheduling, expanded area control error diversity, integration of wind
energy forecasts, and dynamic line rating.
Commission Determination
    93. The Commission will not make any additional standards a
priority for development at this time. Some of the proposed additional
priorities are already included in this Policy Statement. For example,
support for the modernization of the communications and control
technologies on the grid underlies this entire effort, and the use of
legacy equipment as utilities migrate to a smart grid is addressed in
the Interim Rate Policy. Similarly, to the extent that standards for
enabling technology are needed to permit the development of useful
smart grid capabilities like wide-area situational awareness standards,
then such standards would be encompassed by our broader recommendation
to make wide-area situational awareness standards a key priority.
    94. Limitations on access to, and use of, individual customer power
usage information may be addressed by retail regulators and, in any
event, are beyond the scope of this Policy Statement. Finally, although
the topics suggested by AWEA are important, they do not relate to the
development of interoperability standards and, therefore, are more
appropriate to address outside of this proceeding.

C. Interim Rate Policy

    95. In the Proposed Policy Statement, the Commission stated that
certain upcoming challenges to the operation of the bulk-power system
justified enacting policies to encourage the near-term deployment of
smart grid systems capable of helping to address those challenges.\130\
Accordingly, the Commission proposed certain rate policies meant to
encourage such near-term deployment while appropriately protecting
customers from stranded costs and the electric system from potential
cybersecurity threats. Consistent with FPA section 205, which requires
that all rates for the transmission or sale of electric energy subject
to the Commission's jurisdiction be just and reasonable,\131\ the
Commission proposed to consider smart grid devices and equipment--
including those used in a smart grid pilot program or demonstration
project--to be ``used and useful'' \132\ for purposes of cost recovery
if the applicant makes certain showings.\133\
---------------------------------------------------------------------------

    \130\ Proposed Policy Statement, 126 FERC ] 61,253 at P 45.
    \131\ 16 U.S.C. 824d.
    \132\ The general rate-making principle is that expenditures for
an item may be included in a public utility's rate base only when
the item is ``used and useful'' in providing service. See NEPCO
Municipal Rate Committee v. FERC, 668 F.2d 1327, 1333 (D.C. Cir.
1981).
    \133\ Proposed Policy Statement at P 45.
---------------------------------------------------------------------------

1. Scope and Duration
    96. In the Proposed Policy Statement, the Commission stated that,
once interoperability standards are adopted, it will consider making
compliance with those standards a mandatory condition for rate recovery
of jurisdictional smart grid costs. For the period until
interoperability standards are adopted, the Commission proposed the
Interim Rate Policy to accept rate filings submitted under FPA section
205 by public utilities to recover the costs of smart grid deployments
involving jurisdictional facilities, provided those filings make
certain showings set out by the Commission in this Policy Statement.
The Commission restated this proposal in terms of finding smart grid
investments to be ``used and useful'' for purposes of rate recovery if
an applicant makes these showings.
Comments
    97. Several commenters support the Interim Rate Policy.\134\ These
commenters state that an interim rate policy is necessary for the
deployment of smart grid resources. National Grid states that the
Commission properly recognizes that utilities will only be willing to
deploy smart grid equipment if they are able to recover the associated
costs in regulated rates.\135\ PSEG

believes that implementing the Interim Rate Policy is a critical
component in advancing the ultimate smart grid evolution.\136\
---------------------------------------------------------------------------

    \134\ Gridwise Alliance Comments at 12, PSEG Companies Comments
at 4-5, 8, National Grid Comments at 5-7, Duke Comments at 11-12,
Comverge Comments at 5-6, and FirstEnergy Comments at 10.
    \135\ National Grid Comments at 5.
    \136\ PSEG Comments at 4.
---------------------------------------------------------------------------

    98. Allegheny Companies assert that utilities with stated
transmission rates may fail to recover their full cost of service as
the deployment of smart grid technologies may reduce the amount of
electricity they sell, and argue that rates should be revised to
decouple revenues from electricity sold.\137\ Meanwhile, several
commenters expect or seek clarification that smart grid costs can be
recovered in formula rates including existing formula rates, and that
existing rate formulae do not require modification in order to
accommodate such smart grid costs.\138\
---------------------------------------------------------------------------

    \137\ Allegheny Comments at 8.
    \138\ American Transmission Comments at 6-7, EEI Comments at 14,
and National Grid Comments at 6.
---------------------------------------------------------------------------

    99. NARUC states that efficiency gains and other related benefits
of smart grid deployments should be factored into rate-setting before
passing all costs through to consumers.\139\ NARUC also comments that
any government funding under the Department of Energy smart grid grant
programs should be factored into cost recovery. AARP urges caution
regarding expedited consideration of such rate filings before final
adoption of interoperability standards.\140\
---------------------------------------------------------------------------

    \139\ NARUC Comments at 12.
    \140\ AARP Comments at 4, 13-15.
---------------------------------------------------------------------------

    100. Wal-Mart proposes that the Commission include a deadline for
either terminating or at least revisiting the Interim Rate Policy.\141\
Alternatively, Wal-Mart argues for a deadline by which utilities who
have made use of the Interim Rate Policy must file a full rate case.
Wal-Mart also supports the concept of some type of sharing of risk with
shareholders.
---------------------------------------------------------------------------

    \141\ Wal-Mart Comments at 6-7.
---------------------------------------------------------------------------

    101. Alcoa asserts that the Proposed Policy Statement is silent
about cost allocation issues associated with smart grid costs and
argues that the Commission should specify that smart grid costs will be
allocated in accordance with long-standing cost causation
principles.\142\ In particular, Alcoa argues that consideration of cost
causation and allocation based on proportional benefits should be
specified so that, for example, stable high load-factor loads would not
be over-burdened by the allocation of costs for smart grid equipment
deployed primarily to support variable loads and resources.\143\
Meanwhile, GridSolar states that existing cost allocation schemes
within RTOs may unduly favor the development of transmission over
competing distributed energy projects by allocating costs regionally
while a competing distributed energy project might only qualify for
local cost allocation.\144\ GridSolar urges the Commission to require
that, where distributed energy projects incorporating smart grid
technologies and practices have been approved by a State regulatory
commission in lieu of transmission reliability upgrades, these
distributed energy projects receive the same cost allocation treatment
as transmission reliability upgrades.
---------------------------------------------------------------------------

    \142\ Alcoa Comments at 6-7.
    \143\ Id. at 7.
    \144\ GridSolar Comments at 6-8.
---------------------------------------------------------------------------

    102. Several entities comment on broad market design issues.
CPower, in an appendix to its filing, includes a letter to the
Commission dated February 24, 2009 that includes various rate
proposals.\145\ The letter includes proposals for how demand response
should participate in various RTO markets. Academic Commenters believe
that the Proposed Policy Statement does not go far enough because it
fails to provide guidance on the revised market structures that they
believe would be needed to realize the benefits of a smart grid.\146\
BP makes similar comments, focusing primarily on the possibility of
moving away, at least partially, from the current model of centrally
dispatched large-scale generation with passive load to a more
decentralized decision-making process more like other commodities
markets.\147\ CAISO indicates that a wholesale energy and transmission
market that allows a more refined and granular understanding of what is
happening on the grid would take better advantage of smart grid
capabilities.\148\ NEMA points out that some smart grid technologies,
like Phasor Measurement Units and associated software, could have
benefits beyond those identified in the Proposed Policy Statement.\149\
---------------------------------------------------------------------------

    \145\ CPower states that this letter was originally submitted in
connection with the Commission's demand response stakeholder
process. It is not entirely clear what stakeholder process is
referenced but it appears to have been an informal submission.
    \146\ Academic Commenters Comments at 1-13.
    \147\ BP Comments at 3-6.
    \148\ CAISO Comments at 3-4.
    \149\ NEMA Comments at 7-8.
---------------------------------------------------------------------------

Commission Determination
    103. The Commission will adopt an Interim Rate Policy allowing the
recovery of jurisdictional smart grid costs if certain showings are
made, as discussed in the next section. Through this Interim Rate
Policy, the Commission will provide for assurance of recovery of future
smart grid costs. To receive this assurance, a public utility must file
either a petition for declaratory order or an FPA section 205 filing
demonstrating that it has made the relevant showings described below.
This Interim Rate Policy will be effective until relevant
interoperability standards have been adopted through Commission
rulemakings, as provided for under EISA section 1305(d).\150\ There are
certain potentially imminent challenges to the operation of the
nation's bulk-power system as described earlier, and the key smart
grid-related capabilities identified in this Policy Statement can help
address these concerns. Utility equipment that performs Commission-
jurisdictional activities could be affected by many of these smart
grid-related investments. Accordingly, we find that the adoption of the
Interim Rate Policy is appropriate.
---------------------------------------------------------------------------

    \150\ Thus, utilities that want to receive the benefit of this
Interim Rate Policy must submit their filings seeking such treatment
prior to the issuance of a final rule adopting relevant standards.
---------------------------------------------------------------------------

    104. Several commenters argue that having an Interim Rate Policy
for smart grid investments is premature, citing unresolved technical
issues, such as interoperability standards. However, waiting for all
technical issues to be resolved before beginning investment in smart
grid deployment would frustrate the development of those very
standards. Smart grid resources deployed with appropriate protections
in the interim period could increase our body of knowledge and
ultimately assist the standards development process. In this case, the
Commission proposed several protections, in the form of additional
showings, to be discussed in the next section.
    105. Several commenters seek to modify rate treatments other than
those targeted by the Commission in the Proposed Policy Statement.
Allegheny Companies seek a decoupling of electricity sales from
revenues to encourage utilities to develop these technologies even
though they may lead to lower electricity revenues. The Commission
finds that Allegheny Companies' proposal is beyond the scope of this
Policy Statement.
    106. Alcoa's arguments regarding cost allocation are outside the
scope of this Policy Statement. We have not proposed any modification
to currently-effective cost allocation policies for Commission-
jurisdictional transmission rates. For similar reasons, we decline to
address GridSolar's request to modify cost allocation methods within
RTOs, Valley Group's real-time ratings incentive proposal, and the
comments on broad market design.

    107. Smart grid costs may be recovered through formula rates if the
formula rate already authorizes cost recovery of a particular type of
investment. In this case, the public utility may recover that cost as
it would any other recoverable cost. However, in the event the public
utility desires the assurance of cost recovery provided under the
Interim Rate Policy, it must submit an FPA section 205 filing or a
request for a declaratory order justifying such rate treatment by
making the demonstrations required herein.\151\ In the absence of a
Commission order approving such a proposal, a smart grid-related cost
automatically incorporated into a formula rate could be subject to
future review and challenge.
---------------------------------------------------------------------------

    \151\ The Commission will allow a public utility to file to
amend a formula rate to recover such costs and to seek rate
assurance under this Interim Rate Policy without reopening other
elements of the formula rate.
---------------------------------------------------------------------------

    108. Finally, with regard to Wal-Mart's proposal for a stated
deadline for terminating or revisiting the Interim Rate Policy, the
Interim Rate Policy is structured to allow applicants to file with the
Commission for rate treatment under the Interim Rate Policy until the
Commission adopts relevant interoperability standards. This is
necessary because standards will likely be filed for certain functions
before others and setting an arbitrary deadline may result in rate
treatment for some standards and not others. Moreover, our regulations,
which are based on the requirements of the FPA, provide customers with
the ability to file complaints if they believe that an existing rate
has become unjust or unreasonable. Because this Interim Rate Policy
provides protections in addition to such existing protections, nothing
more is needed here.
2. Additional Showings
    109. In the Interim Rate Policy, the Commission proposed to require
applicants seeking the recovery of costs associated with smart grid
investments made during the period in which interoperability standards
are being developed to make several showings, beyond the normal filing
requirements, before being considered ``used and useful'' and therefore
eligible to recover such costs. First, the Commission proposed that an
applicant must demonstrate that the reliability and security of the
bulk-power system will not be adversely affected by the deployment of
smart grid facilities at issue. Second, the Commission proposed that
the filing be required to show that the applicant has minimized the
possibility of stranded costs for smart grid equipment, in light of the
fact that such filings will predate adoption of interoperability
standards through Commission rulemakings. Finally, because it would be
important for early smart grid deployments, particularly pilot and
demonstration projects, to provide feedback useful to the
interoperability standards development process, the Commission proposed
to direct the applicant to share certain information with the
Department of Energy Smart Grid Clearinghouse, provided for in the
American Recovery and Reinvestment Act (ARRA).\152\
---------------------------------------------------------------------------

    \152\ American Recovery and Reinvestment Act, Pub. L. 111-5,
section 405(3)(2009).
---------------------------------------------------------------------------

Comments
    110. Midwest ISO Transmission Owners fully support the Commission's
proposals regarding the used and useful determination for smart grid
costs.\153\ Ice Energy supports the proposed eligibility requirements
and discusses how its own thermal-storage air conditioning technology
meets those requirements and could aid utility compliance with those
requirements as well.\154\ Public Interest Organizations support the
criteria already included in the Interim Rate Policy, and also propose
two additional criteria: First, a requirement that the smart grid cost
in question be vetted through a regional planning process and that such
planning process demonstrates the value of such investments for meeting
reliability, security, dispatchable demand response, or renewable
energy integration needs, and second, a requirement to perform a cost/
benefit analysis.\155\ Ohio Counsel states that it fully supports the
comments made by Public Interest Organizations but would add further
emphasis to the need for a comprehensive plan based upon appropriate
criteria to insure prudence in project scope, implementation, and cost
recovery. It views this as necessary to insure that the cost/benefit
analysis of the deployment will be favorable and that the guidelines
for cost recovery are prudent and net of operation and asset management
benefits.\156\
---------------------------------------------------------------------------

    \153\ Midwest ISO Transmission Owners Comments at 7.
    \154\ Ice Energy Comments at 19-20.
    \155\ Public Interest Organizations Comments at 4.
    \156\ Ohio Counsel Comments at 1-3.
---------------------------------------------------------------------------

    111. NRECA states that smart grid deployments should not exceed
``the pace of value'' with new elements entering the system only as
they are able to demonstrate value.\157\ Ohio Partners and Maryland
Counsel similarly argue that the benefits to customers must be shown
before cost recovery is granted.\158\ Likewise if any Interim Rate
Policy is finalized, ELCON believes that it must incorporate a cost/
benefit requirement.\159\
---------------------------------------------------------------------------

    \157\ NRECA Comments at 13-14.
    \158\ Ohio Partners and Maryland Counsel Comments at 5-6.
    \159\ ELCON Comments at 10.
---------------------------------------------------------------------------

    112. Several commenters \160\ also support the addition of a cost-
effectiveness requirement. In this regard, North Carolina Agencies
stress the need for coordination with the affected State commissions,
and Wal-Mart points to item number six in the document ``Proposed
Funding Criteria for the ARRA Smart Grid Matching Grant Program''
recently proposed by the NARUC/FERC Smart Grid Collaborative to the
Department of Energy, which proposes a variety of information
requirements that could be used to help determine cost-effectiveness.
Springfield argues that utilities should be required to demonstrate
that they are following best utility practices, and should be required
to demonstrate the incremental benefit of smart grid deployment as if
such best practices were in place.\161\
---------------------------------------------------------------------------

    \160\ CPower Comments at 2, Alcoa Comments at 9, PSEG Companies
Comments at 2, North Carolina Agencies Comments at 3, and Wal-Mart
Comments at 6.
    \161\ Springfield Comments at 10.
---------------------------------------------------------------------------

    113. Illinois Commission argues that the Commission's proposed
requirements seem to assume that smart grid proposals are economically
justified by their very nature.\162\ Illinois Commission points out
that under the Department of Energy's grant criteria, a smart grid
project could be denied grant funding if it fails to adhere to the
Institute-published standards, but under the Interim Rate Policy the
same project could receive rate recovery and, in particular, guaranteed
recovery of abandonment costs. Illinois Commission seeks clarification
that this would not be automatically permitted. Instead, Illinois
Commission argues that during the period between when the Institute
publishes standards and the Commission adopts them through rulemaking,
any affected smart grid rate recovery applicants should have the burden
to establish that such project remains used and useful.\163\ Illinois
Commission and AWEA also urge the Commission to limit application of
the Interim Rate Policy to only those smart grid projects that further
the Commission's goals associated with the two cross-cutting issues and
priority functionalities identified in the

Proposed Policy Statement.\164\ Finally, Illinois Commission also
argues that the Commission should maintain a traditional cost-
causation, beneficiary-pays cost allocation methodology and, in
particular, prohibit broad socialization of such costs within
RTOs.\165\
---------------------------------------------------------------------------

    \162\ Illinois Commission Comments at 4.
    \163\ Id. at 6. Maryland Counsel Comments at 5, n.4.
    \164\ Illinois Commission Comments at 6-7 and AWEA Comments at
11-12.
    \165\ Illinois Commission Comments at 7.
---------------------------------------------------------------------------

    114. Michigan Commission argues that the Interim Rate Policy should
be applied carefully and conservatively to avoid inefficient spending
on equipment that does not promote real progress toward true smart grid
functionality. Michigan Commission is particularly concerned about
permitting cost recovery for smart grid deployments that cannot be
upgraded to final interoperability standards. Accordingly, it argues
that if the Commission proceeds with an Interim Rate Policy, it should
clarify that its eligibility criteria will be strictly applied and only
available to investments that create significant new smart grid
functionality or serve as the basis for upgrading or expanding such
functionality in the future.\166\
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    \166\ Michigan Commission Comments at 10-12.
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    115. Indianapolis P&L also supports the proposed criteria but
requests that the Commission apply these criteria with some degree of
flexibility given that national smart grid development is a work-in-
progress. Specifically, Indianapolis P&L suggests that the need to
demonstrate good faith adherence to the smart grid vision articulated
in EISA may be complicated by the early stage of the interoperability
process generally. In this regard, Indianapolis P&L suggests that any
evaluation of applicant good faith decisions take into account the
state of affairs at the time any decisions were made.\167\ Regarding
the requirement to share information with the Department of Energy
Smart Grid Clearinghouse, Indianapolis P&L respectfully requests that
confidential and commercially-sensitive information not be demanded or
that appropriate protections be permitted to apply.\168\
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    \167\ Indianapolis P&L Comments at 4.
    \168\ Id. at 4-5.
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    116. FirstEnergy urges the Commission not to require applicants to
make showings that would be unreasonable, overly burdensome, or
inflexible such that any proposed cost recovery would discourage
investment. It does not, however, specify whether any of the
Commission's proposed eligibility criteria would fall into this
category.\169\ DRSG Coalition, on the other hand, seems to argue that
some of the Commission's proposed security criteria for cost recovery
may be overly burdensome.\170\
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    \169\ First Energy Comments at 10.
    \170\ DRSG Coalition Comments at 9-10.
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    117. SDG&E proposes that, where an application for rate recovery or
incentives involves the utility's share of the cost of a project
receiving partial Department of Energy funding, the Commission could
deem the utility's share of the investment per se prudent as used and
useful plant so that rate recovery of such costs would be deemed per se
just and reasonable. If this proposal is not adopted outright, then
SDG&E argues that the Commission should at least apply a rebuttable
presumption that such costs are per se prudent and their rate recovery
would be per se just and reasonable.
    118. AARP argues that the Commission's proposed eligibility
criteria are equivalent to ``near automatic rate recovery'' for new
investments labeled ``smart grid.'' \171\ AARP does not believe that
the Commission's statutory responsibility to insure just and reasonable
rates can be fulfilled with such criteria. First, it asserts that the
Commission has failed to identify the specific investments, devices, or
other systems that would or could be subject to the proposed Interim
Rate Policy. It also asserts that the Commission should require
applicants to affirmatively demonstrate benefits, such as enhanced
reliability, as a condition for rate recovery. It also seems to argue
that rate recovery should not be granted unless the applicant can
demonstrate that the smart grid equipment in question can be
upgraded.\172\ Finally, AARP proposes that the Commission require
applicants to demonstrate that their investments have been reviewed and
approved by State regulators when those investments are intimately
related to, and coordinated with, investments that are subject to State
regulatory authorities.\173\
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    \171\ AARP Comments at 10.
    \172\ The Proposed Policy Statement encourages upgradeability
but stops short of requiring it because it may not always be
technically or economically feasible. Proposed Policy Statement, 126
FERC ] 61,253 at P 49.
    \173\ AARP Comments at 10-12.
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    119. APPA has two concerns in this area.\174\ First, it is
concerned that only smart grid costs associated with wholesale rates
and transmission functions be recovered through filings under this
proposal. It argues that the cost of smart grid installations that
support retail service should be recovered in retail rates. Second,
APPA opposes the Commission's proposal to consider smart grid devices
and equipment to be used and useful for cost recovery purposes if the
applicant meets the criteria set out in the Proposed Policy Statement.
APPA believes that such treatment shifts the burden of proof from the
applicant to customers opposing such a finding. Third, APPA believes
that applicants for smart grid-related rate recovery or incentives
should be required to show that their suppliers have attested to the
integrity of the components used in the smart grid installation in
question.
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    \174\ APPA Comments at 16-17, 19.
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    120. Kansas Commission concurs with the need to provide certainty
and guidance regarding cost recovery issues but expresses concerns
regarding the three criteria proposed by the Commission. Specifically,
it prefers that more traditional demonstrations of the used and useful
requirement be preserved and also supports a cost/benefit
requirement.\175\ Massachusetts Attorney General believes that no smart
grid costs should be eligible for rate recovery until after the
Institute provides guidance on which technologies are most cost
effective and where device deployment will be most valuable.\176\
Massachusetts Attorney General also recommends that the Commission
require applicants to demonstrate that they maximized all opportunities
to secure Federal funding to offset the costs associated with smart
grid deployment.
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    \175\ Kansas Commission Comments at 7-8.
    \176\ Massachusetts Attorney General Comments at 3-4.
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    121. Citizens Coalition opposes the proposal to find smart grid
equipment used and useful if three conditions are met on the basis that
such changes are ``simply dishonest manipulation of traditional utility
principles.'' \177\ It also expresses concern with the proposal to
require good faith efforts to adhere to the vision of a smart grid
described in Title XIII of EISA. Specifically, it opposes a ``good
faith'' standard and instead urges that applicants be required to show
that they acted reasonably and prudently, which it characterizes as a
standard of reasonableness.
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    \177\ Citizens Coalition Comments at 10, 12-13.
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Commission Determination
    122. To help inform our review for rate approval of smart grid
costs, an applicant seeking the recovery of smart grid costs must make
four demonstrations. The first, and threshold, demonstration is that an
applicant must show that the smart grid facilities will advance the
goals of EISA section 1301. Second an applicant must show that the
reliability and

cybersecurity of the bulk-power system will not be adversely affected
by the deployment of the smart grid facilities at issue. Third, the
applicant must show that it has minimized the possibility of stranded
investment in smart grid equipment, in light of the fact that such
filings will predate adoption of interoperability standards. Finally,
because it will be important for early smart grid deployments,
particularly pilot and demonstration projects, to provide feedback
useful to the interoperability standards development process, an
applicant must agree to provide feedback useful to the interoperability
standards development process, by sharing information with the
Department of Energy Smart Grid Clearinghouse.
    123. To make the first and threshold demonstration, an applicant
must describe the proposed investment (including the technologies,