4. EISA Obligations Related to Smart Grid Investment
4.1. Should the Commission Require Each Utility to Demonstrate That it Has Considered a Smart Grid Investment Before Making Any Grid Investment?
As the legal analysis above makes clear, PURPA, as amended by EISA, requires that for each electric utility subject to the Commission's ratemaking authority, the Commission must make findings as to whether to require that the utility, before investing in any nonadvanced grid technologies, demonstrate that it has considered a Smart Grid investment based on factors that include: (i) total costs; (ii) cost-effectiveness; (iii) improved reliability; (iv) security; (v) system performance; and(vi) societal benefit.
This section considers whether this Commission should adopt this requirement as consistent with the purposes of EISA in the California context.
In comments filed in this proceeding, the California IOUs were uniform in their opposition to the imposition of a requirement that a utility demonstrate that it has considered a Smart Grid investment before investing in any nonadvanced grid technologies.
SCE opposes the adoption of this requirement. SCE argues that "[w]hile SCE strongly supports the intent of EISA Section 1307(a), which seeks to promote the deployment of a smart grid electric system, we are concerned that the language of this section, if taken to an extreme, might inadvertently delay ongoing and necessary electric utility capital deployment and infrastructure replacement programs."31 In addition, SCE argues that "even with emerging advancements in energy technologies, telecommunications, and computing technology capabilities, the electric power delivery system over the next ten years will largely continue to consist of longstanding and proven technologies, such as conductors, poles, towers, and transformers."32
SDG&E also argues against requiring a utility to demonstrate that it has considered an investment in a Smart Grid system before undertaking investments in nonadvanced grid technologies. SDG&E argues that "[s]mart grid investment decisions should be made a part of every utility's normal investment planning process."33 SDG&E therefore argues that such a requirement is not necessary. Moreover, SDG&E argues that such a requirement would be counterproductive and lead to inefficiencies in infrastructure development. SDG&E argues that "if a utility is required to demonstrate to the Commission that it considered an investment in a qualified smart grid system as an alternative, it would lengthen the investment planning process and make it less efficient."34
PG&E similarly argues that the Commission should not impose such a requirement on any utility. PG&E points out that "the EISA `smart grid' definition is broad and somewhat imprecise, so that determining the technical difference between smart grid and non-smart grid investments cannot be made without further evaluation and review by individual state utility commissions and policymakers."35 Thus, PG&E's view is that it would prove difficult to determine to which activities the requirement applies.
CASMU states that:
Mountain Utilities is not connected to any transmission system. Bear Valley Electric Service is physically connected to the distribution system of Southern California Edison Company. PacifiCorp owns a transmission grid spanning several states, and operates its own control area, which is not connected to the CAISO grid operationally. Sierra Pacific Power Company operates its own control area as well, and like PacifiCorp, Sierra Pacific's grid in not connected operationally with the CAISO grid.36
PacifiCorp argues that "[s]mall utilities and multi-jurisdictional utilities with small California customer bases should be excluded from this requirement."37 Because of these facts, CASMU argues that these utilities should not be held to any of EISA's proposed requirements for the Smart Grid at this time.
Sierra Pacific argues that "the programs proposed for smart grid implementation may achieve certain goals in the three large IOUs' service territories, while being impracticable in Sierra's much smaller California territory."38 On the other hand, Sierra Pacific notes that it "is in the process of investigating a smart grid program for its Nevada territory."39
The opposition to this requirement was not limited to IOUs. Enspiria similarly argues that "[i]mposing a strict interpretation of this section will be overly burdensome."40
TURN, like PG&E, also notes the lack of clarity as to what constitutes either a Smart Grid investment or a "non-advanced grid technology."41 As a result, "TURN recommends that the Commission defer any decision on this proposed standard until there is a more definitive definition of what constitutes a `smart grid' investment and a better understanding of the current status of a utility's conformance to a `smart grid' system."42
DRA argues that "[w]ithout specifics on what technologies the Commission requires makes it inherently difficult to make this consideration a requirement."43
Some parties, however, did support the imposition of this requirement. CFC argues that the Commission should impose this requirement, but CFC does not provide any analysis to support its recommendation.44 CFC does, however, quote a California Energy Commission's 2007 Integrated Energy Policy Report, that it contends endorses this position.45
CPower also supports the imposition of such a requirement without a supporting argument 46 as does TechNet.47
CLECA argues that "[p]rior to undertaking investments in either non-advanced or advanced grid-technologies, the Commission should require that any investment meet the criteria listed above in a cost-effective manner that minimized the obsolescence of existing equipment and thus the need for customers to pay for stranded costs."48
In response to the Joint Ruling's invitation for further comments, PG&E expressed support for the Joint Ruling's proposal to abstain from requiring a demonstration that a utility had considered a Smart Grid investment before making a grid investment.49
SCE also supports this position, arguing that:
Given that the substantial majority of current capital deployment occurs in proven core technologies, it seems burdensome and unreasonable to mandate that electric utilities formally demonstrate that they "considered" Smart Grid processes and technologies that may not even be commercially available.50
CASMU states that it "broadly supports the tentative conclusions of the Joint Ruling declining to implement the Smart Grid standards ..."51 Mountain Utilities supports the CASMU position.52
Sierra Pacific argues that "unique characteristics of Sierra Pacific's service territory" make it reasonable to decline "to implement these federal standards upon Sierra ..."53
DRA supports the Joint Ruling's proposal to not adopt this PURPA standard. DRA notes that "[w]hile a utility need not demonstrate that it has considered a Smart Grid investment every time it invests in the grid, the Commission should provide direction to the utilities about developing a Smart Grid, guidance in making grid investments to support development of a Smart Grid, and criteria by which to review those investment requests."54
TURN states that it "agrees with the recommendation that the Commission not adopt the standard as written in EISA," but that TURN "cautions that lack of consideration of `smart grid' alternatives could eventually harm ratepayers if it results in stranded costs."55 On the other hand, TURN also states that "[a] policy that requires utilities either to explain that there is no alternative `smart grid' investment for a particular asset class ... could promote both efficient use of resources and equitable rates."56
On this issue, CFC objects to the policy proposed in the Joint Ruling and notes that "[a] smart grid deployment plan must be developed under SB 17 Padilla."57
CEERT reasserts that the Commission should adopt this requirement. CEERT argues that:
The Commission first needs to set a policy course for what it intends to accomplish by deploying Smart Grid technologies and applications. Once that policy is established, utilities should be required to demonstrate that they are building their systems to meet these goals and objections.58
CEERT also argues that "[i]t is fundamentally the obligation of the proponent to demonstrate the need for an investment and carry the burden of proof."59
CLECA, in contrasts, supports the Joint Ruling's proposal to decline to adopt a standard requiring a regulatory showing before making an investment in the local grid, noting that "many grid replacements are routine matters that do not require Smart Grid consideration" and that "such a requirement would require additional time, effort, and paperwork."60 Moreover, CLECA notes that "the Commission has the ability to address utility investments in a wide variety of proceedings and can consider the most appropriate alternatives."61
We decline to adopt the proposed EISA requirement that a utility demonstrate that it considered Smart Grid investments before making any new investments in the grid. Specifically, applying such a requirement on California utilities is inconsistent with the purposes of the act, which seek to optimize the efficient use of facilities and resources by electric utilities and to produce equitable rates for electric consumers.62
For Sierra Pacific, Mountain Utilities, PacifiCorp and Bear Valley Electric, we find that the small size of these utilities and the nature of their operations makes it inappropriate to impose such a requirement. Specifically, Sierra Pacific, Mountain Utilities, and PacifiCorp do not operate within the CAISO's control area. Bear Valley Electric, which does, is only a distribution customer of another larger utility. Thus, a requirement to consider Smart Grid investments before making any grid investment would only impose costs and inefficiencies on these small IOUs while producing no benefits.
In addition to this finding for small IOUs, we find that adopting such a blanket requirement for any IOU would not serve the public interest. First, many grid investments, such as a pole replacement or grid extension, are routine matters and tasks that utilities must perform. A requirement to make a consideration of a "Smart Grid" technology a prerequisite to such action would almost surely increase costs and eventually consumer rates while increasing response times for services. Thus, a requirement that a utility consider a "Smart Grid" investment in such a circumstance is inconsistent with the purposes of the act, which seek to produce equitable rates to consumers. Moreover, for the foreseeable future, much of the technology used in the distribution network, such as poles, wires, and trenching, will remain decidedly "non-smart."
Second, for all utilities, the imposition of a requirement to demonstrate that the utility has considered a Smart Grid investment would impose a regulatory hurdle that can slow infrastructure investment and modernization, thereby undercutting the PURPA purpose of producing the efficient use of facilities and resources by electric utilities.
Third, the utilities' routine regulatory proceedings offer an opportunity for the consideration of Smart Grid investments as part of the Commission's review of any grid or transmission project. Although we believe that the public interest is served by a consideration of Smart Gird investments in most instances, we conclude that the Commission should decline to make such a consideration a requirement. We note that SB 17 requires that the Commission "shall determine the requirements for a smart grid deployment plan."63 This approach is very different from that proposed in EISA. SB 17 requires that the Commission adopt policies that guide investments in a Smart Grid, while the EISA requirement, if adopted, would suspend grid investment until the Commission considered a "showing as to why [a utility] didn't choose a `more advanced' technology in the case of each and every one of the thousands of grid components that utilities invest in each year ..."64 Such an approach would clearly be burdensome and contrary to cost-effective practices.
In summary, the imposition of a requirement to consider Smart Grid investments even in situations for which there is no rational basis would produce costs without benefits and is therefore inconsistent with the purposes of EISA.
4.2. Should the Commission Authorize Each Electric Utility to Recover From Ratepayers Any Capital, Operating Expenditure, or Other Costs of the Electric Utility Relating to the Deployment of a Qualified Smart Grid System, Including a Reasonable Rate of Return?
EISA requires that each state consider "authorizing each electric utility of the State to recover from ratepayers any capital, operating expenditure, or other costs of the electric utility relating to the deployment of a qualified smart grid system, including a reasonable rate of return on the capital expenditures of the electric utility for the deployment of the qualified smart grid system."65 This section develops our assessment as to whether such a requirement would be necessary and consistent with the purposes of the act.
Each of the responding California IOUs support adopting this requirement of authorizing recovery of capital, operating expenditures and other costs associated with a qualified Smart Grid system from ratepayers.
SCE argues that "[s]mart grid development and deployment expenses should be recoverable from ratepayers."66 SCE cites Commission decisions, potential benefits and state law. SCE asserts that "[e]xisting precedent, potential benefits, and existing state law support utility recovery of its costs and investments."67
SDG&E argues that "smart grid assets should be included in the utility asset base similar to any asset that is deemed `used and useful' for the ratepayer."68 SDG&E further argues that these assets "warrant the design of an incentive-based rate of return (ROR) for smart grid assets."69
Similarly, PG&E argues that "the Commission should authorize an electric utility to recover any reasonable costs associated with the deployment of qualified smart grid projects, investments and programs, including an incentive rate of return on such investments if they meet or support major energy policy goals of the state ..."70
Sierra Pacific argues that "[t]o the extent that the Commission imposes goals, measures, or other criteria upon Sierra's California service territory, then such costs should be recovered from Sierra's California customers."71
PacifiCorp similarly argues that "[y]es, utilities should be able to recover the costs of implementing and operating smart grid systems within their California service territories from their customers within those service territories."72
DRA does not support special rate treatment for Smart Grid assets. DRA notes that:
... the Commission considered and authorized the rate recovery of AMI [Advanced Meter Infrastructure] deployment in Applications (A.) 05-03-015, A.05-06-028 and A.07-07-026 based on the following criteria: total costs; cost effectiveness; improved reliability; security; system performance; and societal benefit. ... This rulemaking should adopt these standards to remain consistent with existing Commission policy, and for the purpose of federal statutory compliance with PURPA ...73
TURN "recommends that the Commission NOT adopt this federal standard."74 TURN views this federal standard as imposing special ratemaking standards for Smart Grid investments, and argues:
The Commission should not grant electric utilities with any "special" or unique ratemaking treatment for smart grid investments, however defined. Rate recovery for smart grid investments should be governed by traditional ratemaking policies, all of which are designed to ensure that utilities do recover reasonable and cost effective expenditures through rates and allowed [sic] an opportunity to earn a reasonable rate of return on capital investments.75
Thus, TURN sees following traditional ratemaking practices as a rejection of the federal standard.
CFC also supports traditional ratemaking, stating that:
... [o]nce smart grid investments are isolated, then the traditional rules of ratemaking should apply to those investments. If an investment is prudent and the capital addition is used and useful to utility service, and if costs classified as expenses are reasonable, they are recoverable.76
TechNet "agrees that the Commission should authorize recovery for qualified Smart Grid systems."77 TechNet, furthermore, argues that "[w]here necessary, a slightly higher rate of return authorization might incentivize utilities to accelerate Smart Grid investment projects."78
CPower takes a more cautious approach, arguing that "[t]he utility should be required to demonstrate that any investments it makes are based on a comprehensive review of all resources, including non-traditional resources such as demand response, that can best meet the needs of its customers at the lowest possible cost."79
Enspiria argues that:
If investments in smart grid related solutions are going to become the mainstay of electric utilities instead of a temporary program, then utilities need to have confidence that their investments in these technologies and solutions will not face higher hurdles than current utility investments. This would indicate that utilities should be able to enjoy the same rates of return and cost recovery as other expenditures.80
The Joint Ruling requested comments on its proposal to rely on the Commission's traditional ratemaking proceedings to examine Smart Grid investments.
SCE agrees that no special ratemaking treatment is warranted and notes that the creation of a new standard providing a special incentive for Smart Grid investments "may create confusion, prove counterproductive, and lead to regulatory delays."81
PG&E supports the proposed policy to rely on traditional ratemaking procedures, but requested "that the Commission clarify that its rejection of a 'premium` return on Smart Grid investments is not intended to preclude a utility or the Commission from proposing or adopting an incentive or `premium' rate of return for Smart Grid investments on a case-by-case basis ..."82
TURN also opposes adopting the federal standard, noting that:
... the proposed federal standard uses the term "deployment" rather than the term "used and useful." This distinction could result in unnecessary and contentious litigation if potential smart grid "deployments" are terminated prior to the assets being place in service.83
DRA argues that:
If the Commission simply affirms the close similarities between the PURPA standards and the AMI Business Case Analysis Framework, the Commission will find that it has made comparable considerations in its R.02-06-001, hence complying with Section 1307 through a prior state action.84
DRA also argues that "[t]he Ruling correctly rejects special ratemaking treatment ..." and cautions that "[t]he Commission risks double cost recovery when it allows rate recovery for Smart Grid distribution-level investments outside of the GRC process."85
CFC argues that "[t]here is no need for an incentive ..."86
CARE argues that the Smart Grid "should be subject to the Commission's traditional ratemaking."87
CLECA similarly argues that "Smart Grid investments do not require special ratemaking treatment."88
CEERT states that "it opposes the Joint Rulings proposed policy." CEERT desires that the Commission develop "Smart Grid deployment plans ..."89
There is little significant difference between the Commission traditional ratemaking procedures, which offer IOUs a reasonable return on investments made to provide service to ratepayers, and the proposed requirement that would adopt as a regulatory standard "authorizing each electric utility of the State to recover from ratepayers any capital, operating expenditure, or other costs of the electric utility relating to the deployment of a qualified smart grid system ..."90 We therefore see no need for the Commission to adopt this provision for Smart Grid investments because this reasonable ratemaking treatment already applies to all utility investments, including those related to the Smart Grid.
Additionally, since this standard is already the current practice, adoption of a new federal standard may create confusion. In particular, creating a special rate treatment for Smart Grid investments would likely prove counterproductive and lead to regulatory delays in determining whether a particular investment qualified for special treatment.
Moreover, providing special treatment does not appear to comport with the stated purposes of PURPA, which include ensuring the efficient use of resources and equitable rates for consumers. Special rate treatment for Smart Grid investments is likely to distort the use of resources and lead to higher rates for electric customers than needed to finance network upgrades. Thus, adopting this standard in the California setting would be inconsistent with the purposes of PURPA.
Similarly, we see no reason at this time for granting the developers of the Smart Grid an increase in return beyond that offered for other investments. Current California law and practice requires that utilities have an opportunity to earn a fair return on the funds that they invest. Granting premiums above market may, absent a compelling reason, distort investment choices and lead to inefficient results. Thus, providing an earnings premium for Smart Grid investments at this time would be inconsistent with the statutory purposes of using resources efficiently.
For the reasons contained in the discussion above, we do not adopt a federal standard that would authorize each electric utility of the State to recover from ratepayers any capital, operating expenditure, or other costs of the electric utility relating to the deployment of a qualified Smart Grid system, including a reasonable rate of return on the capital expenditures of the electric utility for the deployment of the qualified Smart Grid. We note that the standard proposed in EISA is essentially the one currently in place for all utility investments in California. We reject special treatment for Smart Grid infrastructure projects as both unnecessary, and ultimately inconsistent with the purposes of PURPA.
4.3. Should the Commission Authorize any Electric Utility that Deploys a Smart Grid to Recover in a Timely Manner the Remaining Book-Value Costs of Any Equipment Rendered Obsolete by the Deployment of the Qualified Smart Grid System, Based on the Remaining Depreciable Life of the Obsolete Equipment?
As the legal analysis above demonstrates, PURPA, as amended by EISA, requires that for each electric utility subject to the Commission's ratemaking authority, the Commission must make findings as to whether to permit timely recovery of the remaining book-value costs of any equipment rendered obsolete by the deployment of the qualified Smart Grid system, based on the remaining depreciable life of the obsolete equipment. In this section, we consider whether to adopt this requirement as a new state regulatory standard.
Although this issue was posed in the OIR, only two parties filed comments in response.
SCE believes that further analysis is required to better understand the potential impacts of replacing an increasing amount of grid assets (which may have asset lives of several decades) with technologies that have asset lives of perhaps a single decade.91
SDG&E argues that the Commission should let obsolete equipment remain on utility books because "these assets were placed in service under a specific recovery time as deemed appropriate by the Commission at the time."92
In its comments on the Joint Ruling, SCE states that it agrees with the Joint Ruling's tentative conclusion that "an insufficient record exists in this proceeding to support detailed policies pertaining to the regulatory treatment of infrastructure rendered obsolete by Smart Grid investments."93 SCE asks for that recovery to be "carefully considered" in other proceedings, such as a general rate case.94
PG&E, in contrast, argues that:
Historically, the Commission has applied its overall "just and reasonable" criteria to ratemaking recovery of reasonable investments in utility plant and equipment that is abandoned or rendered obsolete, and the Commission can reaffirm the applicability of that policy to Smart Grid investments generally. One of the key barriers to robust consideration and implementation of cost-effective Smart Grid investments is lack of clear assurance that the "sunk costs" of obsolete equipment with long ratemaking lives is recoverable.95
DRA argues that:
In general, DRA is not opposed to utility recovery of the remaining book value of the assets if they are rendered obsolete by a mandated regulatory change imposed by the Commission. However, should the Commission decide that further reviews of the assets are necessary before ruling on their recoverability, this review should, to the extent possible, be provided as part of the record of the Smart Grid proceeding and not be deferred to the utility's current or next GRC.96
In addition, DRA asks that the Commission require the utilities to provide in the Smart Grid proceeding "their initial accounting records, including account numbers, amounts and book values of the obsolete assets."97
TURN argues:
... that this federal standard concerning the rate recovery of costs that are "stranded" by Smart Grid investments should not be adopted as general policy. Any requests for rate recovery of obsolete equipment related to "Qualified Smart Grid System" investments should be treated as any other such request and considered in the context of general rate cases or specific applications that relate to Smart Grid investments.98
TURN cautions that "[i]t would be inappropriate to adopt a vague and blanket standard for recovery of `obsolete' equipment whenever the utility claims replacement by a `smart grid' investment."99
CFC argues that with the planning process envisioned by SB 17, "stranded costs can be minimized."100 CFC also states that it:
... agrees with the Assigned Commissioner that specific rate treatment for obsolete equipment should be considered in a general rate case, but disagrees with the prospect of cost recovery being sought in a separate proceeding where other uses of smart grid technologies will not be considered.101
CEERT states that it "does not believe that all Smart Grid investments will necessarily strand previous investments."102 CEERT does not state a preference as to where the Commission considers stranded investment, but states that it "does not oppose recovery of stranded investments in a timely manner, but with due consideration of rate impacts."103
CLECA states that concerning the issue of stranded investment, "[t]he Commission is fully capable of addressing this matter in its normal ratemaking proceedings under its current practices and policies."104
Based on the record in this proceeding, we conclude that it is more consistent with the purposes of PURPA to defer consideration of specific rate treatment for obsolete equipment to general rate cases or applications that address Smart Grid investments. At that time, the Commission can address the ratemaking treatment of any equipment that is made obsolete.
As PG&E points out, the Commission has historically adopted policies that permit the recovery of the costs associated with stranded assets. There is no reason to doubt that such historical policies would fail to guide a consideration of costs stranded by Smart Grid investments. There is no need, therefore, to adopt this EISA standard. Moreover, creating a special policy for these investments when none is needed may cause confusion.
31 SCE Comments at 14.
32 Id.
33 SDG&E Comments at 6.
34 Id.
35 PG&E Comments at 7.
36 CASMU Comments at 3.
37 PacifiCorp Comments at 3.
38 Sierra Pacific Comments at 3.
39 Id.
40 Enspiria Comments at 5.
41 TURN Comments at 6.
42 Id. at 7.
43 DRA Comments at 4.
44 CFC Comments at 21.
45 Id. at 21.
46 CPower Comments at 3.
47 TechNet Comments at 6.
48 CLECA Comments at 6.
49 PG&E Comments on Joint Ruling at 2.
50 SCE Comments on Joint Ruling at 3.
51 CASMU Comments on Joint Ruling at 2.
52 Mountain Utilities Comments on Joint Ruling at 2.
53 Sierra Pacific Comments on Joint Ruling at 2.
54 DRA Comments on Joint Ruling at 3.
55 TURN Comments on Joint Ruling at 3.
56 Id. at 4.
57 CFC Comments on Joint Ruling at 6.
58 CEERT Comments on Joint Ruling at 4.
59 Id. at 5.
60 CLECA Comments on Joint Ruling at 4.
61 Id.
62 16 U.S.C. § 2611.
63 Cal. Pub. Util. Code § 8362.
64 SCE Reply Comments on Joint Ruling at 3.
65 16 U.S.C. § 2621(d)(18)(B).
66 SCE Comments at 15.
67 Id.
68 SDG&E Comments at 6.
69 Id. at 7.
70 PG&E Comments at 8.
71 Sierra Pacific at 7.
72 PacifiCorp Comments at 3.
73 DRA Comments at 5.
74 TURN Comments at 7, emphasis in original.
75 TURN Comments at 7-8.
76 CFC Comments at 25.
77 TechNet Comments at 7.
78 Id.
79 CPower Comments at 2.
80 Enspiria Comments at 5.
81 SCE Comments on Joint Ruling at 5.
82 PG&E Comments on Joint Ruling at 2.
83 TURN Comments on Joint Ruling at 6.
84 DRA Comments on Joint Ruling at 4-5.
85 Id. at 5.
86 CFC Comments on Joint Ruling at 8.
87 CARE Comments on Joint Ruling at 3.
88 CLECA Comments on Joint Ruling at 5.
89 CEERT Comments on Joint Ruling at 6.
90 16 U.S.C. § 2621(d)(18)(B). We note that our discussion assumes that only a "reasonable" Smart Grid system would be "qualified."
91 SCE Comments at 16.
92 Id.
93 SCE Comments on Joint Ruling at 5.
94 Id.
95 PG&E Comments on Joint Ruling at 3.
96 DRA Comments on Joint Ruling at 5.
97 Id.
98 TURN Comments on Joint Ruling at 7.
99 Id.
100 CFC Comments on Joint Ruling at 11.
101 Id. at 12.
102 CEERT Comments on Joint Ruling at 7.
103 Id.
104 CLECA Comments on Joint Ruling at 5-6.
