On Tuesday, November 6, 2012, the Edison Electric Institute (“EEI”), on behalf of its member companies, filed a late motion to intervene in NorthWestern Corporation’s (“NorthWestern”) proceeding regarding NorthWestern’s proposed revisions to its rates for Regulation and Frequency Response (“Schedule 3”) Service. In its motion, EEI focused on the resulting policy implications if the FERC Administrative Law Judge’s (“ALJ”) Initial Decision is affirmed. Specifically, EEI stated that these policy implications could limit electric utilities’ ability to recover the cost of their investments – including costs used to ensure system reliability – that are needed to support the integration of variable resources. As such, EEI asked FERC to reverse findings in the Initial Decision.
Before 2007, NorthWestern depended on third parties to provide it with Schedule 3 services. However, third parties were no longer available to provide these services in 2007. To address this issue, NorthWestern constructed the Dave Graves Generating Station (“DGGS”). According to NorthWestern, the DGGS was specifically built to serve as a regulating resource, and would not be providing energy to retail customers, making off-system sales, or providing any other ancillary services. Instead, the DGGS was designed to provide enough regulating reserves to cover load and wind generation variation, thus complying with both mandatory reliability standards and FERC’s open access requirements.
In April of 2010, NorthWestern filed revised Schedule 3 tariff sheets with FERC, proposing to recover both the fixed and variable costs for DGGS through a monthly demand rate and a monthly energy rate. FERC established hearing procedures and appointed the ALJ over the matter. In November of 2011, NorthWestern filed additional revisions to its Schedule 3 in a separate docket. The Commission rejected certain proposed changes and ultimately consolidated the two dockets. On September 21, 2012, the ALJ issued its Initial Decision for the combined dockets.
NorthWestern’s proposed allocation of the DGGS fixed cost revenue requirement is divided into two subparts, a proposed a numerator of 60 MW and a proposed denominator of 105 MW. In the Initial Decision, the ALJ found that the proposed numerator had to be adjusted in several respects, one of which was to exclude consideration of regulation down service. The ALJ further found that the denominator should reflect the nameplate capacity of DGGS, and not, as NorthWestern contended, the anticipated amount of sustained regulation service that the facility will be providing, with two of the DGGS units operating while the remaining unit is held in reserve as a spare as necessary to satisfy NERC Reliability Standards. Additionally, the ALJ found that NorthWestern should not recover fuel costs related to the provision of Schedule 3 service because Schedule 3 service is a capacity service and not an energy service.
EEI is concerned that the Initial Decision deviates from FERC’s long-standing ratemaking precedent with regard to cost recovery for reliability-related projects and has the potential to effectuate a policy change that is detrimental to the industry generally. EEI states that the Initial Decision will result in trapped costs resulting from, among other issues, “improper allocation of costs related to providing firm service under Schedule 3, rejection of an adjustment in the cost allocation ratio related to providing regulation down service, and disallowance of fuel costs incurred to provide Schedule 3 service.” According to EEI, these findings will mean that NorthWestern will be $8 million short of its annual wholesale revenue requirement. As a result, EEI argues that the wholesale customers that use the Schedule 3 service will not bear the proper portion of the costs of DGGS.
EEI also argues that the Initial Decision deviates from the policy goals of Order No. 755 (regarding frequency regulation service) and Order No. 764 (wherein the Commission discussed cost recovery for regulation down service under Schedule 10, which EEI believes should also apply to the similar aspects of Schedule 3). Finally, EEI believes that it is critical that FERC provide a reasonable opportunity for cost recovery investments that are made to comply with mandatory reliability standards and FERC’s open access requirements, and encourage the development of ancillary service resources, such as those provided by DGGS, to facilitate the integration of variable energy resources.
The complete EEI filing can be viewed here.