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FERC approves next step in establishing spare transformer program


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FERC approves next step in establishing spare transformer program

Havingpreviously been convinced that a spare transformer program would providebenefits, FERC on March 25 offered certain additional regulatory clarity thatthe program's developers said is needed for transmission owners to subscribe tothe service.

Theinnovative program ismeant to address an issue with which the industry has been grappling for sometime. Large power transformers typically weigh hundreds of tons and aredifficult to transport by rail and road. They are also expensive, custom-madeand often manufactured outside of the U.S., making utilities vulnerable tounplanned failures.

Giventhose challenges, officials worry that a group of terrorists or a naturaldisaster such as a solar flare-triggered geomagnetic storm could cripple thegrid by damaging a large number of those transformers.

Tohelp address the issue, the Edison Electric Institute in 2006 created a programrequiring participants to have a certain number of spare transformers on hand,but the program was seen as far too limited to respond effectively to awidespread incident or coordinated attack.

TheAmerican Electric Power Co.Inc. therefore has teamed up with subsidiaries of seven otherutilities — Berkshire HathawayEnergy, Duke EnergyCorp., EdisonInternational, Eversource Energy, Exelon Corp., Great Plains Energy Inc. and — to create a stand-alonecompany, Grid Assurance LLC, to provide a "sparing service" thatwould handle their spare transformer equipment needs.

Pursuantto a subscriber agreement, Grid Assurance would maintain and warehouse atcritical locations an inventory of spare transformer and related transmissionequipment and release that equipment to utility subscribers in the aftermath ofcatastrophic events. In return, subscribers would pay a monthly, cost-basedsparing service fee to cover the expenses related to warehousing andmaintaining the inventory.

InAugust, the commission granted the utilities' request (EL15-76) for certainpreliminary determinations about their plan, such as finding that contractingwith Grid Assurance would be one way for utilities to comply with a reliabilitystandard requiring them to have a physical security plan and access to spareparts. However, FERC stopped short of declaring that the sparing service is acost-effective means for supporting grid resilience because the companies didnot submit a related rate filing.

GridAssurance subsequently asked FERC to rule on certain other aspects of the plan.For instance, Grid Assurance said it expects to rely on competitive procurementprocesses and to leverage volume purchase efficiencies in procuring equipmentfor inventory. The company therefore asked FERC to confirm that any decisionsto contract with Grid Assurance and subsequently purchase spare equipment fromthat company following a qualifying event would be considered prudent.

Theprogram's organizers also asked FERC to declare that Grid Assurance subscribersmay use single-issue ratemaking to seek to recover the costs of purchasing thesparing service and equipment from Grid Assurance. Finally, Grid Assuranceasked the agency to confirm that its sparing service pricing plan complies withFERC's affiliate pricing restrictions related to the purchase of nonpowergoods, or, alternatively, to grant a waiver of affiliate pricing restrictions.

EEIand several utilities later told FERC that they support Grid Assurance's request,but American Municipal PowerInc. protested the proposal because of its rate implications andurged FERC not to predetermine that a utility's costs related to purchases andservices from Grid Assurance are prudent.

Relyingheavily on the reasoning behind its approval of EEI's spare transformerprogram, FERC in its March 25 order agreed that a transmission owner's decisionto participate as a Grid Assurance subscriber and to acquire spare equipmentfrom the company in the aftermath of a qualifying event would be prudent. Inparticular, the commission found that the proposed sparing service is expectedto be more efficient and cost effective than requiring individual utilities topurchase spare equipment on their own.

FERCalso determined that a subscriber's decision to acquire spare equipment at GridAssurance's original cost upon the occurrence of a qualifying event is prudent,but stressed that utilities are under no obligation to participate in thesparing service and subscribers have no duty to purchase spare equipment fromGrid Assurance.

"Thus,subscribers, weighing all possible alternatives, can still pursue the mostcost-effective solution to ensure reliability even if that involves purchasingspare equipment from sources other than Grid Assurance," FERC said.

Thecommission further emphasized that a utility wishing to recover costsassociated with those decisions will need to submit a Federal Power Act Section205 rate filing, which the agency will review as it does any other rate filingand without any predeterminations.

Againrelying on its order regarding the EEI program, FERC said a utility subscribermay seek to recover the costs of participating in the program usingsingle-issue ratemaking, but again stressed that a subscriber must fullydevelop and support any rate designed to recover those costs.

Finally,FERC rejected Grid Assurance's request to find that its sparing service pricingplan complies with FERC's affiliate pricing restrictions related to thepurchase of nonpower goods services. "The Grid Assurance business model isin the development stage and it is unclear which, if any, public utilities willhave an ownership interest in Grid Assurance and how that ownership interestmay be held in their corporate structures," FERC reasoned.

Thecommission granted the company's alternative request for waiver of theaffiliate pricing restrictions, however. The program's cost-based pricingprovisions should resolve any concerns that captive customers of franchisedpublic utilities may cross-subsidize the activities of non-utility affiliates,the order stated.

Still,FERC stressed that jurisdictional utilities will need to submit a rate filingif they wish to recover costs associated with the subscription agreement. Theorder also directed Grid Assurance to submit annual reports detailing the costsunderlying the sparing service and all sales showing a piece of equipment'soriginal cost and the price at which it was sold.

GridAssurance has said it expects to begin accepting subscribers and identifyinginventory in 2016. (EL16-20)