Can Utilities Rate Base Energy Storage as a Distribution Asset?

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Can utilities rate base energy storage as a distribution asset? Texas is now tackling this big question, with the potential to set policy that could have national ramifications.

The question arose when American Electric Power (AEP) asked the Public Utility Commission (PUC) of Texas to approve its proposal to install numerous grid-scale batteries to beef up a distribution substation, Docket 46368, according to Steven Shparber, attorney for Nelson Mullins Riley & Scarborough.

AEP’s $2.3 million storage proposal was much lower than the company’s $11.3 to $22.5 million estimate for traditional distribution system upgrades, he said.

The storage plan included a 500-kW battery to enhance a distribution substation and a 1-MW battery that could help if an important distribution line went out.

“AEP was trying to use storage instead of building a transmission line and rate basing it,” he said. In addition, AEP’s proposal looked at storage as a transmission resource — not as generation, which is unusual, he said.

AEP’s proposal looked at storage as a transmission resource — not as generation.

The Texas PUC dismissed the AEP proposal “without prejudice,” and instead opened up a rulemaking to look at the larger issues related to storage, he said. By dismissing the proposal “without prejudice,” the PUC was saying it wasn’t necessarily opposed to the idea.

In its filing, AEP wanted to confirm that the storage assets would qualify for inclusion in the company’s distribution cost of service.

“I am not aware of any final precedent on this issue, but the use of storage as a transmission or distribution asset has been broadly discussed by many stakeholders,” said Shparber, adding that the eventual decision by the Texas PUC on the issue “will likely impact microgrid and storage development in Texas and elsewhere.”

In Texas — one of the most deregulated states — there are strict barriers for utilities, he explained. They can own distribution lines and rate base them, but can’t own generation. The question, in part, is whether storage is generation, he explained.

Earlier, an administrative law judge (ALJ) said that AEP’s proposal did not constitute a competitive service and wouldn’t represent utility ownership of generation. The ALJ recommended approval of the AEP proposal. The ALJ also said that many of the issues raised were policy issues. The PUC over-ruled the ALJ and called for the broader look at the issues.

“The question of how to use energy storage is not going anywhere,” said Shparber. “This is one of the first test cases.”

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In deregulated states, utilities still own distribution lines and can rate base them but are limited in their ownership of generation. Being able to rate base generation is seen as a competitive advantage, he explained.

“Is storage truly a distribution line substitute or is it generation? If it’s generation, it might give AEP a competitive advantage,” he explained.

A year ago, the Federal Energy Regulatory Commission (FERC) issued a policy statement that looked at some of the issues for owners and operators of energy storage resources who want to recover their costs through cost-based and market-based rates.

One of the key issues, FERC said, is how to allow multiple uses of energy storage.

“We are mindful that, by providing electric storage resources the opportunity to receive cost-based
rate recovery concurrently with other revenue from market-based services (e.g., through
organized wholesale electric markets), there can be implementation details that may need
to be addressed.” Those details include the potential for double-recovery of costs
from cost-based ratepayers and adverse market impacts, FERC said.

After a Jan. 25 open meeting, PUC Chairman DeAnn T. Walker released a memo that thanked AEP for bringing the issues up to the PUC.

“The utility has proposed an innovative solution to serve their distribution customers with a battery storage option that potentially could be implemented at a lesser cost to the ratepayers than traditional transmission and distribution options. In the changing environment in which we live, there are new technologies that could hold significant promise to serve Texas customers more reliably and efficiently,” she wrote.

The PUC needs to review all potential solutions to solving infrastructure problems “in a reliable and cost effective manner,” she said. Opening a separate proceeding will help give the commission the information it needs to look at a number of issues, among them the possible impacts on the energy-only wholesale market and competitive retail market, she said.

What’s your take? Should utilities be allowed to rate base energy storage? Post your thoughts below or on our LinkedIn Group, Distributed Energy Resources.

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  1. roger feldman says:

    Further question: relationship of resolution to Electric Vehicle charging station issues?