When the Federal Power Act passed in 1935, Congress thought it had established and enshrined a clear division of jurisdiction between the federal government and the states for the emerging electricity sector. The federal government would regulate wholesale electricity and interstate transmission, while regulation of retail electric service and local distribution facilities would be left to the states.
What should be a bright line is increasingly muddled and challenged by the changes, both regulatory and technological, that have occurred since 1935. Significant regulatory, structural, and technological changes since the FPA’s passage have tested the adaptability and coherence of this jurisdictional division. At the heart of many of today’s energy policy debates is the uncertainty of where the line between these two spheres of jurisdiction falls.
Federal and state and local governments particularly need to play constructive and collaborative roles to ensure that consumers and industry can maximize the value of new energy technologies. FERC could create frameworks that explicitly recognize and accommodate state policy goals and regulatory responsibilities to address jurisdictional uncertainty and market integration problems impacting new and emerging technologies. Instead, FERC has shown an increasing willingness to push its jurisdictional boundaries at the expense of state and local authority in a number of areas.
In two recent orders, one dealing with energy efficiency resources and the other dealing with electric storage resources (ESRs), FERC exceeds the limits of its jurisdiction.
In Advanced Energy Economy,i FERC stated that it has exclusive jurisdiction under the FPA to regulate the participation of certain energy efficiency resources in wholesale electricity markets. FERC acknowledged that energy efficiency resources involve retail customer actions to reduce consumption, but the agency nonetheless found that participation by these retail customers in the wholesale markets could not be restricted by state and local regulators unless FERC expressly granted them authority to adopt such restrictions. In issuing this ruling, FERC effectively modified its demand response orders (Order Nos. 719 and 745) by stating that its accommodation of Relevant Electric Retail Regulatory Authorities’ (i.e., states and local governments) right to opt-out from allowing retail resources (i.e., retail customers) to participate in wholesale demand response markets had been wholly voluntary. Viewing itself as under no obligation to do so, FERC declined to extend the RERRA opt-out approach to energy efficiency resources, except for Kentucky for which FERC grandfathered a pre-existing state opt-out.
The AEE decision is important because it indicated FERC is willing to assert its jurisdiction in areas where it previously accommodated state regulatory authority. In Order No. 719, where FERC adopted the opt-out approach for demand response, FERC did not claim legal authority to override state restrictions on retail customer participation in wholesale demand response programs. FERC said its intent was not to interfere with the operation of successful state and local demand response programs, place an undue burden on state and local retail regulatory entities, or to raise new concerns regarding federal and state jurisdiction. That is, FERC’s position at the time it adopted the opt-out provision was that it was doing so, in part, to clarify that it was not challenging the jurisdictional authority of states. FERC’s AEE order takes a decidedly different approach. Indeed, under the expansive interpretation of its jurisdiction in that order, FERC could conceivably even remove the opt-out provisions from its demand response regulations and claim states are powerless to prevent it from doing so on jurisdictional grounds.
In arguing that the order in AEE is lawful despite the lack of a right for state and local regulators to opt-out from allowing retail customers to participate in the wholesale markets, FERC relies on the Supreme Court’s holding in FERC v. EPSA.ii FERC points to the Court’s observation that “[a]lthough claiming the ability to negate such state [opt-out] decisions, the [FERC] chose not to do so in recognition of the linkage between wholesale and retail markets and the States’ role in overseeing retail sales.”iii The majority opinion in EPSA, however, made clear that states’ opt-out or “veto” authority was a reason that any jurisdictional challenge to Order No. 745 should fail. The Supreme Court noted that the opt-out provision gave states the means to block any resulting retail rate increases demand response programs might produce and that “[w]holesale demand response as implemented in the Rule is a program of cooperative federalism, in which the States retain the last word.”iv
According to the Court, the opt-out power removed “any conceivable doubt as to [Order No. 745’s] compliance with [the FPA’s] allocation of federal and state authority.”v In short, the EPSA holding was premised, at least in part, on the existence of an opt-out right for state and local regulators, and, thus, that case does not support the conclusion that the demand response orders were a necessarily lawful exercise of jurisdiction without the opt-out provision. FERC now has declared such orders would be lawful, just as the AEE order is lawful, without a mandatory state opt-out provision.
FERC recently extended this line of thinking in its Order No. 841, Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators.vi FERC suggests in Order No. 841 that ESRs located on a distribution system or behind a retail meter may circumvent restrictions under state or local law on retail customers directly purchasing from, or selling into, the wholesale market – actions that are beyond the Commission’s jurisdiction to authorize. The Commission does not adopt a RERRA “opt-out/opt-in” mechanism for electric storage resources located on the distribution system or behind a retail meter, like the regulation for demand response bids in RTO and ISO markets. Such a mechanism would appropriately preserve state and local authority over retail electric service and local distribution facilities, while providing clear rules for RTOs/ISOs, state/local regulators, distribution utilities, and wholesale market participants.
The American Public Power Association has sought rehearing of both FERC orders. We cannot stand by while FERC continues to erode state and local authority. We need to continue to remind FERC that it is bound by the jurisdictional limits of the FPA.
[ii] FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760 (2016) (EPSA).
[iii] Id. at 779.
[iv] Id. at 780.
[vi] 162 FERC ¶ 61,127 (2018).