The U.S. Court of Appeals for the District of Columbia Circuit on July 10 issued an opinion that denied an appeal filed by the American Public Power Association and several other parties that challenged certain aspects of Federal Energy Regulatory Commission Order Nos. 841 and 841-A, which established rules for the participation of electric storage resources (ESRs) in regional transmission organization (RTO) and independent system operator (ISO) markets.
In 2019, APPA, the Edison Electric Institute (EEI), the National Rural Electric Cooperative Association (NRECA) and American Municipal Power (AMP) challenged FERC’s conclusion that state and local regulators may not “broadly prohibit” ESRs located on a distribution system or behind a retail meter -- what the court refers to as “local ESRs” -- from participating directly in wholesale markets.
While the Federal Power Act (FPA) gives FERC jurisdiction over wholesale sales, the FPA leaves regulation of distribution facilities to state and local regulators.
APPA and the others primarily argued that FERC exceeded its jurisdiction in Order Nos. 841 and 841-A by concluding that state and local regulators could not exercise their jurisdiction over distribution facilities to prohibit local ESRs from participating in RTO/ISO markets.
APPA and the other groups also asserted that FERC acted arbitrarily and capriciously by not applying to ESRs the same “opt-in/opt-out” framework that FERC adopted for demand response in Order Nos. 719 and 719-A, under which a relevant electric retail regulatory authority can restrict aggregated retail customer participation in wholesale demand response programs.
The National Association of Regulatory Utility Commissioners (NARUC) filed an appeal raising similar issues, which was consolidated with the appeal made by APPA, EEI, NRECA and AMP.
Court addresses jurisdictional issues
As framed by the court, the primary question in dispute was whether Order No. 841 unlawfully regulates matters left to the states. On this issue, the court concludes that, in allowing local ESRs to access wholesale markets, FERC is not directly regulating distribution facilities. The fact that local ESRs will use the distribution system “is the type of permissible effect of direct regulation of federal wholesale sales that the FPA allows,” the court said.
The court turned aside arguments that authority over distribution facilities allows state and local regulators “to close their facilities to local ESRs seeking to transport electric energy to the wholesale markets,” citing principles of federal preemption under the Supremacy Clause of the U.S. Constitution.
The court said that the argument that a local ESR does not participate in the federal wholesale market -- and therefore cannot fall within FERC’s authority -- until after it navigates through state-regulated facilities falls short.
Any state effort that aims directly at “destroying” FERC’s jurisdiction by necessarily dealing with matters which directly affect the ability of the Commission to regulate comprehensively and effectively over that which it has exclusive jurisdiction invalidly invades the federal agency’s exclusive domain, the court said.
While agreeing that state and local regulators cannot broadly prohibit wholesale market participation by local ESRs, the court points out that, under Order No. 841, states retain their authority to prohibit local ESRs from participating in the interstate and intrastate markets simultaneously, “meaning states can force local ESRs to choose which market they wish to participate in.”
The court also emphasized that state and local regulators retain authority to impose restrictions on local ESR participation in wholesale markets, short of broadly prohibiting such participation, even if such requirements hinder FERC’s efforts to facilitate wholesale market participation by local ESRs.
Thus, for example, states retain their authority to impose safety and reliability requirements without interference from FERC, the court said.
The court also noted that states “will be free to challenge” Order Nos. 841 and 841-A as applied to their own state regulations or imposed conditions.
The court also responded to the argument made by APPA, EEI, NRECA and AMP that allowing state and local regulators to broadly prohibit local ESR participation would be preferable to the inevitable litigation over which state restrictions on local ESRs are permissible and which are not.
The court said that “Petitioners are likely correct that litigation will follow as states try to navigate this line, but such is the nature of facial challenges.”
The court also rejected the argument that FERC acted arbitrarily and capriciously by not applying to local ESRs the “opt-in/opt-out” framework that FERC applies to demand response resources. The court said that FERC’s decision to treat local ESRs different from demand resources was “neither unexplained nor unsupported.”
Order No. 841 was issued in February 2018
Order No. 841, issued in February 2018, adopted rules aimed at removing barriers to the participation of ESRs in wholesale power markets operated by RTOs and ISOs. At the time, several organizations, including APPA, asked FERC to reconsider some aspects of Order No. 841, arguing that FERC was overstepping its jurisdictional authority and encroaching on state and local authority over distribution utilities and networks.
APPA also argued that FERC should have given state and local authorities the ability to opt out of allowing ESRs in their jurisdictions from participating in wholesale markets, as the Commission did for demand response aggregation in Order Nos. 719 and 719-A. FERC largely rejected these arguments in Order No. 841-A, issued in May.