In July, associations representing utilities and state regulatory agencies asked the United States Court of Appeals for the District of Columbia Circuit to overturn portions of the Federal Energy Regulatory Commission’s landmark Order No. 841. In that order, FERC adopted critical regulatory reforms that require regional wholesale electricity market operators to remove barriers to the participation of energy storage technologies in their markets. Last week, AEE led a broad coalition of clean energy associations and public interest advocates in formally intervening in the case to urge the court to uphold FERC’s bipartisan effort to remove regulatory barriers to the growth of electric storage. The entire advanced energy industry has much at stake.
A decision in favor of the utilities and states challenging Order No. 841 could significantly narrow the opportunities available to energy storage resources and other distributed energy resources (DER) like solar, fuel cells, demand response, and energy efficiency, which can be aggregated to participate in wholesale markets. It would also chill innovation in new energy services that can be designed using smaller energy storage resources located on the distribution grid or at a customer location in combination with rooftop solar, electric vehicles, or other technologies. Finally, it could deny consumers and the grid of significant benefits in cost, reliability, and resilience.
The litigation over Order No. 841 revolves around the question of whether FERC or the states hold primary authority to regulate wholesale market participation by energy storage resources located on the distribution grid or behind the meter. The Federal Power Act established a regulatory scheme that divides authority over the electricity grid and electricity transactions between the federal government (FERC) and state governments (state public utility commissions). Congress granted FERC jurisdiction to regulate transmission of electricity and wholesale sales of electricity in interstate commerce, but preserved the authority of states to regulate the distribution grid and retail sales of electricity to end users.
FERC concluded in Order No. 841 that to ensure just and reasonable rates for consumers, Regional Transmission Organizations and Independent System Operators (RTOs/ISOs) must develop new participation models that permit all energy storage devices to participate in their markets, regardless of whether they are located on the transmission grid, the distribution grid, or behind a retail customer’s meter. FERC rejected requests from several utilities and some states that it adopt an “opt-out” provision that would allow them to impose a broad ban on participation in wholesale markets by energy storage resources located on the distribution grid or behind a customer’s retail meter. Parties requesting the opt-out argued, in part, that FERC must include such a provision to respect the authority retained by the states (and by unregulated utilities like electric cooperatives and municipal utilities) under the Federal Power Act to regulate the distribution grid and retail sales. They also asserted that such an opt-out was necessary to allow utilities and states to address potential reliability and cost issues that could arise due to wholesale market participation by distributed energy storage assets.
This past May, in Order No. 841-A, FERC affirmed its decision not to provide an opt-out. First, it rejected arguments that it lacks authority under the Federal Power Act to include within the scope of its ruling energy storage resources located on the distribution grid or behind a retail meter. FERC held that the Federal Power Act and recent Supreme Court precedent require it to exercise exclusive jurisdiction over the participation of these resources in wholesale markets, and that ensuring their ability to participate is “essential to the Commission’s ability to fulfill its statutory responsibility to ensure that wholesale rates are just and reasonable.” Second, FERC declined to exercise its discretion to nonetheless adopt an opt-out provision, explaining that such a provision is not necessary to ensure that states can continue to regulate their distribution systems and manage any cost and reliability impacts of wholesale market participation by energy storage resources located on the distribution grid or behind the customer’s meter.
Commissioner McNamee, the most recent member to join FERC, dissented from this ruling, arguing that states have primary authority to determine whether these energy storage resources may participate in wholesale markets because such market participation requires the use of state-regulated distribution facilities. McNamee also argued that, even assuming FERC has authority to allow such participation, it should have exercised its discretion to provide an opt-out provision that would allow utilities and states to manage wholesale market access by distributed energy storage resources.
The utilities (represented by the American Public Power Association, Edison Electric Institute, and National Rural Electric Cooperative Association) and states (represented by the National Association of Regulatory Utility Commissioners) are asking the D.C. Circuit to take up two issues:
A ruling by the court in favor of the challengers on either of these issues could seriously diminish the wholesale market opportunities available to energy storage resources. While such a ruling would most likely leave the remainder of Order No. 841 intact, it would limit the order to only energy storage resources connected to the transmission system, leaving states or utilities able to bar from wholesale market participation the rapidly expanding set of energy storage resources connected to the distribution grid or located at customer sites behind the retail meter. Such a ruling would also set a precedent extending to other DERs, effectively allowing them to be barred from wholesale market participation as well. An order that parallels Order No. 841, removing barriers to wholesale market participation for a broader set of aggregated DERs, which has been pending final approval by FERC for more than a year, would be directly constrained in the opportunity it could offer a growing DER industry.
Indeed, the consequences of a court-mandated opt-out for states and utilities go even farther than that. Ensuring that smaller energy storage resources installed on the distribution system or at customer sites can participate in wholesale markets allows for innovation in service offerings to consumers. For example, accessing wholesale market revenue streams can make energy storage systems ( alone or paired with other resources) more affordable for end users, allowing them to meet their individual energy, reliability, and resilience needs. Moreover, ensuring that this rapidly expanding set of resources is fully utilized to provide all of the wholesale and retail services they are technically capable of avoids investment in other resources and infrastructure, lowering overall system costs for all customers (including those not using DERs). This is in addition to the benefits of enhanced market competition and lower wholesale rates that FERC already identified in finalizing Order No. 841. Finally, integrating these resources into the wholesale markets also makes them available to regional grid operators as a tool to address broader system needs. Their distributed and localized nature is especially valuable in addressing local resilience threats like weather-related damage and in shaping customer demand during heat waves and other events stressing the grid.
It should be noted that not all states stand opposed to FERC’s balancing of federal and state authority with respect to wholesale market participation by distribution-connected and behind-the-meter energy storage. Arkansas, for example, vocally supported FERC’s approach (despite the fact that it remains a vertically integrated market) and joined with the advanced energy industry in urging FERC to ensure broad wholesale market participation by all energy storage resources, recognizing the reliability, cost, and innovation benefits that would flow to their customers. In its recent comprehensive climate bill, New York State has also recognized these benefits, explicitly providing for energy storage resources to be developed in both wholesale and retail applications, and has urged FERC to ensure that those resources do not face barriers to wholesale market participation.
The parties to the case are currently filing procedural motions, and the court will adopt a procedural schedule based on its review of those motions. Based on a proposed briefing schedule filed last week, it is likely that briefing will conclude next Spring. The court will then hold an oral argument and render a decision (expected no earlier than late Spring or early Summer of 2020).
In the meantime, Order No. 841 and the compliance obligations it places on the RTOs/ISOs remain in effect. FERC is expected to rule on the pending compliance filings by December 3, 2019, for most if not all of the RTOs/ISOs subject to its jurisdiction.