D.C. Circuit Upholds FERC’s Electric Storage Rule

In a consequential case addressing the jurisdictional boundaries of federal and state authority over energy policy, on July 10, 2020, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued its decision in NARUC v. FERC upholding Order No. 841 issued by the Federal Energy Regulatory Commission (“FERC”) and affirmed FERC’s authority to regulate, without infringing on state jurisdiction, the ability of electric storage resources interconnected with the local distribution system to participate in organized wholesale markets. Order No. 841 directs wholesale markets operated by Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”) to accommodate electric storage resources, regardless of whether the resources are located on the transmission system, the distribution grid, or “behind” a retail customer’s meter.

Challenge to Order No. 841

State and utility groups (“Petitioners”)[1] challenged Order No. 841 at the D.C. Circuit, arguing that FERC infringed on state authority by improperly regulating matters of state jurisdiction and removing from States the decision of whether electric storage resources located on state-jurisdictional distribution systems or behind the meter may participate in FERC’s wholesale markets. Under the Federal Power Act, States exercise jurisdiction over “facilities used in local distribution.”[2] Because many of the electric storage resources covered by Order No. 841 are located on the distribution grid, Petitioners argued that state authority – not FERC authority – governed the participation of such facilities in wholesale RTO/ISO markets. Petitioners focused on the fact that FERC provided an “opt-out” in some past orders that effectively gave States the right to decide whether certain demand resources may participate in FERC-regulated wholesale markets.[3] In Petitioners’ view, FERC’s decision in Order No. 841 not to include a similar “opt-out” created an illegal imposition on state jurisdiction.

FERC Has Authority to Regulate Electric Storage Resources in Wholesale Markets

The D.C. Circuit disagreed with Petitioners’ challenges to Order No. 841 and affirmed FERC’s actions in Order No. 841. Citing reasoning from prior decisions, the D.C. Circuit held that FERC’s regulation of wholesale markets may impact the distribution system without offending state jurisdiction.[4] Specifically, the court found that:

• although Order No. 841 will inevitably affect the distribution system and will “lure” electric storage resources to use state-jurisdictional distribution facilities, doing so is “the type of permissible effect … that the [Federal Power Act] allows.”[5] The court makes this finding with an awareness that utilities will “bear the operational burdens” of electric storage resources sited on the distribution system.[6]
• nothing in Order No. 841 directly regulates distribution, and States “remain equipped with every tool they possessed prior to Order No. 841 to manage their facilities and systems.”[7] For example, States can independently impose safety and reliability requirements on the distribution system, and electric storage resources must still obtain all state permits or required agreements to participate FERC wholesale markets.
• FERC did not need to provide an “opt-out” option for States. Here, FERC supported its decision to exclude an opt-out and its conclusion that any negative administrative burdens falling to States as a result are outweighed by the benefits of the rule.[8]
• FERC has exclusive jurisdiction over who may participate in wholesale markets, and States may not overcome FERC’s jurisdiction by seeking to regulate matters that would otherwise limit FERC’s jurisdiction over matters within its exclusive domain.[9]

Implications on Boundaries of Federal and State Authority Over Energy Policy

This decision provides support for FERC’s authority over the “panoply of rules and practices affecting” wholesale rates, even when those rules impose burdens on facilities subject to state jurisdiction. There is a point at which the “permissible effects” of FERC’s orders on state-jurisdictional facilities become impermissible, but Order No. 841 did not reach that point.

The implications of this case are not clear with regard to other ongoing challenges of FERC action affecting state authority, e.g., FERC’s Minimum Offer Price Rule (“MOPR”), in part because some of the principal objections in the MOPR case were not in dispute here. For example, in this case there was no real dispute regarding the purpose of Order No. 841. The court easily found that Order No. 841 does what it sets out to do: it “solely targets” the participation of electric storage resources in wholesale markets. The court underscores this point by invoking the image of a target itself: “If ‘directly affecting’ wholesale rates were a target, [Order No. 841] hits the bullseye.”[10] In contrast, among the various objections raised by MOPR critics, including Commissioner Glick, from the beginning is the principal complaint that the true aim of the MOPR has little to do with capacity market competitiveness, as it purports, but instead seeks to limit States’ jurisdiction over generation facilities and States’ ability to determine their resource mix.[11] Given the differences between this case and others, it remains to be seen how this opinion might affect FERC’s ability to defend other orders affecting state jurisdiction, such as the MOPR order, where the true aim of FERC’s actions is sharply disputed.

A copy of the D.C. Circuit’s decision in NARUC v. FERC may be found here.

[1] Petitioners in the consolidated case include the National Association of Regulatory Utility Commissioners, as well as American Public Power Association, National Rural Electric Cooperative Association, Edison Electric Institute, and American Municipal Power, Inc.

[2] 16 U.S.C. § 824(b)(1).

[3] See, e.g., Wholesale Competition in Regions with Organized Electric Markets, Order No. 719, FERC Stats. & Regs. ¶ 31,292 at P 47 (2009) (requiring RTOs and ISOs to amend their market rules to allow direct participation of demand response resources in RTO/ISO markets “unless the laws or regulations of the relevant electric retail regulatory authority do not permit a retail customer to participate”).

[4] See Slip Opinion at 13 (citing FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760, 772 (2016)).

[5] Slip Opinion at 13-14.

[6] Id. at 10.

[7] Id. at 14 (internal citations omitted); see also id at 16.

[8] Id. at 19-20.

[9] Id. at 15.

[10] Id. at 13.

[11] See, e.g., Calpine Corp. v. PJM Interconnection, L.L.C., 169 FERC ¶ 61,239 (2019) (Glick, Comm’r, dissenting at 4, 9-11) (explaining that, despite the MOPR’s purported purpose to improve the competitiveness of capacity markets, “we all know what is going on here: [the MOPR order is] a transparent attempt to handicap … state actions”).