Although there were tempting things to write about in last few months, client considerations meant not writing about certain “hot” topics such as net metering. The Order No. 841 oral argument at the D.C. Circuit, however, demanded an article. The only challenge to Order No. 841 involved distributed storage and its participation in wholesale markets. The oral argument already has been summarized by many and although a close call on whether the case will be dismissed for lack of injury or upheld on the “affects” clause, a victory for distributed storage is fairly likely. The oral argument proved to be interesting not so much for the future of Order No. 841, but for the future of FERC regulation of wholesale distribution service, a service that it has regulated for decades. It seems no one involved in the oral argument remembered that the D.C. Circuit once stated: “FERC’s assertion of jurisdiction over all wholesale transmissions, regardless of the nature of the facility, is clearly within the scope of its statutory authority.” That is, TAPS v. FERC gave FERC a seal of approval to regulate “wholesale distribution service,” as it is a form of transmission service in interstate commerce. FERC counsel’s decision not to mention this decision was puzzling and whether FERC will return to embracing it, if a DER Aggregation Final Rule is issued, will be interesting to watch.

The oral argument was somewhat unsatisfying because those arguing seemed unaware of FERC’s quite active regulation of DERs’ and storage DERs’ use of local distribution facilities. Indeed, the rates, terms, and conditions of the use of local distribution facilities by storage DERs to bring power inbound is being litigated in an active docket. But I can’t talk about that case, for now. The rates, terms, and conditions for sending DERs-produced energy outbound over local distribution facilities was litigated as to three California utilities two decades ago, resulting in Opinion No. 458.

Indeed, the oral argument began with a factual error, that FERC’s counsel did correct, that the very idea of distributed storage participating in wholesale markets is so new, it basically does not exist. And, counsel for NARUC implied that there are few non-storage DERs selling into wholesale markets. This would be news to distributed storage devices in California and other states as well. Commonwealth Edison had to defend its wholesale distribution rate to a distributed storage device participating in the PJM market in the early half of last decade. Later, NARUC admitted that non-storage DERs were participating in markets but claimed they only could do so by signing wholesale market participation agreements, which is true in PJM. The fact that PJM has signed hundreds of such agreements provides a clue that non-storage DERs participating in markets are already quite common and that many states have learned to address the local distribution facility impacts of DERs.

The reason understanding the facts about all these existing DERs participating in wholesale markets proved important was apparent later in the oral argument. The judges were correctly puzzled by FERC’s position that once a storage DER was permitted to interconnect, as all participants seemingly agreed a state could prohibit interconnection, allowing the DER to transfer power to the wholesale market did not create an impact on local distribution facilities that FERC had failed to address or take into account. (On a side note, the fact that everyone seemed to agree a state could prohibit interconnection of storage DERs is belied by: 1) Order No. 2003, which permits interconnection to second-use distribution facilities under FERC jurisdiction and reinforces FERC’s PURPA interconnection jurisdiction for QF DERs selling to the market, and 2) Section 210 of the FPA (under which FERC can likely compel any DER wholesale interconnection). Indeed, QFs have been interconnecting to distribution for many decades, and their interconnections are FERC-jurisdictional if selling to a wholesale market under case law dating to the 1990s.) In any case, this line of questioning as to impacts on local distribution facilities of power from storage DERs being delivered to the transmission system proved somewhat challenging for FERC.

FERC could have explained to the court that once the state has allowed interconnection (and set the terms for interconnection), the game is over for the states. Under TAPS v. FERC, the transfer of power from a DER to the transmission system, i.e., wholesale distribution service, is FERC-regulated and is considered a form of transmission service. That is, if the interconnection happens to be state-regulated, the state certainly can impose any conditions on the interconnection, including complete prohibition (although the storage DER may get around that as noted above), but, the easy answer for FERC to the questions about burdens and impacts on local distribution facilities was that FERC’s transmission jurisdiction simply trumps state jurisdiction over local distribution facilities under FPA Section 201 and that FERC will address the issue itself. Rather than provide this answer, FERC argued, perhaps hamstrung by the reasoning in Order No. 841, that its jurisdiction over wholesale sales as well as states’ rights to ensure reliability, safety etc. was sufficient such that the court should not be concerned about the impacts of wholesale distribution service on local distribution facilities. It appeared to this listener that there was no awareness of TAPS v. FERC confirming FERC’s exclusive jurisdiction over wholesale distribution service.

This article is not advocating ignoring states’ concerns as to the provision of wholesale distribution service, but the states’ concerns over the rates, terms, and conditions of such service and protecting pre-existing retail and wholesale customers who use local distribution facilities, can be addressed by state participation in FERC cases setting such rates, terms, and conditions. Indeed, FERC already reasonably adopted a policy in Order No. 2003 that DERs pay for upgrades that they cause on local distribution facilities, such that DERs should not be a financial burden on other distribution customers. If storage DERs need “very smart” meters to allocate retail and wholesale load, states can advocate that DERs pay for such meters. Indeed, in Order No. 841, FERC even provided that if an ISO/RTO could not discern retail from wholesale load because the state had not adopted a means to do so, the ISO/RTO would not be able to charge a storage DERs at wholesale when charging; rather, the state could require the DER’s indistinguishable “mixed” load to pay retail rates.

Almost certainly, some of the same Petitioners in this case will take the same position here as in the DER Aggregation proceeding. The open question is whether in any Final Rule, FERC will rely on TAPS v. FERC and not merely EPSA, for its authority to regulate the delivery of DER-generated power to the transmission grid. Such reliance would make for an “easier” oral argument.