On July 10, 2020, the D.C. Circuit issued its opinion on various Petitioners’ appeals of Order No. 841. As predicted, the Court denied Petitioners’ claim that FERC lacks the authority to prohibit States from barring electric storage resources (ESRs) located on utility distribution systems from participating in wholesale power markets. Given the EPSA Supreme Court decision involved the sale of a product – demand response – that is not even FERC-jurisdictional, this case – involving sales by ESRs of clearly FERC-jurisdictional products – made the decision a slam dunk. Indeed, Petitioners would be hard-pressed to obtain either a rehearing en banc or a writ of certiorari.
The D.C. Circuit applied a test found in EPSA in rejecting most of the Petitioners’ claims. The court examined: 1) whether the challenged practice at issue – FERC’s prohibition of State-imposed distributed ESRs participation bans – directly affects wholesale rates; 2) whether FERC had regulated State-regulated facilities; and, 3) whether the court’s determinations would conflict with the FPA’s core purposes of curbing prices and enhancing reliability in the wholesale electricity market. The first and third prongs were so easily met that the court barely touched on them. The court found “swiftly” as to the first prong that FERC’s prohibition of State-imposed participation bans directly affects wholesale rates. Indeed, it noted that “If ‘directly affecting’ wholesale rates were a target, this program hits the bullseye.” As to the third prong, the court found that the “challenged Orders do nothing more than regulate matters concerning federal transactions – and reiterate ordinary principles of federal preemption – they do not facially exceed FERC’s jurisdiction under the Act. Our decision today does not foreclose judicial review should conflict arise between a particular state law or policy and FERC’s authority to regulate the participation of ESRs in the federal markets.”
As to the second prong, the court relied heavily on the Supremacy Clause of the Constitution to reject claims that States can close off access to wholesale markets. The court explained that “because FERC has the exclusive authority to determine who may participate in the wholesale markets, the Supremacy Clause – not Order No. 841 – requires that States not interfere.”
In ruling on the second prong, the court portended that it would not be a friendly venue for States trying to use the their limited jurisdiction to thwart FERC’s goals. In Order No. 841-A, FERC reiterated “that nothing in Order No. 841 preempts the states’ right to regulate the safety and reliability of the distribution system and that all electric storage resources must comply with any applicable interconnection and operating requirements.” The court made a similar finding, noting that “States retain their authority to impose safety and reliability requirements without interference from FERC, and ESRs must still obtain all requisite permits, agreements, and other documentation necessary to participate in federal wholesale markets, all of which may lawfully hinder FERC’s goal of making the federal markets more friendly to local ESRs.” Although these findings appear to support a State or local regulatory authority using its authority to either prohibit distributed ESRs from obtaining needed services or imposing terms and conditions that effectively result in a participation ban, the court made clear that State jurisdiction over (some) interconnections could not be used in such fashion:
Supreme Court “cases have consistently recognized a significant distinction, which bears directly upon the constitutional consequences, between” a State’s regulations “aimed directly” at matters in FERC’s jurisdiction, “and those aimed at” fulfilling a State’s own jurisdictional obligations. N. Nat. Gas Co., 372 U.S. at 94. “The former cannot be sustained when they threaten . . . the achievement of the comprehensive scheme of federal regulation.” Id.
That said, the interconnection jurisdiction of States is a red-herring. Although not discussed in the Opinion, FPA Section 210 provides an effective weapon for distributed ESRs to avoid State jurisdiction altogether. And, once an ESR is interconnected, the further services required from FERC-jurisdictional utilities, such as wholesale distribution service, are FERC-jurisdictional.
The court also addressed Petitioners’ claim that the lack of an opt-out provision results in FERC directly regulating access to the federal markets and is thus arbitrary and capricious particularly because such opt-out was permitted as to demand response. However, the court found that the EPSA Court “did not condition its holdings on the existence of an opt-out.” The court concluded that FERC also explained its differing holdings on the opt-out option by ruling that it was “promoting more participation of ESRs in wholesale markets increases competition, likely causing prices to lower, and more diversity in the types of ESRs encourages participation models that will be untethered to specific storage technologies.”
There was as interesting statement from the court that “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.” This holding has several applications. It means that states can continue to draft or approve net metering tariffs that prohibit wholesale market participation, as is the norm. Another intrastate market that exists for distributed ESRs is to sell power behind the retail meter of a co-located third-party. But, if an ESR was a battery charged from a solar facility and thus was part of a qualifying facility (QF), a State would be prohibited by federal law from restricting the ability of the QF to participate in the wholesale market. A State perhaps could prohibit such a QF from making retail sales behind the meter, if the QF wanted to sell at wholesale, but States generally allow QFs to make both behind the retail meter and wholesale sales. That said, even if a distributed ESR is not a QF, why a State might limit it sales to either behind the retail or to the market is unclear. The holding also may permit States to limit wholesale sales by ESRs that are being compensated for distribution deferral or distribution reliability, in that intrastate “market,” if the State so desires.
The most direct ramification of the Opinion is that it largely eradicates any meaningful chance of successfully challenging on jurisdictional grounds a distributed energy resource aggregation Final Rule, if one is ultimately is issued by FERC. (That said, meaningful participation in wholesale market aggregations should continue to be unlikely as long as net metering is available.) The Opinion could be used by FERC to reassert jurisdiction over all distribution interconnections for the purpose of wholesale sales to FERC-jurisdictional utilities, a position it once held. (The current situation, of jurisdiction impacted by prior uses of distribution facilities and QF status is becoming more unwieldly by the day, with distributed energy resources and others baffled by the complex topic.) But, such a change in interconnection jurisdiction is more likely to occur if states impose onerous interconnection terms where they do have (concurrent) interconnection jurisdiction.
Finally, net metering opponents may be pleased with the statement that:
Any State effort that aims directly at destroying FERC’s jurisdiction by “necessarily deal[ing] with matters which directly affect the ability of the [Commission] to regulate comprehensively and effectively” over that which it has exclusive jurisdiction “invalidly invade[s] the federal agency’s exclusive domain.”
A State-imposed monthly net metering period destroys FERC jurisdiction over wholesale sales. We will find out the week of July 12, 2020 if FERC will continue to be complicit in the destruction of its wholesale sales jurisdiction, but if and when FERC is ready to confront the practice, the path for its elimination is quite clear.