D.C. Circuit Rejects State Challenges to FERC's Energy Storage Order

In a forceful rejection of several legal challenges, the D.C. Circuit Court of Appeals issued an opinion on July 10, 2020,¹ upholding FERC's Order No. 841,² which directed wholesale market operators to establish market participation rules for energy storage resources (ESRs).

The Orders Under Judicial Review

Order No. 841 requires each regional transmission organization (RTO) and independent system operator (ISO) to establish a set of rules in its tariff to ensure that ESRs have access to RTO/ISO markets to sell all of the products they may be technologically capable of providing (e.g., energy).³ In Order No. 841, FERC rejected requests for the inclusion of an "opt-out clause" in which states could decide whether "local" ESRs, namely, those located behind the meter or connected to a local distribution system, could participate in RTO/ISO markets.⁴

FERC also observed that nothing in Order No. 841 was intended to affect the right of distribution utilities to maintain the safety and reliability of their systems or the use of their systems by ESRs. On rehearing in Order No. 841-A,⁵ FERC emphasized that its jurisdiction over wholesale electricity markets gave it authority to determine which resources are eligible to participate in those markets and that a state may not "broadly prohibit" all retail customers from participating in RTO/ISO markets.⁶

Grounds for Judicial Review

Several parties petitioned for judicial review of both Order No. 841 and Order No. 841-A on the following grounds:

• FERC exceeded its jurisdiction by barring states from broadly prohibiting local ESRs from participating in RTO/ISO wholesale markets;
• The lack of an "opt-out clause" impinges on the states' authority and "commandeers" the state administrative process; and
• The lack of an opt-out clause is arbitrary and capricious.

The Court's Rulings

In dismissing complaints that FERC exceeded its jurisdiction, the D.C. Circuit concluded that FERC's prohibition on state-imposed participation bans in RTO/ISO markets "directly affects wholesale rates" and, hence, involves a matter squarely within FERC's jurisdiction. The court also noted that FERC had intended the participation of ESRs in wholesale markets to increase competition and thereby reduce wholesale rates. Noting that the challenged orders do nothing more than regulate matters concerning federal transactions, the court concluded that those orders "do not facially exceed FERC's jurisdiction under the [Federal Power Act]."⁷ 

The D.C. Circuit also disposed of arguments maintaining that Order No. 841 unlawfully regulated matters left to the states. Several parties argued that by prohibiting states from blocking the "gates" to the federal markets, FERC is directly regulating access to those gates, a matter left to the states under the Federal Power Act (FPA). The court disagreed, noting that FERC was not regulating matters of access to distribution systems but, rather, was encouraging ESRs to participate in wholesale markets, which will require use of state distribution systems.

In the court's view, the impact on the operation or management of a distribution system is the "type of permissible effect of direct regulation of federal wholesale sales that the FPA allows."⁸ The court reminded states that they remain "equipped with every tool they possessed prior to Order No. 841 to manage their facilities and systems."⁹ In dismissing the "commandeering argument," the court explained that FERC is not requiring states to guarantee access to states' distribution facilities in order to reach wholesale markets and, thus, FERC is "not commanding" states "to administer or enforce a federal regulatory program."¹⁰ 

Finally, the D.C. Circuit considered and rejected the assertion that FERC exercised its jurisdiction in an arbitrary and capricious manner. Holding that FERC had adequately explained its departure from the inclusion of an "opt-out clause" (which FERC did include in its rulings with regard to the participation of demand response resources in wholesale markets),¹¹ the court observed that FERC weighed the benefits of full participation of ESRs and the positive impacts on wholesale market competition against the administrative burden that ESRs can place on a utility's distribution system. While certain parties found FERC's consideration of costs/benefits to have arrived at the wrong conclusion, the court did not find FERC's deliberation and conclusion to be arbitrary or capricious.

Implications

The D.C. Circuit's opinion sends an encouraging signal to the ESR market that FERC has broad latitude to promote ESR participation in wholesale markets and the ability to scrutinize closely state efforts to establish conditions for access to facilities needed to effect that participation. This fits within FERC's recent trend of eliminating barriers to ESR participation in the wholesale markets.

Meanwhile, the court's opinion has placed states and distribution utilities on notice that they must craft distribution system access rules with a demonstrable link to maintaining system safety and reliability (which the court recognized is a legitimate and retained area of state jurisdiction). Indeed, comments from FERC Commissioner Glick regarding the appeals court's opinion reflected his desire for FERC and the states to collaborate to ensure that rules governing ESRs recognize the legitimate concern of states to ensure that distribution service is provided reliably.

While it remains to be seen how FERC will apply the court's confirmation of its broad authority to fashion rules for the participation of other market entities like distributed energy resources, in wholesale markets, it is likely that FERC will assert its jurisdiction over wholesale markets vigorously and establish "wide gates" to encourage broad market participation.

Footnotes

1  Opinion, Nat'l Assoc. of Regulatory Comm. V. FERC, et al., No. 19-1142 (D.C. Cir. July 10, 2020), available here.
2  162 FERC ¶ 61,127 (2018)("Order No. 841"), which is referred to as FERC's "Energy Storage Rule."
3  FERC defined an ESR as a "resource capable of receiving electric energy from the grid and storing it for later injection of electric energy back to the grid." Order No. 841, at P 29.
4  Order No. 841, at P 23.
5  167 FERC ¶ 61,154 (2019)("Order No. 841-A").
6  Order No. 841-A, at P 38.
7  Opinion, at 17.
8  Opinion, at 14. The court also noted that because "FERC has exclusive authority to determine who may participate in the wholesale markets, the Supremacy Clause – not Order No. 841 – requires that States not interfere." Id.
9  Opinion, at 13.
10 Opinion, at 15 FN6.
11 Wholesale Competition in Regions with Organized Electric Markets, Order No. 719-A ¶ 50, 128 FERC ¶ 61,059, FERC Stats. & Regs. ¶ 31,292, on reh'g, Order No. 719-B, 129 FERC ¶ 61,252 (2009).