On January 31, 2020, FERC filed its brief in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) responding to consolidated petitions challenging Order No. 841. Order No. 841—the agency’s 2018 rulemaking that established a regulatory framework for Electric Storage Resources (“ESRs”) including grid-level batteries—is widely hailed as the legal lynchpin for the very recent, significant penetration by ESRs into the U.S. electricity resource mix. Accordingly, the D.C. Circuit proceeding has been closely watched by industry stakeholders as the petitioners seek to vacate important parts of the rule facilitating ESR participation in wholesale markets.

Petitions for review were filed in July 2019 by: (1) the National Association of Regulatory Utility Commissioners (“NARUC” or “State Commissions”); and (2) jointly by the American Public Power Association, National Rural Electric Cooperative Association, Edison Electric Institute, and American Municipal Power, Inc. (“Utility Petitioners”). The Transmission Access Policy Study Group also filed a brief as intervenor in support of petitioners.

Background

FERC’s Order No. 841 required each Regional Transmission Organization/Independent System Operator to revise its Open Access Transmission Tariff to enable wholesale market participation by ESRs, including those located on the interstate transmission system, on a distribution system, or behind the meter (see February 20, 2018 edition of the WER). Among other things, FERC asserted exclusive Federal Power Act (“FPA”) jurisdiction over the wholesale “market participation” of ESRs. FERC noted, importantly, that its federal jurisdiction over wholesale sales provided it with authority to set access terms and conditions for ESRs interconnected at or below distribution-level voltages, even though the FPA reserves to the states jurisdiction over “local distribution” facilities.

The State Commissions and Utility Petitioners argued primarily that FPA Section 201’s reservation of local distribution facility jurisdiction to the states effectively limits FERC’s authority to set terms and conditions for ESRs located behind-the-retail-meter or interconnected to such local distribution facilities. Also, these parties argued that FERC arbitrarily neglected to allow states to opt-out of Order No. 841, even though such a carve-out was afforded to demand response participation in wholesale markets. Finally, the challengers argued that Order No. 841 violates the 10th Amendment to the U.S. Constitution which, they note, prohibits federal officials from commandeering areas of authority traditionally reserved to the states (e.g., health and safety).

FERC’s response, filed last week, forcefully rejects these arguments. FERC argues, first, that the State Commissions and the Utilities’ petitions should be dismissed on procedural grounds. Specifically, FERC argues: (1) NARUC lacks standing to bring the appeal because it has not shown that it will be the victim of “actual, imminent or concrete” harm as a result of the Order No. 841 (which is the requisite showing of legal standing under Article III of the U.S. Constitution); (2) its claim is hypothetical and therefore, unripe; and (3) the Utility Petitioners have failed to demonstrate that the relief sought on appeal will actually remedy their claimed injury.

FERC’s January 31, 2020 brief answers the petitioners by relying on the U.S. Supreme Court’s decision in Elec. Power Supply Ass’n v. FERC (“EPSA”) and noting that the federal agency’s regulation of ESRs is a rule or practice that is intended to impact only wholesale rates, terms and conditions. EPSA, FERC says, squarely permits this exercise of federal authority. FERC notes that Order No. 841 does not directly intrude on the states’ purview (i.e., retail sales and regulation of distribution facilities). FERC states that EPSA stands for the proposition that “the Commission’s statutory authority over wholesale sales and practices affecting wholesale rates, [applies] even when its actions implicate distribution facilities.” FERC noted directly that D.C. Circuit law clearly holds that all aspects of wholesale sales are subject to federal regulation, regardless of the facilities used, as long as the transactions occurring over such local distribution facilities are connected to its FPA-plenary authority over interstate transmissions and wholesale sales. FERC’s brief also focuses on how Order No. 841 is aimed at ESR participation at wholesale, not regulation of local distribution facilities. What’s more, FERC says, state action that thwarts ESR participation in wholesale markets would very likely be preempted under federal law. FERC told the D.C. Circuit that a hypothetical state law—e.g., legislation, rule, or administrative order—categorically barring distributed storage wholesale transactions would intrude on its exclusive jurisdiction over the field (wholesale markets).

Conclusion

The appeal of Order No. 841 will be closely watched, given the advancement of storage resource efficiency and price points in the past several years. This is particularly true for grid level lithium-ion batteries which, according to UBS, have declined in price by 85 percent as a result of production increases. The petitioners’ approach appears to turn, to some extent, on versions of arguments lodged in the EPSA proceeding regarding DSM. The EPSA Court found these arguments unpersuasive. It remains to be seen whether the D.C. Circuit will agree with FERC (that impacts on retail rates and local distribution facilities are incidental impacts to the wholesale market-aimed purpose of Order No. 841) or with the petitioners’ contention (that establishment of local distribution interconnection and ESR market participation rules violate state authority under the FPA and the U.S. Constitution). Oral argument has yet to be scheduled in this D.C. Circuit proceeding.

FERC’s brief, filed in D.C. Circuit Docket Nos. 19-1142 and 19-1149, is available here.