On July 10, the US Court of Appeals for the DC Circuit found that the Federal Energy Regulatory Commission was well within its rights to prevent states from prohibiting energy storage resources from participating in wholesale (i.e., sales for resale) energy markets. The court’s order is the latest judicial affirmation of FERC’s authority to regulate activities on wide portions of the electric grid, including facilities reserved to state regulators, if those activities affect wholesale rates.
The case arose following challenges to FERC’s Order No. 841 (and its order on rehearing), a 2018 rulemaking requiring grid operators (i.e., regional transmission organizations (RTOs) and independent system operators (ISOs)) to implement rules to facilitate the participation of electric storage resources in wholesale capacity, energy, and ancillary service markets.
RTOs and ISOs have since implemented those rules to varying degrees in accordance with FERC’s mandate. In the meantime, several petitioners argued that FERC exceeded its statutory authority by not allowing state “opt-outs,” i.e., the ability for states to prohibit storage resources on state-regulated distribution systems from participating in wholesale markets.
Summary of Order
The court rejected the petitioners’ jurisdictional arguments and held that FERC acted within its statutory authority under the Federal Power Act to limit state opt-outs. The court’s reasoning is based in large part on an application of the three-pronged analysis established in FERC v. EPSA, the landmark 2016 US Supreme Court case that upheld FERC’s authority to regulate demand response transactions. That framework required the court in this case to (1) determine whether Order No. 841’s prohibition on state-imposed participation bans “directly affect[s] wholesale rates,” (2) examine whether FERC’s rulemaking improperly regulated state-regulated facilities, and (3) ensure that the court’s order does not conflict with the Federal Power Act’s core purpose of ensuring just and reasonable wholesale rates.
The court reasoned as follows:
- With respect to the first prong, because Order No. 841 targets the manner in which storage resources participate in wholesale markets, the court easily concluded that the rulemaking directly affects wholesale rates. (“If ‘directly affecting’ wholesale rates were a target, this program hits the bullseye.”)
- The bulk of the petitioners’ challenge as well as the decision of the court focused on the second prong. There the court held that Order No. 841 does not unlawfully regulate matters left to the states because FERC has plenary authority to regulate wholesale markets and the supremacy clause of the US Constitution requires that states not interfere with that statutory mandate. The court also disagreed that Order No. 841 usurps any power conferred upon the states because states continue to operate and manage their facilities with the same authority they possessed prior to Order No. 841. In particular, the court found that states still have the ability to force local storage resources to choose whether they participate in wholesale or retail markets; retain their authority to impose safety and reliability requirements without interference from FERC; and require storage resources to obtain all requisite permits, agreements, and other documentation necessary to participate in federal wholesale markets. The court reasoned that all of those powers may still serve to lawfully preclude storage resources from participating in federal markets. Importantly, however, the court left open the door to future specific challenges by the states of Order No. 841 as applied to their own state regulations or imposed conditions. In fact, the court expressly noted that it expected “that litigation will follow as States try to navigate this line.”
- The third prong was addressed by the court in a summary manner similar to the first prong. In light of the court’s finding that FERC did not perpetuate policy goals to the detriment of states, it easily concluded that its order is consistent with the Federal Power Act’s core purpose and therefore satisfies the third EPSA prong.
The court also dismissed arguments that FERC acted arbitrarily and capriciously when it rejected state opt-outs, a practice that FERC had allowed previously under its demand response rulemaking in the EPSA proceeding. Although the court conceded that FERC had indeed pivoted from its prior policy position, it found that FERC had sufficiently weighed the benefits of the change on wholesale market access and the promotion of just and reasonable rates. Therefore, the court held that FERC did not act arbitrarily and capriciously in limiting state opt-outs under Order No. 841.
The court decision to uphold Order No. 841 is the latest ruling supporting FERC’s broad role to regulate an evolving and increasingly interconnected electric grid. However, the DC Circuit’s order may not be the final word on FERC’s ambitious vision under Order No. 841.
The court’s holding may be subject to further challenge before the Supreme Court, as was the case in the EPSA proceeding. However, it is unclear whether any petition for certiorari to the Supreme Court (which requires acceptance by at least four of the nine sitting Supreme Court justices) would be accepted given the DC Circuit’s heavy reliance on the recently decided EPSA decision.
That said, this decision acknowledges the potential for future litigation challenging whether specific rules or regulations implemented under Order No. 841 unlawfully regulate matters left to the states. In any event, for the time being, FERC’s implementation of market reforms for energy storage resources will continue as planned.