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FERC clarifies order on distributed energy, launches demand response inquiry

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FERC clarifies order on distributed energy, launches demand response inquiry

The Federal Energy Regulatory Commission on March 18 agreed to make several important clarifications to a landmark rule opening wholesale power markets to aggregations of distributed energy resources, including a key determination that state opt-out rules for demand response resources do not apply to those types of aggregations.

In doing so, FERC also voted to launch a separate notice of inquiry to explore whether state opt-out rules for a separate demand response rule, Order 719, still make sense.

Taken together, the separate orders indicate that regional grid operators could be directed to disregard state opt-out rules for retail demand response resources such as those adopted by nearly all states with the Midcontinent ISO region.

Legal background

FERC in 2008 issued a major new rule, Order 719, opening wholesale markets to demand response, allowing large industrial customers to be compensated at wholesale rates for dialing back power demand in response to price signals when grid conditions are stressed. As relevant here, the rule included an opt-out provision for states in recognition that they have exclusive jurisdiction under the Federal Power Act over the siting and permitting of their own energy infrastructure.

The U.S. Supreme Court in January 2016 upheld a subsequent landmark rule, Order 745, allowing demand response resources to participate in energy and ancillary services markets. However, the high court did not address the question of whether state opt-out provisions for demand response are legal under the Federal Power Act, which gives FERC jurisdiction over activities affecting wholesale rates.

In February 2018, FERC issued another related rule, Order 841, that opened wholesale markets to energy storage resources. Unlike Order 719, FERC did not include a state opt-out provision in its storage rule, reasoning that the benefits of not doing so outweighed potential implementation costs for states.

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The U.S. Court of Appeals for the District of Columbia Circuit in July 2020 upheld Order 841, rejecting claims by state regulators that FERC failed to articulate a reasoned basis for declining to include an opt-out. The court reasoned that the Supreme Court's demand response decision was not conditioned on the inclusion of an opt-out for states.

Following up on its storage order, FERC in September 2020 issued its aggregated distributed energy resource, or DER, rule, Order 2222 (RM18-9), which similarly did not include a broad opt-out for states. However, it did contain a limited opt-out for small utilities like rural electric cooperatives, recognizing the potential difficulties they may have in facilitating the participation of DERs, which can include small solar arrays and electric vehicles.

Key clarifications

Multiple parties subsequently filed requests for rehearing and clarification of Order 2222, with environmental groups and others asking FERC to clarify that aggregations of DERs containing demand response resources are not subject to Order 719's opt-out provisions.

According to a FERC press release and discussions during FERC's March 10 open monthly meeting, a draft order approved during the meeting granting the rehearing request found that applying Order 719's opt-out rules to "heterogeneous" aggregations of DERs would undermine Order 2222's goal of breaking down market barriers facing those resources.

The draft order noted that FERC did not anticipate such aggregations when Order 719 was issued. But the draft order also clarified that the commission will not exercise jurisdiction over the interconnection of DERs to the grid for the exclusive purpose of participating in FERC-jurisdictional wholesale markets.

"As the D.C. Circuit Court of Appeals explained, removing the availability of opt-outs does not mean a state cannot continue to regulate the distribution system consistent with their jurisdiction," Commissioner Allison Clements said during the meeting.

State laws intended to directly limit DER participation in wholesale markets will still be prohibited under Order 2222, Clements noted. "When a state law or regulation is aimed directly at FERC's wholesale markets, that's a matter within this commission's sphere," she said.

The rehearing order drew a sharp dissent from Commissioner Mark Christie, a former Virginia regulator who has stated that consumer costs will be one of his top priorities at FERC.

"If I was going to describe this order in one word, I think I would use the Greek word 'hubris,'" Christie said. "It's based on the belief that the members of this commission know better how to manage the complicated issues of timing, grid reliability, and the costs of behind-the-meter DER deployment, than all the state regulators in all the 50 states, who by the way, are tasked with defending the public interest just like we are here at FERC."

New notice of inquiry

Turning back to Order 719, Chairman Richard Glick said a separate but related notice of inquiry (RM21-14) approved during the meeting will focus on whether state-opt provisions for retail demand response are still appropriate.

The issue was crystallized in an October 2020 complaint filed by Voltus Inc., a company that enrolls customers in various demand response programs. It noted that third-party demand response aggregators that are not acting on behalf of load-serving entities such as local utilities are barred from direct wholesale market participation in all but three out of 15 MISO states.

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In asking FERC to direct MISO to disregard those rules, Voltus argued that the D.C. Circuit's ruling upholding the commission's energy storage rule made clear that the commission has exclusive authority over the rules surrounding retail resource participation in wholesale markets.

Commissioner Neil Chatterjee noted during the meeting that he was prepared to support a move advanced notice of proposed rulemaking on the matter, but Chairman Richard Glick said he needs to see more evidence in the administrative record before taking that step.

As part of the inquiry, Glick told reporters he will be watching for comments on market changes that have occurred since Order 719 was issued and whether state opt-outs can still be justified in light of the various legal and technological developments. Glick added that he was sensitive to the earlier comments made by Christie, who argued during the meeting that states and smaller public utilities like rural co-ops are not inherently opposed to new technologies.

"I think he made some very relevant points that we need to consider," Glick said. "Not only are we interested in making sure that the wholesale markets are operating properly and demand response can participate in the markets, we also have a responsibility to work with our states to ensure that they have the ability to protect the reliability of their distribution systems around the country."

Comments on the notice of inquiry are due 90 days after publication in the Federal Register.