FERC Moderates NYISO Rule Impacting NY-Supported Demand Response

As former Federal Energy Regulatory Commission (FERC) Chairman Norman Bay walked out the door on Feb. 3, 2017, he and the remaining two commissioners issued a decision that makes it easier for New York State to support certain special demand or distributed resources while such projects also qualify for compensation in the wholesale energy markets.

Perhaps what was most remarkable about the decision was Bay's concurring opinion that explained energy federalism after last year's landmark U.S. Supreme Court decisions and delivered a hidden gem for New York State officials committed to the rollout of a clean energy agenda.

At issue in the decision are demand-side resources, including on-site generation, of at least 100 kW that are able to be interrupted upon the New York Independent System Operator's (NYISO) demand. In the more congested areas of New York, including New York City, these so-called special case resources have been essentially forced to decide between whether to accept state incentives or support, or to accept NYISO compensation, but not both.

FERC's decision Friday was in response to a complaint the New York Public Service Commission (PSC) and other state agencies, including the New York State Energy Research and Development Authority (NYSERDA), City of New York, Advanced Energy Management Alliance and Natural Resources Defense Council filed against the NYISO seeking an exemption from the rule to allow such demand resources to accept both state and wholesale market compensation and benefits. 

Citing the U.S. Supreme Court's FERC v. Electric Power Supply Assn. decision last year that upheld FERC Order No. 745 (which found that FERC has authority to mandate that demand resources be paid the same as generators in competitive power markets), the complaint argued that it would be irrational, inconsistent and counterproductive for FERC to allow the NYISO rule to undermine FERC's effort to eliminate barriers to demand response in the energy market, but still allow the rule to erect barriers within New York's installed capacity market.

In sustaining the complaint and exempting such resources, FERC reasoned that payments made through such retail demand response programs are actually for providing local services that are separate and apart from the services such resources deliver into New York's wholesale energy marketplace. For example, more than 75 percent of Consolidated Edison's network peaks at times that differ from the statewide peak load, with some networks peaking mid-day and other networks peaking in the late evening. "We believe that a blanket exemption . . . allows appropriate flexibility for, and avoids the creation of unnecessary barriers to, the participation" of such resources in the wholesale markets, FERC explained.

Bay's concurrence explained that all state action that increases or decreases electric supply, such as a prompt siting decision or a favorable zoning exemption, has an impact on wholesale energy markets, but only the state subsidy is subject to impairment through the NYISO rule. "The Supreme Court has now made clear that states are permitted to enact a wide range of policy choices that can affect the wholesale market," wrote Bay, quoting Hughes v. Talen Energy Mktg. "After the decision in Hughes, the Commission cannot defend [the NYISO rule] on the grounds that states have overstepped their authority except in the rare situation where the state action impermissibly interferes with wholesale rates."

Bay continued to explain that while there are times when FERC must check state action that impermissibly interferes with the wholesale markets, FERC "should endeavor to do so only when necessary."

"A resource receiving any amount of state support now faces a considerable degree of legal uncertainty," said Bay. "States, no less than industry, are entitled to as much regulatory certainty as the Commission can provide them and an appropriate level of deference under principles of federalism."