July 14, 2020

D.C. Circuit Upholds FERC Ruling that Promotes the Participation of Energy Storage Technologies

Holland & Knight Energy and Natural Resources Blog
Graham T. Coates
Energy and Natural Resources Blog

On July 10, 2020, the U.S. Court of Appeals for the District of Columbia Circuit upheld a major Federal Energy Regulatory Commission (FERC) order intended to support fledgling energy storage participation in organized wholesale electricity markets. In its ruling, the D.C. Circuit rejected a challenge from a consortium of utilities and state regulators led by the National Association of Regulatory Utility Commissioners (NARUC), which alleged that FERC's Order 841 impermissibly encroached on state jurisdiction.

FERC's Order 841, issued in February 2018, was a watershed moment for the energy storage industry in that it directed regional transmission organizations and independent system operators to establish rules to allow energy storage units (over 100 kW) to participate in organized capacity, energy and ancillary services markets, and for such rules to take into account the physical and operational characteristics of such resources. FERC's order effectively cleared the way for energy storage participation in organized markets — a critical milestone in the deployment and monetization of energy storage resources into the utility grid.

NARUC and utilities challenged FERC's order on the grounds that the order prohibited states from managing their own state-jurisdictional distribution systems and thereby impermissibly encroached on state jurisdiction under the Federal Power Act (FPA). NARUC's suit also argued that FERC acted arbitrarily when it declined to provide states with the ability to "opt out" of Order 841's energy storage directives, as FERC had done in prior orders regarding the integration of demand response resources into wholesale markets.

The D.C. Circuit rejected both claims, finding that Order 841 does not directly regulate state-jurisdictional distribution systems, but instead solely targets wholesale market participation, which is well within FERC's purview under the FPA. The court reiterated FERC's exclusive jurisdiction under the U.S. Constitution's Supremacy Clause in carrying out the FPA and found a reasoned basis for FERC's decision not to allow states to opt out of Order 841.

While the D.C. Circuit made clear that accommodative wholesale market rules regarding energy storage would stand, the court also acknowledged that states still retain the ability to regulate energy storage units with regard to local state-level safety, reliability and siting requirements, as well as the ability to control energy storage participation in state-level retail markets. While the ruling likely creates no new precedent going forward regarding the dividing line between state and federal jurisdiction, the D.C. Circuit ruling makes clear that FERC's energy storage rules fall within the FERC's mandate under the FPA.

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