A federal appeals court July 10 upheld a major Federal Energy Regulatory Commission order designed to remove barriers to energy storage participation in wholesale electricity markets.
The ruling by the U.S. Court of Appeals for the District of Columbia Circuit handed a win to storage supporters and dealt a loss to a coalition of state regulators and utility petitioners that argued the order had exceeded FERC's authority under the Federal Power Act, or FPA.
FERC issued Order 841 in February 2018, a long-awaited final rule aimed at removing barriers that keep energy storage resources, such as batteries and flywheels, from more fully participating in markets run by the nation's regional transmission organizations and independent system operators.
Order 841 directed each RTO and ISO to establish market rules that accommodate the participation of storage resources in their capacity, energy and ancillary services markets to the extent possible based on those resources' physical and operational characteristics. The order specified that the market rules must apply to storage resources over 100 kW that supply energy to the grid.
In May 2019, FERC issued Order 841-A that largely affirmed the storage rule. In doing so, the commission refused to include an opt-out provision called for by groups including the National Association of Regulatory Utility Commissioners, Edison Electric Institute, American Public Power Association, and American Municipal Power Inc.
Jurisdictional dispute
The state regulators and utility groups subsequently sued at the D.C. Circuit, arguing that FERC's move to bar states from broadly prohibiting storage resource participation in wholesale markets interferes with their right under the FPA to regulate their own distribution systems.
Specifically, the groups argued that FERC is impermissibly regulating distribution systems by prohibiting states from blocking storage access to wholesale markets. They also asserted that FERC acted arbitrarily and capriciously by refusing to allow states to opt-out of the storage participation requirement in the same manner as it allowed states to opt-out of certain requirements of the agency's landmark demand response rule that was later upheld by the U.S. Supreme Court.
While that 2016 high court decision ( FERC v. EPSA) did not rest on the inclusion of an opt-out provision, the petitioners recounted that the ruling cited the provision's efficacy in promoting the goals of cooperative federalism under the FPA. And they maintained that unlike its order for demand response resources, which are paid to not consume energy, FERC's rationale for its storage orders ignored that storage resources can inject energy into the grid. The petitioners said this creates a greater need from states to exercise their authority over those resources to maintain grid reliability.
DC Circuit's ruling
The D.C. Circuit rejected those claims, concluding that Order 841 should stand because it "solely targets" the manner in which a storage resource may participate in wholesale markets. In doing so, the court noted that "there is little doubt" the order will entice storage resources to seek access to the federal marketplace. But "that is the type of permissible effect of direct regulation of federal wholesale sales that the FPA allows," Judge Robert Wilkins wrote for the court.
"Nothing in Order No. 841 directly regulates those distribution systems," Wilkins said. "States remain equipped with every tool they possessed prior to Order No. 841 to manage their facilities and systems."
The D.C. Circuit further explained that the U.S. Constitution's Supremacy Clause "creates uneven playing fields" that extend to the FPA's two separate zones of jurisdiction. Because FERC has exclusive authority over wholesale market participation, the Supremacy Clause effectively bars states from interfering with that jurisdiction, the court said.
Addressing petitioners' arbitrary and capricious claims, the court also sided with FERC by finding that the commission provided a reasoned basis for deciding not to include an opt-out provision. In doing so, the court deferred to FERC's reasoning that the benefits of broad storage access to wholesale markets — including increased competition, enhanced grid reliability and lower rates — outweighed the costs to states.
Under its ruling, however, the court said states will retain authority to prohibit local storage resources from participating in interstate and retail markets simultaneously, meaning regulators can force storage resources to choose between the two. And FERC cannot interfere with state-level safety and reliability requirements for storage resources, the court said.
"Petitioners are likely correct that litigation will follow as states try to navigate this line, but such is the nature of facial challenges," Wilkins said, noting that the ruling does not foreclose judicial review in future related conflicts.
FERC Chairman Neil Chatterjee cheered the ruling during a July 10 call with reporters.
"I have said repeatedly that I think [with] 841, we may look down the road and say it was one of the single most significant actions taken by a government agency to address carbon mitigation and the transition to a clean energy future," Chatterjee said.
The ruling was also met with praise on social media by former commissioners who helped craft Order 841.
"The decision of the D.C. Circuit upholding FERC Order 841 on energy storage is a very important case for the future of storage technology," former FERC Chair and commissioner Cheryl LaFleur wrote on Twitter. "Happy to see bipartisan support for this FERC rule in the years since, and now judicial validation."
Joining in the opinion were Judges Merrick Garland and Judith Rogers. NARUC v. FERC (No. 19-1142)