On December 1, 2017, FERC concluded that it has exclusive jurisdiction over the participation of energy efficiency resources (“EERs”) in wholesale electricity markets.  FERC also found that: (1) state or local regulators may not bar or restrict EER participation in wholesale electricity markets, unless given express authority to do so by FERC; and (2) FERC’s previous Order No. 719 on demand response may not be interpreted to permit a state or local regulator to exercise an opt-out and bar or restrict the participation of EERs.

FERC issued its declaratory order in response to a June 5, 2017 petition filed by Advanced Energy Economy (“Advanced”), a national trade association representing organizations within the energy efficiency, demand response, and other advanced energy industry sectors (see June 12, 2017 edition of the WER).  In the petition, Advanced highlighted an on-going stakeholder process at PJM Interconnection, L.L.C. (“PJM”) to change its Open Access Transmission Tariff to essentially allow state regulators to restrict EER participation in PJM’s wholesale markets in a manner similar to current restrictions on demand response resources.  Advanced argued that allowing states to essentially bar participation of EERs – i.e., providers of a wholesale capacity product that represents the electricity savings created through the sale and use of energy efficiency products such as high efficiency lighting, appliances, and modern heating, ventilation, and air conditioning systems – would result in unjust and unreasonable barriers to participation by EERs and hinder the ability of Regional Transmission Organizations and Independent System Operators (“RTOs/ISOs”) to administer wholesale electricity markets.

In its declaratory order, FERC likened its exclusive jurisdiction over EER participation in wholesale electricity markets to its regulation of demand response compensation as both are a “practice directly affecting wholesale markets, rates, and prices,” under the Federal Power Act.  Like demand response, FERC found that offering EERs directly into the wholesale capacity markets increases supply and reduces demand and thus can cause lower wholesale capacity prices.  Given this similarity between EERs and demand response, FERC recognized that, where possible, EERs and demand response should be able to participate equivalently in wholesale markets.

In declaring its exclusive jurisdiction, FERC also determined that state and local regulators are prohibited from barring or restricting the participation of EERs in wholesale markets without FERC giving express authority to do so.  FERC reasoned that “unilateral state action,” which could impede on EER participation, “impermissibly intrudes upon the wholesale electricity market, a domain Congress reserved to [FERC] alone.”  FERC affirmed that because it holds exclusive jurisdiction over the matter at hand, only FERC may grant an opt-out to state and local regulators.

Finally, FERC addressed how Order No. 719 affected EERs participating in RTO/ISO wholesale markets.  While FERC recognized that it granted state and local regulators an opt-out from allowing demand response participation in wholesale markets in Order No. 719, FERC reiterated in the declaratory order that it was not obligated to do so.  Furthermore, FERC clarified that the scope of Order No. 719 is expressly limited to demand response in wholesale electricity markets, and does not include energy efficiency.  Notwithstanding its decision, FERC recognized a 2004 grant of authority to the Kentucky Public Service Commission (“Kentucky Commission”) to bar or restrict the participation of any demand-side management programs originating in Kentucky to participate in the PJM market.  FERC explained that the stipulation was granted to the Kentucky Commission in connection with the joining of Kentucky Power Co. into PJM and is broad enough to include energy efficiency.

While FERC declined to establish broad opt-out standards for EERs going forward, FERC reiterated that it will act on any such requests in a manner consistent with its obligations to ensure just and reasonable rates.  A copy of the order is available here.