On July 10, 2020, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued an opinion resolving jurisdictional challenges under the Federal Power Act (“FPA”) of FERC’s electric storage resource (“ESR”) participation rule, holding that the challenges “fail to show that Order Nos. 841 and 841-A run afoul of the [FPA’s] jurisdictional bifurcation or that they are otherwise arbitrary and capricious” because they do not include a state opt-out provision.

The challenged Order Nos. 841 and 841-A (“Orders” or “Storage Rule”), issued February 15, 2018 and May 16, 2019, respectively (see February 20, 2018 edition of the WER and May 22, 2019 edition of the WER), concern FERC’s effort to remove existing barriers to the participation of ESRs in the Regional Transmission Organization and Independent System Operator jurisdictional markets (“RTO/ISO markets”). In the Storage Rule, FERC found that ESRs, e.g., batteries, are affected by such participation barriers because ESRs have unique physical and operational characteristics distinct from traditional resources in that they can both inject energy into the grid and receive energy from it. In addition to requiring RTO/ISO markets to develop participation models that would ensure ESRs’ eligibility to provide FERC-jurisdictional services in those markets, FERC declined requests to establish a state opt-out provision, which, in essence, would have allowed states to determine whether ESRs interconnected to the federal grid through local distribution facilities are permitted to participate in the RTO/ISO markets. FERC clarified on rehearing that it had the requisite authority to determine which resources, such as ESRs, are eligible to participate in RTO/ISO markets, and noted that its Storage Rule does not modify states’ authority to regulate the distribution system, including the terms of access, provided that states do not aim directly at the RTO/ISO markets.

Separate petitions were filed at the D.C. Circuit by the National Association of Regulatory Utility Commissioners, and a consortium of local utility entities, including the American Public Power Association and the National Rural Electric Cooperative Association (“Petitioners”). Petitioners argued that FERC exceeded its jurisdiction under the FPA by barring states from “broadly prohibiting” local ESRs (those interconnected through local distribution facilities) from participating in RTO/ISO markets or, alternatively, that the lack of a state opt-out was otherwise arbitrary and capricious. After finding that Petitioners, as membership organizations, possessed standing to challenge the Orders, the court concluded that the petitions were ripe for judicial review notwithstanding the fact that no conflicting state laws had been presented to the court. Despite addressing only a facial challenge, the court noted its ruling would preserve the right of complainants to bring as-applied challenges against any alleged unlawful applications of the Storage Rule.

On the merits, guided by the U.S. Supreme Court’s three-part jurisdictional analysis in EPSA v. FERC (see February 2, 2016 edition of the WER), the D.C. Circuit “swiftly conclude[d]” that FERC’s prohibition of state-imposed participation bans “directly affects” wholesale rates because the Storage Rule “solely targets the manner in which an ESR may participate in wholesale markets.” On whether the Storage Rule unlawfully regulates matters left to the states, the court disagreed with Petitioners’ contention that FERC was impermissibly regulating access to state-regulated distribution facilities. The court noted that, while the Storage Rule would likely incentivize local ESRs to participate in the wholesale marketplace, this is a “permissible effect” of FERC’s direct regulation of federal wholesale sales that leaves states “equipped with every tool they possessed prior to Order No. 841 to manage their facilities and systems.” Petitioners similarly argued that the Storage Rule unlawfully prevents states from closing their facilities to local ESRs seeking to participate in wholesale markets. But the court concluded that, under the FPA, FERC has the exclusive authority to determine who may participate in the RTO/ISO markets and, thus, the Supremacy Clause of the U.S. Constitution “requires that [s]tates not interfere.” According to the court, because Congress may preempt states through federal legislation, FERC’s finding that states may not block RTO/ISO market participation through conditions on the receipt of retail service was a clear expression of “the well-established principles of federal preemption.” The court noted the many ways in which states retained their authority to operate and manage their facilities, including ways that “may lawfully hinder FERC’s goal of making the federal markets more friendly to local ESRs.” However, despite the fact that the FPA creates two separate zones of jurisdiction (one federal, one state), the court explained that the Supremacy Clause “creates uneven playing fields,” thus “[a]ny [s]tate effort that aims directly at destroying FERC’s jurisdiction by ‘necessarily deal[ing] with matters which directly affect the ability of the [Commission] to regulate comprehensively and effectively’ over that which it has exclusive jurisdiction ‘invalidly invade[s] the federal agency’s exclusive domain.”

A subset of Petitioners further claimed that, even if FERC has the authority under the FPA to prevent states from prohibiting local ESR participation in RTO/ISO markets, its decision to exercise that authority in the Orders was arbitrary and capricious. While the court acknowledged that the challenged FERC orders leading to EPSA v. FERC contained a state opt-out provision, it also observed that the Court in EPSA v. FERC “did not condition its holdings on the existence of an opt-out.” Thus, FERC was not bound to rely on a similar opt-out provision in the Storage Rule. Moreover, the court found FERC’s departure from its previous opt-out policy was neither unexplained nor unsupported because FERC “specifically considered” the benefits of enabling broad ESR participation to promoting just and reasonable wholesale rates, as well as the additional administrative burdens the Storage Rule would place on states. The court concluded that, while Petitioners may disagree with FERC’s calculus of benefits and burdens, FERC’s decision was not arbitrary and capricious because it was “the kind of reasonable agency prediction about the future impact of its own regulatory policies to which we ordinarily defer.”

A copy of the D.C. Circuit’s opinion can be found here.