By Bud Earley and Mark Perlis, Covington & Burling LLP
The Federal Energy Regulatory Commission (FERC) on Sept. 17, 2020, approved a final rule that will enable distributed energy resource aggregators to compete in organized wholesale electricity markets. Distributed energy resources (DERs) are located on the electric distribution system or behind the customer meter and include electric storage resources, distributed generation, demand response, energy efficiency, thermal storage, and electric vehicles and their charging equipment. Under the rule, aggregators will be able to aggregate multiple small DERs as a single resource to compete in the markets, smoothing the way for many more of such resources to enter the wholesale market.
The new rule requires FERC-jurisdictional Regional Transmission Organizations and Independent System Operators (RTO and ISOs) to revise their tariffs to include provisions specifically aimed at allowing DER aggregators to participate in their organized wholesale markets. The rule generally bars state retail regulators from prohibiting such participation.
Small DERs should find it more attractive to locate on utility distribution systems. Then-FERC Chairman Neil Chatterjee characterized the new rule as “a landmark, foundational rule that paves the way for the grid of tomorrow.” Commissioner James Danly, however, dissented from the rule, saying FERC is exceeding its authority in barring state retail regulators from preventing aggregator participation in wholesale markets. Danly on Nov. 5 was appointed as the new FERC chairman.
FERC first proposed to allow DER aggregators to participate in organized electricity markets in its 2016 proposal to remove barriers to the participation of electric storage resources. FERC recognized that individual DERs may be too small to participate directly in the organized markets on a stand-alone basis. For example, they may not meet market rules regarding the minimum size requirements to participate or have difficulty satisfying other qualification and performance requirements. FERC proposed to require each RTO/ISO to allow DER aggregations to participate directly in the wholesale electric markets under rules that best accommodate the physical and operational characteristics of the aggregation.
When FERC issued the final rule in 2018 geared to storage participation (Order No. 841), however, it found that it needed additional information before deciding what action to take regarding DER aggregation reforms. Since then, FERC has held a technical conference on the issue and accepted proposals from the New York and California ISOs for DER aggregation participation.
New DER Aggregation Rule
FERC’s final rule, Order No. 2222, finds that current RTO/ISO market rules present barriers that prevent certain DERs from participating in the markets that are technically capable of participating on their own or through aggregation. Accordingly, FERC modifies its regulations to require each RTO/ISO to revise its tariff to ensure that its market rules accommodate the participation of DER aggregations.
FERC’s order requires each RTO/ISO to establish market rules that address:
- Eligibility of DERs to participate directly in RTO/ISO markets through a DER aggregation. Tariffs must allow different types of DER technologies to participate in a single DER aggregation (i.e., heterogeneous DER aggregations), including those with different physical and operational characteristics.
- A minimum size requirement for an aggregation that does not exceed 100 kW.
- Locational requirements for DER aggregations that are as geographically broad as technically feasible.
- Modifying the resources in a DER aggregation.
- Coordination among the RTO/ISO, aggregator, distribution utility, and relevant electric retail regulatory authorities.
- Market participation agreements.
The new rule allows a single DER to participate in both retail and wholesale programs and allow a DER to provide multiple services in the wholesale market. This raises a concern with double counting a service and overcompensation. Accordingly, FERC requires each RTO/ISO to include appropriate restrictions on DERs’ participation in RTO/ISO markets through distributed energy resource aggregations to avoid double counting of services provided by DERs in the RTO/ISO markets.
Federal-State Jurisdiction Issue
The Federal Power Act gives FERC authority over interstate wholesale sales and transmission of electricity, while the states have authority over generation and distribution facilities as well as retail sales. The participation in FERC wholesale markets of resources on the distribution system or behind a retail customer’s meter raises sensitive jurisdictional issues. Some parties questioned FERC’s authority to impose the adopted reforms regarding resources on the distribution system or sought clarification of federal and state jurisdictional boundaries.
Citing a court opinion upholding its storage participation rule, FERC rejects the jurisdictional challenges, finding its “authority to issue regulations pertaining to distributed energy resource aggregations stems from both the Commission’s jurisdiction over the wholesale sales by distributed energy resource aggregators into RTO/ISO markets and from its jurisdiction over practices affecting wholesale rates.”
FERC declined requests to allow retail regulatory authorities, such as state public utility commissions, or distribution utilities to either authorize or prohibit the participation of DERs and/or DER aggregators in RTO/ISO markets (i.e., to “opt in” or “opt out,” respectively). FERC noted “establishing the criteria for participation in RTO/ISO markets, including with respect to resources located on the distribution system or behind the meter, is essential to the Commission’s ability to fulfill its statutory responsibility to ensure that wholesale rates are just and reasonable.”
Thus, according to FERC’s order, a retail regulatory authority cannot broadly prohibit the participation of all DERs or of all DER aggregators in RTO/ISO markets as that would interfere with FERC’s statutory obligation to ensure that wholesale electricity markets produce just and reasonable rates. Retail regulatory authorities may, however, prohibit DER aggregators from bidding the demand response of retail customers into the wholesale markets. In addition, small utilities, i.e., those that distribute less than 4 million mWh per year, may determine whether they will allow their customers to participate in wholesale aggregations (“opt-in”) or prohibit them to participate in wholesale markets through aggregation (“opt-out”).
Danly dissented from the final rule on two grounds. First, the commission overstepped the extent of its jurisdiction by prohibiting retail regulators from broadly prohibiting the participation of all DERs, or of all DER aggregators, in RTO/ISO markets. Commissioner Danly argued that under the Federal Power Act the states retain authority over the local concerns of choice of generation, siting of transmission lines, and the entirety of retail sales and distribution. FERC’s jurisdiction comes into play where a specific state prohibition collides with FERC’s wholesale rate jurisdiction.
Second, Commissioner Danly argued that the Commission should not encourage resource development by fiat: “If the promises of DERs are what they purport to be, the markets will encourage their development … Commission directives are unnecessary to encourage the development of economically-viable resources.”
There is still a bit of a road to travel before the new DER aggregation rule is fully implemented. First, rehearing requests have been filed. After FERC acts on those requests, any unsatisfied parties may appeal to a Federal Court of Appeals, but an appeal generally does not stop FERC from implementing a rule.
And second, each RTO/ISO must file revised tariffs to comply with the rule by July 19, 2021. Those proposed tariff provisions may raise challenging implementation and other issues that could result in litigation. The proposed tariffs, however, may go into effect while litigation goes forward.
—Bud Earley is a non-lawyer senior advisor who provides analysis and advice on a wide range of federal and state energy regulatory issues for Covington & Burling LLP. Mark Perlis is a seasoned energy and environmental attorney for Covington & Burling LLP, with a broad-based federal regulatory and litigation practice encompassing all aspects of the electric utility industry.