Reed Smith Client Alerts

The D.C. Circuit recently held that the Federal Energy Regulatory Commission (Commission or FERC) did not exceed its jurisdiction under the Federal Power Act (FPA) by barring states from “broadly prohibiting” the participation of energy storage resources (ESRs) in electric wholesale markets. The D.C. Circuit’s opinion in National Association of Regulatory Utility Commissioners v. FERC (NARUC) upheld the Commission’s efforts to remove barriers to the participation of ESRs in organized wholesale markets in Order Nos. 841 and 841-A (Order No. 841).1

In 2018, the FERC issued Order No. 841 to remove barriers to participation for ESRs in the Independent System Operator (ISO) and the Regional Transmission Organization (RTO) organized wholesale markets. Order No. 841 required the ISOs and RTOs to draft new rules that would ensure that ESRs would be able to provide their services in the markets. FERC held that its actions with respect to ESRs did not exceed its jurisdiction under the FPA because as the regulator of the organized markets, FERC has the authority to determine which resources may participate in those markets. FERC also stated that Order No. 841 did not intrude on states’ ability to regulate distribution systems by prohibiting states from preventing ESRs from participating in the wholesale markets.

The petitioners in NARUC argued that Order No. 841 exceeded FERC’s FPA authority because the limitation on states’ ability to prohibit the participation of ESRs in wholesale markets impinged upon their ability to regulate electric distribution within their states. The petitioners also argued that FERC’s refusal to allow states to opt out of the new participation requirement was arbitrary and capricious.

The D.C. Circuit held that FERC did not exceed its authority under the FPA in Order No. 841. In determining whether FERC exceeded its authority, the court conducted a three-part analysis in which it determined whether: (1) FERC’s mandate in Order No. 841 had a direct effect on wholesale rates; (2) FERC’s action in Order No. 841 amounted to unlawful regulation of state facilities; and (3) the court’s determination would interfere with the FPA’s statutory purpose of enhancing reliability and restraining prices in the wholesale market. As for the first prong, the court concluded that FERC’s prohibition in Order No. 841 directly affected wholesale rates, noting that FERC’s authority to regulate the wholesale markets included the authority to regulate wholesale rates as well as rules and practices affecting such rates. With respect to the second prong, the court found that due to FERC’s exclusive authority to determine wholesale market participation, the Supremacy Clause barred states from interfering with FERC’s authority. Order No. 841 will not prevent states from exercising jurisdiction over the distribution system facilities. In addressing the third prong, the court concluded that its determination does not interfere with the FPA’s purpose as FERC did not exceed its authority or impede upon the states’ statutory authority.

The D.C. Circuit also held that FERC’s decision to preclude states from opting out of the new participation requirement was not arbitrary and capricious. The court concluded that FERC adequately explained its decision to prohibit an opt-out in Order No. 841.

  1. National Association of Regulatory Utility Commissioners v. FERC, No. 19-1142, slip op. (D.C. Cir. July 10, 2020).

Client Alert 2020-452