FERC affirms small utility opt-in element of DER aggregation order backed by APPA

by Paul Ciampoli
APPA News Director
March 22, 2021

The Federal Energy Regulatory Commission recently issued an order affirming the small utility opt-in feature supported by the American Public Power Association of a final rule that allows for distributed energy resource (DER) aggregators to compete in regional organized wholesale electric markets.

At the same time,  contrary to APPA’s position, FERC found that demand response resources participating in aggregations with other types of DERs are not subject to the state and local regulator opt-out/opt-in framework that FERC adopted for demand response aggregations in Order Nos. 719 and 719-A.

At its monthly open meeting, FERC issued an order (2222-A) that responded to requests for rehearing and clarification of FERC Order No. 2222, which addresses the participation of distributed energy resource (DER) aggregations in markets administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). FERC approved Order 2222 in September 2020.

In November 2020, APPA and the National Rural Electric Cooperative Association urged FERC to reject objections to a small utility “opt in” mechanism that the Commission adopted in Order No. 2222, a final rule that allows for distributed energy resource (DER) aggregators to compete in regional organized wholesale electric markets. In addition, APPA and NRECA said that FERC should not carve out an exception to the small utility opt-in for energy efficiency resources.

In Order No. 2222-A, FERC considered requests for rehearing and clarification of FERC Order No. 2222. 

Among the important features of Order No. 2222, FERC provided an “opt-in” mechanism for small distribution utilities — including most public power utilities. 

Specifically, the Commission determined that customers of utilities that distributed 4 million MWh or less in the previous fiscal year may not participate in distributed energy resource aggregations unless the relevant electric retail regulatory authority affirmatively allows such customers to participate in distributed energy resource aggregations. The small utility opt-in mechanism was supported by APPA, and FERC affirmed it in Order No. 2222-A. 

Order No. 2222-A also addresses the participation of demand response resources in DER aggregations. 

Under regulations adopted in 2008-2009 in FERC Order Nos. 719 and 719-A, an ISO or RTO may not accept bids from a demand response aggregator of retail customers served by utilities that distributed more than 4 million MWh in the previous year if the relevant electric retail regulatory authority (RERRA) affirmatively prohibits wholesale market participation (opt-out). 

In the case of customers served by utilities that distribute 4 million MWhs or less, the ISO/RTO may not accept bids from an aggregator unless the RERRA affirmatively permits it (opt-in). 

In Order No. 2222, FERC said that demand response resources seeking to participate in DER aggregations would still be subject to the opt-out/opt-in regulations.  FERC modifies this ruling in Order No. 2222-A, concluding that the opt-out/opt-in rules ordinarily applicable to demand response resources would apply only “to aggregations made up solely of resources that participate as demand response resources, consistent with our regulations.” 

The opt-out/opt-in rules will not apply “to demand response resources that participate in heterogeneous distributed energy resource aggregations—i.e., those that are made up of different types of resources including demand response as opposed to those made up solely of demand response.”

Order No. 2222-A clarifies a number of other aspects of FERC’s DER aggregation rules, including jurisdiction over interconnection of PURPA QFs and various implementation issues.

The revisions take effect 60 days after publication in the Federal Register.

Danly, Christie offer dissents

Commissioner James Danly and Commissioner Mark Christie offered dissents to the order.

For his part, Christie said FERC’s majority was doubling down “on siding with commercial interests seeking entry into the RTO/ISO markets and against the states and other authorities whose job is to defend the public, not private, interest. By doing so, the majority also sides against the consumers who for years to come will almost surely pay billions of dollars for grid expenditures likely to be rate-based in the name of ‘Order 2222 compliance.’” (Christie discusses Order No. 2222-A, among other topics, in the most recent episode of APPA’s Public Power Now podcast).

Instead of making the states, municipal and public power authorities and electric cooperatives “truly equal partners in managing the timing and conditions of deployment of behind-the-meter DERs in ways that are sensitive to local needs and challenges — both technical and economic — today’s order denies them any meaningful control by prohibiting any opt-out or opt-in options except in relatively tiny circumstances,” wrote Christie.

“This order — and its predecessor — intentionally seize from the states and other authorities their historic authority to balance the competing interests of deploying new technologies while maintaining grid reliability and protecting consumers from unaffordable costs,” he said.

A rapid concentration of behind-the-meter aggregated DERs at various locations on the local grid “will inevitably require costly upgrades to a distribution grid that has largely been engineered to deliver power from the substation to end-user retail customers. Meeting the technological challenges of this re-engineering of the local grid are not insuperable but there are substantial costs and we all know these costs will ultimately be imposed on retail consumers. States, public power authorities and cooperatives are far better positioned to manage these costs and competing interests in their own areas of responsibility than FERC,” Christie said.

Moreover, he argued that Order No. 2222-A is not “cooperative federalism,” but rather its opposite. “It undermines the overarching policy framework that Congress incorporated into the Federal Power Act decades ago: federal regulation of wholesale rates and the bulk power system; state regulation of retail rates and the local distribution grid,” he wrote in the dissent.

“Any argument that allowing state policies to determine the entry of aggregated DERS into capacity or other markets will result in a ‘checkerboard’ or ‘patchwork’ of different policies, is an argument against state authority itself. The existence of fifty states by definition means a patchwork of 50 state retail regulatory structures, but that goes with the territory in our constitutional structure and is entirely consistent with the Federal Power Act’s basic division of federal and state authority. This panoply of diverse state policies is exactly what Justice Brandeis celebrated when he recognized states as laboratories of democracy.”

While encouraging the development of DERs “is a good thing, eviscerating the states’ historic authority in the name of encouraging DER development is not,” Christie said.

“On the contrary, it is the states and other local authorities that are far better positioned than FERC to manage successfully the development and deployment of DERs in ways that serve reliability needs, that protect consumers from inflated costs, and that are far more sustainable in the long run.”

For his part, Danly said he was “dissenting from this order on rehearing of Order No. 2222, the Commission’s distributed energy resource aggregations mandate, for the same reasons that I dissented from the original. It oversteps the reasonable exercise of the Commission’s authority at the expense of the states.”

Danly acknowledged the recent cases upon which the Commission relies to exercise its jurisdiction in the order, “but these cases concerned whether the Commission possesses claimed authority, reserving the question of whether the Commission has discretion to exercise it. Clearly the Commission has the power, exclusive jurisdiction or not, to establish a state opt-out.”

He would “decline to exercise our jurisdiction to obstruct the states from asserting authority over distributed energy resource aggregations. The Commission owes fidelity to the clear division of jurisdiction between the federal government and the states, a due regard for federalism that is embedded in the very structure of the Federal Power Act. This order unnecessarily invades an area best left to the states, burdening them with another of our Good Ideas, the details of which we leave them to figure out, and the burdens of which we leave to them to bear.”

FERC issues NOI

In related action, FERC on March 18 also issued a notice of inquiry on the potential impacts of eliminating the ability of states to prevent demand response resources from participating in organized wholesale markets.

FERC is asking whether the circumstances relevant to this demand response opt-out have changed since the opt-out was established in Order Nos. 719 and 719-A, and what are the potential benefits or burdens of removing it.

Comments are due 90 days after publication in the Federal Register, with reply comments due 30 days after that.

Glick     

In comments at the Commission meeting, FERC Chairman Richard Glick praised Order No. 2222-A as a further improvement to the rules adopted in Order No. 2222. 

“By allowing demand response providers located in states that have opted out of Order No. 719 to participate as part of a DER aggregation as long as other DER technologies are included in the aggregation, the Commission is further expanding our opportunities for DER aggregation in our wholesale markets,” he said at the meeting.

With respect to the NOI, “a lot has changed” since Order No. 719 was first issued “and I think it is prudent for us to reconsider whether the opt out remains appropriate,” he said.

“I recognize that certain state regulators have been frustrated with the” approaches FERC has taken over the last several years, specifically in Order No. 841, which dealt with energy storage, and Order No. 2222.

“With regards to the potential participation of behind-the-meter resources in RTO and ISO wholesale markets, it is not a simple matter,” Glick said. “FERC has the duty pursuant to the Federal Power Act to eliminate undue discrimination in terms of access to jurisdictional wholesale markets. The states have a legitimate interest in ensuring the reliability of their distribution systems.”

Some are concerned that the participation of behind-the-meter resources in wholesale markets will make it more difficult for the states to address distribution reliability, Glick said.

In his view, the states still retain important tools such as jurisdiction over DER interconnections and the ability to condition DER participation in retail markets in a manner that ensures DER participation in wholesale markets won’t impair reliability.

“But we need to continue this dialogue with our state colleagues, which I am very much committed to doing,” he said. “This Commission over the last several years has run roughshod over the states’ responsibilities over resource decision making all in an effort to raise prices in mandatory capacity markets.”

In his comments at the meeting, Commissioner Christie said that if he were to describe the order in one word it would be hubris. “It’s based on the belief that the members of this Commission know better how to manage the complicated issues of timing, grid reliability and the costs of behind-the-meter DER deployment than all the state regulators in all the fifty states who, by the way, are tasked with defending the public interest just like we are here at FERC. Better than all the dedicated people who run the public power and the municipal power authorities. Better than all the dedicated people who run the electric coops do,” he said.

“And it’s based on the false belief that state regulators, public power authorities, municipal power authorities and coops are opposed to behind-the-meter DER deployment, and so these people can’t be trusted to manage the deployment of DER deployment and I know that’s just not true,” Christie said.

“States have been dealing with these issues for years and taking the lead in DER deployment. So have the munis, so have the public power authorities, so have the coops,” he said.

“Consumers are going to pay a lot for this,” Christie said.

Investor-owned utilities are “going to seek to put billions of dollars into rate base and the argument to the state regulators will be, oh, we have to do this to comply with FERC’s Order 2222 and so you state regulators have to approve it. And as a former state regulator who sat on a lot of rate cases, I’ve heard this argument before and it’s very hard – frankly it’s almost impossible – for a state regulator to deny cost recovery when the utility says we have to spend this money to comply with federal regulations. That’s a very hard argument to rebut and so the costs of this are going to be substantial.”

Prior to becoming a FERC Commissioner, Christie served as a Chairman and Commissioner with the Virginia State Corporation Commission.