The FERC approved a final rule that will enable distributed energy resource (DER) aggregators to compete in organized wholesale electricity markets.  DERs are located on the distribution system or behind the customer meter and include electric storage resources, intermittent generation, distributed generation, demand response, energy efficiency, thermal storage, and electric vehicles and their charging equipment.  Aggregators will now 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 (“RTOs”) and Independent System Operators (“ISOs”) to revise their tariffs to include provisions specifically aimed at allowing DER aggregators to participate in the organized wholesale markets.  The rule also bars state retail regulators from prohibiting such participation, with one exception discussed herein.

FERC Chairman Chatterjee characterized the new rule as “a landmark, foundational rule that paves the way for the grid of tomorrow.”  Commissioner Danly, however, dissented from the rule, saying FERC is exceeding its authority in barring state retail regulators from preventing aggregator participation in wholesale markets.

FERC’s rule should be of interest to a wide range of electricity market participants, including utilities, generation companies, investors in storage and other electricity resources and electricity customers.

Background

FERC first proposed to allow DER aggregators to participate in organized electricity markets as part of its proceeding to remove barriers to the participation of electric storage resources.  The 2016 proposal recognized that individual DERs may be too small to participate directly in the organized wholesale electric 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 all of the operational performance requirements.

The proposed rule on storage participation would have required each RTO/ISO to allow DER aggregations, including electric storage resources, to participate directly in the wholesale electric markets under rules that best accommodate the physical and operational characteristics of the aggregation.  When FERC issued its final rule on storage participation in 2018,[1] 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 two RTOs for DER aggregation participation.

The 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 modified its regulations to require each RTO/ISO to revise its tariff to ensure that its market rules accommodate the participation of DER aggregations.

Each RTO/ISO must 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, DER aggregator, distribution utility, and relevant electric retail regulatory authorities; and
  • Market participation agreements.

The new rule allows a single DER to participate in both retail and wholesale programs and be compensated in each for providing distinctly different services.  This raises a concern with establishing a method to identify duplicate services.  To address this, FERC grants RTOs/ISOs flexibility with respect to implementing restrictions to minimize market impacts caused by the double counting of services provided by distributed energy resources in the RTO/ISO markets.

Federal-state jurisdiction

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 proposed reforms or sought clarification of federal and state jurisdictional boundaries.

Citing prior court opinions, 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.”[2]  Accordingly, FERC found that:

  • Sales of electric energy by DER aggregators into an RTO/ISO market are wholesale sales subject to FERC’s jurisdiction.
  • RTO/ISO market rules governing sales in their markets by DER aggregators from demand resources (e.g., demand response and energy efficiency) are practices affecting wholesale rates.

FERC also clarified that:

  • To the extent a DER aggregator makes sales of electric energy into RTO/ISO markets, it will be considered a public utility subject to FERC’s jurisdiction
  • An individual resource’s participation in a DER aggregation would not cause that resource to become subject to requirements applicable to Commission-jurisdictional public utilities.

FERC declined requests to allow retail regulatory authorities 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, a retail regulatory authority cannot broadly prohibit the participation in RTO/ISO markets of all DERs or of all DER aggregators as that would interfere with FERC’s statutory obligation to ensure that wholesale electricity markets produce just and reasonable rates.[3]  Retail regulatory authorities may, however, prohibit DER aggregators from bidding the demand response of retail customers into the wholesale  markets.  In addition, noting the potentially greater burden on small utility systems, FERC will allow an opt-in mechanism for small utilities, i.e., those that distribute less than 4 million mWh per year.

Commissioner Danly’s dissent

Commissioner James 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 in RTO/ISO markets of all DERs, or of all DER aggregators.  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, where FERC is  “armed with principles of federal preemption and the Supremacy Clause.”

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.”

FERC’s DER aggregation rule will become effective 60 days after the date of publication in the Federal Register, and each RTO/ISO must file the tariff changes needed to implement the requirements of the rule within 270 days after such publication.

[1] Electric Storage Participation in Markets Operated by Regional Transmission Organizations & Independent System Operators, Order No. 841, 83 FR 9580, 162 FERC ¶ 61,127, at P 78 (2018), order on reh’g, Order No. 841-A, 84 FR 23902, 167 FERC ¶ 61,154 (2019), aff’d sub nom. Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC, 964 F.3d 1177 (D.C. Cir. 2020).

[2] FERC cites Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC, 964 F.3d at 1186 (“FERC bears the responsibility of regulating the wholesale market, which encompasses ‘both wholesale rates and the panoply of rules and practices affecting them.’”) (quoting EPSA, 136 S. Ct. at 773).

[3] FERC cites id. at 1187.

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Photo of Bud Earley Bud Earley

Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers…

Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers, a natural gas pipelines and hydroelectric facility licenses, and LNG export authorizations.

Working with Covington teams, Mr. Earley has provided expert advice and analysis to investment firms, utilities, independent power producers, project developers, customers, marketers and U.S. and international energy companies,

Prior to joining Covington, Mr. Earley served for over 30 years in various staff positions at the Federal Energy Regulatory Commission (FERC). While at the FERC, Mr. Earley was instrumental in developing and applying policies regarding the transition of the electric utility industry to competition, including policies regarding independent power producers, transmission access, standard generator interconnection procedures, organized electricity markets, mergers and market-based rates.