In  two recent orders, the Federal Regulatory Energy Commission (FERC) continued its push to 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 may aggregate multiple small DERs as a single resource to compete in the market.

Responding to rehearing requests, a divided FERC largely upheld its landmark Order No. 2222,  which requires the tariffs of Regional Transmission Organizations (“RTO”) and Independent System Operators (“ISO”) to include provisions specifically aimed at allowing DER aggregators to participate in the organized wholesale markets.  However, FERC scaled back a provision that allowed retail regulators to prohibit DER aggregators from bidding the demand response of retail customers into wholesale markets.  The rehearing order withdraws that opt-out provision with respect to aggregations that include both demand response and other types of resources, but allows the opt-out to apply to aggregations of solely demand response resources.

FERC’s opt-out provision for aggregations of demand response resources is rooted in its established policy allowing retail regulators to prohibit demand response resources from bidding into wholesale markets.  In a separate order, FERC opened a proceeding to consider eliminating that opt-out provision as well.

Commissioners Danly and Christie are not on board with trimming the scope of the opt-out provision, and, in separate statements, said they would expand the opt-out provision.

FERC’s orders 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.

Order No. 2222 rehearing

Background

As discussed in a prior post to this blog, Order No. 2222 requires that RTO/ISO market rules accommodate the participation of DER aggregations.  Those rules must address such things as: (1) the eligibility of DERs to participate directly in RTO/ISO markets through an aggregation, (2) locational requirements for DER aggregations that are as geographically broad as technically feasible; and (3) coordination among the RTO/ISO, DER aggregator, distribution utility, and relevant electric retail regulatory authorities.

The participation in FERC wholesale markets of resources on the distribution system or behind a retail customer’s meter raises sensitive Federal-state jurisdictional issues. 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.  In Order No. 2222, FERC rejected challenges to its authority to impose the proposed reforms and rejected requests to allow retail regulatory authorities 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 did agree, however, to allow retail regulatory authorities to prohibit DER aggregators from bidding the demand response of retail customers into the wholesale markets (i.e., to opt out).

The rehearing order

FERC’s rehearing order (Order No. 2222-A) provides a few clarifications but upholds the provisions of Order No. 2222, except for the opt-out provision allowed to retail regulatory authorities.  In response to rehearing requests, the Commission excluded from the opt-out provision “heterogeneous” DER aggregations, i.e, those made up of different types of resources including demand response as opposed to those made up solely of demand response.

The basis of the opt-out provision is FERC’s 2008 Order No. 719, which required RTOs/ISOs to permit aggregators to bid retail customer demand response directly into their wholesale markets.  To alleviate concerns of retail regulatory authorities, FERC allowed retail regulatory authorities to prohibit retail customer demand response from being bid into RTO/ISO markets by aggregators.

In excluding heterogeneous aggregations that include demand response from the opt-out provision, the rehearing order found that heterogeneous aggregations “do not fall squarely within the Order No. 719 opt-out …because they are not solely aggregations of retail customers.”  In addition, the rehearing order notes that DER aggregations take advantage of the different resources’ operational attributes and complementary capabilities.  Ensuring that demand response resources can combine with other forms of distributed energy resources has the potential to enhance competition and further FERC’s mandate to ensure just and reasonable rates.

FERC found, however, that DER aggregations of only demand response resources is “materially indistinct” from the aggregations of retail customers allowed by the Order No. 719 opt-out. Accordingly, that opt-out will continue to apply to those aggregations.

Dissents

Commissioners Christie and Danly issued separate dissents to the rehearing order.

Commissioner Christie, a former state regulatory commissioner, disagrees with trimming back the opt-out provision and would instead allow a full opt-out for all load serving utilities.  He argues that the order “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.”  The dissent also argues that the substantial costs of behind-the-meter aggregated DERs at various locations on the local grid will ultimately be imposed on retail consumers, and retail regulatory authorities are better positioned to manage these costs and competing interests than FERC.

Commissioner Danly dissented from the rehearing order for the same reasons that he did regarding Order No. 2222: it “oversteps the reasonable exercise of the Commission’s authority at the expense of the states.”  He would prefer “that the Commission stay out of the way when it can—as it certainly can here—and let the states exercise their own authority to the maximum extent possible over distribution systems and retail sales.”

Eliminating the demand response opt-out provision

FERC also issued a Notice of Inquiry (NOI) seeking comments on the potential impacts of removing the demand response opt-out provision entirely.

In Order No. 719, FERC found that permitting retail customer aggregator participation in RTO/ISO markets would increase competition, help reduce prices to consumers, and enhance reliability.  Accordingly, the Commission required RTO/ISO market rules to permit aggregators to bid retail customer demand response directly into their wholesale markets.  To alleviate concerns of retail regulatory authorities, FERC allowed retail regulatory authorities to prohibit retail customer demand response from being bid into RTO/ISO markets by aggregators.

The NOI notes that since Order No. 719, FERC has issued rules relating to other types of demand-side resources and resources located on the distribution system or behind a retail customer meter and has consistently declined to adopt a similar opt-out mechanism, finding that that the benefits of allowing such broader access to RTO/ISO markets are outweighed by any policy considerations in favor of an opt-out.  In addition, there have been significant improvements in the technology that aggregators offer to retail customers.  In light of changed circumstances, the NOI notes that the  balance of interests underlying the opt-out may have shifted and the opt-out may no longer be just and reasonable.

Separate statements

Commissioner Christie dissented from the NOI order, stating that the ”end game is to repeal or severely restrict the ‘opt-out’ provisions of Order Nos. 719.”  The dissent notes that eighteen states have chosen to use the opt-out provision, and FERC should respect those state policy decisions.

Commissioner Danly concurred.  Although opposed to eliminating the opt-out provision, Commissioner Danly recognizes FERC “has the discretion to issue a Notice of Inquiry (NOI) on any topic within its purview.”  In the comments to be filed, Commissioner Danly is interested in evidence on whether wholesale demand response aggregation programs are providing reliability benefits commensurate with their costs.  He notes that “anecdotal evidence suggests their performance during times of strain may be poor, and perhaps terrible.”

Comments in response to the NOI are due 90 days after date of publication in the Federal Register, and reply comments are due 120 days after date of the NOI’s publication in the Federal Register.

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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.