On Friday, July 10, 2020, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) upheld the Federal Energy Regulatory Commission’s (“FERC”) Order Nos. 841 and 841A, which established a framework for electric storage resources’ (“ESRs”) participation in wholesale markets. The D.C. Circuit rejected the petitioners’ arguments that FERC exceeded its jurisdictional boundaries and intruded on regulatory matters left to the states in prohibiting states from barring ESRs located on their distribution and retail systems from participating in federal markets. The D.C. Circuit also held that FERC’s orders were not arbitrary and capricious, and that FERC adequately explained its decision to reject a state opt-out, a feature present in previous FERC programs addressing demand-response participation in wholesale markets.

In holding that FERC’s prohibition on state-imposed bans on local ESR participation in federal markets directly affects wholesale rates, the D.C. Circuit explained: “Keeping the gates open to all types of ESRs – regardless of their interconnection points in the electric energy systems – ensures that technological advances in energy storage are fully realized in the marketplace, and efficient energy storage leads to greater competition, thereby reducing wholesale rates.” The D.C. Circuit concluded that FERC did not unlawfully regulate matters left to the States: “There is little doubt that favorable participation models will lure local ESRs to the federal marketplace, which will require use of States’ distribution systems, but that is the type of permissible effect of direct regulation of federal wholesale sales that the FPA allows. . . . Nothing in Order No. 841 directly regulates those distribution systems.” The court noted that states retain their authority to prohibit local ESRs from participating in both the interstate and intrastate markets simultaneously, retain their authority to impose safety and reliability requirements, and remain unimpeded in their ability to manage utilities and allocate costs incurred in operating and maintaining their systems. Finally, the court concluded that FERC adequately explained its refusal to permit a state opt-out, determining that burdens on the states were outweighed by the benefits of increased participation of ESRs in wholesale markets.