The Federal Energy Regulatory Commission (FERC) provided itself an early holiday present by extending its jurisdictional reach in Advanced Energy Economy (AEE),[1] further blurring the lines with regard to just how far FERC’s jurisdiction extends vis-à-vis state authority over retail matters and customers. In AEE, FERC stated that it has exclusive jurisdiction under the Federal Power Act (FPA) to regulate the participation of certain energy efficiency resources (EERs)[2] in wholesale electricity markets. In doing so, FERC effectively modified its demand response orders (Order Nos. 719[3] and 745[4]) by stating that its grant to state retail regulatory authorities (RERRAs) to opt-out from allowing retail resources (i.e., retail customers) to participate in wholesale demand response markets was wholly voluntary.[5] As to EERs, FERC included no opt-out provision for RERRAs (i.e., states), with the exception of Kentucky for which FERC grandfathered a pre-existing Kentucky opt-out.

This decision is important because FERC clarified that it believes that it has the legal authority to alter Order Nos. 719 and 745 by removing the opt-out option reflected in those demand response regulations.[6] In Order No. 719, the source of the opt-out provision, FERC did not claim legal authority to remove such opt-out clause, stating that its “intent was not to interfere with the operation of successful demand response programs, place an undue burden on state and local retail regulatory entities, or to raise new concerns regarding federal and state jurisdiction.”[7] That is, FERC’s position at the time it adopted the opt-out provision was that it was doing so, in part, to clarify that it was not challenging the jurisdictional authority of states. Now, FERC says that it could remove the opt-out clause from the demand response regulations and states cannot prevent it from doing so on jurisdictional grounds.

In arguing that the its order in AEE is lawful despite the lack of an opt-out clause (and that Order Nos. 719 and 745 would be as well), FERC relies on the Supreme Court’s holding in EPSA[8] that “[a]lthough claiming the ability to negate such state [opt-out] decisions, the [FERC] chose not to do so in recognition of the linkage between wholesale and retail markets and the States’ role in overseeing retail sales.”[9] The majority opinion in EPSA, however, made clear that the opt-out or “veto” provision was a reason that any jurisdictional challenge to Order No. 745 should fail. The Court noted that the opt-out provision gave the states the means to block any resulting increases in retail rates demand response programs might produce and that “[w]holesale demand response as implemented in the Rule is a program of cooperative federalism, in which the States retain the last word.”[10] According to the Court, the opt-out power removed “any conceivable doubt as to its compliance with § 824(b)’s allocation of federal and state authority.”[11] In short, the EPSA court did not find that the demand response orders were a necessarily lawful exercise of jurisdiction without the opt-out provision.[12] FERC now has declared such orders would be lawful, just as the AEE order is lawful, without a mandatory state opt-out provision.

In sum, AEE further shrinks FERC’s view of what matters were left to the states under FPA Section 824. And, it raises the issue of whether Order Nos. 719 and 745 would be lawful assertions of jurisdiction by FERC absent the opt-out provisions. With several preemption cases pending in the courts regarding state actions that impact wholesale markets, any FERC order interpreting the scope of its jurisdiction versus state jurisdiction should be carefully monitored.