Energy Efficiency Resources — the Latest Battleground in FERC-State Jurisdictional Conflicts

by Cozen O'Connor

Cozen O'Connor

The goals of restructured wholesale electric markets often conflict with state electric goals. In 2016, the U.S. Supreme Court addressed two of these conflicts; (1) regulation of demand response; FERC v. Electric Power Supply Ass’n.1 (participation by demand response resources in FERC jurisdictional markets is not the regulation of retail sales subject to state jurisdiction) and (2) state subsidies for new generation; Hughes v. Talen2 (ruling that states cannot subsidize new generation in a manner that affects FERC jurisdictional wholesale capacity markets). State subsidies to keep nuclear facilities operating have spawned numerous FERC complaints and federal district court litigation. There is a pending open FERC docket, Docket No. AD17-11-000, State Policies and Wholesale Markets Operated by ISO New England Inc., New York Independent System Operator, Inc., and PJM Interconnection, L.L.C., where the issue is reconciling state policies on generation — primarily new renewables but also existing nuclear — with the existing wholesale power markets in the Northeast, specifically the proper functioning of FERC jurisdictional capacity markets.

The latest conflict — the jurisdiction over the resources obtained from energy efficiency improvements.

  • The battleground — a petition for declaratory order filed June 2, 2017, by Advanced Energy Economy (AEE), a trade association representing energy efficiency resources (EERs) in FERC Docket No. EL17-75
  • The resources at issue — energy efficiency resources;3 aggregating energy efficiency improvements and then selling those improvements as a product in the wholesale market, specifically capacity.4
  • The issue — whether states can prevent the energy efficiency resources in their state from participating in the wholesale market, particularly the capacity market. 
  • The combatants — AEE, East Kentucky Power Company (EKPC), the Kentucky Public Service Commission (KPSC), and PJM.

Early skirmishes occurred at the KPSC and PJM. EKPC filed a petition with the KPSC5 asking that the KPSC prohibit EERs from participating in the PJM market except under a tariff or special contract approved by KPSC.6 EKPC also asked PJM to prohibit the EERs in their service territory from participating in the PJM wholesale market unless the KPSC approved. PJM initiated a stakeholder process that would prevent EERs from participating in the future (and if necessary provide a process for wiping out current capacity commitments) if a state restricted its EERs from participating in the wholesale market.7

The AEE responded to PJM’s actions by filing its petition asking FERC to exercise jurisdiction over wholesale EERs (and stop the stakeholder process.)The petition seeks a FERC declaration:

  1. That under the Federal Power Act, the Commission has exclusive jurisdiction over the rates, terms, and conditions under which Wholesale EERs are sold in wholesale electricity markets;9 and
  2. That an RERRA may not bar, restrict, or otherwise condition the participation of Wholesale EERs in wholesale electricity markets unless the Commission expressly adopts rules or regulations giving states and retail regulators such authority.10

FERC Docket No. EL17-75. Comments due July 5, 2017.

A key issue in the case will be whether EERs are just another form of demand response. If FERC decides EERs are a form of demand response, they will likely find that (i) a state can prohibit its EERs from participating in the wholesale market — the same as demand response resources — and (ii) more specific to Kentucky, that allowing EERs in EKPC’s service territory to participate in the PJM wholesale market, without KPSC approval, would be inconsistent with the KPSC decisions integrating EKPC’s assets into PJM.11

EKPC and the Kentucky PSC are likely to argue that EERs are the same as demand response. Both involve retail customers reducing load — the only difference being one of timing, demand response being a temporary reduction by the retail customer, energy efficiency being a permanent reduction by the retail customer. As the KPSC decision says:

In basic terms energy efficiency produces a similar result as demand response: both reduce a customer's load which, in sum, reduces demand on the utility supplier’s system. They differ in the respect that energy efficiency is typically a permanent reduction in load, while demand response is typically a temporary reduction or shifting of the load during certain hours of the day. However, both have the same impact by reducing the load of the supplying utility.12

The AEE will counter that while the resources may have developed from the load of retail customers, there is no nexus with or connection to state-regulated retail electric service; specifically (i) EERs are developed separate and apart from any purchases or sales of retail electricity, (ii) retail customers are not dispatched to produce those resources, and (iii) there is no ongoing communications or relationships with retail customers.13

1 FERC v. Elec. Power Supply Ass'n, 136 S. Ct. 760; 193 L. Ed. 2d 661 (2016) (FERC can set the payments in the wholesale market for demand response commitments because demand response directly affects wholesale rates)

2 Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288; 194 L. Ed. 2d 414 (2016). The Talen Court left open the question as to what form of state subsidies would be appropriate. As the court said, “[w]e reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC … So long as a State does not condition payment of funds on capacity clearing the auction, the State’s program [the state subsidy program] would not suffer from the fatal defect that renders Maryland’s program unacceptable.” Slip op. at 15. Answering that open question has resulted in further litigation at FERC and in the courts, particularly in the context of state subsidies for nuclear facilities.

3 Section L.1 of Schedule 6 of PJM’s Reliability Assurance Agreement defines an “Energy Efficiency Resource” as:

a project, including installation of more efficient devices or equipment or implementation of more efficient processes or systems, exceeding then-current building codes, appliance standards, or other relevant standards, designed to achieve a continuous (during peak summer and winter periods as described herein) reduction in electric energy consumption at the End-Use Customer’s retail site that is not reflected in the peak load forecast prepared for the Delivery Year for which the Energy Efficiency Resource is proposed, and that is fully implemented at all times during such Delivery Year, without any requirement of notice, dispatch, or operator intervention.

4 The AEE Petition at 5 explains:

Wholesale EERs can be created by commercial arrangements to facilitate the sale of energy efficient products (such as more efficient light bulbs) to consumers. By facilitating the sale of energy efficient products, providers of Wholesale EERs acquire beneficial attributes (e.g., the expected electricity reductions from the use of such products) that can be packaged and offered as EERs into certain wholesale markets under Commission-approved tariffs and market rules (e.g., as capacity resources in some RTO/ISO capacity markets, including PJM).

5 East Kentucky Power told the PSC that, absent PSC approval, East Kentucky Power Company would overbuy capacity in PJM by the amount of the phantom energy efficiency resource.

6 On June 6, 2017, after the filing of the FERC AEE petition, the KPSC ruled on the EKPC petition. See Application of East Kentucky Power Cooperative, Inc. for a Declaratory Order Confirming the Effect of Kentucky Law and Commission Precedent on Retail Electric Customers’ Participation in Wholesale Electric Market, Case No. 2017-00129, issued June 6, 2017 (KPSC Decision.) While the KPSC said that it “is not asserting any jurisdiction over third parties involved in aggregating or bidding EER in PJM markets,” KPSC Decision at 20, the KPSC did take action to prevent retail customers from participating with aggregators. The KPSC said, that “[a]ny Kentucky retail customer that participates directly or indirectly in any wholesale electric market in the absence of authorization under a tariff or contract with the Commission is in violation of Kentucky statutes and Commission Orders and is subject to termination of service by its retail electric supplier under 807 KAR 5:006, Section 15.” Id.

7 The KPSC Decision said the PJM response to initiate a stakeholder process appeared “weak and hollow” adding “[r]ather than stating a definitive plan whereby PJM itself will quickly correct this situation, PJM seems to be content to pass the problem off to a committee of PJM’s stakeholders for their review and determination of whether any remedy is warranted.” KPSC Decision at 21.

8 The petition asserts that the “the stakeholder process is an inappropriate vehicle to initiate a request that the Commission cede or share some of its exclusive jurisdiction over wholesale market participation with States and other retail regulators.” AEE Petition at 32.

9 AEE Petition at 8.

10 Id.

11 Adding firepower to the battle, as a result of EKPC EER dispute, the KPSC said it was considering whether to order EKPC, Kentucky Power, and Duke Kentucky to leave PJM saying the “issues raised in this case [the EER case] cause us to question whether a change needs to be made in the functional control of transmission assets due to PJM’s actions that are inconsistent with Kentucky’s regulated electric market.” KPSC Decision at 21. The KPSC put that decision off pending further action by PJM.

12 KPSC Decision at 19.

13 See generally AEE Petition at 15-16.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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