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FERC Limits the Retail Regulator "Opt-Out" from Demand Response Participation in Wholesale Markets and Considers Further Limitations

On March 18, 2021, the Federal Energy Regulatory Commission (FERC or Commission) issued two orders relating to the rules for “behind-the-meter” resource participation in wholesale markets. Both orders centered on FERC’s earlier decision in Order No. 719 to allow state and other retail regulatory authorities to “opt-out” of Regional Transmission Organization (RTO)/Independent System Operator wholesale demand response programs (Opt-Out). First, Order No. 2222-A clarified that demand response resources are not eligible for the Opt-Out when they participate in aggregations of distributed energy resources (DER) that include other resource types.  In addition, FERC issued a notice of inquiry (NOI) seeking public comment on whether to remove the Opt-Out entirely. 

While Order No. 2222-A largely affirms the findings of Order No. 2222, the order sets aside, in part, the finding that participation of demand response resources in heterogeneous DER aggregations (i.e., aggregations containing multiple types of DER) is subject to the Opt-Out adopted in Order Nos. 719 and 719-A. Although FERC removed the ability for state and other retail regulatory bodies to elect the Opt-Out for aggregations of demand response and other types of DER, DER aggregations that are composed solely of demand response resources will continue to be eligible for the Opt-Out.  

Notably, Commissioner Mark Christie, who served as a Virginia utility regulator before joining FERC, issued a dissenting opinion arguing that the removal of heterogeneous DER aggregations from the Opt-Out is a violation of state’s rights, and highlighted the potentially negative effects of the removal on municipal and public power providers and ratepayer costs. For similar reasons, Commissioner James Danly also dissented.

FERC based its decision in Order No. 2222-A to take away the Opt-Out for demand response resources that are aggregated with other types of DER on three factors. As an initial matter, FERC explained that extending the Opt-Out to demand response resources in heterogeneous DER aggregations would undermine the potential of Order No. 2222 to break down barriers to competition by giving state and retail regulators the ability to remove all such aggregations from wholesale markets.  Further, the Commission reasoned that allowing demand response resources to combine with other forms of DER has the potential to increase the number and the variety of DER aggregations, thereby enhancing competition and helping to ensure rates are just and reasonable. Finally, according to the Commission, applying the Opt-Out to heterogeneous aggregations could prevent DER aggregators from combining the complementary capabilities of existing and future demand response technologies.  The Commission also found that precluding demand response from participating in heterogeneous DER aggregations would undermine the Commission’s goal of ensuring a technology-neutral approach to DER aggregations.

The Commission’s NOI represents a step further in examining the efficacy of the Opt-Out.  Noting that it has been more than a decade since the Commission established the Opt-Out in Order Nos. 719 and 719-A, the NOI seeks comments on whether to remove the state Opt-Out from RTO demand response programs entirely. The NOI cites legal and technological changes that have occurred since Order Nos. 719 and 719-A that have caused FERC to reconsider the Opt-Out. The Commission also noted an October 2020 complaint challenging the Opt-Out as applied in the Midcontinent Independent System Operator, Inc. region. 

The NOI requests comments on:

  1. Whether and how circumstances relevant to the Opt-Out have changed since Order No. 719 was issued;
  2. The potential benefits of removing the state Opt-Out; and
  3. The potential burdens that would result from removal of the state Opt-Out.

The NOI specifically does not seek comments on a related “opt-in” FERC adopted in Order Nos. 719 and 719-A that is available to regulators of small utilities (less than 4 million MWh of annual sales).  Comments on the NOI are due on June 23, 2021, and reply comments are due on July 23, 2021.