New paper – The Case Against Direct FERC Regulation of Distributed Energy Resources – environment.law.harvard.edu/wp-content/upl…
The utility business model and power generation industry are built upon a century-old legal regime that does not contemplate DERs. At the state level, some legislatures have filled the gap in traditional public utility laws with demand response, net metering, and other programs.
Congress has been largely silent, so FERC is in the process of fitting DER sales into an 85 year old law. Thus far it has not attempted to directly regulate DER sales; rather, it is inviting aggregations of DERs to sell to RTOs (i.e. demand response rules)
Congress gave FERC authority over wholesale sales of power “in interstate commerce.” Its longstanding position is that energy transfers that offset retail consumption are under state authority – hence, state net metering programs.
Other energy transfers – regardless of location or amount – are under FERC’s authority. However, most energy-generating DERs can be regulated by states pursuant to PURPA. But some energy-injecting DERs don’t qualify for PURPA (i.e. grid-connected batteries).
The result is that the ratemaking regime varies based on technology and whether the DER is behind-the-meter. Here is a decision tree to figure out what ratemaking regime governs a particular DER energy sale: 
This fractured regulatory framework imposes inconsistent ratemaking criteria on DER energy sales and forces them into fragmented and incompatible markets.
Rates based on administrative frameworks not designed for DERs may inhibit competition among DER providers and fail to capture the values DERs provide to the grid.
In practice, FERC has not filed suits to preempt state DER programs. But existing programs exist under a cloud of legal uncertainty and states considering new DER markets are likely to design them w/in the confines of decades old jurisdictional lines that were not drawn for DERs.
FERC can simplify this mess by disclaiming jurisdiction over DER energy sales. Doing so would allow states to regulate initial DER sales, regardless of resource type or location.
FERC’s key legal move would be to clarify the meaning of “in interstate commerce.” Because power used to flow in only one direction, courts have understood the phrase literally – FERC has jurisdiction when power crosses state lines.
There is no case holding that FERC has jurisdiction over sales of locally produced energy transferred on the distribution grid to a local buyer. I briefly lay out a case for state authority; this paper provides an in-depth analysis - eba-net.org/assets/1/6/15-…
FERC's jurisdiction should not be defined by the exceptional case of DER-generated energy flowing up to high-voltage network.
There are a few reasons why it makes sense for states to have authority over these sales. First, many of the costs and benefits of DER energy sales will be borne by local ratepayers. FERC can’t allocate these costs or price the benefits in rates.
Second, FERC has no authority to create a unified DER framework. Even if it preempted net metering (which it probably can’t do legally), states would still have authority over most energy-generating DERs under PURPA and initial DR sales.
Third, FERC does not want the burden of direct regulation. Technically, DERs not under PURPA must comply with FERC’s filing rules, such as asking permission to sell at market-based rates. Will EV owners need to file w FERC if they inject energy?
FERC has directly addressed its jurisdiction over DER energy sales in paragraph 72 of this order - ferc.gov/whats-new/comm…. It should reverse. But will it?
Regulators do not typically limit their own jurisdiction. FERC is unlikely to choose to disclaim authority on its own and petitioning FERC could backfire – it might, for the first time, make a robust argument for its own authority over DER energy sales.
The path forward is murky. I am looking forward to discussing the future of DER regulation and state renewable programs at #SPICon on Wed at 11:30 -- Reconciling Federal Power Market Regulation with State Renewable and DER Programs -- goo.gl/sJHvJx
Addendum: What about resource X providing service Y? My jurisdictional theory creates a line drawing problem. As I say in the paper, the Supreme Court has rejected a transaction-by-transaction analysis. So what should the line be?
I (tentatively) propose for states to have ratemaking authority: 1) the buyer must be local (disco, aggregator) and 2) the resource alone would not typically cause power flows up to the transmission network.
