Idea #29

Addressing Climate Change at the Edge of the Grid

by Charles Howland

That buzz you’re hearing from your utility’s nearby pole transformer is coming from something more than its high use in the late summer heat.  In the Northeast, the Midwest, and increasingly across the country, climate change is being addressed by transformational changes happening at the grid’s edge, part of a fundamental shift in how electricity is generated, transmitted, and sold, which collectively is helping to decarbonize the entire system.

However, potentially impeding this particular energy transition in the U.S. are ambiguities in certain provisions of the 1935 Federal Power Act (FPA) which dictate who controls the economic terms of various transactions on the grid: the Federal Energy Regulatory Commission (FERC), or the various state public utility commissions (PUCs).  This uncertainty is further amplified in FERC’s and some PUCs decisions to assert (or decline to assert) authorities that might arguably be in the other’s exclusive province under the FPA. Finally, this is playing out in the political context of the stark difference between the aggressive steps that some states are taking to lower the carbon footprint of the grid, while those currently at the top of the federal government and some other states nominally deny any connection between human activities and climate change that requires immediate action, a viewpoint they are pushing with all seemingly available levers.

Under our constitutional system (including the Supremacy Clause and principles of preemption), state action is typically trumped by any conflicting federal law (including regulations and FERC orders); thus any uncertainty over which government agency has jurisdiction over a particular decarbonization measure at the edge of the grid may discourage any business model that might implement it.

Following is a brief review of some of these measures at the ‘edge of the grid;’ and the regulatory impediments to these developments created by the jurisdictional ambiguities in the FPA.  It then joins the call of some commentators that FERC (which, after all, is supposedly independent from the Executive branch) should explicitly, prudentially, recognize that the FPA does not mandate its jurisdiction over the various economic relationships that are developing at the grid’s edge, much as it did for transmission rates that are bundled into PUC-regulated retail sales in its groundbreaking, market opening (and Supreme Court upheld) 1996 Order 888.

Where Is, And What’s Happening At, The ‘Edge Of The Grid’?

From the early 20th Century through its last several decades, typically one local utility (often an “investor owned utility,” or “IOU”) provided all your electricity needs, from generation (including frequency regulation, ‘black start’ capabilities and other ancillary services, as well as energy) (G) through transmission (T) and distribution (D) to final delivery at your meter for consumption (C).  It was a one-way flow which ended up at your meter, the “grid’s edge,” where historically, regulation stopped and your individual use of the electricity began.

Today, consumers (residential as well as commercial and industrial), equipment providers, private investors, and regulators are bringing together new technologies, financing structures, and legal relationships (regulatory and contractual) to build new facilities and set new relationships close to, and on either side of, the grid’s edge.  Examples of these new facilities and relationships include:

  • Distributed G, including relatively small solar, wind, and biomass generation facilities), interconnected on the D system, as well as consumer owned/controlled ‘behind the meter’ G (e.g. net metered facilities which set off a customer’s G against its C, at the retail rate), nominally off the edge of the grid,
  • Battery storage, also on either side of the grid’s edge, capable of providing G for at least short time periods, including utility sale storage facilities and (at some point in the future), aggregated, parked and plugged-in electric vehicles,
  • Microgrids, combining multiple, adjacent small generation units and consumers, often joined with a small central power plant (often combined heat and power), which can decouple from the grid and remain operational in the event of grid disruptions,
  • Voluntary, aggregated, legally binding limits on C that are verifiably beyond what that C otherwise would have been (demand response), which can be bid into the wholesale market as G (since a MWHr not consumed (a “negawatt”) is as valuable to the grid as having to procure a MWHr), and are often cheaper to obtain,
  • Similar aggregation of G ownership ‘in front of the meter’ facilities (e.g. community solar), and
  • A more dynamic D system overall, in part resting on widespread deployment of “smart meters” able to respond to complex changes in local G and C behavior in real time, necessary to enable much of the above.

With respect to climate change, collectively these developments can provide:

  • Mitigation, by reducing the grid’s carbon footprint through lessened peak demand (which typically require the dispatch of the most expensive, and typically dirtiest G units (e.g. oil and diesel “peakers”), and increased deployment of renewables, and
  • Adaptation, by increasing resiliency against grid disruption (G, T, and C) from storm events and other new weather patterns.

Additionally, this diversification of G and D (and potentially lessened need for new T) allows each of us to provide both G and C, thus becoming a “prosumer,” a growing trend in the U.S. and across the globe.  Finally, it also improves the grid’s ability to survive other challenges, including natural (“Carrington event” solar flares) and manmade insults (cyberattacks and worse).

Regulatory Challenges, or “Is the ‘Edge of the Grid’ Anywhere Near The ‘Attleboro Gap’?”

In the earliest years of the grid’s development, the typical IOU owned all of G, T, and D, all of which was all confined to one state, and its rates were supervised by that state’s PUC.  Over time IOUs began buying and selling power from neighboring IOUs to fill temporary gaps in their generation needs.  In the seminal 1927 decision Pub. Util. Comm. of Rhode Island v. Attleboro Steam & Electric Co. the Supreme Court held that the Rhode Island PUC’s assertion of ratemaking authority over an interstate sale of power to a Massachusetts utility violated the Dormant Commerce Clause of the Constitution, and that “such regulation . . . can only be attained by the exercise of the power vested in Congress,” which had not yet occurred.

In 1935 Congress filled the revealed Attleboro gap with the FPA, which set out a federal/state division of ratemaking authority that made sense for the grid of siloed, vertically integrated IOUs that existed over 80 years ago:

  • Federal: The FPA granted FERC (then known as the Federal Power Commission) exclusive jurisdiction over “the transmission of electric energy in interstate commerce” and “the sale of electric energy at wholesale in interstate commerce,” including the power to ensure that rates “for or in connection with the transmission or sale” of electricity at wholesale are “just and reasonable” and must be “not unduly discriminatory or preferential.”  16 U.S.C. §§ 824(b), 824d(a), 824e.
  • State: Section 201(b) provided that FERC “shall not have jurisdiction [except as specifically otherwise excepted] over facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or over facilities for the transmission of electric energy consumed wholly by the transmitter.” §824(b)(1).  Additionally, Section 201(a) of the FPA reserves to the states jurisdiction over all grid matters not specifically given to FERC, understood by various Supreme Court decisions and FERC orders to include retail sales and intrastate wholesale sales (see here).

The problem today is that many of the grid edge innovations discussed above can arguably be viewed under the FPA as falling in to one or the other of these two categories, and thus subject either to federal or state jurisdiction.

  • Should the formula by which a particular state values excess G from a net metering project – retail or wholesale rate – determine whether it is subject to FERC or PUC jurisdiction?
  • Should aggregated demand resources (which reduce retail load) which are bid into the federally regulated wholesale markets be subject to PUC or FERC jurisdiction?
  • Should a D-connected solar project which sells its output to the local D utility, or to an in-state reseller in a deregulated market, be subject to FERC or PUC jurisdiction?
  • Do state renewable portfolio standards (RPSs) (which typically require retail sellers of electricity to obtain a certain percentage of their wholesale supply from renewable resources), or the analogous state Zero Emission Credit programs (ZECs) (which similarly give wholesale price support to nuclear generation) unduly impinge on FERC’s authority to set wholesale rates?

To be sure, some of these questions have been answered by some courts (including some by the Supreme Court, albeit in factually limited contexts which turned on FERC’s discretionary decision to exercise its federal authorities), and all have been discussed in detail in recent articles from the Kleinman Center and elsewhere (see here, here, and here).

The broader point is that regulatory uncertainty impedes the deployment of current and future technologies and business models at the grid’s edge that could play a significant role in helping to decarbonize the grid overall.  Indeed, in its recent Interim Report on its “Pathways for Regional Energy Transition” project, the Kleinman Center found from its discussions with key local energy stakeholders that “uncertainty” over applicable policy (as well as technology and climate impacts) “rather than deadlock, is what limits decision making on Philadelphia’s energy future.”

In sum, while the “Edge of the Grid” is both historically and functionally far removed from the “Attleboro Gap,” both reflect a moment of regulatory uncertainty that was/is counter-productive, and which was and should be, respectively, eliminated.

A Modest Proposal:  FERC Should Formally Recognize That The FPA Does Not Require It To Exercise Jurisdiction Over Certain Developments At The Grid’s Edge

In 1996 FERC issued Order 888, which opened up the wholesale electricity markets to new participants by forcing utilities to provide all with generators non-discriminatory access to their transmission systems.  Significantly, while finding that the FPA’s authority to assure that rates are “not unduly discriminatory or preferential” authorized it to separate wholesale transmission and generation services, and to set the rates and other terms for “unbundled” (i.e. deregulated) retail as well as wholesale transmission, it decided not to exercise this authority over “bundled” rates, i.e. in states which had decided to retain the vertically integrated IOU model, out of concern that this would be too disruptive to state regulation of retail rates.  The Supreme Court upheld FERC’s decision as being within the scope of its authority under the FPA.

Similarly, FERC could draw a box around some of the grid-edge relationships and technologies described above, declaring them to be sufficiently intrastate in nature so as to leave them beyond the scope of its authority under the FPA.  Moreover, such a decision would accord with the stated goal of those in the federal government today who urge a return of regulatory authority from the federal government to the states, while allowing those states which want to address their mitigation and adaptation climate goals to so more confidently.

Charles Howland teaches Navigating the Regulatory State: Law, Science and Policy in the Law School’s Master of Law Program, and heads the Environmental Law group at Curtis, Mallet-Prevost, Colt & Mosle, LLP.