Energy storage advocates scored a key victory Friday when the D.C. Circuit Court of Appeals rejected challenges to FERC rules that restrict states from prohibiting behind-the-meter storage resources from participating in organized wholesale electricity markets.

State regulators, utilities and public power groups last year petitioned the court to overturn the provisions of FERC Order 841 that require states to provide energy storage resources (ESRs) connected to distribution systems full access to federally regulated energy markets, calling the rules “arbitrary and capricious” and “not in accordance with law.” (See States, Public Power Challenge FERC Storage Rule.)

The National Association of Regulatory Utility Commissioners spearheaded the challenge, with the Edison Electric Institute, the American Public Power Association, the National Rural Electric Cooperative Association and American Municipal Power filing a separate complaint.

The D.C. Circuit’s decision was unsurprising given the three-judge panel’s evident skepticism about the petitioners’ arguments during a May proceeding. (See DC Circuit Skeptical of NARUC Challenge to FERC Order 841.)

“Petitioners argue FERC is offsides in Order No. 841 by prohibiting states from barring electric storage resources on their distribution and retail systems from participating in federal markets. We find no foul here, so we deny the petitions,” Judge Robert Wilkins wrote on behalf of the panel.

In Order 841-A, FERC denied rehearing of Order 841’s express lack of a state opt-out for behind-the-meter retail ESRs, arguing that its authority to regulate RTO/ISO markets gave it “authority to determine which resources are eligible to participate” in those markets.

In its arguments before the court, Wilkins noted, “FERC emphasized, again, that Order No. 841 did ‘not specify any terms of sale at retail,’ but a state may not ‘broadly prohibit all retail customers from participating in RTO/ISO markets,’ since states cannot … intrude on the commission’s jurisdiction by prohibiting all consumers from selling into the wholesale market.’”

The court agreed with FERC’s contention that “Order No. 841 does not modify states’ authority to regulate the distribution system, including the terms of access, provided that they do not aim directly at the RTO/ISO markets.”

“Order No. 841 solely targets the manner in which an ESR may participate in wholesale markets,” the court wrote. “This action is intentionally designed to increase wholesale competition, thereby reducing wholesale rates. Keeping the gates open to all types of ESRs — regardless of their interconnection points in the electric energy systems — ensures that technological advances in energy storage are fully realized in the marketplace, and efficient energy storage leads to greater competition, thereby reducing wholesale rates.”

Even NARUC acknowledged the potential benefits from local ESRs participating in wholesale markets, the court said.

“If ‘directly affecting’ wholesale rates were a target, this program hits the bullseye,” the court wrote.

In rejecting the petitioners’ complaints that the lack of an opt-out provision violates states’ authority to regulate their distribution systems, the court acknowledged “there is little doubt that favorable participation models will lure local ESRs to the federal marketplace,” requiring use of those systems. Still, “nothing in Order No. 841 directly regulates those distribution systems. … States remain equipped with every tool they possessed prior to Order No. 841 to manage their facilities and systems,” the court said.

“But because FERC has the exclusive authority to determine who may participate in the wholesale markets, the Supremacy Clause — not Order No. 841 — requires that states not interfere” with those markets, the court found.

In that vein, the court rebuffed NARUC’s contention that local ESRs cannot participate in federally regulated wholesale markets — and therefore do not fall under FERC’s authority — until they can navigate state-regulated facilities.

“Any state effort that aims directly at destroying FERC’s jurisdiction by ‘necessarily deal[ing] with matters which directly affect the ability of the [commission] to regulate comprehensively and effectively’ over that which it has exclusive jurisdiction ‘invalidly invade[s] the federal agency’s exclusive domain,’” the court said, citing precedent from 1962’s Northern Natural Gas Company decision.

The court also pointed out that under Order 841, states keep their authority to prohibit ESRs from simultaneously participating in interstate and intrastate markets.

“States retain their authority to impose safety and reliability requirements without interference from FERC, and ESRs must still obtain all requisite permits, agreements and other documentation necessary to participate in federal wholesale markets, all of which may lawfully hinder FERC’s goal of making the federal markets more friendly to local ESRs,” the court said.

The court additionally acknowledged that individual states will be free to challenge the rules “applied to their own state regulations or imposed conditions.”

“Petitioners are likely correct that litigation will follow as States try to navigate this line, but such is the nature of facial challenges,” the court wrote.

Renewable energy and storage advocates applauded the decision.

“This is an enormous step for energy storage, with the affirmation that energy storage connected at the distribution level must have the option to access wholesale markets, allowing homes and businesses to contribute to the resiliency, efficiency, sustainability and affordability of the grid,” Energy Storage Association CEO Kelly Speakes-Backman said in a statement. “This latest affirmation of Order 841 is especially important as it ensures energy storage can contribute all its values to the grid, regardless of its connection point. As our electric system becomes more modernized and distributed, we are seeing the regulatory frameworks at both the wholesale and retail levels adjust to that reality.”

“During a time of great uncertainty over the scope of the Federal Power Act, today the court rightfully recognized the important role energy storage plays in our nation’s wholesale electricity markets,” American Council on Renewable Energy CEO Gregory Wetstone said in a statement. “This decision will provide the clarity necessary to widely deploy energy storage, an essential component to securing the carbon-free grid we need to properly combat the climate crisis.”

FERC Chair Neil Chatterjee also expressed pleasure with the ruling, saying the removal of market barriers for storage has been one of his “top priorities.”

“I have said repeatedly that I think … we may look down the road and say [Order 841] was one of the single most significant … actions taken by a government agency to address carbon mitigation and the transition to a clean energy future. And so, if in fact our initial read of this decision is correct, this is a very significant victory indeed,” Chatterjee said.

Plaintiffs in the case were expectedly dissatisfied with the outcome.

“We are, of course, disappointed in the court’s decision,” said NARUC Director of Communications and Public Affairs Regina Davis. “We are still reviewing the opinion and weighing our options at this time. We may issue a formal statement next week after we’ve had time to review today’s decision.”

“We believe that the jurisdiction over local distribution facilities left to state and local authorities under the Federal Power Act includes the authority to determine whether those facilities may be used by electric storage resources to access FERC-regulated wholesale markets,” said APPA General Counsel Delia Patterson. “Although APPA is encouraged that the court emphasizes that state and local regulators retain authority to impose safety, reliability, and other requirements on storage resources’ use of the distribution system to access wholesale markets, the inability to adopt a clear prohibition on such use is likely to lead to further litigation over particular state and local requirements, as the court acknowledges.”