Distributed Energy and Demand Response: Jurisdiction and Pricing David Raskin, Steptoe & Johnson LLP draskin@steptoe.com (202-429-6254) Independent Energy Producers Association Annual Meeting September 21, 2016 Lake Tahoe, California

Evolution of Competition in the Electric Industry Public power/The New Deal Bilateral trading among vertically-integrated utilities Power pools (cost-based) Transmission Dependent Utilities seek alternative power supplies Cogeneration and Small Power Production Non-QF Independent Power Production Marketing and Trading (Enron and friends) RTO Organized Markets (price-based power pools) Renewable Generation (Grid Scale) Distributed Energy Demand Response

At Each Step of the Evolution Attack the incumbent utility to acquire competitive opportunity The latest fad gets the grease. Regulators love the new thing. Someone new is being denied access in some form or another. Subsidies to the latest entrant in the guise of “stimulating” competition. Everyone looks for regulatory assistance when the market turns against them. Incumbents (not just utilities) paint the latest fad as dangerous. There is always opposition from somewhere. My view: The only things dangerous are subsidies and other forms of regulatory favoritism.

Distributed Energy Economics NEM values every kWh generated behind the retail meter at the bundled retail rate. (Not just the excess). In California, retail rates are approaching 20 cents, and more during peak periods. The same generation connected on the grid side of the retail meter must be sold at the unbundled wholesale rate. That is 2 to 5 cents last time I looked. The historical paradigm continues. The new guy gets a huge subsidy and is treated as a favored son. The core problem is not NEM, but the fact that most states use one part retail rates, which just doesn’t work for competition. Need to unbundle as FERC did for wholesale competition. Utilities have tried to fix this problem in two ways: Distinguish between the energy used behind the retail meter to serve load and the excess energy delivered onto the grid, and propose that the price of the latter be at avoided energy cost. Partial fix. Partially unbundle the retail rate into demand and energy components. This issue has to be resolved soon or it will grossly distort power markets and drive up retail prices.

Impacts of NEM Preferential price for energy distorts competition Inefficient allocation of capital. Fixed costs avoided by customers using NEM are shifted to non-NEM customers. Costs shifted from wealthier to poorer people. NEM customers avoid paying for distribution system upgrades required to integrate significant amounts of distributed generation. More total dollars expended to achieve a desired level of clean energy. Value of Solar Arguments: Distributed generation is usually much less efficient than central station renewables, and it increases distribution investment costs. Losses go down, and eventually with significant penetration of storage, wires costs should go down.

FPA Jurisdiction Over Distributed Generation The excess energy delivered over the retail meter to the grid is a sale for resale. FERC says we have to net deliveries over retail billing period (which means there is almost never a jurisdictional sale), but this theory has been rejected by D.C. Circuit. Netting theory treats these sales for resale different from all other wholesale sales. Is all of the energy generated behind the meter a sale for resale or just the excess? Are two separate transactions occurring simultaneously, one bundled retail and the other wholesale? Is the sale for resale in Interstate Commerce? According to Supreme Court, all of the electrons are “commingled.” Lindh argument to the contrary relies on the tyranny of small numbers. Are the sellers public utilities? Yes, but it doesn’t matter. These are QF sales from self-qualifying small power producers. If they were not QFs, utilities would have no obligation to buy the energy.

Demand Response The FPA regulates the rates and charges of public utilities for sales at wholesale and the practices affecting SUCH rates and charges. If there is no wholesale sale by a public utility, there is no jurisdiction. In EPSA v. FERC, the government convinced the Supreme Court to interpret the “practices affecting rates” language broadly to apply to all practices that directly affect jurisdictional rates, not just those of the public utility seller whose rates are being regulated. Court’s economic reasoning on jurisdiction is hard to disagree with. In RTOs, wholesale rates (prices) are set by market forces, and the Court said that supply and demand both directly affect the level of those prices; end of argument. Economics 101. But, isn’t the Court’s job to read the statute and apply it? Then, the Court turns to the merits and says, we don’t care about economics so long as agency gives a minimal explanation. So, demand response is paid twice; the foregone retail rate plus LMP.

The Current Law His It Exactly Backward Energy sales by distributed generation to utilities are sales for resale. FERC avoids jurisdiction by using a monthly netting formulation that is inconsistent with how it regulates all other wholesale sales and that recent cases hold is improper. Are the sellers public utilities? It really doesn’t matter because these are QF sales under PURPA. Otherwise, utility would have no obligation to pay the seller for wholesale energy. Demand response does not involve any wholesale sale and FERC explicitly held that retail demand response providers are not pubic utilities. PURPA doesn’t apply. So: Net metered energy should be subject to regulation under the FPA and demand response should not. The exact opposite of the current law. Both are overcompensated. Distributed energy gets the bundled retail rate. Demand response gets the avoided bundled retail rate plus the wholesale LMP.

And the winner is?