Midwest Renewable Energy Ass'n v. Pub. Serv. Comm'n of Wis.

412 Wis. 2d 698

8 N.W.3d 848

Midwest Renewable Energy Association, Petitioner-Appellant,

v.Public Service Commission of Wisconsin, Summer Strand, Kristy Nieto, and Marcus Hawkins, Respondents-Respondents,

v.Milwaukee Metropolitan Sewerage District, Intervenor,Wisconsin Utilities Association, Intervenor-Respondent

Court of Appeals

No. 2022AP968. Oral argument November 16, 2023.—Decided May 31, 2024.

2024 WI App 34

(Also reported in 8 N.W.3d 848.)

APPEAL from an order of the circuit court for Portage County: THOMAS B. EAGON, Judge, Reversed and cause remanded with directions.

On behalf of the petitioner-appellant, the cause was submitted on the briefs of and oral argument by David C. Bender of Earthjustice.

On behalf of the respondents-respondents, the cause was submitted on the brief of Cynthia E. Smith, Zachary Peters, and Stephanie Bedford of Public Service Commission of Wisconsin. There was oral argument by Zachary Peters.

On behalf of the intervenor-respondent, the cause was submitted on the brief of James E. Goldschmidt, Patrick Proctor-Brown, Lauren N. Zenk, and Bradley D. Jackson of Quarles & Brady LLP, Madison. There was oral argument by James E. Goldschmidt.

Before Kloppenburg, P.J., Blanchard, and Taylor, JJ.

¶ 1. TAYLOR, J. Midwest Renewable Energy Association ("Midwest") appeals a circuit court order dismissing its action for declaratory and injunctive relief against the Wisconsin Public Service Commission and its three Commissioners (collectively "the Commission").¹ In pertinent part, Midwest's action challenged a temporary order issued by the Commission in 2009 ("the Order") that prohibits the retail customers of Wisconsin's four largest public electric utilities, as well as entities known as "aggregators of retail customers," from engaging in "demand response" activities in federally-regulated interstate wholesale electricity markets.

¶ 2. As pertinent to this appeal, Midwest's complaint sought a declaratory judgment that the Order is invalid on the ground that it is a "rule" that the Commission adopted without complying with statutory rulemaking procedures.² The complaint also sought declaratory and injunctive relief precluding the Commission from enforcing the Order. The circuit court dismissed all claims, and Midwest appeals.³

¶ 3. For the following reasons, we conclude that the Order is invalid because it meets the statutory definition of a rule and, therefore, should have been but was not proposed and promulgated in compliance with the statutory rulemaking procedures set forth in Wis. Stat. ch. 227 (2021–22).⁴ Accordingly, we reverse and remand for the circuit court to enter a judgment declaring the Order invalid.

BACKGROUND

¶ 4. The market for electricity in the United States is generally divided into two categories: wholesale sales by electricity producers to public utilities and retail sales by public utilities to consumers. FERC v. Electric Power Supply Ass'n, 577 U.S. 260, 266-67 (2016) ("EPSA"). Interstate wholesale electricity sales fall under the exclusive jurisdiction of the Federal Energy Regulatory Commission ("FERC"), while the regulation of "any other sale"—such as retail sales of electricity—is left to the jurisdiction of the individual states. Id. at 265-66. In Wisconsin, the authority to regulate public utilities and the retail sale of electricity is vested in the Commission. See Wis. Stat. § 196.02(1).

¶ 5. Simplifying for current purposes, in order to ensure "just and reasonable" wholesale electricity rates in interstate markets, FERC has encouraged the creation of nonprofit entities to manage these markets by region. EPSA, 577 U.S. at 267. These nonprofit entities are known as "independent system operators." The independent system operator for the region that includes Wisconsin is the Midcontinent Independent System Operator ("MISO"). County of Dane v. PSC, 2022 WI 61, ¶ 48, 403 Wis. 2d 306, 976 N.W.2d 790. Like other independent system operators, MISO sets wholesale prices for electricity by conducting competitive auctions. EPSA, 577 U.S. at 268. In essence, on a given day, MISO collects orders from utilities specifying how much electricity the utilities need at various times and in various locations on the following day and accepts bids from electricity generators specifying how much electricity they can produce at those times and locations and how much they will charge for it. Id. at 268–69. MISO accepts the generators' bids, considering cost first, until the total electricity demand of the utilities is met. Id. at 268. The price of the last unit of electricity purchased by MISO, i.e., the most expensive unit of electricity purchased, becomes the price used to pay every electricity generator whose bid was accepted, regardless of the actual bid price. The total cost for generating the electricity is split among the utili- ties in. proportion to how many units of energy each utility has ordered at a given time. Id.

¶ 6. As a result, when utilities' demands for electricity increase—for instance, on a hot day when retail electricity customers turn on their air conditioning—more generation is needed from more expensive generators. Id. at 269. In addition, during such "peak" usage, an increased flow of electricity is pushed through the electricity grid, which may overload transmission lines and result in electricity disruptions. Both of these consequences of peak usage provide incentives for the wholesale market operators to reduce electricity use at peak times. Id. at 269–70.

¶ 7. Because there are times when encouraging retail customers to reduce their electricity consumption costs less than paying electricity generators to produce more electricity, Congress and the regional wholesale market operators called on FERC to eliminate barriers for customers to participate in a practice known as "demand response." Id. at 270–72. This practice operates within the regular auctions for electricity in federal interstate wholesale markets and allows retail customers to submit bids to decrease their electricity consumption by a set amount at a set time for a set price. Id. at 270–71. In essence, the practice of demand response "pays consumers for commitments to curtail their use of power, so as to curb wholesale rates and prevent grid breakdowns." Id. at 270. One way that consumers may participate in demand response is through "aggregators of retail customers" ("ARCs"), entities that coordinate demand response by aggregating multiple individual retail consumers' demand response bids into one bid and submitting that bid in federal wholesale market auctions. See id.; Indiana Util. Regul. Comm'n v. FERC, 668 F.3d 735, 736-37 (D.C. Cir. 2012).

¶ 8. In 2008, to facilitate demand response participation in the wholesale market by retail customers and ARCs, FERC issued Order No. 719 ("FERC Order No. 719"), which was later codified in 18 C.F.R. § 35.28(g)(1) (2024).⁵ EPSA, 277 U.S. at 272. In relevant part, FERC Order No. 719 creates two tiers of retail electricity customers for the purposes of demand response: the customers of utilities that distributed more than 4 million megawatt-hours (MWh) in the previous fiscal year ("large utilities") and the customers of utilities that distributed 4 million MWh or fewer in the previous fiscal year ("small utilities"). See 18 C.F.R. § 35.28(g)(1)(iii). This regulation requires MISO and other regional market operators to accept demand response bids from ARCs that aggregate the demand response of retail customers of large utilities, except when the state regulatory authority "prohibits such customers’ demand response to be bid into organized markets by an aggregator of retail customers." 18 C.F.R. § 35.28(g)(1)(iii).⁶ As a result, unless there is a specific prohibition by the Commission, ARCs that aggregate the demand response of retail customers of large utilities in Wisconsin may participate in demand response in wholesale electricity markets. No party identifies any statute, administrative regulation, or other electric retail regulatory action in Wisconsin that prohibited ARCs from submitting demand response bids of retail customers of large utilities in federal wholesale markets on behalf of Wisconsin retail electricity customers at the time that FERC Order No. 719 was adopted in 2008.

¶ 9. In April 2009, following the release of FERC Order No. 719, the Commission issued an "Amended Notice of Investigation and Request for Comments" regarding ARC operations in Wisconsin. The Commission issued this amended notice in a docket that was opened as a summary investigation to develop and analyze electric rate designs and load management options in accordance with the Governor's Task Force on Global Warming.⁷ This amended notice sought written comments about possible ARC operations in Wisconsin and appears to have been distributed to utilities, the entities granted intervenor status in the original investigation, and various press outlets.

¶ 10. In October 2009, the Commission issued the Order, which is titled "Order Temporarily Prohibiting Operation of Aggregators of Retail Customers."⁸ In relevant part, the Order imposes the following prohibition:

As a condition on the provision of electric service, demand response load reductions of retail customers of the four Wisconsin electric utilities which distribute more than 4 million MWh per year (named above)⁹are prohibited from being transferred to MISO markets directly by retail customers or by third-party ARCs.¹⁰

We refer to this as the "prohibition sentence" of the Order. The Order provides that this prohibition will remain in effect until rescinded by another Commission order. To date, the Commission has not rescinded the Order.

¶ 11. There is no dispute that, in issuing the Order, the Commission did not comply with the pertinent rulemaking procedures set forth in Wis. Stat. ch. 227. There is also no dispute that none of the four utilities identified in the Order took or ceased any actions in response to the...