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During their next term, the U.S. Supreme Court will decide whether the Federal Energy Regulatory Commission has authority to run a demand-response compensation program in the wholesale electricity markets. The Supreme Court is taking up FERC's appeal to a D.C. Circuit decision that vacated the energy conservation program, known as Order 745. Power companies, represented by the Electric Power Supply Association, filed a lawsuit contending FERC exceeded its authority under the Federal Power Act by creating subsidies for electricity customers who participate in the demand-response program.
Bloomberg BNA's Rebecca Kern interviewed Jon Wellinghoff, a former FERC chairman and now partner at Stoel Rives, who has been a staunch defender of Order 745. The demand-response program aims to reduce electricity demand during peak periods by paying industrial and large business customers for reducing energy use in dollar amounts comparable to actual electricity generation. He said if the Supreme Court upholds the D.C. Circuit ruling, it could increase the cost of energy. This interview had been edited for clarity and length.
Why did FERC create Order 745 in the first place?
The efforts at FERC were an attempt to ensure that as many competitive resources were available in the wholesale energy market as possible. One resource that was increasing in use and in value to those markets was demand-response. We saw that there were varying levels of payment being made for demand-response in the markets. What we wanted to do, at least for the energy markets, was to rationalize that to be the payment that would be equal to the value that demand-response supplied in the market.
So we believed there was equal parity between [demand-response and generation] and as such, demand-response should get paid the locational marginal price in these wholesale markets, which is the price of the particular location the generator would be entitled to during that settlement period that energy was being sold in that market. So with that premise, we put Order 745 together.
What was the reaction to Order 745 when it was first issued in 2011?
There was a level of controversy over the price that should be paid for demand-response in the Order 745. Some people thought it should be less than the price paid of a generator; other people believed it should be the price of a generator. Ultimately the position in Order 745 was that demand-response be paid the full amount that the generator was paid in the markets.
But there was never really any level of controversy in the Order 745 proceedings about whether or not FERC had any jurisdiction over the issue of demand-response in wholesale markets. There may have been some parties that raised that as perhaps a peripheral, or I think pretty much a throw-away, issue, in the proceedings before FERC. But no one seriously challenged that FERC had jurisdiction over demand-response and that was not seriously or specifically addressed to a great degree.
What has been the value of the Order 745 demand response program?
The value of demand-response in these markets is quite large. That can be seen by the PJM market, where the value of demand-response I think in 2014 was in excess of $11.8 billion. In one year, the value to consumers was very high in one market alone. You multiply that across all markets in the country, you could see the potential levels to consumers in energy markets.
That’s the energy markets only. That doesn’t include capacity markets and ancillary services markets, where demand-response also participates. But Order 745, and the challenge to it, only applies to energy markets, so that’s the current issue that was decided in the D.C. Circuit case and the current issue before the U.S. Supreme Court.
What outcome would you like to see from the Supreme Court case? How do you think the Supreme Court will rule?
I would like to see the D.C. Circuit decision overturned. I think it was an incorrect decision. I think it does not reflect accurately FERC’s role in wholesale markets and its role with regard to demand-response in those markets.
I think it’s highly likely the Supreme Court will overturn the D.C. Circuit decision because the law is on our side, the facts are on our side and the equities are on our side.
One question the Supreme Court will rule on is whether FERC has jurisdiction to regulate rules for demand-response in the wholesale markets. The Electric Power Supply Association and others say this goes beyond FERC’s authority. What do you believe?
Not only legally do I think the D.C. Circuit Court is incorrect, but if you look from an equitable and from a market perspective, to take demand-response out of those markets will severely impact those markets in a negative way. It may make those markets noncompetitive, to the extent that those markets then have to go back under a rate-based regulatory regime that would require them to no longer be market-based.
So it could completely change the nature of wholesale transactions in this country in a very negative way for consumers. Not only is the law wrong, but the potential societal impact of upholding the D.C. Circuit Court case is very severe and very negative for consumers.
What is your response to the Supreme Court question of whether the compensation set by FERC was ‘arbitrary and capricious'?
I think there’s a more than adequate record to show that the commission’s decision was based upon substantial evidence and was therefore not arbitrary and capricious. There was substantial evidence on multiple sides as to what the compensation level should be. One of the most renowned economists in the country at the time—Alfred Kahn—presented substantial testimony on the level of compensation, and that was utilized by the commission in our decision. So I don’t see how the court could possibly say it was arbitrary and capricious.
If the Supreme Court does uphold the D.C. Circuit decision, what would happen to demand-response in the markets?
There are multiple negative impacts. It will be much more difficult for demand-response to in fact be put in place in the states as each state will have to develop their own rules and regulations. Each demand-response provider will have to go around and comply with different rules and regulations in multiple states.
A whole other issue is whether or not the markets will be competitive and whether the markets will have to revert back to a rate-based, regulatory scheme.
So there are multiple problems with maintaining the D.C. Circuit Court [decision] and upholding it through the Supreme Court that will not only cost consumers substantial amounts of money, but will be very unlikely to resurrect these types of beneficial programs in the states.
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More information on the Fed. Energy Regulatory Comm'n v. Electric Power Supply Ass'n case is available at http://www.bloomberglaw.com/public/document/Federal_Energy_Regulatory_Commission_v_Electric_Power_Supply_Asso/2.
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