Supreme Court Questions FERC Demand Response Authority

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By Rebecca Kern

Oct. 14 — U.S. Supreme Court justices questioned whether the Federal Energy Regulatory Commission has authority to compensate demand response in the wholesale energy markets during oral arguments Oct. 14.

The main issue addressed was whether FERC has authority to regulate demand response programs designed to reduce demand in wholesale electricity markets during peak periods. The secondary issue was whether the compensation rates for demand response were “arbitrary and capricious.”

Paul Clement, who argued on behalf of the Electric Power Supply Association, which represents electricity generating companies, said FERC doesn't have authority under the Federal Power Act (FPA) to regulate demand response payments in the wholesale markets.

U.S. Solicitor General Donald B. Verrilli Jr., who argued on behalf of FERC, directly quoted the act, saying that it gives FERC direct jurisdiction over “practices affecting wholesale rates.”

The outcome of the case could have significant regulatory, economic and reliability effects. Demand response wholesale markets have led to billions of dollars in savings for large businesses and has protected against blackouts and brownouts, according to FERC's arguments. For instance, in just the PJM Interconnection LLC market alone, it is estimated that electricity charges could increase by $9 billion for the 2017-2018 period if demand response resources were removed from the market.

FERC's demand response program, known as Order 745, was issued March 2011 and involves paying industrial and large business customers for their power reductions in dollar amounts comparable to actual generation. Order 745 only applies to the wholesale day-ahead and real-time energy markets, which ensure that demand for wholesale electricity matches the supply.

Distinction Between Wholesale, Retail

Chief Justice John G. Roberts Jr. and Justice Antonin Scalia questioned the distinction between wholesale and retail markets. Under the Federal Power Act, FERC only has authority to regulate the wholesale energy markets. The retail energy markets are left to the states to regulate.

Verrilli said he would be “quite comfortable with the court drawing a line” between the markets. But he said demand response programs in wholesale markets do indirectly affect retail prices, saying, “Any action that FERC takes at the wholesale level in some sense is going to affect the retail market.” However, he noted these indirect effects can't be the basis for denying FERC this jurisdiction.

Meanwhile, Roberts said he thought that FERC's demand response program is “directly affecting retail energy market prices.”

Clement said FERC is entering into the state retail markets when it targets retail customers such as Wal-Mart Stores Inc., which he cited as an example, to participate in demand response programs in the wholesale markets.

However, Verrilli refuted the argument that large consumers such as Wal-Mart can't buy directly on the wholesale markets. “They can do it through contract, and they can also go into the wholesale market auctions and buy, if their states permit it, and that does happen in the real world,” he said.

Opposition to FERC Oversight

In addition to the Electric Power Supply Association, several other utility groups and electricity companies have opposed FERC’s jurisdiction over demand response compensation programs in the wholesale energy markets.

The National Rural Electric Cooperative Association, which represents rural electric utilities, opposes FERC Order 745 in how it sets demand response compensation. It also said that FERC has overstepped its jurisdictional authority.

“While co-ops strongly support demand response, we challenge FERC’s authority to set demand response compensation levels,” Paul Breakman, NRECA counsel, said in an Oct. 14 statement.

Similarly Southern Co., a large regional electric company in the Southeast that runs its own demand response program, said it believes demand response programs already work well in the states. Such programs are “being reliably, economically and effectively integrated at the state level and are proven to deliver customer value under the current framework,” Jack Bonnikson, a Southern Co. spokesman, told Bloomberg BNA Oct. 14.

Potential 4-4 Split Decision

Justice Anthony M. Kennedy, who is often the swing vote on decisions, will be a key player in the outcome of the case because there are just eight justices participating. Justice Samuel A. Alito Jr. has recused himself from the case.

Kennedy referred twice during oral arguments to the circular nature of FERC's authority over demand response, saying that FERC claims “the market forces will work it out,” but that FERC defines “the market.”

William Scherman, a partner with Gibson Dunn and former general counsel for FERC, who attended the oral arguments, said he could see the court making a split 4-4 decision, which essentially would affirm the lower U.S. Court of Appeals for the District of Columbia Circuit decision that vacated FERC's Order 745 program.

He said there is a small chance that the justices could reach this split decision in their conference on Oct. 16, with a ruling out as early as Oct. 19.

“If in fact it's clear in the conference that the justices are fairly entrenched in their views, and it's 4-4, you could get a very quick opinion saying affirmed by an equally divided court,” he told Bloomberg BNA Oct. 14.

In the meantime, FERC has a stay on the D.C. Circuit ruling until the Supreme Court issues its decision

Christi Tezak, the managing director for research at the ClearView Energy Partners LLC, who attended the oral arguments, told Bloomberg BNA Oct. 14 that it's likely the Supreme Court may not rule until the end of 2015 or early 2016.

Future of Demand Response?

Scherman said that even if the lower court's ruling is upheld, this doesn't mean the death knell for demand response programs.

There are currently 24 states that regulate demand response programs in their retail energy markets. These states would be able to coordinate tariffs with each other through the Regional Transmission Organizations or Independent System Operators they lie within, which administer regional wholesale electricity markets. These tariffs would have to be approved by FERC, but the jurisdiction would remain among the states.

Allison Clement, director of the Sustainable FERC Project at the Natural Resources Defence Council, said there is a lack of efficiency when states each run their own demand response programs.

“There's a huge efficiency to retail customers being able to aggregate demand response resources and bid them into the wholesale market,” she told Bloomberg BNA Oct. 14. “You lose the efficiency when you take away the ability for demand response resources to participate in these big markets.”

She added, “It's inefficient to have 24 little, tiny markets that don't provide proper incentives. What happens is you're going to leave a lot of money on the table, and from an environmental perspective you're going to leave a lot of carbon pollution and dirty pollution on the table.”

She said that customers will also feel the effects of potentially fewer demand response resources “in their pocketbooks when they look at their electricity bills each month.”

To contact the reporter on this story: Rebecca Kern in Washington at rkern@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

Argument transcript is at http://src.bna.com/Ax.