Court ruling cuts demand response uncertainty

Yesterday the U.S. Supreme Court issued an opinion upholding federal regulation of the compensation paid for wholesale electricity demand response.  The Court's opinion, FERC v. Electric Power Supply Assn., hinges on the distinction between wholesale and retail sales of electricity.  It provides the latest look at the boundary between federal and state jurisdiction over the electric grid.

Under the Federal Power Act, the Federal Energy Regulatory Commission is authorized to regulate "the sale of electric energy at wholesale in interstate commerce."  Its jurisdiction under the Federal Power Act does not extend to "any other sale of electric energy," such as a retail sale.  Traditionally, sales of energy directly to users are viewed as retail sales subject to state ratemaking jurisdiction, while sales of energy for resale are viewed as wholesale sales subject to federal ratemaking jurisdiction.

The case before the Supreme Court arose from a challenge by a group of generators to FERC Order No. 745.  Through that order, FERC adopted a rule requiring wholesale market operators to compensate cost-effective demand response resources for their performance at the same price paid to generators.  Last year, the D.C. Circuit Court of Appeals vacated FERC Order No. 745 on the ground that FERC lacked jurisdiction to set rates for this kind of demand response.  The D.C. Circuit implied that "wholesale" demand response was really retail in nature and thus subject only to state ratemaking jurisdiction.  FERC appealed this decision to the Supreme Court.

As described in the Supreme Court opinion, the appeal presented two legal issues:

First, and fundamen­tally, does the FPA permit FERC to regulate these demand response transactions at all, or does any such rule impinge on the States’ authority? Second, even if FERC has the requisite statutory power, did the Commission fail to justify adequately why demand response providers and electricity producers should receive the same compensa­tion? The court below ruled against FERC on both scores. We disagree.

In analyzing the first issue, the majority found that compensation for demand response directly affects wholesale prices -- "Indeed, it is hard to think of a practice that does so more."  The majority found, "A FERC regulation does not run afoul of section 824(b)’s prescription just because it affects―even substantially―the quantity or terms of retail sales."  The Court finally noted that FERC had offered substantial reasoning and arguments in support of its conclusion that demand response should be paid comparably to generation, and thus that FERC's actions satisfied the applicable standard that they not be "arbitrary and capricious."

The case now returns to the D.C. Circuit for further proceedings consistent with the Supreme Court's opinion. The most widespread direct impact of the Supreme Court in FERC v. EPSA will likely be a reduction to the uncertainty that has hung over the markets since the D.C. Circuit decision.  Market participants, consumers, aggregators, and grid operators have all been awaiting the ruling.  Some market changes, such as ISO New England's implementation of full integration of demand response, had been delayed pending a decision from the Court, as regional wholesale demand response programs hinge on FERC approvals under the Federal Power Act.  With the jurisdictional question resolved, these changes, and other refinements to regional transmission organizations' wholesale demand response programs, can now get back on track.