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.

FERC 2015 report on demand response, advanced metering

Staff of the Federal Energy Regulatory Commission have released their tenth annual report on demand response and advanced metering.  The FERC staff report, 2015 Assessment of Demand Response and Advanced Metering, provides an update on deployment of demand response and advanced metering.

Section 1252(e)(3) of Energy Policy Act of 2005 (EPAct 2005) directed the FERC to prepare and publish an annual report covering six sets of items:

• saturation and penetration rate of advanced meters and communications technologies, devices and systems;
• existing demand response programs and time-based rate programs;
• the annual resource contribution of demand resources;
• the potential for demand response as a quantifiable, reliable resource for regional planning purposes;
• steps taken to ensure that, in regional transmission planning and operations, demand resources are provided equitable treatment as a quantifiable, reliable resource relative to the resource obligations of any load - serving entity, transmission provider, or transmitting party; and
• regulatory barriers to improved customer participation in demand response, peak reduction and critical period pricing programs.

Previous reports have noted growth in the penetration of advanced metering and the value of demand response.  As in recent years, the 2015 FERC demand response report notes a continued increase in advanced meter penetration rates and the number of advanced meters in operation in the United States.

Based on 2013 data from the Energy Information Administration, the report suggests a 37.6 percent overall penetration rate.  It also shows a slightly higher percentage of residential customers have an advanced meter (37.8 percent) than do customers in the commercial (36.1 percent) or industrial (35.2 percent) customer classes.

At the same time, the FERC report shows a 4.9 percent drop in nationwide total potential peak reduction from retail demand response programs between 2012 and 2013, or a drop of 1,408 MW of demand response capability.  It also notes legal uncertainty over FERC’s final rule on demand response compensation in organized wholesale electric markets, Order No. 745, given that the U.S. Court of Appeals for the D.C. Circuit vacated and remanded that order in Electric Power Supply Association v. FERC, No. 11-1486 (D.C. Cir. May 23, 2014).  FERC's appeal of the EPSA v. FERC decision is now pending before the U.S. Supreme Court, with a final decision expected in early 2016.

US Supreme Court considers EPA greenhouse gas emissions regulations

May the U.S. Environmental Protection Agency regulate greenhouse gas emissions from power plants and industry under the Clean Air Act?

The Supreme Court of the United States heard oral argument on this issue yesterday, in the case Utility Air Regulatory Group v. Environmental Protection Agency, Docket No. 12-1146.  How the court rules on the case will shape federal regulation of carbon dioxide and other greenhouse gas emissions in the nation.

The case arises from EPA's decision in 2010 to regulate greenhouse gas emissions from power plants and industrial facilities.  That decision stemmed from a 2007 Supreme Court ruling, Massachusetts v. EPA, requiring EPA to regulate greenhouse gas emissions from motor vehicles under Title II of the Clean Air Act.  Since 1980, EPA has held that once it regulates one type of air pollution (e.g. greenhouse gases from motor vehicles), it may (or must) broaden its regulations to cover all such emissions (e.g. greenhouse gases from all sources).  Applying this precedent in 2010, EPA found that regulating motor vehicle greenhouse gas emission standards under Title II of the Clean Air Act also compelled EPA to regulate greenhouse gas emissions under the Clean Air Act's Title I "prevention of significant deterioration" or PSD program, as well as under its Title V stationary-source permitting program.

Building on its Title II regulation of greenhouse gas emissions from cars and trucks, EPA then promulgated its Title I and Title V regulatory programs for stationary sources.  These rules regulated stationary sources emitting 75,000 tons of carbon dioxide or more per year, but triggered challenges from several states, over 70 non-governmental advocacy groups, and business interests.  While challengers raised a host of objections, one of the key substantive issues raised was whether EPA may truly regulate carbon dioxide as a "pollutant."  Challengers also mounted attacks rooted in law, questioning whether EPA's 2010 decision to regulate motor vehicle greenhouse gas emissions could legally trigger permitting requirements for stationary sources.

After the U.S. Court of Appeals for the D.C. Circuit upheld EPA's rules, challengers appealed that decision to the Supreme Court.  While the Court declined to address most of the issues challengers raised, it decided to entertain argument on one point: "Whether EPA permissibly determined that its regulation of greenhouse gas emissions from new motor vehicles triggered permitting requirements under the Clean Air Act for stationary sources that emit greenhouse gases."

The Court's official docket for Utility Air Regulatory Group v. Environmental Protection Agency can be found here, and unofficial copies of many of the pleadings can be found on SCOTUSBlog.  While the Court has not indicated when it will rule on the case, energy and other industries are watching closely for the ultimate outcome.