DC Circuit Overturns FERC Rule Authorizing Payments for Demand Response Services

By Harvey Reiter

In a 2-1 decision with potentially broad ramifications for power markets, the U.S. Court of Appeals for the D.C. Circuit has overturned the Federal Energy Regulatory Commission’s rule requiring ISO and RTOs to pay electricity consumers for "demand response," that is, to pay them for reducing their electric usage during certain periods. The case was brought by a group of industry trade groups including the American Public Power Association, Edison Electric Institute, Electric Power Supply Association and the National Rural Electric Cooperative Association.

The court ruled that Order No. 745 amounted to regulation of retail sales of electricity, an activity exclusively within the authority of states, not FERC. FERC had maintained that it was only regulating "practices" affecting wholesale energy markets, something within its authority. But that rationale, the court said, left no boundaries on FERC's authority. It "could ostensibly authorize FERC to regulate any number of areas, including the steel, fuel, and labor markets."

The court also had harsh words for FERC's ruling on compensation. “If FERC thinks its jurisdictional struggles are its only concern with Order 745," the Court said, "it is mistaken.” Even if FERC had authority to regulate demand response, the court ruled, its actions were still unlawful since it had failed to address arguments that the demand response payments it had authorized were too high. By having RTOs pay demand response the same price paid to wholesale energy suppliers, the parties had argued, FERC would be subsidizing demand response. End users would be overcompensated because they would receive payments for not using electricity and get a lower energy bill because they were purchasing less electricity. This, the court said, “seems troubling,” particularly since FERC Commissioner Moeller had voiced the same criticism and since FERC had offered no meaningful response.

Dissenting Judge Edwards said that he would have affirmed the agency's decision. While FERC can't regulate retail sales, he said, it wasn't clear "whether a promise to forgo consumption of electricity that would have been purchased in a retail electricity market unambiguously constitutes a 'sale of electric energy.'" And because FERC gets the benefit of the doubt when statutes are ambiguous, he concluded, its claim of jurisdiction should have been upheld.

As to the question of compensation, Judge Edwards also sided with FERC. FERC, he said, had not ignored the overcompensation arguments, but had offered a plausible explanation for the demand response compensation plan it had approved. "This court has no business second-guessing the Commission’s judgment on the level of compensation.”

This case is likely to have considerable significance. As both the court majority and the dissenting judge note, RTOs around the country all have had mechanisms to compensate demand response, even before Order No. 745. The court's opinion does not directly address whether their pre-Order No. 745 mechanisms will be affected by its ruling.

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