Hoecker: Supreme Court demand response ruling key for ‘cementing FERC’s jurisdiction over the wholesale market’

The U.S. Supreme Court on Jan. 25 upheld the authority of FERC to set compensation rates for demand response programs in a case brought by the Electric Power Supply Association (EPSA), PennWell’s GenerationHub reported.

While the case does not involve transmission developers directly, it should be taken as a good sign that the high court gave FERC a “wide berth” to use its authority in the wholesale power market to integrate demand response resources, James Hoecker, counsel for transmission group WIRES and a former chairman at FERC, told TransmissionHub Jan. 25.

The Supreme Court decision will be important for “cementing FERC’s jurisdiction over the wholesale market” and providing certainty in FERC’s authority as that market evolves with energy storage, demand response and other technologies, Hoecker said.

Those elements will benefit consumers and they rely on adequate transmission infrastructure, so although it was not involved in the case, WIRES is pleased with the outcome, Hoecker said in a brief interview.

“We hope it’s a confidence builder for FERC” as it helps policymakers and regional grid planners implement Order 1000, Hoecker said.

As GenerationHub reported, the high court returned its decision Jan. 25 after hearing oral arguments on the matter Oct. 14, 2015. The ruling represents a legal setback for EPSA and other parties, who had initially challenged the demand response rule and had it thrown out by the U.S. Court of Appeals for the D.C. Circuit.

The Supreme Court’s decision was on a 6-2 vote, with Justice Samuel Alito not taking part in the decision.

Justices Antonin Scalia and Clarence Thomas disagreed with the majority opinion and issued a dissenting statement.

FERC Chairman Norman Bay said in a statement, “This decision means that consumers will continue to see the significant benefits of demand response, which enhances competition in the markets, reduces wholesale prices and helps make the grid more reliable.”

As GenerationHub further reported, spurred on by Congress, FERC issued Order No. 719, which, among other things, requires wholesale market operators to receive demand response bids from aggregators of electricity consumers, except when the state regulatory authority overseeing those users’ retail purchases bars demand response participation. Concerned that the order had not gone far enough, FERC then issued the rule under review here, Order No. 745. It requires market operators to pay the same price to demand response providers for conserving energy as to generators for producing it, so long as a “net benefits test,” which ensures that accepted bids actually save consumers money, is met.

The rule rejected an alternative compensation scheme that would have subtracted from LMP the savings consumers receive from not buying electricity in the retail market, a formula known as LMP-G. The rule also rejected claims that FERC lacked statutory authority to regulate the compensation operators pay for demand response bids.

The U.S. Court of Appeals for the D.C. Circuit vacated the rule, holding that FERC lacked authority to issue the order because it directly regulates the retail electricity market, and holding in the alternative that the rule’s compensation scheme is arbitrary and capricious under the Administrative Procedure Act.

The high court, however, said the Federal Power Act (FPA) provides FERC with the authority to regulate wholesale market operators’ compensation of demand response bids.

When the appeals court issued its decision in May 2014, many in the demand response sector were surprised that the court ruled that Order 745 infringed on state authority over retail markets.

Hoecker said that decision showed that the court “did not appreciate the nuances” of the electric power industry and was based on the false notion that there is a clear, bright line separating wholesale and retail markets.

With its authority in wholesale markets affirmed through the Supreme Court decision, FERC will have to develop “an adequate plan of action” to oversee changes in the wholesale market and ensure just and reasonable rates for consumers, Hoecker said.

In a Jan. 25 statement, Travis Kavulla, president of the National Association of Regulatory Utility Commissioners, said that the decision reiterates that retail rate regulation “is the exclusive province of state,” but also that it allows a federal regulator to establish compensation for retail consumers who offer demand reductions as a substitute for generation in the wholesale market.

The court’s ruling appears to stand for the idea that energy conservation measures can be valued in both a retail context, and, under different circumstances, a wholesale context, Kavulla said in the statement.

“Personally, I believe that to be true, although as a legal precedent it may serve to blur the already fuzzy line between state and federal jurisdiction,” he said.

Demand response is only one example of a growing number of situations where consumers are not only passive recipients of a utility’s retail service, but producers as well, added Kavulla, who is vice chairman on the Montana Public Service Commission.

“Making sure that law and regulation keep up with these facts is an essential undertaking,” and, as the Supreme Court observed, there is a steady flow of jurisdictional disputes between FERC and the states because “in point of fact if not of law, the wholesale and retail markets in electricity are inextricably linked,” he said.

One of the larger demand response firms, EnerNOC said that the Supreme Court preserved FERC’s jurisdiction over demand response and ensures an important role for demand-side resources in wholesale markets.

“Today’s decision is a tremendous win for all energy consumers, for the economy, and for the environment,” Tim Healy, chairman and CEO of EnerNOC, said in a statement.

“We commend the court and look forward to continuing to help consumers actively participate in our nation’s wholesale markets,” Healy said.  

Another demand response firm, Comverge, was pleased that the high court “so decisively upheld” FERC’s Order 745, Gregory Dukat, chairman, president and CEO of Comverge, said in a separate statement.

"The court’s ruling is an emphatic victory for demand response providers, utilities, and customers and ensures demand response will continue to deliver value in wholesale markets as a cost-effective option, thus avoiding unnecessary capacity, generation plants, emissions, as well as additional cost," Dukat said.

The Natural Resources Defense Council also weighed in, with a statement by Allison Clements, director of the Sustainable FERC Coalition housed at the NRDC.

The Supreme Court’s decision “gives consumers more opportunity to save, and even make, money through smarter electricity use,” Clements said. “Also, because demand response is flexible and fast-acting, it enables the affordable integration of more wind and solar power into the electricity transmission grid.”

This article was updated at 10:50 am on Jan. 26 to include the statement from NARUC President Travis Kavulla.