Must States Step Up to Keep Demand Response Participating in Wholesale Markets? Part II

By Matthew Rose, Enerdynamics Instructor

In last week’s blog, we discussed the recent U.S. Court of Appeals decision that vacated FERC’s Order 745 concerning participation of demand response (DR) resources in 99681470wholesale markets. In that decision, the Court disagreed with FERC’s justification for compensating DR resources noting that “FERC’s new rule goes too far, encroaching on the state’s exclusive jurisdiction to regulate the retail market.”

This week, we are focusing on the implications to the Court’s decision.

Implications of the decision
The perceived impact of the Court of Appeals’ decision varies by party. FERC claims the ruling, if taken to the extreme, could potentially invalidate all DR participation at any compensation level in any wholesale market. The Maryland Public Service Commission and the Delaware Public Service Commission believe that if the ruling goes into effect it will have “significant adverse consequences” and may impact grid reliability and state statutory goals regarding peak load reduction.

Not all parties share the same dire view. Even some of the DR companies such as EnerNOC believe demand response is not going away and will remain a vital and important part of the country’s energy markets. The value of DR to consumers does not disappear as customers will continue to look for options to reduce energy costs and retain cost effectiveness for their businesses and residences.

What may change, however, are compensation levels, market rules, and regulation. Some experts believe this situation actually serves as an opportunity for all involved to collectively reboot the industry and establish a standardized set of rules that better meets everyone’s needs.

One of the intriguing elements of the Court of Appeals ruling was the determination that regulating DR falls under state purview since it is executed in the retail electric market. This sets up a situation where states can take the lead and establish consistent rules for demand response. This could include the creation of multi-state markets for DR.

Also many of the utilities operating in organized wholesale markets have established demand response tariffs in response to state mandates and other market considerations. There is at least a precedent for electric distribution utilities to step up and expand their existing programs.

Where do we go from here?
The response to the Court of Appeals’ decision has been swift. FERC made an appeal for the case to be re-heard in front of the full judiciary of the court instead of a three-judge panel. FERC is supported by a number of additional organizations requesting a re-hearing including the National Resources Defense Council; the Environmental Defense Fund; regional grid operators PJM and the California ISO; and various utility regulators and demand response aggregators.

PJM has joined FERC in seeking to reinstate FERC Order 745. PJM’s filing expresses its desire to maintain federal jurisdiction of demand response. By appealing for reinstatement, PJM preserves its options regarding relying on DR this summer. The RTO claims it has no practical alternative to replacing DR in the short term. For now, all demand response rules remain unchanged until such time that FERC issues a compliance order reflecting tariff changes. Ironically, PJM opposes FERC 745’s decision to mandate equal compensation for demand response but recognizes its importance to its operations.

It will be several weeks (at least) before the Court of Appeals decides whether to re-hear the case. The Court has a very limited history of agreeing to re-hear cases. If the Court declines, FERC could decide to take the matter to the U.S. Supreme Court.

Given the uncertainty of court appeals, there is a good chance that a final adjudication may be years away. In the meantime, it appears the states may need to step up to ensure that demand response remains a key wholesale supply resource.

References

  1. RTO Insider, PJM to Seek Rehearing on FERC Order 745. July 9, 2014.
  2. Utility Dive. Despite court setback, demand response is here to stay. Claire Cameron. July 17, 2014.
  3. Scott Hempling, Attorney at Law, C. Circuit Kills Demand Response Compensation: Now What? June 2014.
  4. NRDC Switchboard. D.C. Circuit: When It Comes to Demand Response, Please Think Twice, It’s Not Alright. July 9, 2014.
  5. Ener Comments on Circuit Court Decision on FERC Order 745, BOSTON, May 27, 2014.
  6. Forbes The Winners In FERC’s Demand Response Ruling: Batteries and Software, Not Utilities. May 24, 2014 @ 11:56AM.
  7. Pete Yost, Electric Light and Power. Court vacates FERC Order 745. May 27, 2014.
  8. Personal communications. Pete Langbein, PJM Interconnect, July 2014.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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