By Matthew Rose, Enerdynamics Facilitator and Director at EMI Consulting

Background: FERC Order 745, issued in 2012, required RTOs to pay the full locational marginal price (LMP) to economic demand response resources participating in real-time and day-ahead markets as long as the resource was cost effective. A coalition of generators sued FERC making the case that FERC had overstepped its authority by setting rates for demand response. The plaintiffs argued that demand response is a retail, not wholesale, activity and, since FERC only has jurisdiction over wholesale activities, the decision should be vacated. The argument was upheld by the DC Circuit Court in May 2015, resulting in an appeal to the U.S. Supreme Court. For more information on how demand response affects wholesale markets see: http://marketing.enerdynamics.com/Energy-Insider/2012/Q2Electricity.html

After much anticipation and posturing within the demand response (DR) community, the Supreme Court of the United States issued its decision in Federal Energy Regulatory Commission v. Electric Power Supply Association et al (EPSA), restoring FERC Order 745 after the DC Circuit vacated the Order last spring (May 2015).

The Supreme Court’s opinion held that FERC did not overreach its authority. The Court ruled that the FERC Order directly affects wholesale rates and only incidentally affects retail rates. This ruling allows FERC to continue its regulatory oversight over demand response in the wholesale market. There are many interpretations of the ruling, but there is consensus that the ruling highlights how wholesale and retail markets are converging and getting closer together. Wrote Justice Kagan:

“It is a fact of economic life that the wholesale and retail markets in electricity, as in every other known product, are not hermetically sealed from each other.”

Most of the industry believes the immediate impact from the Supreme Court’s decision is certitude. Wholesale market operators and the associated suppliers and aggregators can now move forward without fear that the rulemaking must be changed. PJM issued a statement saying it was pleased with the ruling:

“Certainty and continuity are important in markets. Demand response brings value to competitive wholesale markets and is a vital component of electric system reliability.”

The decision also upheld FERC’s authority to set compensation, which requires grid operators to pay DR providers the relevant locational marginal price (LMP) equal to generation. The Supreme Court noted that in technical areas such as electric rate design, courts provide FERC “great deference” in decision-making.

The court rejected complaints that FERC was overcompensating for the demand response resources by paying the full LMP.  It did not agree with the claim that a DR participant’s avoided retail cost of power should be subtracted from the wholesale compensation. As noted in the ruling, The Court, throughout its opinion, endorsed FERC’s rationale for Order 745’s policy and deferred to its judgment on the technical issue of the level of DR compensation, finding payment of full locational marginal price was not “arbitrary and capricious.” The decision to pay full LMP to demand response providers, despite not facing overhead costs of generators and benefits from not having to pay for their foregone reduction in power, was a controversial issue throughout the various court proceedings.

There is some consensus that the Supreme Court decision ensures the continuation of the status quo, since all the regional transmission organizations (RTOs) under the FERC’s jurisdiction have been operating under the existing rules all along. There were some RTO attempts to advance alternative DR program design plans, but none of the plans were ever adopted or approved. The industry view seemed to follow that there was much more downside risk to the alternative outcome (shifting demand response rulemaking to the states) than upside to the court decision.

References:

Adam Liptak, Supreme Court Upholds Efforts on Managing Electricity Through Pricing, Jan 25, 2016 The New York Times

Rich Heidorn Jr., Supreme Court Upholds FERC Jurisdiction On DR-LMP Pricing Also Upheld, January 25, 2016 RTO Insider

Debra Ann Palmer And Melan Patel, Supreme Court Issues Ruling on FERC Order No. 745, February 3, 2016 Schiff Hardin-Energy and Environmental Law Advisor

Barry Cassell, U.S. Supreme Court Upholds FERC Authority to Set Demand Response Compensation. January 25, 2016 Transmission Hub

The United States Supreme Court, Federal Energy Regulatory Commission v Electric Power Supply Association. Docket No. 14-180, decided January 25, 2016