US Supreme Court upholds wholesale demand response

The Supreme Court of the United States has issued an opinion upholding regional electricity grid operators' ability to operate wholesale demand response programs under federal authority. In that opinion, FERC v. Electric Power Supply Assn., the Supreme Court reversed a lower court's decision invalidating the Federal Energy Regulatory Commission's regulation of electricity demand response. While further evolution of demand response will continue, the Supreme Court's 6-to-2 ruling puts regional wholesale demand response programs back on surer footing after the uncertainty injected by the lower court's previous ruling. A grid portfolio including some degree of demand response can provide beneficial environmental, reliability, and economic effects compared to pure generation. It appears relatively more likely that existing regional wholesale demand response programs may continue to operate under federal authority, and relatively less likely that a new state-driven demand response paradigm will arise.

As described in the Supreme Court opinion, wholesale electricity demand response programs pay consumers for commitments to reduce their consumption of electricity during peak demand periods or other times of scarcity or high prices. For about 15 years, wholesale market operators have increasingly adopted wholesale demand response programs, with the blessing of both Congress and the FERC. In 2011, the FERC issued its Order No. 745, establishing a rule requiring market operators to pay the same price to cost-effective demand response providers for conserving energy as to generators for producing it.

But that order was challenged by an association of generators, among others. In May 2014, the D.C. Circuit Court of Appeals issued a ruling in Electric Power Supply Association v. Federal Energy Regulatory Commission vacatingOrder No. 745. Its chief logic was that FERC lacked authority to issue the order on jurisdictional grounds -- because in the lower court's view, Order No. 745 directly regulates the retail electric market. Under the Federal Power Act, FERC is authorized to regulate "the sale of electric energy at wholesale in interstate commerce," but cannot regulate "any other sale" (i.e. any retail sale) of electricity.

But today's Supreme Court ruling held that the Federal Power Act does provide FERC with the authority to regulate wholesale market operators' compensation of demand response bids. The Court divided its analysis of this point in three parts.

First, the Supreme Court held that the practices at issue directly affect wholesale rates. In the Court's words, "Wholesale demand response is all about reducing wholesale rates; so too the rules and practices that determine how those programs operate."

Second, the Supreme Court noted that FERC has not regulated retail sales. "Here, every aspect of FERC's regulatory plan happens exclusively on the wholesale market and governs exclusively that market's rules. The Commission's justifications for regulating demand response are likewise only about improving the wholesale market." Putting the first and second sets of conclusions together, the Court found that the rule established by Order No. 745 complies with the plain terms of the Federal Power Act.

Third, the Court noted that adopting a contrary view would conflict with the core purposes of the Federal Power Act: "The FPA should not be read, against its clear terms, to halt a practice that so evidently enables FERC to fulfill its statutory duties of holding down prices and enhancing reliability in the wholesale energy market."

The Supreme Court also addressed an alternative holding by the D.C. Circuit Court that the Order No. 745 compensation scheme is arbitrary and capricious under the Administrative Procedure Act. The Supreme Court noted that its "important but limited role" in reviewing FERC's decision "is to ensure that FERC engaged in reasoned decisionmaking." Noting FERC's detailed explanation of its choice to compensate demand response providers at LMP, the same price paid to generators, and its lengthy responses to contrary views, the Supreme Court held that "FERC's serious and careful discussion of the issue satisfies the arbitrary and capricious standard."

Justice Kagan delivered the Court's opinion, joined by Chief Justice Roberts and Justices Kennedy, Ginsburg, Breyer, and Sotomayor. Justice Scalia filed a dissenting opinion, in which Justice Thomas joined, noting his belief that the Federal Power Act prohibits the FERC from regulating the demand response of "retail purchasers of power." Justice Alito did not participate in the case.

The case now returns to the D.C. Circuit for "further proceedings consistent with this opinion." If Order No. 745 stands and FERC retains jurisdiction over the compensation paid to wholesale demand response market participants, it seems likely that existing regional wholesale demand response programs will continue to operate under federal authority. As the Supreme Court found, these wholesale demand response programs can provide significant consumer savings when properly implemented. How will demand response continue to evolve in the wake of FERC v. EPSA? How does this decision reshape the boundary between wholesale (federal) and retail (state) jurisdictions? What's next for demand response?