In a victory for the demand response industry and the Obama administration, the U.S. Supreme Court has upheld a federal rule aimed at encouraging industrial consumers to cut electricity use.
The justices, in a 6-2 vote January 25, said the Federal Energy Regulatory Commission had acted within its authority in setting rates for demand response payments to large electricity users that cut consumption. The court also upheld the formula used by FERC.
The case, Federal Energy Regulatory Commission V. Electric Power Supply Association et al, centered on the U.S. Federal Power Act, which lets FERC regulate rates only at the wholesale level and leaves retail regulation in the hands of the states. The FERC rule, which was disputed by a coalition of generators, requires wholesale-market operators to use the rate they pay generators to similarly compensate large consumers that cut use during periods of high demand.
The preamble to the 48-page decision summarizes in part as follows:
“The Federal Power Act (FPA) authorizes the Federal Energy Regulatory Commission (FERC) to regulate “the sale of electric energy at wholesale in interstate commerce,” including both wholesale electricity rates and any rule or practice “affecting” such rates. But it places beyond FERC’s power, leaving to the States alone, the regulation of “any other sale”—i.e., any retail sale—of electricity.
“... Faced with [the challenges of high rates at times of peak demand] , wholesale market operators devised wholesale demand response programs, which pay consumers for commitments to reduce their use of power during these peak periods. Just like bids to supply electricity, offers from aggregators of multiple users of electricity or large individual consumers to reduce consumption can be bid into the wholesale market auctions. When it costs less to pay consumers to refrain from using power than it does to pay producers to supply more of it, demand response can lower these wholesale prices and increase grid reliability. Wholesale operators began integrating these programs into their markets some 15years ago and FERC authorized their use. Congress subsequently encouraged further development of demand response.
“... 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 locational marginal price] 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 Court of Appeals for the District of Columbia Circuit vacated the Rule, holding that FERC lacked authority to issue the order be-cause 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.”
In its ruling the court held that,
1, the FPA provides FERC with the authority to regulate wholesale market operators’ compensation of demand response bids.
And 2, that FERC’s decision to compensate demand response providers at LMP—the same price paid to generators—instead of at LMP-G, is not arbitrary and capricious.