FERC Seeks Rehearing of Order 745, What it Means for Demand Response

Source: CEB Blogs, executiveboard.com

Source: CEB Blogs, executiveboard.com

Last month, the Federal Energy Regulatory Commission (“FERC”) announced it would seek rehearing of a recent US Court of Appeals decision, which changes how demand response providers are compensated in wholesale energy markets. The court’s decision was a setback for demand response, a clean energy resource used by utilities and electric grid operators that pays people to conserve energy during periods of peak or high demand.

Demand response balances stress on the electric grid by reducing demand for electricity, rather than increasing supply. This makes our grid more efficient, reduces harmful air emissions from fossil fuel plants, and keeps electricity prices lower. The court decision is significant because it invalidates FERC Order 745. This Order required that demand response be fairly valued in the wholesale energy market, allowing it to compete on a level playing field with more traditional electricity resources, like coal and natural gas.

The court split 2-1 in deciding to rescind Order 745. The dissenting opinion, by Judge Edwards, highlights the closely-contested nature of the decision and its far-reaching consequences:

The unfortunate consequence is that a promising rule of national significance – promulgated by the agency that has been authorized by Congress to address the matters in issue – is laid aside on grounds that I think are inconsistent with the statute, at odds with applicable precedent, and impossible to square with our limited scope of review.

What is at stake?

In the wholesale energy market, electricity is like any other commodity, bought wholesale and resold to consumers at retail prices. For example, a power plant generates electricity that you use in your home — and it needs to be paid for that electricity. This happens in wholesale energy markets, which operate at a regional level and cover large parts of the United States. PJM Interconnection, for example, covers all or parts of 13 states (and Washington D.C.) throughout the Midwest and Northeast.

By rescinding Order 745, the court has devalued demand response in wholesale energy markets and reduced the incentive for demand response providers to offer this service.

Why the decision should be reversed

Demand response shifts demand for electricity to a different time of day when inexpensive, carbon-free renewable energy is more abundant. This reduces energy use during high demand periods, when an additional, fossil-fueled power plant may need to be turned on to balance energy supply with demand. Demand response provides a number of other important benefits, including improved energy resiliency and renewable energy integration. This decision by the three-judge panel of the US Court of Appeals stymies this transition to a clean energy future.

However, if the full court votes to rehear the case, it can reverse the panel’s decision to rescind Order 745.

FERC’s authority to regulate the sale of electricity for re-sale to others– known as wholesale energy – was granted by Congress under the Federal Powers Act. The Federal Powers Act doesn’t speak directly to what should be done with tools like demand response. However, this ambiguity does not mean prohibition. In fact, the opposite is true, with courts typically deferring to agencies like FERC to provide expertise on matters they regulate.

Moreover, Order 745, when in effect, provided an opportunity in deploying and motivating demand response while not encroaching on state rights. It was a pathway for demand response into the wholesale energy market, but did not limit a state's decisions or laws in respect to the resource.

Moving Forward

The court’s decision to rescind Order 745 fails to realize the full benefits of demand response, including cleaner, more affordable electricity options for all Americans. However, demand response will still play an important part in making our electricity grid more efficient. The court’s decision could be reheard and overturned. In the alternative, FERC could create a new way to ensure that demand response is fully incorporated into wholesale energy markets. Regardless of the path forward, demand response will remain important, as a critical asset in moving toward a better, cleaner, and more modernized electric grid.

Since this blog post was published, EDF, with NRDC and CUB, have requested invitation to file a brief of Amici Curiae in this case.

On July 18th, the D.C. Circuit of Appeals ordered that petitioners file a response to FERC's request for rehearing en banc in the Order 745 case. This is welcome news, a necessary predicate to prevailing en banc, and the Court has moved swiftly.  Now we will wait to see if the court acts on the basis of the pleadings filed or requests additional briefing/argument.   

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