Summary:The Supreme Court is considering whether it is federal or state government that has authority to regulate demand response, a decision that will have important implications for the future of the electric industry in the U.S.
The development of demand response is instrumental to competitively restructuring the nation’s wholesale electricity markets, as it is a distributed resource that offsets the generation market power inherent in this former monopoly industry. Yet the United States Supreme Court may fundamentally alter this strategy. The court is currently considering whether it is the federal or the state government that has the legal authority to regulate this increasingly critical electric resource. Currently, both the Federal Energy Regulatory Commission (FERC) and state public utility commissions take responsibility for the growth of this clean and low-cost resource. But many interests in the highly technical, and tightly regulated, electric utility industry are hotly divided over FERC’s most recent demand response initiative, known as FERC Order 745.
As background, the United States electric grid, one of the engineering marvels of the modern world, constantly seeks equilibrium between electricity production and consumption to provide us with instantaneous access to things like lights, air conditioning, and Netflix. In seeking this balance, the grid is not well equipped to absorb unexpected spikes in electricity demand (increased energy appetite), peak loads (extreme temperatures), or intermittent distributed generation (solar and wind energy). This is due, in part, to the current lack of cost-effective energy storage options on the system. Demand response is a leading strategy to increase the grid’s resilience to these types of inevitable situations.
Demand response is an important distributed resource. It incentivizes customers to reduce peak electricity loads during critical hours, minimizing the long-term need for building generation facilities and the short-term cost of ramping up expensive, dirty generators. Demand response programs can be consumer-driven, as with local utility-implemented, time-based rates (state regulated). They can also be regionally aggregated, as with centrally directed peak load reductions for economic or emergency reasons (federally regulated).
FERC, an independent agency tasked with regulating the interstate transmission of electricity, has statutory obligations to maintain the reliability of the regional grid at a fair cost to the consumer. FERC supports effective implementation of demand response because it can help mitigate generation market power and enhance reliability. In March 2011, FERC published a final rule for Order 745, which expanded its existing demand response initiatives by allowing demand response resources to provide electricity to the grid in lieu of a generation resource. Under the rule, FERC would pay this load reduction the same price paid to a generating resource supplying additional energy to the grid. Electric loads would reap a two-fold benefit by reducing retail rate payments, and also receiving the wholesale market energy price for reducing demand on the grid.
A number of parties oppose Order 745. The electric generators’ trade group, the Electric Power Supply Association (EPSA), has taken this petition against FERC to the federal courts. Agreeing with these opponents, the D.C. Circuit Court held that FERC has no authority to regulate demand response because regulation of retail markets is explicitly left to the states. Additionally, even if FERC has the statutory authority to execute it, the court found the pricing scheme under Order 745 arbitrary and capricious.
On Oct. 14, 2015, the Supreme Court heard oral arguments seeking to resolve both of these arguments. During oral argument at the Supreme Court, Justice Anthony Kennedy said that, while the wholesale and retail markets affect each other, “we have to make the distinction between the end of federal power and the beginning of local power.” This case is certain to center around the role of regulatory agencies, while the court attempts to answer the question, “Where did Congress draw the line for regulating the price of electricity?”
If the Supreme Court upholds the D.C. Circuit Court’s decision, then Order 745 will be vacated and FERC will need to end this, and likely other, previously enacted demand response programs, slowing the implementation of this critical electric resource. If the court reverses the decision on state versus federal jurisdiction, the rule will remain in place, though the court could also find that FERC must develop a more just and reasonable rate. Either decision will have important implications for the future of the electric industry and its response to other sweeping changes, such as the Clean Power Plan.