Considerations for State Regulators and Policymakers in a Post-FERC Order 745 World

By vacating the Federal Energy Commission’s (FERC) Order 745 in Electric Power Supply Association vs. FERC (EPSA, 2014) the U.S. Court of Appeals for the D.C Circuit injected uncertainty into the future of demand response (DR) resources in U.S. wholesale markets. Among several things, the decision explicitly identified “incentive-responsive demand” as a retail transaction, not a wholesale transaction. Thus, demand response, as the industry has come to understand it within the confines of Independent System Operators’ and Regional Transmission Organizations’ (ISO/RTO) administered energy markets, is not under FERC jurisdiction but rather state jurisdiction. However, if the Court of Appeals’ majority arguments are taken to their logical conclusion, then FERC may not have jurisdiction over DR providing any bulk-power system service, not just energy.

This is exactly the conclusion FirstEnergy Corp. espoused when, on the same day the D.C. Circuit Court panel issued its EPSA opinion, the utility filed a complaint with FERC requesting that the federal regulator require the removal of all of PJM Interconnection’s tariff provisions regarding DR in its capacity markets (FERC, 2014a). New England Power Generators Association (NEPGA) followed suit in mid-November asking FERC to order ISO New England to exclude DR resources from the region’s Forward Capacity Market (FERC, 2014b). Both FirstEnergy and NEPGA are not just asking for DR to be excluded from future participation as a directly compensated resource in wholesale capacity markets, but that all existing ISO/RTO capacity contracts with DR resources become null and void.

The legal fight over FERC Order 745 and the D.C. Circuit panel’s decision is set to continue, as the U.S. Solicitor General on January 15, 2015, filed a petition for review of the lower court’s decision in EPSA to the U.S. Supreme Court.

While the courts and parties will continue to weigh in on a distinction between retail and wholesale markets, DR is a resource that does not concern itself with such boundaries. Furthermore, what is being played out in the courts has serious implications for DR and all the benefits it provides electricity systems, and consumers, chief among them helping to keep electricity costs down and the lights on during system emergencies.

Yet, given the uncertainty surrounding how FERC and the federal courts will rule on the various matters before them on this topic, certain affected states run a risk of experiencing a drop in reserve margins and resource adequacy, and a commensurate rise in market prices in the intervening period between DR being excluded from direct participation in wholesale capacity markets should FERC or the courts rule as FirstEnergy and NEPGA have asked, and when statedriven retail DR capacity programs can ramp up as necessary to address this disruption.