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Demand Response, Order 745 and the Supreme Court
Demand Response, Order 745 and the Supreme Court Demand response is a low-cost, environmentally friendly resource that helps balance electric supply and demand, and is integrally related to FERC’s mission to ensure ‘just and reasonable rates.’ FERC’s Order 745 on demand response has, however, been subject to an incredible amount of scrutiny over the past year, beginning in earnest in May 2014, when the DC Circuit Court of the United States invalidated the Order by a 2-1 vote. That decision is now on hold pending review by the Supreme Court. Michael Panfil
I. Introduction Michael Panfil is an attorney for the Environmental Defense Fund’s Clean Energy Program, focusing on reducing energy waste throughout the electric power grid. He also engages on efforts to reduce emissions throughout the United States by advocating for the deployment of smarter technology, improved design standards, and sustainable practices.
22
On May 4, 2015, the Supreme Court of the United States granted petitions for certiorari on two interrelated cases: FERC v. EPSA and EnerNOC et al. v. EPSA. Both cases, now consolidated by the Supreme Court, involve the same issue: whether the Federal Energy Regulatory Commission (FERC) properly exercised its authority in promulgating Order 745.1 Any grant of certiorari – essentially a
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
decision by the court to hear an appeal – is significant; statistically speaking, the Supreme Court hears less than 1 percent of cases brought.2 However, this case is particularly noteworthy to the electricity industry, given that Order 745 is a federal rule on demand response. FERC’s Order, on its face, is narrow: it simply requires that demand response be given a fair opportunity to compete in one type of regional market, the The Electricity Journal
wholesale energy market, by setting compensation comparable to that received by traditional sources of generation when providing comparable benefit. Demand response is a low-cost, environmentally friendly resource that helps balance electric supply and demand, and is integrally related to FERC’s mission to ensure ‘‘just and reasonable rates.’’3 FERC Order 745 has, however, been subject to an incredible amount of scrutiny over the past year, beginning in earnest in May 2014, when the D.C. Circuit Court of the United States invalidated the Order by a 2-1 vote. That decision is now on hold pending review by the Supreme Court. his ongoing legal battle is discussed below, first explaining demand response and the value it affords. Second, FERC Order 745 is described, as well as the interplay between federal and state authority in electricity regulation. Lastly, the history of this case and legal process ahead is examined.
T
II. Demand Response To ensure customers have reliable, consistent access to electricity, supply and demand must be balanced at all times on the electric grid. Energy sources like coal and natural gas balance increased customer demand by increasing electric supply. Demand response balances the grid in a different way: by reducing June 2015,
Vol. 28, Issue 5
demand elsewhere in the system. Demand response is typically aggregated reductions in demand, deployed in the same way and for the same reason as traditional fuel sources – to meet increased demand and balance it with proper supply. By reaching this same end in a different way, demand response operates as a resource that makes the grid more efficient. This efficiency, in turn, translates to quantifiable, real-world benefits.
By reducing nonessential demand, demand response helped keep the grid balanced and avoid blackouts.
First, demand response reduces system costs by avoiding the need to turn on the most costly power plants. In the long term, demand response can further reduce system costs by avoiding or delaying the need to build such plants in the first place. The savings are substantial: in 2013, for example, demand response saved customers in the midAtlantic region $11.8 billion in lower electricity prices.4 econd, demand response supports a more reliable and resilient grid by offering a different balancing pathway. For example, the 2014 Polar Vortex
S
rendered a number of coal and natural-gas-fired power plants unable to perform. At the same time, access to electricity was particularly important due to the extreme cold. By reducing nonessential demand, demand response helped keep the grid balanced and avoid blackouts.5 Third, demand response provides environmental benefits. Because the power plants used to balance peak demand also tend to be the most polluting, demand response reduces CO2 emissions and air pollution by foregoing the need for these typically fossilfueled energy sources. It also has the potential to help integrate more clean, renewable energy, like wind and solar, which predictably vary in output throughout the day. For example, when the sun stops shining or the wind stops blowing, demand response – a quick-acting resource – can be used to ‘‘firm’’ these renewable resources by ensuring electricity continues its flow, uninterrupted.
III. FERC Order 745 FERC, under the Federal Power Act (FPA), is required to ensure electricity rates are ‘‘just and reasonable’’ at the wholesale, interstate level. Because demand response is a low-cost resource, it serves as an important tool to ensure rates are indeed ‘‘just and reasonable.’’ In this context, it is thus unsurprising that FERC promulgated Order 745 in 2011.6
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
23
This relatively narrow Order requires that in wholesale energy markets, demand response receive comparable compensation to traditional energy sources so long as it meets a ‘‘net benefits’’ test. The Order was additionally carefully crafted to respect state jurisdiction, providing an avenue for demand response into federally regulated markets without limiting a state’s ability to control and spur the resource on its own should it so choose. To unpack this Order, further description of the three underlined elements above is helpful: Wholesale energy markets: FERC’s authority extends to the regulation over the sale of electricity for re-sale to others. This authority can be contrasted to intrastate or retail sales of electricity, typically from utility to end-use customers, which are regulated by state public utility commissions (PUC). Wholesale transactions, however, often take place in regional electricity markets run by independent system operators’’ (ISOs). ISOs oversee a number of different markets, such as the wholesale capacity market, ancillary services market, and, at issue here, the wholesale energy market. Order 745 only impacted wholesale energy markets, where electricity is bought and sold for re-sale to others.7 Comparable compensation: Traditional power resources are paid a ‘‘locational marginal price’’ (LMP) determined by the market 24
in a given ISO. In general, this price is based on the outcome of competitive energy auctions. Under Order 745, demand response must receive the same compensation as any other energy resource in the marketplace, leveling the playing field between it and traditional fuel sources. Net benefits test: To enter wholesale energy markets, FERC required demand response meet a test to ensure that, on balance, the
EPSA’s argument rested upon the distinction in authority between the federal and state government.
resource was providing ‘‘net benefits’’ to the electric grid. To meet this test, the ‘‘benefits to load from the reduced LMP that result from dispatching demand response resources [must] exceed the costs of paying LMP to those resources.’’8 This test provided an important gatekeeper function: any demand response being used in the electric grid must, by the Order’s very nature, be costeffective. aken together, these elements of Order 745 ensured demand response would be fairly paid when providing customers and the electric grid
T
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
value in the form of a lower cost, environmentally friendly resource.
IV. EPSA V. FERC The Electric Power Supply Association (EPSA) filed suit against FERC, alleging that Order 745 was outside of FERC’s jurisdiction. EPSA’s arguments would prove persuasive to the D.C. Circuit Court of Appeals, which found for the Association on both grounds in a 2-1 decision. EPSA’s argument rested upon the distinction in authority (discussed above in section III) between the federal and state government. FERC’s authority covers interstate, wholesale transactions; state PUC authority covers intrastate, retail transactions. EPSA’s argument was, in essence, that demand response was a retail product because it is supplied by end users of electricity. In a divided opinion, the court agreed, holding that demand response consists of actions taken at the retail level by individual end users. EPSA made one additional argument, that the compensation scheme designed by FERC was ‘‘arbitrary and capricious’’ – in other words, that FERC had not weighed nor considered sufficient evidence in deciding demand response should receive comparable compensation to traditional sources of generation. Again, the court agreed in a 2-1 decision. Both holdings by the The Electricity Journal
three-judge panel included a vigorous dissent by Judge Harry Edwards. he decision by the majority overlooked well-established law and precedent in FERC’s favor. It likewise attempted to create a clear, bright-line distinction between federal and state authority despite the complex, interrelated physical realities of energy and the grid, with power overlapping and moving between states and regions constantly to ensure power is continuously available. It likewise ignored the tremendous deference, noted above, which FERC gave to states. For example, FERC gave states express ability to opt out should they chose to. In sum, Order 745 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. The dissenting opinion summarized this view well and starkly contrasted with the majority, with Judge Edwards stating:
T
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.9
FERC swiftly appealed the decision to the larger D.C. Circuit
June 2015,
Vol. 28, Issue 5
Court of Appeals through a process known as a request for en banc rehearing. Following a denial of this request, FERC, via the Solicitor General, filed a petition for certiorari to the Supreme Court. This petition, as noted earlier, has now been granted. ith the petition granted, the path forward is through the Supreme Court. There are reasons for optimism, because Order 745 was carefully crafted to fall within FERC’s jurisdiction and to respect state jurisdiction. As the United State Solicitor General rightly stated, Order 745 ‘‘governs only payments made by wholesale power purchasers for demand response commitments used by wholesale market operators to set the wholesale price.’’10 Regardless of the Supreme Court’s decision, one thing is certain, however: demand response will remain an important resource and provide benefit to customers, the grid, and the environment. The value afforded by this resource is simply too great to remove from the system. It is these benefits, which in turn help make electric rates just and reasonable, that FERC properly carried out in Order 745. It is now up to the Court to decide whether Order 745 will continue to help further this central mission.&
W
Endnotes: 1. The Supreme Court granted two questions presented: (1) Whether the
Federal Energy Regulatory Commission reasonably concluded that it has authority under the Federal Power Act, 16 U. S. C. 791a et seq., to regulate the rules used by operators of wholesale electricity markets to pay for reductions in electricity consumption and to recoup those payments through adjustments to wholesale rates; and (2) Whether the Court of Appeals erred in holding that the rule issued by the Federal Energy Regulatory Commission is arbitrary and capricious. See http:// www.supremecourt.gov/orders/ courtorders/050415zor_7648.pdf 2. See http://www.supremecourt. gov/faq.aspx 3. See Federal Power Act Section 205 and 206. 4. http://www.prweb.com/releases/ 2014/09/prweb12182218.htm 5. http://blogs.edf.org/ energyexchange/2014/06/30/ resiliency-demand-response-canhelp-prevent-blackouts-in-thenortheast/?_ga=1.55674924. 642161300.1423634360 6. See FERC Order 745, available at: http://www.ferc.gov/Event Calendar/Files/20110315105757RM10-17-000.pdf 7. This can be contrasted to the other named markets, such as the wholesale capacity market, where future energy commitments are bought and sold and ancillary services markets, where energy for use in maintaining the electric grid is bought and sold. 8. https://www.ferc.gov/media/ news-releases/2011/2011-1/03-15-11. asp 9. http://www.cadc.uscourts.gov/ internet/opinions.nsf/ DE531DBFA7DE1A BE85257CE1004F4C53/$file/ 11-1486-1494281.pdf 10. http://blogs.edf.org/ energyexchange/files/2014/12/ FERC-v-EPSA-Pet.pdf at 28
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
25
I. Introduction Michael Panfil is an attorney for the Environmental Defense Fund’s Clean Energy Program, focusing on reducing energy waste throughout the electric power grid. He also engages on efforts to reduce emissions throughout the United States by advocating for the deployment of smarter technology, improved design standards, and sustainable practices.
22
On May 4, 2015, the Supreme Court of the United States granted petitions for certiorari on two interrelated cases: FERC v. EPSA and EnerNOC et al. v. EPSA. Both cases, now consolidated by the Supreme Court, involve the same issue: whether the Federal Energy Regulatory Commission (FERC) properly exercised its authority in promulgating Order 745.1 Any grant of certiorari – essentially a
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
decision by the court to hear an appeal – is significant; statistically speaking, the Supreme Court hears less than 1 percent of cases brought.2 However, this case is particularly noteworthy to the electricity industry, given that Order 745 is a federal rule on demand response. FERC’s Order, on its face, is narrow: it simply requires that demand response be given a fair opportunity to compete in one type of regional market, the The Electricity Journal
wholesale energy market, by setting compensation comparable to that received by traditional sources of generation when providing comparable benefit. Demand response is a low-cost, environmentally friendly resource that helps balance electric supply and demand, and is integrally related to FERC’s mission to ensure ‘‘just and reasonable rates.’’3 FERC Order 745 has, however, been subject to an incredible amount of scrutiny over the past year, beginning in earnest in May 2014, when the D.C. Circuit Court of the United States invalidated the Order by a 2-1 vote. That decision is now on hold pending review by the Supreme Court. his ongoing legal battle is discussed below, first explaining demand response and the value it affords. Second, FERC Order 745 is described, as well as the interplay between federal and state authority in electricity regulation. Lastly, the history of this case and legal process ahead is examined.
T
II. Demand Response To ensure customers have reliable, consistent access to electricity, supply and demand must be balanced at all times on the electric grid. Energy sources like coal and natural gas balance increased customer demand by increasing electric supply. Demand response balances the grid in a different way: by reducing June 2015,
Vol. 28, Issue 5
demand elsewhere in the system. Demand response is typically aggregated reductions in demand, deployed in the same way and for the same reason as traditional fuel sources – to meet increased demand and balance it with proper supply. By reaching this same end in a different way, demand response operates as a resource that makes the grid more efficient. This efficiency, in turn, translates to quantifiable, real-world benefits.
By reducing nonessential demand, demand response helped keep the grid balanced and avoid blackouts.
First, demand response reduces system costs by avoiding the need to turn on the most costly power plants. In the long term, demand response can further reduce system costs by avoiding or delaying the need to build such plants in the first place. The savings are substantial: in 2013, for example, demand response saved customers in the midAtlantic region $11.8 billion in lower electricity prices.4 econd, demand response supports a more reliable and resilient grid by offering a different balancing pathway. For example, the 2014 Polar Vortex
S
rendered a number of coal and natural-gas-fired power plants unable to perform. At the same time, access to electricity was particularly important due to the extreme cold. By reducing nonessential demand, demand response helped keep the grid balanced and avoid blackouts.5 Third, demand response provides environmental benefits. Because the power plants used to balance peak demand also tend to be the most polluting, demand response reduces CO2 emissions and air pollution by foregoing the need for these typically fossilfueled energy sources. It also has the potential to help integrate more clean, renewable energy, like wind and solar, which predictably vary in output throughout the day. For example, when the sun stops shining or the wind stops blowing, demand response – a quick-acting resource – can be used to ‘‘firm’’ these renewable resources by ensuring electricity continues its flow, uninterrupted.
III. FERC Order 745 FERC, under the Federal Power Act (FPA), is required to ensure electricity rates are ‘‘just and reasonable’’ at the wholesale, interstate level. Because demand response is a low-cost resource, it serves as an important tool to ensure rates are indeed ‘‘just and reasonable.’’ In this context, it is thus unsurprising that FERC promulgated Order 745 in 2011.6
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
23
This relatively narrow Order requires that in wholesale energy markets, demand response receive comparable compensation to traditional energy sources so long as it meets a ‘‘net benefits’’ test. The Order was additionally carefully crafted to respect state jurisdiction, providing an avenue for demand response into federally regulated markets without limiting a state’s ability to control and spur the resource on its own should it so choose. To unpack this Order, further description of the three underlined elements above is helpful: Wholesale energy markets: FERC’s authority extends to the regulation over the sale of electricity for re-sale to others. This authority can be contrasted to intrastate or retail sales of electricity, typically from utility to end-use customers, which are regulated by state public utility commissions (PUC). Wholesale transactions, however, often take place in regional electricity markets run by independent system operators’’ (ISOs). ISOs oversee a number of different markets, such as the wholesale capacity market, ancillary services market, and, at issue here, the wholesale energy market. Order 745 only impacted wholesale energy markets, where electricity is bought and sold for re-sale to others.7 Comparable compensation: Traditional power resources are paid a ‘‘locational marginal price’’ (LMP) determined by the market 24
in a given ISO. In general, this price is based on the outcome of competitive energy auctions. Under Order 745, demand response must receive the same compensation as any other energy resource in the marketplace, leveling the playing field between it and traditional fuel sources. Net benefits test: To enter wholesale energy markets, FERC required demand response meet a test to ensure that, on balance, the
EPSA’s argument rested upon the distinction in authority between the federal and state government.
resource was providing ‘‘net benefits’’ to the electric grid. To meet this test, the ‘‘benefits to load from the reduced LMP that result from dispatching demand response resources [must] exceed the costs of paying LMP to those resources.’’8 This test provided an important gatekeeper function: any demand response being used in the electric grid must, by the Order’s very nature, be costeffective. aken together, these elements of Order 745 ensured demand response would be fairly paid when providing customers and the electric grid
T
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
value in the form of a lower cost, environmentally friendly resource.
IV. EPSA V. FERC The Electric Power Supply Association (EPSA) filed suit against FERC, alleging that Order 745 was outside of FERC’s jurisdiction. EPSA’s arguments would prove persuasive to the D.C. Circuit Court of Appeals, which found for the Association on both grounds in a 2-1 decision. EPSA’s argument rested upon the distinction in authority (discussed above in section III) between the federal and state government. FERC’s authority covers interstate, wholesale transactions; state PUC authority covers intrastate, retail transactions. EPSA’s argument was, in essence, that demand response was a retail product because it is supplied by end users of electricity. In a divided opinion, the court agreed, holding that demand response consists of actions taken at the retail level by individual end users. EPSA made one additional argument, that the compensation scheme designed by FERC was ‘‘arbitrary and capricious’’ – in other words, that FERC had not weighed nor considered sufficient evidence in deciding demand response should receive comparable compensation to traditional sources of generation. Again, the court agreed in a 2-1 decision. Both holdings by the The Electricity Journal
three-judge panel included a vigorous dissent by Judge Harry Edwards. he decision by the majority overlooked well-established law and precedent in FERC’s favor. It likewise attempted to create a clear, bright-line distinction between federal and state authority despite the complex, interrelated physical realities of energy and the grid, with power overlapping and moving between states and regions constantly to ensure power is continuously available. It likewise ignored the tremendous deference, noted above, which FERC gave to states. For example, FERC gave states express ability to opt out should they chose to. In sum, Order 745 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. The dissenting opinion summarized this view well and starkly contrasted with the majority, with Judge Edwards stating:
T
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.9
FERC swiftly appealed the decision to the larger D.C. Circuit
June 2015,
Vol. 28, Issue 5
Court of Appeals through a process known as a request for en banc rehearing. Following a denial of this request, FERC, via the Solicitor General, filed a petition for certiorari to the Supreme Court. This petition, as noted earlier, has now been granted. ith the petition granted, the path forward is through the Supreme Court. There are reasons for optimism, because Order 745 was carefully crafted to fall within FERC’s jurisdiction and to respect state jurisdiction. As the United State Solicitor General rightly stated, Order 745 ‘‘governs only payments made by wholesale power purchasers for demand response commitments used by wholesale market operators to set the wholesale price.’’10 Regardless of the Supreme Court’s decision, one thing is certain, however: demand response will remain an important resource and provide benefit to customers, the grid, and the environment. The value afforded by this resource is simply too great to remove from the system. It is these benefits, which in turn help make electric rates just and reasonable, that FERC properly carried out in Order 745. It is now up to the Court to decide whether Order 745 will continue to help further this central mission.&
W
Endnotes: 1. The Supreme Court granted two questions presented: (1) Whether the
Federal Energy Regulatory Commission reasonably concluded that it has authority under the Federal Power Act, 16 U. S. C. 791a et seq., to regulate the rules used by operators of wholesale electricity markets to pay for reductions in electricity consumption and to recoup those payments through adjustments to wholesale rates; and (2) Whether the Court of Appeals erred in holding that the rule issued by the Federal Energy Regulatory Commission is arbitrary and capricious. See http:// www.supremecourt.gov/orders/ courtorders/050415zor_7648.pdf 2. See http://www.supremecourt. gov/faq.aspx 3. See Federal Power Act Section 205 and 206. 4. http://www.prweb.com/releases/ 2014/09/prweb12182218.htm 5. http://blogs.edf.org/ energyexchange/2014/06/30/ resiliency-demand-response-canhelp-prevent-blackouts-in-thenortheast/?_ga=1.55674924. 642161300.1423634360 6. See FERC Order 745, available at: http://www.ferc.gov/Event Calendar/Files/20110315105757RM10-17-000.pdf 7. This can be contrasted to the other named markets, such as the wholesale capacity market, where future energy commitments are bought and sold and ancillary services markets, where energy for use in maintaining the electric grid is bought and sold. 8. https://www.ferc.gov/media/ news-releases/2011/2011-1/03-15-11. asp 9. http://www.cadc.uscourts.gov/ internet/opinions.nsf/ DE531DBFA7DE1A BE85257CE1004F4C53/$file/ 11-1486-1494281.pdf 10. http://blogs.edf.org/ energyexchange/files/2014/12/ FERC-v-EPSA-Pet.pdf at 28
1040-6190/# 2015 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2015.05.003
25