In a significant blow to the authority of the Federal Energy Regulatory Commission ("FERC" or "Commission") over incentive-based electricity conservation measures known as demand response, the United States Court of Appeals for the District of Columbia Circuit vacated a seminal FERC rulemaking order in its entirety as ultra vires. Order No. 745, issued in March 2011, required each FERC-approved Regional Transmission Organization ("RTO") and Independent System Operator ("ISO") to modify its energy market tariff to require that a demand response resource be paid the full price established for generators that sell electric energy (known as the locational marginal price) when the demand response resource reduces or limits it electricity consumption.1 In the D.C. Circuit's May 23, 2014 decision, Electric Power Supply Ass'n v. FERC ("EPSA"), the court concluded that Order No. 745 exceeded FERC's authority under the Federal Power Act ("FPA").2 "Because the Federal Power Act unambiguously restricts FERC from regulating the retail market,"3 the court held that the FPA foreclosed FERC's claimed regulatory authority over demand response.4 The court's decision in EPSA has long-term implications for FERC's authority to regulate demand response in the energy, capacity, and ancillary services markets, as well as FERC's authority to regulate practices that "affect" jurisdictional rates under FPA Sections 205 and 206, as limited by FPA Section 201.
The EPSA Decision
FERC Orders Regulating Demand Response
Resources. At issue in EPSA is Order No.
745 in which FERC required RTOs and ISOs to implement or amend
energy market tariffs to compensate providers of demand response
resources based on the marginal value of the resource—the
same method ordinarily used to determine payments to generators
producing electric energy. Although Order No. 745 regulates
compensation in the energy markets, demand response resources also
participate in ancillary services markets and capacity
markets.
FERC's regulations define "demand response" as
"a reduction in the consumption of electric energy by
customers from their expected consumption in response to an
increase in the price of electric energy or to incentive payments
designed to induce lower consumption of electric
energy."5 Order No. 745 divided demand response in
the energy market into two categories: (i) "price-responsive
demand response," which corresponds with higher prices for
retail electricity; and (ii) "incentive payments," which
are paid to aggregators of demand response resources who agree to
reduce or forgo retail electricity purchases at certain
times.6 FERC limited Order No. 745's compensation
requirements to "incentive payments" on the basis that
these payments constituted "wholesale demand response,"
whereas "price-responsive demand response" is a
"retail-level demand response."7 Order No. 745
also established a method for allocating the costs of demand
response payments "among all customers who benefit from the
lower" energy market price that results from demand response
participation in the market.8 These costs were to be
allocated proportionally among all energy market participants when
demand response resources are participating in the
market.9
The D.C. Circuit's EPSA Decision Holds that FPA Section
201 Unambiguously Limits FERC's Authority Over Practices that
"Affect" Wholesale Rates. FERC attempted to
persuade the court that Order No. 745's directive for incentive
payments for demand response resources is permissible because
demand response affects rates in connection with transactions that
are squarely within FERC's authority to
regulate—wholesale sales of electricity.10
Notwithstanding the court's recognition in EPSA that
"demand response is a complex matter that lies at the
confluence of state and federal jurisdiction,"11
the court did not defer to FERC's interpretation of its
statutory authority. Rather, the court found FERC's distinction
between "retail demand response" and "wholesale
demand response" meaningless and "a
fiction."12 In the court's view, if FERC has
the authority to regulate so-called "wholesale demand
response" under Order No. 745's rationale, FERC
necessarily could regulate "retail demand response" in
the same way.13 The EPSA decision rejects
FERC's argument that "when retail consumers voluntarily
participate in the wholesale market, they fall within the
Commission's exclusive jurisdiction to make rules for that
market."14 According to the court, paying demand
response resources not to engage in a certain activity (electricity
consumption) in the retail market is equivalent to direct
regulation of the retail market.15 "The fact that
the Commission is only 'luring' the resource to enter the
market instead of requiring entry does not undercut the force of
Petitioners' challenge. The lure is change of the retail
rate."16
While acknowledging that demand response "affects" the
wholesale market, which might seem to validate FERC's actions
in light of its jurisdiction under FPA Sections 205 and 206 over
rules and regulations "affecting" wholesale rates, the
court reasoned that FERC's authority would be "almost
limitless" if FERC were able to require a change in the retail
market simply because that market has an impact on the upstream
wholesale market.17 Under FERC's approach, the
Commission "could ostensibly [be authorized] to regulate any
number of areas, including the steel, fuel, and labor markets"
because those markets too can affect the market for wholesale
electricity sales.18 The EPSA decision resolves
FERC's jurisdiction at Chevron's first step, where
the "[t]he question is 'whether the statutory text
forecloses the agency's assertion of
authority.'"19 The court interpreted FPA
Sections 205 and 206 in light of the FPA as a whole, focusing on
FPA Section 201's express limitation on FERC's authority
over state regulatory issues. FPA Section 201 grants FERC
jurisdiction "only to those matters which are not subject to
regulation by the States."20
EPSA holds that FPA Section 201's limitation can be
overcome only where Congress has provided FERC a "clear and
specific grant of jurisdiction" over the state regulatory
issue.21 The court concluded that FERC's
"broad" interpretation of what "affects rates"
under FPA Sections 205 and 206 does not constitute such an express
grant.22 "Otherwise, FERC could engage in direct
regulation of the retail market whenever the retail market affects
the wholesale market, which would render the retail market
prohibition useless."23
EPSA also distinguishes Connecticut Department of
Public Utility Control v. FERC, which upheld FERC's
regulation of the installed capacity markets on the basis that the
markets affect jurisdictional rates.24 Although
installed capacity market regulations resulted in the construction
of new generation facilities, a matter subject to exclusive state
control, EPSA concluded that the regulations at issue in
Connecticut did not directly regulate the construction of
new generation.25 EPSA distinguished between
rules that incidentally result in increases in non-jurisdictional
activities (i.e., the "logical byproduct" of FERC's
regulation in Connecticut was the construction of
additional generation facilities),26 and rules intending
to alter nonjurisdictional activities (i.e., a rule that
"reaches directly into the retail market to draw retail
consumers into [FERC's] scheme").27 Rules that
incidentally incentivize nonjurisdictional actions are not
ultra vires, whereas rules that intend a change in
nonjurisdictional behavior are a form of direct regulation and
therefore are beyond the scope of FERC's
authority.28 In EPSA,
"FERC's metaphysical distinction between
price-responsive demand and incentive-based demand [could not]
solve its jurisdictional quandary."29
EPSA Rejects Jurisdictional Claim Based on a Statement of
Policy. As additional support for its jurisdiction, FERC
relied on a congressional policy statement accompanying the Energy
Policy Act of 2005, which stated that federal facilitation of
demand response and removal of unnecessary barriers to demand
response were intended by the Act.30 The court concluded
that FERC misinterpreted the congressional policy
statement.31 Even if FERC's interpretation of the
policy statement had been correct, EPSA holds that FERC
"cannot rely on the [policy] section for an independent source
of power."32 Such statements are merely
"statements of policy," and "not delegations of
regulatory authority."33 At most, congressional
policy statements can be used to assist the court (or FERC) in
delineating "the contours of statutory
authority."34
What Comes Next?
The EPSA decision is likely to have a wide-ranging
impact on FERC's efforts to regulate the way demand response
resources participate in RTO/ISO markets. FERC, the RTOs, and
market participants are likely to spend considerable time and
effort coming to grips with the repercussions of the court's
decision.
Other Demand Response Products Such As Ancillary Services
Markets and Capacity Markets. In the wholesale energy
markets, energy is supplied to meet the actual demand for
electricity, and such demand fluctuates both daily and in real
time. In contrast, in the wholesale capacity market, a seller makes
a commitment, in advance, that the seller has the capability to
meet a specified quantity of customer demand when called upon to do
so.35 The concept of capacity is particularly important
to planning in advance for, and meeting, the year's anticipated
peak demand for electricity. Ancillary services are distinct from
energy and capacity. As relevant here, ancillary services rely on
resources other than physical transmission facilities to support
the transmission of electric energy from seller to purchaser and to
assist transmitting utilities in maintaining reliable operation of
the transmission system.
The EPSA decision directly applies to Order No. 745, which
imposed specific requirements on the way demand response resources
participate in the RTO-operated energy markets. However, demand
response resources currently participate in both the ancillary
services market and the capacity market. EPSA's broad
holding, premised on demand response being a retail market activity
subject to state regulation, may well prompt challenges to the way
FERC regulates these other markets. In both the ancillary services
markets and capacity markets, demand response resources are paid to
reduce consumption in the retail energy market in response to
particular criteria.36 But the RTO tariffs governing
demand response resource participation in each of these markets
have been developed in part through voluntary actions resulting
from the RTO stakeholder process and in part in response to
specific FERC requirements. Unraveling specific aspects of the
energy market tariffs, or the tariffs governing other markets, will
have repercussions for aspects of the markets over which FERC
clearly has jurisdiction.
The process of reevaluating the way FERC regulates these markets
already has begun. For example, one FPA Section 206 complaint based
on EPSA already has been filed, on May 23, 2014,
challenging those aspects of PJM's FERC-approved tariff that
apply to demand response resource participation in the capacity
markets.37 The complaint relies on EPSA's
holding that the FPA "unambiguously restricts FERC from
regulating the retail market."38 This complaint is
likely to be the first of many actions by market participants,
RTOs, and FERC itself to determine the permissible contours of
policies governing demand response resources in the nation's
wholesale markets.
Other Cases Where FERC Has Justified Its Proposals Using
Its Regulatory Authority Over Practices That "Affect"
Rates. The EPSA decision's approach to statutory
interpretation may have ripple effects in other contexts. EPSA
concludes that FERC cannot broadly interpret FPA Sections 205 and
206 to sidestep FPA Section 201's specific
limitation.39 In reaching this conclusion, EPSA relies
on a bedrock rule of statutory interpretation that "the
specific governs the general."40 This is
particularly true "when the two are interrelated and closely
positioned, both in fact being parts of" the same statutory
scheme.41 The EPSA decision applies this canon of
statutory interpretation in restricting FERC's authority under
FPA Sections 205 and 206, delineating FPA Section 201's
limitation as a specific provision, whereas the grant of authority
under FPA Sections 205 and 206 is a general provision.42
This reasoning may affect ongoing and future challenges to FERC
regulations and actions.
For example, in a pending appeal, FERC is defending its actions
under Order No. 1000, a landmark rulemaking order governing
electric transmission planning, including the selection of the
entity to build new transmission facilities, on the ground that
Order No. 1000 governs a practice that "affects"
FERC-jurisdictional rates.43 But, like retail energy
markets, transmission construction (including siting and
permitting) is subject exclusively to state
regulation.44 Parties to that appeal have filed letters
with the D.C. Circuit arguing that EPSA's interpretation of FPA
Section 205 and 206 limits FERC's authority over regional
transmission planning.45 Order No. 1000 provides one
example of how EPSA may be used by stakeholders to oppose future
assertions of authority by FERC over practices
"affecting" jurisdictional rates.
Footnotes
1 Demand Response Compensation in Organized Wholesale Energy Markets, Order No. 745, FERC Stats. & Regs. ¶ 31,322 at P 2 (2011), on reh'g and clarification, Order No. 745-A, 137 FERC ¶ 61,215 (2011), reh'g denied, Order No. 745-B, 138 FERC ¶ 61,148 (2012).
2 Elec. Power Supply Ass'n v. FERC, No. 11-1486, slip op. at 14 (D.C. Cir. May 23, 2014). On June 11, 2014, FERC issued a press release stating that it will ask the full D.C. Circuit to rehear en banc the EPSA decision.
3 Id. slip op. at 14.
4 Id. slip op. at 6.
5 18 C.F.R. § 35.28(b)(4) (2013).
6 See EPSA slip op. at 6-7, 10.
7 Id.
8 Order No. 745 at P 5.
9 EPSA slip op. at 5.
10 Id. slip op. at 7-8.
11 Id. slip op. at 3 (quoting Order No. 745).
12 Id. slip op. at 6-7.
13 Id. slip op. at 10.
14 Id. slip op. at 6.
15 Id. slip op. at 11.
16 Id.
17 Id. slip op. at 10.
18 Id. slip op. at 8.
19 Id. slip op. at 5-6 (quoting City of Arlington, Tex. v. FCC, 133 S. Ct. 1863, 1871 (2013))
20 Id. slip op. at 8; see also 16 U.S.C. § 824(a) (2012).
21 EPSA slip op. at 9 (quoting New York v. FERC, 535 U.S. 1, 22 (2002)).
22 Id. slip op. at 9.
23 Id.
24 Connecticut Dept. of Pub. Utility Control v. FERC, 569 F.3d 477 (D.C. Cir. 2009).
25 EPSA slip op. at 10 & n.2.
26 Id. slip op. at 10 n.2.
27 Id.
28 Id.
29 Id. slip op. at 11.
30 Id. slip op. at 12; see also Pub. L. No. 109-58, § 1252(f), 119 Stat. 594, 966 (2005).
31 Id. slip op. at 11-12.
32 Id. slip op. at 12.
33 Id. slip op. at 12 (quoting Comcast Corp. v. FCC, 600 F.3d 642, 654 (D.C. Cir. 2010)).
34 Id. slip op. at 12 (quoting Comcast, 600 F.3d at 654).
35 See, e.g., Connecticut Dept. of Pub. Util. v. FERC, 569 F. 3d 477, 479 (D.C. Cir. 2009).
36 See EPSA slip op. at 11.
37 Complaint of FirstEnergy Service Company, Docket No. EL14-55-000 (filed May 23, 2014.
38 Id. slip op. at 14.
39 Id. slip op. at 8-9.
40 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2071 (2012) (citation omitted); see also EPSA slip op. at 9 (citing RadLAX, 132 S. Ct. at 2071).
41 RadLAX, 132 S. Ct. at 2071 (quoting HCSC-Laundry v. United States, 450 U.S. 1, 6 (1981) (per curiam)).
42 See EPSA slip op. at 8-9.
43 Brief of Respondent FERC, South Carolina Pub. Serv. v. FERC, No. 12-1232, at 34 (D.C. Cir. May 25, 2012); see also Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000-A, 139 FERC ¶ 61,132 at P 151 ("[T]he Commission's authority arises from the fact that planning is a practice that affects rates...."), order on reh'g, Order No. 1000-B, 41. FERC ¶ 61,044 (2012).
44 See, e.g., Piedmont Environmental Council v. FERC, 558 F.3d 304, 314-15 (4th Cir. 2009) (discussing the limits on FERC's backstop authority under FPA Section 216).
45 See Fed. R. App. P. 28(j) letters filed in No. 12-1232 (D.C. Cir.) by PSEG Companies (June 6, 2014), ECF No. 238; South Carolina Public Service Authority, (May 30, 2014), ECF No. 237; and Alabama Public Service Commission, (May 30, 2014), ECF No. 236.
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