United States: FERC Order 745 Affirmed By The United States Supreme Court

On Monday, January 25, 2016, the U.S. Supreme Court issued a decision in FERC v. Electric Power Supply Assn affirming the validity of FERC Order 745, which provides for compensation to consumers for using less power during peak demand periods. The decision overturns the ruling in the D.C. Circuit case, EPSA v. FERC (May 27, 2014) that held that the FERC rule usurps state authority over retail electricity markets.

FERC Order 745, also known as the demand response rule, was issued in March 2011 with the goal of encouraging the participation of demand resources in wholesale markets administered by FERC. Such demand response participants, typically large consumers such as industrial consumers, factories, local utilities or large groups of electricity users, are compensated for reducing or abstaining from energy use during high demand periods by being able to bid such reduced energy consumption on the wholesale market at the same wholesale Locational Marginal Prices ("LMP") as generating resources. By allowing compensation of demand resources for reduced consumption, the wholesale market operates more competitively, thereby benefitting electricity customers and increasing the reliability of the grid.

Led by the Electric Power Supply Association ("EPSA"), several independent power producers challenged Order 745, maintaining that it affects retail markets and thereby infringes on the exclusive jurisdiction of the states over retail rate regulation. Such argument carried the day in the D.C. Circuit in May 2014 and stalled Order 745.

In a 6-2 decision (Justice Alito recused himself from the case) authored by Justice Kagen, the Supreme Court reversed the D.C. Circuit decision and upheld Order 745 as a valid exercise of FERC's authority under the plain terms of the Federal Power Act ("FPA"), affirming FERC's jurisdiction to regulate wholesale markets.

The thrust of the EPSA's argument was that FERC is precluded from structuring wholesale markets in ways that affect retail markets. Since every kilowatt hour sold on the wholesale market becomes a kilowatt hour that is either sold on the retail market or becomes a retail distribution loss, EPSA maintained that FERC had overstepped its bounds by directly affecting the retail markets. The Court saw this argument as an overreach, holding that Order 745 does not function to regulate retail sales even if it does affect the quantity or terms of such sales. Rather, the demand response rule meets the FPA standard of being a directive that "directly affects wholesale rates" because compensating demand resources on the wholesale market lowers wholesale electricity prices. That such practice, and a variety of other wholesale energy transactions, has consequences on the retail market is not of legal significance. In fact, the Court determined that the EPSA's position would subvert the FPA because it would remove from FERC's jurisdiction the ability to regulate wholesale demand response (which is not within the states' authority to regulate), which would in turn prevent FERC from fulfilling its statutory duty to keep wholesale prices in check and enhance the reliability of the wholesale market. The Court further found that FERC had taken necessary steps to avoid intruding on state authority over retail rate regulation by only permitting retail purchasers to participate in the demand response program in the wholesale market if state regulators do not forbid them from doing so.

The Court also held that FERC's decision to compensate demand resources at the same wholesale LMP prices paid to generating resources was reasonable.

The dissent, authored by Justice Scalia and joined by Justice Thomas, argues that the majority decision treats every electricity sale as being within FERC's authority unless it is a demonstrably a retail sale, yet the FPA excludes from FERC's authority any electricity sale except those that are demonstrably wholesale transactions. Since demand response is non-consumption and its customers are energy consumers and not resellers, Justice Scalia argues that it does not involve wholesale sales of electricity and therefore FERC does not have authority to regulate it, either directly or indirectly.

Many environmental groups, including the Natural Resources Defense Council, see this decision as a boost for renewable energy and emissions reductions. Additionally, many experts see the revival of Order 745 as having a positive impact not only on the demand response market, but also on the further emergence of energy storage.

A copy of the Supreme Court decision can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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