The Supreme Court of the United States is set to hear arguments on two questions concerning demand response. This blog entry discusses the first question before the court, concerning federal jurisdiction over demand response.
Demand Response, for purposes relevant here, is a reduction in the consumption of electricity by customers from their expected consumption in response to incentive payments. For a primer, see this report from the Department of Energy.
Demand Response is big business. During 2013, in organized wholesale electricity markets across the United States, the potential peak reduction from demand response was almost 30,000 megawatts, more than six percent of peak demand. The Brattle Group has estimated that a three percent load reduction in the 100 highest peak hours corresponds to a price decrease of six to twelve percent. In short, demand response markedly improves on the dismal elasticity of demand for electricity. In PJM, an organized wholesale market with a footprint spanning 13 states and the District of Columbia, the independent market monitor reports that removing demand response from certain markets could skyrocket by $9 billion the cost of capacity to meet resource adequacy in PJM, more than doubling the cost of capacity.
In a May 2014 decision, the D.C. Circuit Court of Appeals held that the Federal Energy Regulatory Commission lacks jurisdiction under the Federal Power Act to determine compensation in wholesale electricity markets for reductions of demand by end-use consumers. Without federal jurisdiction over compensation, many believe that demand response participation in wholesale electricity markets could come to an end. For example, in the aftermath of the D.C. Circuit opinion, separate filings were submitted to FERC by PJM Interconnection, L.L.C., FirstEnergy Service Company, and the New England Power Generators Association, Inc. seeking removal of, or fundamental change to, demand response participation in wholesale markets. In response, FERC has either denied these filings as premature or allowed them to remain pending.
FERC and the Solicitor General of the United States focused on the D.C. Circuit’s jurisdictional holding in their appeal to the Supreme Court. Indeed, recognizing the danger of losing wholesale demand response, California has switched sides of the “v.” In the D.C. Circuit, California had opposed FERC on arguments distinct from the jurisdictional question. Now, along with Maryland and Pennsylvania, California supports FERC on the jurisdictional question.
The jurisdictional question is one of statutory interpretation. The Federal Power Act gives FERC jurisdiction over sales of electric power for resale. The 2014 D.C. Circuit opinion, and a 2010 FERC order, found that reductions of demand by end-use consumers were not “sales for resale.” But the D.C. Circuit went further, also finding that the reductions did not fall within FERC’s jurisdiction to regulate practices affecting rates of electricity sold for resale. FERC argues that demand response providers are direct participants in wholesale markets, thereby affecting rates and falling within its jurisdiction. The D.C. Circuit found that, in determining the compensation paid for reductions of demand by end-use consumers, FERC was “luring” extra-jurisdictional entities to wholesale markets. The court stated that, under FERC’s analysis, steel, fuel, and labor markets could fall within FERC jurisdiction.
Arguments to the court are due this summer and the oral argument is scheduled for this fall. As the case progresses, this blog will be updated with additional entries.