In response to a significant decision in May 2014 on the issue of demand response, the United States Solicitor General has asked the U.S. Supreme Court for more time to file a writ of certiorari.
The issue in the DC Circuit’s ruling held demand response is a retail product and, therefore, outside the scope of the Federal Energy Regulatory Commission (FERC) jurisdiction and should be regulated by states. The decision cast doubt on recent auction results, which at least one utility has advocated be thrown out and the auction re-run, a result sure to increase the compensation to the utility and which would increase costs to ratepayers. The outcome in the Supreme Court will have substantial impact on energy generators, demand response providers and, ultimately, customers who may end up paying more for their electricity.
The appeals court held that demand response is solely a retail product and therefore it falls exclusively within state jurisdiction. (Electric Power Supply Association v. FERC 11-1486). Previously, demand response had been treated like a wholesale product and participated in wholesale auctions alongside traditional generation resources. The outcome of that ruling altered the way regional markets price supply. With the elimination of demand response as a resource, additional generation will be required to meet the anticipated customer demand.
The inclusion of demand response in the wholesale auction, however, reduced the amount of generation supply required to meet peak periods of demand and lowered the cost of Capacity (Capacity charges typically represent 7-10 percent of a customer's bill). Demand response works by paying customers to voluntarily reduce their load (or demand) on the system. In this way, demand response participants reduce the amount of power needed to maintain system reliability, and demand response customers are compensated for voluntarily reducing their demand for electricity. In effect, electric generators are paid less and demand response aggregators are paid for helping to reduce load.
The issue is complex to be sure, and also reflects the intersection of the Federal Power Act, FERC’s regulatory authority, and the compensation paid to suppliers and demand response providers under an RTO tariff (i.e. are demand response providers paid the same rate for their “product” as a traditional power plant that has iron in the ground). In a changing market, where distributed generation, empowered consumers, and products like demand response are all competing for attention, the formerly clear areas of law are now much less so. And, at the end of the day, the dollars in question as a result of this decision run into the billions of dollars.
Why is demand response important? During the Polar Vortex of 2014, demand response was called on by regional grid operators in order to maintain the electrical grid during a period of very high demand, coupled with unusually high outage rates. In fact, PJM’s polar vortex analysis showed that demand response performed better than traditional generators in responding to system needs. While this is positive, it is important to remember that in order for the lights to come on when a switch is flipped, there must be an electron being generated somewhere and that happens at power plants, not through demand response. Demand response taken to the extreme means there would be no generation. While no one is asserting that an outcome like that is forthcoming, it does sharply contrast some of the competing views.
This appeal to the Supreme Court on a question as basic as jurisdiction bears watching. As the last two FERC nominees prior to Colette Honorable have learned, the bright lights of scrutiny have been turned toward FERC and the decisions made there have significant impacts on service, reliability, and cost for utility service.