Why FERC 745 is about more than demand response

By Frank Lacey

Editorial note: The opinions expressed in the following guest blog are the author’s and do not reflect the views of either the Solar Electric Power Association (SEPA) or its board of directors in general.

Ushering in January with a prediction for the top energy stories of the year might seem a bold move, especially in an industry changing more rapidly now than at any time in recent memory.  I am confident, however, in eschewing the traditional “Top 10” list and instead rolling out my own “Top 1” list for 2016.

Specifically, barring some huge or unexpected turn of events, the U.S. Supreme Court’s decision in FERC v. EPSA — aka, the FERC 745 case — will be the biggest energy market story of the year.

The importance and potential impact of FERC 745 can be gauged by the hundreds of people who turned out at the Supreme Court on Oct. 14, the day case was argued, hoping to get one of 50 available seats in the court chamber. A friend, who lined up in the wee hours of the morning, got one of the last seats, but most — a veritable who’s who of the Washington, D.C. energy world — didn’t make the cut, myself included.

And I was in line before 7 a.m.

Waiting for FERC 745: Hundreds lined up outside the U.S. Supreme Court on Oct. 14, 2015, hoping to get a seat for the oral arguments in the FERC 745 case. (Photo: Courtesy of Frank Lacey)

A quick recap will explain what makes this case so critical. The Federal Energy Regulatory Commission (FERC) — the independent government agency regulating interstate transmission of natural gas, oil and electricity — issued Order 745 in 2011, requiring regional grid operators to pay wholesale market rates for dispatchable, cost-effective demand response resources.

In their simplest form, the affected demand response programs pay consumers for cutting their energy use at times of peak demand, in response to a dispatch signal from a grid operator.

A typical demand response curve: Demand response programs can cut or shift load (blue line) at times of peak demand (yellow line). The graph here is intended as a typical, but hypothetical example. (Courtesy of Frank Lacey)

The order was challenged in federal court by the Electric Power Supply Association (EPSA), an industry trade group representing traditional generators, and in May 2014, it was overturned by the U.S. Court of Appeals for the District of Columbia Circuit. It is the D.C. Circuit’s decision — and how it could be applied to other energy market issues if the Supreme Court upholds it — that has elevated 745 to the center of attention for many in the energy sector.

FirstEnergy, a large investor-owned utility, and the New England Power Generators Association (NEPGA), another trade association, have already filed complaints at FERC, seeking to expand the D.C. Circuit’s decision. They want to remove demand response from the regional capacity markets operated by PJM and ISO New England respectively.

PJM is a regional transmission operator (RTO) in the mid-Atlantic and Midwestern regions, while ISO New England is an independent system operator (ISO) in the Northeastern region.  Both operate energy and capacity markets under FERC jurisdiction.

If the Supreme Court upholds the D.C. Circuit decision, other energy resources could soon be under attack from traditional generators, and ISO- and RTO-based electricity markets could be in turmoil.  FERC has not ruled on the FirstEnergy or NEPGA cases, and will not likely do so before the Supreme Court rules in FERC v. EPSA.

Behind-the-meter technologies and regional markets at risk

But the core problem lies not in the fact that the D.C. Circuit has decided that load shift or drop on demand is a state issue, but in the specific language used in its ruling.

“Demand response — simply put — is part of the retail market,” the court stated. “It involves retail customers, their decision whether to purchase at retail, and the levels of retail electricity consumption.  If FERC had directed ISOs to give a credit to any consumer who reduced its expected use of retail electricity, FERC would be directly regulating the retail rate.”

The potential significance of the D.C. Circuit’s reasoning here can be glimpsed simply by replacing the words “demand response” in the beginning of the first sentence with “rooftop solar,” “on-site storage,” “cogeneration” or any other behind-the-meter technology.  If these products can’t compete in the markets over which FERC has jurisdiction, the impact is game-changing.

If the Supreme Court ultimately believes that demand response should be only under state jurisdiction, it could limit the effects of such a decision with a carefully worded opinion.  But given the complexity of energy markets, the justices seem unlikely to adopt all of the nuanced language required to produce that outcome.  More to the point, if the justices believe demand response is a retail product, they might also believe that other behind-the-meter technologies are retail products as well.

Some might argue that state jurisdiction of these technologies is workable, which may or may not be true in the few parts of the country without RTOs or ISOs.  Still, it definitely would be a problem in most parts of the country, where electricity markets operate across state lines and are therefore under FERC jurisdiction.

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For the better part of the past 25 years, energy market stakeholders have worked to eliminate what are truly artificial state barriers.  The wholesale markets have been deregulated, and many states — 15 in total, plus the District of Columbia — have also deregulated or partially deregulated their retail electricity businesses, buying into the logic that the interstate markets are more efficient than a single-state market.

Elimination of these state-line barriers has resulted in consumer savings of billions of dollars annually.  PJM operates the grid across all or parts of 13 Mid-Atlantic and Midwestern states. In its 2014 Annual Report, the company said that its Perfect Dispatch Initiative, aimed at increasing dispatch efficiency, had saved consumers over $1 billion in the past seven years. Overall, PJM said, the regional efficiencies of its system result in annual savings of $2.8 to $3.1 billion.

To understand the full value of regional markets nationwide, multiply these figures by the country’s multiple grid operators, then add the untold savings from competitive retail markets and the innovative products and services they offer, such as residential demand response programs and smart thermostats.

A quarter century of work and billions of dollars in annual savings are all at risk because an adverse decision from the Supreme Court will separate supply-side planning and demand-side planning by placing behind-the-meter technologies and services squarely in the states’ hands. Such a decision could restore the artificial barriers on the demand side that the industry has worked collectively to remove.

Be careful what you wish for

From the regulatory point of view, doing supply planning at the federal level and demand planning at the state level hardly seems feasible.  The result, at best, would be inefficient and difficult to envision compared to today’s systems.

Ironically, if the Supreme Court upholds the D.C. Circuit decision, demand response and all of the other technologies being challenged will survive, but the ISO market mechanism could fall apart.  States will adopt market frameworks to bring these services into their jurisdictions.  Customers and state regulators benefit from and want these new products and services to continue.

In fact, a large group of customers and most of the states operating in ISO markets filed briefs, either through their utility commissions or consumer advocates, or both, urging the Supreme Court to take the case or to simply overturn the D.C. Circuit decision.

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Meanwhile, EPSA, the trade association for generators, which says on its website that its focus is “full competition,” will have potentially begun the process of unraveling truly competitive energy markets.  On that, I say, be careful what you wish for.

My Top 1 energy story of 2016 also comes with a Top 1 wish list. I wish that all my predictions detailed thus far will be wrong.

Rather, I hope that the Supreme Court understands the magnitude of this case, the complexity of the markets and the differences in electricity policies across the country.  I hope the justices realize, first, that no single answer will be right for different electricity markets and, second, that FERC understands how ISO markets are different from regulated states. I hope that the court finds that FERC was right and that ISO markets as designed are fair, competitive and efficient.  I hope that the D.C. Circuit decision is overturned and that the decision is in the headlines for one day only so the energy industry can return its attention to where it should be in 2016.

Hopefully, the year will bring us many new stories of evolving state and regional energy markets all focused on providing the clean, affordable and reliable power — and innovative products and services — we all want.

Frank Lacey is President of Electric Advisors Consulting and a member of the Board of Directors of the Solar Electric Power Association (SEPA).  He can be reached at [email protected].