GRID UNLOCK: WHOLESALE MARKET DEMAND RESPONSE PAYMENTS UPHELD

Posted on January 29, 2016 by Brian Rosenthal

By upholding FERC’s regulatory authority over demand response transactions, the Supreme Court finds FERC is properly regulating wholesale electricity market sales operating in interstate commerce (Federal Energy Regulation Commission vs. Electric Power Supply Association).  Associate Justice Scalia’s dissent criticizes the framing of the question.  While acknowledging  FERC’s regulatory authority over wholesale sales, he notes the statutory framework proscribes regulating other sales or those “not at wholesale,” suggesting a proper focus on whether there is a true sale at wholesale includes reviewing whether the prospective participant is in the business of reselling energy.  

Besides the regulatory impact and effect on the markets, Justice Kagan’s majority opinion sends waves by its impact on energy use or non-use.  As in peak periods it may be more efficient and easier to pay consumers for non-use versus paying generators to increase production, wholesale market operators developed demand response programs that pay consumers not to use available power.  Non-use has the complementary benefits of being less taxing on a grid and results in fewer emissions.  Thus, the reviewed and supported programs were viewed as resulting from market forces balancing supply and demand of wholesale electricity, which programs serve to improve competitiveness (may “drive down” generator bids), provide more efficient grid use, result in greater grid reliability, and, produce fewer emissions.

Additional parts of the opinion discuss: (i) the method and formula for compensating demand response payments similarly to those to suppliers, with an added review of whether resulting payment for the demand response is indeed cost beneficial; and (ii) whether the technical order was properly supported by “reasoned judgment” and “intelligibly explained,” and thus, not subject to being set aside as arbitrary and capricious.      

In short, the Court found that FERC did not go too far in affecting retail markets and regulated on the wholesale side.  Acknowledging the breadth of regulatory authority over affecting wholesale rates and charges must be read with “common sense” and care so as not to extend the same beyond its intended reach, the Court concluded that because wholesale demand responses result in reduced wholesale rates, the rules and regulations that govern same are a direct effect on the wholesale markets. 

In a footnote the Court notes even if states could achieve the same result by giving rebates to customers for non-use, the process would be less efficient.  The dissent uses this same example to support its view that the overall program in practice is the equivalent to offering credits to retail customers in excess of  FERC’s authority. 

FERC Commissioner Tony Clark’s post decision comments predict further judicial involvement as participants test jurisdictional limits.  He invites the Commission to re-evaluate its approved pricing mechanism, referred to by the commissioner as a “compensation regime that continues to be widely panned by market experts.

For another review of the case and its common sense outcome, see college member Seth Jaffe’s post.



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