U.S. utility trade groups are asking a federal court to overturn a key ruling on demand response -- let’s call it equal pay for negawatts -- in a move that could undercut one of the industry's brightest hopes for expanding investment in the business of turning down power.

The challenge comes from a who’s who of utility groups, including the Electric Power Supply Association, the American Public Power Association, and the Edison Electric Institute. In a June 6 filing with the U.S. Court of Appeals for the District of Columbia Circuit, the groups claim that the Federal Energy Regulatory Commission exceeded its authority in March 2011, when it issued FERC Order 745.

That order, in essence, requires negawatts of power reduced via demand response to be paid on an equal footing with megawatts of generated power, rather than at the discounted rates most have been paid to date. It applies to grid operators around the country that cross state boundaries, which includes mid-Atlantic grid operator and demand response leader PJM, as well as most of the biggest power markets in the country.

Demand response companies like EnerNOC and Viridity Energy have praised the ruling as a fair way to compensate customers for the costs of implementing real-time power-down technology in their buildings and factories. But power producers say it’s unfair, because those customers are already being compensated, in the form of lower power bills from using less energy.

Those two points of view set out the extremes in the conflict. One compromise has been to offer demand response participants an “LMP-R” rate. 'LMP' stands for locational marginal price, or the price generators are earning for their power at the moment, and R is a retail reduction set at a dollars-and-cents or percentage shaved off that LMP payment.

There’s a lot of complicated math that goes into figuring out what the ideal compensation is, because demand response has different effects on the grid. In small amounts, it helps to defer ultra-expensive peaking generation capacity, which hurts owners of peaker plants but helps utilities and everyone else. But in larger amounts, power generation groups say, it can start to undercut at the core prices that are required to entice new baseload power generators to build new plants.

FERC has sided with demand response in this matter, mandating that it should be paid LMP, just like power generation. The agency has said that the U.S. could increase its demand response capacity from about 40 gigawatts today to as much as 180 gigawatts by 2020, but only if technology, economic and regulatory barriers are dealt with to open it up to broader investment.

Having failed to convince FERC in a December 2011 rehearing, the generator trade groups are now arguing that FERC’s order actually pushes extra costs down to retail power users at the state-by-state level, thus exceeding its authority to only regulate interstate power matters.

Grid operators around the country were supposed to have their demand response programs revamped to reflect Order 745 by the end of this year. Whether this legal challenge will delay that is unclear. FERC hasn’t been entirely friendly to the demand response industry, siding with PJM in a dispute with EnerNOC in a March ruling over how to calculate baselines for demand response compensation.

It’s hard to estimate how the rule change would affect overall demand response programs across the country, but big DR providers have certainly said they’re expecting a windfall from it. Another FERC ruling from last year, which would set higher payments for faster and more reliable forms of frequency regulation, could also open up new markets for demand response. There's no sign yet of a legal challenge to that ruling.

Tags: akuacom, caiso, comverge, constellation energy, demand response, efficiency, enbala, energy efficiency, enernoc, ferc, openadr, pjm, policy, smart grid, utilities