A legal struggle over the future of demand response took another step forward last week, as the federal government officially filed a Supreme Court challenge to a lower court ruling that it says “seriously misinterpreted” federal law, with results that could be “tremendously damaging to the electricity system.”

The Thursday filing (PDF) from the U.S. Solicitor General is on behalf of the Federal Energy Regulatory Commission (FERC), which is facing the possibility of losing its authority to regulate demand response in wholesale, interstate electricity markets under a May ruling by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit.

That ruling overturned FERC Order 745, which set compensation rates for demand response in wholesale energy markets, a relatively small portion of U.S. demand response markets. Beyond that, however, it also called into question FERC’s ability to regulate the participation of retail energy customers in wholesale capacity markets, which account for tens of billions of dollars in demand response capacity. These are the markets where demand response -- that is, turning down power use or firing up onsite generators during times of peak grid demand -- have led to big reductions in energy costs and fewer “peaker” power plants being built.

We’ve covered the complex issues of this court ruling, and how FERC, interstate grid operators like PJM, and demand response providers like EnerNOC have been responding to the possibility of having to unwind multi-gigawatt contracts if it becomes the law of the land. But if the Supreme Court overturns the ruling, it’s possible that none of these changes will need to happen.

And according to the Solicitor General, none of these changes should have to happen. In its 36-page filing, it cited multiple reasons why it believes the appeals court made a mistake in its ruling, particularly in declaring that demand response, as something that’s provided by retail energy customers in individual states, is something that FERC has no authority to regulate.

“In holding invalid an important rule for ensuring the efficiency and reliability of modern wholesale-electricity markets, the court of appeals seriously misinterpreted the FPA,” or the Federal Power Act, which sets FERC’s responsibility as making sure that wholesale electricity rates are “just and reasonable.” It also “misapplied basic principles of deference to agency interpretations of statutes” and “departed from the interpretive approach to the FPA that this Court has applied for a half-century” to give FERC flexibility in performing its mandate, the Solicitor General’s filing states.

Beyond citing previous court cases to bolster the point, the filing also provides this useful “hypothetical illustration” to show how taking away FERC’s authority to regulate wholesale demand response actually prevents it from performing its duty under the Federal Power Act:  

“Suppose that a wholesale-market operator was vastly overpaying for demand-response commitments, choosing to utilize them when it would be far more efficient to pay for additional generation instead. That overcompensation would inevitably result in a higher-than-optimal wholesale rate. Given that the FPA requires FERC to ensure that wholesale rates are just and reasonable, it is inconceivable that the Commission would lack authority to act in that situation. And if that is so, no convincing basis exists to distinguish the Commission’s decision here to set the compensation level for demand-response commitments prospectively to ensure that demand response is neither overused nor underused -- and neither overpaid nor underpaid -- in light of its important role in securing system reliability and efficient pricing.

Despite this logic, “The court of appeals nevertheless concluded that Sections 824d and 824e do not constitute a ‘clear and specific grant of jurisdiction’ and therefore do not displace state authority,” the Solicitor General stated. “That unexplained holding is irreconcilable with this Court’s decisions finding state laws preempted by FERC’s authority under those provisions -- for example, its authority to regulate power allocations among related wholesale purchasers,” the filing contends.

For example, previous court cases have overturned individual states’ authority to demand additional wholesale market compensation for renewable power resources, because that’s a matter of interstate commerce. Indeed, “The court of appeals’ ruling not only misinterprets the text of the FPA, but it also creates exactly the sort of regulatory gap that Congress sought to close when it enacted the FPA,” the Solicitor General’s filing states. “Under settled FPA preemption principles, States could not regulate the wholesale-market rules addressed in the Rule, because such regulation would directly alter the terms of wholesale transactions.”

Given that “regulatory gap,” it’s unclear how the Appeals Court panel’s decision intended demand response to be managed in interstate wholesale markets. “The court thus may have intended to suggest that wholesale-market operators should be barred from accepting demand-response bids at all -- i.e., that FERC may not approve tariffs that permit the use of demand-response commitments in wholesale markets,” the filing states.

“If so, its ruling would be tremendously damaging to the electricity system, because demand-response providers play an increasingly important role in ensuring the efficiency and reliability of those markets,” the filing concludes. That’s essentially the same argument being made by FERC, PJM, EnerNOC, and a number of state utility regulatory agencies that have weighed in on behalf of FERC and against the lower court’s decision.

These threats aren’t hypothetical. Soon after the Appeals Court decision, power plant utility FirstEnergy filed a complaint with FERC, demanding that it force PJM to unwind its May 2014 Base Residual Auction to exclude the 11,000 or so megawatts of demand response that won bids for the 2017/2018 season. Other legal challenges from power plant operators before New York ISO and ISO New England are demanding similar rollbacks of those grid operators’ corresponding wholesale demand response market programs.

It’s unclear whether or not the Supreme Court will decide to hear the case, and if it does, what its decision may be. But at least the backers of demand response as an integral part of the country’s energy mix now have the federal government’s legal arguments on their side.