The U.S. Supreme Court heard arguments on Wednesday about the jurisdiction of the Federal Energy Regulatory Commission (FERC) related to the implementation of demand response, where grid-edge assets curtail load for the benefit of the grid and are paid in the wholesale market.
FERC has appealed a lower court ruling that vacated its Order 745, which calls for demand response to be paid on equal footing with generators in wholesale energy markets.
FERC’s Order 745, approved in 2012, calls for grid operators to pay the full market price, known as the locational marginal price, to economic demand response resources in real-time and day-ahead markets as long as dispatching DR is cost-effective. Economic demand response is a very small portion of the market compared to demand response in the capacity market.
The issue at stake in the court, however, is not just the price demand response can be paid. It's also about whether FERC has the authority under the Federal Power Act to regulate the rules of the wholesale power markets or whether that power should lie in states’ hands.
On Wednesday, upward of 200 people waited in line to hear the arguments, but only a handful of energy professionals and lawyers got in.
Justice Anthony Kennedy, likely the swing vote, questioned Solicitor General Donald Verrilli about whether FERC was “luring” retail customers into wholesale markets through Order 745.
"This idea of wholesale demand response was not FERC's idea. FERC didn't impose it on the market," asserted Verrilli. "This is a practice that grew up organically out of the private actions of market participants once the wholesale markets were deregulated. It's exactly the kind of innovative private-market conduct that you would hope that deregulation would bring about."
Justices Scalia and Roberts also questioned the solicitor general on whether by providing this incentive in the wholesale market they were regulating the retail market, which is the state’s jurisdiction.
"But ultimately, it remains up to the states, because FERC takes state law as it finds it here, whether citizens of the state can go into the wholesale market," said Verrilli. Scalia found that point “interesting,” but did not seem completely moved.
On the other side, Justice Stephen Breyer fell clearly on the side of FERC. He used the example of demand response being cheaper than building a new peaker plant to meet peak demand on a hot summer afternoon. “Of course it affects retail prices; so does everything we do in respect to wholesale prices," he said. “End of the matter.”
But the matter is hardly settled. Paul Clement, the lawyer for the Electric Power Supply Association (EPSA), argued that FERC was certainly regulating retail markets through this mechanism at the wholesale level. Not only was FERC in a jurisdiction it doesn’t belong, it was bringing retail customers to a place they didn’t belong, he argued.
"These retail customers don't belong in the wholesale market," he said. "Whether you think they were lured in or you think they walked in the door, it doesn't matter. They are in a market where they don't belong."
Verrilli noted in his rebuttal, however, that these aren’t clearly delineated markets and large power customers are, in fact, in the wholesale market. He ended by arguing that the power producers want a one-size-fits-all approach for power users who are looking to participate in economic demand response.
"I thought that the solicitor general rebuttal was thorough, anchored in a careful assessment of the law and the record,” said Vickie Patton, general counsel for Environmental Defense Fund.
Beyond this narrow question before the court is the jurisdiction of FERC in regulating capacity demand response, a much larger market that some power producers are seeking to dismantle. If the court rules against FERC, it may help those that want to see demand response further undone.
But the solicitor general’s argument also highlights a larger issue at play. Energy consumers are increasingly playing in wholesale markets through contracts where they are allowed; they are also seeking more options to control power prices and curb demand where it makes sense financially. “Without this order, you have very limited choice,” said Patton.
If the court rules in favor of EPSA, the states will have to rewrite the rules of economic demand response. Some states like New York and California already want to do that, and more states may follow. But without FERC's jurisdiction over demand response in wholesale markets, lagging states may fall even further behind, argue supporters.
Listen to analysis of the Supreme Court arguments from this week's Energy Gang podcast. The demand response segment begins at 24:15.