FERC “Demand Response” Rule Upheld

On January 25, in a 6-2 decision authored by Justice Kagan, the Supreme Court issued its opinion in the case Federal Energy Regulatory Commission (“FERC”) v. Electric Power Supply Association. The Court reversed the judgment of the Court of Appeals for the District of Columbia and upheld FERC’s Demand Response Rule (FERC Order 745). IPR had previously submitted an amicus brief to the Supreme Court in support of FERC’s Order.

Under the Order, qualified electricity customers (“demand response providers”) can receive compensation for curtailing their electricity usage.  The curtailment is bid into the wholesale electricity market, just like electricity generation itself, in order to help balance supply and demand, lower wholesale electricity prices, and reduce transmission congestion during times of peak usage.

The Court was presented with two issues, and answered both in the affirmative: (1) does the Federal Power Act permit FERC to regulate demand response transactions without impinging on the States’ exclusive authority to regulate retail sales of electricity, and, (2) if so, was FERC’s requirement that there be equal compensation for demand response providers and electricity generators in such transactions reasonable?

As previously posted on this blog, IPR’s amicus brief received mention from Justice Breyer during oral argument in October when the Justice looked for clarification on a technical aspect of the Order, the “net benefits test.”  The amicus brief, written by former IPR Teaching Fellow Justin Gundlach and economist Dr. Charles Cicchetti, served to explain the economic principles and logic underlying FERC’s decision to compensate demand response providers and electricity generators equally at the wholesale market’s clearing price.

The Court espoused many of the same points offered in IPR’s amicus brief.  Most notably, the Court explained that FERC provided a detailed explanation for its decision and responded at length to a proposal that demand response providers should be compensated below the wholesale market’s clearing price because these providers will also be reducing their electricity bills.  In accepting FERC’s decision to reject this proposal, the Court noted that it was appropriate for FERC to set a compensation level that focused on the economic value that curtailed electricity usage brings to the wholesale electricity market, instead of the costs and benefits incurred by demand response providers themselves.  And the Court acknowledged that curtailment and generation provide an equal economic value because both allow market operators to balance supply and demand, and because the “net benefits test” ensures that electricity costs, not just the market-clearing price, go down.

This post was drafted by IPR student Aaron Flyer.

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