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U.S. Supreme Court: Demand Response is Here to Stay

On January 25th, the Supreme Court issued a landmark decision for the electricity industry, and particularly for demand response providers, settling considerable unease and speculation as to the future of the demand response industry. The term “demand response” generally refers to programs allowing individual customers or groups of electricity customers to curtail their energy usage during times of peak demand, and receive a payment for such reductions. The Supreme Court explained demand response as follows: “wholesale market operators can sometimes—say, on a muggy August day—offer electricity both more cheaply and more reliably by paying users to dial down their consumption than by paying power plants to ramp up their production.”

The 6-2 decision in Federal Energy Regulatory Commission v. Electric Power Supply Association et al., with Justice Scalia joined by Justice Thomas dissenting, upheld the Federal Energy Regulatory Commission’s (“FERC”) Order 745, which sets the rules for demand response pricing. Order 745 requires that demand response be compensated at the full price paid to power generators – the locational marginal price (“LMP”). The Supreme Court’s decision overruled a decision by the Court of Appeals for the District of Columbia Circuit that: (1) FERC lacked authority to issue Order 745 because the Order regulates the retail market; and (2) alternatively, Order 745’s compensation scheme, paying full LMP for demand response, is arbitrary and capricious under the Administrative Procedure Act. The D.C. Circuit’s decision was overruled on both counts.

The threshold issue was whether FERC has jurisdiction to regulate demand response compensation. On that issue, the Supreme Court found that FERC’s regulation of demand response compensation is consistent with its authority to regulate wholesale market rates. FERC’s demand response compensation scheme is exclusively directed at the wholesale market. Any natural consequences of such wholesale market regulation at the retail level do not render the regulatory scheme unlawful as exceeding FERC’s jurisdiction. As the Supreme Court explained, “every aspect of FERC’s regulatory plan happens exclusively on the wholesale market and governs exclusively that market’s rules.” Moreover, FERC’s demand response compensation scheme is consistent with the Federal Power Act’s “core purposes of protecting ‘against excessive prices’ and ensuring effective transmission of electric power.”

The Supreme Court also rejected arguments that Order 745 overcompensated demand response by setting compensation for demand response at LMP. The alternative pricing methodology, supported by Order 745 opponents, would deduct the savings customers would receive from not using power from the LMP (the LMP-G (generation) formula). Instead, Order 745 will remain in effect, and demand response will continue to be compensated at the full LMP, where demand response offers satisfy FERC’s “net benefits” test, ensuring that accepted demand response offers will save consumers money.

This decision paves the way for continued investment in demand response programs, promoting system reliability and lower electricity prices by allowing demand response to offset higher-cost generators that would otherwise raise wholesale market prices. The long-awaited decision is critical to the future of demand response. As a member of the Advanced Energy Management Alliance (“AEMA”), GreeneHurlocker shares the enthusiasm of its demand response clients and the AEMA on this decision. (A copy of the AEMA’s press release is attached here.)

For questions about the Supreme Court decision or assistance with any demand response matters, please feel free to contact one of GreeneHurlocker’s energy and regulatory lawyers.