Government Files Petition for Certiorari in FERC Demand Response Case

As expected, yesterday the Solicitor General filed a petition for certiorari to the Supreme Court in FERC v. Electric Power Supply Association, asking the Supreme Court to review a May 23, 2014 decision from a divided panel of the D.C. Circuit that invalidated FERC’s Order 745.

Order 745 directs Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish rules that compensate demand response resources at the wholesale market price—the same rate that electric power suppliers receive for selling electricity.  A group of organizations affiliated with generators of electricity sued FERC, alleging that Order 745 had overstepped the agency’s authority.  A majority of the D.C. Circuit panel (Brown, Silberman) agreed, holding that Order 745 exceeds FERC’s jurisdiction over wholesale electricity markets under the Federal Power Act, 16 U.S.C. § 824.  The panel majority reasoned that, because demand response involves decisions by end users regarding their energy use, it is inherently “part of the retail market.”  Judge Edwards dissented.

The government’s petition disagrees, arguing that demand response is not categorically part of the retail market because Order 745 regulates transactions in the same markets in which wholesale electricity transactions occur. As the petition explains, demand response providers participate directly in the wholesale markets.  Order 745 “regulates the price that wholesale purchasers of power pay—through the wholesale rate established in auction markets run by wholesale market operators—for a reduction in consumption by demand-response providers.” Noting this, the government’s cert petition argues that FERC has plenary authority over the wholesale electricity markets, and that because Order 745 regulates transactions that take place in the wholesale markets, FERC has the authority to regulate them.

Moreover, claims the government, FERC has the authority under the Federal Power Act to regulate not only a rate charged for a transaction in a wholesale market, but also a “practice . . . affecting such rate.” 16 U.S.C. § 824e(a). FERC claims that “rules that wholesale-market operators employ in their auction markets” - including setting the level of compensation for demand response - fall squarely within this provision. FERC also argues that it is due Chevron step two deference for its interpretation of the Federal Power Act about demand response.

Because the panel majority characterized demand response as merely a decision not to purchase electricity in the retail market, the government’s petition notes (p. 18) that the decision “appears to bar FERC from regulating any aspect of demand-response participation in the wholesale markets.”  FERC therefore argues that hearing the case is of national importance, because reduced demand response participation would have broad debilitating effects on the wholesale electricity markets.  The government’s petition explains that demand response has important functions in wholesale markets, leading to lower electricity prices, enhanced grid reliability, and increased competition.

The D.C. Circuit panel majority reasoned in broad-brush strokes that misunderstand the context in which FERC is operating.  If the Supreme Court grants certiorari in this case, it can give FERC the flexibility it needs to allow electricity markets to realize the benefits that demand response can confer.