On February 17, 2015, CLF joined with several state consumer advocates and with other environmental organizations to file an amicus curiæ brief in the United States Supreme Court, urging the Court to accept a case on appeal. The appeal is from a ruling by the D.C. Circuit Court of Appeals, which had ruled that the Federal Energy Regulatory Commission (FERC) has no legal jurisdiction (authority) to regulate Demand Response in wholesale electricity markets. You can see the Circuit Court decision here, CLF’s amicus brief here, and a press release about the case here.
In this blog I want to help you understand four things: (1) What Demand Response is; (2) What FERC does to regulate Demand Response; (3) What the Circuit Court ruled (and why it is wrong); and (4) Why all of this really matters.
What is “Demand Response”?
Demand Response (DR) refers to electricity end-use customers reducing their consumption of electricity at certain specific times of peak demand.
Electricity demand varies considerably over different seasons of the year and over different hours of the day. Here in New England, we usually experience peak demand around mid-afternoon on the very hottest days of the year, when everyone has their air conditioners running. Most days of the year (in fact, about 99% of the time), New England needs no more than about 20,000 megawatts (MW) of electricity to meet the needs of all electricity customers. But on those hottest days, peak demand can spike to about 33,000 MW.
This is important because we have to build enough generators and transmission lines to accommodate that peak load, even though it only occurs a few hours every year! This extra capacity is really expensive; it costs billions of dollars, and you pay for that. This extra capacity is also really polluting, because these so-called “peaking” power plants (that are only turned on during times of peak demand) are the dirtiest, most polluting fossil fuel power plants on the system.
DR seeks to lower the cost of electricity and decrease pollution from peaking power plants by reducing electricity load when demand gets unusually high. This can be done in many ways. For example, an individual factory can move a shift of workers from daytime hours to nighttime hours so that its machines will not be running during the day, when electricity demand is highest. DR aggregators can automatically adjust air conditioners at, say, a chain of 500 grocery stores (or drug stores or shopping malls) upward from, say, 69 degrees to, say, 73 degrees, so that those stores use less electricity.
When hundreds (or thousands) of separate electricity users all participate in DR programs like these, electricity demand during peak hours can be significantly reduced. This reduces costs to all ratepayers by eliminating the need to build expensive infrastructure (like power plants and transmission lines) which only get used a few hours a year. DR also reduces costs to all ratepayers because those peaking power plants are the most expensive ones to run (and ratepayers pay a blended average of the cost of producing all electricity).
What Does FERC Do to Regulate Demand Response?
Under the Federal Power Act (FPA), the Federal Energy Regulatory Commission (FERC) has authority to regulate all interstate sales of electricity and the interstate wholesale electricity markets. The FPA also gives FERC power to regulate everything “affecting” the electricity markets, and the power to ensure that electricity rates paid by customers are “just and reasonable.”
Over the years, FERC has issued a number of Orders concerning DR. In previous Orders, FERC had encouraged the non-profit ISOs that run most of the wholesale electric markets in the United States to use DR; and, in the past, FERC left it to those ISOs to decide how much to pay those DR providers. Here in New England, our electricity grid is run by ISO-New England; you can read more about what ISOs are, and how they work, here and here.
In March 2011, FERC Issued its Order 745; this instructed all ISOs to pay a certain price for DR. FERC set the price fairly high, because FERC wanted to create an economic incentive for DR to come into wholesale electricity markets.
FERC’s Order 745 was controversial. By creating economic incentives for DR to enter the market, ratepayers stood to save literally (not figuratively) billions of dollars. If DR had not been in the market, ratepayers would unnecessarily have had to pay much more for electricity. Of course, those billions of additional ratepayer dollars would have flowed directly to electricity generators, mostly fossil-fuel generators. So a group of generators, the Electric Power Supply Association (EPSA), sued FERC, saying that FERC had no legal authority (jurisdiction) to issue Order 745. Such lawsuits against FERC are brought in the U.S. Circuit Court for the District of Columbia.
What the Circuit Court Ruled (And Why It is Wrong)
On May 23, 2014, the D.C. Circuit Court of Appeals issued its decision. The case is called EPSA v. FERC, 753 F.3d 216 (D.C. Cir. 2014). By a 2-1 vote, the Court of Appeals agreed with the power generators; the Court said that FERC had no legal authority to order the ISOs to pay a certain (relatively generous) amount for DR. The Circuit Court reasoned that the FPA gives FERC jurisdiction over sales of electricity; and “demand response is not a wholesale sale of electricity; in fact, it is not a sale at all.” (753 F.3d at 221.)
The Circuit Court was wrong in two different ways.
First, the FPA gives FERC jurisdiction over all matters that “affect” electricity rates in any way at all. And all 3 Circuit judges agreed that DR affects rates. As even the majority conceded: “We agree with [FERC] that demand response compensation affects the wholesale market.” (753 F.3d at 221.) That alone should have been enough for the Court to rule against the power generators and in favor of FERC.
But there is more: In 2005, recognizing the benefits to ratepayers of DR, Congress amended the FPA and specifically gave FERC jurisdiction to regulate DR. Congress told FERC to issue regulations designed to promote and encourage DR. FERC issued its Order 745 in response to Congress’s instruction – and FERC said so right in the Order (on page 9, in footnote 21).
Why All This Matters
On January 15, 2015, a group of DR providers (that had taken part in the proceedings in the Circuit Court) filed an appeal with the U.S. Supreme Court. Technically, that appeal is called a “petition for a writ of certiorari.” What this means is that these companies are asking the Supreme Court to hear their appeal. (This type of appeal is discretionary on the part of the Supreme Court; it can choose to hear the appeal if it wants to do so, but it does not have to do so.) In their papers, the DR providers emphasized the 2005 amendment of the FPA that ordered FERC to promote and encourage DR. On the same day, the Solicitor General of the United States, representing both FERC and the United States, filed his own petition for certiorari. In urging the Supreme Court to hear the appeal, the United States emphasized the public policy benefits of DR.
And, on February 17, 2015, CLF joined with the statutory ratepayer advocates of several states (including Citizens Utility Board of Illinois, Delaware Division of Public Advocate, and the West Virginia Consumer Advocate Division) and with other environmental groups (including Natural Resources Defense Council, Environmental Defense Fund, and Sierra Club) to file an amicus curiæ brief with the Supreme Court, urging the court to take the appeal.
The ratepayer advocates that signed the petition for certiorari were concerned about the potentially dire financial consequences of removing DR from the market. For example, removing DR for just a single year could increase the price of capacity by more than 100% in the PJM area. (PJM is the ISO that runs the electricity grid for all or parts of 13 states, including Pennsylvania, New Jersey, and Maryland.) This would result in added expense to ratepayers of over nine billion dollars – in just a single year, and in just one part of the country!
The environmental groups (like CLF) that signed the petition for certiorari were concerned about the dire environmental consequences of removing DR from the market. As we said in our brief: “Avoiding resort to the 10% most-polluting natural gas-fired power plants avoids millions of metric tons of annual greenhouse gas emissions, plus large quantities of nitrogen oxides and sulfur dioxide. Indeed, because peaking plants are frequently built near major population centers, the air pollutants they discharge do disproportionate harm to human health.” (Amicus Brief, at 8-9.)
Summing It Up
There are three different ways we can look at the May 2014 decision of the Circuit Court in EPSA v. FERC, which said that FERC cannot set prices for Demand Response.
- As a matter of law, the Court is wrong, because in 2005, Congress amended the FPA to specifically give FERC authority over Demand Response.
- As a matter of money, the Circuit Court decision, if not overturned by the Supreme Court, will cost electricity ratepayers billions of dollars.
- As an environmental matter, Demand Response is a powerful, proven, effective tool for reducing carbon emissions and other dangerous pollutants.
That’s why CLF is so proud to be a part of this lawsuit as an amicus curiæ.