D.C. Circuit Curbs FERC Authority Over Key Electricity Conservation Programs: Demand Response Deemed Beyond Federal Control

In a significant blow to the authority of the Federal Energy Regulatory Commission ("FERC" or "Commission") over incentive-based electricity conservation measures known as demand response, the United States Court of Appeals for the District of Columbia Circuit vacated a seminal FERC rulemaking order in its entirety as ultra vires. Order No. 745, issued in March 2011, required each FERC-approved Regional Transmission Organization ("RTO") and Independent System Operator ("ISO") to modify its energy market tariff to require that a demand response resource be paid the full price established for generators that sell electric energy (known as the locational marginal price) when the demand response resource reduces or limits it electricity consumption.1 In the D.C. Circuit's May 23, 2014 decision, Electric Power Supply Ass'n v. FERC ("EPSA"), the court concluded that Order No. 745 exceeded FERC's authority under the Federal Power Act ("FPA").2 "Because the Federal Power Act unambiguously restricts FERC from regulating the retail market,"3 the court held that the FPA foreclosed FERC's claimed regulatory authority over demand response.4 The court's decision in EPSA has long-term implications for FERC's authority to regulate demand response in the energy, capacity, and ancillary services markets, as well as FERC's authority to regulate practices that "affect" jurisdictional rates under FPA Sections 205 and 206, as limited by FPA Section 201.

The EPSA Decision

FERC Orders Regulating Demand Response Resources. At issue in EPSA is Order No. 745 in which FERC required RTOs and ISOs to implement or amend energy market tariffs to compensate providers of demand response resources based on the marginal value of the resourcethe same method ordinarily used to determine payments to generators producing electric energy. Although Order No. 745 regulates compensation in the energy markets, demand response resources also participate in ancillary services markets and capacity markets. FERC's regulations define "demand response" as "a reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy."5 Order No. 745 divided demand response in the energy market into two categories: (i) "price-responsive demand response," which corresponds with higher prices for retail electricity; and (ii) "incentive payments," which are paid to aggregators of demand response resources who agree to reduce or forgo retail electricity purchases at certain times.6 FERC limited Order No. 745's compensation requirements to "incentive payments" on the basis that these payments constituted "wholesale demand response," whereas "price-responsive demand response" is a "retail-level demand response."7 Order No. 745 also established a method for allocating the costs of demand response payments "among all customers who benefit from the lower" energy market price that results from demand response participation in the market.8 These costs were to be allocated proportionally among all energy market participants when demand response resources are participating in the market.9 The D.C. Circuit's EPSA Decision Holds that FPA Section 201 Unambiguously Limits FERC's Authority Over Practices that "Affect" Wholesale Rates. FERC attempted to persuade the court that Order No. 745's directive for incentive payments for demand response resources is permissible because demand response affects rates in connection with transactions that are squarely within FERC's authority...