Demand Response after EPSA v. FERC — Now FERC Can't Do It Alone

Flipping on a light switch calls upon the electric grid for power, and the grid responds by supplying it—a supply response. A demand response reverses this relationship: the end-user changes her electricity usage in response to a price change or in return for compensation. Since the 1970s, state and federal regulatory authorities have slowly opened electricity markets’ doors to participation by demand- as well as supply-side resources. The resulting incremental growth in demand-side participation has shown that all manner of electricity end-users, ranging from large industrial facilities to individual residential consumers, will change their pattern of electricity consumption if doing so can save them money. Further, it is generally understood that such participation would not only reduce the volume of electricity generated and consumed but could also greatly reduce the aggregate cost of generating it. Nonetheless, the electricity sector’s business models and rate designs continue to ignore many potential demand-side participants.One form of demand-side participation, called economic demand response (DR), involves specifying a baseline for a particular end-user’s electricity consumption at a particular time, then providing compensation for a reduction in actual consumption below that baseline. Electricity system operators can often make use of such reductions in much the same way as additional generation resources—meaning that DR can substitute for turning on or even building power plants. In addition, DR is also cheaper than many forms of generation.Demand-side participation, which debuted in the 1970s, has since become more sophisticated and prevalent. Congress endorsed DR with the Energy Policy Act of 2005 and the Federal Energy Regulatory Commission (FERC) pushed it forward in 2008 with Order No. 719 and again in 2011 with Order No. 745. That latter push encountered a major legal hurdle, however, because it entailed FERC arguably exceeding its jurisdiction under the Federal Power Act of 1935 (FPA). The FPA assigns FERC jurisdiction over interstate wholesale sales and transmission of electric energy, as well as services “affecting” rates within FERC’s jurisdiction. However, the FPA reserves to state jurisdiction the regulation of generation facilities, local distribution facilities, and “any other sale of electric energy”—that is, other than at wholesale—including retail sales. When the question of FERC’s jurisdiction to set compensation levels for DR purchased from retail market participants was put to the D.C. Circuit, two judges said that FERC Order No. 745 impermissibly crossed the FPA’s jurisdictional dividing line; the third judge disagreed. FERC was rebuffed after seeking a rehearing en banc to challenge the majority’s interpretation of the FPA. It remains to be seen whether a majority of FERC’s commissioners will decide to seek certiorari, whether the Supreme Court will hear the case, and what the Court will decide if it does—in short, the ultimate fate of the D.C. Circuit’s decision remains unclear. This article describes DR and other demand-side resources before addressing what FERC can do to promote DR now, in the aftermath of the D.C. Circuit’s decision. Of course, the question of what to do now should also be put to other stakeholders, including Congress, the regional transmission organizations (RTOs) and independent service operators (ISOs) that administer wholesale electricity markets, state legislatures, state regulatory authorities, utilities, and DR providers. But this article proposes an ambitious answer for FERC under the current FPA. Its proposal can be summed up in this way: because FERC can’t give up but also can’t go it alone, it should insist that wholesale market participants support DR and it should make DR part of the solution to the problem that states face in having to comply with EPA’s new Clean Power Plan.