In a major setback for efforts to support demand response, the U.S. Court of Appeals for the District of Columbia Circuit threw out Federal Energy Regulatory Commission (FERC) Order 745, finding that the rule overstepped state authority to regulate retail electricity markets.

FERC Order 745, issued in 2011, required the nation’s Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) to offer uniform compensation levels for suppliers of demand response resources who participate in the day-ahead and real-time energy markets. The order has been credited with spurring major growth in demand response resources over the past few years.

However, a group of generators and transmission providers represented by the Electric Power Supply Association, the American Public Power Association, and others, argued that the order effectively required them to subsidize payments to demand response providers, and further that it encroached too far on state authority over retail electricity markets.

The court, in a 2-1 decision by Judge Janice Rogers Brown, agreed. The Federal Power Act, under which FERC regulates the wholesale market, leaves the retail market to the exclusive jurisdiction of the states. Because demand response is inextricably tied to behavior in the retail market—participants are paid for reducing their retail consumption—the court found that FERC lacked authority to issue the Order.

“[I]f FERC’s arguments are followed to their logical conclusions . . . FERC’s authority regarding demand response would be almost limitless,” the court said. “Although the current rule leaves price-responsive demand untouched, nothing would stop FERC from expanding this regulation and encroaching further on state authority in the future.”

A vigorous dissent from Judge Harry Edwards argued that Order 745 was aimed at how ISOs and RTOs manage the wholesale market, it was within FERC’s authority. “The critical point here is that . . .  Order 745 requires compensation of demand response resources only when their participation in a wholesale electricity market actually lowers the market-clearing price for wholesale electricity.”

FERC officials did not immediately comment on the ruling, but a statement from the Environmental Defense Fund (EDF) denounced the decision. “If the U.S. intends to win the race to the multi-trillion dollar, clean energy economy, we need to ensure that our nation’s policies protect our health and environment and boost economic growth by fairly valuing clean energy resources, instead of reinforcing the status quo,” said John Finnigan, EDF lead counsel.

—Thomas W. Overton, associate editor (@thomas_overton, @POWERmagazine)