By a 6–2 vote, the U.S. Supreme Court on January 25 ruled that the Federal Energy Regulatory Commission (FERC) had authority under the Federal Power Act (FPA) to issue rules requiring equal market participation by demand response (DR) resources.

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 DR resources who participate in the day-ahead and real-time energy markets. The order has been credited with spurring major growth in DR resources over the past few years. In some markets, such as PJM, DR has accounted for as much as 10% of total capacity.

However, Order 745 was challenged by a group of generators and transmission providers represented by the Electric Power Supply Association, the American Public Power Association, and others, which claimed that the order effectively required them to subsidize payments to demand response providers. They also argued that the order encroached too far on state authority over retail electricity markets, which FERC has no power to regulate.

In a 2014 decision, the D.C. Circuit Court of Appeals threw out Order 745, agreeing that FERC had intruded into matters left to the states under the FPA. Monday’s Supreme Court ruling overturns that decision.

Focus on Wholesale Markets

The court, in opinion authored by Justice Elena Kagan, recognized that FERC’s jurisdiction extends only to matters “directly affecting” wholesale electricity markets. However, it felt that rules governing wholesale DR programs “meet that standard with room to spare.”

“In general,” the court noted, “wholesale market operators employ demand response bids in competitive auctions that balance wholesale supply and demand and thereby set wholesale prices. The operators accept such bids if and only if they bring down the wholesale rate by displacing higher-priced generation. And when that occurs (most often in peak periods), the easing of pressure on the grid, and the avoidance of service problems, further contributes to lower charges.”

Because “[w]holesale demand response, in short, is all about reducing wholesale rates,” the court said, it fell well within FERC’s jurisdiction.

Under the FPA, the court also had to find that Order 745 did not control retail electricity rates, but it had little trouble reaching that conclusion as well. It recognized that any regulation affecting the wholesale market will have some effect on the retail market, but that alone does not transgress the FPA. And because the court felt that Order 745 was directed only at transactions in the wholesale market, it did not constitute regulation of the retail market.

“When FERC regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs,” the court noted, “then no matter the effect on retail rates, [the FPA] imposes no bar. And in setting rules for demand response, that is all FERC has done.”

“In sum, whatever the effects at the retail level, every aspect of the regulatory plan happens exclusively on the wholesale market and governs exclusively that market’s rules.”

Justices Antonin Scalia and Clarence Thomas dissented, arguing that the majority opinion took too broad a view of FERC’s authority. (Justice Samuel Alito recused himself from the decision.)

Environmentalists Praise Order 745’s Resurrection

The ruling was praised by environmental groups in large part because of the support Order 745 has provided for distributed generation.

Allison Clements, director of the Sustainable FERC Coalition at the Natural Resources Defense Council said, “Demand response is a critical tool for bringing energy markets into the 21st century by recognizing the value in avoiding carbon emissions and other pollution while maintaining a clean, affordable and reliable electric system. Today’s ruling gives clean energy a huge boost and keeps America moving forward toward our critical goal of slashing climate-warming emissions while maintaining a clean, affordable, and reliable electric system.”

“This is a great day for clean energy and the health of a more affordable, stronger power grid,” Earthjustice Managing Attorney of Clean Energy Jill Tauber said. “Demand response provides tremendous benefits to our environment, helps consumers save money and makes our electricity grid more reliable. Today’s decision confirms FERC’s ability to remove barriers to this vital clean energy resource in wholesale energy markets and fulfill its responsibility to ensure just and reasonable rates and enhance reliability.”

The generating company group did not issue statements on the decision but had previously criticized Order 745 as treating DR the same as “steel in the ground” capacity.

—Thomas W. Overton, JD is a POWER associate editor (@thomas_overton, @POWERmagazine).