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U.S. Supreme Court Brings Closure to FERC Order 745 Saga

Brett Feldman — January 26, 2016

Control panelThis is a bittersweet moment. The Federal Energy Regulatory Commission’s (FERC) Order 745 legal case has provided me with consistent blog fodder for the past year and a half, ever since the U.S. Court of Appeals overturned the order in May 2014. Every few months, I could count on a new development and twist in the plot to pontificate upon. Now, the end has come.

On January 25, the U.S. Supreme Court reversed the lower court’s decision on both parts of the case, meaning that demand response (DR) does fall under the FERC’s jurisdiction, and that the payment of the full locational marginal price (LMP) in the wholesale energy markets is just and reasonable. The DR community could not have asked for more, while the generators must acquiesce and learn to live with the competition.

After the Supreme Court hearing in October 2015, many pundits felt that the court was close to being split 4-4 (Justice Samuel Alito recused himself), which would have meant that the lower court’s ruling would stand. The final tally was 6-2 in favor of the FERC, with the swing vote of Justice Anthony Kennedy and the somewhat surprise vote of Chief Justice John Roberts going to the majority side. Chief Justice Roberts had some harsh questions for the FERC in the hearing, but perhaps he was just trying to make sure there weren’t any holes in his mind.

Status Quo

So what does all this mean? In reality, this decision just ensures the continuation of the status quo, since all the regional transmission organizations (RTO) under the FERC’s jurisdiction have been operating under the existing rules all along. There was much more downside risk to the alternative outcome than upside to this conclusion. DR has had little participation in the day-ahead and real-time energy markets lately, mostly due to historically low natural gas and electricity prices. In the capacity markets, resource performance requirements have become more stringent in many regions, so DR will likely struggle to see significant growth. This was really just a defensive battle for DR rather than an effort to gain more ground in the markets. However, the California Independent System Operator (CAISO) is in the midst of major enhancements to DR participation, so that is one area with growth potential.

Industry Reactions

How did the industry players react? PJM, which runs the largest DR market in the world, stated that “Although PJM will have to study the court’s decision, the ruling supports the continued participation of demand response in competitive wholesale markets. We’re pleased with that outcome. Certainty and continuity are important in markets. Demand response brings value to competitive wholesale markets and is a component of electric system reliability.”

In an interview, David Brewster, president of EnerNOC, said that there were no wild celebrations in the office after the decision was made, just a lot of high fives and sighs of relief that a major distraction of the past 2 years was over. The company had playbooks ready for whatever scenario prevailed, but this was definitely Plan A, rather than having to go state-by-state to develop new DR programs. Brewster wouldn’t say how much EnerNOC spent to fight this legal battle, but it hired one of the top lawyers in the field to represent it and had a monumental internal team effort to support the case every step of the way. The stock market liked the outcome as well, as EnerNOC’s stock jumped almost 70% on the day of the ruling (although it has come back down somewhat from that high).

In a statement to me, CPower’s Chief Sales and Marketing Officer Chris Cantone said “We are very happy to see the Supreme Court decision to uphold FERC 745. It is a clear reflection that demand response is a valuable and cost-effective resource keeping the energy market competitive and fair. We were privileged to participate in the arguments in this case and to help our customers continue their participation in DR and allow their communities to see the benefits of their efforts.”

“We are pleased the Supreme Court ruled in favor to allow FERC Order 745 to remain in place, thus securing the true value of demand response within wholesale energy markets,” said Terrill Laughton, Vice President and General Manager of Integrated Demand Resources for Johnson Controls. “This outcome ensures that demand-side assets can contribute to both the competitiveness of energy markets and enhance the reliability of the nation’s electrical grid.”

Now that the extraordinary saga that brought DR to the legal forefront is over, it can now return to obscurity, buried deep in the RTO’s market rules. I guess I’ll have to turn my attention to something more mundane this year—perhaps how the presidential election will affect the energy industry.

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