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What’s Next? Potential Impact Of The Landmark Supreme Court Decision In FERC v. EPSA On Demand Response Across The Country

By now, much has been written about the January 25 decision by the United States Supreme Court (the Court) in Federal Energy Regulatory Commission v. Electric Power Supply Association, Docket No. 14-840, and EnerNOC, Inc. v. Electric Power Supply Association, Docket No. 14-841 (together, EPSA II). EPSA II reversed and remanded the D.C. Circuit Court of Appeals (D.C. Circuit) decision holding that the Federal Energy Regulatory Commission (FERC) did not have jurisdiction over demand response (Electric Power Supply Ass’n v. FERC, 753 F.2d 216 (D.C. Cir. 2014) [EPSA I]). That D.C. Circuit decision found that FERC had exceeded its jurisdiction in electricity matters in Order No. 745 (Docket No. RM10-17), which required wholesale market operators to pay retail customers the full locational marginal price (LMP) for reducing their energy consumption (referred to as G) rather than a lower rate that nets out the customer’s savings from purchasing less energy (LMP-G). The Supreme Court held that FERC was within its authority under the Federal Power Act (FPA) to regulate market operators’ compensation of customers for demand response (DR) in the organized wholesale markets and FERC’s decision to compensate demand response providers at LMP rather than LMP-G was not arbitrary and capricious.

So now that the Supreme Court has spoken, what’s next? This Advisory seeks to answer that question.

Remand to the D.C. Circuit

Pursuant to the Supreme Court’s decision, the case will now be sent back to the D.C. Circuit for further proceedings. The formal judgment remanding the case is likely to be issued by the end of February.

On remand, the D.C. Circuit may have to address one remaining issue left undecided in the D.C. Circuit’s initial decision. When the case was before the D.C. Circuit previously, the California ISO (CAISO) and California Public Utilities Commission (CPUC) (collectively, the California Petitioners) argued that in issuing Order No. 745, FERC failed to make the prerequisite finding under Section 206(a) of the FPA that the cost allocation methodology it had accepted in CAISO’s tariff filing submitted in response to FERC’s earlier demand response rulemaking (Order No. 719)1 was now unjust and unreasonable. The California Petitioners explained that pursuant to FERC’s Order No. 719, CAISO had submitted tariff revisions to FERC updating its cost allocation methodology to permit demand response resources to participate in the wholesale market. CAISO’s Order No. 719 tariff provisions were developed through the region’s stakeholder process and, after FERC approval of the same, CAISO spent millions of dollars implementing those changes. Nine months after CAISO’s Order No. 719 tariff changes were approved, FERC issued Order No. 745.

The California Petitioners argued that FERC exceeded its authority in requiring CAISO’s compliance with Order No. 745 because FERC did not find, either specifically or generically, that the cost allocation methodology it previously approved for CAISO’s tariff had become unjust and unreasonable. FERC held in response that Order No. 745 was a generic rulemaking applicable to all ISOs/RTOs, and that specific findings concerning the justness and reasonableness of each independent system operator’s demand response program were therefore unnecessary. Furthermore, FERC argued that Order No. 745 found existing cost allocation methods inadequate only to the extent that they failed to comply with the general guidelines in Order No. 745. FERC therefore expressly declined to make specific findings for each ISO/RTO, including CAISO.

On remand, the California Petitioners will have the option to withdraw this remaining issue, particularly in light of the limited scope of this issue contrasted with the breadth of the EPSA II decision. Absent a withdrawal, the D.C. Circuit will have the opportunity to determine whether it will decide the matter based only on the briefs already before it or it will allow additional briefing and arguments, and if so, whether those new briefs and arguments will be permitted from the California Petitioners and FERC only or also from any party that has intervened. The D.C. Circuit’s ultimate decision on this open issue could have impacts beyond California if it is broadly construed to apply to any region’s market operator that amended its Order No. 719 tariff provisions to comply with Order No. 745.

The Impact of EPSA II on Order No. 745 Compliance in Each Region

Order No. 745 directed each independent system operator to submit a compliance filing with the tariff changes needed to implement the compensation approach in Order No. 745 on or before July 22, 2011. An extension until August 19, 2011, was requested and granted in New England, the Midwest and New York.

ISO New England, PJM and Midwest ISO

In all three of these regional wholesale markets, tariff revisions were filed by the independent system operator in compliance with Order No. 745, and those revisions were accepted and made effective in 2012. In each region, the Electric Power Supply Association (EPSA) filed a petition with the D.C. Circuit appealing FERC’s orders accepting the regional Order No. 745 compliance filings. In New England, EPSA’s petition was filed jointly with the New England Power Generators Association, Inc. (NEPGA). Those petitions have been held in abeyance pending the outcome of the original appeals of Order No. 745, as described below, and the approved tariff changes remain in effect in all three regions.

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