FERC rejects operator’s bid to salvage demand response 

Source: Hannah Northey, E&E reporter • Posted: Thursday, April 2, 2015

The Federal Energy Regulatory Commission in a split vote last night rejected PJM Interconnection’s bid to salvage its ability to use demand-response programs, casting the proposal as “premature” given the issue may be taken up by the Supreme Court.

FERC Chairwoman Cheryl LaFleur and Commissioners Philip Moeller, Colette Honorable and Norman Bay denied PJM’s plan to change the way demand response is treated in annual capacity auctions, changes that would apply for the 2018/2019 delivery year. Commissioner Tony Clark cast the lone dissenting vote, calling on the agency to be proactive.

The vote stems from a plan PJM formally proposed in January after a federal appeals court moved to scrap FERC’s Order 745, which provided incentives for electricity users to consume less power. PJM, operator of the nation’s largest wholesale electricity market, sought to continue using demand response — effectively the voluntary conservation of electricity by large customers — in exchange for payments.

The federal program was thrown for a loop after the court found FERC had overstepped its authority under the Federal Power Act when issuing Order 745. That decision was a win for the Electric Power Supply Association (EPSA) and Edison Electric Institute, which have for years argued the rule goes “too far” and tramples states’ exclusive authority to regulate retail markets (Greenwire, Oct. 8, 2014).

The Department of Justice has since asked the Supreme Court to review the case, while EPSA has asked the court to reject DOJ’s request.

LaFleur, Moeller, Honorable and Bay in the order expressed concern that PJM’s plan could actually further complicate an uncertain situation and have “unanticipated spillover effects” on state programs and private sector arrangements, and possibly affect the commission’s options following the Supreme Court’s decision.

But Clark in a separate statement said the agency should seize the opportunity to work with states to improve the way in which demand response is compensated in the Midwest and Mid-Atlantic. FERC’s earlier “impatience” with the process led to the current uncertainty surrounding the agency’s jurisdiction, he added.

Only states have the ability to set retail rates, and PJM — having already developed a product — is arguably better positioned to serve as an example of a more advanced marketplace going forward, Clark said.

He went on to urge the commission to embrace — not shy away from — enabling “price-responsive” demand without “concocting bureaucratically complex schemes to pay consumers not to consume power.” Clark said equating a “nega-watt” to a “mega-watt” was clever rhetoric but defied common sense, and FERC should recognize the problems that arise from trying to redefine “demand” and “supply.”

“The commission created Order No. 745, and it is the commission that should explore ways to transition demand response from the supply-side to the demand-side where it properly belongs,” he wrote. “PJM has presented us with an open door to begin to pare back on the ‘deleterious consequences,’ and I believe it is time to address the broader issue on the merits and remedy the effects of prior regulatory overreach.”

Paula DuPont-Kidd, a PJM spokeswoman, said in a statement that the grid operator would move forward with its capacity auction under existing rules, and the changes only would have been implemented if the Supreme Court had denied FERC’s request for a review of the lower court’s decision.

“PJM had sought the changes to provide greater certainty to market participants in the upcoming annual capacity auction in light of the questions surrounding demand response following the EPSA decision,” she wrote.

James Lucier, managing director at Capital Alpha, in a note to clients said the agency’s denial is a “positive” for conventional generators that compete with demand response in PJM’s footprint.

“PJM’s proposal, which would have shifted demand response to the ‘demand side’ of the capacity market, could have been legally workable, mitigating risks to [demand response] posed by the pending EPSA case,” he wrote. “Without the contingency plan cushion, [demand-response] participation in PJM’s capacity markets could decrease in the face of greater uncertainty.”

Lucier also said PJM could resubmit the filing if the Supreme Court decides not to review the case. “However, we note that we think the court is, on balance, more likely than not to take up the EPSA case,” he wrote. “If so, Supreme Court litigation could stretch out into 2016.”