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The grid operator in the Mid-Atlantic and Midwest staked a trail for demand response today that it says might avoid litigation expected in the wake of a federal appeals court’s torpedoing of a key federal electricity-saving program.

PJM Interconnection outlined a new framework that it called a “trial balloon” for the participation of demand response in power markets. The proposal was released in a white paper yesterday.

“We believe that structure creates a path to continue demand response participation in these markets,” Andrew Ott, PJM’s executive vice president for markets, told stakeholders and reporters today.

Demand response refers to agreements by large industrial and commercial utility customers to cut back on electricity use to ease pressure on the grid during times of peak power demand or to respond to economic signals from a competitive wholesale market.

Under PJM’s proposal, competitive retail service providers and load-serving entities would be able to participate in the demand response markets directly through PJM’s capacity markets. A third of PJM’s demand response is currently derived from load-serving entities, Ott said.

PJM, he said, still “sees a role” for third-party providers and aggregators — companies like EnerNOC Inc. and Viridity Energy Inc., for example — that were blindsided when the court scrapped the federal program.

“I think that vital role will continue, we’ll work with the states and competitive providers within the states,” Ott said.

But PJM, the nation’s largest wholesale electricity market, acknowledged the proposal is one of many being circulated in response to the appeals court’s scrapping last May of the Federal Energy Regulatory Commission’s rule that provided incentives for electricity users to consume less power.

The court held that FERC had overstepped its authority under the Federal Power Act. The ruling was welcomed among industry groups — notably the Electric Power Supply Association and Edison Electric Institute — that have for years argued that FERC’s Order 745 goes “too far” and tramples states’ exclusive authority to regulate retail markets.

FERC’s request for a rehearing has since been denied, and the agency is now mulling whether to take its concerns to the Supreme Court.

Vincent Duane, PJM’s general counsel, said the court left many questions unanswered and the grid operator has since received several “clever, creative and reasonable” proposals for how to manage demand response.

Duane said the proposal that PJM has floated would ensure that demand response transactions maintain wholesale character, which would comply with the court’s decision. It would also treat DR as a demand resource, not supply.

“Some may say it’s conservative, but the concern for us — and it’s really the major point I want to underscore — is that we ensure we proceed on solid legal footing to” prevent litigation and uncertainty in the markets, Duane said.

It’s unacceptable for PJM, he said, to pursue untested approaches that might be challenged through FERC or the courts, and run the risk of being remanded in coming years.

PJM is interested in seeing whether the plan gains traction or gets support, Duane said, adding that the grid operator needs to make decisions before its 2015 auction, or even before incremental markets in February.

“We’d love to see a path get some support that would allow us to present it to [FERC],” he said.

PJM also filed its proposal in a FERC docket that stems from Akron, Ohio-based FirstEnergy Corp.’s request to remove “all PJM Tariff provisions that allow or require demand response to be included in the PJM capacity market.”

PJM officials said they “purposefully” filed the plan there because they cannot otherwise discuss the issue with FERC with FirstEnergy’s request pending.

FirstEnergy is one of the nation’s largest investor-owned electric companies, with 10 regulated distribution companies operating in the Mid-Atlantic and Midwest. It also has nearly 18,000 MW of generating capacity, nearly all of it in the PJM market, which serves 13 states and the District of Columbia.

In its filing with FERC, FirstEnergy said the auction results “must be considered void and legally invalid because the inclusion of demand response in the auction parameters was unlawful.”

If a path forward for demand response isn’t firmed up by the year’s end, PJM will have to take a hard look at the “undesirable” option of suspending demand response in the wholesale markets, Duane said. Or the grid operator could propose a path forward to thwart uncertainty going into 2015, he said.