The Justices of the United States Supreme Court are not strangers to the retail versus wholesale distinction that often plagues FERC’s regulations.  Indeed, on January 12, 2015 they heard arguments in Oneok v. Learjet regarding this very question.  Three days later, on January 15, 2015, the Solicitor General, on behalf of FERC, filed a petition for awrit of certiorari in FERC v. EPSA regarding FERC’s jurisdiction to regulate ISO/RTO demand response programs.  Will the Justices take FERC up on its request to argue the wholesale versus retail distinction in the context of demand response?  As the Magic 8 Ball® counsels “reply hazy, try again.”

Recall, on May 23, 2014, the D.C. Circuit vacated FERC’s Order No. 745 regarding demand response.  The D.C. Circuit did not defer to the agency’s determination and held that FERC acted beyond its jurisdictional authority in issuing Order No. 745 because it infringed on the exclusive jurisdiction of the states to regulate the retail electricity market and was arbitrarily and capriciously implemented without a response to the dissenting comments that Order No. 745 would result in unjust and discriminatory rates.  FERC sought en banc review of the D.C. Circuit decision, but was denied.1

The validity of FERC’s demand response program has wide ranging implications for the ISOs/RTOs, many of whom are faced with questions from participants.  FirstEnergy Service Company was among the first to step forward seeking clarification, filing a complaint with FERC requesting that PJM amend its tariff to remove its demand response provisions, among other things.  The New England Power Generators Association followed suit soon afterward, requesting FERC to exclude demand response resources from ISO-NE’s February 2015 forward capacity auction and tariff provisions.  In sum, market participants have exercised various avenues to pursue much needed clarification going forward.

Petition for Certiorari

In arguing that the Court should grant certiorari, the Solicitor General contends that this case is easily resolved through the application of step one in the Chevron framework, meaning the statutory language is unambiguous:  “the Rule applies only to demand-response providers who directly participate in wholesale markets by seeking payments from wholesale-market operators that are recouped by adjusting the wholesale rate.”2  Not only does the Solicitor General allege that the D.C. Circuit misapplied principles of agency deference, they further claim that the court “seriously misinterpreted the FPA.”3  While acknowledging that Section 824(b)(1) of the FPA reserves the regulation of retail transactions to the states, the Solicitor General draws a fine line, arguing that it is the “sale” of electric energy that is reserved, and nothing else.4  And, since the D.C. Circuit acknowledged that demand response is not a sale, that statutory limitation has no application in the present case.5

The Solicitor General further argued that should the Court determine that the FPA is ambiguous, it should defer to the agency’s reasonable interpretation.6  Interestingly, the Solicitor General chose not argue the D.C. Circuit’s assertion that Order No. 745 also was arbitrary and capricious.  Instead, the Solicitor General asserted that the D.C. Circuit’s determination that FERC Order No. 745 was arbitrary and capricious did “not pose any jurisdictional or prudential barrier to the Court’s consideration” of the case.7

Lastly, emphasizing the need for review, the Solicitor General stressed:  (1) the critical role that demand response plays in the electricity market;8 (2) Third and Fourth Circuit precedent striking down state laws that effectively set the rate of sales in wholesale-market auctions, concluding that they were field preempted;9 and (3) the fact that the D.C. Circuit’s decision is unlikely to be reviewed by another court because the FPA expressly allows petitions for review to be filed in the D.C. Circuit.10

The Status of Demand Response in PJM

As we have previously notedEPSA technically only addresses the energy markets; yet, the decision casts a shadow of uncertainty on FERC’s jurisdiction over demand response in the capacity markets.  Two ongoing proceedings filed by FirstEnergy Service Company and the New England Power Generators Association call on FERC to determine the status of demand response participation in PJM’s and ISO-NE’s capacity markets, respectively.

In the meantime, PJM has made an effort to minimize the risk that EPSA’s unsettled status may distort the results of its upcoming May 2015 RPM Base Residual Auction or open it up to legal challenges that would require PJM to re-run the auction.  On January 14, 2015, PJM filed with FERC proposed tariff revisions that would go into effect only in the event the Supreme Court denies FERC’s petition for certiorari.  These “stop-gap” rules present a new demand-side commitment model that aims to preserve the demand- and price-reduction benefits of demand response participation in RPM, while keeping within EPSA’s jurisdictional limits.

Specifically, PJM’s tariff revisions propose the following:

  • Removing existing provisions in the PJM Tariff and RAA that currently provide forsupply-side Demand Resource participation (pending a future filing to restore or address such provisions); and
  • Adding new provisions permitting LSEs or other wholesale entities to bid demand-side reductions, in the form of Wholesale Load Reductions and Wholesale Energy Efficiency Loads, from the 2015 Base Residual Auction onwards.  These load reductions would cause a leftward shift of the VRR curve, reducing the amount of capacity PJM would have to procure and resulting in a lower clearing price.

Notably, the proposed rules retain EPSA’s retail versus wholesale distinction by permitting only wholesale entities to submit load reduction bids.  PJM would leave it to the LSEs, retail customers, and states to determine how retail end-users ultimately would be compensated for the reduction in their electricity consumption that underlies the LSEs’ load reductions.  Moreover, under the revised rules, PJM would not compensate LSEs as it would supply-side generation; instead, cleared wholesale load reductions would result in reductions to the LSE’s capacity obligations and associated capacity charges.  LSEs would still be on the hook for complying with their load reductions, however, and would be subject to measurement and verification requirements and compliance charges for non-performance.

PJM proposes that the revised tariffs become effective April 1, 2015, and only in the event the Supreme Court denies certiorari in EPSA.  If the Commission accepts the revisions before the Supreme Court has acted, PJM requests that the Commission suspend the effective date for five days to permit PJM to submit a motion for continued suspension until such time as the Supreme Court has acted.  If the Supreme Court does not make a decision on the petition for certiorari as the Base Residual Auction approaches, PJM would continue to operate under its existing demand response rules. 

In its filing, PJM emphasizes that its proposed revisions would not alter capacity commitments or compensation from previous auctions.  Going forward, PJM’s “stop-gap” rules also are not intended to be set in stone, but rather to provide a way for demand response to continue to participate in this year’s Base Residual Auction despite its shaky status.  In its own words, PJM recognizes that because “determining the overall future of demand response . . . may require Commission action of nationwide scope,” the revisions are “not intended to foreclose, either legally or practically, the Commission’s consideration of the larger issues that EPSA may raise.”11

FERC’s View

Former FERC Chairman Jon Wellinghoff exuded confidence recently regarding FERC’s petition for certiorari, stating:  “[i]f the Supreme Court takes this case, we’re going to win . . . .  We, in fact, will win this hands down.”12  Notably, the Supreme Court has historically given petitions for certiorari submitted by the Solicitor General a close review, grantingcertiorari in a higher number of cases submitted by the government than private petitioners.13

In the event that certiorari is denied, and without a legislative solution, FERC will review PJM’s pending tariff proposal and, separately, may endeavor to:  (1) revise its demand response regulation consistent with a narrow reading of the D.C. Circuit’s decision under which the court only invalidated “FERC’s authority to regulate the level of compensation paid by wholesale-market operators to demand-response providers in energy markets;”14and (2) revise the compensation structure to address Commissioner Moeller’s dissenting arguments.15

Future Filings to Look For

EPSA’s response is due February 17, 2015, along with all amicus briefs.  The Supreme Court’s decision on whether to grant the petition will likely be issued in the spring or early summer of 2015.  This means that if certiorari is granted, we will not see a decision until spring or summer of 2016.  While this seems a long way off, the lasting impacts of the removal of demand response from the market may prove worth the wait.