Demand response is one of the Federal Energy Regulatory Commission’s (FERC, or the “Commission”) top initiatives. Not surprisingly, FERC recently acted quickly to remove any market uncertainty that had been created by a February 4, 2011, joint statement issued by PJM Interconnection, L.L.C. (PJM) and its Independent Market Monitor (“Market Monitor”) (the “Joint Statement”) asserting that one method for measuring and verifying compliance by demand side resources for interruption during an emergency event resulted in “double counting,” exploited the current PJM market rules and could result in referrals to the FERC Office of Enforcement as market manipulation. FERC nullified the Joint Statement in an unusual order that should be of interest to all market participants who rely on unclear tariff provisions in the organized electric markets.

On February 22, 2011, EnerNOC, Inc. (“EnerNOC”), the largest demand response provider in PJM and an Aggregator of Retail Customers (ARC) pursuant to PJM’s tariff, responded to the Joint Statement by filing a Petition for Declaratory Order with FERC asking it to declare appropriate the existing methods used to measure and verify demand response during an emergency event under the PJM tariff. EnerNOC argued that there was a policy dispute about the proper methods for measuring and verifying compliance by demand side resources under the tariff, that the PJM stakeholders were considering the issue and that the threat of enforcement action created market uncertainty. All parties agreed that the PJM tariff is not clear on this issue. PJM had convened a stakeholder process to evaluate this issue and the collective decision was to defer evaluation of tariff changes until May 2011.

A week after the EnerNOC filing, FERC issued an order stating that it would treat the Joint Statement as if it had never been issued so that market participants are placed in exactly the same position as they were prior to the Joint Statement.1 FERC indicated that it expected the normal PJM stakeholder process to continue to decide what methods are appropriate for measuring and verifying demand response in emergency events under the PJM Tariff.

Several aspects of FERC’s order are significant.

First, FERC acted quickly to remove doubt about the application of the tariff prior to the April 1, 2011, deadline for participation in PJM’s program.

Second, FERC is allowing the demand response issue to be resolved through the stakeholder process to determine the permitted method to be used in the future under the tariff, instead of allowing PJM and the Market Monitor to unilaterally interpret the tariff.

Third, one of the issues in FERC enforcement cases has been the issue of notice—i.e. when is a market participant sufficiently on notice that its actions could result in prohibited market manipulation. The EnerNOC order contrasts with two show cause orders issued in 2009 concerning multiple-affiliate bidding for natural gas pipeline capacity.2 Similar to the EnerNOC case, in those cases, the tariff did not preclude the bidding practice used but FERC pointed to a warning from FERC staff posted on an electronic bulletin board regarding multiple-affiliate bidding as evidence that the parties were on notice that the practice could violate FERC’s market manipulation rules.3 In the EnerNOC case, FERC expressly rejected the use of the Joint Statement by PJM and the Market Monitor to put market participants on notice that their actions could constitute market manipulation. Instead, FERC will ignore the issuance of the Joint Statement and has decided “until further notice” not to institute any enforcement actions against EnerNOC or other similarly situated ARCs. In Order No. 670, FERC stated that if a market participant undertakes an action or transaction that is “explicitly contemplated” in Commission-approved rules and regulations, the Commission will presume the market participant has not violated the Commission’s anti-manipulation rule.4 Although FERC’s order in the EnerNOC case preserved the possibility of pursuing market manipulation violations in PJM’s demand response program, given the specific rulings, it appears unlikely that FERC will pursue any enforcement actions concerning the method for measuring demand response during an emergency event based on the existing PJM demand response tariff provisions, which all parties have conceded are not clear.