Demand Response Needs a Mulligan

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The D.C. Circuit Court of Appeals has nullified the retail electric market Demand Response programs governed by the Federal Energy Regulatory Commission, putting a chink in the armor of the new EPA carbon curbs.

Demand Response is defined in FERC’s Order 745 as “a reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.” When the electric grid is near its capacity (for example, when weather temperatures rise dramatically and air conditioning use is increased), building operators can participate in Demand Response programs that provide incentives for reducing the building’s energy demand during peak hours.

Specifically, on May 23, 2014, in Electric Power Supply Association v. FERC, the court said in a challenge to the FERC’s “Order 745’s direct regulation of the retail market, we vacate the rule in its entirety as ultra vires agency action.”

Key to EPA’s new carbon curbs assumption that electricity consumption will drop sharply are energy efficiency programs like Demand response.

Vacating the entire rule as ultra vires, holding it unlawful and “in excess of statutory jurisdiction, authority, or limitations” is dramatic and has the effect that the FERC cannot correct its mistake by simply revising its rulemaking.

Demand Response regulation is complex and lies at the confluence of state and federal jurisdiction. The court noted, Congress in 2005 declared “the policy of the United States that time-based pricing and other forms of demand response . . . shall be encouraged.” But the FERC gamed the marketplace by encouraging aggregators of retail customers that acted like ‘buying clubs’ reselling cheaper electricity.

This case makes clear the “FERC’s jurisdiction over the sale of electricity has been specifically confined to the wholesale market.” Demand Response is the purview of state public service commissions.

An example of the complexity is that many public service commission approved Demand Response programs do not qualify for the LEED NC-2009 EApc8: Demand Response pilot credit. After several iterations as a pilot credit, including changes to automated programs based on external utility initiation, a Demand Response credit is incorporated into LEED v4.

The effect of the court ruling will be to embolden state public service commissions and give electric customers more clout in the shaping of revised Demand Response programs.

The real economic winners should be electric rate payers across the country who have paid public benefit funds, system benefits charges and overall higher electric rates to subsidize unlawful FERC required Demand Response programs that have benefited a relatively small number of participants in the name of a national energy policy.

It is unclear how this court decision announced only days before the new EPA rule will reshape Demand Response. What we do know is that Demand Response programs will continue across the country. And we know they won’t be run from Washington DC.

About Author

Stuart Kaplow is an environmental attorney and the principal at the law firm that bears his name, Stuart D. Kaplow, P.A.

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