Energy Choice
                            

Matters

Pa. PUC: FirstEnergy Interpretation of Court's "EPSA" (Order 745) Decision Also Means FERC Lacks Authority to Create, Compel PJM Capacity Market

October 23, 2014

Email This Story
Copyright 2010-14 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

The legal reasoning used by FirstEnergy in a FERC complaint that seeks to eliminate demand response from participation in the capacity market would also mean that FERC lacks jurisdiction to create and compel participation in capacity markets, the Pennsylvania PUC said in a protest of FirstEnergy's complaint.

Citing an Appeals Court order which vacated FERC's compensation mechanism for demand response in the energy market, FirstEnergy has filed a complaint with FERC asking FERC to remove demand response from participation in the PJM capacity market, arguing that the court's conclusion that FERC lacked jurisdiction over demand response compensation (since it is a retail rate) in the energy market equally applies to the capacity market.

In particular, the Court dismissed FERC's argument that FERC could set demand response compensation because demand response, while not a wholesale energy rate itself, "affects" wholesale energy rates, since the Federal Power Act empowers FERC with ensuring, "all rules and regulations affecting ... rates," in connection with the wholesale sale of electric energy are just and reasonable.

The Court essentially found FERC could not blithely claim that it was empowered to adopt policies merely because such policies regulated matters "affecting" wholesale rates.

However, as we have noted previously, capacity markets are premised not on an explicit grant of authority to FERC under the FPA, but under the "affecting" doctrine -- namely, that because a lack of sufficient capacity would allegedly result in unjust and unreasonable wholesale energy rates, FERC somehow has authority to compel load to participate in capacity markets.

We immediately noted (click here) in our analysis of the Court's order vacating Order 745 that the Court's reason for vacating the Order presented a problem for capacity market acolytes. As an aside, other recent court orders have taken a similar line, as a separate appeals court ruling regarding state-procured capacity contracts found that, "FERC's authority over interstate rates does not carry with it exclusive control over any and every force that influences interstate rates." (See RetailEnergyX.com: Generators Playing With Fire: Court Further Chips Away At FERC Justification for Capacity Market)

In its protest of FirstEnergy's complaint, the Pennsylvania PUC made note of the dichotomy -- FirstEnergy is embracing the court's finding of a lack of FERC jurisdiction over demand response on the basis that simply "affecting" wholesale rates does not grant FERC jurisdiction, but taken to its logical conclusion, this finding would necessitate the termination of the capacity market for a lack of FERC jurisdiction as well.

Indeed, EPSA itself notes in support of FirstEnergy's complaint that, "It also bears emphasis that the FPA says nothing about electric capacity and that the Commission's jurisdiction over capacity is entirely derivative of the statutory grant of jurisdiction over 'the sale of electric energy at wholesale in interstate commerce.'" (emphasis added).

EPSA, however, does not acknowledge the obvious problem for the capacity market, where FERC only has "derivative" authority, that is created by striking FERC's jurisdiction over demand response where FERC claimed the same "derivative" authority

But the implication to the Pennsylvania PUC was clear:

"[I]f the reasoning in the D.C. Circuit majority opinion [regarding demand response] is applied to the capacity market as FirstEnergy requests, the FERC's sanctioning of the capacity market itself, is ultra vires agency action, and must be vacated insofar as the FERC would be using the capacity market payments, as it did in the [demand response] rulemaking, to do indirectly what it cannot do directly, namely luring entities to build new generation or offer their existing generation capacity into the energy markets," the PUC said.

Now, the Pennsylvania PUC believes that FERC does in fact retain authority to create and compel participation in capacity markets, and was merely following the rationale of FirstEnergy's legal reasoning to its logical conclusion to highlight what the PUC believes are fatal flaws in such reasoning. Just as FERC has authority over the capacity market, FERC retains authority to allow demand response participation in the capacity market despite the Court's ruling with respect to demand response in the energy market, the PUC said.

"The PAPUC believes that the reasoning relied upon by the D .C. Circuit majority to vacate the FERC Order 745 rulemaking and the facts of that case are distinguishable from the law and facts presented in the instant FirstEnergy complaint. The PAPUC contends that the FERC and PJM have attempted to appropriately balance the ability of supply and demand to participate in the capacity market to promote and ensure system reliability and that the FERC did so within its authority under Section 215 of the FPA, 16 U.S.C. §824o ... [T]he D.C. Circuit has already determined that the FERC is acting within its authority when it established such a capacity market," the PUC said.

"The PAPUC also notes that the capacity market does not in any way involve the sale of electricity at wholesale or retail nor does it directly regulate an area subject to exclusive state control that was the D.C. Circuits [sic] overarching basis for vacating Order 745. These facts clearly distinguish this complaint from the EPSA v. FERC case and make that cases [sic] reasoning inapplicable to this proceeding. Significantly, as pointed out previously, demand response that clears the capacity market is not required to bid into the energy market and is only required to be available to respond to system conditions that threaten system reliability during certain times of the year and day, which is well within the FERC's authority granted under Section 215 of the FPA. Thus, it does not violate the Section 201 prohibitions whereas, the EPSA case relied upon by FirstEnergy addressed the wholesale energy market, which directly involves the sale of energy and the price paid for wholesale energy, and did not implicate the reliability of the bulk power system," the PUC said.

"The primary purpose of the capacity market is to ensure system reliability of the bulk power system. The application of the D .C. Circuit Court's reasoning in EPSA, which was based on facts and issues limited to electric sales at wholesale, to the much broader issue and circumstances surrounding the reliability of the entire bulk power system is contrary to prior D.C. Circuit decisions, is inappropriate, and irrational. There are many factual and legal issues that differentiate the capacity market from the wholesale energy market," the PUC said, noting, "The Commission [FERC] has express authority under Section 215 of the FPA, 16 U.S.C. §824o, to ensure the reliability of the bulk power system."

ADVERTISEMENT
NEW Jobs on RetailEnergyJobs.com:
• NEW! -- Regulatory and New Markets Manager -- Retail Supplier -- New York
• NEW! -- Director - Business Analyst and Pricing -- Retail Supplier -- New York
• NEW! -- Manager, Risk Management -- Retail Supplier -- Houston
• NEW! -- Customer Experience & Retention Manager -- Retail Supplier
• NEW! -- Sales Business Development Manager -- Retail Supplier -- Houston
• NEW! -- Regional Sales Manager - Ohio/Texas/Various -- Retail Supplier
• NEW! -- Senior Supply Analyst, PJM -- Retail Supplier -- Houston
• NEW! -- Controller -- Retail Supplier -- Houston
• NEW! -- Director of Operations -- Retail Supplier
• NEW! -- Branch Sales Manager -- Retail Supplier
• NEW! -- Pricing Manager -- Retail Supplier -- Houston
• Director of Channel Development
• Energy Sales Representative -- Texas -- Dallas
• Vice President, Operations
• Pricing Analyst
• Sr. Pricing Analyst -- Retail Provider -- Houston