Careful What You Wish For: In Generator-Friendly Demand Response Order, Court Clips FERC's Authority to Regulate Based on "Affecting" Wholesale Prices

An order initially being hailed by competitive generators concerning demand response should ultimately prove most beneficial to retail suppliers and consumers in reining in FERC's unchecked authority to issue regulations over anything allegedly "affecting" wholesale electric rates.

The U.S. Court of Appeals for the D.C. Circuit in a Friday opinion struck down FERC's Order 745 which pays certain demand resources the full LMP (with no deduction of a retail generation rate or proxy). The Court concluded that FERC's order amounted to regulation of retail rates, which is a power exclusive to the states.

"FERC argues §§ 205 and 206 [of the Federal Power Act] grant the agency authority over demand response resources in the wholesale market. These provisions task FERC with ensuring 'all rules and regulations affecting ... rates' in connection with the wholesale sale of electric energy are 'just and reasonable,'" the Court noted

"Thus, the Commission argues it has jurisdiction over demand response because it 'directly affects wholesale rates,'" the Court noted.

"The Commission's rationale, however, has no limiting principle," the Court observed.

"Without boundaries, §§ 205 and 206 could ostensibly authorize FERC to regulate any number of areas, including the steel, fuel, and labor markets. FERC proposes the 'affecting' jurisdiction can be appropriately limited to 'direct participants' in jurisdictional wholesale energy markets. But, as this case demonstrates, the directness of participation may be a function of the richness of the incentives FERC commands. The commission's authority must be cabined by something sturdier than creative characterizations," the Court ruled.

"States retain exclusive authority to regulate the retail market. Absent a 'clear and specific grant of jurisdiction' elsewhere, the agency cannot regulate areas left to the states," the Court said.

In its own doublespeak, the Court, having reached this conclusion, nonetheless harmonizes it with precedent finding that, notwithstanding the reliance on the same rejected rationale, FERC can mandate installed reserve margin requirements and mandatory capacity payments to meet such requirements.

The Court weakly distinguishes the capacity market mandates with the demand response compensation by finding that by setting an installed reserve margin and mandatory mechanisms to meet the mandate, FERC was not "directly" encroaching on generation construction (a power left to the states), while the full LMP compensation demand response directly affects the retail rate.

Still, even if the decision does not provide grounds for chipping away at capacity mandates, the Court's clear finding that FERC cannot merely assert that an action (or inaction) "affects" wholesale rates in attempts to regulate retail load serving entities is welcome news

We also find amusing the Court's characterization that "wholesale demand response" (as opposed to retail demand response), "is a fiction of its [FERC's] own construction." Certainly, many other of FERC's "markets" qualify as "fiction" as well.

The case is 11-1486, Electric Power Supply Assoc. v. FERC