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Negawhat?

EPSA v. FERC: How the court went wrong on demand response.

Fortnightly Magazine - June 2014
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As I sit down to write, the U.S. Court of Appeals for D.C. Circuit only hours ago dropped a bombshell, declaring in the case of EPSA v. FERC, No. 11-1486, decided May 23, 2014 by a vote of 2-1, that Federal Energy Regulatory Commission Order 745 is completely null and void.

And for that clever bit of timing, waiting until Friday afternoon, so as not to roil markets, I applaud the court. But in forcing reporters back to their computer screens, to give up a portion of their Memorial Day holiday weekends in order to grind out a story to make their Tuesday deadlines, I can only curse.

You see, in treating demand response as the moral equivalent of electric generation, as it did in 2011 in Order 745 - that is, by rewarding forgone consumption with a payment equal to the going wholesale market price for day-ahead energy, known as the locational marginal price, or "full LMP," without any offset for "G" (that being the cost of buying energy that is thereby avoided) - FERC had sought to remove barriers and place DR on an equal footing with power plants. Congress in fact just a few years earlier had told the commission to do exactly that, in sec. 1252 of the 2005 EPACT law.

But no. Choosing not to buy electricity, the court said, is a retail transaction, every bit as much as buying. So when the regulator promises a payment or credit for forgone consumption, the court explained, he is setting a retail rate - just the same, and no different in concept, than fixing the per-kilowatt-hour charge we all see on our monthly power bills. And so the court ruled: "Because FERC's rule entails direct regulation of the retail market - a matter exclusively within state control - it exceeds the commission's authority."

But as to all this, at least from an economic viewpoint, while waiting for the law to catch up with reality I say in all candor that the court has got it completely wrong.

No Longer 'Neat and Tidy'

Back when I was in law school, so many years ago that I can hardly remember the time, my professors (the best ones, at least) would tell me always to read the dissenting opinion. That, they said, was where you would learn the ideas that were worth holding on to. And this case is one that proves the rule.

But first, let me explain what the court's ruling in EPSA v FERC did and did not say.

It did not, in any way shape or form, settle the long-running squabble over which is better: Full LMP, or LMP minus G. The Electric Power Supply Association and many others had advocated LMP minus G. They had argued that consumers who sell demand response back to the wholesale market are not selling energy, per se, but only a

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