High Stakes at the High Court

Cost-conscious commercial and industrial customers may be oblivious to the legal issues surrounding their energy choices, but their demand response providers are not. The U.S. Supreme Court will now decide whether those services will be regulated by the federal government or state utility commissions.

Demand response provides insight for commercial and industrial customers into the nature and patterns of their energy consumption. That allows them to run specific applications at times of the day that are more favorable under the applicable utility rate structure - something that also eases transmission congestion while avoiding some electric generation or expensive power purchases on spot markets.

The flip side, though, is that demand response tools are diverting a share of revenue from power producers and utilities that still own generation, which together take in billions each year. Their beef: the current rule for demand response has allowed regional market operators to compensate suppliers of demand response in the same amount as is earned by the generators that actually produce power.

To be clear, the High Court has combined two lower court rulings and will consider both of them. The first issue is whether the U.S. Federal Energy Regulatory Commission (FERC) has primary responsibility over these transactions in wholesale markets or whether the state utility commissions oversee them as retail transactions.

The second issue is whether the demand response providers should be paid the same (the full LMP, or "locational marginal price") as the generators. Many argue that to be fair to power producers, FERC must offset the DR compensation rate set in wholesale energy markets by an amount equal to the generation component of the retail rate, known as "G." Thus, they insist on a formula known as "LMP - G," so that markets don't give too much reward to retail users who forgo consumption.

Both issues are crucial, as many see demand response as essential to the workings of FERC-regulated wholesale energy markets, while others see full-LMP compensation as essential to entice suppliers to bid demand response into those markets.

"Demand response is not going to die a legal death," says Dan Delurey, chief executive of the Association for Demand Response and Smart Grid, in a phone interview with the Fortnightly. "It is part of the mix. We still believe the lower court made the wrong decision in ruling that FERC did not have jurisdiction over demand response."

The background: In 2011, FERC issued Order 745 to comply with its prior directive in Order 719, which dictated that demand response resources must be treated equally with generation and other resources, not only in energy markets, but in supplying other products and services, such as capacity or frequency response.

In the case of demand response (DR), consumers shift or forgo their consumption. That can reduce customer load (demand) and make it easier for grid operators to keep the lights on. Companies known as DR "aggregators" help this process by amassing high-volume bundles of DR resources from large numbers of small-volume customers. These aggregated DR resources are then easier to sell into regional wholesale energy markets. Doing so potentially frees up space on the transmission network while also possibly avoiding the use of fossil-fueled generation.

These DR resources are also given credit for preventing blackouts, and include such customer strategies as shutting off non-critical lighting or switching to onsite electric generation. FERC has said that demand response technologies could ultimately cut electricity demand by as much as 188,000 megawatts, referred to as "negawatts."

However, in May 2014, the U.S. Court of Appeals for the D.C. Circuit overturned FERC Order 745, but allowed the FERC rule to continue in force until the case would be ultimately resolved by the Supreme Court. In its lower court ruling, the court of appeals sided with power generators and utilities, ruling that demand response is essentially a retail product for which the states have jurisdiction.

As early as October, the Supreme Court will rule on the two cases: FERC v. Electric Power Supply Association, and EnerNOC v. EPSA. EnerNoc is a technology provider and a demand response aggregator. EPSA represents independent power producers and is joined by the Edison Electric Institute, whose members are investor-owned utilities.

Wholesale energy markets in the U,.S. are regulated by the FERC and are run by and large by regional non-profit organizations independent of the utility industry, and which also oversee the operation of the much of the nation's power grid. These independent system operators - commonly called ISOs or RTOs - conduct auctions by soliciting bids from power suppliers and buyers (and other market players, such as DR suppliers), and then dispatch generating plants and resources to send electrons across the wires.

ISO New England and the PJM Interconnection represent two regions that rely heavily on demand response resources to make markets work smoothly. They employ demand response to help comply with resource adequacy standards, such as the mandated installed reserve margin. They solicit bids from DR suppliers and aggregators not only in the wholesale regional energy market, but also in the regional capacity market.

The DR suppliers and aggregators argue that it's not clear if demand response is truly retail or wholesale, as the ISOs and RTOs rely on DR both to clear the wholesale market, as well as to ensure that the electrons sold in those markets are delivered at retail to homes and businesses. Because the line between wholesale and retail is unclear, they say, FERC should have authority to regulate demand response. Moreover, FERC's Order 745 provides one set of rules to govern compensation for DR, whereas the states, if left to their own devices, may set rates using widely different guidelines.

At the same time, however, retail electric customers now are sometimes generating their own power, often with solar panels on-site on residential rooftops, and selling it back to utilities. As this new "distributed" generation grows, in tandem with so-called "Smart Grid" technologies, the issue becomes more complex. Experts increasingly are now thinking of demand response not just as a tool to reduce congestion on the interstate electric grid, which is regulated by FERC, but also to manage load and transactions between resources on the smaller, local distribution grids, regulated by the states.

"Demand response has reached a point of inflection in its evolution and has begun shifting toward retail markets and residential customers," says Ahmad Faruqui, Brattle Group Principal, in an interview with this reporter. "That movement will not be hindered by whatever happens to demand response in wholesale markets."

Legal experts are saying, however, that the two portions of the pending case are not created equal. That is, a distinction should be made between the one issue - whether federal or state regulators are responsible for overseeing demand response transactions - and the second question: whether demand response should be compensated the same as generators.

"Just because the Supreme Court (agreed to hear the case), does not mean that it will uphold FERC's position," explains Joe Hall, partner and co-chair of the Energy Industry Group at Dorsey & Whitney, in an interview with the Fortnightly.

"Either way," he adds, "the order could be an important benchmark for purposes of defining the roles between FERC and the states, particularly as they implement increasingly converging energy and environmental policies."

Putting aside the jurisdictional question, Hall does think that the electric suppliers have a valid point about how to value actual generation with the "negawatts" provided by demand response companies.

"Practically speaking, the generators have spent tens of millions and you can understand their position - why demand response, especially if it is subsidized, should get the same rate as they do," Hall says.

"No matter what the Supreme Court does, however, the industry will need to address this issue if it wants to promote a balanced portfolio of generation and demand response technologies. Otherwise, the incentives may outweigh one approach over the other and sufficient generation or demand response initiatives may not be developed."

With new energy technologies continually unfolding, the legal world will be playing catch up. But the outcome of those cases will profoundly affect not just the key providers but also the broader electricity markets.