Industry reaction rolls in to court ruling on demand response

It didn't take long for electricity industry players to try to leverage a federal appeals court ruling Friday that voided the Federal Energy Regulatory Commission's authority to regulate demand response.

Demand response is a term that refers to when end-use customers -- typically large industrial and commercial businesses -- agree to reduce their use of electricity in response to power grid needs or economic signals from a competitive wholesale market.

After the court ruling Friday, FirstEnergy Corp. asked FERC to "fast track" an order delaying the release of PJM Interconnection's latest capacity auction results, which included the "clearing" of nearly 11,000 megawatts of demand-response resources for use in 2017 and 2018.

The commission did not, and the results were posted on PJM's website at 4 p.m. EDT on Friday (EnergyWire, May 27).

Akron, Ohio-based FirstEnergy also asked FERC to order PJM, the nation's largest wholesale electricity market, to remove "all PJM Tariff provisions that allow or require demand response to be included in the PJM capacity market."

FirstEnergy is one of the nation's largest investor-owned electric companies, with 10 regulated distribution companies operating in the Mid-Atlantic and Midwest. It also has nearly 18,000 MW of generating capacity, nearly all of it in the PJM market, which serves 13 states and the District of Columbia.

In its filing with FERC, FirstEnergy said that the auction results "must be considered void and legally invalid because the inclusion of demand response in the auction parameters was unlawful."

The divided ruling Friday by the U.S. Court of Appeals for the District of Columbia Circuit effectively said FERC overstepped its authority under the Federal Power Act in its Order 745, ruling that demand response is a function of retail electricity markets, which are governed by the states (Greenwire, May 23).

Grid operators and power providers, represented by the Electric Power Supply Association, the American Public Power Association and others, challenged the FERC order, saying the commission was unlawfully wading into retail electricity markets when the Federal Power Act granted the agency jurisdiction solely over wholesale markets. Retail sales, they argued, are regulated by states.

"The continued use of demand response in capacity auctions is likely to prevent generation units owned by FirstEnergy to clear in PJM's auctions, resulting in potentially millions of dollars in lost revenues," the company told FERC.

A FERC order "on this complaint will impact not only rates, but commercial decisions whether to close or build new generation resources, which will affect employment decisions and local economies," FirstEnergy said.

FERC issued a terse statement that it "is reviewing the decision and considering next steps." The commission has 45 days to ask for a rehearing by the D.C. Circuit.

"I'm not thinking what a lot of people are thinking; by that I mean this overturning the entirety of federal versus state jurisdiction over demand response," said Dan Delurey, executive director of the Association for Demand Response and Smart Grid.

"I think it is not the correct decision. But I think it's important for us all to understand that it was in many ways a surgical decision. There's not blood in the water, and this is not what some people are making it out to be. That's not saying there's a lot of things that have to be clarified now," Delurey said.

Observers are wrong if they believe the court ruling means that states will "have to come together and decide how demand-response programs would operate at the wholesale level. I don't see that at all," he added, noting that "states are in many different places with respect to DR."

"We think this is a landmark ruling," said Donald Moul, vice president of commodity operations for FirstEnergy Solutions.

"If demand response is a retail product, then it has no place in the wholesale markets," he said in an interview.

But Moul's concern goes beyond the question of federal-state jurisdiction. "It's the argument we've been making all along. Choosing not to consume a retail product is not the same as generating a megawatt.

"As a generator, we make long-term asset decisions based on capacity revenues and energy revenues," he said.

Demand response lacks the qualities of a steel-in-the-ground power plant and has led to a distorting of the value of generation assets and even the closure of some power plants, he said.

"You kind of wonder where this is all going to go," Moul said, adding that his company has been "working the phones" trying to get other generators to join FirstEnergy in its effort at FERC.

"We're pleased with the decision," said John Shelk, president and CEO of the Electric Power Supply Association, which represents independent power producers. EPSA was one of the plaintiffs in the case decided Friday.

"There's clearly a lot of open questions now, and we're still working through how this will play out," Shelk said.

He chided FERC for resisting suggestions as to how demand resources should be compensated in the markets before Order 745 was issued in 2011.

"We said all along that there was a way to do this properly," he said. "They would have avoided all this if they had listened to us."

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