Understanding the U.S. Supreme Court's Demand Response Ruling

On January 25, 2016, the Supreme Court issued a decision finding that the Federal Energy Regulatory Commission (FERC) has jurisdiction over demand response and Order 745 compensation stands. Six judges supported the order, with Justices Scalia and Thomas dissenting (Judge Alito recused himself). The Court conceded that there are challenges in determining where state and federal jurisdiction stop and start, but that in the instant case clearly demand response had a direct effect on wholesale market prices. 

Additionally, the Court noted that FERC had provided that states had the option to opt-out of regional transmission organization (RTO) programs, indicating a clear intent to NOT regulate retail rates. With respect to the compensation under Order 745, the Court noted that it had to give deference to the regulating agency, and that while reasonable minds might disagree with the proposed compensation, FERC had met its burden of justifying the compensation scheme (Locational Marginal Pricing + “G” – a proxy for retail transmission).

From a process perspective, there is a 25-day waiting period for parties to appeal, which appeal is unlikely. At that point, the Supreme Court will remand the case back to the Second Circuit, which must now rescind its ruling staying demand response inclusion in the wholesale market. Pending cases at FERC alleging capacity markets should not have included demand response will have to be dismissed as moot. The expectation is FERC will wait to dismiss the cases until after the 25-day waiting period.

What does this mean? No RTO rules will need to be modified per any court decision. We expect to see PJM continue to try and push demand response out of its capacity performance auction as much as possible, and perhaps work on enhancing emergency demand response and having demand response be incorporated more into energy markets (to reduce peak load). We can expect the opposite from NYISO and ISO-NE, in that they are likely going to support initiatives that expand demand response participation in their markets. ISO-New England in particular will re-start their proposal to fully integrate DR into the energy and ancillary service markets that had been put on hold pending a court ruling. We do not expect significant activity in MISO because its stakeholders are primarily vertically integrated utilities that have state sponsored programs.  

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Marjorie Phillips is Director of RTO and Federal Services at Direct Energy.

For more regulatory and policy updates, please visit our Regulatory Update page. To learn how how Demand Response can benefit your business, please visit our Demand Response page.