Amicus Curiae Brief — Fed. Energy Regulatory Comm'n v. Elec. Power Supply Ass'n, 135 S. Ct. 2049 (2015) (No. 14-840)

Nos. 14-840 & 14-841

In THE

Supreme Court of the Hnited States

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,

Vv.

ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.,

Respondents.

ENERNOC, INC. ET AL.,

Petitioners,

v.

ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.,

Respondents.

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR ELECTRICITY CONSUMERS AND

DEMAND RESPONSE PROVIDERS AS AMICI

CURIAE IN SUPPORT OF PETITIONERS

SETH P. WAXMAN

Counsel of Record

MARK C. KALPIN

DAVID M. LEHN

SAURABH H. SANGHVI

WILMER CUTLER PICKERING

HALE AND DorR LLP

1875 Pennsylvania Ave., NW

Washington, DC 20006 ,

(202) 663-6000 ——-

seth. waxman@wilmerhale.com

TABLE OF CONTENTS

Page

ee PS il

INTEREST OF AMICI CURIAE...0000.0......ccccccscsceseseeees 1

SUMMARY OF ARGUMENT ..............c.cccccccssessessesesseceeee 2

| —_____—E e 4

I. DEMAND RESPONSE HAS PROVIDED SUB-

STANTIAL BENEFITS FOR YEARG.............-.-.0-0-0-e0e0ee0s 4

A. FERC Has Facilitated Demand Re-

sponse To Address Important Prob-

lems Affecting Wholesale Rates......................... 4

B. Demand Response Provides Demon-

strable Benefits To Electricity Marketz............ 9

C. Demand Response Provides Important

Additional Benefits To End-Use Con-

sumers... snsungemnentenananseunsuumsmenessneenes 12

II. IF ALLOWED To STAND, THE DECISION

BELOW WILL HAVE BROAD AND SEVERE

CONSEQUENCES FOR THE MARKETS, DE-

MAND RESPONSE PARTICIPANTS, AND

RATEPAYERS GENERALLY ............-0c--eeesseeseeeseceseeeses 13

A. The States Cannot Adequately Repli-

cate The Benefits Of Wholesale De-

mand Response In Energy Markets ................ 15

B. The Decision Below Threatens Capaci-

ty Markets And The Availability Of

Demand Response In Those Markets............... 17

CEES cxcnesssncnsmnsnsstensesnnsssmmsssereesnsmenenneevenenmnas 22

‘

TABLE OF AUTHORITIES

CASES

Morgan Stanley Capital Group, Inc. v. Public

Utility District No. 1 of Snohomish

County, 554 U.S. 527 (2008) .............c-ccecesseeeesereeeeeeees 14

Motor Vehicle Manufacturers Ass’n v. State

Farm Mutual Auto Insurance Co.,

463 U.S. 29 (1983) .........0000+ semuiieeeeamenenenes 14

New York v. FERC, 535 U.S. 1 (2002) ................-..-.-- 5, 19

STATUTES, RULES, AND REGULATIONS

16 U.S.C.

TTT cite apriascipendeesitbieatanmctadiniaseeaitinaminnene 1

§ 824e seiinaninnadeamssensiperimaiadueninenenimepeenmeene 1

Energy Policy Act of 2005, Pub. L. No. 109-58,

119 Stat. 594 ................ece00e Se eee 8

Wholesale Competition in Regions with

Organized Electric Markets, 73 Fed. Reg.

Ee 8

OTHER MATERIALS

Boshart, Glen, Navigant: Absent DR

participation, PJM capacity prices could

jump up to $-fold, SNL Financial (Oct. 6,

2014) available at https://www.snl.com/

y— ,adananiadatnnienntoinennenee

Comments of the Electric Power Supply

Association, FERC Docket No. EL1521-

TABLE OF AUTHORITIES—Continued

Page(s)

Delaware Public Service Commission

Comments to FERC Regarding D.C.

Circuit May 23, 2014 Opinion Vacating

FERC Order No. 745, FERC Docket

RM10-17-000 (July 2, 2014)..... — —

FERC, 2007 National Assessment of Demand

Response and Advanced Metering (Sept.

2007), available at http//www-ferc.gov/

legal/staff-reports/09-07-demand-response

ae senntesianteasninneisnenneinen 9, 10, 11

FERC, 2008 National Assessment of Demand

Response and Advanced Metering (Dec.

2008), available at http//www-ferc.gov/

FERC, 2010 Assessment of Demand Response

and Advanced Metering (Feb. 2011)

available at http://www -ferc.gov/legal/staff

FERC, 2011 National Assessment of Demand

Response and Advanced Metering (Nov.

2011), available at http//www-ferc.gov/

legal/staff-reports/11-07-11-demand-response

Si aniteenmiemencienmmnetnaiennninmnmens 11

FERC, 2012 National Assessment of Demand

Response and Advanced Metering (Dec.

— available at http//www_-ferc.gov/legal/

iv

TABLE OF AUTHORITIES—Continued

Page(s)

FERC, 2014 Assessment of Demand Response

and Advanced Metering (Dec. 2014),

available at http-//www.ferc.gov/legal/staff

-reports/2014/demand-response.pdf ... — 5

FERC, A National Assessment of Demand

Response Potential (June 2009), available

at http//www-ferc.gov/legal/staff-reports/

06-09-demand-response. pd ..............c-cecsseeeeeeeeecereereee 8

FERC, Assessment of Demand Response and

Advanced Metering (Aug. 2006, rev. Dec.

2008), available at http://www-ferc.gov/

legal/staff-reports/demand-response

pdf , 7, 8, 9, 16

FERC, Energy Primer: A Handbook of

Energy Market Basics (July 2012),

available at http~//wwwferc.gov/market-

oversight/guide/energy-primer. pdf ....................-0-+: 17

FERC, National Action Plan on Demand

Response (June 2010), available at http-//

www ferc.gov/legal/staff-reports/06-17-10-

FirstEnergy Service Co. v. PJM

Interconnection, L.L.C., FERC Docket No.

EL14-55-000 (May 23, 2014)... ceeceececceceseneeennee 18

Letter from W. Kevin Hughes, State of

Maryland Public Service Commission, to

Cheryl A. LaFleur, FERC Acting

Chairman, FERC Docket RM10-17-000

aT atistsitapnatacdnniestedaptetnennetionisesneniunitandninnuiagien 19

Vv

TABLE OF AUTHORITIES—Continued

Monitoring Analytics, Analysis of the

2015/2016 RPM Base Residual Auction

(Sept. 24, 2013), available at http:/

www.monitoringanalytics.com/reports/Rep

orts/2013/Analysis_of_2015_2016_RPM_Ba

se_Residual_Auction_20130924.pdf................

Monitoring Analytics, Analysis of the

2016/2017 RPM Base Residual Auction

(Apr. 18, 2014), available at http://

www.monitoringanalytics.com/reports/Rep

orts/2014/IMM_Analysis_of_the_20162017_

RPM_Base_Residual_Auction_20140418.pdf.

Navigant, Carbon Dioxide Reductions from

Demand Response (Nov. 25, 2014),

available at http://www.ieca-us.com/wp-con

tent/uploads/Carbon-Dioxide-Reductions-fr

r~ ecaiaaaiamaaiin Navigant_11.25.14

NERA Economic Consulting, Distributed

Resources: Incentives (Mar. 9, 2006),

available at http://sites.energetics.com/

madri/pdfs/whitepaper_031006.pdf.................

New England Power Generators Ass’n v. ISO

New England, Inc., FERC Docket No.

EL15-21-000 (Nov. 14, 2014)..........-ccccessesereeses

Order Accepting Tariff Sheets As Modified,

95 FERC 4 61306 (May 30, 2001)....................

Order Removing Obstacles, 94 FERC ] 61272

Page(s)

a 10

sansssves 10

pesemane 15

vi

TABLE OF AUTHORITIES—Continued

Page(s)

PJM Interconnection, L.L.C., Revisions to the

Reliability Pricing Market and Related

Rules in the PJM Open Access

Transmission Tariff and _ Reliability

Assurance Agreement Among Load

Serving Entities, FERC Docket No. ER15-

852-000 (Jan. 14, 2015)............ccsccorescesesssssorercesees 20, 21

INTEREST OF AMICI CURIAE’

Amici curiae Alcoa, Inc., Aqua America, Inc., Colo-

nial Pipeline Co., Comverge, Inc., Cpower Corp., the

Calvert County Board of Education, Direct Energy, the

Electricity Consumers Resource Council, EnergyHub,

Inc., Ferrite International Co., Icetec Energy Services,

Industrial Energy Consumers of America, the North

Penn School District, and the University of Maryland,

College Park, submit this brief in support of petitioners.

Amici are a diverse group unified by a common

theme: the tremendous value of demand response. The

group includes two public school systems, a state uni-

versity, an energy pipeline company, a water utility,

two industrial metals manufacturers, and two associa-

tions representing industrial businesses. The group

also includes demand response providers, i.e., compa-

nies that enable hundreds of thousands of commercial,

industrial, institutional, and residential electric power

consumers to participate in demand response pro-

grams.

The court of appeals’ decision—that the Federal

Energy Regulatory Commission (“FERC”) lacks the

statutory power to regulate demand response in whole-

sale electric energy markets—is wrong. The Federal

Power Act expressly authorizes FERC to regulate any

practice affecting wholesale rates, unless the practice is

a “sale of electric energy” other than at wholesale. See

16 U.S.C. §§ 824(b(1), 824e. Remarkably, the court

held that FERC had unreasonably construed the Fed-

' Letters consenting to the filing of this brief have been filed

with the Clerk of the Court. No counsel for a party authored this

brief in whole or in part, and no person, other than amici or their

counsel, made any monetary contribution to the preparation or

submission of this brief.

2

eral Power Act to grant it authority over a practice

that the court conceded both affected wholesale rates

and was not a sale of electric energy at all. EnerNOC

Pet. App. 6a-8a & n.1.

But amici do not write to show the court of appeals’

legal error. Rather, amici write to further explain the

exceptional importance of correcting that error. If the

decision stands, electricity consumers will lose the sig-

nificant benefits of demand response because they can-

not adequately be replicated by the States, and because

the validity of demand response in important, closely

related markets will be, at best, disrupted by a cloud of

legal uncertainty for years.

SUMMARY OF ARGUMENT

Various regions of the country have developed fed-

erally regulated wholesale electricity markets to cap-

ture efficiencies across state lines. Demand response

addresses two distinct problems affecting wholesale

rates in those markets: 1) the inelasticity of electricity

demand arising from fixed retail pricing, and 2) the in-

efficiency of relying on generation as the sole resource

to ensure grid reliability.

Recognizing that the rare moments of peak demand

can be met more cheaply by paying some consumers to

reduce their demand than by maintaining or building

power plants just for that purpose, FERC has worked

for over fifteen years to facilitate demand response in

fulfillment of its statutory mandate to ensure just and

reasonable wholesale electricity rates. Those efforts,

coupled with investments by independent system oper-

ators, States, and market participants, have yielded

substantial benefits for the nation.

3

Demand response benefits all end-use consumers

by eventually reducing their electricity prices by bil-

lions of dollars per year. It also provides a reliable and

effective mechanism for balancing the grid when de-

mand spikes. But demand response further provides

specific benefits to those who participate in such pro-

grams, including many amici. With some investment,

power consumers can extract the value of an asset they

might not otherwise have appreciated: the ability to

help bring supply into balance with demand by lower-

ing their consumption on request. Thus, for example, a

school district can find itself with funds to invest in ad-

ditional cost-saving energy-conservation projects and

even enhance its curriculum.

The court of appeals’ decision uproots FERC’s and

many other stakeholders’ substantial investments in

demand response and imperils the benefits of demand

response. If it stands, the decision will stop a fast-

growing and crucial industry in its tracks.

The decision below will likely have consequences

beyond the “energy markets” that were the subject of

Order 745. Generators have already asked FERC to

rule that, in light of the decision below, demand re-

sponse cannot participate in the much larger wholesale

“capacity markets” either. At a minimum, absent this

Court’s immediate intervention, electricity markets

will be in disarray for years as the scope of the court of

appeals’ decision is contested. This legal uncertainty is

particularly destructive to capacity markets, which are

supposed to stimulate investment necessary to ensure

future reliability.

State regulation is not the answer, in the wholesale

energy or capacity markets. States are legally and

practically incapable of administering interstate elec-

4

tricity markets, and they specifically are unable to rep-

licate demand response that has existed under FERC’s

auspices. Indeed, the creation of regional markets and

of wholesale demand response programs within those

markets was a response to the inefficiencies and other

barriers associated with piecemeal State-level regula-

tion.

For all these reasons, the decision below warrants

this Court’s review.

ARGUMENT

L DEMAND RESPONSE HAS PROVIDED SUBSTANTIAL

BENEFTTS For YEARS

Demand response is built on the simple premise

that when supply is short, it is often far more efficient

for consumers to reduce their electricity consumption

than for power plants to increase their generation. So,

regulators and the industry have spent over a decade

integrating demand response into electricity markets.

These efforts have produced substantial benefits for

the markets and end-use consumers that are jeopard-

ized by the decision below.

A. FERC Has Facilitated Demand Response To

Address Important Problems Affecting

Wholesale Rates

Consistent with congressional policy to realize sub-

stantial efficiencies through integrated interstate

wholesale markets, much of the nation’s wholesale elec-

tricity markets are operated under FERC’s close regu-

lation by regional nonprofit entities called independent

5

system operators (“ISOs”).’ See FERC Pet. 2, 6-7;

EnerNOC Pet. 6-7; New York v. FERC, 535 US. 1, 8

(2002) (noting that national electric system is designed

to permit consumers in one State to purchase electrici-

ty efficiently from generators in another). ISOs are

charged by FERC with balancing supply and demand

within the markets they administer—known as “orga-

nized markets”—on both a real-time and prospective

basis, and with ensuring efficient reliability of the elec-

tric grid. Demand response is a device for addressing

two fundamental problems that have impaired ISOs’

ability to achieve these objectives: the relative inelas-

ticity of retail demand for electric power, and the ineffi-

ciency of relying solely on generation to ensure system

reliability.

1. The first problem arises from the fact that tra-

ditionally demand has not been responsive to prices,

i.e., prices are relatively inelastic. Pursuant to state

policies favoring stable retail prices, end-use consumers

generally pay fixed rates, which respond to wholesale

price changes only long after the fact. Thus, when

there would be an imbalance between supply and de-

mand, consumers would have little incentive to reduce

their consumption to restore equilibrium. Rather, the

ISO would have to call on increasingly expensive mar-

ginal supply, raising wholesale prices and leading later

to retail price increases.

The second problem arises from the need to ensure

utmost reliability in electricity markets, as required by

federal and state policy. Many ISOs manage not only

energy markets, but also capacity markets. In capacity

? For ease of reference, this brief includes within the category

of ISOs the closely related regional transmission organizations

(“RTOs”).

6

markets, load serving entities (“LSEs”), i.e., entities

that supply power to end-use consumers, traditionally

pay generators, through an auction, for the commit-

ment to produce power on the ISO’s request. The auc-

tions generally occur long before the capacity is needed,

to encourage the maintenance or building of sufficient

generation capacity. Fulfilling these commitments can

be expensive, and the resulting generation is often inef-

ficient or unreliable. In some cases, generators are paid

substantial sums to maintain or build power plants that

might run only a few hours in an entire year.

2. Because both of these problems—the relative

inelasticity of demand and the inefficiency of generation

as the sole reliability resource—directly affect whole-

sale electricity prices, they implicate FERC’s core

statutory responsibility: ensuring that those prices are

just and reasonable.

FERC and ISOs have recognized that both prob-

lems can be addressed through the use of “demand re-

sponse.” In organized markets, demand response pro-

viders commit to reduce demand when called upon by

an ISO, in return for certain payments. Demand re-

sponse providers fulfill these commitments by aggre-

gating contracts with all kinds of retail customers on

Demand response programs vary depending on

which problem they principally seek to address. “Eco-

nomic” demand response programs, which participate

in energy markets, mostly address the first problem.

> 1$0s also manage ancillary services markets. In traditional

ancillary services markets, generators aie paid for their ability to

provide, in real time, various services an ISO might need to main-

tain grid reliability. Demand response, however, now also partici-

pates in such markets.

7

In these programs, the provider makes a short-term

commitment in the wholesale market to reduce demand

(typically one day ahead). The bulk of the payment the

provider receives for this commitment is passed on to

its end-use customers. The program thus increases

elasticity of demand by exposing the provider's cus-

tomers to wholesale price changes and compensating

them for reducing electricity consumption.

“Reliability-based” demand response programs

principally address the second problem. In these pro-

grams, demand response providers make similar com-

mitments to reduce demand, but do so months or years

ahead. And they are paid both for the commitment to

stand by (in the capacity markets) and for the actual

reduction in demand when eventually called upon (in

the energy market). These programs generally provide

ISOs a far cheaper tool to ensure system reliability and

avoid blackouts than bringing additional generation

online.‘

3. To fulfill its mandate of ensuring just and rea-

sonable wholesale prices, FERC began asserting juris-

diction over demand response programs in wholesale

markets in 2001, following the California electricity cri-

sis. See Order Accepting Tariff Sheets As Modified, 95

‘ FERC has recognized that demand response can be more ef-

fective than generation in responding to emergencies. First, it can

be much quicker: it is often easier to turn off consumption than to

start a new generator. Second, it can be more reliable, because it

is a “statistical resource.” See FERC, Assessment of Demand Re-

sponse and Advanced Metering 119-120 (Aug. 2006, rev. Dec.

2008), available at http://www ferc gov/legal/staff-reporta/demand-

response.pdf (“2006 FERC Report”). That is, whereas the failure of

a few consumers to fulfill their commitments to reduce consump-

tion when requested has a small effect on the relationship between

supply and demand, the failure of a generator to provide power on

request has a substantial effect.

8

FERC { 61,306 (May 30, 2001); Order Removing Ob-

stacles, 94 FERC ¥ 61,272 (Mar. 14, 2001). In so doing,

it appropriately rejected jurisdictional objections es-

sentially identical to those presented here.

In 2006, Congress directed FERC to expand its ef-

forts by establishing a federal policy of removing “un-

necessary barriers to demarid response participation in

energy, capacity, and ancillary service markets”—the

key wholesale markets that only FERC has authority

to regulate. Energy Policy Act of 2005, Pub. L. No.

109-58, § 1252(f), 119 Stat. 594, 966 (“EPAct”). Pursu-

ant to EPAct, FERC commissioned studies of demand

response and then developed with States, ISOs, and

other stakeholders a demand response national action

plan.’ FERC then undertook several demand response

rulemakings, including Order 719, which institutional-

ized the structure of demand response, see Wholesale

Competition in Regions with Organized Electric Mar-

kets, 73 Fed. Reg. 64,100, 64,101-64,102 (Oct. 28, 2008),

and Order 745, which standardized the methodology for

determining compensation rates for demand response

in wholesale markets and which is the subject of this

case, see EnerNOC Pet. App. 140a-253a.

FERC’s actions triggered a cascade of actions by

ISOs, States, and market stakeholders. [SOs initiated

extensive processes to implement FERC’s orders, ul-

* See, e.g., 2006 FERC Report; FERC, A National Assess-

ment of Demand Response Potential (June 2009), available ai

http//www ferc.gov/legal/staff-reporta/06-09-demand-response. pdf;

FERC, National Action Plan on Demand Response (June 2010),

available at http//www-ferc.gov/legal/staff-reports/06-17-10-

demand-response.pdf,; FERC, 2014 Assessment of Demand Re-

sponse and Advanced Metering (Dec. 2014), available at

http//www.ferc.gov/legal/staff-reports/20 14/demand-response.pdf

(“2014 FERC Report”).

9

timately leading to the submission of revised tariffs for

FERC’s approval. State utility commissions and legis-

latures relied on the revised ISO tariffs to create com-

plementary retail-level demand response programs.

And end-use consumers invested in the infrastructure

necessary to reliably reduce consumption when re-

quested so that they could participate in demand re-

sponse programs.

B. Demand Response Provides Demonstrable

Benefits To Electricity Markets

This collective effort has paid off. In 2013, demand

response resources in organized markets provided an

aggregate potential peak reduction of approximately

29,000 megawatts (“MW”)—or 6.1% of peak demand.

2014 FERC Report 11. That was enough electricity to

power millions of homes.

Because demand response’s impact is most signifi-

cant at the margin, an even better indicator of its im-

portance is its effect on wholesale prices. See 2006

FERC Report 7 (“Not all consumers need to respond

simultaneously for markets to benefit by lowered over-

all prices.”). For example, one of the largest ISOs in

the United States—PJM*°—calculated that, on a single

hot day in 2006, its use of demand response saved the

system $230 million in energy costs by avoiding the

need to “dispatch” (or activate) inefficient generation

plants. See FERC, 2007 National Assessment of De-

mand Response and Advanced Metering 6 (Sept. 2007),

avatlable at http://www ferc.gov/legal/staff-reports/09-

07-demand-response.pdf (“2007 FERC Report”).

® PJM serves 13 States, principally in the Mid-Atlantic region,

and the District of Columbia.

10

Longer-term price benefits are most visible in the

related capacity markets. One independent analysis

calculated that, without demand response, capacity

prices for the 2017/2018 delivery year could have tri-

pled in certain PJM zones. See Boshart, Navigant: Ab-

sent DR participation, PJM capacity prices could

jump up to 3-fold, SNL Financial (Oct. 6, 2014) availa-

ble at |https://(www.snl.com/InteractiveX/Article.aspx?

cedid=A-29411194-12081. Moreover, removing demand

response in PJM would increase system-wide capacity

costs by up to $9 billion for that same year. See FERC

Pet. 32; EnerNOC Pet. 29-30. Having to redo capacity

auctions in PJM for 2016/17 and 2015/16 would poten-

tially increase costs by $10 billion and $14 billion, re-

spectively. See Monitoring Analytics, Analysis of the

2016/2017 RPM Base Residual Auction 37 (Apr. 18,

2014), available at http//www-.monitoringanalytics.com/

reports/Reports/2014/IMM_Analysis_of_the_20162017_

RPM_Base_Residual_Auction_20140418.pdf; Monitor-

ing Analytics, Analysis of the 2015/2016 RPM Base Re-

sidual Auction 5 (Sept. 24, 2013), available at http://

www.monitoringanalytics. com/reports/Reports/2013/A

nalysis_of_2015_2016 RPM_Base_Residual_Auction_2

0130924.pdf. And these figures are just for a single or-

ganized market.

The impact on system reliability in emergencies is

equally stark. As FERC has observed, “even small

load reductions at system peak can have a large impact

on reducing stress on electric delivery systems when

operating reserves are in near-shortage conditions.”

2007 FERC Report 4. Both petitions highlight the im-

portant role demand respouse played in meeting peak

demand in the PJM market during the summer of 2013

and the 2014 “polar vortex.” See FERC Pet. 33;

EnerNOC Pet. 30. But these benefits have not been

11

limited to the PJM market or to those particular

events. For example, in February 2011 demand re-

sponse saved the day in Texas when a “significant

number of electric generating facilities in the U-S.

Southwest tripped off line, failed to start, or had their

available capacity de-rated during the extreme cold

weather.” See FERC, 2011 National Assessment of

Demand Response and Advanced Metering 10 (Nov.

2011), available at http://www-ferc.gov/legal/staff-

reports/11-07-11-demand-response.pdf (“2011 FERC

Report”). And FERC repeatedly has catalogued the

“critical” or “necessary” role demand response has

played in the hottest summers of the past decade, in

markets including New York, New England, California,

the Midwest, Texas, and PJM. See FERC, 2012 Na-

tional Assessment of Demand Response and Advanced

Metering 44 (Dec. 2012), available at http//www.

ferc.gov/legal/staff-reports/12-20-12-demand-response

.pdf (summer 2012); 2011 FERC Report 9-10 (summer

2011); FERC, 2008 National Assessment of Demand

Response and Advanced Metering 50-51 (Dec. 2008),

available at http://www.ferc.gov/legal/staff-reports/12-

08-demand-response.pdf (summer 2007); 2007 FERC

Report 4-6 (summer 2006).

Finally, as others have observed, demand response

provides various other benefits, including promoting a

cleaner environment.’

’ For example, a recent Navigant study concluded that de-

mand response could reduce carbon dioxide emissions by 2%,

which is 10% of the Environmental Protection Agency’s target of

20% reductions by 2030. See Navigant, Carbon Dioxide Reduc-

tions from Demand Response 1 (Nov. 25, 2014), available at http://

www .ieca-us.com/wp-content/uploads/Carbon- Dioxide-Reductions-

from-Demand-Response_Navigant_11.25.14.pdf. As Navigant

notes, demand response not only directly reduces fossil fuel con-

12

C. Demand Response Provides Important Addi-

tional Benefits To End-Use Consumers

Additional benefits accrue to the wide range of con-

sumers that participate in demand response programs.

End-use consumers that can reliably reduce power con-

sumption on request—a factory delaying manufactur-

ing processes until night hours, a hospital turning on a

back-up generator, a resident lowering the air-

conditioning—hold assets of substantial value: the abil-

ity to bring demand into balance with supply, especially

when demand peaks. Demand response programs offer

such end-use consumers an opportunity to both extract

this value and benefit society as a whole.

For example, amici Calvert County Board of Edu-

cation and North Penn School District run school sys-

tems in Maryland and Pennsylvania, respectively, each

with at least twenty buildings and 13,000 students.

Working with demand response providers, both school

systems committed to reducing electric load in various

ways, including adjusting lighting, pump motors, and

other units. Their respective demand response provid-

ers successfully bid these commitments, aggregated

with those of other customers, into wholesale markets.

Each school system was then paid significant sums for

its demand response efforts. The North Penn School

District, for example, earned up to $110,000 per year

for the past three years, which permitted it to both pay

for these investments and maintain educational pro-

grams that other schools have had to eliminate. The

Calvert County Board of Education invested its pay-

sumption, but also indirectly supports renewable technologies.

The generation output of solar and wind power can vary unpre-

dictably due to weather conditions. Demand response can plug

such variability gaps efficiently and thereby permit renewables to

form a greater portion of the nation’s generating capacity.

13

ments into several energy conservation projects that

reduced utility costs even further. In both school sys-

tems, the energy management programs have become a

visible part of the curriculum.

Amici could provide countless other examples. The

commercial and industrial amici have found that de-

mand response significantly offsets costs and helps

maintain competitiveness. And collectively the demand

response provider amici have brought similar value to

hundreds of thousands of residential consumers in fed-

erally regulated markets. For example, just one

Comverge program in the Philadelphia area that is of-

fered into PJM’s capacity market pays nearly 100,000

residential consumers $80 a year for making their air

conditioners available to be cycled during system

emergencies.

Il. IF ALLOWED To STAND, THE DECISION BELOW WILL

HAVE BROAD AND SEVERE CONSEQUENCES FoR THE

MARKETS, DEMAND RESPONSE PARTICIPANTS, AND

RATEPAYERS GENERALLY

The court of appeals’ decision threatens to uproot

over a decade of investment in demand response and

deny the markets, end-use consumers that participate

in demand response programs, and ratepayers general-

ly the significant benefits described above, potentially

costing them billions of dollars per year. Although Or-

der 745 concerns only demand response in energy mar-

kets, the decision below is having, and if allowed to

stand will continue to have, serious adverse effects on

demand response in capacity markets as well.

The States on their own cannot step into the void

created by the decision below and facilitate demand re-

sponse programs capable of achieving comparable effi-

ciencies to those yielded by FERC-regulated demand

14

response programs. Indeed, it was the States’ differing

approaches and limitations in providing adequate incen-

tives for demand response that spurred FERC to pro-

mote demand response in wholesale markets in the first

place. See EnerNOC Pet. App. 181a-1838a (FERC rec-

ognizing in Order 745 “lack of market incentives to in-

vest in [demand response] enabling technologies”), id.

84a-86a (FERC expanding on these findings on rehear-

ing).

Thus, over the course of 15 years, FERC, along

with States, ISOs, end-use consumers, and other mar-

ket stakeholders, have invested in and developed a de-

mand response system predicated on cooperative fed-

eralism: States in organized markets structure retail

programs while FERC promotes “complementary

wholesale programs” in ISO markets. 94 FERC

{ 61,272, 61,972. Order 745 in particular creates neces-

sary incentives by setting a uniform reasonable rate at

which demand response providers are paid for their

aggregated demand reductions in the wholesale energy

market.* The decision below would discard this suc-

* FERC appropriately determined, after careful considera-

tion, that this rate should be the full value of the energy demand

response providers return to the market, i.e., the wholesale price

of energy, also called the locational marginal price (“LMP”). See

EnerNOC Pet. App. 174a-189a (FERC’s extensive explanation of

this decision in original order); see also id. 78a-90a (FERC’s fur-

ther explanation of this decision on rehearing). After all, a mega-

watt saved is a megawatt earned. FERC’s determination was

owed “great deference” because the “statutory requirement that

rates be ‘just and reasonable’ is obviously incapable of precise ju-

dicial definition.” Morgan Stanley Capital Grp., Inc. v. Public

Utility Dist. No. 1 of Snohomish Cnty., 564 U.S. 527, 532 (2008);

see also Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto Ins.

Co., 463 U.S. 29, 43 (1983) (requiring agency only to “examine the

relevant data and articulate a satisfactory explanation for its ac-

tion including a rational connection between the facts found and

15

cessful model and leave the market without an ade-

quate replacement.

A. The States Cannot Adequately Replicate The

Benefits Of Wholesale Demand Response In

Energy Markets

There are significant barriers to replicating the

benefits of wholesale demand response programs in en-

ergy markets on the state level. The basic challenge of

promoting demand response is to provide an adequate

incentive to the consumer to reduce demand when

called upon to do so, even on short notice. For various

reasons, state-level actors have not been able to pro-

vide such an incentive.

States could offer to pay consumers to reduce de-

mand. This might make sense in a State served by a

vertically integrated utility, as the State’s ratepayers

would also fully internalize the benefits of lower prices

and reduced congestion resulting from the demand re-

duction. But if the State is within an organized inter-

state market, those benefits will be diffused across

neighboring States within the same market. States are

generally reluctant to impose the full costs of demand

response programs on their own ratepayers when those

ratepayers will not capture all the benefits of the in-

vestments. See NERA Economic Consulting, Distrib-

uted Resources: Incentives 15 (Mar. 9, 2006), available

at http://sites.energetics.com/madri/pdfs/whitepaper_03

the choice made”). The court of appeals’ alternative holding that

Order 745 was arbitrary and capricious failed to accord the requi-

site deference, as explained by the dissent below. See EnerNOC

Pet. App. 39a-44a. Amici respectfully submit that should the

Court grant certiorari to address FERC’s jurisdiction, it would be

in the interest of justice for the Court also to address (and reverse)

this alternative holding.

16

1006.pdf (discussing inefficiencies due to the misalign-

ment of costs and benefits of demand response).

Nor would an adequate incentive likely come from

entities in the supply chain responsible for delivering

power from wholesale markets to retail customers: the

LSEs that supply power to retail customers; the state-

regulated utilities that distribute that power to cus-

tomers on the LSE’s behalf; or utilities that play both

roles. FERC has recognized the “long-standing” and

“difficult to address” problem that these entities are

not typically exposed to wholesale prices changes and

thus are unlikely to encourage their customers to re-

duce demand. 2006 FERC Report 72; see also FERC,

2010 Assessment of Demand Response and Advanced

Metering 47 (Feb. 2011) available at http//www.

ferc.gov/legal/staff-reporta/2010-dr- -report.pdf (reiterat-

ing concern). LSEs (including utilities functioning as

LSEs) are generally indifferent to short-term whole-

sale price increases because they enter into fixed-price

contracts with generators or have otherwise hedged

their power purchases. And utilities that are not LSEs

are generally paid as a function of the total power they

distribute; accordingly, reducing power sales will either

reduce their revenue, which they obviously do not

want, or cause them to petition for rate increases.

State-level dynamic pricing programs, whereby re-

tail prices vary somewhat based on the time of day or

market conditions, would not solve the problem.’ First,

* Programs along these lines include: “critical-peak pricing,”

in which customers pay lower prices in most hours in exchange for

paying very high prices during peak events; “peak time rebates”

where customers are given rebates for reducing demand in certain

peak hours; “time-of-use pricing,” which charges customers differ-

ent fixed rates depending on the time of day of the power con-

sumption; and “real-time pricing,” which exposes the consumer to

17

state-level dynamic pricing programs face the same

challenges just discussed. Second, such programs in-

sufficiently incentivize load reductions when they

would be needed. Although States have made progress

encouraging some forms of dynamic pricing for large

consumers, dynamic pricing remains a distant goal for

residential and smaller consumers because such con-

sumers generally prefer stable retail prices, and States

support that preference. See EnerNOC Pet. App. 182a

(Order 745 noting “lack of dynamic retail prices” as im-

petus for FERC action). Moreover, even where dy-

namic pricing is available to large consumers in States

in ISO markets, those consumers often purchase their

power at a fixed price from LSEs to limit the risk of

price spikes. This reduces the potential effectiveness of

these programs.

B. The Decision Below Threatens Capacity

Markets And The Availability Of Demand Re-

sponse In Those Markets

Although Order 745 only concerns the energy mar-

kets, generators have argued that the decision below

should be extended to capacity markets. The resulting

legal uncertainty has already severely disrupted capac-

ity markets, and if it is determined that the decision in

fact bars demand response from participating in such

markets, that disruption will increase and become per-

manent. The decision below thus poses a serious threat

to the benefits demand response provides in these

markets, because States in organized interstate mar-

kets have no ability to encourage sufficient demand re-

changes in wholesale prices directly. See generally FERC, Energy

Primer: A Handbook of Energy Market Basics 47-48 (July 2012),

available at http//www-ferc.gov/market-oversight/guide/energy-

primer.pdf.

18

sponse to meet the market’s capacity and reliability

needs.

1. As petitioners point out, several power genera-

tors, with respondent EPSA’s support, have filed com-

plaints with FERC arguing that the decision bars de-

mand response providers from participating in future

capacity auctions—and even that some previously held

and settled capacity auctions in which demand response

providers participated must be invalided. See FERC

Pet. 31 (citing FirstEnergy Serv. Co. v. PJM Intercon-

nection, L.L.C., FERC Docket No. EL14-55-000 (May

23, 2014); New England Power Generators Ass'n v. ISO

New England, Inc., FERC Docket No. EL15-21-000

(Nov. 14, 2014)); EnerNOC Pet. 30-31 (same)."°

2. If the generators’ reading of the decision below

prevails, there is not likely to be an adequate alterna-

tive way to encourage comparable demand response

participation in organized capacity markets.

States are not positioned to play the role of [SOs in

interstate markets to ensure reliability and adequate

‘The generators contend that “the D.C. Circuit’s jurisdic-

tional holding speaks directly to the Commission’s jurisdiction to

regulate demand response generally, not just demand response in

any particular wholesale market.” Comments of the Electric Pow-

er Supply Association 4, FERC Docket No. EL16-21-000 (Dec. 4,

2014). Pointing to the D.C. Circuit’s remark that “demand re-

sponse—simply put—is part of the retail market,” id. at 2 (quoting

EnerNOC Pet. App. 10a), the generators argue that “[tjhere is

simply no plausible distinction that can be drawn between ‘com-

pensating a consumer for reducing demand’ in the energy market

and doing the exact same thing in the capacity market,” id. at 5

(quoting EnerNOC Pet. App. 10a (alterations omitted)). Dozens of

entities, including various market participants, state utility com-

missions, state consumer advocates, [SOs, and others, have sought

to intervene in opposition to the generators’ complaints. See

FERC Docket No. EL14-55-000; FERC Docket No. EL15-21-000.

19

capacity. Currently, ISOs in such markets decide

whether to ensure system reliability by dispatching

marginal generation or demand response, and they do

so on an interstate basis. For example, PJM can com-

pensate for a temporarily downed generator in Penn-

sylvania by calling on a Maryland university’s commit-

ment to lower its consumption. This enables the ISO to

achieve substantial efficiencies. An individual State or

state-regulated utility, however, has no comparable

ability because its authority stops at its borders. See

New York, 535 U.S. at 4 (explaining the “Attleboro

gap”).

Indeed, most state-level reliability-based demand

response likely would not even exist if demand re-

sponse could not participate in FERC-regulated capaci-

ty markets. Generally, utilities can adopt a demand re-

sponse program only if they prove to their state regula-

tor that the benefits would exceed costs, and one of the

biggest benefits of such a program is that it allows the

utility to offset its capacity obligations in ISO auctions.

If these state-level demand response programs cannot

participate in capacity markets, they likely will be

deemed not cost-effective and have to be discontinued.

Recognizing that the decision has endangered States’

ability to fund their own programs, States in organized

markets have voiced strong opposition to it. See, e.g.,

Delaware Public Service Commission Comments to

FERC Regarding D.C. Circuit May 23, 2014 Opinion

Vacating FERC Order No. 745, FERC Docket RM10-

17-000 (July 2, 2014) (noting that Delaware’s $26 million

Delmarva program and statutory efficiency goals are

now in jeopardy because of potential inability to access

demand response in wholesale markets); Letter from

Hughes, State of Maryland Public Service Commission,

to LaFleur, FERC Acting Chairman, FERC Docket

20

RM10-17-000 (June 25, 2014) (same regarding state

EmPOWER Maryland programs).

3. In view of these difficulties, one ISO has pro-

posed a sweeping and potentially destructive preemp-

tive action should this Court deny review. PJM has de-

cided that it “cannot reasonably plan its operations

based on the expectation that the Commission and sub-

sequent reviewing courts will confine [the decision be-

low] to energy markets.” PJM Interconnection, L.L.C.,

Revisions to the Reliability Pricing Market and Related

Rules in the PJM Open Access Transmission Tariff and

Reliability Assurance Agreement Among Load Serving

Entities, FERC Docket No. ER15-852-000, at 4 n.7

(Jan. 14, 2015). Accordingly, last month PJM asked

FERC to approve revisions to its capacity market rules

that would apply only if this Court denies the certiorari

petitions. Jd. PJM’s proposal would bar non-LSE de-

mand response providers from bidding into the capacity

markets, but would attempt to permit some form of

demand response through LSEs. :

But if the decision below forecloses demand re-

sponse providers from participating in organized capac-

ity markets, it may equally foreclose PJM’s p -

Moreover, for much the same reasons that States can-

not adequately facilitate demand response, there are

serious practical doubts about whether PJM’s proposal

could facilitate meaningful demand response. Indeed,

PJM itself describes its proposal as a “stop-gap” pro-

gram that is inferior to the status quo, and recognizes

that demand response participation “could be substan-

| After all, PJM is seeking approval from FERC simply to

narrow the range of companies that can provide demand response

in the wholesale market; it does not propose to leave demand re-

sponse only to the retail markets and the States.

21

tially lower under this proposal than it has been histori-

cally.” Id. at 2-3.

_ 4. This controversy has immense stakes. If the

generators prevail and the decision below is deter-

mined to also foreclose demand response in capacity

markets, then ratepayers are expected to incur billions

of dollars per year in additional costs, ISOs will lose a

valuabie tool for ensuring system reliability, and (as

just discussed) even state demand response programs

may cease.

In the meantime, even the legal uncertainty raised

by the decision below is pernicious because the purpose

of capacity markets is to encourage long-term invest-

ment because of the time it takes to build new capacity.

The possibility that ISOs may not be able to call upon

demand response commitments already made raises

the specter of extremely expensive, and possibly fruit-

less, last-minute scrambles for capacity.

Simply put, other than this Court’s intervention to

correct the court of appeals’ error, there is no apparent

remedy for the quandary the decision below has im-

posed on capacity markets. Nor is there a prospect of

any positive outcome for these markets, at least in the

short term. Given the substantial stakeholder interest

and the difficult questions presented, FERC will likely

take months if not years to ultimately resolve the gen-

erators’ complaints and PJM’s proposal. If FERC de-

cides it must alter the status quo, [SOs will then under-

take their own extensive stakeholder processes to un-

wind existing practices and develop new rules that im-

plement FERC’s order, and then those new rules will

again have to be reviewed and approved by FERC.

State utility commissions and legislatures will have to

modify their own programs to be consistent with what-

22

ever new approach FERC and the ISOs adopt, as will

industry participants. All of these actions would have

to take place under the cloud of legal challenges that

will inevitably follow. This is no way to develop a

wholesale electricity market that ; produces reliable ser-

vice at just and reasonable rates. '

CONCLUSION

For the foregoing reasons, the petitions for certio-

rari should be granted.

Respectfully submitted.

SETH P. WAXMAN

Counsel of Record

MARK C. KALPIN

DAVID M. LEHN

SAURABH "1. SANGHVI

WILMER CUTLER PICKERING

HALE AND DoRR LLP

1875 Pennsylvania Ave., NW

Washington, DC 20006

(202) 663-6000

seth.waxman@wilmerhale.com

FEBRUARY 2015

'2 While undoubtedly some demand response investment has

already been chilled by the decision below, markets have contin-

ued to operate because of the prospect of this Court’s review. PJM

for its part has said it will withdraw its proposal if this Court

grants the petitions.