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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0317%3A10

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2015

## Text

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0317%3A10. Public record. Not legal advice.