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

Supremn. Court, US.

Nos. 14-840 & 14-841 [ FED

ci = 1§ 2015

Supreme Court of the United | Basis Semeur

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,

v.

ELECTRIC POWER SUPPLY ASSOCIATION, e¢ ai.,

Respondents.

—

ENERNOC, INC., et al.,

Petitioners,

v.

ELECTRIC POWER SUPPLY ASSOCIATION, et ai.,

Respondents.

On Writs oF CERTIORARI TO THE UNITED STATES

Court or APPEALS FOR THE D.C. Circuit

Brier Amici CurRiAE IN SUPPORT OF PETITIONERS FOR

CONSERVATION LAW FOUNDATION, ENVIRONMENTAL

DEFENSE FunD, THE ENVIRONMENTAL LAW AND

Poxicy CENTER OF THE MipwEst, NATURAL

RESOURCES DEFENSE COUNCIL AND SIERRA CLUB

_————

--

Davip T. GOLDBERG

Counsel of Record

DonaAHUE & Go._pserc, LLP

99 Hudson Street, 8th Floor

New York, New York 10013

(212) 334-8813

david@donahuegoldberg.com

Counsel for Amici Curiae

[Additional counsel listed on signature block] ,s-ac of Conarx*

TABLE OF CONTENTS

Ee

SEE

I. Order 745 and its Predecessors Correctly

Recognize the Distinct Importance of

Demand Response Participation in Wholesale

ERE TEESE SE

Il. The Public Benefits of Wholesale Demand

Response Are Numerous, Extensive, and

Increasingly Important .....................ccccceeeeeeeeeees

Ill. The Federal Power Act Does Not Prohibit,

and Congress Has Affirmatively Endorsed,

Demand Response Participation in

FERC-Regulated Wholesale Markets................

A. The Federal Power Act and This Court’s

Precedents Plainly Establish

FERC’s Regulatory Authority......................

B. Congress Has Expressly Endorsed

Demand Response Participation

in Wholesale Markets

IV. FERC’s Understanding of the

Allocation of Regulatory Authority is

Reasonable and Judicious ....................02. sseseeeeeees

V. The D.C. Circuit’s Alternative Holding

ee III cctdlececrnsssnshsissiestncinstnisctieniinsitleindainisaes

il

TABLE OF AUTHORITIES

STII sich eiicetilieedaainlbaitigeadebaniaiaia es hadienniial Page(s)

City of Arlington v. FCC,

I i 19, 20

Chevron U.S.A. Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984).................... 19, 20

Comcast Corp. v. FCC,

600 F.3d 642 (D.C. Cir. 2010) ...0....c.cecccseceeseeeee 23, 24

Connecticut Dep’t of Pub. Util.

Control v. FERC, 569 F.3d 477

5 “= eee 12, 32

Delaware Dep't Natural Res. v. EPA,

ee ee Ny I aiinritecenincntininitatincniinctisninniia 16

Fed. Power Comm'n v. La.

Power & Light Co., 406 U.S. 621 (1972)................ 27

Michigan v. EPA, 576 U.S. __ (June 29, 2015) ............ 33

Morrison v. Olson, 487 U.S. 654 (1988).................0...00 29

New York v. FERC,

I insets cicnaeatiatianals 19, 20, 22, 23

NARUC v. FERC,

3 + & fl, eee 30

NRG Power Marketing, LLC v. Maine Pub. Util.

Comm’n, 558 U.S. 165 (2010) ..................cceeeseseeeees 12

il

Oneok, Inc. v. Learjet, Inc.,

135 S. Ct. 1591 (2015).....................

Phillips Petroleum Co. v. Wisconsin,

ee

W. Va. Univ. Hosps., Inc. v. Casey,

499 U.S. 83 (1991)..................s.ecs00e.

Statutory Provisions

Energy Policy Act of 2005,

Pub. L. No. 109-58,

16 U.S.C. § 2642 note

Sa C SEE RTE ane ea

thy ES ed eee a

§ 1252(6)(S)(E) ...-..coeesecneecosesecoseessnsee

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16 U.S.C. § 824(a)....cccsccceescseecsssesssseeeeen

16 U.S.C. § 824(€) ..cccesccoesccseesssseesssveeeee

16 U.S.C. § 824d (Aa).......cccsccceeccsseseseteeeen

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Lis Coe b. \; | Cec 18

4B UBC. § 1TBB1CG) onan ensccsnscceccvesceccceccescnscocecnese 8, 18

CTI, 0 IN icici esereeecoen 26

RRP te een Pa a ence 8

Regulatory and Administrative Materials

en ccna 10

U.S. Dep’t of Energy, National Electric Transmission

Congestion Study (Aug. 2009).................cccceccceeeeeee 14

U.S. Dep’t of Energy, Benefits of Demand

Response in Electricity Markets

and Recommendations

for Achieving Them (2006) ..........................c.ceee000es 25

FERC Staff Report,

Assessment of Demand Response

and Advanced Metering (Aug. 2006) ............... 25, 29

FERC Staff Report AD13-7-000,

Centralized Capacity Market

Design Elements (Aug. 2013)......................ccccceeees 12

Letter of New England Conf. Pub.

Utilities Comm’rs, FERC Docket

Ps PS CM Bho Bi ccecccsessscccnsscssosstecsscsessis 13

Ltr. of PJM to U.S. Dep’t Energy

Building Technologies Program

I ahs a neecianiiamaitl 17

Other Materials

American Lung Ass'n, State of the Air (2014) .......... 167

Fabio Caiazzo, et al., Air Pollution and

Early Deaths in the United States,

79 Atmospheric Env’t 198 (2013) ..............::ccccceeees 15

Peter Cappers, et al., Market and Policy

Barriers for Demand Response

Providing Ancillary Services in

U.S. Markets (March 2013) ...0............ccccceeeeeeeeeeeeees 33

Jaquelin. Cochran, et al.

Market Evolution: Wholesale Electricity

Market Design for 21st Century

Power Systems (2013) ...............cccccceeeceececeeeeeeeeeeeees 10

Scott Harvey, et al., Evaluation of the New York

Capacity Market (Mar. 2013)...................cccceeceeeeees 15

Doug Hurley, Paul Peterson & Melissa Whited,

Demand Response as a Power System

BITTE scsietrieaphnienetcianineeatananenaeiinniies 10, 11, 15

Monitoring Analytics, Analysis of the 2017/2018

RPM Base Residual Auction (2014) ....................0000 7

National Academy of Engineering,

Greatest Engineering Achievements

of the Twentieth Century,

http://greatachievements.org) ..............:.ccc-se0eeeeeee 18

National Research Council, et al.,

Hidden Costs of Energy (2010) ...................000- 14, 15

Navigant, Carbon Dioxide Reductions

from Demand Response (Nov. 2014)..................... 17

Richard J. Pierce, A Primer on Demand Response

and A Critique of FERC Order 745,

3 Geo. Wash. J. Energy &

Envtl. L. 102 (Winter 2012)..............cccceceeeesseeeeeeeees 31

Bo Shen, et al, Addressing Energy Demand

Through Demand Response:

International Experiences and Practices

ERENT res rareene a en eeOONT RO maED 15

Julian L. Simon, The Airline Oversales Auction

Plan, J. Transp. Econ. & Policy 319 (1994) .......... 17

Br. Amicus Curiae for EPSA,

Conn. Dept. Pub. Util. Control, C.A.D.C.,

No. 07-1375 (Sep. 2008)

(available at https://goo.gl/IsASvZ). .......... 11, 21, 30

Br. Opp., Nazarian v. PPL EnergyPlus LLC,

Ey SUID chosen etisalat 27, 30

Statement of Interest*

Amici, leading nongovernmental organizations

committed to protecting public health and natural

resources, are described in the Addendum. We

participate here, as we did before the Commission and

the court below, because FERC Order 745 advances

important national energy policy goals — ensuring an

adequate, affordable, and reliable electric power

system — in a manner that is consistent with

protecting public health and the environment.

Wholesale demand response makes markets more

efficient, saves consumers billions of dollars, and

renders the bulk power system more stable and

reliable. But it also avoids the need to build and

operate costly and polluting generating plants while

supporting the integration of cleaner and cheaper

energy resources into the increasingly dynamic and

interconnected power grid. Indeed, as Congress has

explicitly recognized, demand response resources play

an important part in the Nation’s rapidly advancing

transition to a modern, economical, and sustainable

energy system. Amici support this transition and the

role demand response plays.

Amici are deeply concerned by the D.C. Circuit’s

holding that federal law prohibits realization of these

benefits, on the theory that demand response is

inherently and exclusively a retail product that has

no place in FERC-regulated organized markets. As

* Pursuant to Rule 37.6, counsel certifies that this brief was

not authored in whole or in part by counsel for any party and

that no person or entity other than Amici or counsel made a

monetary contribution to its preparation or submission. Counsel

for all parties have consented io its filing.

petitioners demonstrate, and as we elaborate below,

that theory rests on a basic misunderstanding of how

demand response participates in wholesale markets

and the unique and vital functions it serves. Amici

also actively support retail-level demand-response

programs. We believe, as do state regulators

themselves, that wholesale-level demand response

complements rather than threatens these state

initiatives.

We are further concerned about the implications

of the D.C. Circuit’s decision for the allocation of

energy regulation responsibility more generally. The

decision rejected FERC’s restrained and pragmatic

approach to fulfilling its statutory duty in favor of one

that defines “matters” at an implausibly high level of

generality and then assigns them exclusively to either

State or federal regulators. That approach is contrary

to this Court’s precedent and unsupported by the

statute. It is especially ill-suited to the practical

realities of a rapidly transforming electric power

system.

Introduction and Summary of Argument

Order 745 is a lawful, appropriate and important

exercise of FERC’s responsibility under the Federal

Power Act to secure “just and reasonable” wholesale

rates. The Order addresses the compensation

practices of Regional Transmission Organizations

and Independent System Operators — FERC-

jurisdictional “public utilities” — in a manner that is

entirely consistent with the “scheme [of that statute]

as a whole,” Pet. App. 9a n.l, and with the

Commission’s longstanding effort to promote market

efficiency and open competition as a means of

discharging its core Federal Power Act

responsibilities. Order 745 and its precursors

addressing demand response implement federal

legislation expressly recognizing the benefits of

“participation of demand response” resources in

FERC-regulated wholesale markets and committing

the Nation to reducing barriers obstructing their

realization.

The benefits of demand response participation in

wholesale markets extend beyond the market

efficiency and operational performance imperatives

Order 746 addresses. Wholesale demand response

provides important public health and environmental

benefits, which are not accounted for in wholesale

market prices, by avoiding the need to operate plants

that are both dirty and costly; by postponing or

avoiding construction of power plants and

transmission lines; and by helping the grid to reliably

integrate inexpensive and clean renewable energy

resources.

Indeed, the diverse benefits and capabilities of

demand response are increasingly important, as the

Nation accelerates its transition to a flexible, dynamic

modern grid and as the power system makes fuller

and more efficient use of renewable energy resources.

Accordingly, Congress, far from relegating demand

response resources to the sidelines, has recognized

that these resources can and must play an important

role in the Nation’s energy future.

Without disputing that Order 745 addressed

market practices that directly affect wholesale rates

under FERC’s jurisdiction, the majority opinion below

nonetheless held Order 745 “ultra vires,” based on

what were presented as “simpl[e]” and self-evident

realities: that demand response (1) is intrinsically

“part of the retail market” and only that “market,”

and (2) is, on that basis, subject to regulation only by

States.

Neither proposition is tenable. Order 745’s

central premise — that demand response resources’

participation in wholesale markets is distinctly

beneficial — is one that Congress has explicitly

endorsed. There is nothing “metaphysical” about

wholesale demand response or how resources

participate in wholesale markets. Far from only

“declining to act,” demand response resources must

make investments and binding contractual

commitments, and they participate as a resource,

competing with others capable of providing

comparable market and system benefits. Indeed, the

basic misunderstandings animating the decision

below are especially consequential, as Congress has

enacted laws envisioning an integral place for

demand response resources in the Nation’s future

electricity landscape.

The statutory basis of the decision is equally

infirm. In any circumstances, the reference, in a

prefatory provision of the Federal Power Act, to

unspecified “matters subject to [state] regulation”

would fall vastly short of the “direct” and “precise”

expression of congressional intent that this Court’s

precedents would require to adjudge Order 745

uniawful. But here Congress has spoken. It has

affirmed, in statutory language respondents cannot

blunt or evade, the legitimacy and importance of

demand response “participation” in FERC-regulated

markets.

Order 745’s allocation of regulatory authority is

lawful and sensible. The Order recognizes the

benefits of both retail- and wholesale-level demand

response and assigns oversight responsibility

precisely as one would expect: FERC regulates

wholesale market compensation and cost allocation

practices that appear in ISO/RTO tariffs, while States

regulate retail-level activities. Indeed, Order 745 not

only leaves untouched States’ control of retail

programs, it respects their decisions to permit (or not)

residents’ wholesale market demand response

participation. Thus, while FERC properly rejected

the notion that Section 201(a) preempts its core

wholesale market responsibilities, Order 745 takes

account of the policies underlying that provision,

along with those animating the Section 205 and 206

grants of authority and Congress’s recently enacted

policy statements. FERC’s restrained approach to

jurisdiction is consonant with the Court’s precedent

and well suited to the realities of a bulk power system

and a regulatory landscape that are increasingly

complex and interconnected. And FERC’s regulation

accomplishes what the decision below fails to: it

describes a readily ascertainable jurisdictional line.

To the extent the substance of FERC’s exercise of

its authority is before the Court, Order 745 should be

upheld. The basic principles underlying Order 745

are not only those of FERC’s earlier demand response

orders, they are the familiar linchpins of the

Commission’s general competition-focused regulatory

approach: that markets should be organized to meet

particular system needs and structured to account for

real-world conditions; that auctions should be broadly

open to all resources that are capable of performing;

and that compensation should generally be based on

the market-clearing price, irrespective of successful

bidders’ costs or auction bids. Indeed, respondents

have highlighted these features in defending FERC-

regulated capacity markets in which they participate

(alongside demand response resources) and receive

compensation.

While demand response and generation resources

are not identically situated, they are comparable in

the respects most relevant to system operators. And

there are important ways that the former are more

valuable than generator competitors. In energy

markets under conditions of peak demand, demand

response resources reduce transmission congestion

that can threaten service; and generation resources

that clear the market (especially during peaks)

impose costs, in the form of health and environmental

harms, that market-clearing demand response

resources do not. Whatever the theoretical merit of

disputed claims that LMP is “overcompensation” that

could yield “too much” curtailment, the record before

FERC does not support such claims. And it is plain

that Congress, having repeatedly legislated to

broaden opportunities for demand _ response

participation, does not take that view.

ARGUMENT

I. Order 745 and its Predecessors Correctly

Recognize the Distinct Importance of Demand

Response Participation as Resources in Wholesale

Markets

Order 745 and FERC’s prior, related actions

respond to market problems that flow from

characteristics distinct to electricity as a commodity

and the bulk power system. In particular, the historic

approach to balancing supply and demand — building

facilities large enough to serve maximum load and

bringing increasingly costly generation sources online

to meet peaks — is inefficient and can yield intolerably

high wholesale prices. When demand response

resources participate in wholesale energy markets

and “flatten the ... load profile,” Pet. App. 60a, they

lower transmission congestion and make it more

likely that market-clearing auction prices will be just

and reasonable.

Similar benefits have been realized when ISOs

and RTOs have, with FERC approval, permitted

demand response participation in their capacity

markets, avoiding unnecessary and costly new plant

construction, and in their ancillary services markets,

where, inter alia, demand response resources perform

as reserves, serving a need that would otherwise be

met by maintaining generating plants idle or under-

used to respond to unexpected system events. These

benefits of wholesale market demand response have

proven to be dramatic and are largely uncontested.

See Pet. App. 156a (Commissioner Moeller);

Monitoring Analytics, Analysis of the 2017/2018 RPM

Base Residual Auction 6 (2014) (estimating $9 billion

in savings from demand response participation in

single capacity auction).!

1 These benefits might be likened to those from the auction

mechanism through which airlines compensate passengers who

volunteer to be “bumped” when the number of flyers at the gate

exceeds the number of available seats on an aircraft. As with

demand response, the passenger’s willingness to shift her travel

to a different, non-peak time can save the operator — and

ultimately fellow customers — sums of money vastly exceeding

the amount of the travel voucher, given the “supply side”

alternatives (e.g., flying a second plane or limiting advance sales

to the number of seats, notwithstanding significant and we)l-

known “no-show” rates). See Julian L. Simon, The Airline

The premises underlying FERC’s actions are that

these benefits derive from demand response

participation as a resource in these markets; that

economic and regulatory barriers can and do obstruct

such participation; and that wholesale demand

response is compatible with, and not a threat to,

initiatives at the State or utility level. See Pet. App.

138a, 223a. Notably, each of these has been endorsed

by Congress in the time since FERC first approved

ISO and RTO tariffs providing for demand response

participation in the early 2000s. Numerous

enactments affirm the importance of demand

response, see, e.g., 42 U.S.C. § 17381(4) (Smart Grid

Modernization); id. § 8279 (“Action Plan for Demand

Response”). The Energy Policy Act of 2005 (EPAct

2005) included both provisions supporting state

programs and ones committing the United States to

eliminating “unnecessary barriers to demand

response participation in energy, capacity and

ancillary service markets,” and to ensuring that the

Oversales Auction Plan, J. Transp. Econ. & Pol'y 319, 319 (1994)

(collecting evidence that such mechanisms “raise[] the capacity

level at which planes fly, hence increasing their efficiency and

lowering price”). It would miss the point to say in these

circumstances that the passenger “participated only by declining

to act.”

Two further similarities might be noted: First, the benefits

of this demand-side response occur even though retail travel

prices already reflect supply and demand, e.g., tickets are much

cheaper at off-peak times; second, though this mechanism - like

demand response in electricity markets — did not arise for

environmental reasons, flying a single plane at full capacity (and

having the “bumpees” ride on a scheduled later flight) is much

less polluting than adding a flight to transport them at the

original departure time. See pp. 14-17, infra.

benefits from such participation be shared among all

customers in “the same regional electricity entity.”

Pub. L. No. 109-58, § 1252(f), 16 U.S.C. § 2642 note.

While respondents do not dispute that demand

response lowers wholesale energy rates, see Pet. App.

7a, they nonetheless maintain, as did the decision

below, that these effects reflect no more than the

truism that a diminution in retail demand for any

product will reduce its wholesale price. According to

the D.C. Circuit’s majority, wholesale demand

response is a “fiction” and demand response resources

“participate’ in wholesale markets only by declining

to act,” id. 6a. See also id. 8a, 11a (portraying Order

745 as “luring” into wholesale markets resources that

are “simply... part of the retail market,” in order “to

create [FERC] jurisdiction”).?

These assertions are fundamentally mistaken,

and they reflect serious misunderstandings of how

organized wholesale markets operate and how

demand response participates in them.

There is nothing problematic, let alone

“metaphysical,” Pet. App. 6a, about the distinction

Order 745 recognizes, between demand response

participation in organized wholesale markets and in

retail price-responsive electricity demand programs

regulated by States. To be sure, not consuming

energy at a particular time is a common denominator

of all demand response (and accordingly a central

2 Respondents make no effort to ratchet down the D.C.

Circuit’s skeptical tone, placing “demand response” within scare

quotes more than thirty times in their Brief in Opposition, to the

point of noting respondent APPA’s own experience “sponsor[ing]

... ‘demand response’ programs,” Br. Opp. iii.

focus of FERC’s — supposedly inculpatory — “single

definition,” Pet. App. 5a (citing 18 C.F.R. §

35.28(b)(4)).2 But wholesale market participation

entails much more than “only” inaction. In order to

bid into auctions in FERC-regulated markets,

demand response resources must satisfy “rigorous

performance characteristics (response time and

minimum load size), {subject to] special contractual

and compensation mechanisms, robust measurement

and verification methodology, and high-speed

communications interface to enable automatic

control.” Jaquelin Cochran, et al., Market Evolution:

Wholesale Electricity Market Design for 21st Century

Power Systems at 25 (2013). These requirements

entail often-substantial investments in control,

metering, and verification technology.

Even more important, where retail-level demand

response programs typically allow participants to

“decline to act” (or not) when confronted with a price

signal, Pet. App. 6a, wholesale demand response is a

“firm’ resource{]”and is “dispatchable,” Hurley, et al.,

Demand Response as a Power System Resource

(2013) at 15. In wholesale markets, system-wide

3 The opinion below seemed to assume that the inclusive

definition itself proved that Order 745’s distinction was

“fictional,” Pet. App. 6a, and indeed that FERC was without

authority. But, as the Court explained last Term, it is not at all

unusual for a “single physical action” or “activity” to be subject

to multiple laws, both state and federal. Oneok, Inc. v. Learjet,

Inc., 135 S. Ct. 1591, 1600 (2015). See pp. 20-21, infra.

* Time-shifting is itself a cost to those who provide

wholesale demand response and sometimes a direct monetary

one, as when a manufacturer has to pay employees extra to

reschedule shifts. See Private Petrs. Br. 55.

10

decisions are made in reliance on binding, contractual

commitments to reduce electricity use at particular

points in time. Thus, demand response resources

participate in these markets the same way other

resources do: by efficiently and reliably meeting the

identified system need that the particular market is

designed to meet — whether maintaining the stability

of the grid, in ancillary services markets, or ensuring

the real-time or future balance of supply and demand,

in energy and capacity markets, respectively.

Wholesale market participation enables demand

response to have a “much larger price impact,”

because resources help to “set the market clearing

price” and thereby reduce costs for consumers region-

wide. Hurley at 16. Participation in multistate

wholesale markets likewise enables resources to be

“compensated for the full system value of their

demand reduction,” id. at 19, and “wholesale markets

[also] creat[e] ... opportunities for entrepreneurs to

find innovative means to supply demand response,”

thereby widening “the pool of potential participants.”

Id. at 21. Cf. Br. Amicus Curiae for EPSA, Conn.

Dept. Pub. Util. Control v. FERC, No. 07-1375 (D.C.

Cir. Sep. 2008) (““EPSA CDPUC Br.”) (available at

https://goo.g/isASvZ) at 15 (“The whole point of

establishing a regional transmission operator ... with

federal oversight provided by the Commission, is to

have an entity focused on market-wide, regional

concerns.”).

Indeed, the skepticism expressed by respondents

and the decision below rests on_ serious

misunderstandings about the FERC-regulated

organized wholesale markets. Precisely because

those markets are structured to serve discrete system

11

needs (and because markets electricity are so unlike

those for “steel [and] fuel,” Pet. App. 8a), it is entirely

common for generating sources to _ receive

compensation for forbearance, when that is what is

needed. Coal-fired plants that bid successfully to

provide reserve service or do so in a market auction

for “frequency regulation,” participate and receive

compensation for reducing output or not operating.

Participants in FERC-regulated capacity markets do

not sell “energy itself,” NRG Power Mktg. v. Me. Pub.

Util. Comm'n, 558 U.S. 165, 168 (2010), but instead

receive compensation for binding, future

commitments that ensure system operators there will

not be shortfalls.®

N ¢ are respondents well positioned to cast

aspersions on FERC’s recognition that regulatory

uncertainties and real-world economics can result in

less-than-socially-beneficial levels of investment.

That is the very reason for wholesale capacity

markets in which respondents participate: Some

measure of compensation certainty is necessary to

encourage efficient levels of provision. See Conn.

Dep't Pub. Util. Control, 569 F.3d 477, 484 (D.C. Cir.

5 These organized wholesale markets are fundamentally

different because electricity is fundamentally different. A

devotee of unregulated markets would be surprised to learn that

the capacity markets from which many respondents receive

payments begin with a central authority (the RTO/ISO)

determining the multistate region’s future needs and include

“Minimum Offer Price” rules,” restricting how low a price

particular “suppliers” may accept and impose an

“administratively-determined price” when the market does not

clear. See FERC Staff Report AD13-7-000, Centralized Capacity

Market Design Elements (Aug. 2013) at 2, 5, 24.

12

2009) (noting that challengers in that case had argued

that “as a matter of economic theory, the, supply of

capacity is actually perfectly elastic and hence fixed

at the long run cost of new entry” but had then

“candidly conceded [that] ... this may be true in the

theoretical world of economics textbooks, but is

almost certainly false in the real world outside

them”).

Il. The Public Benefits of Wholesale Demand

Response Are Numerous, Extensive, and

Increasingly Important

The benefits of demand response participation

extend well beyond the substantial and indisputable

rate impacts that support Order 745 and impelled

system operators to incorporate demand response

bidding more than a decade ago.

First, although respondents and the decision

below depict wholesale market demand response and

retail-level programs as a jurisdictional zero-sum

game, the reality is starkly opposite. The investments

and innovations that participation in wholesale

markets encourage also benefit those retail-level

programs. In fact, state officials who regulate those

programs explained to FERC that eliminating

“demand response[’s ability] to participate in the

wholesale energy market would ... adversely affect

the viability of retail price-responsive demand

programs.” Ltr. of New Eng. Conf. Pub. Util.

Comm’rs, Docket No. RM10-17, 2-3 (July 1, 2014).

Moreover, as FERC explained, demand response

participation for economic reasons improves the

operational performance of the grid. By reducing the

amount of power that must be transmitted at critical

13

times, demand response helps diminish the risk of

forced power plant outages and full-scale blackouts.

And in transmission-constrained areas, where it can

be literally impossible to add additional energy at

peak times, demand response is uniquely able to

prevent interruptions. See U.S. Dep’t of Energy,

National Electric Transmission Congestion Study 57

(Dec. 2009) (describing mitigating effects of

“aggressive demand response” in New England).

Finally, as Amici can attest, the rate savings and

economic and operational efficiency benefits of Order

745 are achieved while significantly reducing the

serious environmental and public health harms that

the bulk power system can inflict.

These benefits result in large part from the same

basic circumstances that prompt economic demand

response participation. For example, even basic time-

shifting, e.g., industrial users’ rescheduling

production to night-time hours, can produce dramatic

public health benefits. Generation sources that

provide marginal supply during peaks are not only

economically inefficient; they are sometimes among

the oldest and most polluting in the fleet. Avoiding

resort to the 10% most-polluting natural gas-fired

power plants avoids millions of metric tons of annual

greenhouse gas emissions plus large quantities of

nitrogen oxides, which can cause respiratory disease

and premature death. See National Research

Council, et al., Hidden Costs of Energy 8, 119-23

(2010).6 And because peaking plants are frequently

6 As is true with respect to operating efficiency, “not all

power plants are created equal” in their health and

environmental impacts. Pet. App. 22a (Edwards, J., dissenting).

14

built near major population centers, the air pollutants

they discharge cause disproportionate .harm to

human health. Jd. at 120-121, 363.

Moreover, when demand response resources bid

successfully into capacity markets, they “not only

offset the operation of power plants [and transmission

lines], but also their very construction.” Shen, et al.,

Addressing Energy Demand through Demand

Response: International Experiences and Practices

(June 2012) at 2. The health and ecological benefits

of avoiding such construction are large. Hurley at 13.

At the other end of the life cycle, demand response

resources can enable the on-schedule retirement of

older, inefficient large generating plants, which are

often the greatest sources of pollution, alleviating

system operators’ concerns about shortfalls during

the time it takes to bring new capacity on line. See

Scott Harvey, et al., Evaluation of the New York

Capacity Market (Mar. 2013) at 164.

Demand response resources that clear organized

wholesale markets commonly yield reductions in

overall electricity consumption (users who make

dispatchable commitments, through aggregators, to

turn down air conditioners during peak usage periods

will rarely run them more intensively during non-

peak hours), which can yield even larger public health

benefits. Cf. Fabio Caiazzo, et al., Air Pollution and

Early Deaths in the United States, 79 Atmospheric

Env’t 198, 202 (2013). Indeed, reductions during

For example, the National Academy of Sciences determined that

the most polluting 5% of natural gas-fired power plants cause

approximately 550 times as much damage per kilowatt hour of

electricity generated as the cleanest 5%. Hidden Costs at 123.

15

summer peaks, when demand resources are likely to

be dispatched, are vital, because concentrations of

harmful pollutants such as smog (or ground level

ozone) are already particularly high then. See

American Lung Ass'n, State of the Air 30 (2014).?

Especially important, demand response has

significant potential to facilitate greater integration

into the grid of renewable generating sources. The

North American Electric Reliability Corporation

estimates that renewable generation will account for

nearly 17% of capacity by 2022, NERC Long Term

Reliability Study at 65 (2012), and a National

Renewable Energy Lab study found that solar and

wind sources alone could comprise nearly half (48%)

of U.S. energy supply by 2050. Renewable Electricity

Futures Study p. xvii (2012). Such clean energy

resources produce power inexpensively, but their

output is variable and therefore can present

operational challenges for power systems.

Demand response resources enable system

operators to reduce load at times when those variable

sources are not generating — and can also ensure their

output is absorbed at times, such as with wind power

7 While the overall health and environmental impact of

demand response is starkly positive, respondents have pointed

out, and Amici would not dispute, that it is not universally so.

Curtailments that involve “behind the meter” use of high-

polluting generators can cause environmental harm, even as

they relieve congestion and otherwise benefit the grid. But there

plainly are more appropriate ways to target such harms than a

categorical prohibition on highly beneficial wholesale market

demand response. See, e.g., Del. Dep't Nat. Res. v. EPA, 785 F.3d

1 (D.C. Cir. 2015) (rejecting broad Clean Air Act exception for

diesel generators operated on a non-emergency basis).

16

generators overnight, when system oversupply would

be a concern. See PJM Ltr. to U.S. Dept. Energ.

Building Technologies Program (April 29, 2013) at 3

(http://goo.gl/9M5qtG) (describing “[a]ggregated and

controllable residential electric water heaters [that]

can help grid operators ... by heating water in

response to a signal that there is an abundance of

wind energy on the system”). Demand response is

particularly valuable both because it is a fast-acting

resource and because renewable generators tend to be

“added to the grid in small increments,” and demand

response can likewise be procured “as needed.”

Navigant, Carbon Dioxide Reductions from Demand

Response 16 (Nov. 2014).

These environmental and health benefits are, in

significant part, distinct to wholesale demand

response and depend on the efficiencies that

wholesale market participation provides. One

utility's individual retail demand response program

may not provide sufficient resources to enable the

retirement of an out-of-market generator that

provides reserve or peaking power both within and

outside the utility’s service area, but aggregation of

demand response resources from around the region

might suffice. Similarly, one State’s price-responsive

demand program may not provide enough flexibility

to accomplish the reliable integration of large grid-

connected wind farms that could provide clean power

to customers across a multistate region. Aggregating

geographically varied demand response resources

allows such integration to occur.

The dramatic shifts in the mix of resources that

will meet the Nation’s future energy needs are

occurring in conjunction with fundamental changes in

17

America’s electricity infrastructure. The Nation’s

power grid, for all its strength, was a signal

“engineering achievement of the twentieth century,”

see http://greatachievements.org/ (last visited Jul. 15,

2015) (emphasis added), and Congress has recognized

the need for a far-reaching “modernization of the

Nation’s electricity transmission and distribution

system,” 42 U.S.C. § 17381. Demand response

resources are an integral part of this more dynamic

power system, one more reliant on “digital

information and controls technology,” id. § 17381(1).

Indeed, as part of legislation committing to this

endeavor, Congress expressly identified

“fdjevelopment and incorporation of demand

response,” id. § 17381(4), as among the ingredients

that “characterize a Smart Grid.”

III. The Federal Power Act Does Not Prohibit, and

Congress Has Affirmatively Endorsed, Demand

Response Participation in FERC-Regulated

Wholesale Markets

Respondents and the opinion below depict the

adverse consequences of banishing demand response

resources from wholesale markets as the necessary

price of enforcing the “unambiguous|}” intent of the

Federal Power Act. Pet. App. 14a.

However “importan[t] demand response resources

[are] to the wholesale market,” the court concluded,

“Congress left [their] regulation ... to the states,

rather than to the federal government.” Jd. See also

Br. Opp. 28 (“The division of regulatory authority

between the federal government and the States

might not produce the most efficient regulation ...

but ‘Our Federalism’ has many virtues that extend

well beyond efficiency.”).

18

This is not so. Congress manifestly did not

prohibit demand response resources from FERC-

regulated markets when it enacted the Federal Power

Act, and its more recent enactments unambiguously

affirm the lawfulness and importance of their

participation.

A. The Federal Power Act and This Court’s

Precedents Plainly Establish FERC’s Regulatory

Authority

By its terms, Order 745 is addressed only to

practices in wholesale energy markets of system

operators subject to FERC’s jurisdiction. See

16 U.S.C. § 824(e). And the practices it targets

indisputably “affect[] rates” in those markets, Pet.

App. 7a. See 16 U.S.C. §§ 824d(a), 824e(a). Order

745’s LMP compensation rule, as Judge Edwards

pointed out, applies only in circumstances where it

reduces costs for those who purchase energy at

wholesale. Id. 40a.

Under this Court’s governing precedents, that

should have been the “end of the matter,” Chevron

U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S.

837, 842 (1984). See also City of Arlington v. FCC,

133 S. Ct. 1863, 1874-75 (2013).

As petitioners explain, the D.C. Circuit’s finding

of a “clear” — and dispositive — articulation of

“fclongressional intent” in Section 201(a) of the

Federal Power Act not only slights the powers over

“practice[s] ... affecting ... rates” that Congress

affirmatively conferred in Sections 205 and 206, but

it disregards this Court’s case law treating this

“precise reserved state powers language in § 201(a),”

as “prefatory,” New York, 535 U.S. at 22, and merely

19

descriptive of the Act’s other express reservations —

which are themselves “strictly construed.” Phillips

Petroleum Co. v. Wisconsin, 347 U.S. 672, 679 (1954)

(citation omitted).

But even if Section 201(a) were substantive

rather than “meref[ly] ... declara[tory],” 535 U.S. at

22, it could not meet the stringent standard affirmed

in City of Arlington. The opinion below nowhere

explained how Congress’s generic reference to state-

regulated “matters” could be said to “sp[eak] directly”

to the “precise” subject that Order 745 addresses, 133

S. Ct. at 1878 (quoting Chevron), i.e., ISO/RTO

practices for compensating demand _ response

resources that clear organized wholesale energy

markets, and to have resolved that question against

FERC authority — even when those practices directly

affect wholesale rates. Like the “unbundled

transmissions” that New York held outside the

Section 201(a) language, demand response, RTOs,

and organized wholesale markets are, from the

perspective of the FPA, “a recent development.” 535

U.S. at 21. As the Court explained, “there was neither

state nor federal regulation [in 1935] of what did not

exist.” Jd.

The D.C. Circuit’s legal error was similar to, but

significantly worse than, the one the Court corrected

in Oneok. As in that case, the court here mistakenly

assumed that the FPA requires that every “activity” —

identified at the highest possible level of generality —

must be assigned to a single field within which

jurisdiction is exclusive. See id. But the Ninth

Circuit decision in Oneok at least addressed a practice

— manipulation of information about sale prices in

natural gas markets — that the parties agreed was

20

“single” and unitary. Jd. The majority opinion here

addressed a jurisdictional conflict of. its own

manufacture. The opinion disregarded the “practices”

at which Order 745 actually is “directed,” 135 S. Ct.

at 1600, i.e., practices in organized wholesale markets

by system operators subject to FERC regulation,

based solely on the ipse dixit — in the face of market

participants’ contrary understanding — that demand

response is an intrinsically unitary, “retail” product.

Indeed, while Oneok counsels “cautio[n]” before

pronouncing broad “matters” or categories of activity

off limits to either state or federal regulatory

authority, 135 S. Ct. at 1599, under the FPA, a

decision to eject federal regulation from a field surely

requires heightened restraint. There is no

constitutional doctrine of reverse field preemption,

and as petitioners emphasize, the FPA grants FERC,

but not a state regulator, authority over practices

affecting rates under its jurisdiction. See EPSA

CDPUC Brief at 6 (rejecting as “an upside-down view

of the statutle]” an argument that States have

exclusive authority to regulate practices that “merely

‘affect’ generation facilities”). As in New York, where

the only disagreement within the Court concerned

whether FERC, in the face of State opposition, should

have been more assertive in exercising jurisdiction,

see 535 U.S. at 28 (Thomas, J., dissenting in part), the

only division in Oneok concerned whether FERC’s

“practices affecting” jurisdiction precluded all (or only

some) state regulation. See 135 S. Ct. at 1608 (Scalia,

J., dissenting). No Justice suggested that the States’

“long history of providing ‘common-law and statutory

remedies against monopolies and unfair business

practices” affecting retail rates, id. at 1601 (citation

21

omitted), might divest FERC of its power to regulate

wholesale markets.

B. Congress Has Expressly Endorsed Demand

Response Participation in Wholesale Markets

The decision below pointed to “no evidence” that

if “the 1935 Congress” had “foreseen the

developments to which FERC has _ responded,

Congress would have objected to FERC’s

interpretation of the FPA,” 535 U.S. at 23. But the

decision’s stark errors in construing that statute are

especially startling in view of the series of twenty-first

century legislative enactments, coinciding with

FERC’s activity in this field, that do speak directly to

the question and that express unambiguously

Congress's approval of demand __ response

participation in the markets overseen by FEKC.

The opinion below discussed the most prominent

of these provisions, EPAct 2005 § 1252(f), announcing

that “review of [the provision’s} statutory text,” Pet.

App. 13a (citation omitted), along with its title and

the content of immediately neighboring provisions,

reinforced the majority’s thesis that demand response

belongs exclusively to the “retail market,” subject to

state regulation only. Jd. 14a.

That is untenable. To be sure, the first clause of

the provision, as the court noted, contemplates

“encourag(ing]’ and ‘facilitat[ing]” certain retail-level

efforts, Pet. App. 13a — activities not inconsistent with

the hypothesized regime, where demand response

resources are statutorily forbidden from wholesale

markets; and a neighboring provision does include

language providing for FERC’s “technical assistance”

to demand response initiatives at the State level. See

22

Pet. App. 13a-14a (citing § 1252(e)); accord Br. Opp.

27 (asserting that this “context” “makes clear” that

Congress was focused only on encouraging “smart

metering’ technology under the purview of state

regulators).

But the statutory text that immediately follows

the clause the court parsed discloses that Congress

expressly endorsed and sought to expand demand

response resources’ “participation in energy, capacity,

and ancillary services markets” — i.e., the familiar

triad of FERC-regulated organized wholesale

markets. And the provision’s next sentence

establishes a “further national policy,” that the

benefits of participation in those markets should be

shared broadly with all customers in “the same

regional electricity entity,” EPAct 2005 § 1252(f)

(emphasis added), a term that fits RTOs and ISOs to

a T, but could not describe State-regulated utilities

that operate retail demand response programs.

The majority opinion’s observation that the

EPAct 2005 provision is a “policy statement, ... not [a]

delegation{] of regulatory authority,” id. 12a (quoting

Comcast Corp. v. FCC, 600 F.3d 642, 654 (D.C. Cir.

2010)), and, as such, could not “nullify a clear and

specific grant of jurisdiction” id. (quoting New York,

535 U.S. at 22), is irrelevant. FERC did not purport

to rely — and did not need to rely — on any authority

beyond its power over “practice[s] ... affecting ...

rate[s}” conferred by Sections 205 and 206,

affirmative grants that are coextensive with the

Commission’s authority over rates themselves.

Indeed, the “mere policy declaration” language the

opinion quoted in denigrating Section 1252(f) came

from this Court’s description of the provision -

23

Section 201(a) — that supplied the linchpin for the

D.C. Circuit’s jurisdictional ruling.

But policy statements like § 1252(f) do cast light

on “the contours of [an agency’s] statutory authority,”

Comcast, 600 F.3d at 654, and they are not an

exception to the judicial responsibility to give effect to

the plain meaning of statutes Congress enacts into

law — and to read statutes so as “to make sense rather

than nonsense out of the corpus juris,” W. Va. Univ.

Hosps., Inc. v. Casey, 499 U.S. 83, 101 (1991). It

would be “nonsense” to construe the FPA’s 80-year-

old generically-worded declaration as requiring that

demand response resources be ejected from organized

wholesale markets, when Congress announced a

national policy to enable their fuller “participation.”

As for “context,” the bare fact that certain

surrounding provisions relate to federal assistance to

States and retail-market initiatives supports FERC’s

understanding no less than respondents’. Nothing in

Order 745 contemplates that demand response would

or should participate exclusively in wholesale

markets. Rather, FERC recognized, as do state

regulators and Congress, that wholesale market

participation is consistent with innovative and

vibrant retail demand response programs. See p.13,

supra.

Other proximate provisions in fact push against

the D.C. Circuit's “retail only” theory. For example,

Congress’s reference to measures “ensur[ing] that ...

demand resources are provided equitable treatment

.. relative to the resource obligations of any load-

serving entity,” in “regional transmission ...

operations,” EPAct 2005 § 1252(e)(3)(E), is naturally

understood as referring to wholesale markets, where

24

demand response resources compete with generators,

to meet those obligations. Likewise, adjacent

provisions directing the Secretary of Energy and

FERC to report to Congress concerning, inter alia, the

“identififable] and quantiffiable] ... national benefits

of demand response,” “existing demand response

programs,” and “the annual resource contribution of

demand resources,” id. §§ 1252(d)(3) and (e)(3), have

been understood since their enactment to address

wholesale, as well as retail demand response. The

Energy Secretary's 2006 report, Benefits of Demand

Response in Electricity Markets and

Recommendations for Achieving Them, discussed

wholesale markets extensively. See pp. 13-16, 74-80.

So did FERC’s congressionally-mandated 2006 report,

which, after explaining that “at [the] wholesale level,

the impetus comes from independent system

operators (ISOs) or regional transmission

organizations (RTOs),” described “demand-bidding

programs’ operated by NYISO and ISO-NE, where

customers “bid a price at which they would be willing

to curtail their load ... on a day-ahead basis.” FERC

Staff Report, Assessment of Demand Response and

Advanced Metering (Aug. 2006) (“2006 Assessment”)

at 6, 50. See also id. 49-51 (describing “[c]apacity

market programs ... typically offered by wholesale

market providers such as ISOs/RTOs” and programs

“allowing demand response to participate in

ancillary-service markets’).

The policy declarations codified in EPAct 2005 do

not stand alone. Other provisions of the U.S. Code are

equally irreconcilable with the thesis of a “clear{] ...

Congressional intent,” Pet. App. 8a, to exclude

demand response from wholesale markets. For

example, 10 U.S.C. § 2919 authorizes the Secretary of

25

Defense “to participate in demand response programs

... conducted by,” inter alia, “[a]n independent system

operator” or “[a] third party entity (such as a demand

response aggregator or curtailment service provider)

implementing demand response programs on behalf

of an ... independent system operator.” Id.

§ 2919(a)(2), (4). And provisions like those discussed

above, authorizing federal “smart grid” funding of

research into “means for demand response ... to

provide ancillary services,” 42 U.S.C. § 17384(a)(2),

would make no sense if demand response were

confined by law to the “retail market.”

IV. FERC’s Understanding of the Allocation of

Regulatory Authority is Reasonable and

Judicious

Once the lawfulness of demand response

participation in wholesale markets is settled, the

basic regime Order 745 embraces — with retail

demand response matters subject to state regulation

and wholesale market practices under FERC’s

oversight — is unassailably reasonable and correct.

It could not seriously be claimed, for example,

that Congress meant for the subject of Order 745 —

the level and means of compensation paid by RTOs to

demand response resources that clear their wholesale

energy markets — to be a matter of state regulation.

And the notion that demand response resources

might participate in wholesale markets without any

regulation, state or federal (or that compensation

practices, alone among matters directly affecting

wholesale rates, would be exempt from all

government oversight) — is equally a nonstarter:

“(W]hen a dispute arises over whether a given

transaction is within the scope of federal or state

26

regulatory authority, we are not inclined to approach

the problem negatively, thus raising the possibility

that a ‘no man’s land’ will be created.” Fed. Power

Comm'n v. La. Power & Light Co., 406 U.S. 621, 631

(1972) (citation omitted).

Respondents’ objections, waving the flag of

federalism, are peculiar. Recognizing that Order 745

does not regulate retail sales of electricity or retail

demand response programs and does not purport to

preempt state law of any kind, they nonetheless insist

that participation in FERC-regulated wholesale

markets impinges on State prerogatives, even

asserting that Order 745 “effectively” sets retail

market prices, by raising the “lost opportunity cost” of

purchasing electricity at the state-regulated rate. Br.

Opp. 9, 24.

FERC’s Order provides the first and essentially

complete answer: a State that has the objections

hypothesized — or any others — need not allow

resources within its jurisdiction to participate in

organized wholesale markets.* See Joint States Br.

15-16.

8 Notably, certain respondents, advancing a muscular view

of the Commission's authority over practices affecting rates in a

different case, have argued that States’ “latitude to retreat from

the federal wholesale market entirely if they no longer believe

that it is serving their interests” is sufficient protection. Br.

Opp., Nazarian v. PPL EnergyPlus LLC, No. 14-614 (Feb. 2015)

at 2. Order 745’s regime provides something much more

nuanced and therefore more potent: States may retain the

benefits of wholesale markets — indeed they may retain the

benefits of wholesale demand response (so long as other States

in their regional system permit participation). That such free-

riding is not a problem in the real world is powerful confirmation

27

The further answer comes from actual state

regulatory authorities, which in lopsided numbers,

supported FERC’s jurisdiction in this case,

emphasizing the myriad ways wholesale market

participation benefits state-regulated demand

response programs and broader state policy interests.

See p. 16, supra. It is unsurprising that States would

prefer FERC’s regime, which enables them to decide

for themselves whether these benefits are in their

interest, to respondents’ rule, which, in the name of

federalism, denies States the power of choice and

imposes the widely disfavored option. That States

have aligned in favor of FERC’s jurisdiction shows in

itself how different this case is from recent ones where

the balance between State and federal interests was

genuinely under pressure.

For its part, the opinion below explained its ruling

in terms of prophylaxis, i.e., that depriving FERC

authority over wholesale market practices was

necessary to ensure that “price-responsive demand

[remains] untouched ... in the future.” Pet. App. 10a.

That vigilance seems truly unwarranted here: Not

that retail programs can be strengthened by wholesale market

participation. See p. 13, supra.

® Respondents’ attempts to make Order 745 look like retail

rate-setting entail hiding a great deal inside the word

“effectively.” The “lost opportunity costs” of purchasing energy

at retail include not only the wholesale energy market demand

response compensation at issue here, but any demand response

payment available in any wholesale market — and every

incentive, from whatever source, to consume less. In fact,

opportunity costs extend to anything that lowers the price of any

good that could be bought with funds used to purchase

electricity.

28

only does Order 745 (and the understanding of FPA

authority on which it rests) leave retail demand

response programs to state regulation, FERC defers

to the States as to their residents’ wholesale market

participation. This sheep comes as a sheep. Cf.

Morrison v. Olson, 487 U.S. 654, 699 (1988) (Scalia,

J., dissenting).

The decision’s depiction of Order 745 as

improperly “luring” demand response from its

rightful place in “the retail market” “to create [FERC]

jurisdiction,” Pet. App. 8a, 11a, is similarly untenable.

Order 745 regulates practices by entities already

subject to FERC regulation. And wholesale demand

response participation did not originate with Order

745; its impetus came substantially from [SOs and

RTOs, who received FERC’s permission to allow

demand response bidding in their auctions in the

early 2000s. See 2006 Assessment at 6. (Some of

these paid LMP compensation, as did a number of

RTOs at the time Order 745 was adopted, Pet. App.

63a-65a).

FERC’s restrained resolution of the jurisdictional

question here is not only reasonable, but exemplary.

Section 201(a) does not, as this Court has held, impose

an independent substantive limit on the FPA’s broad

grants of power, let alone enact a rule of “reverse

preemption” of the sort the D.C. Circuit supposed.

And the fundamental changes in the electricity

universe over the past four decades have, as

respondents themselves have elsewhere explained,

altered the state-federal balance: “as the Nation’s

energy markets become more complex and regional,

the Commission’s regulation of wholesale rates and

services ... have an increasing likelihood of

29

incidentally affecting issues of local concern,” EPSA

CDPUC Br. 13.!© But as FERC recognized in Order

745, the interests served by Sections 205 and 206

need not be pursued at all costs; nor need the values

underlying Section 201(a) be disregarded. Cf.

NARUC v. FERC, 475 F.3d 1277, 1281 (D.C. Cir.

2007) (“Any proper construction of § 201 must give

effect to both FERC’s jurisdiction over certain

transactions occurring over public utilities and to

§ 201(f)’s exclusion of state facilities.”). On the

contrary, fundamentally important developments and

initiatives relating to the power system are

increasingly occurring at the State and local level,

presenting regulatory challenges that will benefit

from coordination, rather than _ jurisdictional

brinksmanship, and from the “[c]autious” approach,

toward preemptive authority (in either direction) that

FERC followed here. See Oneok, 135 S. Ct. at 1599.

V. The D.C. Circuit’s Alternative Holding Should Be

Reversed

The Court of Appeals also “erred in holding [Order

745] is arbitrary and capricious.” FERC Br. I. The

decision below ostensibly confined that alternate

holding to FERC’s procedural obligation to respond

directly to the points raised in Commissioner

Moeller’s dissent, a ruling, as FERC demonstrates,

that cannot stand. The Commission gave a

comprehensive, reasoned response to the dissent,

10 Other respondents recently offered a much harder-edged

version of this point, arguing that States, “by rendering their

local electricity markets largely dependent on the federally

regulated wholesale market, [have] necessarily ceded much of

their traditional regulatory authority.” Nazarian Br. Opp. 6.

30

which had consisted largely of endorsing the principal

objection raised by commenters, that FERC made the

wrong choice by selecting LMP (subject to the net

benefits test), rather than “LMP-G,” as_ the

compensation metric. See FERC Br. 57-60; Richard

J. Pierce, A Primer on Demand Response and A

Critique of FERC Order 745, 3 Geo. Wash. J. Energy

& Envtl. L. 102, 108 (Winter 2012) (“{I] would have

joined [the dissenting] opinion had I been a member

of FERC. Yet, if I were instead a judge reviewing

Order 745, I would uphold FERC’s rule on the basis

that the agency provided reasoning adequate to

support each step in its decision-making process.”).

But to the extent the ruling below is instead

treated as a de facto acceptance of respondents’

objections (albeit one not filtered through the lens of

requisite deference), it should not stand. As explained

above, Order 745 is fundamentally an application of

principles common to almost every organized

wholesale market auction under FERC’s jurisdiction:

that diverse resources that are comparably situated

with respect to the market or system benefit should

be treated comparably (“equitabl[{y],” in Congress’s

phrasing); that the same compensation generally is

accorded to all resources that clear the market, rather

than, e.g., one that takes account of their costs; and

that markets’ structural shortcomings (including

barriers to entry and the potential for manipulative

behavior) should be accounted for.

Respondents’ objections principally’ entail

disputing whether demand response and generating

resources really are sufficiently comparable, along

with an ostensible demonstration that, as a matter of

economic theory, LMP “overcompensates” demand

31

response resources, raising the specter of

participation (and curtailment of economic activity)

above the “optimal” level. Pet. App. 15a-16a. But

even airtight theoretical demonstrations often

founder under real-world conditions, see CDPUC, 569

F.3d at 484 (noting that a proposition arguably “true

in the theoretical world of economics textbooks, [was]

... almost certainly false in the real world outside

them”); and it would be hard to read Congress’s

multiple enactments on the subject as viewing the

problem with demand response as one of too much

participation.

And FERC surely was correct that any inquiry

into windfalls or “overcompensation” would be a

significant departure from its bedrock approach:

Generating resources that submit zero-dollar bids are

paid full LMP compensation, notwithstanding their

expressed willingness to accept less. (Indeed, for

nuclear plants, marginal cost is sometimes described

as negative, because shutting down would be more

expensive than dispatch.). See Pet. App. 101a-102a.

Offering demand response, in contrast, entails often-

costly investments in metering, control, and

verification technology.

And while respondents have arguments why

demand response resources are not comparable — or

not sufficiently so to warrant comparable treatment —

such judgments are within an expert agency’s broad

discretion. In that regard, respondents cannot deny

that demand response resources perform the basic

function of balancing demand and supply as

generators do. And, as Amici explained in comments

to FERC, it should not be assumed that

dissimilarities between demand response and

32

generation sources cut uniformly in the latter’s favor.

There are many situations in wholesale markets

where demand response performs better than do

generators — e.g., in ancillary service markets, where

highly developed demand response resources are

“prized” for their reliability, swiftness, and flexibility,

see Peter Cappers, et al., Market and Policy Barriers

for Demand Response Providing Ancillary Services in

U.S. Markets 2 (March 2013). And, as explained

above, demand response resources not only ensure

more reasonable prices when markets are under

pressure, but avoid significant costs — in terms of

pollution and system stress — that should make them

preferable to comparably priced generation. '!

Conclusion

The judgment of the court of appeals should be

reversed.

Respectfully submitted,

11 To be sure, allowing demand response participation does

not perfectly internalize these costs, but FERC was permitted to

consider them, precisely in the manner it did, in determining

that these resources are sufficiently comparable and that LMP

compensation was reasonable and nondiscriminatory. Cf.

Michigan v. EPA, 576 U.S. __ (June 29, 2015), Slip Op. 7 (“cost’

includes more than the expense of complying with regulations ...

[and includes] harms ... to human health or the environment”).

33

Michael Panfil David T. Goldberg

Vickie L. Patton Counsel of Record

Tomas Carbonell DONAHUE & GOLDBERG, LLP

Peter Zalzal 99 Hudson Street, 8th Floor

ENVIRONMENTAL DEFENSE FUND New York, NY 10013

2060 Broadway, Suite 300 (212) 334-8813

Boulder, CO 80302 david@donahuegoldberg.com

Counsel for Environmental

Sean H. Donahue

DONAHUE & GOLDBERG, LLP

1130 Connecticut Ave., NW

Suite 950

Defense Fund

Gregory M. Cunningham

Jerry Elmer

CONSERVATION Law Founpation W#shington, D.C. 20036

47 Portland Street, Suite 4 Counsel for all Amici Curiae

Portland, ME 04101

Counsel for Conservation Law a a

Foundation oe

EARTHJUSTICE

1625 Massachusetts Ave., NW,

Tony G. Mendoza Suite 702

Casey A. Roberts

SIERRA CLUB

85 Second Street, Second Floor

San Francisco, CA 94105

Washington, DC 20036

Allison Clements

John N. Moore

Counsel for Sierra Club Jennifer Chen

NATURAL RESOURCES

Howard A. Learner DEFENSE COUNCIL

Justin Vickers 40 W 20th Street

ENVIRONMENTAL LAW AND New York, NY 10011

POLICY CENTER

35 E. Wacker Drive, Suite 1600

Chicago, IL 60601

Counsel for Environmental Law

And Policy Center

Counsel for Natural Resources

Defense Council

34

APPENDIX

DECRIPTION OF AMICI CURIAE

Conservation Law Foundation (CLF) is a

New England non-profit, public-interest

environmental advocacy organization with offices

and members in the states of Maine, New

Hampshire, Vermont, Rhode Island and

Massachusetts. A substantial component of CLF’s

work is directed at influencing energy policy in order

to ensure that the region achieves its collective goals

of reducing greenhouse gas emissions and

avoiding or limiting the impacts of climate change.

The role of demand-side resources, including demand

response, aS an emergy resource is a_ central

component of this work. CLF is a voting NEPOOL

governance participant. In that role, CLF

participates actively in the market-design initiatives

of ISO-NE, including advocacy for the inclusion of

demand response resources in the wholesale energy

markets. CLF was directly involved in the NEPOOL

stakeholder process associated with FERC’s Order

745 and was an intervenor and commenter in the

FERC review of ISO-NE’s Order 745 compliance

filing.

Environmental Defense Fund (“EDF”) is a

national non-profit, non-governmental, non-partisan

organization, representing more than 300,000

members and supporters. Since 1967, EDF has

worked to preserve the natural systems on which all

life depends. Guided by science and economics, we

find practical and lasting solutions to the most

serious environmental problems. EDF advocates

policies that protect human health and the

environment and that support a strong economy by

ensuring that cost-effective clean energy resources

A-1

have open access to our nation’s electricity

markets. EDF participated as amicus in support of

FERC Order 745 in the case below and participated

in the underlying FERC rulemaking.

The Environmental Law and Policy Center

of the Midwest (“ELPC”) is a not-for-profit public

interest environmental legal advocacy organization

that conducts strategic advocacy campaigns to

improve environmental quality and protect our

natural resources through the advancement of clean

air, clean transportation and clean energy policies at

the regional and national levels. ELPC promotes the

deployment of clean energy resources including

demand response.

Natural Resources Defense Council (NRDC)

is a national nonprofit organization with

approximately 300,000 members. NRDC is

committed to the preservation and protection of the

environment, public health, and natural resources.

Addressing the climate change crisis is one of

NRDC’s top institutional priorities. As part of its

work in this arena and to curb air pollution, NRDC

has been actively involved in advocacy related to

demand response, energy efficiency, and renewable

energy.

Sierra Club is a national organization founded

in 1892 with more than 60 chapters and over a

million members and supporters. Sierra Club's

purpose is to explore, enjoy, and protect the wild

places of the earth; to practice and promote the

responsible use of the earth’s ecosystems and

resources; and to educate and enlist humanity to

protect and restore the quality of the natural and

human environments. Sierra Club works to address

A-2

the environmental and public health problems

associated with energy generation, and actively

advocates for demand-side management and

renewable energy resources.

A-3