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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Nos. 14-840, 14-841 JUL 16 20% |

a nape | OFFICE OF THE CLERK |

3n The

Supreme Court of the United States

2

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,

V.

ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.,

Respondents.

°

ENERNOC, INC., ET AL.,

Petitioners,

Vv.

ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.,

Respondents.

.

On Writs Of Certiorari To The United States

Court Of Appeals For The District Of Columbia

.

BRIEF OF THE GUARINI CENTER

ON ENVIRONMENTAL, ENERGY AND

LAND USE LAW AT NEW YORK UNIVERSITY

SCHOOL OF LAW AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

.

RICHARD B. STEWART*

DANIELLE SPIEGEL-FELD

GUARINI CENTER ON ENVIRONMENTAL,

ENERGY AND LAND USE LAW

NEW YORK UNIVERSITY SCHOOL OF LAW

139 MacDougal St., 3rd Floor

New York, NY 10012

(212) 998-6146

rbs1@nyu.edu

*Counsel of Record

—

-_——

COCKLE LEGAL BRIEFS (800) 225-6984

WWW .COCKLELEGALBRIEFS.COM

i

QUESTION PRESENTED

This amicus brief considers the first of the Questions

Presented:

Whether the Federal Energy Regulatory

Commission reasonably concluded that it has

authority under the Federal Power Act, 16

U.S.C. §§ 791a, et seq., to regulate the rules

used by operators of wholesale electricity

markets to pay for reductions in electricity

consumption and to recoup those payments

through adjustments to wholesale rates.

ii

TABLE OF CONTENTS

Page

Interest of the Amicus Curiae .................0.ccs0eee00s 1

Summary of the Argument ....................ccceeseeeeeees 2

I nnccnscivevierictintniiiviciinvnivcaiisipiiiiainaaiiaadmaaiain 3

I. Demand Response Resources Play a Vital

iI.

Role in Improving the Performance of the

Wholesale Markets ....................ccccseeeeeeeeees

A.

Wholesale demand response programs

confer four important resource effi-

ciency benefits to the electricity sys-

Wholesale demand response programs

also can confer important environ-

IS Wi is esinceseccnncccticcassinisianaseien

The benefits of wholesale demand re-

sponse programs cannot be replicated

Bar Ey Fe iiiisttincsassnttniciininciinnn

1. Dynamic pricing programs are still

NR ncdnssvsecctntstnnanitninisasinaana

2. State level demand response pro-

grams pose significant coordination

problems that prevent them from

providing adequate demand re-

Order 745 is a Logical and Incremental

Extension of FERC’s Prior Steps to De-

ploy Demand Response Resources in

WetRRRIS DERTMOED ...000cccvcscccccsessescsceceseceses

10

10

11

IT.

A.

E.

ill

TABLE OF CONTENTS -— Continued

Page

RTOs and ISOs took early steps to

develop demand response programs

to improve the efficient operation of

the wholesale markets.........................

The Western Energy Crisis prompted

FERC initiatives to encourage whole-

sale demand response........................+.

FERC took further steps to expand

demand response programs after Con-

gress endorsed such programs ............

Order 719 required RTOs and ISOs to

incorporate demand response in cer-

tain markets and was not judicially

ee

Order 745 is a natural outgrowth of

FERC’s prior decisions ........................

In its Efforts to Remove Barriers to

Demand Response Participation § in

Wholesale Markets, FERC Has Consist-

ently Respected State Authority................

A. States remain free to design and im-

plement state level demand response

te etiriiniadnhntninatmndsocs

. FERC’s orders on demand response

have consistently empowered States

to prohibit retail demand response

resources from participating in whole-

sale markets if they wish ....................

14

15

16

17

18

19

19

iv

TABLE OF CONTENTS -— Continued

Page

C. States did not seek judicial review of

Order 745 on jurisdictional grounds..... 22

IV. EPSA’s Attack on FERC’s Jurisdiction in

This Case is Flatly Inconsistent with the

Position it Previously Asserted to FERC

in Administrative Proceedings .................. 25

SEE an ON REACT ey Ser WO CR ERE Sm 26

v

TABLE OF AUTHORITIES

Page

CASES

Electr. Power Supply Ass’n v. FERC, 753 F.3d

I i eile 19

Ind. Util. Regul. Comm’n v. FERC, 668 F.3d

I I eecsite auiiiiincssiinis 17

FEDERAL AND STATE STATUTES

Ark. Code Ann. § 23-18-1004 (2014) ...0..........cccecceeee 21

Energy Independence and Security Act of 2007,

Pub. L. No. 110-140, 121 Stat. 1492:

§ 529, 121 Stat. 1664-65 (42 U.S.C. § 8279)........... 16

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

119 Stat. 594:

§ 1252(f), 119 Stat. 966 (16 U.S.C. § 2642)............ 16

FEDERAL REGULATIONS

a: IED cncccrtneshcecisicnstatnianiisecntiansiniatarte 20, 21

FEDERAL ENERGY REGULATORY COMMISSION RULEMAKINGS

AND DECISIONS

Demand Response Compensation in Organized

Wholesale Energy Markets:

75 Fed. Reg. 15,362 (Mar. 29, 2010)................. 18, 19

76 Fed. Reg. 16,658 (Mar. 24, 2011) ............0000000.... 18

137 F.E.R.C. ¥ 61,215 (2011) ..................-seesesseseseees 19

vi

TABLE OF AUTHORITIES — Continued

PJM Interconnection, L.L.C., Order Accepting

and Suspending Filing, 92 F.E.R.C. 9 61,059

PJM Interconnection, L.L.C., Order Accepting

Tariff Sheets as Modified, 99 F.E.R.C.

SE icinininisinsratariatecsiicitiilincipiiciniiithantnitiaiientn 15

PJM Interconnection, L.L.C., Order Accepting

Tariff Sheets as Modified, 99 F.E.R.C.

ITE SA ke 15

Preventing Undue Discrimination and Prefer-

ence in Transmission Service:

72 Fed. Reg. 12,266 (Feb. 16, 2007) ...........cce0cse000e. 16

Removing Obstacles to Increased Electric Gen-

eration and Natural Gas Supply in the West-

ern United States, 66 Fed. Reg. 15,858 (Mar.

LT UIT instetiintectinipntecaetincihinnaasisniaciaiencinninaiatilisiisitadscaeaaitiieaita 15, 20

Wholesale Competition in Regions with Orga-

nized Electric Markets:

73 Fed. Reg. 64,100 (Oct. 28, 2008) ...........cecceccsc00e- 17

74 Fed. Reg. 37,776 (July 29, 2009) ..........cecccecsee0e- 17

vil

TABLE OF AUTHORITIES — Continued

STATE ADMINISTRATIVE DECISIONS

AK Steel Corp., Petition for Approval of Ex-

tension of the Term to Participate in PJM

Load Response Programs, Ind. Util. Regul.

Comm'n Cause No. 43566 (Feb. 25, 2009) ........

Detroit Edison Co., Request to Initiate Investi-

gation of Licensing Rules, and Regulations

Needed to Address the Effect of the Partici-

pation of Retail Customers, Mich. Pub. Serv.

Comm’n No. U-16020 (Dec. 2, 2010) ...........00....

In re Order Temporarily Prohibiting the Opera-

tion of Aggregators of Retail Customers, Mo.

Pub. Serv. Comm’n File No. EW-2010-0187

FRE Gilly SI crcicenesensescesocvensesssonsediensemmecmenees

Motion of the Commission to Develop Dynamic

Load Management Programs, N.Y. Pub. Serv.

Comm’n, Case No. 14-E-0423 (Dec. 15, 2014)...

Order Adopting Dynamic Load Management

Filing, N.Y. Pub. Serv. Comm’n, Case No. 14-

E-0423 (June 18, 2015).....................csesscseseseesees

SCHOLARLY SOURCES

Mohammed H. Albadi & Ehab F. El-Saadany, A

Summary of Demand Response in Electricity

Markets, 78 Electric Power Sys. Res. 1989

Benjamin Biegel et al., Value of Flexible Con-

sumption in the Electricity Markets, 66 Ener-

gy 354 (Mar. 2014) .......ccccccccecsecsecsesuessesscsseeneesee

Page

Vili

TABLE OF AUTHORITIES — Continued

Page

Richard N. Boisvert & Bernard F. Neenan,

Social Welfare Implications of Demand Re-

sponse Programs in Competitive Electricity

Markets, LBNL-52530 (20038) ....0.........cccceecceeeeeeeeeee 10

Severin Borenstein, The Trouble with Elec-

tricity Markets: Understanding California’s

Restructuring Disaster, 16 J. Econ. Persp.

I IITA iticd aadadaneoct iicainatipasiieaeaicnintinnidiiiimaeeninteaiiens 7

Severin Borenstein et al., Dynamic Pricing,

Advanced Metering and Demand Response in

Electricity Markets, CSEM WP 105 (2002)

TL aa eee ae 6, 10, 11

Steven Braithwait & Ahmad Faruqui, The

Choice Not to Buy: Energy Savings and Policy

Alternatives for Demand Response, 139 Pub.

Util. Fort. 48 (Mar. 15, 2001)................ccccssescseeseseees 6

Romkaew Broehm & Peter Fox-Penner, Price-

Responsive Electric Demand: A National

Necessity, Not an Option, in Electricity Pric-

ing in Transition (Ahmad Faruqui & Kelly

I a eat 14

Paul Centolella, The Integration of Price Re-

sponsive Demand into Regional Transmission

Organization Wholesale Power Markets and

System Operations, 35 Energy 1568 (2010)............. 5

Ahmad Faruqui et al., Fostering Economic

Demand Response in the Midwest ISO, 35

ERI RE ele a 10

ix

TABLE OF AUTHORITIES — Continued

Page

William W. Hogan, Transmission Benefits and

Cost Allocation (May 31, 2011)...............cccccecceeeeeees 12

Doug Hurley et al., Regul. Assistance Proj.,

Demand Response as a Power System Re-

I a ctetensrensiinenneiininnnsie 8,9, 14

James Newcomb et al., Distributed Energy

Resources: Policy Implications of Decentrali-

zation, 26 Electr. J. 65 (Oct. 2013) .........ccccceseeeeeeees 9

Stephen J. Rassenti et al., Controlling Market

Power and Price Spikes in Electricity Net-

works: Demand-Side Bidding, 100 PNAS

I iciitliiediiiaaataininlidiaicieina 7

Kyle Siler-Evans et al., Marginal Emissions

Factors for the U.S. Electricity System, 46

Environ. Sci. Tech. 4742 (2012) ..........ccccceeeeeeeeeees 9

Rahul Walawalkar et al., Evolution and Cur-

rent Status of Demand Response in Electrici-

ty Markets: Insights from PJM and NYTSO,

ee eB I tcsecatnenncectedncssessosincnsnsstsctenses 14

Jon Wellinghoff & David L. Morenoff, Recogniz-

ing the Importance of Demand Response: The

Second Half of the Wholesale Electric Market

Equation, 28 Energy L.J. 389 (2007) ..................... 14

xX

TABLE OF AUTHORITIES — Continued

Page

MISCELLANEOUS

Answer of Electr. Power Supply Ass’n, FERC

Docket No. ELO9-68-000 (Oct. 30, 2009)................ 25

Comments of Md. Pub. Serv. Comm’n, FERC

Docket No. ER15-852-000 (Feb. 13, 2015) ............. 22

FERC, Regional Transmission Organizations

(RTO)/Independent System Operators (ISO),

http//www.ferc.gov/industries/electric/iindus-act/

FirstEnergy Serv. Co. v. PJM Interconnection,

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

Siti TI sdchiiahiiiettsdahemaileadaihmneeineiguaditatotnsinilanhiaaiiiiambsiniedsened 4

Letter from Audrey Zibelman, Chair, N.Y. Pub.

Serv. Comm’n, to Cheryl A. LaFleur, FERC

Acting Chairman, FERC Docket No. RM10-

dell latest 8

Letter from Edward S. Finley, Chairman, N.C.

Util. Comm’n, to Cheryl A. LaFleur, FERC

Acting Chairman, FERC Docket No. RM10-

I Wi MII iiss icnignsnntnnsienishsnebesnadleitinespiasisions 21, 24

Letter from Martin O’Malley, Governor of Md.,

to Jon Wellinghoff, FERC Chairman, FERC

Docket No. RM10-17-000 (May 12, 2010).............. 22

Letter from Sarah Hofmann, Exec. Dir., New

Eng. Conf. of Pub. Util. Comm’rs, to Chery]

A. LaFleur, FERC Acting Chairman, FERC

Docket No. RM10-17-000 (July 1, 2014) ......000000...... 7

xl

TABLE OF AUTHORITIES — Continued

New Eng. Power Generators Ass’n, Inc. v. ISO

New Eng., Inc., FERC Docket No. EL15-21-

I a culitnanaiuanie

N.Y. Indep. Sys. Op., Demand Response Pro-

grams, http://www.nyiso.com/public/markets_

operations/market_data/demand_response/

REESE AE A eve Pw eee OR Se OD

Protest of Demand Response Supporters, FERC

Docket No. EL09-68-000 (Sep. 16, 2009)...........

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

Response in Electricity Markets and Rec-

ommendations for Achieving Them: A Report

to the U.S. Congress Pursuant to Section

1252 of the Energy Policy Act of 2005 (2006) ...

U.S. Energy Info. Admin., Annual Electric

Power Industry Report, Form EIA-861 (June

SITE ialientnsiciaatienddesindbiadopadduitichednatibheteniamnianiatunianination

1

INTEREST OF THE AMICUS CURIAE’

The Frank J. Guarini Center on Environmental,

Energy, and Land Use Law at New York University

School of Law’ is dedicated to addressing environ-

mental and energy challenges using market-oriented

strategies. The Guarini Center is a collaborative

effort of faculty at New York University School of

Law, a full-time staff, fellows and law student re-

search assistants. The Center’s faculty, Professors

Richard B. Stewart and Katrina M. Wyman, have

produced extensive scholarship on administrative,

regulatory and environmental law. The Faculty

Director of the Center, Professor Richard B. Stewart,

himself has published more than 100 articles on these

subjects.

Recently, the Guarini Center has focused on

innovative approaches to regulating the electricity

system. The Center has undertaken research, re-

leased publications, and hosted events on new

strategies for regulating the electricity sector in the

U.S. and abroad. A particular area of interest has

been New York State’s ongoing efforts to leverage

' Counsel for ali parties received notice, of amicus’ intent to

file this brief and have consented to its filing. No counsel to any

party authored this brief in whole or in part, and no person or

entity other than amicus and its counsel made a monetary

contribution intended to fund the preparation or submission of

this brief.

* No part of this brief purports to represent the views of New

York University School of Law, or New York University, if any.

2

technological advances to enlist more customer

participation in the electricity system, and animate

markets for customer-side resources including de-

mand response. As New York State’s efforts demon-

strate, technological advances are driving significant

change throughout the electricity system. The Court

of Appeals’ restrictive definition of FERC’s jurisdic-

tion would impede FERC’s ability to respond to these

changes to protect the integrity and efficiency of the

wholesale markets that it oversees.

¢

SUMMARY OF THE ARGUMENT

In order to secure the Nation’s goal of efficiently

providing cost-effective electricity to consumers, the

Court should reverse the Court of Appeals’ jurisdic-

tional ruling and thereby preserve the authority of

the Federal Energy Regulatory Commission (FERC)

over wholesale demand response programs. Whole-

sale demand response programs play a critical role in

promoting the efficiency of the organized wholesale

electricity markets that FERC regulates by enabling

market operators to meet electricity needs through

the lowest cost means available.

Recognizing the significant contributions of de-

mand response programs in enhancing the efficiency

of wholesale markets and lowering electricity prices,

FERC has worked incrementally for over a decade to

integrate such programs into the markets, most re-

cently by promulgating Order 745. In so doing, FERC

3

has consistently respected state authority over retail

sales; Order 745 is no exception. The States them-

selves have not judicially challenged Order 745 on

jurisdictional grounds. The present claim of the

Electric Power Supply Association (EPSA) that FERC

lacks jurisdiction over wholesale demand response

resources is flatly inconsistent with a position that it

has previously expressed to FERC.

The D.C. Circuit decision vacating Order 745 on

jurisdictional grounds casts serious doubt on whether

demand response programs will be able to continue to

participate in the wholesale markets in any way,

which would deprive the electricity system and elec-

tricity consumers of important benefits. The Court of

Appeals’ jurisdictional ruling should accordingly be

reversed.

This brief takes no position on the merits of the

formula set forth in Order 745 for compensating

demand response in the wholesale energy markets.

*

ARGUMENT

I. Demand Response Resources Play a Vital

Role in Improving the Performance of the

Wholesale Markets

The organized wholesale electricity markets,

which are managed by FERC-regulated entities known

as Independent System Operators (ISOs) or Regional

4

Transmission Organizations (RTOs), supply power to

tens of millions of American consumers.’ These ISOs

and RTOs manage transmission facilities and admin-

ister markets through which sales of bulk power —

that is, sales of electric power for resale — are ar-

ranged. What is at stake in this case is whether the

ISOs and RTOs can continue to include demand re-

sponse resources as part of their efforts to efficiently

manage the wholesale markets.

Affirming the D.C. Circuit decision vacating

Order 745 could deprive the wholesale markets of the

important benefits that demand response resources

provide. If FERC does not have jurisdiction to regu-

late the terms by which demand response resources

participate in the wholesale markets that it regulates,

it may not be possible for such resources to partici-

pate in these markets at all. See Pet’r’s Br. 31. In fact,

some industry players have already interpreted the

decision as having precisely this effect. See, e.g., New

Eng. Power Generators Ass’n, Inc. v. ISO New Eng.,

Inc., FERC Docket No. EL15-21-000, at 1 (Nov. 14,

2014); FirstEnergy Serv. Co. v. PJM Interconnection,

L.L.C., FERC Docket No. EL14-55-000, at 1 (May 23,

2014). Such a result would undermine the Nation’s

goal of providing cost-effective electricity to consum-

ers while also protecting the environment.

* See FERC, Regional Transmission Organizations (RTO)/

Independent System Operators (ISO), http://www .ferc.gov/industries/

electric/indus-act/rto.asp (last visited July 13, 2015).

5

A. Wholesale demand response programs

confer four important resource effi-

ciency benefits to the electricity sys-

tem

Wholesale demand response programs create a

more efficient allocation of resources by allowing

wholesale market operators to choose the lowest cost

resource to maintain the balance between supply and

demand — by increasing the supply of electricity from

power plants or reducing the demand for electricity

from consumers. See, e.g., Paul Centolella, The Inte-

gration of Price Responsive Demand into Regional

Transmission Organization (RTO) Wholesale Power

Markets and System Operations, 35 Energy 1568,

1569-1570 (2010). In so doing, these programs im-

prove the efficiency of the wholesale electricity mar-

kets in at least four ways: 1) they reduce average

prices, 2) they limit price spikes, 3) they enhance

competition and mitigate market power, and 4) they

fortify reliability. Each of these benefits ultimately

accrues to consumers.

1) Reducing average prices — By limiting

peaks in demand for electricity, whole-

sale demand response programs reduce

the need to bring online the most costly

power plants and to build new power

plants and transmission facilities to meet

peak levels of demand. Both of these

effects can help reduce the average cost

of electricity over the long run. For this

reason, demand response programs lower

average electricity prices. Mohammed H.

2)

3)

6

Albadi & Ehab F. El-Saadany, A Sum-

mary of Demand Response in Electricity

Markets, 78 Electric Power Sys. Res.

1989, 1991 (2008).

Limiting price spikes — By helping to

flatten demand for power in wholesale

markets, demand response can reduce

the frequency and degree of price spikes

during periods of high system demand.

See generally Severin Borenstein et al.,

Dynamic Pricing, Advanced Metering and

Demand Response in Electricity Markets,

CSEM WP 105, at 11 (2002) (working

paper). For instance, it has been esti-

mated that a 2.5 percent reduction in

demand during the peak of California’s

electricity crisis in 2000-2001 could have

reduced wholesale electricity prices by

approximately 25 percent. Steven Braith-

wait & Ahmad Faruqui, The Choice Not

to Buy: Energy Savings and Policy

Alternatives for Demand Response, 139

Pub. Util. Fort. 48, 54 (Mar. 15, 2001).

Enhancing competition and mitigating

market power — Wholesale demand re-

sponse programs help promote competi-

tion and mitigate the market power of

electricity generators in the wholesale

markets by introducing an alternative

resource that can be used to keep the

grid in balance. When power supply in

energy markets is tight, power producers

may withhold a portion of their capacity

so as to create artificial shortages that

4)

7

drastically drive up the spot price.

Severin Borenstein, The Trouble with

Electricity Markets: Understanding Cali-

fornia’s Restructuring Disaster, 16 J.

Econ. Persp. 191, 196 (2002). Wholesale

demand response programs can neutral-

ize power producers’ attempts to manip-

ulate markets in this way by enabling

grid operators to call up demand re-

sources to compensate for shortages in

supply. Stephen J. Rassenti et al., Con-

trolling Market Power and Price Spikes

in Electricity Networks: Demand-Side

Bidding, 100 PNAS 2998, 3003 (2003).

In addition, demand response resources

exert “downward pressure on gener-

ator bidding strategies by increasing the

risk to a supplier that it will not be dis-

patched if it bids a price that is too

high.” U.S. Dep’t of Energy, Benefits of

Demand Response in Electricity Markets

and Recommendations for Achieving

Them: A Report to the U.S. Congress

Pursuant to Section 1252 of the Energy

Policy Act of 2005 vi, 29 (2006).

Fortifying reliability - Wholesale demand

response programs promote the reliabil-

ity of electricity service by enabling ISOs

and RTOs to reduce demand when ser-

vice interruptions are imminent. Several

state electricity regulators have credited

wholesale demand response programs

with helping to maintain the supply of

electricity during heat waves and ex-

treme cold weather. Letter from Sarah

8

Hofmann, Exec. Dir., New Eng. Conf.

of Pub. Util. Comm’rs, to Cheryl A.

LaFleur, FERC Acting Chairman, FERC

Docket No. RM10-17-000 (July 1, 2014)

(describing reliability benefits of whole-

sale demand response in New England).

See also Letter from Audrey Zibelman,

Chair, N.Y. Pub. Serv. Comm’n, to Chery]

A. LaFleur, FERC Acting Chairman,

FERC Docket No. RM10-17-000 (July 3,

2014).

B. Wholesale demand response programs

also can confer important environmen-

tal benefits

In addition to the four market efficiency benefits

described above, wholesale demand response pro-

grams can confer environmental benefits.‘ In the

short term, the ability of wholesale demand response

programs to suppress price spikes, described above,

reduces the system’s reliance on its oldest, least

efficient, and most expensive power plants. Accord-

ingly, in regions with relatively clean baseload power

systems, shifting consumption away from high de-

mand periods may reduce emissions of carbon dioxide

* Customers reducing electricity consumption from the grid

under demand response programs may resort to generating

electricity on site from polluting diesel generators. However, this

problem can be addressed through environmental regulation.

See Doug Hurley et al., Regul. Assistance Proj., Demand Re-

sponse as a Power System Resource 14 n.5 (2013).

9

and local air pollutants such as nitrous oxides and

sulfur dioxide. Hurley et al., supra, at 14 (2013). See

also Kyle Siler-Evans et al., Marginal Emissions

Factors for the U.S. Electricity System, 46 Environ.

Sci. Tech. 4742, 4746 (2012).

Over the long term, the participation of demand

response resources in wholesale markets can facili-

tate the incorporation of greater quantities of renew-

able energy in the electricity system. Because

renewable generation technologies, such as solar and

wind power, produce quantities of electricity that

vary depending on sunshine and wind, it is critical

that other system resources be available at short

notice to retain the balance between supply and

demand when the sun is blocked or the wind stops

blowing. By allowing market operators to reduce

demand when needed, demand response can facilitate

high levels of intermittent generation, as it has in

countries with high levels of renewable sources like

Denmark. See, e.g., Benjamin Biegel et al., Value of

Flexible Consumption in the Electricity Markets, 66

Energy 354, 355 (Mar. 2014). See also James New-

comb et al., Distributed Energy Resources: Policy

Implications of Decentralization, 26 Electr. J. 65, 65 &

n.2 (Oct. 2013) (stating that flexible resources like

demand response are especially important with high

penetrations of variable renewable generation).

10

C. The benefits of wholesale demand re-

sponse programs cannot be replicated

by state initiatives

1. Dynamic pricing programs are still

nascent

A theoretical alternative to wholesale demand

response programs is to vary the price retail con-

sumers are charged to reflect the fluctuating cost of

producing electricity, known as dynamic pricing.

However, there are political obstacles to implement-

ing retail dynamic pricing — for example, very high

prices during peak demand periods threaten public

backlash — and it has not been widely adopted by

state regulators. Borenstein et al., supra, at 20. In

fact, under four percent of U.S. electric utility cus-

tomers were subscribed to a dynamic pricing program

in 2013. U.S. Energy Info. Admin., Annual Electric

Power Industry Report, Form EIA-861 (June 2015). In

the absence of dynamic pricing, economists widely

agree that there is a need to incorporate demand

response programs into the wholesale markets in

order to better link wholesale and retail markets and

thereby improve their performance. See, e.g., Ahmad

Faruqui et al., Fostering Economic Demand Response

in the Midwest ISO, 35 Energy 1544, 1545 (2010);

Richard N. Boisvert & Bernard F. Neenan, Social

Welfare Implications of Demand Response Programs

11

in Competitive Electricity Markets, LBNL-52530, at

ES-II (2003).° FERC has embraced this position.

2. State level demand response programs

pose significant coordination prob-

lems that prevent them from pro-

viding adequate demand response

EPSA has suggested that the D.C. Circuit deci-

sion does not have serious ramifications for the

electricity system because the “States remain free to

develop and regulate their own demand response

programs.” Br. in Opp. 3. Under state level programs,

the customer commitments that utilities and/or

aggregators obtain to reduce consumption are not

sold into the wholesale markets, and the programs

are entirely under the jurisdiction of state electricity

regulators.” If wholesale demand response programs

* Moreover, even if dynamic pricing were widely adopted,

wholesale demand response programs may still confer distinct

reliability benefits to wholesale market operators. Unlike

dynamic pricing programs, which encourage, but do not require,

customers to reduce their electricity usage, demand response

programs elicit advanced commitments to reduce consumption.

As such, they provide system operators greater certainty that

resources will be available at critical moments. Borenstein et al.,

supra, at 18-19.

* For example, Consolidated Edison of New York (ConEd), a

distribution utility, has long had demand response programs

entirely regulated by the New York State Public Service Com-

mission under which the utility pays customers to reduce their

demand at peak times, to help maintain system reliability.

Order Adopting Dynamic Load Management Filing, N.Y. Pub.

(Continued on following page)

12

were eliminated, however, state level demand re-

sponse programs could not fully replicate the benefits

that wholesale programs provide.

Balkanizing the market for demand response

resources along state lines would lead to suboptimal

provision of such resources. In multi-state ISOs or

RTOs, demand reductions within one State can bene-

fit other States by reducing wholesale prices across

the ISO/RTO footprint. If left to determine on their

own how much to reduce electricity demand, each

State will reduce only by the amount that is cost-

beneficial for it. A State will not consider the benefits

that other States enjoy from its demand reductions,

because the State will receive no compensation for

reducing electricity prices in other States and will

have to bear the full costs of the demand reductions

that it undertakes. The combination of diffuse bene-

fits and concentrated costs creates free-riding con-

cerns that would disincentive investment in demand

response. Cf. William W. Hogan, Transmission Bene-

fits and Cost Allocation 3 (May 31, 2011) (discussing

Serv. Comm’n, Case No. 14-E-0423 (June 18, 2015). These

programs currently are state level only demand response

programs because ConEd does not sell its customers’ commit-

ments to reduce power in the wholesale energy markets that are

administered by the New York Independent System Operator

(NYISO). The NYISO compensates customers for contributing to

maintaining bulk power system reliability separately. NY.

Indep. Sys. Op., Demand Response Programs, http://www.nyiso.

com/public/markets_operations/market_data/demand_response/

index.jsp (last visited July 13, 2015).

13

free-rider problems associated with the benefits and

costs of investment in electric transmission infra-

structure). See also Br. for PJM Interconnection,

L.L.C. in Support of Petitioners 31-32.

To overcome such disincentives, and achieve de-

mand reductions that mimic those provided through

wholesale demand response programs, the States

would need to devise a coordination mechanism

to determine both who should reduce consumption

at a given time and how to allocate the costs of

these reductions. Coordinating in this manner could

be exceedingly difficult from a practical standpoint,

especially in multi-state ISOs and RTOs, such as

PJM, which spans thirteen States and the District of

Columbia.

II. Order 745 is a Logical and Incremental

Extension of FERC’s Prior Steps to Deploy

Demand Response Resources in Whole-

sale Markets

Over the past fifteen years, as awareness of the

value of demand response resources has grown,

FERC has moved step by step to increase the contri-

bution of these resources to the wholesale markets.

Order 745 is an incremental and logical outgrowth of

these earlier efforts. The Court of Appeals’ decision

could have the sweeping effect of undoing over a

decade of FERC initiatives to remove barriers to the

participation of demand response resources in the

wholesale markets.

14

A. RTOs and ISOs took early steps to

develop demand response programs to

improve the efficient operation of the

wholesale markets

After the organized wholesale markets were

established in the late 1990s, FERC initially focused

on the design of the markets and the rules governing

access to transmission and the dispatch of supply

from power plants. Hurley et al., supra, at 19-21; Jon

Wellinghoff & David L. Morenoff, Recognizing the

Importance of Demand Response: The Second Half of

the Wholesale Electric Market Equation, 28 Energy

L.J. 389, 391 (2007). In the late 1990s and early

2000s, several ISOs and RTOs recognized that de-

mand response programs could improve the efficiency

of wholesale markets, and with FERC’s approval and

encouragement, adopted such programs. PJM, the

New York ISO, and the New England ISO were among

the earliest wholesale market operators to implement

such programs. Rahul Walawalkar et al., Evolution

and Current Status of Demand Response in Electricity

Markets: Insights from PJM and NYISO, 35 Energy

1553, 1554 (2010); Romkaew Broehm & Peter Fox-

Penner, Price-Responsive Electric Demand: A National

Necessity, Not an Option, in Electricity Pricing in

Transition 160-161 (Ahmad Faruqui & Kelly Eakin

eds., 2002).

15

B. The Western Energy Crisis prompted

FERC initiatives to encourage whole-

sale demand response

In response to the Western Energy Crisis of 2000-

2001, FERC itself initiated measures to promote de-

mand response participation in the wholesale mar-

kets. When wholesale electricity prices in California

skyrocketed and there were blackouts, FERC issued a

series of decisions to address the crisis. In one deci-

sion, FERC allowed customers to sell demand reduc-

tions in wholesale electricity transactions. Removing

Obstacles to Increased Electric Generation and Natu-

ral Gas Supply in the Western United States, 66

Fed. Reg. 15,858, 15,859, 15,861-62 (Mar. 21, 2001).

However, in allowing these transactions, FERC was

careful to include a restriction in favor of state regu-

latory authority: retail customers were only allowed

to sell such reductions, “as permitted by state laws

and regulations.” Jd. As described in Section III.B

below, this limitation, which respects state jurisdic-

tion over retail sales, has been maintained in later

FERC rulemakings on demand response.

Following the Western Energy Crisis, and elec-

tricity price increases in other regions, policy makers

recognized with new urgency the role that demand

response can play in ensuring reliable, lower-cost

electricity service. During this time period, FERC

approved additional ISO and RTO proposals to incor-

porate demand response into the wholesale markets.

PJM Interconnection, L.L.C., Order Accepting Tariff

Sheets as Modified, 99 F.E.R.C. J 61,139 (2002); PJM

16

Interconnection, L.L.C., Order Accepting Tariff Sheets

as Modified, 99 F.E.R.C. 9 61,227 (2002).

C. FERC took further steps to expand

demand response programs after Con-

gress endorsed such programs

In the Energy Policy Act of 2005, Congress

declared: “It is the policy of the United States that

time-based pricing and other forms of demand re-

sponse, whereby electricity customers are provided

with electricity price signals and the ability to benefit

by responding to them, shall be encouraged, and

unnecessary barriers to demand response shall be

eliminated.” Energy Policy Act of 2005, Pub. L. No.

109-58, § 1252(f), 119 Stat. 594, 966 (16 U.S.C.

§ 2642). Subsequently, in the Energy Independence

and Security Act of 2007, Congress required FERC to

prepare several reports on demand response. Energy

Independence and Security Act of 2007, Pub. L. No.

110-140, § 529, 121 Stat. 1492, 1664-65 (42 U.S.C.

§ 8279). That same year, FERC, referring to Congres-

sional support for demand response, authorized

demand response to provide ancillary services, and

required that transmission planning consider demand

response comparably to generation resources. Pre-

venting Undue Discrimination and Preference in

Transmission Service, 72 Fed. Reg. 12,266, 12,326,

12,378-79 (Feb. 16, 2007) (citing Energy Policy Act of

2005 § 1252(f)).

17

D. Order 719 required RTOs and ISOs to

incorporate demand response in cer-

tain markets and was not judicially

challenged

In 2008, FERC issued Order 719, which went

beyond facilitating the participation of demand

response resources in wholesale electricity markets to

require that ISOs and RTOs allow such participation,

provided certain conditions apply. For present pur-

poses, the most notable aspect of the Order was a

requirement that ISOs and RTOs permit, in certain

circumstances, aggregators to bid demand response

on behalf of retail customers directly into organized

wholesale energy markets. Wholesale Competition in

Regions with Organized Electric Markets, 73 Fed.

Reg. 64,100, 64,103 (Oct. 28, 2008); 74 Fed. Reg.

37,776, 37,777 (July 29, 2009). FERC found that

“(alggregating small retail customers into larger pools

of resources expands the amount of resources availa-

ble to the market, increases competition, helps reduce

prices to consumers and enhances reliability.” 73 Fed.

Reg. at 64,119. No one — neither the States nor indus-

try — petitioned for judicial review on the basis that

Order 719 exceeded the scope of FERC’s jurisdiction,

or challenged Order 719 in court on any ground.’

” The Indiana Utility Regulatory Commission unsuccessfully

challenged FERC’s approval of the tariff through which PJM

Interconnection implemented Order 719 in the D.C. Circuit. Jnd.

Util. Regul. Comm’n v. FERC, 668 F.3d 735 (D.C. Cir. 2012).

Indiana did not challenge Order 719 itself in this case.

18

E. Order 745 is a natural outgrowth of

FERC’s prior decisions

FERC launched the rulemaking that culminated

in Order 745 in 2010, after finding that “demand

response providers” still continued to “play a small

role in wholesale markets,” despite the agency's prior

efforts. Demand Response Compensation in Orga-

nized Wholesale Energy Markets, 75 Fed. Reg. 15,362,

15,365 (proposed Mar. 29, 2010). FERC was con-

cerned that “the existing and varying levels of com-

pensation” across the ISOs and RTOs “generally fail

to reflect the marginal value of demand response

resources to ISO and RTO energy markets.” Jd. To

remedy this problem, Order 745 established a uni-

form approach for compensating demand response

resources in the wholesale energy markets in order to

send an appropriately robust price signal of the value

of such resources. Demand Response Compensation in

Organized Wholesale Energy Markets, 76 Fed. Reg.

16,658, 16,668-69 (Mar. 24, 2011).

Order 745 is a logical outgrowth of prior FERC

initiatives to enhance demand response participation

in wholesale markets. FERC has long reviewed the

compensation formulas used by ISOs and RTOs to

pay for demand response resources as part of its duty

to review ISO and RTO tariffs. See, e.g., PJM Inter-

connection, L.L.C., Order Accepting and Suspending

Filing, 92 F.E.R.C. 9 61,059 (2000) (order approving

2000 pilot PJM program). What FERC did in

Order 745 was simply to prescribe a uniform formula

for compensating demand response as part of the

19

agency's step-by-step efforts to enhance the role of

demand response in the wholesale markets. 75 Fed.

Reg. at 15,364-65 (noting that the Commission has

“previously allowed a system-by-system approach

whereby each RTO and ISO has developed its own

compensation formula for demand response.”).

III. In its Efforts to Remove Barriers to De-

mand Response Participation in Wholesale

Markets, FERC Has Consistently Respected

State Authority

In taking steps to include demand response

resources in the wholesale markets, FERC has con-

sistently respected state authority over state level

demand response programs. This is not an instance of

an agency overreaching and intruding on state juris-

diction. See Electr. Power Supply Ass’n v. FERC, 753

F.3d 216, 233 (D.C. Cir. 2014) (Edwards, J., dissenting)

(“This is hardly the stuff of grand agency overreach.”).

A. States remain free to design and im-

plement state level demand response

programs

States remain completely free to establish and

regulate state level demand response programs,

unfettered by FERC oversight. Demand Response

Compensation in Organized Wholesale Energy Mar-

kets, 137 F.E.R.C. J 61,215, 62,302 (2011). This means

that the States can require utilities under their

jurisdiction to provide customers with payments to

20

reduce demand and can regulate the terms under

which such payments are made. States are, in fact,

mandating that utilities establish such programs.

See, e.g., Motion of the Commission to Develop Dy-

namic Load Management Programs, N.Y. Pub. Serv.

Comm’n, Case No. 14-E-0423, at 9 (Dec. 15, 2014)

(requiring all electric distribution utilities in the

State that did not already have demand response

programs to establish such programs).

B. FERC’s orders on demand response

have consistently empowered States to

prohibit retail demand response re-

sources from participating in whole-

sale markets if they wish

FERC has acted consistently to ensure that

States can keep retail customers’ demand response

out of the wholesale markets — and therefore outside

of the federal regulatory ambit — if they so choose.

As discussed above, during the Western Energy

Crisis, FERC allowed retail customers to sell demand

reductions in wholesale transactions only “as permit-

ted by state laws and regulations.” 66 Fed. Reg. at

15,859, 15,861-62. Similarly, Order 719 prohibited

wholesale market operators from accepting bids into

the energy markets from aggregators operating in

territories in which the “laws or regulations of the

relevant electric retail regulatory authority do not

permit a retail customer to participate.” 18 C.F.R.

35.28(g)1\iii). Order 745 does nothing to diminish

21

state autonomy to limit demand response participa-

tion in the wholesale markets. Jd. It merely addresses

the formula that will be used to compensate those

resources that States permit to participate in the

wholesale markets.

The right to restrict demand response resources

from participating in wholesale markets is not merely

theoretical. Numerous States have exercised this

right, including Arkansas, Indiana, Michigan, Mis-

souri, and North Carolina."

By permitting States to prohibit demand response

resources from participating in the wholesale markets,

FERC’s rulemakings on demand response provide the

States with the option of enabling demand response

resources to participate in these markets but do not

require them to do so. As such, FERC’s efforts to

boost demand response in wholesale markets offer

the States an additional regulatory tool that they can

* Ark. Code Ann. § 23-18-1004 (2014); AK Steel Corp.,

Petition for Approval of Extension of the Term to Participate in

PJM Load Response Programs, Ind. Util. Regul. Comm’n Cause

No. 43566, at 5-6 (Feb. 25, 2009); Detroit Edison Co., Request to

Initiate Investigation of Licensing Rules, and Regulations

Needed to Address the Effect of the Participation of Retail

Customers, Mich. Pub. Serv. Comm’n No. U-16020, at 4-5 (Dec.

2, 2010); In re Order Temporarily Prohibiting the Operation of

Aggregators of Retail Customers, Mo. Pub. Serv. Comm'n File

No. EW-2010-0187, at 4 (Mar. 31, 2010); Letter from Edward S.

Finley, Chairman, N.C. Util. Comm’n, to Cheryl A. LaFleur,

FERC Acting Chairman, FERC Docket No. RM10-17-000 (Aug.

1, 2014).

22

call on or not. In fact, a number of States have em-

braced wholesale demand response programs. For

instance, Maryland authorizes its state-regulated

utilities to sell aggregated demand response commit-

ments into FERC-regulated wholesale markets and

use the proceeds to help reduce electricity consump-

tion in the State.” If the D.C. Circuit decision stands,

it could deprive States that wish to allow or require

demand response resources to participate in whole-

sale markets of the option of doing so.

C. States did not seek judicial review of

Order 745 on jurisdictional grounds

The strongest indication that FERC has respected

state authority in working to increase the efficiency of

the wholesale markets by incorporating demand

response programs is the paucity of state claims that

Order 745 impermissibly intrudes upon their juris-

diction. In the rulemaking proceedings leading up to

* Notably, in the lead-up to the promulgation of Order 745,

the Governor of Maryland wrote to then-FERC Chairman Jon

Wellinghoff to support FERC’s proposal, and emphasized the

importance of the revenues “earned by providing demand

response services to [the] PJM” wholesale market. Letter from

Martin O”’Malley, Governor, Md., to Jon Wellinghoff, FERC

Chairman, FERC Docket No. RM10-17-000 (May 12, 2010). See

Comments of Md. Pub. Serv. Comm'n 4, FERC Docket No. ER15-

852-000 (Feb. 13, 2015) (stating that PJM demand response

programs help to achieve demand reduction goals, defray as

much as $66.5 million of costs for Maryland EmPOWER pro-

grams, and cover twenty-eight percent of program costs).

23

Order 745 FERC received comments from a total of

ten state electricity regulators and regional organiza-

tions of state regulators. None of these state com-

menters challenged FERC’s authority to establish a

formula for compensating demand response in whole-

sale energy markets as interfering with state juris-

diction.

Only one state electricity regulator, the Califor-

nia Public Utilities Commission (CPUC), petitioned

for judicial review of Order 745. It did not argue that

the Order unlawfully intrudes on state jurisdiction

under the Federal Power Act. Instead, it challenged a

specific component of the compensation formula that

FERC adopted — the provisions governing the alloca-

tion of the costs for demand response participation in

the wholesale energy markets. Cal. Indep. Sys. Op.

Co. & Cal. Pub. Util’s Comm. C.A. Br. 1-3. CPUC has

since explicitly affirmed that FERC has jurisdiction

to establish a compensation formula for demand

response in wholesale markets. Joint State Br. in

Support of Cert. Br. 8.

Since the Court of Appeals vacated Order 745,

some States have stated that they agree with its

* California Public Utilities Commission, Delaware Public

Service Commission, Illinois Commerce Commission, Maryland

Public Service Commission, New Jersey Board of Public Utilities,

New York State Public Service Commission, Public Utilities Com-

mission of Ohio, Pennsylvania Public Utility Commission, New

England Conference of Public Utilities Commissioners, and

Organization of MISO States.

24

holding that FERC’s attempt to establish a formula

for compensating demand response in wholesale ener-

gy markets unlawfully intrudes upon state jurisdic-

tion." However, the significance of these belated

statements is undercut by the failure of these — or

any — States to make similar arguments during the

proceeding that generated Order 745 or to seek

judicial review on this basis after the Order was

promulgated. Moreover, these States, like others,

retain the ability to insulate their state level demand

response programs from FERC’s reach and to prohibit

participation from their States in wholesale demand

response programs, as discussed above.

" See Petition for Writ of Certiorari at 34 n.9, FERC v.

Electr. Power Supply Ass’n, No. 14-840 (Jan. 15, 2015) (“After

FERC filed its rehearing petition, the Louisiana Public Service

Commission filed a letter in the court of appeals in support of

the challenge to FERC’s authority.”); Letter from Edward S.

Finley, Chairman, N.C. Util. Comm’n, to Cheryl A. LaFleur,

FERC Acting Chairman, FERC Docket No. RM10-17-000 (Aug.

1, 2014) (“Although not a party to this appeal [for rehearing en

bane of the D.C. Circuit decision], the NCUC has previously

determined .. that North Carolina retail customers cannot

lawfully participate in PJM’s demand response programs,

reasoning in part that demand response is a retail matter left to

the exclusive jurisdiction of the States.”).

25

IV. EPSA’s Attack on FERC’s Jurisdiction in

This Case is Flatly Inconsistent with the

Position it Previously Asserted in FERC

Administrative Proceedings

In a 2009 proceeding concerning the compensa-

tion formula for demand response resources in the

PJM region, EPSA made jurisdictional arguments

that are diametrically opposed to its present position.

In that case, a group of demand response supporters

opposed EPSA’s proposed compensation formula on

the grounds that it would intrude upon state juris-

diction over retail rates. Protest of Demand Response

Supporters 12-14, FERC Docket No. EL09-68-000

(Sep. 16, 2009). In response, EPSA argued that FERC

has “exclusive jurisdiction” to regulate the rules gov-

erning demand response participation in the whole-

sale electricity markets. Answer of Electr. Power

Supply Ass’n 16, FERC Docket No. EL09-68-000 (Oct.

30, 2009). EPSA further argued that this authority

“extends to reviewing the underlying components of

such rules [because] [iJt is only in this way that

the Commission will be able to carry out its statutory

mandate to ensure the justness and reasonableness of

wholesale rates.” Jd. at 15. EPSA’s prior position

demonstrates that its current jurisdictional argument

is contrived. What EPSA opposes in this case is the

compensation formula FERC has set.

4

26

CONCLUSION

For the foregoing reasons, the Court should

reverse the decision of the Court of Appeals on

FERC’s jurisdiction.

Respectfully submitted,

RICHARD B. STEWART*

DANIELLE SPIEGEL-FELD

GUARINI CENTER ON ENVIRONMENTAL,

ENERGY AND LAND USE LAw

NEW YORK UNIVERSITY SCHOOL OF LAW

139 MacDougal St., 3rd Floor

New York, NY 10012

(212) 998-6146

rbs1@nyu.edu

*Counsel of Record