# 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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## Record

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

## Text

[reo

|

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0317%3A31. Public record. Not legal advice.