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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0317%3A37

## Record

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

## Text

Supreme Court, U.S. —
FILED

JUL 16 2015

Nos. 14-840 & 14-841 OFFICE OF THE CLERK

ee oo

IN THE
Supreme Court of the United States

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,
AND

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 Circuit

BRIEF OF NRG ENERGY, INC.
AS AMICUS CURIAE IN SUPPORT OF
NEITHER PARTY
ABRAHAM H. SILVERMAN AARON M. PANNER
CORTNEY MADEA Counsel of Record
MONICA M. BERRY BRADLEY FE. OPPENHEIMER
NRG ENERGY, INC. KELLOGG, HUBER, HANSEN,
211 Carnegie Center TODD, EVANS & FIGEL,
Princeton, New Jersey 08540 P.L.L.C.
(609) 524-4696 1615 M Street, N.W.
Suite 400
Washington, D.C. 20036
(202) 326-7900
July 16, 2015 (apanner@khhte.com)

TABLE OF CONTENTS

Page
TAR OF AULT ERUtes CLIO cece ccccessesscscessssesccsssscesscees il
INTEREST OF AMICUS CURIAE.........................0.4. l
SUMMARY OF ARGUMENT ........................00.cceeeeeees 4
TET iikinicidisccnipanatpenieceinnnsennepantatimienniabenbinimiineiatia 6

I. FERC HAS JURISDICTION OVER
DEMAND RESPONSE PARTICIPAT-
ING IN WHOLESALE MARKETS AS A
PRACTICE AFFECTING WHOLESALE

A. A Well-Designed Demand Response
Program Is Vital to the Efficient
Operation of Wholesale Markets and
the Establishment of Just and Rea-
sonable Wholesale Rates .........................6+- 6

B. The D.C. Circuit’s Holding Improp-
erly Restricts FERC’s Jurisdiction

over Practices and Regulations That
Affect the Wholesale Market.................... 10

1. FERC Has Jurisdiction over the
Participation of Demand Response
Resources in the Wholesale
STE SRR: Bee ne eae a 10

2. Incidental Effects on Retail
Markets Do Not Eliminate
py 12

3. Denying FERC Jurisdiction over
Wholesale Demand Response
Creates Substantial Regulatory
I ihasdsieseehateibenspaitcaicaintielimessdanasbdaetialiiadaaiieistics 16

|

a. The D.C. Circuit’s decision
creates regulatory inconsisten-
cies that threaten development
and use of innovative technol-

b. The D.C. Circuit’s decision
will lead to many economic
and operational inefficiencies........ 20

Il. FERC’S DECISION TO SET THE
PRICE FOR DEMAND RESPONSE
RESOURCES AT LMP SUBJECT TO
A “NET BENEFITS” TEST WAS

A. Order 745 Incentivizes Demand
Response Resources More Than
Conventional Generation Resources,
Causing an Uneconomic Mix of
EERE ey Seen Ee a ae a 23

B. Order 745 Discriminates Between
Behind-the-Meter and _ In-Front-of-
the-Meter Generators .............................. 25

C. FERC Offered No Adequate Justi-
fication for the Distortions Created
TTT ih deicantiredenieeateepcenininnimalnnminnadin 28

| ___ aN Na nN SR TET a 30

ii

TABLE OF AUTHORITIES
Page
CASES
California Indep. Sys. Operator v. FERC,
S73 F.Bb SBS D.C. Cie. BODE) ...ccccccceccccccsccccoccesss 11
Chevron U.S.A. Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837 (1984)............0cccceeeeee 12
City of Arlington v. FCC, 133 S. Ct. 1863
ETE RES EE IN LS Derek de en oe 12, 16
FPC v. Southern California Edison Co.,
Ss Sy IIE ciiniininncieinncinionadicebicamnnnniiiiadoetiiens 15

Morgan Stanley Capital Grp. Inc. v. Public
Util. Dist. No. 1 of Snohomish Cnty., 554
i adiinembaiind 20

New York v. FERC, 535 U.S. 1 (2002)...... 11, 15, 16, 18

Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591
ST ide cla tactaspaenadabieacennineaeiitaaaanneeeinieiatl 13

PPL EnergyPlus, LLC v. Nazarian, 753 F.3d
467 (4th Cir. 2014), petitions for cert. pend-
ing, No. 14-614 (filed Nov. 25, 2014) & No.
34-GES GIOe ROU. BB, BID) ...nccccccccccececcccecesccceess 21

PPL EnergyPlus, LLC v. Solomon, 766 F.3d
241 (3d Cir. 2014), petitions for cert. pend-
ing, No. 14-634 (filed Nov. 26, 2014) & No.
14-694 (filed Dec. 10, 2014)................c.ccccccscccesees 21

1V
ADMINISTRATIVE DECISIONS

Order 719, Wholesale Competition in Regions
with Organized Electric Markets, 125
FERC 4 61,071 (2008), aff'd as modified on
denial of reh’g, Order 719-A, 128 FERC

ER TEI Recast ae 9, 10, 29
PJM Indus. Customer Coal. v. PJM Intercon-

nection LLC, 121 FERC 4 61,315 (2007)............ 24
PJM Interconnection, LLC, 99 FERC 4 61,227

EES AERP SERPS ay Oe Oe aIY SNE Nd ON ee 29

STATUTES, REGULATIONS, AND RULES
Federal Power Act, 16 U.S.C. § 791a et seq. ....passim

§ 201(b), 16 U.S.C. § 824(b).......... 10, 12, 15, 16, 18

§ 201(b)(1), 16 U.S.C. § 824(b)(1) «0... 10, 11,

12, 14, 16, 18

tf Lg eee 11, 15, 18

§ 205(a), 16 U.S.C. § 824d(a)...................0 5, 10, 11

oy OF | eT Een 11, 15, 18

§ 206(a), 16 U.S.C. § 824e(a) .......... 5, 11, 12, 13, 22

Natural Gas Act, 15 U.S.C. § 717 et seq. ................. 13

te Oe IR i cccccccecevnementirnenssnsenens 15, 24
Sup. Ct. R.:

I 1

SHEERS RAS eae Se a ee aa ae l

v

ADMINISTRATIVE MATERIALS

Final Rule, Market-Based Rates for Wholesale
Sales of Electric Energy, Capacity and
Ancillary Services by Public Utilities, 72
Fed. Reg. 39,904 (July 20, 2007)............0........00.

Office of Enforcement, Federal Energy Regu-
latory Comm’n, Energy Primer: A Hand-
book of Energy Market Basics (July 2012),
http://www.ferc.gov/market-oversight/guide/
EE EG SE 6, 10,

U.S. Dep’t of Energy:

Benefits of Demand Response in Electricity
Markets and Recommendations for Achiev-
ing Them (Feb. 2006), http://energy.gov/
sites/prod/files/oeprod/DocumentsandMedia/
DOE_Benefits_of_Demand_Response_in_

Electricity_Markets_and_Recommendations_
for_Achieving_Them_Report_to_Congress.

EET Se aso Pea ed Pee ee ARCO 9,

How Microgrids Work (June 17, 2014),
http://energy.gov/articles/how-microgrids-
EER AA ate EASE SA SS meet 2. PRES GAN Se eee

16

12

OTHER MATERIALS
William W. Hogan:

Demand Response Pricing in Organized
Wholesale Markets (May 13, 2010),
http://www.hks.harvard.edu/fs/whogan/
Hogan_IRC_DR_051310.pdf ......................00000000

Implications for Consumers of the NOPR’s
Proposal to Pay the LMP for All Demand
Response (May 12, 2010), http://www.hks.
harvard.edu/fs/whogan/Hogan EPSA_NOPR_
A Aa a ie RRS eR

Intl Energy Agency, Empowering Consumer
Choice in Electricity Markets (Oct. 2011),
http://www.iea.org/publications/free
publications/publication/empower.pdf.... 8-9, 11,

The Brattle Group, The Power of Five Percent
(May 16, 2007), http://www.brattle.com/
system/publications/pdfs/000/004/740/
original/The_Power_of_Five_Percent_May_

2007. pdf?1378772126 ......c.cccecccsssesessesecessesesseseseees

Xiyue Zhang & K. Max Zhang, Demand
Response, Behind-the-Meter Generation and
Air Quality, 49 Envtl. Sci. & Tech. 1260
(2015), http://energy.mae.cornell.edu/PDF/
Demand%20Response, %20Behind-the-
Meter%20Generation%20and%20A1r%20
EEE SL SS SAN a ce

12

INTEREST OF AMICUS CURIAE'

Amicus NRG Energy, Inc. (“NRG”) is one of the
Nation’s largest providers of wholesale generation,
with more than 52,000 megawatts representing 4.5%
of the Nation’s total generation capacity. NRG’s
resources include coal-fired and natural gas-fired
power plants, a nuclear facility, and utility-scale wind
and solar generation facilities. NRG also manages
several thousand megawatts of demand response in
the organized electricity markets.

NRG sells power into the wholesale power markets
from both its traditional generating facilities and,
increasingly, “distributed energy resources” — small-

1 Pursuant to Supreme Court Rule 37.6, counsel for amicus
represent that they authored this brief in its entirety and that
none of the parties or their counsel, nor any other person or
entity other than amicus or its counsel, made a monetary con-
tribution intended to fund the preparation or submission of this
brief. Pursuant to Rule 37.3(a), counsel for amicus represent
that all parties have consented to (or not objected to) the filing of
this brief. The non-federal petitioners have filed letters grant-
ing blanket consent to the filing of amicus briefs; respondents
American Public Power Association, Edison Electric Institute,
Electric Power Supply Association, Lower Mount Bethel Energy,
LLC, National Rural Electric Cooperative Association, Old
Dominion Electric Cooperative, PJM Interconnection, LLC,
PJM Power Providers Group, PPL Brunner Island, LLC,
PPL Electric Utilities Corporation, PPL EnergyPlus, LLC,
PPL Holtwood, LLC, PPL Maine, LLC, PPL Martins Creek, LLC,
PPL Montour, LLC, and PPL Susquehanna, LLC have filed
letters granting blanket consent to the filing of amicus briefs.
Respondents Pennsylvania Public Utility Commission, PSEG
Energy Resources & Trade LLC, PSEG Power LLC, and Public
Service Electric and Gas Company have stated that they do not
object to the filing of NRG’s amicus brief, and those written
notices are being filed contemporaneously with the brief.
Written consents from petitioner Federal Energy Regulatory
Commission and the remaining respondents also are being filed
contemporaneously with the brief.

2

scale power sources that can be aggregated to pro-
vide power necessary to meet consumer demand. In
addition, NRG sells electricity at retail to more than
2.8 million customers in States that have restruc-
tured their retail regimes to allow customers to
choose a competitive energy supplier.

Although demand response competes directly with
NRG’s legacy generation facilities, a large part of
NRG’s future is likely to be in distributed energy
resources including renewable generation facilities
like rooftop selar, energy storage, efficient combined
heat and power facilities, electrical vehicle charging
services, smart home energy management systems,
sophisticated microgrid solutions, and traditional
demand response services. NRG utilizes various
combinations of these technologies to provide ser-
vices to retail customers. NRG also utilizes these
technologies to supply reliable energy to the whole-
sale market and to provide critical “ancillary ser-
vices” that support the stability and security of the
electricity supply. These technologies allow consum-
ers to conserve energy, reduce their dependence on
the electric grid, and realize substantial cost savings.
Demand response, in particular, can significantly
reduce the environmental impact of traditional
sources of energy by harnessing market incentives
and consumer choice, while enhancing overall] grid
reliability. The benefits of demand response thus
extend not just to the individual consumers who
decide to sign up for a demand response program, but
also to the market as a whole and society at large.

To deploy capital and innovate effectively, compa-
nies like NRG make investments on both the supply
and demand sides of the energy value chain in
wholesale markets that cross state lines. Subjecting

3

investments directed to wholesale market participa-
tion to a balkanized patchwork of state* programs
would have a chilling effect on capital deployment
and frustrate innovation. Moreover, federal! jurisdic-
tion over demand response participating in the
wholesale market ensures, among other things, that
(i) state regulations do not undermine the sound
functioning of wholesale markets; (ii) federal regula-
tors can protect participants in the distributed
wholesale energy markets from programs that favor
incumbent monopoly utilities; and (iii) demand-side
resources are properly incorporated into the efficient
wholesale procurement of energy. Sound federal
regulation of demand response resources will ensure
that demand response and generation resources are
treated together, on a nondiscriminatory basis within
the same regulatory and jurisdictional framework,
promoting needed investment and benefiting the
public interest.

For these reasons and as explained below, NRG
agrees with petitioners that the Federal Energy Reg-
ulatory Commission (“FERC”) must have the author-
ity to regulate participation of demand response in
wholesale markets in order to fulfill its statutory
mandate to ensure that wholesale rates are just and
reasonable and to eliminate undue discrimination
and preferences.

NRG is one of the largest members of respondent
Electric Power Supply Association (“EPSA”). NRG
disagrees with EPSA that participation of demand
response resources in wholesale markets can be
separated from other aspects of wholesale markets
subject to FERC’s regulatory authority. NRG does,
however, agree with EPSA’s challenge to the level
of compensation set in Order 745, which creates an

4

inefficient incentive to curtail electricity consumption
when continued use without the incentive would be
economic (i.e., when the value to the customer of
consuming electricity would exceed the marginal cost
of producing it). NRG therefore agrees with EPSA
that FERC’s order was arbitrary and capricious, and
that respondents should prevail on the second ques-
tion presented.

SUMMARY OF ARGUMENT

1A. Electricity markets are unique because elec-
tricity generally cannot be stored economically in
bulk. As a result, the available supply of electricity
must closely match consumption in real time. And
because the least costly generation resources are
typically deployed first, the wholesale cost of energy
can rise sharply during periods of peak demand.
Power consumption generally does not respond to
increases in the wholesale cost of electricity because
retail rates often are fixed or do not vary with
changes in the cost of wholesale electricity, even
when the wholesale cost increases sharply in excess
of retail rates. Demand response programs can
provide one remedy in wholesale electricity markets
for this disequilibrium in electricity pricing. To
operate effectively, these programs must give energy
consumers appropriate financial incentives to reduce
their electricity usage voluntarily, based on whole-
sale market price signals.

B. The Federal Energy Regulatory Commission
(“FERC”) reasonably determined that participation of
demand response resources in wholesale markets is
important to achieving just, reasonable, and non-
discriminatory wholesale rates. The Federal Power
Act (“FPA”) grants FERC jurisdiction over wholesale
electricity rates and practices that affect those rates.

5

See 16 U.S.C. §§ 824d(a), 824e(a). FERC’s demand
response program, which operates within ‘wholesale
markets, has a direct effect on wholesale rates.
Incidental effects on retail markets do not deprive
FERC of jurisdiction. Further, although the FPA
reserves to States jurisdiction over retail] “sales” of
electricity, FERC reasonably determined that refrain-
ing from consumption does not constitute a “sale”
of electricity. Denying FERC jurisdiction over the
participation of demand response resources in whole-
sale markets would undermine FERC’s ability to
carry out its core statutory obligation of ensuring just
and reasonable wholesale rates.

II. Although FERC correctly determined that
wholesale demand response programs are integral to
ensuring just and reasonable rates, the court of ap-
peals was correct that FERC’s decision to set demand
response compensation at the “locational marginal
price” (“LMP”), subject to a “net benefits” test, cannot
withstand review. FERC’s pricing decision creates
a de facto subsidy, preferring demand response
resources over generation resources. FERC’s rate
also favors behind-the-meter generation installed
by customers over otherwise identical generation
resources on the grid. The pricing policy adopted in
the order is thus arbitrary and capricious and vio-
lates the FPA’s prohibition on undue discrimination
or preference.

6

ARGUMENT

I. FERC HAS JURISDICTION OVER DEMAND
RESPONSE PARTICIPATING IN WHOLE-
SALE MARKETS AS A PRACTICE AFFECT-
ING WHOLESALE RATES

A. A Well-Designed Demand Response Pro-
gram Is Vital to the Efficient Operation of
Wholesale Markets and the Establishment
of Just and Reasonable Wholesale Rates

Demand response provides consumers with the
ability and the incentive to reduce their consumption
of electricity in response to high wholesale prices.
But these benefits can be fully realized only if demand
response is integrated into wholesale markets, which
can only be accomplished under FERC’s jurisdiction.

Several features of the electricity market make the
reliable provision of clean, low-cost electricity at just
and reasonable rates especially challenging at times
of peak demand. Electricity cannot be economically
stored in appreciable quantities, so available supply
(generation) and demand (load) must balance in real
time. See Office of Enforcement, FERC, Energy
Primer: A Handbook of Energy Market Basics 38
(July 2012) (“Energy Primer’), http://www.ferc.gov/
market-oversight/guide/energy-primer.pdf. When
demand is highest, the highest cost generation
resources are called into production, leading to sharp
increases in wholesale prices. In addition, if genera-
tion or transmission capacity falls short of high
demand levels, the grid operator is required to take
a series of steps to limit the negative consequences,
starting with voltage reductions or “brownouts” and
ending, in more severe cases, with load shedding or
“rotating blackouts” to restore balance. If these
measures to reduce load to meet available supply are

7

not successful, uncontrolled widespread blackouts
may result. ;

Matching supply and demand in real time is made
more difficult because consumers’ demand for elec-
tricity generally does not respond to wholesale prices.
In ordinary markets, consumers buy a product if the
value they receive from using it exceeds its price but
not otherwise. When price reflects the marginal cost
of production — as it does in well-functioning whole-
sale electricity markets — this ensures an efficient
use of resources, because consumption always creates
more value than the cost of the inputs to production.
But retail electric rates typically do not adjust in real
time to reflect changes in wholesale prices. Retail
customers may continue to consume electricity even
when the marginal cost of electricity production
exceeds not only the retail price but also the benefits
of consumption. This leads to higher than optimal
consumption and higher than optimal wholesale
prices.

Well-designed demand response programs can
address this problem and approximate the efficient
functioning of normal markets by supplying the price
signals that are otherwise missing. Demand response
payments provide an incentive for consumers to
choose to forgo consumption when those payments,
combined with any savings from forgone retail
consumption, exceed the benefit of consuming the
electricity.?

2 As an example, suppose the locational marginal price
(“LMP”) — that is, the marginal cost of generating electricity at
wholesale — rises to $90 per megawatt-hour (MWh), while a cus-
tomer’s fixed retail generation rate is $50/MWh. The customer
in that case does not receive price signals reflecting the actual
costs of producing electricity. If, however, the customer is
offered an additional $40 to curtail consumption, then the total

8

Moreover, when demand adequately responds to
price signals reflecting the actual marginal cost of
generating electricity, peak wholesale prices are
lower and costly spikes in wholesale pricing can be
mitigated. Demand response can thus provide signif-
icant increases in economic efficiency and other
benefits to the wholesale market. Those benefits
flow through to other retail customers in terms of
both lower prices and increased reliability — benefits
that are in addition to the savings reaped by individ-
ual customers who participate in demand response
programs. See FERC App. 79a-80a, 4 33.

Over the long term, the savings achieved from
avoiding investments in generation resources that
would otherwise be needed to meet occasional periods
of peak demand free up capital for investment in
other, more valuable products and services, including
innovative technologies on both the wholesale and
retail sides of the electricity market. See The Brattle
Group, The Power of Five Percent 5-6 (May 16, 2007)
(estimating that a 5% overall peak load reduction
through demand response produces $5-10 billion per
year in short-term benefits and another $3 billion per
year in long-run benefits), http://www.brattle.com/
system/publications/pdfs/000/004/740/original/The __
Power_of_Five_Percent_May_2007.pdf?1378772126;
Int'l Energy Agency, Empowering Consumer Choice
in Electricity Markets 16 (Oct. 2011) (“IEA Report”)
(explaining that, in the European electricity grid, with-
out demand response, the ten peak load hours in a
year would require approximately seven gigawatts of
installed capacity, representing 1.7% of total capacity),

financial incentives offered to the customer (a total of $90 in
savings and incentive payments) mirror the costs of generating
that power at wholesale.

9

http://www.iea.org/publications/freepublications/
publication/empower.pdf. :

Demand response also provides additional advan-
tages that benefit society at large. It can reduce
pollution by eliminating the need to use the least
efficient, and generally most polluting, peaking
units. See FERC App. 79a-80a, 9 33. It can also
improve the reliability of the entire electric system by
providing a mechanism to reduce usage appreciably
and balance the grid on short notice. See U.S. Dep’t
of Energy, Benefits of Demand Response in Electricity
Markets and Recommendations for Achieving Them
28 (Feb. 2006) (“DOE Report”), hitp://energy.gov/sites/
prod/files/oeprod/DocumentsandMedia/DOE_Benefits_
of Demand_Response_in_Electricity_Markets_and_
Recommendations_for_Achieving Them_Report_to_
Congress.pdf. Distributed resources, including demand
response resources, can be quickly deployed, allowing
grid operators to address overloads on the bulk
power system that could lead to uncontrolled black-
outs. See id. at 8. Many of the transmission con-
straints, if solved by installing new central-station
generating facilities or new transmission lines, could
take years to address.

To maximize these benefits, demand response
resources must be integrated into the wholesale
market: participation in the wholesale market
increases competition with traditional generators,
lowers wholesale prices, and helps balance wholesale
supply and demand. See FERC App. 59a-61a, § 10.
For several years, providers of demand response
resources have been permitted to bid those resources
into next-day and real-time wholesale energy
markets operated by independent system operators
(“ISOs”) and regional transmission organizations
(“RTOs”). Under FERC Order 719, issued in 2008,

10

“dispatchable” demand resources — that is, those that
can be verifiably called upon to curtail consumption
from a measurable baseline, see Energy Primer 47 —
can be bid directly into the wholesale market. Bids
may be placed by the end-user itself if the end-user’s
electricity loads are significant enough — for example,
a steel mill — or by an aggregator that can place a
bid on behalf of a collection of smaller users, such
as large retail establishments or office buildings.
See generally Order 719, Wholesale Competition in
Regions with Organized Electric Markets, 125 FERC
§ 61,071 (2008), aff'd as modified on denial of reh’g,
Order 719-A, 128 FERC 4 61,059 (2009).

B. The D.C. Circuit’s Holding Improperly Re-
stricts FERC’s Jurisdiction over Practices
and Regulations That Affect the Whole-
sale Market

Contrary to the D.C. Circuit’s decision, authority to
regulate sales of demand response resources in the
wholesale market falls scuarely within the agency's
jurisdiction to establish “rules and regulations affect-
ing or pertaining” to wholesale sales. 16 U.S.C.
§ 824d(a). Furthermore, because FERC reasonably
determined that sales of demand response are not
“sale[s] of electric energy” that are outside of FERC’s
regulatory authority under § 201(b) of the FPA, id.
§ 824(b)(1), nothing in the FPA restricts FERC’s
jurisdiction over the participation of demand response
resources in wholesale markets.

1. FERC Has Jurisdiction over the Participa-
tion of Demand Response Resources in the
Wholesale Market

Section 201(b) of the FPA gives FERC jurisdiction
over “the sale of electric energy at wholesale,” while
denying FERC jurisdiction over “any other sale of

11

electric energy.” 16 U.S.C. § 824(b)(1). Sections 205
and 206 further extend FERC jurisdiction to “rates
and charges made for or in connection with the
transmission or sale of electric energy subject to the
jurisdiction of [FERC],” including “regulation[s] for]
practice[s] affecting such rate[s].” Id. §§ 824d(a),
824e(a); see also New York v. FERC, 535 U.S. 1, 16-
17 (2002). This “affecting” jurisdiction permits FERC
to regulate those practices that directly affect whole-
sale rates. See California Indep. Sys. Operator uv.
FERC, 372 F.3d 395, 403 (D.C. Cir. 2004) (“[S]ection
206’s empowering of the Commission to assess the
justness and reasonableness of practices affecting
rates of electric utilities is limited to those methods
or ways of doing things on the part of the utility that
directly affect the rate or are closely related to the
rate, not all those remote things beyond the rate
structure that might in some sense indirectly or
ultimately do so.”).

Demand response and distributed energy resources
affect wholesale rates directly. Wholesale electricity
markets employ elaborate mechanisms to determine
the exact point where the supply and demand curves
cross. Small changes in supply or demand can cause
large swings in wholesale price. See JEA Report 15-
16. As FERC noted, the wholesale market participa-
tion of demand response resources is largely identical
to the participation of traditional generation. Like
traditional generation, demand response resources
can participate in capacity and ancillary markets,
see FERC App. 99a, 4 59 n.126, and can be used to
balance generation and load, see id. at 70a-71a, § 21.
These roles are central to the efficient operation of
the wholesale market. See id. at 95a-98a, 99] 55-57.
Wholesale market participation of demand response
resources can reduce wholesale energy costs by

12

hundreds of millions of dollars over the course of a
year because wholesale demand response resources
can effectively — and substantially — moderate peak
pricing in wholesale markets. See JEA Report 16; see
also DOE Report 37 (observing that, “even in regional
markets,” demand response can produce a cumula-

tive wholesale price reduction “in the billions of
dollars”).

Rules governing the terms under which demand
response and distributed energy resources are
authorized to compete with generation resources in
wholesale markets thus “affect[]” wholesale rates
and charges quite directly. 16 U.S.C. § 824e(a).
When FERC concluded that Order 745 was within its
jurisdiction, see FERC App. 137a, 4 112 (“[Djemand
response in organized wholesale energy markets
directly affects wholesale rates.”), it was acting
within its authority. And, even if that conclusion
were subject to debate, it shculd be beyond dispute
that FERC’s conclusion to that effect was reasonable
and therefore lawful. See City of Arlington v. FCC,
133 S. Ct. 1863, 1868, 1874-75 (2013); Chevron U.S.A.
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842-44 (1984).

2. Incidental Effects on Retail Markets Do
Not Eliminate FERC’s Jurisdiction

While granting FERC jurisdiction over sales of
electricity at wholesale, §201(b) also reserves to
States jurisdiction over “any other sale of electric
energy. 16 U.S.C. § 824(b)(1) (emphasis added).
The D.C. Circuit, however, improperly equated retail
sales with the retail market. See FERC App. ila
(“Demand response — simply put — is part of the
retail market. It involves retail customers, their
decision whether to purchase at retail, and the levels
of retail electricity consumption.”). But § 201(b)’s

13

restriction on FERC jurisdiction is more focused than
the D.C. Circuit majority’s interpretation.

The retail market includes the universe of energy
alternatives and choices available to customers seek-
ing to control their own energy consumption and
production decisions. The vast majority of those op-
tions are not final sales of electricity from the grid to
the consumer of that electricity of the type committed
exclusively to state jurisdiction. Examples include
customer-owned solar panels or back-up generators,
combined heat and power facilities, smart thermo-
stats, and other devices used to manage energy in
the customer’s home or facility more efficiently. All
of these options available to customers interact with
and may affect their consumption of retail electricity,
but the FPA does not assign them exclusively to state
jurisdiction, because none is a retail “sale of electric
energy. Notably, while the FPA denies FERC juris-
diction over “any sale of electric energy” other
than wholesale sales, it does not broadly reserve to
States exclusive jurisdiction over any practices that
might affect the retail market. On the contrary,
the FPA explicitly grants FERC jurisdiction over
rules and regulations affecting wholesale rates and
charges, irrespective of the indirect impact on retail
markets. See 16 U.S.C. § 824e(a).

3 Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591 (2015), does not
shed light on the question presented here. This Court there
held that a state antitrust suit was not preempted by the Natu-
ral Gas Act -- a close analog to the FPA — because the suit was
aimed at practices affecting retail rates. Id. at 1599-600. The
Court did not suggest that FERC lacked authority to regulate
the same practices to the extent they affect wholesale prices.
And regulation of demand response participation in wholesale
markets does not regulate retail electricity rates.

14

Although Order 745 involves compensation that
may be paid to retail customers who have entered
the wholesale market, FERC determined that cus-
tomers’ decisions not to purchase electricity are not
“other sale[s] of electric energy” that are carved out
from FERC jurisdiction.4 That determination was
reasonable, particularly when considering the com-
plex and interdependent interactions that take place
in electricity markets. When a customer elects to
install a micro-turbine in the basement or solar panels
on the roof, or simply to reduce consumption during
peak periods, it eliminates the need to purchase that
amount of energy from its retail provider. As FERC
recognized in Order 745-A, at a minimum, it is
ambiguous whether forbearing from purchasing elec-
tricity at retail involves a retail sale of electric energy
jurisdictionally reserved to States. FERC App. 199a,
432. Faced with that ambiguity, FERC reasonably
concluded that load reduction is not a retail sale and
that § 201(b)(1) therefore does not speak to FERC’s
authority to regulate demand response participation
in the wholesale market. As Judge Edwards explained:

The statute, to my mind, is ambiguous regard-
ing whether forgone consumption constitutes a
“sale” under section 201(b)(1). Because of this
ambiguity, the Act is also ambiguous as to
whether a rule requiring administrators of
wholesale markets to pay a specified level of

4 If a demand response customer’s decision to forgo consump-
tion is a “sale of electric energy” at all, it is properly character-
ized as a sale “at wholesale” — that is, the forgone consumption
is akin to a commodities contract wherein the purchaser may
opt to resell the contract prior to delivery, thereby liquidating
its position at the prevailing market price. See 16 U.S.C.
§ 824(b)(1) (granting FERC jurisdiction over “the sale of electric
energy at wholesale”).

15

compensation for such forgone consumption
constitutes “direct regulation” of retail sales that
would contravene the limitations of section 201.

Id. at 20a-21a. The D.C. Circuit majority erred by
allowing its reading of the ambiguous restriction on
FERC’s authority contained in § 201(b) to trump the
clear grant of jurisdiction in § 205 and § 206. Cf.
New York v. FERC, 535 U.S. at 22 (explaining that a
general policy statement “‘cannot nullify a clear and
specific grant of jurisdiction’”) (quoting FPC ov.
Southern California Edison Co., 376 U.S. 205, 215
(1964)).

Moreover, FERC reasonably concluded that, under
the FPA’s jurisdictional provisions, it could provide
an incentive for retail customers to participate in
wholesale market demand response programs, even
though there would be effects in the retail market.
All regulations in the wholesale market impact the
retail market, because changes in the price or quan-
tity of wholesale electricity eventually affect the price
that retail energy customers pay. As with any
wholesale market regulation, the effects on the retail
market in this case are indirect; FERC did not
attempt to regulate retail sales or retail rates. And
retail sales can still proceed on the same terms under
Order 745 as they could before the order was issued,
because FERC has reserved authority for state regu-
lations. See 18 C.F.R. § 35.28(g)(1)G)(A). The D.C.
Circuit erred by failing to defer to FERC’s reasonable

5 Even when electric utilities cannot change their pricing in
real time due to technological or state regulatory constraints,
they typically recover these costs through higher fixed rates or
prices, or through a variety of adjustment clauses in regulated
retail rates.

16

judgment. See City of Arlington, 133 S. Ct. at 1868,
1874-75.

3. Denying FERC Jurisdiction over Whole-
sale Demand Response Creates Substan-
tial Regulatory Gaps
a. The D.C. Circuit's decision creates

regulatory inconsistencies that threaten

development and use of innovative
technologies

The United States is experiencing a wave of
innovation in electric technologies, many of which are
deployed by retail customers but nevertheless can
contribute directly to the efficient operation of whole-
sale markets. This innovation is threatened by the
regulatory gaps created by the D.C. Circuit’s ruling.

Technologies are currently being deployed to
enable customers to participate in wholesale markets
through demand response and other programs. And,
although the court below treated a reduction of elec-
tricity purchases as a retail sale of electric energy,
many of the same devices tha‘ deliver reductions of
consumption can also operate in reverse to increase
consumption, and the movement in either or both
directions can provide ancillary services to the whole-
sale market. Some devices reduce consumption of

6 Ancillary services include operating reserves, which are
resources that can be brought online quickly to increase supply
or reduce demand to balance the grid and prevent outages, and
“regulation” or “frequency” response, which involves modulating
power generation or consumption to maintain the proper fre-
quency in the grid. See Energy Primer 59. Ancillary services fall
within FERC’s § 201(b) jurisdiction over the transmission of
electricity in interstate commerce. 16 U.S.C. § 824(b)(1); see
also New York v. FERC, 535 U.S. at 17 (“[t]here is no language
in the statute limiting FERC's transmission jurisdiction to the
wholesale market”).

17

power purchased at retail by producing power on the
customer’s premises, and, with even greatef levels of
production, can produce energy for resale in whole-
sale markets. For example, a number of NRG’s cur-
rent offerings are capable of supplying both demand
response and ancillary services, as well as electric
energy for resale. Smart the: nostats allow the own-
er to adjust temperatures automatically or remotely,
reducing and increasing power drawn from the grid
on command. This can reduce retail consumption
simply to save money, or many such thermostats
can be aggregated to provide demand response when
wholesale prices are high or to provide ancillary ser-
vices and capacity to the wholesale market. Battery-
powered electric vehicies can use charging systems
that intelligently reduce electricity consumption in
hours when wholesale prices are high and shift it to
hours when wholesale prices are lowest, while also
varying the rate of charging to provide ancillary ser-
vices from vehicles to the wholesale market. Innova-
tive combined heat and power devices can heat build-
ings while also producing supplemental! electricity
that is cheaper or cleaner than the local utility’s grid-
sourced power, which they can use either to reduce
retail purchases or to sell into wholesale markets.

As these examples show, reductions in consump-
tion are electrically equivalent to increases in pro-
duction. Both are used to produce demand response
resources used by wholesale markets. Further, many
distributed energy technologies work by increasing
and decreasing consumption, or production, or a
combination of both, and can in this way produce
ancillary services used by wholesale markets. Consid-
ering reductions in consumption to be retail sales,
as the court below did, is inconsistent with the

18

way electricity works. There is nothing inherently
“retail” or “wholesale” about electricity; similarly,
there is nothing inherently retail or wholesale about
demand response. The demand response programs
and transactions that fall within FERC’s jurisdiction
are critical to efficient functioning of wholesale mar-
kets for electric energy and the promotion of just and
reasonable rates therein; the D.C. Circuit’s insistence
that demand response is inherently a retail product
is inconsistent with and cannot change this fact.

Under the D.C. Circuit’s ruling, these services
would be regulated under different and potentially
conflicting jurisdictional regimes. Demand response
and other services that are based on reductions in
consumption from the grid would presumably be
subject to exclusive state regulation, with all the
attendant distortions and barriers to competition. See
infra Part 1.B.3.b. Sales of excess generation would
remain within FERC’s § 201(b) jurisdiction as sales
of electricity for resale. See 16 U.S.C. § 824(b)(1).
And, although it has been considered settled that
ancillary grid services also fall within FERC’s juris-
diction under §§ 201(b)(1), 205, and 206, see id.
§§ 824(b), 824d, 824e; see also New York v. FERC,
535 U.S. at 16-17, FERC’s authority over certain
ancillary services that are based on reductions in
retail consumption may be thrown into confusion.

These issues of overlapping jurisdiction become
even more complex when considered in the context
of microgrids. Microgrids are complex integrated
networks of generation and consumption devices that
can operate independent of the grid or in connection
with it. See U.S. Dep’t of Energy, How Microgrids
Work (June 17, 2014), http://energy.gov/articles/how-
microgrids-work. Depending on market conditions

19

and other considerations, microgrid customers can
precisely tailor their self-generation and outside
consumption decisions to support their energy needs
while minimizing cost. This functionality allows
microgrids to provide an array of services, including
demand response, to wholesale markets. In particu-
lar, microgrids can supply generating capacity and
ancillary services, such as frequency regulation.
Under the lower court’s ruling, however, these
generation services to the wholesale market would
be subject to FERC jurisdiction, while the actual
curtailment of consumption that allows microgrids
to perform those services would be subject to state
jurisdiction.

The D.C. Circuit’s jurisdictional ruling would likely
force regulatory agencies and courts across the
country to draw an artificial line between “pure”
reduction in retail consumption, which the States
would regulate, and power production and ancillary
services, which would remain within FERC’s juris-
diction. Yet this distinction would not be based
on physical operation of the system, the operation of
the energy markets, or even the nature of parties’
commercial transactions. Innovative technologies
continually cross such artificial lines in both direc-
tions: a controlled reduction in overall demand (that
is, demand response) is functionally equivalent to a
controlled increase in overall electricity production,
which is squarely within FERC’s jurisdiction.

The decision below thus threatens to have profound
and adverse real-world effects. Innovative technolo-
gies can provide the optimal mix of customer and
wholesale market value only if they are subject to a
coherent national regulatory regime regarding their
participation in the wholesale market. And this is

20

what Congress provided for in the FPA, when it gave
the Federal Power Commission (later FERC) juris-
diction over wholesale sales of electric energy and all
practices affecting or pertaining to the rates for those
sales. If a solar panel, battery bank, or combined
heat and power system must switch not only between
production and consumption modes but also between
regulatory regimes many times each day, their
commercial value to developers and adopters of those
technologies will be severely constrained, as will
their ability to contribute to FERC’s goals of ensur-
ing just and reasonable wholesale rates. And an ill-
defined division between state and federal authority
will deter investment. See Morgan Stanley Capital
Grp. Inc. v. Public Util. Dist. No. 1 of Snohomish
Cnty., 554 U.S. 527, 551 (2008) (recognizing that
regulatory uncertainties “‘can have a chilling effect
on investments and a seller’s willingness to enter
into long-term contracts and this, in turn, can harm
customers in the long run’”) (quoting Final Rule,
Market-Based Rates for Wholesale Sales of Electric
Energy, Capacity and Ancillary Services by Public
Utilities, 72 Fed. Reg. 39,904, 39,906 (July 20, 2007)).

b. The D.C. Circuit’s decision will lead to
many economic and operational ineffi-
ciencies

The challenges of integrating demand response and
other distributed energy resources into wholesale
electricity market operation are national in scope.
These issues therefore fall squarely within the area
that Congress authorized FERC to regulate. Indeed,
without a coherent national regulatory framework,
States will be left to attempt to solve these national
problems on a patchwork basis. They are unlikely to
be able to do so.

21

To be sure, demand response programs can be and
are offered at the retail level by state-regulated utili-
ties without being dispatched into the wholesale
market. Those retail-level programs can continue.
But several factors limit their efficacy. First, distri-
bution utility programs are typically not integrated
with the wholesale market clearing process where
demand response can efficiently compete with gener-
ation — and likely could not be under the D.C. Cir-
cuit’s decision.? Second, regulated utilities’ demand
response programs are typically focused on reducing
the distribution utility’s costs, not on improving the
efficiency and reliability of the wholesale power
system. A utility could, for instance, rely on demand
response to avoid certain investments in new local
distribution systems, but fail to provide the level of
demand response that would ensure efficient levels of
wholesale energy production.

Third, distribution utility demand response
programs are often closed to competitive demand
response providers and, instead, limited to programs
provided by the distribution utility itself. This limits
competitive participation and may exclude an entire
universe of competitive smart energy services that
are available for demand response and related

7 If the decision below were allowed to stand, not only would
FERC be disabled from regulating the level of compensation for
wholesale demand response, but the States would likely be
barred from doing so as well. Cf. PPL EnergyPlus, LLC v.
Nazarian, 753 F.3d 467 (4th Cir. 2014) (state laws designed to
promote generation facilities by governing rate for sales into
wholesale capacity markets preempted), petitions for cert. pend-
ing, No. 14-614 (filed Nov. 25, 2014) & No. 14-623 (filed Nov. 26,
2014); PPL EnergyPlus, LLC v. Solomon, 766 F.3d 241 (3d Cir.
2014) (same), petitions for cert. pending, No. 14-634 (filed Nov.
26, 2014) & No. 14-694 (filed Dec. 10, 2014).

22

purposes today and that are evolving rapidly. The
resulting barriers to entry create buyer’s side market
power in the demand response market, which sup-
presses innovation and limits the benefits consumers
enjoy from demand response.

Fourth, there are literally hundreds of regulated
retail utilities across the United States, each with its
own tariffs and rules and operating under a maze of
state, municipal, co-operative, and other regulatory
authorities. The patchwork of demand response
programs and rules that would result from this
splintered regulatory authority would prevent devel-
opment of demand response resources with the
appropriate scale to become a meaningful part of the
electricity market. When demand response resources
have open and nondiscriminatory access to the whole-
sale market, demand response can deliver significant
benefits to the nation’s electricity system. Without
such wholesale market participation, demand response
will be a niche product, customized within each small
service area, rather than a competitive resource.

II. FERC’S DECISION TO SET THE PRICE
FOR DEMAND RESPONSE RESOURCES
AT LMP SUBJECT TO A “NET BENEFITS”
TEST WAS UNLAWFUL

Although FERC properly found that demand
response is an integral part of setting just and
reasonable energy rates, it acted arbitrarily and
capriciously in setting the compensation level for
wholesale demand response. The FPA requires
FERC to set rates that are just and reasonable and
prohibits rates that are “unduly discriminatory” or
“preferential.” 16 U.S.C. § 824e(a). The practical
effect of Order 745, however, is to establish a prefer-
ence in favor of demand response as compared to

23

other suppliers and to discriminate in favor of
behind-the-meter generation as compared tb in-front-
of-the-meter generation. By failing adequately to
consider or to explain the justification for those
effects, FERC departed irrationally and without
explanation from its past precedents calling for just,
reasonable, and nondiscriminatory wholesale market
rates, and instead implemented an arbitrary and
unduly discriminatory pricing mechanism.

A. Order 745 Incentivizes Demand Response
Resources More Than Conventional Gen-
eration Resources, Causing an Uneconom-
ic Mix of Resources

By setting compensation for demand response
resources at full LMP subject to a “net benefits” test,
Order 745 provides greater incentives for curtailment
of electricity consumption than for comparable physi-
cal generation, which leads to discriminatory and
inefficient results both in the electricity market and
in other upstream and downstream markets.

As explained above, to support an efficient choice
between relying on a generation resource or a
demand response resource, rates for demand response
should encourage a customer to continue to consume
power if the value of doing so is greater than the
marginal cost of producing energy at that location on
the transmission system — that is, the LMP. By the
same token, if the benefit derived from consumption
is less than the LMP, the customer should find it
more profitable to accept the demand response pay-
ment and stop consuming electricity.

When a customer stops consuming electricity, of
course, the customer avoids paying the retail rate.
Therefore, the demand response payment should
make up the difference between the LMP and that

24

rate, so that the benefit to the customer is the value
of the full LMP By contrast, paying the customer
full LMP on top of the fixed rate savings will lead to
curtailment even when the value of consumption is
greater than LMP — sometimes by large amounts.

Order 745 establishes this latter regime, inducing
demand response even when it would be more
cost effective for a customer to continue consuming
electricity and pay for additional generation.
Economically, this is equivalent to subsidizing
demand response resources: it distorts the market by
providing higher compensation for non-consumption
and inducing greater levels of demand response than
would occur in an efficient market. FERC itself has
recognized this in the past. See PJM Indus. Customer
Coal. v. PJM Interconnection LLC, 121 FERC
{ 61,315, at 99 3, 26 (2007) (recognizing that pay-
ment of full LMP without an appropriate offset
reflecting the avoided cost of consumption is a
“subsidy” and that subsidy payments are not neces-
sary to produce “just and reasonable” rates); 18 C.F.R.
§ 35.28(g)(1)(i)(A) (“Every Commission-approved inde-
pendent system operator or regional transmission

organization must accept bids from demand
response resources on a basis comparable to any
other resources ”) (emphasis added).®

8 In arguing that LMP is an appropriate price for demand
response, FERC uses an example in which LMP is $100 and
the costs to a factory of providing demand response are $120.
FERC notes that the factory will curtail electricity consumption
if paid LMP but not if paid LMP minus the retail rate. See
FERC Br. 55-56. Yet this example illustrates why the demand
response provider's avoided costs should be taken into account.
LMP “represents the marginal value of a decrease in demand.”
FERC App. 104a, 467. At that price, the factory’s marginal

25

Setting the rate for demand response at LMP
imposes real costs on purchasers of wholesale power,
who are required to make up the cost of wholesale
demand response in the rates they pay. FERC itself
recognized that its pricing structure could induce
provision of demand response that would make
wholesale power more expensive for wholesale cus-
tomers during certain periods. See FERC App. 94a,
{ 52. For that reason, FERC adopted a “net benefits”
test, which seeks to ensure that demand response
resources are permitted to sell into the wholesale
market in exchange for full LMP only when doing so
provides “net benefits” — that is, contributes to lower
wholesale prices — for the system as a whole. See id.
at 94a-95a, 99 52-54. But the fact that FERC needed
to rely on a work-around to mitigate the distortions
created by payment of the full LMP confirms that it
is not sending appropriate pricing signals. If the
price for demand response resources took account of
consumers’ avoided costs, demand response providers
would have no incentive to participate in wholesale
markets except when forgoing consumption would
promote just and reasonable rates for all purchasers
of wholesale power.

B. Order 745 Discriminates Between Behind-
the-Meter and In-Front-of-the-Meter Gen-
erators

FERC further erred in failing to acknowledge or
to justify the discriminatory effects of Order 745 as
applied to identical behind-the-meter and in-front-
of-the-meter generators. The FPA’s prohibition on
undue discrimination means that wholesale markets
must provide the same level of compensation for

costs of curtailment exceed its marginal value, and the factory
should not curtail its electricity usage.

26

provision of the same electrical services. The pricing
policy advanced in Order 745, by contrast, provides
markedly different levels of compensation for provid-
ing equivalent amounts of demand response and
generation.

Consider an example in which a customer uses
10 megawatt-hours (MWh) of electricity and owns a
generator that produces 6 MWh and costs $50/MWh
to run. Suppose that the net-benefits test is satis-
fied and that the LMP is $50/MWh. If.the customer’s
generator were in front of the meter — that is, on the
grid — the customer wouid pay a net of $500 for its
electricity (paying $500 to purchase 10 MWh from
the grid and $300 to operate the generator, and
receiving $300 in wholesale market revenues from
selling the 6 MWh produced by the generator). But,
if the customer installs the generator behind the
meter, it will incur “a net payment of $200 rather
than a net payment of $500” for the same electricity
(paying $200 to purchase 4 MWh from the grid and
$300 to operate the generator, and receiving $300 for
its demand response contribution of 6 MWh paid at
LMP).'° Other wholesale customers have to make
up the difference. The physical effect on the trans-
mission and distribution system is largely identical
whether the hypothetical customer operates the
on-site generator behind the meter or in front of the
meter. But, under FERC’s rule, the compensation for
these identical resources differs markedly.

9 This example and analysis is derived from William W.
Hogan, Demand Response Pricing in Organized Wholesale
Markets 5-6 (May 13, 2010), http://‘www.hks.harvard.edu/fs/
whogan/Hogan_IRC_DR_051310.pdf.

10 Jd. at 6.

27

Moreover, Order 745 prefers behind-the-meter
resources over more efficient RTO-side generators.
See William W. Hogan, Implications for Consumers of
the NOPR’s Proposal to Pay the LMP for All Demand
Response 7-8 (May 12, 2010), http://www.hks.
harvard.edu/fs/whogan/Hogan_EPSA_NOPR_051210.
pdf. Consider the same facts as above, but now
assume that LMP has dropped to $40/MWh. This
means the customers generator, which costs
$50/MWh to run, is less efficient than the least-
efficient grid-based generation resources that have
cleared the market. Accordingly, if the generator is
installed in front of the meter, the customer will
not run it, because it would be operating at a loss.
The customer’s total electricity costs would be $400,
from its purchase of 10 MWh from the grid. But, if
the generator is behind the meter, then (assuming
the net-benefits test is met) the customer’s total elec-
tricity costs would fall to $220 — the generator would
pay $160 to purchase 4 MWh from the grid, pay $300
to operate its generator, and receive $240 (again,
paid for by other consumers of wholesale power)
for its 6 MWh of demand response. In this scenario,
there is no justification for calling the more costly
behind-the-meter generation resources into produc-
tion. As FERC itself appears to acknowledge,'! when

11 See FERC Br. 26-27 (“Suppose that a wholesale-market
operator was vastly overpaying for demand-response commit-
ments, choosing to utilize them when it would be far more effi-
cient to pay for additional power generation instead. That over-
compensation would inevitably result in higher-than-optimal
wholesale rates; the operator would be paying for commitments
it does not need to balance supply and demand, and then charg-
ing wholesale purchasers to fund those payments. Given that
the FPA requires FERC to ensure that wholesale rates are just

28

a rate causes overuse of demand response resources,
it is not just and reasonable.

There is no apparent justification for preferring
behind-the-meter generation; and even less justifica-
tion for preferring behind-the-meter generation that
is less efficient than available generation resources
on the grid. Yet, by paying the full amount of LMP,
FERC’s order establishes a preference for behind-the-
meter generation despite both the economic costs and
other externalities of behind-the-meter generation,
such as increased air pollution. See, e.g., Xiyue
Zhang & K. Max Zhang, Demand Response, Behind-
the-Meter Generation and Air Quality, 49 Envtl. Sci.
& Tech. 1260, 1265-66 (2015) (explaining that shift-
ing generation from peaking units on the grid to
behind-the-meter units through demand response
may significantly increase air pollution), http://
energy.mae.cornell.edu/PDF/Demand%20Response,
%20Behind-the-Meter%20Generation%20and%20
Air%20Quality.pdf.

C. FERC Offered No Adequate Justification

for the Distortions Created by Its Order

FERC provided no explanation adequate to justify
the differential treatment of comparable resources.
FERC stated, correctly, that there are barriers to
wholesale market participation by demand response
resources, such as lack of dynamic retail prices and
lack of real-time pricing information. See FERC App.
96a-98a, 4 57. But it then concluded, with no elabo-
ration, that “paying LMP can address the identified
barriers to potential demand response providers.” /d.
at 99a, 4 58. The record contains no suggestion that

and reasonable, 16 U.S.C. 824e(a), it is inconceivable that the
Commission would lack authority to act in that situation.”).

29

subsidizing demand response providers either elimi-
nates or compensates for those barriers. Instead, the
opposite is true. Inefficient compensation of demand
response resources threatens to undermine invest-
ment by companies like NRG in this burgeoning dis-
tributed energy sector, not promote it.

In Order 719, FERC directly addressed a barrier
to demand response participation — the inability to
bid in the wholesale market — such that demand
response resources could participate in the wholesale
electricity market and make it more efficient. Here,
in contrast, FERC simply assumed that more partici-
pation would necessarily improve efficiency, without
adequate explanation or consideration of the possibil-
ity that payment of full LMP would lead to an ineffi-
cient resource mix and impose unwarranted costs on
wholesale purchasers. Investments in distributed
energy technologies should be directed towards
economic efficiency, as well as environmental benefit,
but FERC’s pricing scheme instead provides an
incentive to engage in inefficient arbitrage.

FERC’s finding that any compensation level other
than LMP (when the net-benefits test is satisfied)
would be unjust and unreasonable underscores its
error. See FERC App. 90a-9la, 4 47. That finding
shows that FERC interprets the FPA’s provisions to
require payment of one and only one rate. This is a
novel interpretation that finds no basis in the stat-
ute’s text, legislative history, or prior interpretations
by courts or the agency itself. Cf. PJM Interconnec-
tion, LLC, 99 FERC 4 61,227, at 61,941 (2002) (stat-
ing that PJM should compensate demand response
providers “by paying the difference between the LMP
and what the customer would save by not using
power” and expressly holding that “the Commission

30

rejects those comments that find that payment of the
full LMP is required”). There is no record basis for
the conclusion that payment of full LMP will promote
appropriate levels of demand response participation
in wholesale markets, let alone that that is the only
way to do so.

CONCLUSION

For the foregoing reasons, this Court should hold
that (1) FERC has jurisdiction to regulate participa-
tion of demand response resources in wholesale
markets but (2) the rate established in Order 745 is
unlawful.

Respectfully submitted,
ABRAHAM H. SILVERMAN AARON M. PANNER
CORTNEY MADEA Counsel of Record
MONICA M. BERRY BRADLEY E. OPPENHEIMER
NRG ENERGY, INC. KELLOGG, HUBER, HANSEN,
211 Carnegie Center Topp, EVANS & FIGEL,
Princeton, New Jersey 08540 P.L.L.C.
(609) 524-4696 1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900

July 16, 2015 (apanner@khhte.com)

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0317%3A37. Public record. Not legal advice.