Amicus Curiae Brief — Enernoc, Inc. v. Elec. Power Supply Ass'n, 135 S. Ct. 2049 (2015) (No. 14-841)

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} Supreme Court, U.S

FILED

JUL 16 2015

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

—_—————————E———————

IN THE

Supreme Court of the Anited 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 F.. OPPENHEIMER

NRG ENERGY, INC. KELLOGG, HUBER, HANSEN,

211 Carnegie Center TopDD, 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

pk ECE ill

INTEREST OF AMICUS CURIAE .......0...........c0cc0.000- 1

SUMMARY OF ARGUMENT .......................0.00..0:0008 4

TET <cischiniijuneincesiiindesitnaeiteipaceeineeitipaeieniiiaaciaaaautiebtabiait 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

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

2. Incidental Effects on Retail

Markets Do Not’ Eliminate

FERC’s Jurisdiction ............................ 12

3. Denying FERC Jurisdiction over

Wholesale Demand Response

Creates Substantial Regulatory

REUSE PERS Ree ce eaters seem 16

a. The D.C. Circuit’s decision

creates regulatory inconsisten-

cies that threaten development

and use of innovative technol-

Se icichiciiititieiinicctnaiiiesbadeiadaiitiaainat acinisitiiennin 16

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

EES Eee SOR ace ea 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

EERSTE RES SIE SRSAS ECE RE ay ree 28

Ue Ainicinntesitinioieicuniisisinsinisiccpiniininaininicasheaciastiniintad 30

ili

TABLE OF AUTHORITIES

Page

CASES

California Indep. Sys. Operator v. FERC,

372 F.3d 395 (D.C. Cir. 2004) ............................. 11

Chevron U.S.A. Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837 (1984)...............cc00eee 12

City of Arlington v. FCC, 133 S. Ct. 1863

aaa i 12, 16

FPC v. Southern California Edison Co.,

8 8 EERSTE nae eC 15

Morgan Stanley Capital Grp. Inc. v. Public

Util. Dist. No. 1 of Snohomish Cnty., 554

keene 20

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

Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591

EIU ERIN ESSE Een OLE okay Ne ease ae 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.

14-623 (filed Nov. 26, 2014) ...............ccccccceeseeeeees 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).............................006. 21

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

ES RETR EREN aneEesoe. 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

SIT iccenintdinedaetphiaheamasipiinbiatememuaemeiieieemedimamibiaaens 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) ....... 10, 11,

12, 14, 16, 18

FB FE 11, 15, 18

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

§ 206, 16 U.S.C. § 824e......ccccccccecesseseeeeee 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 seg. ................. 13

18 C.F.R. § 35.28(@)(1)(I)(A)..............0cecereseseceeeees 15, 24

Sup. Ct. R.:

ERA Sean ae Maar nr pe enue eae l

TS a LN, Sree een ae RE eae CE l

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... 20

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/

energy-primer.pdf..............ccccccccceeeceeseseeeeees 6, 10, 16

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.

ST sisiciinendinieteeentniinennniaiieneiaiinntaséilindeapineiiiimibiniiadins 9,12

How Microgrids Work (June 17, 2014),

http://energy.gov/articles/how-microgrids-

EERE AE St TORE tS oe ea OO 18

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 ...................cccceee cee

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_

SS SEC RRR aR Ee a ae

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_

re ne Sn ncccntnnnciessnncsiniesincassnssecenseces

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%20Air%20

ia acct lla aelieataneinataiedelaiainnia

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.

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

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

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.

)

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.

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

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

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.

http://www.iea.org/publications/freepublications/

publication/empower. paf. :

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”), http://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, 4 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,

“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 squarely 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

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] [or]

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 v.

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-71la, 4 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

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 should 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 2t retail, and the levels

of retail electricity consumption.”). But § 201(b)’s

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 tu 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.

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,

{ 32. 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”).

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 uv.

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.

judgment. Sev 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 that 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”).

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 thermostats 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 vehicles 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

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

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

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.

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

pro™ded 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).

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

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

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 P.JM 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)(G)(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, { 67. At that price, the factory's marginal

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, 949 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.

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.2 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 would 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.

Moreover, Order 745 prefers behind-the-meter

resources over more efficient RTO-side generators.

See William W. Hogan, Jmplications 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 customer’s 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

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, 457. 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.”).

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

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,