D.C. Circuit: When it Comes to Demand Response, Please Think Twice, It's Not Alright

Natural Resources Defense Council (NRDC) has joined with Environmental Defense Fund (EDF) and Illinois Citizens Utility Board (CUB) to support requests that the U.S. Court of Appeals for the D.C. Circuit reconsider its decision to vacate the Federal Energy Regulatory Commission’s (FERC’s) Order 745. Order 745, which FERC issued in 2011, requires grid operators to pay demand response resources the same level of compensation as generation resources in the wholesale energy markets. (“Demand response” typically refers to customer reductions in electricity use in return for payments, usually in times of high electricity demand or grid stress when prices are higher.)

In late May, a panel of 3 D.C. Circuit judges decided in a 2-1 opinion that FERC had overstepped its authority in regulating demand response resources, finding that demand response participation in energy markets is within the exclusive jurisdiction of the states. With this decision, the court waded into new and uncertain legal ground and upset decades of the D.C. Circuit’s decisions that support the statutory authority FERC exercised in issuing Order 745.

In supporting requests for rehearing, NRDC, EDF and CUB joined an impressive list of parties to the original D.C. Circuit case asking the court to reconsider its decision. FERC, regional grid operators PJM and the California Independent System Operator, Maryland, California and Pennsylvania utility regulators, demand response providers and participants in demand response markets all made filings to the full panel of D.C. Circuit judges (not just the 3 judges who originally heard and decided on the case) asking the court to reconsider the decision. All parties explained to the court that the May decision conflicted with past D.C. Circuit rulings and raised “issues of exceptional importance.”  

“Issues of exceptional importance” is a legal standard that doesn’t focus on whether the full panel of D.C. Circuit judges thinks the original 3 judges got it wrong. Instead, the standard asks whether it’s worth re-opening the case (judges don’t like to get into the habit) because should the decision stand, the implications out in the real world would prove a really big deal.

All of the parties asking the D.C. Circuit to reconsider the decision explained the issues of exceptional importance involved in the case. Some discussed the fact that demand response has played a role in wholesale energy markets for the last decade. The court’s decision would not only upset settled market expectations but also undermine a resource that provides important operational and reliability benefits to the grid. And yes, as PJM and others explained, demand response has saved consumers billions of dollars and helped to keep energy prices from going much higher. NRDC, EDF and CUB joined in on these points. 

We also made a critical point that the other parties didn’t raise. We emphasized for the court that clean demand response resources (meaning actually reducing power consumption, rather than shifting demand to dirty back-up generators), can reduce air pollution by avoiding the need for inefficient, high emitting generation during times of peak electricity demand. We pointed out that avoiding the use of just 10% of the peaking plants could avoid 100-200 million metric tons of greenhouse gases annually, in addition to other harmful pollutants such as nitrogen oxides and sulfur dioxide. Now that’s what I call exceptionally important.

It is not clear how quickly the court will respond to this week’s requests for rehearing or what the chances are that the court will take up the case for reconsideration. The D.C. Circuit rarely does so, but the major jurisdictional issue involved combined with the number of parties asking for the full court’s review may be enough for the court to change its mind. Even if the D.C. Circuit doesn’t reconsider, FERC and other parties could appeal to the Supreme Court. In any event, the original court decision may not be truly “final” for months or years. In the meantime, states, grid operators, FERC and others concerned about electricity prices, grid reliability, and pollution should push for new ways to use clean demand response resources to save money and cut carbon and other pollution. For example, check out our friend Scott Hempling’s thoughtful solutions for states and FERC to consider.