DC Circuit Throws Demand Response and FERC a Curve
May 29, 2014
In a 2-1 decision, the D.C. Circuit Court of Appeals vacated Order No. 745, FERC’s controversial rule requiring that cost-effective demand response resources participating in organized energy markets be paid the full locational marginal price (LMP), which is the same price paid to electric generators. The decision “vacate[d] Order No. 745 in its entirety as ultra vires agency action.” The court found that Order No. 745 exceeded FERC’s statutory authority over wholesale markets and intruded on state jurisdiction over retail electricity markets. Further, as an alternative basis for its decision to vacate, the court found that Order No. 745 was not just and reasonable because it was arbitrary and capricious by way of failing to address arguments that full LMP payments result in over-compensation of demand response resources.
Simultaneous with issuing the decision, the clerk of the court issued an order withholding issuance of the court’s “mandate” “until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc.” The deadline for filing such rehearing petitions is forty-five days after the issuance of the May 23 opinion, which is July 7. This procedure is common and stays the effectiveness of the panel decision until the mandate issues and leaves open the possibility of a longer stay.
Grant of a petition for en banc rehearing requires agreement of a majority of the active DC Circuit judges. The DC Circuit rehears perhaps one case en banc every year. FERC and other parties seeking en banc rehearing will likely argue that “the proceeding involves a question of exceptional importance, ” such that en banc review is warranted. Parties may also seek review by the Supreme Court. Grants of en banc review by the DC Circuit and Supreme Court review are discretionary. The extensive dissent by one member of the three-judge panel may provide some support in this regard.
The order does not directly address FERC jurisdiction over demand response participation in RTO capacity markets. The principles underlying the decision on FERC’s jurisdiction over energy markets could be extended to capacity markets. However, the decision refers to a prior DC Circuit opinion acknowledging FERC’s capacity market jurisdiction and this suggests possible grounds for distinction. We expect parties will raise jurisdictional issues in current and future cases involving demand response participation in capacity markets.
In fact, FirstEnergy filed a complaint with FERC on May 23, premised on the DC Circuit opinion, requesting that FERC “direct PJM to remove all portions of its tariff allowing or requiring the inclusion of demand response as suppliers in PJM’s capacity market.” FirstEnergy also requested that FERC order “PJM to delay the release of its auction results pending rehearing of the D.C. Circuit’s Order.” These are the results of PJM Interconnection, LLC’s Base Residual Auction (BRA) for the 2017-2018 delivery year, which PJM released on May 23. Demand response clearing the BRA declined approximately 12% from the last BRA, apparently reflecting new PJM rules that constrain demand response participation.
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