The Fate of FERC Demand Response Order No. 745: Efforts to Adapt While the Judicial and Complaint Processes Play OutNov 14, 2014
Since our last update regarding the D.C. Circuit’s vacatur of FERC Order No. 745 in Electric Power Supply Ass’n v. FERC ( “EPSA”), several developments have occurred in EPSA and related proceedings. The appeals process and related complaints at FERC will take time to play out. In the meantime, certain market participants have weighed in that EPSA should be applied narrowly only to energy (and not capacity or ancillary services markets), while certain market operators have made moves to maintain demand response programs–at least until the final fate of Order No. 745 is known. All of this will occur, moreover, while existing and future supply and demand resource commitments are analyzed against the backdrop of another winter season.
Electric Power Supply Ass’n v. FERC
In the EPSA ruling issued in May, the D.C. Circuit vacated Order No. 745, which required regional transmission organizations and independent system operators to compensate demand response providers at full locational marginal price. The court based its holding on the grounds that Order No. 745 infringed on the states’ exclusive authority to regulate the retail electricity markets. Furthermore, the court held that even if FERC had jurisdiction, the Commission acted arbitrarily and capriciously by implementing Order No. 745 without responding to arguments that it would lead to unjust and discriminatory rates.
On October 20, 2014, the D.C. Circuit granted FERC’s request to stay issuance of the circuit court’s mandate while FERC considers whether to appeal the EPSA decision to the U.S. Supreme Court. The stay comes after the D.C. Circuit denied FERC’s request for en banc review of the circuit court’s decision, and will last until December 16, the government’s deadline for filing a petition for a writ of certiorari. If a petition for certiorari is filed, the stay will be extended until the Supreme Court rejects the petition or, if it accepts the case, until the Court issues its final decision.
FirstEnergy Service Co. v. PJM Interconnection, L.L.C.
On the heels of the EPSA decision, FirstEnergy filed a complaint with FERC, seeking to remove demand response participation from PJM’s capacity markets. Specifically, in its amended complaint filed in September, FirstEnergy requested: (1) removal of all provisions in PJM’s tariff, agreements, and business manuals that authorize or require PJM to compensate demand resources as capacity suppliers, and (2) recalculation of the results of PJM’s May 2014 Base Residual Auction (“BRA”), by removing demand response resources from the capacity supply pool.
In response, PJM submitted two filings with FERC last month: (1) a whitepaper, published on the PJM website and submitted as an informational filing in the FirstEnergy docket, presenting PJM’s proposed approach to demand response in light of EPSA, and (2) an answer to FirstEnergy’s amended complaint. Meanwhile, on November 6, FirstEnergy filed an answer in opposition to a motion to dismiss or hold in abeyance FirstEnergy’s amended complaint filed by the “Environmental Advocates,” a group comprised of the Sustainable FERC Project, Natural Resources Defense Council, Sierra Club, Environmental Defense Fund, Environmental Law and Policy Center, and Environment Northeast. The Environmental Advocates argued that FERC should dismiss First Energy’s complaint because the D.C. Circuit retains jurisdiction over the matter and the complaint is therefore premature. These filings are discussed below.
PJM Whitepaper on the “Evolution of Demand Response in the PJM Wholesale Market”
In its whitepaper, PJM proposed possible modifications to PJM’s demand response program that are intended to maximize continued demand response participation, while avoiding litigation risk and minimizing disruptions to settled transactions, particularly in the three-year “forward” capacity market.
The whitepaper suggests that demand response resources can still play an important role in PJM’s markets because EPSA does not directly address “wholesale curtailment”–i.e., actions by load serving entities (“LSEs”), in partnership with their customers, to manage their wholesale consumption, lower their forecast demand requirements, and actively manage peak consumption to lower their capacity obligations. PJM accordingly takes the view that it can continue to recognize curtailment by wholesale market entities, such as LSEs, but only to the extent that the curtailment reflects the entity’s own wholesale load. The whitepaper envisions that demand may continue to participate in its markets within the following parameters:
1) PJM’s markets would not separately compensate demand reduction as a supply-side resource; rather, the benefits and incentives for demand participation would be avoided costs and obligations.
2) Wholesale market entities would commit to reductions in their wholesale load, based on curtailment commitments or alternate supply arranged with their end-use retail load.
In our previous posts, we noted that the EPSA decision raises questions as to the scope of the EPSA decision and whether and how demand resources may participate in the capacity and ancillary services markets–the PJM whitepaper puts forth proposals for both.
Noting that EPSA’s jurisdictional analysis could potentially extend to its capacity markets, PJM proposes that wholesale market entities would bid into the capacity auction via demand response curtailment commitments, through which LSEs would commit to reduce wholesale demand at PJM’s request during the established compliance period. If a curtailment commitment is called to perform in the energy market, the wholesale market entity would not receive additional energy market payments, but would instead avoid its own energy payments for the reduced demand. In addition, the whitepaper outlines procedures to transition the demand response resources already committed for delivery years 2015/16, 2016/17, and 2017/18 to load-serving entity-based curtailments commitments.
Ancillary services, meanwhile, are characterized in the PJM whitepaper as wholesale products under the FERC’s jurisdiction and are not covered or threatened by the EPSA decision. Accordingly, PJM anticipates compensating demand resource offers submitted by both LSEs and non-LSEs in the frequency regulation and synchronized reserve markets.
Although the whitepaper presents one possible way to evolve demand response in PJM’s markets, it notes that any proposed modifications will ultimately be subject to stakeholder input and FERC and state approval. Certain market participants have already weighed in on the whitepaper in their submissions to the FirstEnergy docket. In its comments, for example, American Electric Power Service Corporation (“AEP”) states that, while it mostly supports PJM’s approach of permitting wholesale demand response to participate on the demand side of the capacity market, it disagrees with the whitepaper “to the extent demand response can continue to set the capacity price in the auction” and reserves further comments on the proposal until PJM provides greater detail on how it will treat demand response in future auctions.
Furthermore, AEP disagrees with PJM’s proposed mechanism to transition demand resources committed in prior BRAs: while the whitepaper suggests converting and replacing non-LSE-based demand resources, it does not propose recalculating the auction clearing price. AEP, on the other hand, urges FERC to find that the auction results should be recalculated to avoid price suppression.
Other commentators have refrained from taking a position on the whitepaper at this time, but have shown support for PJM’s efforts to separate demand-side and supply-side demand resources, and to explore mechanisms that permit wholesale demand response to continue participating on the demand side of the capacity markets.
PJM’s Answer to the FirstEnergy Amended Complaint
In its October 22 filing with FERC, PJM argued that, even if the EPSA decision were to apply to the capacity markets, FirstEnergy’s proposed remedies are unjust and unreasonable and “extremely damaging” to market certainty. PJM argued that the Commission should therefore apply its remedial discretion and refrain from altering settled market outcomes. In particular, PJM urged the Commission not to disturb demand response commitments and compensation that were already cleared in pre-EPSA RPM auctions.
Furthermore, PJM announced that it would submit Section 205 and Section 206 tariff changes as needed. These amendments would serve as stopgap rules effective until “the Commission and industry stakeholders have had an opportunity, once jurisdictional questions are finally resolved, to consider and develop generic and more considered options for demand response participation in organized wholesale electricity markets.” The proposed amendments would:
- Propose rules permitting LSEs to submit price responsive bids into the May 2015 BRA, and possibly for subsequent RPM auctions.
- Affirm that previously cleared demand response capacity commitments will be honored at their established commitment and compensation levels.
- Provide a voluntary exit path for capacity demand resources that anticipate losing compensation due to EPSA.
- Make appropriate changes to incremental auction rules, including rules precluding new demand resource offers in RPM auctions by retail end users or aggregators of retail customer load reduction capabilities.
PJM expects to submit its Tariff changes by or shortly after the end of the year, in order to provide a sufficient transition period before the 2015 BRA next May.
FirstEnergy’s Response to Motion to Dismiss or Hold Complaint in Abeyance
Last month, Environmental Advocates submitted a motion to dismiss FirstEnergy’s complaint or, in the alternative, hold the matter in abeyance, on the grounds that FirstEnergy’s complaint is premature because the D.C. Circuit retains jurisdiction over the matter until the case is officially closed by issuance of the mandate.
FirstEnergy’s response contends that the motion to dismiss should be denied because the stay of the issuance of the D.C. Circuit’s mandate only precludes FERC jurisdiction over the Order No. 745 rulemaking proceeding–which covered the real-time and day-ahead energy markets–as distinguished from the instant proceeding, which deals with PJM’s capacity markets. Taken at face value, this is an important recognition in the marketplace that the scope of the D.C. Circuit court’s ruling may be limited and does not cover the capacity markets.
FirstEnergy argues furthermore that it may rely on EPSA’s reasoning notwithstanding that the D.C. Circuit has not yet issued its mandate; and moreover, that this proceeding is independently based on FPA Section 201, which establishes limits to FERC’s jurisdiction. FirstEnergy also asserts that, because “halting all action in this proceeding for an indefinite time period would undermine [FERC’s] ability to act expeditiously and protect the PJM capacity markets from harmful uncertainty,” the Commission should dismiss the request to hold the complaint in abeyance.
Demand Response in Other Markets – ISO-NE and NYISO
Despite the unsettled status of Order No. 745, ISO New England (“ISO-NE”) plans to continue pursuing full integration of demand response resources into its wholesale electricity markets. On October 31, ISO-NE submitted for FERC approval Tariff revisions that would permit price-responsive demand to provide operating reserves and participate in the Forward Reserve Market. Noting the legal uncertainty caused by EPSA, ISO-NE believes that the appropriate course would be to continue integrating demand response in its markets in order to provide certainty for market participants who have or will be taking on capacity obligations for future commitment periods in the event that Order No. 745 is eventually upheld. ISO-NE argues that this approach would not prevent ISO-NE from engaging in any necessary contingency planning, a “task that can and should proceed through the normal ISO development process with input from stakeholders.”
Meanwhile, on November 6, the New York Independent System Operator (“NYISO”) submitted an answer to a motion filed by NRG in the FirstEnergy FERC proceeding, which requested, inter alia, that demand response resources not assume any new obligations in the upcoming capacity auctions. NYISO opposed NRG’s motion to the extent that is sought removal of demand response from NYISO markets before EPSA is resolved and FERC gives further guidance. NYISO argues, that granting NRG’s motion would eliminate the reliability and benefits of demand response before an orderly transition–which would require FERC guidance and collaboration with stakeholders and state regulators–can be made.
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The fate of demand response will take some time to play out, adding to the uncertainty of market outcomes related to upcoming capacity auctions as well as commitments for the upcoming winter season.
 See generally Electric Supply Ass’n v. FERC, No. 11-1486, et al. (D.C. Cir. May 21, 2014); Demand Response Compensation in Organized Wholesale Energy Markets, Order No. 745, 134 FERC ¶ 61,187 (March 15, 2011) (“Order No. 745).
 PJM Interconnection, L.L.C., The Evolution of Demand Response in the PJM Wholesale Market (Oct. 6, 2014), available at http://pjm.com/~/media/documents/reports/20141007-pjm-whitepaper-on-the-evolution-of-demand-response-in-the-pjm-wholesale-market.ashx.
 See various comments filed on October 22, in FirstEnergy Service Co. v. PJM Interconnection, LLC, FERC Docket No. EL14-55-000, for example, Comments of the Electric Power Supply Association at n. 23 (“While EPSA is not prepared to take a position on PJM’s specific proposals at this time, EPSA commends PJM for attempting to develop an approach that will allow demand response to be accounted for in its markets in a manner that respects the jurisdictional line recognized in the EPSA decision”); id. at 13 (“As a general matter, EPSA agrees with PJM that the EPSA decision allows ISOs/RTOs to account for curtailment in RPM ‘to the extent it reflects the action of a wholesale entity, such as a load-serving entity or competitive retail service provider’ and ‘reflects that entity’s own wholesale load.’”); Comments of the PJM Power Providers Group at 4 (“[We have] some concerns regarding the details of PJM’s initial, proposed ‘road map.’ Nonetheless, [we] appreciat[e] PJM’s attempt to separate the supply- and demand-side of demand’s participation in the PJM’s market, as well as the stated goal of meeting various objectives ‘without exposing PJM and its members to unacceptable litigation risk and uncertainty as to settled market outcomes.’”); Comments in Support of the PSEG Companies at 5-6 (“[W]hile we believe that DR must be removed as a supply-side resource, we support the efforts of PJM . . . to develop a mechanism to accommodate the continued participation of DR in its markets on the demand-side . . . ”).
 See Answer of FirstEnergy Service Company in Opposition to Motion to Dismiss or Hold Complaint in Abeyance, FirstEnergy Service Co. v. PJM Interconnection, LLC, FERC Docket No. EL14-55-000, at 4-11 (Oct. 22, 2014).
 ISO New England Inc. and New England Power Pool, Market Rule 1 Changes to Integrate Price-Responsive Demand into Reserve Markets (Oct. 31, 2014), available at http://www.iso-ne.com/static-assets/documents/2014/10/er15-257-000_mr1_chg_10-31-2014.pdf.