Appeals court vacates FERC order on demand response compensation in RTO markets

Tuesday, May 27, 2014

May 27, 2014 By Robert Varela , Public Power Daily - A federal appeals court vacated a Federal Energy Regulatory Commission rule (Order No. 745) requiring that demand-response resources participating in an RTO-run energy market must be compensated at the full locational marginal price (LMP), provided the demand-response resource passes a net benefits test. In a 2-1 decision in Electric Power Supply Association v. FERC, a U.S. Court of Appeals for the District of Columbia Circuit panel held that the commission exceeded its statutory authority because the rule "entails direct regulation of the retail market—a matter exclusively within state control."

The court also ruled that the order was arbitrary and capricious. The commission majority failed to properly consider arguments by Commissioner Phil Moeller (who dissented) and industry groups that paying the full locational marginal price would overcompensate demand response providers, the court said.

The commission majority said demand response resources are comparable to generation resources and should therefore receive the same level of compensation, but "comparable contributions cannot be the reason for equal compensation, when generation resources are incomparably saddled with generation costs," the court said. The potential windfall to demand response resources seems troubling and the commission majority did not adequately explain how the rule results in just compensation, the court said.

APPA, the Electric Power Supply Association, National Rural Electric Cooperative Association, Old Dominion Electric Cooperative and Edison Electric Institute had filed a joint brief in the case arguing that the rule should be overturned.