A federal appeals court today threw out a high-profile Federal Energy Regulatory Commission order that provided incentives for electricity users to consume less power, a practice dubbed demand response.
In a divided ruling, the U.S. Court of Appeals for the District of Columbia Circuit struck a blow to the Obama administration's energy efficiency efforts, vacating a 2011 FERC order requiring grid operators to pay customers and demand-response providers the market value of unused electricity.
The court held that FERC significantly overstepped the commission's authority under the Federal Power Act.
The goal of the regulation, which was cheered by environmental groups, was to establish parity between demand-response providers -- which pool reduced energy usage by condominiums, hospitals and universities -- and retail electricity providers (Greenwire, March 16, 2011).
Grid operators and power providers, represented by the Electric Power Supply Association, American Public Power Association and others, challenged the rule, claiming FERC was unlawfully wading into retail electricity markets when the Federal Power Act granted the agency jurisdiction solely over wholesale markets. Retail sales, they argued, were left to the states.
The D.C. Circuit, in a 2-1 ruling, agreed. In a 16-page opinion, Judge Janice Rogers Brown wrote that FERC's contention that retail markets affect wholesale rates and that, therefore, the commission has jurisdiction is unavailing.
Under that premise, she wrote, FERC's authority would be "almost limitless."
"The commission's rationale, however, has no limiting principle," Brown, a Republican appointee, wrote. "Without boundaries, [FERC's interpretation] could ostensibly authorize FERC to regulate any number of areas, including the steel, fuel, and labor markets."
She added in her opinion, "The commission's authority must be cabined by something sturdier than creative characterizations."
Senior Judge Laurence Silberman, another Republican appointee, joined Brown's majority opinion.
Senior Judge Harry Edwards dissented. He noted that several conditions have to be met before demand-response providers are paid under the order. Those factors, he contended, largely fall on the retail, not wholesale, market.
"Focusing on the market in which the consumption would have occurred in the first instance," Edwards, a Democratic appointee, wrote, "one can conceive of [the order] as impermissibly falling on the retail side of the jurisdictional line."
Edwards also said there was enough ambiguity in the statute on the demand-response issue that FERC deserved deference from the court.
Environmental groups that fought to maintain FERC's policies said the decision was ominous and will likely limit the agency's ability to act in the future.
"Our higher-level concern is that the grid is evolving pretty quickly with new resources, smart grid technology, on-site power, and we're concerned this decision could really tie FERC's hands in adapting to a new grid," said John Moore, a senior attorney for the Natural Resources Defense Council's Sustainable FERC Project. "It's a pretty strong decision that doesn't give FERC any room to improve the rule."
Demand-response programs will now be directly tied to a patchwork of state programs that are "uneven," making it more difficult for businesses like Wal-Mart Stores Inc. and other industrial companies -- new and established -- to sell their demand-response services into the grid, Moore added.
The decision could also hurt the integration of renewables because demand response helps in supporting the incorporation of wind and solar onto the grid, he said.
"If demand response is going to mean anything in wholesale markets, it's going to require states to better integrate their retail programs," Moore said, while adding that most states do not currently operate vibrant retail demand-response markets.
Click here for the opinion.
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