Will court ruling on demand response affect reliability?

A U.S. court's invalidation last month of federal rules for power grid demand-response programs has jarred expectations of electricity market prices and profits. Now experts are asking: Will it do the same for grid reliability?

On Tuesday, PJM Interconnection, the grid operator across 13 Eastern states, joined the Federal Energy Regulatory Commission in asking the full U.S. Court of Appeals for the District of Columbia Circuit to reconsider the May 24 decision by two of the court's judges striking down FERC's Order 745, governing demand-response pricing in daily electricity markets (Greenwire, May 27).

The judges found that FERC exceeded its authority in directing that demand-response providers such as factories or commercial buildings receive full market prices when they curtail their electricity usage. Demand-response programs are retail market actions, and those are the province of state regulators, not FERC, the judges said.

Yesterday, commentators on a panel assembled by the Gibson Dunn & Crutcher law firm, while supporting the court finding, anticipated that it could trigger a long legal battle. They raised questions about whether policy uncertainty could affect energy investment and the grid's balance of supply and demand.

"It's going to be months, if not years," before the full scope of the FERC ruling will be known, said David Dardis, deputy general counsel and vice president of Exelon Corp.


"This uncertainty is a problem," Dardis added -- hardly good news for a utility sector facing a jarring transition to new business models.

The panel moderator, William Scherman, who leads Gibson Dunn's energy regulatory practice, agreed. "If the court decides to hear [the case], it is likely to take at least a year, if not considerably longer," he said.

Others in the debate see an even longer potential horizon.

"I'm telling my executive team not to expect resolution for three years, and maybe five or six," said Frank Lacey, vice president for regulatory and market strategy at Comverge Inc., a major demand-response aggregator and supplier that has decried the court decision. "If FERC doesn't prevail at the D.C. Circuit, I can't imagine a scenario where this doesn't go to the Supreme Court," Lacey said in an interview yesterday.

Capacity market uncertainties

A key uncertainty is the possible implication of the court ruling on the capacity markets in regional transmission organizations like PJM, industry lawyers and officials say.

FERC's Order 745 deals with energy markets -- supply bids to meet immediate electricity demand. Regional transmission organizations also solicit capacity bids, seeking to line up enough commitments by generators and demand-response providers for demand one to three years ahead.

The industry and its regulators currently are wrestling with doubts about whether capacity markets are up to the task.

"Obviously, the opinion was geared at the energy markets," Lacey said. "The opinion was loosely written so that it could be interpreted as also applying to the capacity market."

FirstEnergy Corp., whose generating plants face competition from demand-response resources, has asked FERC to hold up PJM's latest capacity auction results, which included nearly 11,000 megawatts of demand-response resources for use in 2017 and 2018 (EnergyWire, May 28).

"On its face, the decision is addressing Order 745, which is an energy market construct," said Exelon's Dardis in the Gibson Dunn session. But the court's opinion raises broader questions about FERC's authority to regulate demand response generally, he added.

In seeking a full en banc review by the D.C. Court of Appeals, PJM noted the policy uncertainty created by the May ruling and the region's dependence on demand-response resources to meet power supply needs.

Turning up gas demand

Comverge's Lacey and other commentators predicted that demand response would not disappear. But if the court's theory on Order 745 extends to capacity markets and constrains demand resource participation there, PJM and other regional grid operators could no longer count on these energy savings in meeting future power demand, Lacey said. They would be forced to seek additional supply bids from generators, predominantly from new natural gas turbines. That could raise reliability issues.

Natural gas supplies, and their pipeline networks, already face expansion to replace coal-fired generation that is expected to retire in the face of proposed U.S. EPA regulations to curb greenhouse gases. Lacey's view is that a curtailment of demand-response bids in capacity markets would push that need even higher.

Exelon's Dardis said that as a consequence of the FERC decision, "You could see substantial new investment in gas-fired generation" in affected regional markets. "The existing gas infrastructure certainly would be unable to support a 15- to 20-gigawatt expansion" in PJM, he added.

Advocates for new electricity technologies see other risks. A pullback on demand response would hurt future investments in distributed energy and advanced electricity storage systems, since these are compensated alike with demand response.

"FERC lawsuits cause significant market uncertainty," wrote Michael Gordon, chief executive of Joule Assets Inc., in a recent blog post. "An unpredictable policy environment risks stalling progress in energy efficiency and demand response," he added. His firm finances demand-response and energy efficiency providers.

"Demand response is an element of distributed energy, of smart thermostats, and responsive new appliances that react to pricing signals," said Becky Harrison, CEO of the GridWise Alliance, which promotes smart grid technologies. "All those resources are starting to be developed and will be deployed in the future, and impact the entire grid.

"If the court decision stands, that means we have to go back to create the right rules," she said in an interview.

Other demand-response snags

Another potential complication came up in the Gibson Dunn discussion. If demand response is constrained, that may be a problem for the industry in complying with EPA's greenhouse gas rules, if they go into effect, Shearman said.

EPA has made demand response and efficiency key elements in state strategies for compliance with the rules for existing power plants. "It is unclear how ... the demand response would actually be counted, depending on whether it occurred at the state or federal level," Shearman said.

Energy attorney Carolyn Elefant, in a commentary last month, noted that the D.C. Circuit also has an appeal pending on FERC's Order 1000, its landmark policy on transmission planning, which affects opportunities for new transmission lines linked to renewable energy resources.

While the May court decision doesn't reach to Order 1000, it wouldn't be a surprise to see the Order 1000 opponents call attention to the Order 745 language rebuking FERC for overstepping its authority on demand-response pricing in energy markets, she said.

Attorney Scott Hempling, an energy regulations authority, noted another possible disruption coming from the court decision. The power generators who took FERC to court "should be careful what they wish for," he said in a commentary.

"If demand side bidders can't participate in organized wholesale markets, FERC has found (in statements the Court left untouched), the generation prices produced by those markets won't be 'just and reasonable,' as required by the Federal Power Act. That means every generating company now risks having its market-based pricing authority revoked, in favor of regulated prices."

William Hogan, a professor at Harvard University's John F. Kennedy School of Government, who applauded the circuit court decision, said it could provide an opportunity for FERC and the states to get the pricing of demand-response programs right.

For example, a new FERC policy could invite states -- the regulators of retail electricity transactions -- to opt into a reworked demand-response plan, he said during the Gibson Dunn session. "That should resolve the jurisdictional problem" at the heart of last month's decision, he said.

"If I'm wrong, and this wouldn't satisfy legal interpretations, then this is a much more serious problem," he said.

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