Academic journal article Harvard Law Review

Administrative Law - Energy Law - D.C. Circuit Rules That the Federal Energy Regulatory Commission Lacks Jurisdiction over Rates for Nonconsumption of Energy

Academic journal article Harvard Law Review

Administrative Law - Energy Law - D.C. Circuit Rules That the Federal Energy Regulatory Commission Lacks Jurisdiction over Rates for Nonconsumption of Energy

Article excerpt

ADMINISTRATIVE LAW--ENERGY LAW--D.C. CIRCUIT ROLES THAT THE FEDERAL ENERGY REGULATORY COMMISSION LACKS JURISDICTION OVER RATES FOR NONCONSUMPTION OF ENERGY.--Electric Power Supply Ass'n v. FERC, 753 F.3d 216 (D.C. Cir. 2014).

The Federal Power Act (1) splits jurisdiction over the electricity system between the Federal Energy Regulatory Commission (FERC), which regulates the wholesale market and transmission, and state regulators, which have authority over retail markets. (2) However, the seeming clarity of this jurisdictional divide has been muddied by the recent advent of "demand response," in which consumers are paid for reducing their energy consumption. (3) Recently, in Electric Power Supply Ass'n v. FERC (4) (EPSA), the D.C. Circuit vacated a FERC order that attempted to regulate the wholesale prices paid for demand response, on the basis that the order was beyond FERC's jurisdiction due to its impermissible effect on retail markets. (5) The breadth of the court's holding risks confusion in the energy markets and unnecessarily limits FERC's regulatory options.

Demand response offers a partial solution to inefficiencies in the electricity market. The typical organizational model for the electricity market makes a division between wholesale and retail sectors. (6) The regional systems relevant to this case are run by "system operators," independent entities responsible for ensuring that energy supplied in the system's wholesale market meets the demand in the system's retail market. (7) Because the demand for electricity is not constant, at times of high demand system operators must buy power at high prices from less efficient generators. (8) Due to the unresponsive nature of retail prices, consumers have little incentive to reduce consumption during these peak-demand periods. (9) Demand response offers a partial solution. At times of peak consumption, system operators can reduce the overall cost of electricity in the system by paying consumers or groups of consumers, dubbed "demand response resources" (DRRs), (10) to reduce their energy consumption. (11)

FERC's Order 7452 (12) attempted to address perceived problems with the compensation of demand response in the wholesale market. (13) Though FERC had previously issued orders governing the structure of this market as a whole, (14) Order 745 specifically addressed payments to DRRs. (15) FERC found that the rates paid to DRRs by some electric system operators were too low to adequately incentivize the development of demand response. (16) The Order mandated that, in certain circumstances, a system operator must pay to DRRs the same price for a forgone megawatt of consumption that the system operator would have paid a generator that had successfully bid that megawatt into the wholesale market. (17) After notice and comment, Order 745 was passed by four of FERC's five board members over the dissent of Commissioner Moeller. (18) The Commission received numerous requests for rehearing, which it denied. (19) Electric Power Supply Association, a trade group of power suppliers, (20) petitioned the D.C. Circuit for review. (21)

The D.C. Circuit vacated Order No. 745.22 * Writing for the court, Judge Brown (23) found that FERC had exceeded the bounds of its jurisdiction in issuing Order 745, (24) and that Order 745 was "arbitrary and capricious." (25) To analyze FERC's claim that it had jurisdiction over wholesale demand response, Judge Brown outlined the relevant statutory provisions. The Act contains two sources of agency power, and two prohibitions, relevant to the court's decision. Section 201(b)(1) grants FERC jurisdiction over "the sale of electric energy at wholesale in interstate commerce," (26) but not over "any other sale," (27) which is the domain of the states. Sections 205 and 206 contain a broad ancillary grant of power over "'all rules and regulations affecting ... rates' in connection with the wholesale sale of electric energy. …

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