Supreme Court Upholds FERC’s Authority to Compensate Demand Response

FERC issued Order 745, the rule in question that required market operators to pay DR aggregators the same price as generators, under a theory that DR affects wholesale rates and may therefore be regulated under the Federal Power Act.

Challengers, including APPA and NRECA, asserted that DR is a retail function, to be regulated by state and local governments. The Court rejected that argument, saying, "A FERC regulation does not run afoul of [the Act’s delegation of retail regulation to states] just because it affects the quantity or terms of retail sales. Transactions occurring on the wholesale market have natural consequences at the retail level, and so too, of necessity, will FERC’s regulation of those wholesale matters. That is of no legal consequence."

Generators had also questioned the payment level to DR aggregators, given that they, unlike generators, do not need to pay for fuel and steel in the ground. In Order 745, FERC had considered subtracting the energy savings DR participants see (from foregoing the power they would have consumed) from the payment they receive for the same action, but declined to reduce the payments. Although the lower court called that decision "arbitrary and capricious," the Supreme Court roundly rejected challengers’ arguments on that issue, deferring to FERC’s assessment that both generation and DR benefit the wholesale market equivalently and should be paid equally.

The Court remanded the case to the D.C. Circuit to determine the fate of DR in capacity markets, but given the ruling on FERC’s jurisdiction under the Federal Power Act, the lower court is likely to maintain FERC control there as well.

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