I’ve written dozens of proposals, and I’ve read dozens and dozens of requests for proposals from all sorts of entities including states, local governments, private corporations, and of course, utilities. With this comes scope of work requested, required proposal content, rules, terms and conditions, and due dates. I always consider content of the RFP to mean what it says, and if it isn’t clear what it means, either ask a question via the process detailed in the RFP, or ignore it and work it out later, or it is a minor thing – irrelevant in the big picture.
Enter the recent US District Court of Appeals, DC Circuit smackdown on the Federal Energy Regulatory Commission (FERC) regarding demand response pricing. I first read about this in The Wall Street Journal the day the FERC rule in question was vacated; i.e., nullified, voided, nixed, thrown out. I thought, hmm, that’s interesting. What does it mean?
Later, I started reading opinions of stakeholders including individuals writing for American Public Power Association and Public Utilities Fortnightly. Links not provided because I found them to be confusing and brain damaging.
Not to give up, I kept researching this and that, and finally, I came across the official ruling (if that’s what it is called) from the horses’ mouths; i.e., the ruling judges in the case, directly from the US Court of Appeals, DC Circuit. To my astonishment, I could actually understand the writings of these judges better than the crib-notes versions written in op-eds.
In this country, we have a document called the Constitution, which I do not believe is even mentioned in the ruling. But the ruling essentially boils down to Article I, Section 8, Clause 3. You guessed it! The commerce clause. The commerce clause grants the federal government (congress) authority to regulate the flow of commerce (e.g. electricity, pumpkins, cattle, hammer handles, you name it) across state lines. The purpose is to disallow states from getting into trade wars; e.g., Minnesota places a tariff of 2000% on foam cheese hats from Wisconsin. Can’t do that by rule of the federal government.
FERC’s power is also limited by Article I, Section 8, Clause 3. They are allowed to regulate the flow and pricing of wholesale power from state to state, or among the regional transmission organizations / independent system operators. Regulation of retail power sold to end users, that is, you, me, and the man behind the tree, is the jurisdiction of states and the ISO/RTOs, only.
FERC declared in Order 745, the Order that was tossed, that it has the authority to regulate demand response, which everyone understands is a retail transaction – because it affects prices at the wholesale level. This is true.
For a refresher, demand response, per the DC court ruling, is one of two things: “reduction in the consumption of electric energy by customers from their expected consumption in response to  an increase in the price of electric energy or  to incentive payments designed to induce lower consumption of electric energy.”
In other words, demand response occurs either through the efficient marketplace, in response to pricing signals at the consumer level (which hardly any, if any of us, have), or common utility tariffs and incentives to curtail under periods of high power demand. These utility incentives include interruptible rates for large users and direct load control (cycling air conditioners and water heaters) at the small business and residential level.
FERC’s Order 745 declared that states and RTO/ISOs must set the price of demand response resources the same as actual power supplied by generators (e.g. companies). The DC Circuit ruling says FERC acknowledges the response to pricing signals (#1 in previous paragraph) as a retail function beyond its jurisdiction. However, it declares that magically, #2 above, incentives to curtail are a wholesale event, because it is voluntary, and therefore under the thumb of FERC. Good grief. This is absurd, and thus the vacancy. Utilities and ISOs/RTOs are free to implement demand response as they see fit.
A few passing thoughts:
- The dissenter (the court ruled 2 against 1), Judge Harry Edwards, wrote that the term “sale” [of electricity] used in the statute is ambiguous. I was reminded of the ghost of the Lewinski chronicles, “That depends on what the meaning of the word ‘is’, is.”
- The dissent states retail markets are inefficient with respect to pricing signals. This is true. For example, homeowners pay a constant rate for a given day/week/month, in most of the country. Actual cost at any time is therefore not present at the point of sale. This is unfortunate but getting infrastructure in place to make it so is very expensive. Someday we will have this and this case will be moot.
- The majority argues that if FERC Order 745 were allowed to stand, there would be “no limiting principle” because anything that affects wholesale prices, as they argued for DR, could fall under their control. This is true.
- Naturally, entities that sell power did not like this order because the DR participant requires no investment to compete against them.
- I learned from my boss, and from direct experience, that many attorneys will rig the game in every possible way and in some cases, patently unreasonable in their favor; or in this case, make things up until someone calls them out.
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