Utility Project Amicus Brief Urges Supreme Court Not to Approve FERC’s “Demand Response” Plan to Fix Spiking Wholesale Electricity Spot Markets with “Market-Based Rate” Payments to Retail Customers for Not Using Electricity

The Federal Energy Regulatory Commission (FERC) in 2011 adopted a rule it believed would avoid or reduce price spikes by requiring wholesale electricity spot market operators, such as the NYISO, to pay large retail customers to avoid using electricity at the same “market-based rates” set for the supply of electricity.  By reducing market demand at times when the price is about to spike, through the purchase of so-called “negawatts” from customers who promise to cut their usage, the FERC hoped that the cost of the additional payments to those customers – passed through to ordinary customers — would be offset by reduced price spikes.  The FERC also claims this “demand response” program would reduce “strategic bidding” by sellers, who are all paid the same price in uniform clearing price day-ahead energy spot markets, and that this eventually would lower prices to retail consumers, to whom wholesale energy prices are passed through by state regulators.

The Court of Appeals for the District of Columbia annulled the FERC “demand response” program in 2014, in a decision concluding that the program exceeded FERC’s powers under the Federal Power Act because it unlawfully intrudes into the realm of state jurisdiction over retail rates.  See New York Utility Project Updates, DC CIRCUIT: FERC’S “DEMAND RESPONSE” SCHEME TO PAY RETAIL CUSTOMERS NOT TO USE ELECTRICITY ILLEGALLY EXCEEDS ITS POWERS TO SET WHOLESALE ELECTRIC RATES, May 24, 2014.  In a dual holding, the Circuit Court also invalidated the rate established for paying customers not to use electricity, which some parties claimed was excessive, or in other words not reasonable.  The United States Supreme Court in April 2015 granted the petition for a writ of certiorari to review the case.  The two questions it will answer are whether FERC exceeded its jurisdiction by requiring payments to retail customers curtailing their usage in the “demand response” program, and whether the market-based rate for demand response, made equivalent to the market rate for electric energy supply, was arbitrary.

The Public Utility Law Project in an amicus brief filed September 8, 2015, urged the Supreme Court to affirm the 2014 Circuit Court decision invalidating FERC’s “demand response” program, or alternatively, not to endorse or implicitly approve any “market-based rates” for wholesale electric energy or for “demand response” payments.  The amicus brief points out that an unintended consequence of paying some large retail customers not to use electricity, instead of reducing rates, may only add to the economic burdens of low income customers:

“New York residential customers already pay some of the nation’s highest rates for electricity. High rates presently cause major economic hardship for New York’s low-income customers, many of whom, due to indebtedness to utilities, are threatened with shutoffs as a bill collection measure*** As of April 30, 2015, there were 1,037,651 residential customers who were more than 60 days in arrears, carrying nearly $799 million owed to utilities; and 295,797 residential customers statewide had utility service disconnected for nonpayment during the preceding 12 months. *** FERC’s “demand response” program poses a serious risk to vulnerable retail consumers because rates for electric energy will continue to be higher than many can afford. FERC’s failure to correct excessive charges demanded and received by wholesalers of electric energy and its continued reliance upon illusory “market-based” solutions will most likely cause more serious harm to residential customers, particularly those with low incomes already facing hardship, other rate increases, and decreased assistance in the form of low-income rates.“

Underscoring the point that low-income customers face increased vulnerability and cannot afford to pay more for electric service, the brief noted that “[u]nder a recent recommendation of the New York Public Service Commission Staff to revise low-income rates ‘more than 85 percent of Con Edison’s low income program participants will receive a smaller discount than they currently receive.'”

On the merits of the case, the Utility Project argues that FERC lacks authority to require programs that pay retail customers to avoid using electricity in order to alter the balance of supply and demand in wholesale markets, in an indirect attempt to curb unreasonable price spikes.  The Utility Project agreed with the diverse group of Respondents who argued in their brief that “FERC’s effort to regulate ‘demand response’ is an effort to regulate retail sales, countermand state decisions concerning retail rates, and manipulate retail demand.”  Disagreeing with FERC’s brief, the Utility Project expressed doubt that the “demand response” programs would succeed, because sellers are under no obligation to bid the same way or offer the same amount of supply.  As a result, the effects of costly “demand response” payments to customers for not using electricity could be offset immediately, or over time, by a countervailing sellers’ “supply response” such as physical or economic withholding of supply.  This could restore high prices achieved before “demand response” began, or even increase prices. For example, if, following a 200 megawatt reduction in demand by a successful “demand response” purchase, sellers reduced capacity by shutting down a 300 megawatt baseload power plant, the subsequent supply reduction could give rise to increased operation of peaker plants, and higher prices in more hours than before the advent of “demand response.”

The Utility Project argues that the consequences of affirming the decision ending FERC’s market-based “demand response” solution to problems with its unfiled “market-based rates” system would not end FERC’s ability to moderate peaker-style prices.  Rather, the amicus brief points out that FERC has an arsenal of traditional remedies available, if it chooses to use them, to remedy any unreasonable rate or charge.

The Utility Project also argues that in circumstances like this where a federal administrative agency seeks to change the regulatory paradigm created by statute, the issue is one best taken up by Congress, as occurred in the aftermath of the Supreme Court’s decision in MCI Telecommunications Corp. v. AT&T Co..   In that case, the Supreme Court invalidated the FCC’s effort to deregulate telephone service without congressional authorization to amend the statutory rate filing and review requirements.  The Utility Project amicus brief points out that Congress might, as it did in the telecom arena after the FCC effort to deregulate was struck down, couple approval of some deregulatory measures with affordability, universal service and customer protection improvements that FERC, as the regulatory agency, did not or could not adopt.  For example, before authorizing deregulated market-based rates and purchases of “negawatts,” it is possible that Congress would enact affordability and universal service protections funded by a non bypassable surcharge on all megawatts and “negawatts,” improve protections against market gaming, and ensure consumer remedies are available when the “market-based rates” prove to be unreasonable.  See Paul B. Mohler, HAS THE “COMPLETE AND PERMANENT BOND OF PROTECTION” PROVIDED BY FERC REFUNDS ERODED IN THE TRANSITION TO MARKET-BASED RATES?, 33 Energy Law Journal 41 (2012).

In the event the Supreme Court finds that FERC has authority to require “demand response” payments to retail customers, the Utility Project urged in the alternative that the Court not sanction FERC’s “market-based rates” regime, which abandons the traditional filed rate regulation system spelled out in the Federal Power Act.  In a 2008 case, the Supreme Court noted that it had not yet decided whether FERC’s “market-based rates” regime is legal:

We have not hitherto approved, and express no opinion today, on the lawfulness of the market-based-tariff system, which is not one of the issues before us. * * * * We reiterate that we do not address the lawfulness of FERC’s market-based-rates scheme, which assuredly has its critics.

Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527, 548 (2008).  See New York Utility Project Updates, SUPREME COURT LEAVES FUNDAMENTAL QUESTIONS ABOUT FERC MARKET RATE SCHEME UNANSWERED, June 26, 2008.  In a 2012 case, the Supreme Court declined to review a case where consumer groups raised the issue of FERC’s power to allow unfiled “market-based rates.”   See New York Utility Project Updates,  SUPREME COURT DENIES REVIEW OF CONSUMER GROUPS’ CHALLENGE TO FERC’S “MARKET-BASED RATES” SCHEME, LEAVING ISSUE UNRESOLVED, June 29, 2012.  Since denial of certiorari is no indication of the Court’s view of the merits of a claim, the validity of FERC’s “market-based rates” scheme remains undecided.

The case was argued before the Supreme Court on October 14, 2015.

Updates

Transcript of Oral Argument, October 14, 2015, see page 13 questioning FERC’s  authority to dispense with rate filing and allow market rates, Oral argument, beginning at 10:45.

Glen Boshart, Supreme Court decision on FERC demand response rule will be in 2016,  SNL, Dec. 14, 2015.

Robin Bravender, No news may be good news for FERC in grid case, E&E Greenwire, Jan. 13, 2013

 On January 25, 2016 the Supreme Court issued its opinion reversing the lower court decision and upholding FERC’s “demand response” program, which pays retail customers not to use electricity in the hope that reduced demand would lower spiking prices in the deregulated spot markets of grid operators.  See High Court Upholds Government’s Energy Conservation Program, AP Jan 25, 2016.
The Utility Project’s amicus brief agreed with the lower court that FERC went beyond its powers to allow wholesale grid operators pay retail customers not to use electricity, but also urged that no matter how it ruled, the Court should not approve market based rates. The decision does not mention the public rate filing requirements of 16 U.S. § 824d(d), or discuss consistency of FERC’s unfiled private market based rates scheme with the Federal Power Act.  The decision does discuss how the grid operators’ “bid-based” markets work to pay all sellers the market clearing price, but there is no reason power could not be dispatched, and sellers paid prices based upon their publicly filed rates, consistent with § 824d(d), instead of prices based on unfiled, secret rate demands and rate increases which are not reviewable by FERC for reasonableness.
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