As federal regulators consider whether or not to appeal demand response setbacks to the U.S. Supreme Court, legal wrangling continues over the demise of FERC Order 745.

Earlier this year the U.S. Court of Appeals for the District of Columbia Circuit vacated Order 745, determining that FERC had overstepped its jurisdiction and violated states' rights to regulate the retail energy markets. That meant demand response could no longer bid into wholesale energy markets an equal ground with generation, though the practical impact was minimal, as the rule was not yet implemented.

But that could all change if the theories are applied to other markets. FirstEnergy has filed a complaint aimed at removing demand response from the capacity markets as well, meaning the impacts could be far greater.

"That's where it really gets salacious," said EnerNOCSenior Vice President of Marketing and Sales Gregg Dixon. EnerNOC is a leading provider of demand response products.

FirstEnergy's complaint targeted demand response's ability to compete in the PJM capacity market, using the same logic the circuit court did in vacating 745 from the energy markets. "If that's true and you can eliminate demand response from participating in wholesale cap markets, you will see a massive amount of megawatts in the PJM market vaporize overnight," Dixon said.

The situation is complicated, fluctuating and being watched closely by both power generators and an entire industry built around reducing the need for those generators.

Demand response, taken as a whole in the PJM market, could be considered the single biggest power plant at the operator's disposal. Results of PJM's most recent capacity auction in May yielded 10,975 MW of demand response resources, and should FirstEnergy prove successful in its challenge the generator has asked the courts declare the auction void and illegal, meaning results would have to be recalculated.

Low gas prices and an improving economy have kept power prices relatively low in recent years, meaning demand response has had fairly little chance to compete in energy markets. But when FirstEnergy attacked DR participation in long-term capacity planning, "it was at that point where people really began to get nervous," Dixon said.

Right now, much is uncertain. Last month, the D.C. Circuit Court issued a stay on its earlier decision to vacate Order 745 while FERC decides whether or not to appeal to the Supreme Court That stay expires Dec. 16 but would extend in the event of an appeal. Meanwhile, PJM will be clearing capacity auctions next year and has been working to propose alternate ways for demand response to participate.

"The appeals process and related complaints at FERC will take time to play out," Cadwalader, Wickersham & Taft LLP warned in its analysis on the proceeding.

"The fate of demand response will take some time to play out, adding to the uncertainty of market outcomes related to upcoming capacity auctions as well as commitments for the upcoming winter season," the firm said.

Electric Power Supply Ass’n v. FERC

In May, when the D.C. Circuit overturned FERC Order 745, it did so on the grounds that regulators had overstepped in ordering grid operators to provide demand response incentives.

FERC's order, a policy victory for the demand response industry, valued demand response at market parity with other resources. But the 2-1 court decision determined FERC had gone too far with its new rule, encroaching on the states’ exclusive jurisdiction to regulate the retail market. That decision opened the door for FirstEnergy to challenge demand response in the capacity markets. 

FERC will need to first rule on the FirstEnergy capacity market complaint, and that proceeding is underway. The commission's position is established, however, so it is likely the challenge will wind up in the courts.

PJM: Invalidating May auction 'extremely damaging'

PJM has taken steps on a couple of fronts. The grid operator has begun developing a utility-focused strategy it says can help demand response to remain functioning as a resource in  marketplace.

“Load serving entities, in partnership with their customers (often under state programs), can manage their wholesale consumption, lower their forecast demand requirements and actively manage their consumption of energy at the peaks to lower their capacity obligations,” PJM said in a white paper describing a proposed solution.

But accounting for demand response and paying for it are different things. PJM will be clearing capacity auctions in 2015, including May's Base Residual Auction—that 10,975 MW, effectively the operator's largest "single plant."

“The form by which demand is eligible to participate in these auctions ideally would be known before conducting such auctions,” PJM said. “Pursuing creative but untested notions of demand as a demand resource in upcoming capacity market auctions and thus facing the prospect of several years of uncertain administrative and judicial litigation serves to undermine completely the very purpose of the capacity market—namely, to provide a certain stream of forward revenues to assist capital formation for resource investment.”

PJM also filed a response to FirstEnergy, asking federal regulators to dismiss the complaint on a variety of issues.

"The relief FirstEnergy seeks is not just and reasonable, and would be extremely damaging to the market certainty that is critical to sustaining investment in electricity infrastructure," PJM said. 

"Under any reasonable interpretation of EPSA, the decision does not require abrogating the commitments of the demand response capacity resources that PJM procured in [Reliability Pricing Model] auctions held prior to the court’s ruling," the operator said. "Those resources entered into their commitments under, and reasonably relied upon, market rules approved by the commission in final orders."

'Clearing prices can be recalculated'

In a response filed with FERC on Nov. 14, FirstEnergy said demand response should not be allowed in PJM's capacity markets for the same reasons the courts removed it from the power markets.

Demand response is not a wholesale sale of electricity, or a sale at all, FirstEnergy said, echoing the findings of the court. "Rather, demand response reflects a decision not to consume energy at retail and therefore fundamentally is a retail event subject to state jurisdiction," the company said.

FirstEnergy has requested FERC direct PJM to remove all tariff provisions allowing or requiring PJM to compensate demand response as a form of supply in the capacity markets, effective May 23, 2014 (the date of the court's decision). The company also requested FERC declare the results of PJM’s May 2014 Base Residual Auction for the 2017/2018 Delivery Year "void and illegal to the extent that demand response resources cleared that auction." 

First Energy said that it was not seeking in this proceeding to invalidate the results of PJM capacity auctions before May 23, but added that  "the most equitable way to cure the unlawful participation of demand response in PJM’s May 2014 BRA" would be to recalculate the results.

"Clearing prices can be recalculated with relative ease simply by eliminating the unlawful bids by demand response resources while leaving all other offers as  they were," FirstEnergy said. From there, the company said analysis would determine which capacity suppliers clear the auction on the basis of the offers they submitted consistent with the existing tariff once the unlawful demand response resources have been removed.