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Federal Versus State Jurisdiction: the Argument Over FERC Order 745

A year ago, we wrote to you about the decision from the Washington, DC US Court of Appeals to vacate the Federal Energy Regulatory Commission’s (FERC) Order 745 regarding Demand Response Services. The order, in effect since 2011, defines market rules on how compensation should be paid to demand response assets, basically placing them on an equal platform with generation assets. On May 5th , the US Supreme Court decided to hear arguments on whether the lower court’s decision should be upheld.

At the core of the dispute are generators who object to the plan, which allows Independent System Operators (ISO) to dispatch Emergency Demand Response assets ahead of more expensive generation assets if it is cheaper to do so. Generators argue that all generation assets should be dispatched before Emergency Demand Response assets are dispatched and paid. They also believe that Emergency Demand Response assets should not be paid at the same rates as generators because they do not have the same operating costs to produce energy.

A deeper analysis of arguments and sub-arguments surrounding this issue reveals these important points:

  • ISOs are responsible for safely and reliably dispatching electricity to areas when and where it is needed. The only way they can do this is if they have control over all assets participating in the system. But if Emergency Demand Response assets can only participate through utility-operated retail programs, then individual ISOs can not control when or where these assets are dispatched. This conflict speaks directly to the issue of reliability—the ISO would no longer be in control of the flow of energy during extreme grid conditions.
  • The second issue concerning grid reliability is incentive compensation. If remuneration for demand response is not sufficient, then these assets will not participate. In congested areas like New York City, the performance of Emergency Demand Response assets is crucial to maintaining reliability during periods of peak electrical consumption. In 2014, ECM customers provided 4.2% of all capacity MW’s provided by SCR/demand response assets in New York State, as well as 13% of all capacity MW’s provided in Zone J.

If the Supreme Court upholds the Appeals Court Decision when they reconvene in October, FERC Order 745 will remain vacated. Emergency Demand Response Programs (should they continue) would then be administered on the retail level through the utilities and regulated by individual states—where ISOs would not have any control or real time access.

In the end, this issue boils down to a load versus generation problem. Namely, if load pays for everything in the end, shouldn’t the system favor the economic solution as well as the safest option for reliability—especially since load suffers most when the system fails.