An Anti-Consumer Campaign by the Utility Industry Is Now Before the Supreme Court

In deciding last week to hear Electric Power Supply Association v. FERC, the U.S. Supreme court took on a case that has major implications for national electricity markets and the ratepayers who support them.

At issue before the court is “demand response,” the practice by which utilities incentivize electricity customers to curtail their energy use during the most expensive times of the day. Demand response is a growing resource for independent system operators, or ISOs, the groups that control wholesale electricity markets across the U.S.

The beauty of demand response is that individual rate-paying households and businesses benefit from it. Demand response helps avoid the construction of expensive new power plants, which of course are financed ultimately by ratepayers, and which—if you think about it—may not be necessary at all. If there’s less demand for electricity, more power plants are gratuitous. Electric Power Supply Association v. FERC boils down to a contest between whether utilities will support energy efficiency or simply expect consumers to pay for more and more energy generation.

Some backstory:

In 2011, the Federal Energy Regulatory Commission ordered that wholesale electricity market operators had to compensate demand response at the same price as electricity generation (this mandate was codified in FERC Order 745). In other words, a demand-response provider had to be paid the same amount to curtail its usage as a power plant is paid to generate the equivalent amount of electricity. FERC Order 745 was an effort to put demand response on an equal footing with conventional generation resources, helping reduce wholesale electricity prices.

DURING THE “POLAR VORTEX” EVENTS OF 2014, DEMAND RESPONSE DEMONSTRATED ITS VALUE, providing more than 2,000 megawatts of demand reduction, resulting in lower power prices and helping prevent major grid-reliability problems.

By facilitating competition between demand response and conventional power generation, FERC Order 745 drew the ire of major power plant owners, however. The Electric Power Supply Association (EPSA)—whose membership includes the largest merchant-generation companies in the country—has a strong interest in keeping wholesale power prices high, since higher wholesale prices benefit the association’s members.

The association challenged FERC Order 745 in court and last year the U.S. Court of Appeals for the District of Columbia Circuit ruled in their favor, overturning Order 745. The court held that FERC did not have jurisdiction to regulate demand response. FERC appealed the decision to the Supreme Court.

If the appeals court decision to vacate FERC Order 745 is upheld, it will open the door to further restrictions on demand response in wholesale energy markets—to the benefit of power plant owners and to the detriment of ratepayers.

The decision could have ramifications beyond wholesale energy markets, as shown recently by Ohio-based FirstEnergy, whose power plants have been struggling to compete in wholesale energy markets in the 13-state region controlled by PJM Interconnect. FirstEnergy took advantage of the appeals court decision to argue, in a case now pending before FERC, that demand response should not be part of the wholesale capacity market—which is separate from wholesale energy markets but affects ratepayers nonetheless. If FirstEnergy’s challenge is successful, it would drive up the price of capacity in PJM, benefitting FirstEnergy’s power plants at the expense of electricity customers throughout the mid-Atlantic.

If the Electric Power Supply Association is successful in preserving its agenda, the results would be even more catastrophic, and such an outcome would harm ratepayers in deregulated markets everywhere.

Cathy Kunkel is an IEEFA fellow.