On May 23, 2014, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated FERC Order No. 745, “Demand Response Compensation in Organized Wholesale Energy Markets” in its entirety as an ultra vires agency action, explaining that FERC’s rule overstepped its authority, “encroaching on the states’ exclusive jurisdiction to regulate the retail market.”  While the court based its decision on jurisdictional grounds, it said it would have vacated the order on substance also, concluding it was arbitrary and capricious to promulgate rules that over-compensate demand response providers.  The panel was split two to one.

In early 2011, FERC issued Order No. 745, requiring organized wholesale energy markets administered by a Regional Transmission Organization (“RTO”) or Independent System Operator (“ISO”) to compensate demand response resources at the market price for energy (see March 21, 2011 edition of the WER).  At the time, Commissioner Philip Moeller issued a ten page dissent to Order No. 745, explaining that he preferred to allow organized markets to “continue to develop their own rules” regarding demand response compensation.  Commissioner Moeller also expressed concern that Order No. 745 granted preferential treatment to demand response resources in some instances and unduly discriminated against them in others.

On review of the order, the D.C. Circuit panel overturned the decision as outside FERC’s jurisdiction, but was split two to one on the decision.  Circuit Judge Brown and Senior Circuit Judge Silberman for the majority concluded that because the Federal Power Act unambiguously restricts FERC from regulating the retail market, Order No. 745 necessarily failed.  They explained that though FERC is granted authority over all rules and regulations affecting wholesale rates under sections 205 and 206 of the Federal Power Act, and though demand response can affect wholesale rates even though it is in essence a retail issue, it was too indirect of a correlation to justify Commission jurisdiction.  If allowed to assert jurisdiction over demand response, there would be no limit to what attenuated topic could conceivably fall under the umbrella of “affecting” wholesale rates, the court concluded.  While deciding further analysis was not required, the majority also noted that FERC failed to properly consider Commissioner Moeller’s arguments and the order was therefore also arbitrary and capricious.  In particular, the majority echoed Commissioner Moeller’s concerns regarding the overcompensation of demand response providers and noted that FERC’s failure to adequately explain how the system results in just compensation would have required the rule be vacated on substantive grounds.

Senior Circuit Judge Edwards dissented, emphasizing that Order No. 745 required compensation for demand response resources only in the event that their participation actually affected the wholesale electricity market by lowering the market-clearing price.  Further, Judge Edwards disagreed with the majority’s opinion that the Federal Power Act was unambiguous with regard to where the line for “affecting the wholesale rates” actual fell, and argued instead that the court was limited to determining whether FERC made a fair interpretation of an ambiguous statutory delegation of authority.

Insofar as the order was vacated in its entirety as an ultra vires agency action, additional actions and proceedings at FERC will likely be required to unwind certain market rules implemented in compliance with the order.

To view the decision, click here