Who Regulates the Smart Grid? FERC's Authority Over Demand Response Compensation in Wholesale Electricity Markets

San Diego Journal of Energy & Climate Law, Vol. 4, Forthcoming

30 Pages Posted: 11 Apr 2013

See all articles by Joel B. Eisen

Joel B. Eisen

University of Richmond - School of Law

Date Written: April 10, 2013

Abstract

A potentially revolutionary shift is taking place in the wholesale electricity markets that provide power for roughly half the nation’s customers, involving participants offering reductions in demand, or “demand response” (DR) into the markets. DR is a reduction in consumption in response to an increase in the price of electricity or to incentive payments, and can have numerous benefits, such as reducing overall demand for electricity, reducing greenhouse gas emissions and the need for constructing new power plants, and contributing to increased reliability of the electric grid. DR is also is an interactive and dynamic application that can spur the growth of other two-way uses of the Smart Grid, such as greater incorporation of distributed energy resources.

“Order 745” of the Federal Energy Regulatory Commission (FERC) requires DR to be compensated in wholesale energy markets at the same price as electricity bid into the markets. The Article contends that this Order is a building block of a fundamental shift in FERC’s regulatory role from fostering competition in electricity generation and promoting the sale of electricity at its lowest cost, to using the wholesale power system to achieve environmental objectives and other social goals and transform the wholesale market as fundamentally as FERC’s initial restructuring orders that fostered the markets’ creation. A challenge to Order 745, Electric Power Supply Association v. FERC, is currently pending in the D.C. Circuit. This Article contends that Order 745 should be upheld against states’ objections that it impermissibly regulates retail electricity rates, because it fits within FERC’s broad authority to regulate the wholesale power markets under the Federal Power Act, and is essential to ensure the transition to a clean energy future. Also, FERC’s determination that any potential for overcompensation of DR at the full “locational marginal price” prevailing in wholesale electricity markets will be offset by application of a “net benefits” test is entitled to deference, as it represents FERC’s judgment about the importance of DR as a resource in the markets.

Keywords: Demand response, Smart Grid, wholesale electricity market, electricity, energy, climate change, greenhouse gases, locational marginal price, FERC, Order 745

JEL Classification: K00, K20, K22, K33

Suggested Citation

Eisen, Joel B., Who Regulates the Smart Grid? FERC's Authority Over Demand Response Compensation in Wholesale Electricity Markets (April 10, 2013). San Diego Journal of Energy & Climate Law, Vol. 4, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2248209

Joel B. Eisen (Contact Author)

University of Richmond - School of Law ( email )

203 Richmond Way
Richmond, VA 23173-0001
United States
804-287-6511 (Phone)
804-289-8683 (Fax)

HOME PAGE: http://law.richmond.edu/faculty/jeisen/

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