On May 23, 2014, the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit"), in a 2-1 decision, vacated in its entirety and remanded the Federal Energy Regulatory Commission’s ("FERC") Order No. 745, "Demand Response Compensation in Organized Wholesale Energy Markets." Order No. 745 sought to incentivize retail customers to reduce electricity consumption, when economically efficient, by requiring independent system operators and regional transmission organizations to compensate, in certain circumstances, demand response providers at market prices, i.e., the locational marginal price.

The D.C. Circuit found that FERC acted: (1) beyond its jurisdictional authority and infringed on the exclusive jurisdiction of the states to regulate the retail electricity market unambiguously set forth in Section 201 of the Federal Power Act; and, (2) arbitrarily and capriciously by implementing Order No. 745 without fully addressing arguments that such compensation would result in unjust and unreasonable rates.

The DC Circuit stated that FERC jurisdiction is limited to regulating the wholesale energy market, while the retail energy market is within the exclusive jurisdiction of the states, under Section 201(b)(1) of the Federal Power Act.  However, FERC relied on Sections 205 and 206 of the Federal Power Act, which give FERC broad authority to certify that "all rules and regulations affecting . . . rates in connection with the wholesale sale of electric energy are "just and reasonable." FERC stated in Order 745 that by reducing retail consumption incentivized by locational marginal price payments, demand response "directly affects wholesale rates." The majority rejected FERC's position and found: "Demand response – simply put – is part of the retail market. It involves retail customers, their decision whether to purchase at retail, and the levels of retail electricity consumption." FERC cannot regulate areas left to the states, and although demand response is "not necessarily a retail sale, [it] is indeed part of the retail market, which . . . is exclusively within the state’s jurisdiction."

The dissent argued that the Federal Power Act is ambiguous regarding whether demand response is a retail sale; and that a narrow application of Order No. 745 allows it to fall squarely within the Commission's jurisdiction "affecting wholesale rates."

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