Billions of Dollars at Stake in Supreme Court Power Market Fightby and
Factories, offices have earned $3.68 billion since 2007
Competition cost generators $9 billion in 2014, lawyer says
Power generators may see billions of dollars in additional revenue should the U.S. Supreme Court strike down a federal rule that pays factories and offices to dim their lights when energy is most needed.
Generators say such payouts for cutting electricity use, what’s known as demand response, are too generous. Industrial consumers and environmental groups defend the program they say makes the grid more reliable and lowers utility bills. The case was argued before the U.S. Supreme Court in October. A ruling is expected to be issued by the end of June and possibly as early as Wednesday.
The court case involves a Federal Energy Regulatory Commission rule that allowed for demand-response payments in narrow circumstances, but the outcome has broader implications. Generators say a victory will improve their odds of prevailing in another bid at FERC to deny such payments in annual power auctions where large users have collected $3.68 billion since 2007.
“A ruling leaving demand response to state retail regulation, as we seek, will likely result in federal regulators reexamining the status of demand response in capacity markets,” John Shelk, chief executive officer of the Electric Power Supply Association, a Washington-based group, said in an e-mail Tuesday.
Large power users in the mid-Atlantic grid managed by PJM Interconnection LLC, the largest U.S. market for demand response, took in a record $810.5 million under the program last year. Since consumers are paid to curtail energy use the same amount generators would have earned to produce it, demand response comes at the expense of producers.
“Demand response, if visible and dependable, can and has proven to be an operational tool that assists in maintaining reliability,” PJM said in a report. “PJM Interconnection remains committed to finding ways to preserve the value that demand response provides to both our system and market operations.”
Akron, Ohio-based FirstEnergy Corp. has asked FERC to end demand response payments in the power auctions. That complaint, which has been suspended pending a decision in the case before the Supreme Court, comes as power providers face increasing competition from industrial consumers in the annual auctions, a source of about 15 percent of revenue for suppliers.
Grid operators accept commitments for the supply of power, or the reduction of energy use, in ascending order with the last bid needed to meet demand setting the auction price. Consumers can underbid generators, suppressing prices, according to Chip Cannon, a partner at Akin Gump Strauss Hauer & Feld LLP in Washington.
“Participation by demand response providers in the mid-Atlantic capacity auctions in 2014 resulted in a reduction in gross revenues of about $9 billion,” Cannon said on a conference call Jan. 14. “It’s very, very real for the generators and other market participants.”
Scrapping the rule would boost profits for some of the biggest U.S. power producers that sell into competitive markets including NRG Energy Inc., Exelon Corp., and American Electric Power Co., according to Bloomberg Intelligence analyst Kit Konolige. Companies that benefit from demand response include large consumers such as General Motors Co. and Perdue Farms Inc.
"They are providing real economic benefits to the grid, to everybody using the grid, and they’re doing it at a lower cost than a generating unit," Michael Panfil, an attorney at the Environmental Defense Fund, said in a phone interview. "And the end result is you see a balanced grid that’s cheaper, that’s actually more reliable, and it also happens to be environmentally friendly."
Not everyone agrees that a Supreme Court decision for the generators would further their bid to keep industrial consumers out of power auctions.
"The lack of FERC jurisdiction over demand response in wholesale energy markets in no way predisposes FERC’s jurisdiction in capacity markets," Jon Wellinghoff, a former chair of the agency, said in an e-mail Tuesday. "Those markets are completely different and one cannot assume that a legal precedent in one market applies to the other."