On October 7, 2014, PJM Interconnection, L.L.C. (“PJM”) filed with the Federal Energy Regulatory Commission (“FERC”) a blueprint for the continued participation of demand response resources in its markets in the wake of the United States Court of Appeals for the D.C. Circuit’s decision in Electric Power Supply Ass’n v. Fed. Energy Reg. Comm’n, 753 F.3d 216 (D.C. Cir. 2014) (“EPSA”).  In that case, the D.C. Circuit vacated Order No. 745, FERC’s rule governing the compensation of demand response resources in wholesale energy markets on the basis that the rule encroached upon state jurisdiction over retail sales.  The court’s opinion casts significant doubt on FERC’s authority to require transmission providers to allow demand response to participate in their markets, with some wondering whether there is any room left for demand response in wholesale markets at all. 

PJM’s filing acknowledges the significant uncertainty created by the court’s decision, but expresses a commitment to “finding ways to preserve the value that demand response provides to [its] system and market operation.”  Characterizing sales of demand response by retail customers, either individually or through aggregators as “supply-side,” PJM argues that EPSA’s holding – and reasoning – does not extend to demand response offered by wholesale entities, who have contracted with their customers to curtail electric consumption under specific circumstances.  The latter form of demand response, in which the specific economic arrangements for curtailing electric consumption are a matter of contract between the wholesale entity and its retail customer, are defined in PJM’s paradigm as, “demand-side” and were not considered by the EPSA court.  PJM suggests that these contractual commitments can be bid into wholesale electric markets managed by RTOs/ISOs without fear of crossing the line between state and federal regulation.

PJM proposes that, going forward, demand response would not participate directly in PJM’s markets, but through load-serving entities (“LSEs”), who would commit to reduce wholesale load based on agreements with end-users.  Rather than being directly compensated by PJM, demand would curtail according to individual economic circumstances in order to avoid costs and reap any associated financial incentives offered by their LSE.

As in the case of PJM’s capacity markets, demand response would not be directly compensated through PJM’s energy market.  In this regard, PJM notes that its Day-Ahead Market already allows entities to submit price responsive demand bids in which LSEs can specify a price at which they will forego consuming energy.  PJM also notes that PJM’s Tariff includes provisions for Price-Responsive Demand in the Real-Time Market, which allow LSEs to submit a forecast of price responsive demand that PJM uses to avoid dispatching generation in anticipation of curtailment.

In contrast to its view concerning its energy and capacity markets, PJM’s is optimistic that demand response can continue to participate directly in PJM’s ancillary service markets.  PJM notes that “[a]ncillary services are well-defined wholesale products and services closely tied to the FERC’s federal authority over interstate transmission service” and “are not matters historically under state purview.”  For this reason, PJM proposes to continue to pay demand eligible to provide frequency regulation and synchronized reserve as a resource in its markets.

With FERC having requested en banc review of the D.C. Circuit decision and a complaint pending before FERC seeking removal of all portions of PJM’s Tariff permitting participation of demand response in capacity auctions, it is likely that litigation concerning the implications of EPSA and the role of demand response in wholesale markets will remain ongoing for the foreseeable future.  Nevertheless, PJM’s filing provides a glimpse of what the future of wholesale demand response may look like in a post-EPSA world.