FERC Order No. 745 established uniform compensation levels for DR resources in wholesale day-ahead and real-time energy markets. FERC directed regional transmission organizations (RTOs) and independent system operators (ISOs) to pay DR resources the full locational marginal price (LMP) typically paid to the owners of electric generating units. FERC justified payment of the full LMP on the ground that DR can supply the same benefits to the grid, in terms of balancing supply and demand, as can generation when dispatched. FERC, however, made payment of the full LMP conditional on the DR resource (1) being able to displace generation in a manner that serves the RTO/ISO and (2) meeting a net-benefits test, which required that the cost of paying the full LMP be less than the beneficial effect on energy prices resulting from the demand reduction provided by the DR resource.
The Electric Power Supply Association (EPSA) − which represents the interests of merchant generation owners – sought judicial review of Order No. 745. Among other things, EPSA argued that DR by retail customers is within the regulatory domain of state utility commissions and that, in adopting rules for compensating DR resources, FERC had impermissibly encroached on state jurisdiction. EPSA asserted that, under Section 201 of the Federal Power Act (FPA), FERC’s regulatory jurisdiction encompasses transmission and wholesale power sales in interstate commerce but not retail DR. In response, FERC claimed that the use of retail DR affects electricity prices at the wholesale level, thereby bringing DR within FERC’s jurisdiction under Sections 205 and 206 of the FPA.
District energy systems are well-suited to participate in DR programs, whether at the state or federal level. For example, a district energy system that serves the heating needs of a large building complex also may be able to produce steam that can be used to generate electricity. Such combined heat and power can be configured to function as a DR resource because the electricity produced can be used on-site to reduce the demand that the building complex otherwise would impose on the grid. Such “behind-the-meter” CHP allows a large customer to curtail electricity consumption from the grid in response to a market price signal (economic DR) or to an emergency call from the grid operator (emergency DR), simply by ramping up the electricity production from its CHP facility. Through the compensation it receives for responding to the grid operator’s directives for demand reduction, a district energy system may be able to secure additional economic benefits beyond those derived solely from the more efficient delivery of heating services.