Electricity in the New SCOTUS Season

It’s October and  a new SCOTUS term has started.  Inasmuch as Burt has temporarily withdrawn, I’ll try to take up a little of the slack with a preview of one of the early cases (oral arguments on Oct. 13).  This one is likely to have a significant impact on the shape of electricity supply policy for the US.

The current big-picture regulatory scheme for electrical power in the US breaks things up into generators, who produce power, utilities, who purchase from the generators and distribute to retail customers, and independent system operators (ISOs) who manage the transmission network that connects generators to utilities.  From the 1990s, federal policy has encouraged former vertically-integrated utilities to split off their generating business.  Utilities provide their best estimates of the future hour-by-hour demand from customers; generators bid to supply that electricity (lowest price wins, obviously).  ISOs may make last-minute purchases (or order some generation curtailed) to keep the grid stable.

Regulatory authority is split along similar lines.  The Federal Energy Regulatory Commission (FERC) oversees the wholesale markets where generators and utilities interact.  States oversee retail (mostly monopoly) markets for consumers.  Conflicts happen.  In California in the early 2000s, generators including Enron gamed the system — and in some cases, just broke the law — to produce shortages and very high wholesale prices.  California state regulators, for the most part, held retail prices steady.  The state wound up having to bail out a couple of the largest utilities.  At the other end of experiences, the Pennsylvania-New Jersey-Maryland (PJM) wholesale market has worked out quite well, although the market operators continue to tinker with it.

One of the problems with the overall market strategy as originally defined is that none of the big players have any incentive to conserve electricity.  California’s utilities, under state regulation, used to operate large conservation programs.  The California regulators allowed the utilities to “invest” in conservation (eg, LED traffic light bulbs) rather than in yet another new generating plant.  So-called “negawatts”, at least in modest amounts, turn out to be significantly cheaper than additional generating capacity.  Separation of distribution and generation removed the incentive to invest in efficiency: distributors make money by delivering more electricity, and generators make money by generating more electricity.  No one (other than consumers directly) makes money by using less electricity.

The FERC’s Order 745 formally added the concept of demand response to the wholesale market model.  The basic concept is simple.  During peak load periods, when the ISO is faced with the need to purchase additional power, usually at quite high prices, utilities make a different bid.  “Pay us $X per megawatt, and we will incent our consumers to reduce their demand.”  For example, a utility may offer residential consumers a deal that says, “We’ll pay you $25 if you let us install a remote-control switch so we can shut off your air conditioner for 15 minutes during peak load periods.”  Over hundreds of thousands of customers, the utility can shed large amounts of demand in fairly short order.  The money to pay those $25 offers can be recovered by selling demand reduction to the ISO.

The generators were upset by the amount of potential money they lost.  In the PJM market, for peak periods, demand response is estimated to have reduced the cost to the ISO for last-minute purchases by about $9B per year. The Electric Power Supply Association (EPSA) representing large generators filed a lawsuit alleging that FERC had overstepped its authority.  The federal DC Circuit Court ruled in EPSA v. FERC (EPSA) that the generators were correct because demand response was a retail transaction, and vacated Order 745 (they also stayed their order, pending appeal to the SCOTUS).

Prediction time.  I’m biased, because I believe the US is facing a long-term electricity supply problem that will require maximum flexibility to address.  The SCOTUS will reverse the Appeals Court 5-4, with Chief Justice Roberts siding with the liberal wing.  The opinion will turn on the fact that where wholesale electricity markets have been successful in the US, the markets deal in much more than just simple generation.  The PJM is a case in point.  The original market for electricity had to be expanded to deal in generation-plus-transmission combinations (in California, Enron made large sums by bidding supply that they knew the grid couldn’t deliver).  The PJM operates a market in spinning reserves to deal with unexpected failures.  The PJM operates a market in long-term capacity to deal with growth.  Just as the utilities aggregate demand by their customers, they should be able to aggregate demand reduction by the customers.

Oh, and why will CJ Roberts side with this argument?  Personal opinion: while he’s a supporter of big corporations, he’s also willing to protect them from themselves.  This won’t be the first time that he’s done this to/for the big generators — he did much the same thing in Utility Air Regulatory Group v. EPA last year, signing on to a convoluted opinion that gave the EPA limited ability to regulate CO2 emissions from power plants.  That was the best deal that the generators could reasonably expect then; demand response in the wholesale market is the best deal they can get now.