The Supreme Court Saves Demand Response:
Now What?

The U.S. Supreme Court has upheld FERC's Order 745.  That order requires operators of wholesale energy markets to treat demand side bids comparably to generation bids.  Comparable treatment requires that demand side bidders (a) be allowed to compete with generators on the "supply side" of the market, and (b) receive the same compensation generation bidders getthe locational marginal price (LMP).  This entitlement to LMP compensation is available only to demand resource bids meeting a "cost-effectiveness" test—a test designed to ensure that no wholesale buyer is made worse off by the presence of demand side bids.   
The Court's opinion has two main holdings.  First, demand side bidding is a "practice …affecting" wholesale rates—a phrase used in the Federal Power Act to define FERC's jurisdiction.  Because FERC acted within its wholesale domain, it did not enter the states' FPA-preserved retail domain.  Second, the Court held that FERC's justifications for LMP compensation were not "arbitrary and capricious."  


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