Court says no to FERC’s negawatt payment rule

Jeremy Jacobs and Hannah Northey at Greenwire report “Appeals court throws out FERC’s demand-response order“:

A federal appeals court today threw out a high-profile Federal Energy Regulatory Commission order that provided incentives for electricity users to consume less power, a practice dubbed demand response.

In a divided ruling, the U.S. Court of Appeals for the District of Columbia Circuit struck a blow to the Obama administration’s energy efficiency efforts, vacating a 2011 FERC order requiring grid operators to pay customers and demand-response providers the market value of unused electricity.

Among environmentalists this demand-response enabled “unused electricity” is sometimes described as negawatts. FERC’s rule required FERC-regulated wholesale electric power markets to pay demand-response providers the full market price of electricity. It is, of course, economic nonsense pursued in the effort to boost demand response programs in FERC-regulated markets.

The court held that FERC significantly overstepped the commission’s authority under the Federal Power Act.

The Federal Power Act assigns most regulatory authority over retail electricity prices to the states, and the court said FERC’s demand response pricing rule interfered with state regulators’ authority.

Personally, I would have dinged FERC’s rule for economic stupidity, but maybe that isn’t the court’s job. Actually, I did ding the FERC’s rule for its economic stupidity. I was one of twenty economists joining in a amicus brief in the case arguing that the FERC pricing rule didn’t make sense. The court’s decision gave our brief a nod:

Although we need not delve now into the dispute among experts, see, e.g., Br. of Leading Economists as Amicus Curiae in Support of Pet’rs, the potential windfall  to demand response resources seems troubling, and the Commissioner’s concerns are certainly valid.  Indeed, “overcompensation cannot be just and reasonable,” Order 745-A, 2011 WL 6523756, at *38 (Moeller, dissenting), and the Commission has not adequately explained how their system results in just compensation.

But if this negawatt-market price idea survives the appeals court rejection and takes off in the energy policy area, I have the following idea: I’d really like a Tesla automobile, but the current price indicates that Teslas are in high demand so I’m going to not buy one today. Okay, now who is going to pay me $90,000 for the nega-Tesla I just made?

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2 thoughts on “Court says no to FERC’s negawatt payment rule

  1. Good analogy with the Nega-Tesla.

    Of course, we’d have no problem with people selling back power they’ve committed to purchase day-ahead, with all of its commensurate risks. But with no commitment, no risks, the reward shouldn’t double down on the market-price savings that the consumer gets from not consuming.

  2. Exactly: pay to play. Make a binding financial agreement through the day ahead market or via longer term contract or whatever. No need for imagining some baseline level of consumption against which consumption during emergency conditions can be judged. Much less opportunity for gamesmanship, for opportunistic behavior, and so on.

    So with respect to my Nega-Tesla, if ten customers had paid for delivery of a new Tesla sedan this afternoon, and only nine cars show up on the truck, then one of us is owed compensation for the seller’s failure to deliver on the agreement. All the people who happen to be walking by the showroom that afternoon and who also agree not to demand delivery of a Tesla are not owed anything.

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