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Federal policy to encourage electricity demand response suffers setback

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The U.S. Court of Appeals for the D.C. Circuit on Friday overturned a federal rule that encourages people and businesses to reduce their use of electricity to offset peak electricity needs of other customers.

[D]emand response is not a wholesale sale of electricity; in fact, it is not a sale at all,” the appellate court said.

The decision will likely disrupt the wholesale market for what had become a new product – the commitment by people and businesses to reduce electricity consumption when their utility supplier would otherwise have to buy power to meet the electricity needs of its customers.

Utilities must simultaneously balance electric generation supply with electricity demand in order to keep the electric grid from shutting down. As more and more people have begun to rely on rooftop solar power and other forms of local electric generation, the strain on utilities to balance electricity supply with demand has increased.

For years, large electric customers have had the ability to back-off electricity use when their utility supplier suffered peak demands in return for compensation. But smart grid technology, which allows utilities to track electricity use in real-time, has also created the opportunity for utilities to expand use of demand response as a way to balance their supply and customer demands.

Back in 2011, the Federal Energy Regulatory Commission, the agency that regulates the wholesale transmission and sale of electricity, had viewed this so called “demand response” as equivalent to electric generation during peak periods of electric load.

The agency sought to encourage demand response by adopting a rule that set a price for quantities of electricity a customer cut back equivalent to the price of electric generation.

Under the rule, utilities paid the same price to customers for electricity they did not use as they would have paid for power the utilities otherwise would have had to buy in order to meet peak electricity demands.

But a three-judge panel disagreed on the legality of the federal rule. The majority found that the rule had out-stepped the agency’s authority to regulate wholesale electricity sales. Under federal law, the Federal Energy Regulatory Commission regulates interstate transmission and wholesale power sales.

The majority relied in part on the fact that demand response invariably involves a retail transaction.

“[The] rule entails direct regulation of the retail market – a matter exclusively within state control,” the majority's decision said.

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