Todd S. Aagaard and Joel B. Eisen
Todd S. Aagaard and Joel B. Eisen ()

On June 2, the Environmental Protection Agency (EPA) proposed its Clean Power Plan, a high-profile regulation to reduce greenhouse gas emissions from existing fossil fuel-fired power plants. The EPA’s action has received considerable attention because it may reduce heat-trapping emissions from the power sector by as much as 30 percent by 2030.

EPA is proposing the Clean Power Plan under Section 111(d) of the Clean Air Act, 42 U.S.C. §7411(d), which directs the agency to establish standards of performance for certain existing sources of air pollution. States submit plans to the EPA that are designed to achieve these standards. Section 111 provides that the standards must limit emissions to the extent “achievable through the application of the best system of emission reduction.” 42 U.S.C. §111(a)(1).

A cornerstone of the EPA’s proposed rule is flexibility for the states in deciding how to reduce emissions. The Clean Power Plan establishes state-specific emissions goals that take into account the amount of emission reduction, technical feasibility, cost, and other factors. Each state’s emissions goals are based on its particular circumstances, such as its existing mix of generation resources.

In deciding how to reach their emissions goals, states can choose the path that works best for them. Available measures include improving efficiency at existing power plants, shifting generation to cleaner power plants, or taking other means of reducing emissions.

Demand Response Strategies

One option available for states under the plan is relying on greater efficiency in energy usage and other demand-side strategies such as “demand response,” which involves programs to reduce consumption at specific times of high electricity demand. An example of demand response includes programs in which residential customers agree to allow their utility to automatically cycle their central air conditioners on hot summer days. Large commercial and industrial users employ even more sophisticated demand response strategies, such as staggering the startup of equipment.

Improving efficiency and deploying more demand response can substitute for additional power generation and offer other significant benefits. Often it costs less to reduce demand through more efficiency and demand response than it would to meet demand by generating additional power. During periods of peak electricity usage that push the power grid to its physical and economic limits, the appeal of demand-side measures that can be “turned on” in mere minutes is especially apparent.

Finally, demand response is an important part of the Smart Grid, in which smart meters and devices that communicate with one another and energy service providers can help reduce emissions and improve the aging electric power grid’s efficiency, reliability, and environmental sustainability. Indeed, former Federal Energy Regulatory Commission (FERC) Chairman Jon Wellinghoff has called demand response the Smart Grid’s “killer app.”

More use of demand-side measures is also a significant innovation for energy and environmental policy. FERC, which oversees wholesale power markets in half the nation, has traditionally focused primarily on energy supply, relying on new generation to meet increasing energy demand. For its part, the EPA has focused on energy supply as well, for example, by requiring that new power plants use improved pollutant control technologies.

Order 745

Yet in another recent development that has received decidedly less attention than the EPA’s new plan, a federal court cast a cloud over demand response’s future. On May 23, a panel of the U.S. Court of Appeals for the D.C. Circuit invalidated FERC’s Order 745, a pillar of the agency’s demand response initiatives. Elec. Power Supply Ass’n v. FERC, No. 11-1486, 2014 WL 2142113 (D.C. Cir. May 23, 2014). Order 745 applies to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), which administer the electric grid in half the nation and operate wholesale electricity markets. Order 745 directs RTOs and ISOs to establish rules that compensate demand response resources the same as electric power suppliers—at the wholesale market price.

Prior to Order 745, RTOs and ISOs chose their own methods of compensating demand response resources. FERC issued Order 745 out of concern that RTOs and ISOs were undercompensating demand response, inhibiting the development of demand response and undercutting its ability to compete in wholesale electricity markets.

A group of organizations affiliated with generators of electricity sued FERC, alleging that Order 745 had overstepped the agency’s authority and that compensating demand response providers at the wholesale market price was unwarranted. A majority of the D.C. Circuit panel agreed, holding that Order 745 exceeded FERC’s jurisdiction over wholesale electricity markets under the Federal Power Act, 16 U.S.C. §824.

The D.C. Circuit panel’s decision undermines FERC’s efforts to promote demand response and makes it less likely that states will rely on more demand response in their plans to meet the requirements of EPA’s Clean Power Plan. Some states may still find it prudent to implement demand response programs, but without the promise of full compensation at market prices, others may balk.

Looking Ahead

Both the Clean Power Plan and Order 745 reflect essential links between the energy sector and environmental concerns. The D.C. Circuit decision and the attacks on the EPA’s Plan—many launched even before the agency released its proposal—signal that the legal basis for relying on demand-side measures will be hotly contested going forward.

In both situations, criticisms of the federal agencies’ approaches employ a crabbed reading of their statutory authority that would unduly restrict the use of demand-side measures. The D.C. Circuit panel assumed that demand response is exclusively a retail market phenomenon, beyond the scope of FERC’s authority over wholesale markets. The panel reached this conclusion even though FERC’s Order 745 provided for compensating demand response services in wholesale—not retail—markets.

Opponents of EPA’s proposal to include demand-side measures in its Clean Power Plan similarly assume that Clean Air Act section 111(d)’s “best system of emission reduction” standard for existing sources of air pollution necessarily allows only regulations aimed directly at power plants, not broader measures that result in lower emissions from power plants.

It remains to be seen whether FERC and EPA will prevail in their initiatives. The D.C. Circuit panel’s decision invalidating Order 745 generated a strong dissent from Judge Harry Edwards, and the case may yet go before the full en banc court. EPA is taking public comments on its Clean Power Plan, and its opponents will almost certainly sue to block the finalized plan. Agencies have an obligation to abide by their statutory mandates, and courts appropriately invalidate regulations when agencies overstep their bounds. But, as long as they maintain fidelity to Congress’ language, agencies should be applauded, rather than penalized, for taking innovative approaches to difficult problems. Achieving the Clean Power Plan’s ambitious goals requires no less.

Todd S. Aagaard is a professor at Villanova University School of Law. Joel B. Eisen is a professor and Austin Owen Research Fellow at the University of Richmond School of Law.