United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 23, 2013 Decided May 23, 2014

No. 11-1486

ELECTRIC POWER SUPPLY ASSOCIATION,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

MADISON GAS AND ELECTRIC COMPANY, ET AL.,

INTERVENORS

Consolidated with 11-1489, 12-1088, 12-1091, 12-1093

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Ashley C. Parrish argued the cause for petitioners 

Electric Power Supply Association, et al. With him on the 

briefs were David G. Tewksbury, Stephanie S. Lim, David B. 

Raskin, Harvey L. Reiter, and Adrienne E. Clair. 

Daniel J. Shonkwiler argued the cause for petitioners 

California Independent System Operator Corporation, et al. 

With him on the briefs were Nancy J. Saracino, Roger E. 
2

Collanton, Frank R. Lindh, Mary F. McKenzie, and Charlyn 

A. Hook. 

Sandra E. Rizzo was on the brief for intervenors PJP 

Power Providers Group, et al. in support of petitioners. 

Jeffrey A. Lamken, Martin V. Totaro, and John L. 

Shepherd Jr. were on the brief for amici curiae Robert L. 

Borlick, et al. in support of petitioners. 

Robert H. Solomon, Solicitor, Federal Energy Regulatory 

Commission, argued the cause for respondent. With him on 

the brief were David L. Morenoff, Acting General Counsel, 

and Holly E. Cafer, Attorney. 

Donald J. Sipe, Jonathan G. Mermin, Robert A. Weishaar 

Jr., Joseph D. Shelby, Barry S. Spector, Paul M. Flynn, Kriss 

E. Brown, Marvin T. Griff, Miles H. Mitchell, Ransom E. 

Davis, and Owen J. Kopon were on the brief for intervenors 

Counsel of Coalition of Midwest Transmission Customers, et 

al. in support of respondent. 

Vickie L. Patton and John N. Moore were on the brief for 

amici curiae Environmental Defense Fund, et al. in support of 

respondent. 

Before: BROWN, Circuit Judge, and EDWARDS and 

SILBERMAN, Senior Circuit Judges.

Opinion for the Court by Circuit Judge BROWN. 

Dissenting opinion filed by Senior Circuit Judge EDWARDS.

BROWN, Circuit Judge: Electric Power Supply

Association and four other energy industry associations 
3

(“Petitioners”) petition this court for review of a final rule by 

the Federal Energy Regulatory Commission (“FERC” or “the 

Commission”) governing what FERC calls “demand response 

resources in the wholesale energy market.” The rule seeks to 

incentivize retail customers to reduce electricity consumption 

when economically efficient. Petitioners complain FERC’s 

new rule goes too far, encroaching on the states’ exclusive

jurisdiction to regulate the retail market. We agree and vacate 

the rule in its entirety. 

I

Under the Federal Power Act (“FPA” or “the Act”) the 

Commission is generally charged with regulating the 

transmission and sale of electric power in interstate 

commerce. The FPA “split[s] [jurisdiction over the sale and 

delivery of electricity] between the federal government and 

the states on the basis of the type of service being provided 

and the nature of the energy sale.” Niagara Mohawk Power 

Corp. v. FERC, 452 F.3d 822, 824 (D.C. Cir. 2006). Section 

201 of the Act empowers FERC to regulate “the sale of 

electric energy at wholesale in interstate commerce.” 

16 U.S.C. § 824(b)(1) (emphasis added). Thus, “FERC’s 

jurisdiction over the sale of electricity has been specifically 

confined to the wholesale market.” New York v. FERC, 535 

U.S. 1, 19 (2002).

The Commission concedes that “demand response is a 

complex matter that lies at the confluence of state and federal 

jurisdiction.” See Demand Response Compensation in 

Organized Wholesale Energy Markets, 134 FERC ¶ 61,187, 

2011 WL 890975, at *30 (Mar. 15, 2011) [hereinafter Order 

745]. For more than a decade, FERC has permitted demandside resources to participate in organized wholesale markets, 

allowing Independent System Operators (ISOs) and Regional 
4

Transmission Organizations (RTOs) to use demand-side 

resources to meet their systems’ needs for wholesale energy, 

capacity, and ancillary services. As this court has noted, 

Congress in 2005 declared “the policy of the United States 

that time-based pricing and other forms of demand response . 

. . shall be encouraged . . . and unnecessary barriers to 

demand response participation in energy, capacity and 

ancillary service markets shall be eliminated.” Ind. Util. Reg. 

Comm’n v. FERC, 668 F.3d 735, 736 (D.C. Cir. 2012) (citing 

16 U.S.C. § 2642). The Commission has issued dozens of 

orders on demand-side resource participation, and ISOs and 

RTOs maintaining economic demand response programs 

could file tariffs with the Commission and accept bids for 

ancillary services and from aggregators of retail customers 

directly into the wholesale energy markets. See Wholesale 

Competition in Regions with Organized Electric Markets, 

73 Fed. Reg. ¶ 64,100, 64,101 (Oct. 28, 2008) (to be codified 

at 18 C.F.R. pt. 35) [Order 719]. 

Order 745 establishes uniform compensation levels for 

suppliers of demand response resources who participate in the 

“day-ahead and real-time energy markets.” Order 745, 2011 

WL 890975, at *1. The order directs ISOs and RTOs to pay 

those suppliers, including aggregators of retail customers, the 

full locational marginal price (LMP), or the marginal value of 

resources in each market typically used to compensate 

generators. The Commission conditioned the payment of full 

LMP on the ability of a demand response resource to replace 

a generation resource and required demand response to be 

cost effective. Cost effectiveness would be determined by a 

newly devised “net benefits test,” which FERC directed ISOs 

and RTOs to implement. FERC acknowledged that the cost 

of payments to retail customers to encourage reduced energy 

consumption would have to be subsidized by load-serving 

entities participating in the wholesale market. Id. ¶ 99, 2011 
5

WL 890975, at *27; see also id. ¶ 102. Finally, the rule 

allocated the costs of demand response payments 

proportionally to all entities that purchase from the relevant 

energy markets during times when demand response 

resources enter the market. Commissioner Moeller dissented, 

arguing the Commission’s retail customer compensation 

scheme conflicted both with FERC’s efforts to promote 

competitive markets and with its statutory mandate to ensure 

supplies of electric energy at just, reasonable, and not unduly 

preferential or discriminatory rates. See id., 2011 WL 890975, 

at *34–39.

Requests for rehearing and clarification were filed by 

ISOs, RTOs, state regulatory commissions, trade associations, 

publicly owned utilities, transmission owners, suppliers, and 

others. The Commission, in another 2–1 decision, confirmed 

its approach and Petitioners filed timely petitions for review. 

II

 The Administrative Procedure Act (APA) directs us to

“hold unlawful and set aside agency action . . . in excess of 

statutory jurisdiction, authority, or limitations.” 5 U.S.C. 

§ 706(2)(C). “FERC is a creature of statute” and thus “has no 

power to act unless and until Congress confers power upon 

it.” Cal. Indep. Sys. Operator Corp. (CAISO) v. FERC, 372 

F.3d 395, 398 (D.C. Cir. 2004) (citing La. Pub. Serv. Comm’n 

v. FCC, 476 U.S. 355, 374 (1986)). If FERC lacks authority 

under the Federal Power Act to promulgate a rule, its action is 

“plainly contrary to law and cannot stand.” See Michigan v. 

EPA, 268 F.3d 1075, 1081 (D.C. Cir. 2001).

We address FERC’s assertion of its statutory authority 

under the familiar Chevron doctrine. See City of Arlington, 

Tex. v. FCC, 133 S. Ct. 1863, 1870–71 (2013). The question 
6

is “whether the statutory text forecloses the agency’s assertion 

of authority.” Id. at 1871. If, however, the statute is silent or 

ambiguous on the specific issue, we must defer to the 

agency’s reasonable construction of the statute. Id. at 1868.

FERC claims when retail consumers voluntarily 

participate in the wholesale market, they fall within the 

Commission’s exclusive jurisdiction to make rules for that 

market. Petitioners protest that retail sales of electricity are 

within the traditional and “exclusive jurisdiction of the States” 

and regulating consumption by retail electricity customers is a 

regulation of retail, not wholesale, activity. Reply Br. 11–12. 

The problem, Petitioners say, is the Commission has no 

authority to draw retail customers into the wholesale markets 

by paying them not to make retail purchases.

Initially, we note the regulations have a single definition 

of “demand response”—a “reduction in the consumption of 

electric energy by customers from their expected consumption 

in response to an increase in the price of electric energy or to 

incentive payments designed to induce lower consumption of

electric energy.” 18 C.F.R. § 35.28(b)(4) (emphasis added); 

see also Order 745, 2011 WL 890975, at *1 n.2. High retail 

rates will reduce demand. Conversely, if consumers are paid 

to reduce demand, prices fall. FERC acknowledges the first 

case, “price-responsive demand” is a “retail-level” demand 

response.” See Order 745, 2011 WL 890975, at *1–3 & n.2 

(citing 18 C.F.R. § 35.28(b)(4)). In contrast, FERC dubs a 

reduction in the consumption of energy in response to 

incentive payments a “wholesale demand response.” See 

FERC Br. 5, 34; see also Order 745, 2011 WL 890975, at *1–

3 & n.2 (citing 18 C.F.R. § 35.28(b)(4)). The Commission 

draws this distinction between “wholesale demand response” 

and “retail demand response” in an attempt to narrow the 

logical reach of its rule. See, e.g., FERC Br. 5 (“[T]he 
7

Commission has made plain that its focus is narrow and that it 

addresses only wholesale demand response.”); id. (“States 

remain free to authorize and oversee retail demand response 

programs.”); id. at 14–15. Yet FERC acknowledges 

“wholesale demand response” is a fiction of its own 

construction. See Oral Arg. Tape, No. 11-1486, at 27:31

(Sept. 23, 2013) (conceding “selling” demand response 

resources in the wholesale market “is a bit of a fiction”). 

Demand response resources do not actually sell into the 

market. Demand response does not involve a sale, and the 

resources “participate” only by declining to act. 

 As noted, and as the Commission concedes, demand 

response is not a wholesale sale of electricity; in fact, it is not 

a sale at all. See Order 745, 2011 WL 890975, at *18 (“[T]he 

Commission does not view demand response as a resale of 

energy back into the energy market.”). Thus, FERC astutely 

does not rely exclusively on its wholesale jurisdiction under 

§ 201(b)(1) for authority. See Niagara Mohawk Power Corp., 

452 F.3d at 828 & n.7. 

Instead, FERC argues §§ 205 and 206 grant the agency 

authority over demand response resources in the wholesale 

market. These provisions task FERC with ensuring “all rules 

and regulations affecting . . . rates” in connection with the 

wholesale sale of electric energy are “just and reasonable.” 

16 U.S.C. § 824d(a) (emphasis added); see also id. § 824e(a). 

Thus, the Commission argues it has jurisdiction over demand 

response because it “directly affects wholesale rates.” FERC 

Br. 32–34; see also Order 745, 2011 WL 890975, at *30. 

We agree with the Commission that demand response 

compensation affects the wholesale market. Because of the 

direct link between wholesale and retail markets, compare 

FERC Br. 32, with Pet’rs Br. 11–14 (describing the “direct” 
8

relationship between wholesale and retail rates), and Reply 

Br. 12 (“[T]here is undeniably a link between wholesale rates 

and retail sales”), a change in one market will inevitably beget 

a change in the other. Reducing retail consumption—through 

demand response payments—will lower the wholesale price. 

See Oral Arg. Tape, at 33:13. Demand response will also 

increase system reliability. FERC Br. 33. Because incentivedriven demand response affects the wholesale market in these 

ways, the Commission argues §§ 205 and 206 are clear grants 

of agency power to promulgate Order 745.

The Commission’s rationale, however, has no limiting 

principle. Without boundaries, §§ 205 and 206 could 

ostensibly authorize FERC to regulate any number of areas, 

including the steel, fuel, and labor markets. FERC proposes 

the “affecting” jurisdiction can be appropriately limited to 

“direct participants” in jurisdictional wholesale energy 

markets. See FERC Br. 37. But, as this case demonstrates, the 

directness of participation may be a function of the richness of 

the incentives FERC commands. The commission’s authority 

must be cabined by something sturdier than creative 

characterizations. See Altamonte Gas Transmission Co. v. 

FERC, 92 F.3d 1239, 1248 (D.C. Cir. 1996) (noting FERC 

cannot “do indirectly what it could not do directly”). The 

“direct participant” theory also assumes FERC can “lure” 

non-jurisdictional resources into the wholesale market in the 

first place to create jurisdiction, see Oral Arg. Tape, at 29:52, 

which is the heart of the Petitioners’ challenge.

The limits of §§ 205 and 206 are best determined in the 

context of the overall statutory scheme. See FDA v. Brown & 

Williamson Tobacco Corp., 529 U.S. 120, 132–33 (2000). 

Congressional intent is clearly articulated in § 201’s text: 

FERC’s reach “extend[s] only to those matters which are not 

subject to regulation by the States.” 16 U.S.C. § 824(a). 
9

States retain exclusive authority to regulate the retail market. 

See Niagara Mohawk Power Corp., 452 F.3d at 824. Absent 

a “clear and specific grant of jurisdiction” elsewhere, see New 

York, 535 U.S. at 22, the agency cannot regulate areas left to 

the states. The broad “affecting” language of §§ 205 and 206 

does not erase the specific limits of § 201.1 See generally 

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. 

Ct. 2065, 2071 (2012); sections 205 and 206 do not constitute 

a “clear and specific grant of jurisdiction.” Indeed, the 

Commission agrees its jurisdiction to regulate practices 

“affecting” rates does not “trump[] the express limitation on 

its authority to regulate non-wholesale sales.” FERC Br. 34–

35. Otherwise, FERC could engage in direct regulation of the 

retail market whenever the retail market affects the wholesale 

market, which would render the retail market prohibition 

useless. Cf. Morpho Detection, Inc. v. TSA, 717 F.3d 975, 

 1 The Dissent focuses extensively on § 201(b)(1), positing that the 

“jurisdictional issue turns on a rather straightforward question of 

statutory interpretation: whether a promise to forgo consumption of 

electricity that would have been purchased in the retail electricity 

market unambiguously constitutes a “sale of electric energy” under 

section 201(b)(1).” Dissenting Op. at 3. The jurisdictional issue is 

not quite so narrow. In fact, even the Commission does not 

characterize the challenge this way and never offers an 

interpretation of § 201(b)(1), arguing instead that demand response 

resources are direct participants in wholesale markets. See FERC 

Br. 34–40. Though our review is deferential, even if we reached 

Chevron step two, we could not defer to an interpretation the 

agency has not offered. 

In any event, we do not base our conclusion on the “any other 

sales” language of § 201(b)(1). Rather, we look to the statutory 

scheme as a whole and find that demand response, while not 

necessarily a retail sale, is indeed part of the retail market, which, 

as the statute and case law confirm, is exclusively within the state’s 

jurisdiction. 
10

981 (D.C. Cir. 2013) (declining to “adopt a reading that 

would render the . . . general rule a nullity”). 

In addition, if FERC’s arguments are followed to their 

logical conclusions, price-responsive demand response—

retail demand response in “FERC speak”—would also affect 

jurisdictional rates in the same way as the type of demand 

response at issue in FERC’s rule here, and FERC’s authority 

regarding demand response would be almost limitless. 

Although the current rule leaves price-responsive demand 

untouched, nothing would stop FERC from expanding this 

regulation and encroaching further on state authority in the 

future. 

Thus, FERC can regulate practices affecting the wholesale 

market under §§ 205 and 206, provided the Commission is 

not directly regulating a matter subject to state control, such 

as the retail market. Cf. Conn. Dep’t of Pub. Util. Control v. 

FERC, 569 F.3d 477, 479 (D.C. Cir. 2009) (finding FERC 

could regulate the installed capacity market under its affecting 

jurisdiction because FERC did not engage in direct regulation 

of an area subject to exclusive state control). 2

 

 2 Connecticut Department of Public Utility Control v. FERC, 569 

F.3d 477 (D.C. Cir. 2009), does not sanction FERC’s rule. In 

Connecticut, FERC raised the capacity requirement and incidentally 

incentivized construction of more generation facilities, which are 

subject to state control; here, the Commission’s rule reaches 

directly into the retail market to draw retail consumers into its 

scheme. Here, FERC’s incentive is not merely a logical byproduct 

of the rule; it is the rule. According to the Dissent, “FERC can 

indirectly incentivize action that it cannot directly require so long as 

it is otherwise acting within its jurisdiction.” Dissenting Op. at 18. 

We agree Connecticut cannot control where FERC has directly

incentivized action it cannot directly require. 
11

The fact that the Commission is only “luring” the resource 

to enter the market instead of requiring entry does not 

undercut the force of Petitioners’ challenge. The lure is 

change of the retail rate. Demand response—simply put—is 

part of the retail market. It involves retail customers, their 

decision whether to purchase at retail, and the levels of retail

electricity consumption. If FERC had directed ISOs to give a 

credit to any consumer who reduced its expected use of retail 

electricity, FERC would be directly regulating the retail rate. 

At oral argument, the Commission conceded crediting would 

be an impermissible intrusion into the retail market. See Oral 

Arg. Tape, at 27:15. Ordering an ISO to compensate a 

consumer for reducing its demand is the same in substance 

and effect as issuing a credit.3

 Thus, while it is true demand 

response can occur in two ways—through a response to either 

price change or incentive payments—nothing about the latter 

makes it “wholesale.” A buyer is a buyer, but a reduction in 

consumption cannot be a “wholesale sale.” FERC’s 

metaphysical distinction between price-responsive demand 

and incentive-based demand cannot solve its jurisdictional 

quandary.

Nor does FERC’s reliance on a statement of 

congressional policy from the Energy Policy Act of 2005 save 

its rule. FERC insists its actions “are consistent with 

Congressional policy requiring federal level facilitation of 

demand response, because this final rule is designed to 

remove barriers to demand response participation in the 

organized wholesale energy markets.” Order 745, 2011 WL 

890975, at *30. FERC’s reliance on this language is 

 3 The agency’s concession contradicts the Dissent’s contention that 

FERC can regulate demand response here because “nonconsumption [does not] constitute an ‘other sale,’” Dissenting Op. 

at 16.
12

perplexing; if anything, the policy statement supports the 

opposite conclusion, that Congress intended demand response 

resources to be regulated by states, as part of the retail market.

The Energy Policy Act of 2005 confirms the national 

policy of encouraging and facilitating “the deployment of 

[time-based pricing and other demand response] technology 

and devices that enable electricity customers to participate in 

such pricing and demand response systems . . . and 

[eliminating] unnecessary barriers to demand response 

participation in energy, capacity and ancillary service 

markets.” Pub. L. No. 109-58, § 1252(f), 119 Stat. 594, 966 

(2005). As an initial matter, even if § 1252(f) supports 

FERC’s authority, the Commission cannot rely on the section 

for an independent source of power. Policy statements like 

§ 1252(f) “are just that—statements of policy. They are not 

delegations of regulatory authority.” See Comcast Corp. v. 

FCC, 600 F.3d 642, 654 (D.C. Cir. 2010); cf. New York, 535 

U.S. at 22 (finding that a “mere policy declaration . . . cannot 

nullify a clear and specific grant of jurisdiction”). Thus, the 

relevant sections of the Energy Policy Act of 2005 can only 

be used to “help delineate the contours of statutory authority.” 

Comcast Corp., 600 F.3d at 654. And here, those contours do 

not encompass federal regulation of demand response. 

FERC latches onto the language in § 1252(f) requiring 

elimination of “unnecessary barriers to demand response 

participation in energy . . . service markets” to support its 

claim that Order 745 advances congressional policy. See 

FERC Br. 40. In Order 745, however, FERC went far beyond 

removing barriers to demand response resources. Instead of 

simply “removing barriers,” the rule draws demand response 

resources into the market and then dictates the compensation 

providers of such resources must receive. 
13

We think the title of the section is noteworthy: “Federal 

Encouragement of Demand Response Devices.” (emphasis 

added). Pub. L. No. 109-58, § 1252(f), 119 Stat. 594, 966. 

“To encourage” is not “to regulate.” Although the title is “not 

dispositive of the provision’s meaning,” “it is not too much to 

expect that it has something to do with the subject matter” of 

the section. See CAISO, 372 F.3d at 399. And here, “review 

of the statutory text reveals that [the title] has everything to do 

with the subject matter.” See id. The section dictates demand 

response is to be “encouraged” and “facilitated,” not directly 

regulated as Order 745 proposes. 

This is obvious when § 1252(f) is read in tandem with 

§ 1252(e), “Demand Response and Regional Coordination,” 

which declares it the “policy of the United States to encourage 

States to coordinate, on a regional basis, State energy policies 

to provide reliable and affordable demand response services 

to the public.” Pub. L. No. 109-58, § 1252(e), 119 Stat. 594, 

966. This language underscores that states, not the 

Commission, regulate demand response. Indeed, § 1252(e) 

goes on to note FERC should “provide technical assistance to 

States and regional organizations . . . in . . . developing plans 

and programs to use demand response to respond to peak 

demand or emergency needs.” Id. The Commission is also to 

prepare an annual report, assessing demand response 

resources. Id. Thus, the Energy Policy Act clarifies FERC’s 

authority over demand response resources is limited: its role 

is to assist and advise state and regional programs. 

Even more importantly, the Energy Policy Act statements 

show Congress understood the importance of demand 

response resources to the wholesale market—an importance 

Petitioners do not dispute. Yet, despite this significant impact

on the wholesale market, Congress left regulation of this 
14

aspect of retail demand up to the states, rather than to the 

federal government.

Because the Federal Power Act unambiguously restricts 

FERC from regulating the retail market, we need not reach 

Chevron step two. But even if we assumed the statute was 

ambiguous—as Judge Edwards argues, we would find 

FERC’s construction of it to be unreasonable for the same 

reasons we find the statute unambiguous. Because FERC’s 

rule entails direct regulation of the retail market—a matter 

exclusively within state control—it exceeds the Commission’s 

authority.

IV

Alternatively, even if we assume FERC had statutory 

authority to execute the Rule in the first place, Order 745 

would still fail because it was arbitrary and capricious.

Under the APA, we must set aside orders that are 

“arbitrary, capricious, an abuse of discretion, or otherwise not 

in accordance with law.” 5 U.S.C. § 706(2)(A). In particular, 

“it most emphatically remains the duty of this court to ensure 

that an agency engage the arguments raised before it,” NorAM 

Gas Transmission Co. v. FERC, 148 F.3d 1158, 1165 (D.C. 

Cir. 1998), including the arguments of the agency’s dissenting 

commissioners, Am. Gas Ass’n v FERC, 593 F.3d 14, 19 

(D.C. Cir. 2010); see also Kamargo Corp. v. FERC, 852 F.2d 

1392, 1398 (D.C. Cir. 1988) (“We recognize that this case 

presents a difficult problem for the Commission, but we think 

it has no alternative but to confront the questions raised by the 

[commissioner’s] dissent.”).

A review of the record reveals FERC failed to properly 

consider—and engage—Commissioner Moeller’s reasonable 
15

(and persuasive) arguments, reiterating the concerns of 

Petitioners and other parties, that Order 745 will result in

unjust and discriminatory rates. Moeller argued Order 745 

“overcompensat[es]” demand response resources because it 

“requires that demand resource[s] be paid the full LMP plus 

be allowed to retain the savings associated with [the 

provider’s] avoided retail generation cost.” Demand 

Response Compensation in Organized Wholesale Energy 

Markets: Order on Rehearing and Clarification, 137 FERC 

¶ 61,215, 2011 WL 6523756, at *38 (Dec. 15, 2011) 

[hereinafter Order 745-A] (Moeller, dissenting); see also 

Pet’rs Br. 45–50. The Commission then responded that 

demand response resources are comparable to generation 

resources and should therefore receive the same level of 

compensation. Order 745-A, 2011 WL 6523756, at *14–15. 

Yet comparable contributions cannot be the reason for equal 

compensation, when generation resources are incomparably

saddled with generation costs. Nor can FERC justify its 

current overcompensation by pointing to past undercompensation.4

 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. 

 4 Similarly, the hope that demand response resources will use the 

expected windfall for “capital improvements,” see Dissenting Op. 

at 24, does not respond to Petitioner’s concerns that the 

overcompensation is unfair and discriminatory. 
16

The Commission cannot simply talk around the arguments 

raised before it; reasoned decisionmaking requires more: a 

“direct response,” which FERC failed to provide here. See 

Am. Gas Ass’n, 539 F.3d at 20. Thus, if FERC thinks its 

jurisdictional struggles are its only concern with Order 745, it 

is mistaken. We would still vacate the Rule if we engaged the 

Petitioners’ substantive arguments. 

V

 Ultimately, given Order 745’s direct regulation of the 

retail market, we vacate the rule in its entirety as ultra vires 

agency action. 

For the reasons set forth above, we vacate and remand the 

rulings under review.

So ordered.
EDWARDS, Senior Circuit Judge, dissenting: Under the 

Federal Power Act, regulatory authority over the nation’s 

electricity markets is bifurcated between the States and the 

federal government. In simplified terms, the Federal Energy 

Regulatory Commission (“FERC” or “Commission”) has 

authority over wholesale electricity sales but not retail 

electricity sales, with the latter solely subject to State 

regulation. See 16 U.S.C. § 824(a), (b)(1). The consolidated 

petitions before the court call on us to parse this jurisdictional 

line between FERC’s wholesale jurisdiction and the States’ 

retail jurisdiction – a line which this court and the Supreme 

Court have recognized is neither neat nor tidy. See New York 

v. FERC, 535 U.S. 1, 16 (2002) (“[T]he landscape of the 

electric industry has changed since the enactment of the 

[Federal Power Act], when the electricity universe was 

‘neatly divided into spheres of retail versus wholesale sales.’” 

(quoting Transmission Access Policy Study Grp. v. FERC, 

225 F.3d 667, 691 (D.C. Cir. 2000))).

Petitioners challenge Order 745, a rule imposing certain 

compensation requirements on the administrators of the 

nation’s wholesale electricity markets. See Order 745, 

Demand Response Compensation in Organized Wholesale 

Energy Markets, 134 FERC ¶ 61,187, 2011 WL 890975, at *1

(Mar. 15, 2011). The rule requires these wholesale-market

administrators – called Regional Transmission Organizations 

(“RTOs”) and Independent System Operators (“ISOs”) – to 

compensate so-called “demand response resources” at a 

specified price when certain conditions are met. As relevant 

here, “demand response resources” are essentially electricity 

consumers, often bundled together by a third-party

aggregator, who agree to reduce their electricity consumption 

in exchange for incentive payments. See 18 C.F.R. 

§ 35.28(b)(4)-(5). The pun scattered throughout the record is 

that while generators produce megawatts, consumers produce 

“negawatts.” In effect, Order 745 requires that, at certain 

times, megawatts and negawatts receive the same amount of 
2

payment in wholesale markets, an amount called the 

“locational marginal price” or “LMP.”

Although the challenged rule requires ISOs and RTOs to 

pay demand response resources a specified compensation 

(LMP), this requirement is applicable only when two 

conditions are met: (1) when the demand response resource is 

capable of balancing supply and demand in the wholesale 

market, and (2) when compensating the demand response 

resource is cost-effective under a “net benefits test”

prescribed by the rule. The specific mechanics of these 

conditions and of the “net benefits test” are less important 

than what they accomplish. The critical point here is that, 

because of the specified conditions, Order 745 requires 

compensation of demand response resources only when their

participation in a wholesale electricity market actually lowers 

the market-clearing price for wholesale electricity.

With these basics in hand, it is easy to see why FERC

stated in its rulemaking that “jurisdiction over demand 

response is a complex matter that lies at the confluence of 

state and federal jurisdiction.” Order 745, 2011 WL 890975, 

at *30. On one view, the demand response resources subject 

to the rule directly affect the wholesale price of electricity. 

That is, the final rule’s conditions operate to ensure that every

negawatt of forgone consumption receiving compensation 

reduces both the quantity of electricity produced and its 

wholesale price. Focusing on this direct effect – direct, it 

bears repeating, because under the rule’s conditions all

demand response resources receiving compensation reduce 

the market-clearing price – it is easy to conceive of Order 745 

as permissibly falling on the wholesale side of the wholesaleretail jurisdictional line. On another view, however, the 

electricity not consumed thanks to the rule’s compensation 

payments would have been consumed first in a retail market.
3

Focusing on the market in which the consumption would have 

occurred in the first instance, one can conceive of Order 745 

as impermissibly falling on the retail side of the jurisdictional 

line. 

The task for this court, of course, is not to divine from 

first principles whether a demand response resource subject to 

Order 745 is best considered a matter of wholesale or retail 

electricity regulation. Rather, our task is one of statutory 

interpretation within the familiar Chevron framework. See 

Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 

U.S. 837, 842-44 (1984); see also Cal. Indep. Sys. Operator 

Corp. (CAISO) v. FERC, 372 F.3d 395, 399-400 (D.C. Cir. 

2004). The Commission has interpreted the Federal Power 

Act to permit it to issue Order 745. And it falls to this court to 

determine whether the Act unambiguously “sp[eaks] to the 

precise question,” 467 U.S. at 842 (Chevron step one), and, if 

not, whether the Commission’s interpretation is a permissible

construction of the statute, id. at 843 (Chevron step two).

Though the rule and its operation are highly technical, the 

primary jurisdictional issue raised in these consolidated 

petitions turns on a rather straightforward question of 

statutory interpretation: whether a promise to forgo

consumption of electricity that would have been purchased in 

a retail electricity market unambiguously constitutes a “sale of 

electric energy” under section 201(b)(1) of the Federal Power

Act. 16 U.S.C. § 824(b)(1). If so, the Commission lacked 

jurisdiction to issue Order 745 because section 201(b)(1) of 

the Act states, in relevant part, that the “provisions of this 

subchapter shall apply . . . to the sale of electric energy at 

wholesale in interstate commerce, but . . . shall not apply to 

any other sale of electric energy.” Id. (emphasis added). 
4

The statute, to my mind, is ambiguous regarding whether 

forgone consumption constitutes a “sale” under section 

201(b)(1). Because of this ambiguity, the Act is also 

ambiguous as to whether a rule requiring administrators of 

wholesale markets to pay a specified level of compensation 

for such forgone consumption constitutes “direct regulation”

of retail sales that would contravene the limitations of section 

201. Conn. Dep’t of Pub. Util. Control v. FERC, 569 F.3d 

477, 481-82 (D.C. Cir. 2009) (holding that FERC’s approval 

of an Installed Capacity Requirement was not “direct 

regulation” of electrical generation facilities and, thus, did not 

violate section 201 (emphasis added)). Because the Act is 

ambiguous regarding FERC’s authority to require ISOs and 

RTOs to pay demand response resources, we are obliged to 

defer under Chevron to the Commission’s permissible 

construction of “a statutory ambiguity that concerns the scope 

of the agency’s statutory authority (that is, its jurisdiction).” 

City of Arlington v. FCC, 133 S. Ct. 1863, 1868, 1874-75 

(2013).

Absent an affirmative limitation under section 201, there 

is no doubt that demand response participation in wholesale 

markets and the ISOs’ and RTOs’ market rules concerning 

such participation constitute “practice[s] . . . affecting” 

wholesale rates under section 206 of the Act. 16 U.S.C. 

§ 824e(a); see also id. § 824d(a) (providing that “all rules and 

regulations affecting or pertaining to [wholesale] rates or 

charges shall be just and reasonable”). Petitioners’ arguments 

to the contrary ignore the direct effect that the ISOs’ and 

RTOs’ market rules have on wholesale electricity rates

squarely within FERC’s jurisdiction. The Commission has

authority to “determine the just and reasonable . . . practice” 

by setting a level of compensation for demand response 

resources that, in its expert judgment, will ensure that the 

rates charged in wholesale electricity markets are “just and 
5

reasonable.” Id. § 824e(a). It was therefore reasonable for the 

Commission to conclude that it could issue Order 745 under 

the Act’s “affecting” jurisdiction. See id. §§ 824e(a), 824d(a).

In addition to challenging FERC’s jurisdiction, 

Petitioners argue that its decision to mandate compensation 

equal to the LMP was arbitrary and capricious. Petitioners 

believe that the LMP overcompensates demand response 

resources since they also realize savings from not having to 

purchase retail electricity. The Commission, Petitioners insist, 

should have set the compensation level at the LMP minus the 

retail cost of the forgone electricity. But the Commission’s 

decision in this regard was reasonable and adequately 

explained.

For these reasons, explained below in greater detail, I 

respectfully dissent.

I. BACKGROUND

A. The Problem

To understand this case, one must appreciate the scope 

and significance of the problem FERC sought to address in 

Order 745. Three characteristics of the nation’s electricity 

market go a long way toward framing the problem. First, 

electricity, unlike most commodities, cannot be stored for 

later use. There must instead be a continual, contemporaneous 

matching of supply to meet current electricity demand. 

Second, not all power plants are created equal: some are 

efficient and cheap; others, inefficient and expensive. Third, 

most retail consumers are charged a fixed price for electricity

that does not adjust in the moment to temporary spikes in the 

cost of producing electricity.
6

The first two characteristics, in tandem, cause significant 

fluctuations in the cost of supplying electricity at different 

times of day. During periods of regular electricity 

consumption, only the efficient and cheap power plants need 

be deployed. But at hours of peak usage (e.g., a summer 

afternoon in Washington, D.C. when countless air 

conditioners toil against the humidity and heat), the suppliers 

of electricity must marshal the least efficient and most costly 

power plants to match the soaring demand for electricity. It is 

because electricity cannot be efficiently stored that these 

periods of peak demand must be met with new generation and

not stockpiled supply.

In a perfect market, or even in a well-functioning market,

the skyrocketing cost of producing additional electricity at 

hours of peak usage would be reflected in temporarily higher 

prices charged to consumers. In turn, this increased price

would reduce the megawatts of electricity demanded, as some 

individuals and businesses would, for example, turn off their 

air conditioners to save money. The market would thereby 

reach an efficient equilibrium. 

But here is where the third characteristic of electricity 

markets comes in. Retail electricity prices are generally 

regulated to remain constant over longer periods of time. That 

is, consumers do not pay different amounts during different 

hours of the day, notwithstanding the sharply vacillating cost 

of producing electricity. Electricity demand thus does not 

respond to time-sensitive price signals. As a result, there are 

times when people and businesses consume electricity that 

costs more to produce than it is worth to them to consume. 

This is inefficient.

Wholesale electricity markets, which are under FERC’s 

jurisdiction, suffer the same inefficiency. Since retail demand 
7

is not price-responsive, the aggregate amount of electricity 

demanded in the wholesale market by the entities that serve 

retail customers is also uncoupled from the time-specific price 

of supplying electricity. In economic terms, the demand for 

electricity in the wholesale market is inelastic. See Order 

745-A, Demand Response Compensation in Organized 

Wholesale Energy Markets, 137 FERC ¶ 61,215, 2011 WL 

6523756, at *9 (Dec. 15, 2011).

The Commission recognizes the problem. As it observed 

in its order denying requests for rehearing of Order 745,

[a] properly functioning market should reflect both the 

willingness of sellers to sell at a price and the willingness 

of buyers to purchase at a price. In an RTO- or ISO-run 

market, however, buyers are generally unable to directly 

express their willingness to pay for a product at the price 

offered. As discussed later, RTOs and ISOs cannot 

isolate individual buyers’ willingness to pay which 

results in extremely inelastic demand. 

Id.; see also Order 745, 2011 WL 890975, at *1 (“[A] market 

functions effectively only when both supply and demand can 

meaningfully participate.” (emphasis added)).

B. FERC’s Solution

Having identified a problem in the wholesale electricity 

market, the Commission has a statutory obligation to do what 

it can to fix it. That is because FERC is charged under the 

Federal Power Act with ensuring that wholesale electricity 

rates are “just and reasonable.” 16 U.S.C. §§ 824d(a), 

824e(a). It must ensure that all “rates and charges made, 

demanded, or received by any public utility for or in 

connection with the . . . sale of electric energy subject to the 
8

jurisdiction of the Commission” are “just and reasonable.” Id.

§ 824d(a) (emphasis added); see also id. § 824(a). And when 

FERC determines that a “practice . . . affecting” such a rate is 

unjust or unreasonable, it must itself determine and fix “the 

just and reasonable . . . practice . . . to be thereafter observed.” 

Id. § 824e(a).

Consistent with its statutory duty and in view of the

market distortions caused by inelastic wholesale demand, the 

Commission has initiated a series of reforms to open 

wholesale markets to “demand response resources.” For our 

purposes, “demand response resources” are resources that are 

capable of reducing “the consumption of electric energy by 

customers from their expected consumption in response . . . to 

incentive payments designed to induce lower consumption of 

electric energy.” 18 C.F.R. § 35.28(b)(4)-(5). Put simply, 

demand response resources agree not to purchase electricity in 

exchange for payment. 

The basic premise of FERC’s demand-response reforms 

is that there are two ways that wholesale-market 

administrators (i.e., ISOs and RTOs) can balance wholesale 

supply and demand: by increasing the supply of electricity or

by decreasing the demand for it. See Order 745-A, 2011 WL 

6523756, at *14. An ISO or RTO reduces wholesale demand 

when it pays a demand response resource because that 

resource will forgo electricity consumption in the retail 

market, which, in turn, will lead to fewer megawatts of 

electricity being demanded in the aggregate in that ISO’s or 

RTO’s wholesale market. At certain times (e.g., summer 

afternoons in Washington, D.C.), paying incentive payments 

to induce consumers not to consume electricity may be

cheaper than paying generators to produce more power; 

negawatts, in such circumstances, are the cheaper alternative.

And because, functionally, there is little difference to 
9

wholesale-market administrators between a megawatt and a 

negawatt (both assist equally in the administrator’s task of 

bringing wholesale demand and supply into equipoise),

demand response resources are capable of competing directly 

with traditional generation resources so long as the 

appropriate market rules are in place.

For some years now, FERC has recognized that the direct 

participation of demand response resources in wholesale 

markets improves the functioning of these markets in several 

respects. First, it lowers wholesale prices because “lower 

demand means a lower wholesale price.” Order 719-A, 

Wholesale Competition in Regions with Organized Electric 

Markets, 128 FERC ¶ 61,059, 2009 WL 2115220, at **12 

(July 16, 2009). Second, it mitigates the market power of 

suppliers of electricity because they have to compete with 

demand response resources and adjust their bidding strategy 

accordingly. See id. (“[T]he more demand response is able to 

reduce peak prices, the more downward pressure it places on 

generator bidding strategies by increasing the risk to a 

supplier that it will not be dispatched if it bids a price that is 

too high.”). Third, demand response “enhances system 

reliability,” for example, by “reducing electricity demand at 

critical times (e.g., when a generator or a transmission line 

unexpectedly fails).” Id. at **12 & n.76; see also Order 

745-A, 2011 WL 6523756, at *6 (“[D]emand response 

generally can be dispatched by the [ISO or RTO] with a 

minimal notice period, helping to balance the electric system 

in the event that an unexpected contingency occurs.”).

The benefits of demand response participating in 

wholesale markets are beyond reproach. Commissioner

Moeller, who dissented in Order 745, put it best:
10

While the merits of various methods for 

compensating demand response were discussed at length 

in the course of this rulemaking, nowhere did I review 

any comment or hear any testimony that questioned the 

benefit of having demand response resources participate 

in the organized wholesale energy markets. On this point, 

there is no debate. The fact is that demand response plays 

a very important role in these markets by providing 

significant economic, reliability, and other market-related 

benefits.

Order 745, 2011 WL 890975, at *34 (emphasis added)

(Moeller, dissenting).

It is no surprise, then, that FERC has initiated a series of 

reforms to open up its markets to demand response, on the 

theory that doing so helps to ensure “just and reasonable” 

wholesale rates by improving how these markets function in 

the three ways just mentioned. See Order 890, Preventing 

Undue Discrimination and Preference in Transmission 

Service, 72 Fed. Reg. 12,226, 12,378 (Mar. 15, 2007); Order 

719, Wholesale Competition in Regions with Organized 

Electric Markets, 73 Fed. Reg. 64,100 (Oct. 28, 2008); see 

also Br. for Resp’t at 11-13 (providing overview of these 

rulemakings); id. at 12 (noting that, before Order 719, FERC

had approved proposals by various ISOs and RTOs “to allow 

demand response participation in their ancillary services

markets” (citations omitted)).

In particular, in Order 719 FERC required ISOs and 

RTOs to “accept bids from demand response resources in 

RTOs’ and ISOs’ markets for certain ancillary services on a 

basis comparable to other resources” and, in certain 

circumstances, to “permit an aggregator of retail customers 

. . . to bid demand response on behalf of retail customers 
11

directly into the organized energy market.” Order 719-A, 

2009 WL 2115220, at **1. But FERC placed an important 

condition on this requirement; ISOs and RTOs were required 

to accept bids from demand response “unless not permitted by 

the laws or regulations of the relevant electric retail regulatory 

authority.” 18 C.F.R. § 35.28(g)(1)(i)(A), (iii); Order 719-A, 

2009 WL 2115220, at **13. Finally, recognizing that “further 

reforms may be necessary to eliminate barriers to demand 

response in the future,” FERC further ordered ISOs and RTOs 

to “assess and report on any remaining barriers to comparable 

treatment of demand response resources that are within the 

Commission’s jurisdiction.” Order 719-A, 2009 WL 2115220, 

at **1.

And further reforms were indeed necessary. Prior to 

issuing Order 745, ISOs and RTOs had differing practices 

concerning the level of compensation to be paid to demand 

response resources in their markets. Order 745, 2011 WL 

890975, at *4. The Commission found that many ISOs and 

RTOs undercompensated demand response resources in 

certain circumstances. See id. at *16. It reached this finding in 

light of existing barriers to demand response participation in 

wholesale markets, including “the lack of market incentives to 

invest in enabling technologies that would allow electric 

customers and aggregators of retail customers to see and 

respond to changes in marginal costs of providing electric 

service as those costs change.” Id.; see also id. (“[T]he 

inadequate compensation mechanisms in place today in 

wholesale energy markets fail to induce sufficient investment 

in demand response resource infrastructure and expertise that 

could lead to adequate levels of demand response 

procurement. Without sufficient investment in the development 

of demand response, demand response resources simply 

cannot be procured because they do not yet exist as 

resources. Such investment will not occur so long as 
12

compensation undervalues demand response resources.” 

(emphasis added) (quoting a commenter)).

Order 745 sought to correct the undercompensation 

problem by mandating that ISOs and RTOs pay demand 

response resources the same market price that they pay to 

generators, i.e., LMP. But it limited this compensation 

requirement to circumstances where two specific conditions 

are met. LMP-compensation would be required only when (1) 

“the demand response resource [is] able to displace a 

generation resource in a manner that serves the RTO or ISO 

in balancing supply and demand,” and (2) “the payment of 

LMP . . . [is] cost-effective, as determined by [a] net benefits 

test.” Id. at *13; see also 18 C.F.R. § 35.28(g)(1)(v)(A).

FERC understood that it had authority to correct the 

undercompensation problem because, in the absence of 

adequate compensation, too few demand response resources 

affirmatively bid into the wholesale markets. And such 

participation is necessary for the market to function rationally 

and reach “just and reasonable” rates. As FERC stated:

We find, based on the record here that, when a demand 

response resource has the capability to balance supply 

and demand as an alternative to a generation resource, 

and when . . . paying LMP to that demand response 

resource is shown to be cost-effective as determined by 

the net benefits test described herein, payment by an 

RTO or ISO of compensation other than the LMP is 

unjust and unreasonable. When these conditions are met, 

we find that payment of LMP to these resources will 

result in just and reasonable rates for ratepayers.

Order 745, 2011 WL 890975, at *13 (emphasis added).
13

II. ANALYSIS

A. Jurisdiction

Petitioners argue that Order 745 is “in excess” of FERC’s 

“statutory jurisdiction.” Br. of Pet’rs Elec. Power Supply 

Ass’n, et al. (“Br. of Pet’rs”) at 27 (citing 5 U.S.C. 

§ 706(2)(C)). We evaluate this contention under Chevron and 

defer to FERC’s permissible construction of its authorizing 

statute, regardless of “whether the interpretive question 

presented is ‘jurisdictional.’” City of Arlington, 133 S. Ct. at 

1874-75; see also Connecticut, 569 F.3d at 481. The proper 

question is thus whether the Act unambiguously forecloses 

FERC from issuing Order 745 under its “affecting” 

jurisdiction. See 16 U.S.C. § 824e; Chevron, 467 U.S. at 842. 

FERC’s explanation of its jurisdiction under the Federal 

Power Act is straightforward and sensible. FERC has the 

authority and responsibility to correct any “practice . . . 

affecting” wholesale electricity rates that the Commission 

determines to be “unjust” or “unreasonable.” 16 U.S.C. 

§ 824e(a); see also id. § 824d(a). In its view, the ISOs’ and 

RTOs’ rules governing the participation of demand response 

resources in the nation’s wholesale electricity markets are 

“practices affecting [wholesale electricity] rates.” Order 

745-A, 2011 WL 6523756, at *10 (quoting 16 U.S.C. 

§§ 824d, 824e). That is, an ISO’s or RTO’s market rules 

governing how a demand response resource may compete in 

its wholesale market, including the terms by which a demand 

response resource is to be compensated in the market, are 

“practices affecting” that wholesale market’s rates for 

electricity. And FERC has determined that an ISO’s or RTO’s 

“practice” is unjust and unreasonable to the degree that it 

inadequately compensates demand response resources capable 

of supplanting more expensive generation resources. See id. at 
14

*36. As explained above, FERC has found that demand 

response improves the functioning of wholesale markets by

(1) lowering the wholesale price of electricity, (2) exerting 

downward pressure on generators’ market power, and (3) 

enhancing system reliability. 

FERC’s explanation is consistent with our case law. In 

Connecticut, we considered whether FERC has jurisdiction to 

review an ISO’s capacity charges. 569 F.3d at 478-79. 

Capacity is not electricity but the ability to produce it when 

needed, and in Connecticut the ISO had established a market 

where capacity providers – generators, prospective generators,

and demand response resources – competitively bid to meet 

the ISO’s capacity needs three years in the future. Id. at 479-

81. Generation, like retail sales, is expressly the domain of 

State regulation under section 201, 16 U.S.C. § 824(b)(1), and 

the petitioners argued that by increasing the overall capacity 

requirement the ISO was improperly requiring the installation 

of new generation resources. 569 F.3d at 481. We disagreed 

and held that FERC had “affecting” jurisdiction under section 

206 because “capacity decisions . . . affect FERCjurisdictional transmission rates for that system without 

directly implicating generation facilities.” Id. at 484. That the 

capacity requirement helped to “find the right price” was 

enough of an effect to satisfy section 206. Id. at 485.

Petitioners’ specific arguments against FERC’s 

exercising jurisdiction are unpersuasive. First, Petitioners 

note that section 201 of the Act establishes a clear 

jurisdictional line between “the sale of electric energy at 

wholesale in interstate commerce,” which is properly the 

subject of FERC’s jurisdiction, and “any other sale of electric 

energy.” Br. of Pet’rs at 27-28 (citing 16 U.S.C. § 824(a), 

(b)(1)). According to Petitioners, the Commission has 

transgressed this line because it “has ordered ISOs and RTOs 
15

to pay retail customers for reducing their retail purchases of 

electricity.” Id. at 28. 

But this argument mischaracterizes the rule and papers 

over a key ambiguity. First, the mischaracterization: 

Petitioners are wrong inasmuch as they imply that FERC 

requires all ISOs and RTOs to pay demand response 

resources a minimum level of compensation (LMP). The 

compensation requirement promulgated in Order 745 does not 

apply unless an ISO or RTO “has a tariff provision permitting 

demand response resources to participate as a resource in the 

energy market.” 18 C.F.R. § 35.28(g)(1)(v). And the 

regulation’s requirement that ISOs and RTOs accept bids 

from demand response resources comes with a key caveat: the 

requirement applies “unless not permitted by the laws or 

regulations of the relevant electric retail regulatory authority.”

Id. § 35.28(g)(1)(i)(A); see also id. § 35.28(g)(1)(iii). In other 

words, there is a carve-out from the compensation 

requirement for ISOs and RTOs in States where local 

regulatory law stands in the way. Thus, the Order preserves 

State regulation of retail markets. This is hardly the stuff of 

grand agency overreach. 

More fundamentally, Petitioners’ argument founders on a 

statutory ambiguity they ignore. Section 201 makes clear that 

FERC may regulate “the sale of electric energy at wholesale 

in interstate commerce” but not “any other sale of electric 

energy.” 16 U.S.C. § 824(b)(1) (emphasis added). The 

demand response at issue here is forgone consumption, which

is no “sale” at all. Perhaps the phrase “any other sale of 

electric energy” could be interpreted to include non-sales that 

would have been sales in the retail market, but it certainly 

does not require such a reading. It is reasonable to categorize 

demand response as neither a retail sale nor wholesale sale

under the Federal Power Act. And on this understanding, 
16

section 201 “says nothing about” FERC’s power to review 

compensation rates for demand response in wholesale 

electricity markets. Connecticut, 569 F.3d at 483.

Nor is Petitioners’ argument under section 201 made any 

stronger by reference to subsection (a). This prefatory 

subsection states that while “Federal regulation . . . of electric 

energy in interstate commerce and the sale of such energy at 

wholesale in interstate commerce is necessary in the public 

interest,” federal regulation should “extend only to those 

matters which are not subject to regulation by the States.” 16 

U.S.C. § 824(a). But the Supreme Court has made clear that

“the precise reserved state powers language in § 201(a)” is a 

“mere policy declaration that cannot nullify a clear and 

specific grant of jurisdiction, even if the particular grant 

seems inconsistent with the broadly expressed purpose.” New 

York, 535 U.S. at 22 (emphasis added) (internal quotation 

marks omitted). And, as I discuss below, section 206’s 

specific grant of “affecting” jurisdiction quite clearly 

authorized FERC to issue Order 745.

The most that can be said of section 201 is that it

commits regulation of retail sales to the States and regulation 

of wholesale sales to the Commission. And while it is true 

that the forgone consumption would have been purchased in 

the first instance in the retail market, it does not follow from 

this fact that non-consumption constitutes an “other sale” 

under section 201(b). There was no sale, period. And the 

statute does not give a clear indication that Congress intended 

to foreclose FERC from regulating non-sales that have a 

direct effect on the wholesale markets under FERC’s 

jurisdiction.

Even assuming that the Federal Power Act requires 

demand response resources to be considered inextricably part 
17

of retail “sales” subject solely to State regulation, Order 745 

does not engage in the type of “direct regulation” that would 

violate section 201. See Connecticut, 569 F.3d at 481. Order 

745 does not require anything of retail electricity consumers

and leaves it to the States to decide whether to permit demand 

response. All Order 745 says is that if a State’s laws permit 

demand response to be bid into electricity markets, and if a 

demand response resource affirmatively decides to participate 

in an ISO’s or RTO’s wholesale electricity market, and if that 

demand response resource would in a particular circumstance 

allow the ISO or RTO to balance wholesale supply and 

demand, and if paying that demand resource would be a net 

benefit to the system, then the ISO or RTO must pay that 

resource the LMP. That is it. This requirement will no doubt 

affect how much electricity is consumed by a small subset of 

retail consumers who elect to participate as demand response 

resources in wholesale markets. But that fact does not render 

Order 745 “direct regulation” of the retail market. Authority 

over retail rates and over whether to permit demand response 

remains vested solely in the States.

In this respect, Order 745 is similar to the capacity rule in 

Connecticut that we found did not directly regulate generation 

facilities. 569 F.3d at 482. Even though increasing the 

capacity requirement incentivized the procurement of 

additional resources, including new generation facilities, to 

meet the higher requirement, we recognized that States 

retained their ultimate authority over the construction of new 

generation facilities. Id.at 481-82. And because the capacity 

requirements could be met in other ways aside from building 

new generators (e.g., through demand response or capacity 

contracts), it was irrelevant that “public utilities . . . 

overwhelmingly responded to [increased capacity 

requirements] by choosing to allow construction of new 

facilities over other alternatives.” Id. at 482. The lesson of 
18

Connecticut is that FERC can indirectly incentivize action 

that it cannot directly require so long as it is otherwise acting 

within its jurisdiction – and that doing so does not constitute 

impermissible direct regulation of an area reserved to the 

States. So too here: Order 745 may encourage more demand 

response, but States retain the ultimate authority to approve 

the practice.

Second, Petitioners argue that the FERC’s “affecting” 

jurisdiction under sections 205 and 206 of the Act “does not 

extend so far as to allow the Commission to regulate directly 

the retail services that are expressly carved out from the scope 

of its jurisdiction.” Br. of Pet’rs at 30-31 (citing 16 U.S.C. 

§ 824(a), (b)(1)). To a large degree, this argument simply 

rehashes Petitioners’ erroneous reading of section 201 and 

fails for the reasons just described. Demand response 

resources are promises to forgo consumption of electricity and 

therefore are not retail “sales.” This is not changed by the fact 

that forgone consumption would have taken place in the first 

instance in a retail market. Because of this, the Commission’s 

asserting “affecting” jurisdiction over demand response does 

not, as Petitioners suggest, “nullify[]” a limitation set forth in 

section 201. Id. at 32.

To be sure, section 206 cannot be read to displace 

unambiguous jurisdictional limits imposed by section 201(b). 

Suppose, for example, that FERC issued a rule requiring ISOs 

and RTOs to condition all wholesale sales of electricity on 

load-serving entities’ agreeing to charge retail customers with 

real-time pricing that adjusted hourly for variations in the cost 

of producing electricity. Such a rule would unambiguously 

regulate each retail “sale” because it would mandate a 

particular form of compensation for actual – not 

counterfactual – retail sales. Thus, while price-responsive 

retail pricing would no doubt “affect” the wholesale rate, 
19

FERC could not claim jurisdiction under sections 205 and 206 

because the subchapter which includes these sections “shall 

not apply to any other sale of electric energy.” 16 U.S.C. 

§ 824(b)(1) (emphasis added). This example plainly differs 

from the present case because demand response resources are 

forgone sales or non-sales, and therefore it is at best 

ambiguous whether the limitation in section 201(b) applies. 

See Connecticut, 569 F.3d at 483 (“Section 201 prohibits the 

Commission from regulating generation facilities but says 

nothing about its power to review the capacity requirements 

that an [ISO] imposes on member [utilities].”).

To bolster their case, Petitioners invoke the specter of 

limitless federal authority if FERC is permitted to exercise 

“affecting” jurisdiction to issue Order 745. They caution that 

“the Commission’s expansive interpretation of its ‘affecting’

jurisdiction would allow it to regulate any number of 

activities – such as the purchase or sale of steel, fuel, labor, 

and other inputs influencing the cost to generate or transmit 

electricity – merely by redefining the activities as ‘practices’

that affect wholesale rates.” Br. of Pet’rs at 33. 

This argument cannot carry the day because it ignores at 

least two important limits. It first ignores section 201’s limit 

proscribing any “direct regulation” of retail sales (which 

would bar the hypothetical rule, discussed above, in which 

FERC tries to mandate that retail sales have dynamic, timeresponsive pricing). See Connecticut, 569 F.3d at 481. It also 

ignores the limitations we announced in CAISO, 372 F.3d 

395. There, we held that FERC exceeded its jurisdiction when 

it replaced the board members of an ISO on the theory that the 

composition of the ISO’s board was a “practice . . . affecting 

[a] rate” under section 206(a). Id. at 399. We held that 

“section 206’s empowering of the Commission to assess the 

justness and reasonableness of practices affecting rates of 
20

electric utilities is limited to those methods or ways of doing 

things on the part of the utility that directly affect the rate or 

are closely related to the rate, not all those remote things 

beyond the rate structure that might in some sense indirectly 

or ultimately do so.” Id. at 403 (emphasis added). 

These limits foreclose the parade of horribles marshaled 

by Petitioners. Like replacing the ISO’s board of directors in 

CAISO, FERC could not, consistent with Circuit precedent, 

regulate markets in steel, fuel, labor, and other inputs for 

generating electricity, which constitute “remote things beyond 

the rate structure that might in some sense indirectly or 

ultimately” affect the wholesale rate of electricity. Id.; see 

also Calpine Corp. v. FERC, 702 F.3d 41, 47 (D.C. Cir. 2012) 

(affirming FERC’s determination that it lacked “affecting” 

jurisdiction over station power, which is a necessary input to 

energy production, because there was not a “sufficient nexus 

with wholesale transactions” (internal quotation marks 

omitted) (citing City of Cleveland v. FERC, 773 F.2d 1368, 

1376 (D.C. Cir. 1985))); City of Cleveland, 773 F.2d at 1376 

(“[T]here is an infinitude of practices affecting rates and 

service. The statutory directive must reasonably be read to 

require the recitation of only those practices that affect rates 

and service significantly . . . .” (emphasis added)). 

Order 745 passes the CAISO test quite comfortably 

because the demand response resources subject to the rule 

have a quintessentially “direct” effect on wholesale rates. The 

rule’s compensation requirement applies only when an ISO or 

RTO can use the demand response resource in lieu of a 

generation resource to balance supply and demand, and only 

when paying a demand response resource is cost-effective 

under the rule’s net benefits test. 18 C.F.R. 

§ 35.28(g)(1)(v)(A). Order 745 thus does not purport to 

regulate demand response writ large; its compensation 
21

requirement applies only when the demand response by 

definition alters the wholesale electricity price. That is about 

as “direct” an effect and as clear a “nexus” with the wholesale 

transaction as can be imagined. See Calpine Corp., 702 F.3d 

at 47; CAISO, 372 F.3d at 403; City of Cleveland, 773 F.2d at 

1376. There can be little doubt that FERC has the authority to 

review the justness and reasonableness of rates that are so 

closely connected with the healthy functioning of its 

jurisdictional markets; this, as we said in Connecticut, is the 

“heartland of the Commission’s section 206 jurisdiction.” 569 

F.3d at 483.

Third, Petitioners argue that the Commission’s orders 

exceed its jurisdiction because “they unreasonably interfere 

with existing state and local programs addressing retail 

customer ‘demand response.’” Br. of Pet’rs at 41. Any such 

effect, however, is merely incidental. As the Commission 

correctly observed, Order 745 “does not directly affect retaillevel demand response programs, nor does it require that 

demand response resources offer into the wholesale market 

only. Indeed, the organized wholesale energy markets can and 

do operate simultaneously with retail-level programs . . . .” 

Order 745-A, 2011 WL 6523756, at *19. FERC’s reforms in 

Order 745 run on a parallel track with State-level reforms. 

And to the degree that FERC’s reforms incidentally affect 

parallel State-level initiatives, that does not render FERC’s 

actions improper. See Nat’l Ass’n of Regulatory Util. 

Comm’rs v. FERC, 475 F.3d 1277, 1280 (D.C. Cir. 2007) 

(observing that FERC’s authority to act within its statutory 

scope of jurisdiction “may, of course, impinge as a practical 

matter on the behavior of non-jurisdictional” entities). 

* * *
22

To summarize: FERC’s jurisdiction turns on two issues: 

(1) whether demand response is a retail “sale” or is otherwise 

unambiguously committed to State regulation under the 

Federal Power Act, and (2) whether sections 205 and 206 

clearly grant jurisdiction to FERC to regulate how wholesalemarket administrators compensate demand response resources 

that “directly affect” wholesale prices. Unless we inject 

quasi-philosophy into our Chevron analysis (what is the sound 

of one hand clapping? what is the true nature of a sale that 

was never made? of megawatts never consumed?), I think it 

clear that the Federal Power Act does not precisely address 

the first question; forgone consumption is not unambiguously 

a “sale,” nor does the statute dictate that demand response be 

treated solely as a matter of retail regulation. And the second 

question is resolved, in my view, by the terms of Order 745 

which narrowly apply only to demand response resources that 

by definition directly affect the wholesale rates of electricity. 

This falls squarely within the Commission’s “affecting” 

jurisdiction. See 16 U.S.C. §§ 824d, 824e. The proper course 

for this court is to defer to the Commission’s well-reasoned 

and permissible interpretation of its authority under the 

statute. 

B. Level of Compensation 

Petitioners also argue that Order 745 is arbitrary and 

capricious under 5 U.S.C. § 706(2)(A). In reviewing such 

claims, we consider whether FERC “examine[d] the relevant 

data and articulate[d] a satisfactory explanation for its action 

including a rational connection between the facts found and 

the choice made.” Motor Vehicle Mfrs. Ass’n of the U.S. v. 

State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) 

(internal quotation marks omitted). We also afford significant 

deference to FERC in light of the highly technical regulatory 

landscape that is its purview. Indeed, “the Commission enjoys 
23

broad discretion to invoke its expertise in balancing 

competing interests and drawing administrative lines.” Am. 

Gas Ass’n v. FERC, 593 F.3d 14, 19 (D.C. Cir. 2010). And 

we “afford great deference to the Commission” in cases 

involving ratemaking decisions as the “statutory requirement 

that rates be ‘just and reasonable’ is obviously incapable of 

precise judicial definition.” Morgan Stanley Capital Grp. Inc. 

v. Pub. Util. Dist. No. 1, 554 U.S. 527, 532 (2008). Finally, to 

the extent that the Commission bases its actions on factual 

findings, such findings are conclusive if supported by 

substantial evidence. 16 U.S.C. § 825l(b).

Petitioners’ chief complaint is that Order 745 sets the 

required compensation level for demand response at the LMP

(recall: locational marginal price). LMP equals “the marginal 

value of an increase in supply or a reduction in consumption 

at each node within” an ISO’s or RTO’s wholesale market, 

and is the compensation generation resources generally 

receive. Order 745-A, 2011 WL 6523756, at *20. Petitioners

complain that demand response resources already get the 

benefit of the forgone expense of retail electricity 

(abbreviated in the record as “G”). Therefore, Petitioners 

contend that, under FERC’s rule, demand response resources 

effectively receive a “double payment”: LMP plus G. Br. of 

Pet’rs at 47. According to Petitioners, requiring LMP 

compensation thus results in unjust and discriminatory 

overcompensation of demand response resources. Id. at 45-

50; see also Order 745-A, 2011 WL 6523756, *38 (Moeller, 

dissenting).

It is of course true, as the majority observes, that FERC is 

“bounded by the requirements of reasoned decisionmaking.” 

Am. Gas Ass’n, 593 F.3d at 19. Therefore, FERC was 

required to provide a “direct response” to the Petitioners’ and 

the dissenting Commissioner’s concerns about 
24

overcompensation. Id. at 20. This is precisely what the 

Commission did in carefully explaining how Order 745’s 

setting compensation at the LMP was neither discriminatory 

nor unjust.

To begin with, FERC provided a thorough explanation 

for why compensating demand response at the LMP (and not 

LMP - G) was neither unjust nor over-compensatory. It 

explained that such compensation was necessary to encourage 

an adequate level of demand response participation in 

wholesale markets in light of existing market barriers. See 

Order 745-A, 2011 WL 6523756, at *15 (noting that 

Petitioners “fail to acknowledge the market imperfections 

caused by the existing barriers to demand response”). That 

last part – the market barriers – is the key. The Commission 

has identified numerous barriers preventing adequate 

participation of demand response in wholesale markets. Order 

745, 2011 WL 890975, at *16 & n.122 (citing study). Indeed, 

citing record evidence, the Commission explained that “the 

inadequate compensation mechanisms in place today in 

wholesale energy markets fail to induce sufficient investment 

in demand response resource infrastructure and expertise that 

could lead to adequate levels of demand response 

procurement.” Id. at *16 (quoting a commenter). FERC

further explained that “a lack of incentives to invest in 

enabling technologies can be addressed by making additional 

investment resources available to market participants” and 

that paying LMP “to demand response will provide the proper 

level of investment resources available for capital 

improvements.” Order 745-A, 2011 WL 6523756, at *16. In 

view of these barriers, and the value of demand response 

participation to ensuring “just and reasonable” wholesale 

rates, the Commission concluded that LMP was the 

appropriate level of compensation.
25

FERC sums it up well:

The Commission acknowledged that noted experts 

differed on whether paying LMP in the current 

circumstances facing the wholesale electric market is a 

reasonable price. In determining that LMP is the just and 

reasonable price to pay for demand response, the 

Commission examined some of the previously 

recognized barriers to demand response that exist in 

current wholesale markets. These barriers create an 

inelastic demand curve in the wholesale energy market 

that results in higher wholesale prices than would be 

observed if the demand side of the market were fully 

developed. The Commission found that paying LMP 

when cost-effective may help remove these barriers to 

entry of potential demand response resources, and, 

thereby, help move prices closer to the levels that would 

result if all demand could respond to the marginal price 

of energy.

Id. at *17. This is a “direct response” to the points raised by 

the Petitioners. Am. Gas Ass’n, 593 F.3d at 20.

With respect to the argument that utilizing the LMP is 

somehow discriminatory because incomparable resources are 

paid comparable amounts, the Commission offered reasonable 

grounds for treating demand response as comparable to 

generation resources. The Commission observed that, from 

the perspective of an ISO or RTO, a demand response 

resource was comparable to a generation resource inasmuch 

as demand response is equally capable of balancing wholesale 

supply and demand. Order 745-A, 2011 WL 6523756, at *14. 

This is not the sum total of the explanation, however. In the 

same section of its order, the Commission explained that 

“examining cost avoidance by demand response resources is 
26

not consistent with the treatment of generation. In the absence 

of market power concerns, the Commission generally does 

not examine each of the costs of production for individual 

resources participating as supply resources in the organized 

wholesale electricity markets.” Id. at *17; see also id. at *21. 

FERC continued: “we note that certain generators may 

receive benefits or savings in the form of credits or in other 

forms. In these cases, the generators realize a value of LMP 

plus the credit or savings, but ISOs or RTOs do not take such 

benefits or savings into account in determining how much to 

pay those resources.” Id. at *17 n.122. The point is that the 

comparability of compensation is assessed without regard to 

outside costs and credits; just as two generators are both 

compensated at the LMP even though only one might be 

receiving a tax credit for producing energy, so too with 

comparing demand response resources to generation 

resources. This was clearly explained, and it is reasonable. 

This court has no business second-guessing the 

Commission’s judgment on the level of compensation. See

La. Pub. Serv. Comm’n v. FERC, 551 F.3d 1042, 1045 (D.C. 

Cir. 2008) (noting that “[w]here the subject of our review is . . 

. a predictive judgment by FERC about the effects of a 

proposed remedy . . . , our deference is at its zenith”); Pub. 

Serv. Comm’n of Ky. v. FERC, 397 F.3d 1004, 1009 (D.C. 

Cir. 2005) (holding that “more than second-guessing close 

judgment calls is required to show that a rate order is arbitrary 

and capricious” (citation omitted)); Envtl. Action, Inc. v. 

FERC, 939 F.2d 1057, 1064 (D.C. Cir. 1991) (“[I]t is within 

the scope of the agency’s expertise to make . . . a prediction 

about the market it regulates, and a reasonable prediction 

deserves our deference notwithstanding that there might also 

be another reasonable view.”).
27

Whatever policy disagreements one might have with 

Order 745’s decision to compensate demand response 

resources at the LMP (and there are legitimate disagreements 

to be had), the rule does not fail for want of reasoned 

decisionmaking. FERC’s judgment is owed deference because 

it has put forth a reasonable multi-step explanation of its 

decision to mandate LMP compensation. First, responsive 

demand is a necessary component of a well-functioning 

wholesale market, and FERC understood that its obligation to 

ensure just and reasonable rates required it to facilitate an 

adequate level of demand response participation in its 

jurisdictional markets. See Order 745, 2011 WL 890975, at 

*16. Second, FERC concluded that market barriers were 

inhibiting an adequate level of demand response participation. 

See id. Third, FERC concluded that mandating LMP would 

provide the proper incentives for demand response resources 

to overcome these barriers to participation in the wholesale 

market. See id.; see also Notice of Proposed Rulemaking, 

Demand Response Compensation in Organized Wholesale 

Energy Markets, reprinted in J.A. 208, 220-21 (stating that 

“demand response resources react correspondingly to 

increases or decreases in payment” and citing study showing 

that switching from LMP to LMP - G compensation resulted 

in a 36.8% decrease in demand response participation in the 

ISO being studied).

III. CONCLUSION

FERC had jurisdiction to issue Order 745 because 

demand response is not unambiguously a matter of retail 

regulation under the Federal Power Act, and because the 

demand response resources subject to the rule directly affect

wholesale electricity prices. See 16 U.S.C. §§ 824d, 824e. 

And the Commission’s decision to require compensation 

equal to the LMP, rather than LMP - G, was not arbitrary or 
28

capricious. The majority disagrees on both points. The 

unfortunate consequence is that a promising rule of national 

significance – promulgated by the agency that has been 

authorized by Congress to address the matters in issue – is

laid aside on grounds that I think are inconsistent with the 

statute, at odds with applicable precedent, and impossible to 

square with our limited scope of review. I therefore 

respectfully dissent.