ORAL ARGUMENT HAS NOT BEEN SCHEDULED 

Nos. 11-1486, et al.

IN THE UNITED STATES COURT OF APPEALS 

FOR THE DISTRICT OF COLUMBIA CIRCUIT 

________________ 

ELECTRIC POWER SUPPLY ASSOCIATION, ET AL., 

Petitioners,

V. 

FEDERAL ENERGY REGULATORY COMMISSION, ET AL., 

Respondents.

________________ 

OPENING BRIEF OF PETITIONERS 

ELECTRIC POWER SUPPLY ASSOCIATION, AMERICAN PUBLIC 

POWER ASSOCIATION, NATIONAL RURAL ELECTRIC 

COOPERATIVE ASSOCIATION, OLD DOMINION ELECTRIC 

COOPERATIVE AND EDISON ELECTRIC INSTITUTE 

________________ 

David G. Tewksbury 

Stephanie S. Lim 

KING & SPALDING LLP 

1700 Pennsylvania Avenue, N.W. 

Washington, D.C. 20006 

Telephone: (202) 737-0500 

Facsimile: (202) 626-3737 

Email: dtewksbury@kslaw.com 

Email: slim@kslaw.com 

Ashley C. Parrish 

 Counsel of Record

KING & SPALDING LLP 

1700 Pennsylvania Avenue, N.W. 

Washington, D.C. 20006 

Telephone: (202) 626-2627 

Facsimile: (202) 626-3737 

Email: aparrish@kslaw.com 

Counsel for Petitioner Electric Power Supply Association

DATED: June 6, 2012 * Additional counsel listed on inside cover

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Harvey L. Reiter 

 Counsel of Record 

Adrienne E. Clair 

STINSON MORRISON HECKER LLP

1775 Pennsylvania Avenue, N.W. 

Washington, D.C. 20006 

Telephone: (202) 728-3016 

Facsimile: (202) 785-9163 

Email: hreiter@stinson.com 

Email: aclair@stinson.com 

Counsel for Petitioners American Public 

Power Association, National Rural 

Electric Cooperative Association and 

Old Dominion Electric Cooperative

David B. Raskin 

 Counsel of Record

STEPTOE & JOHNSON LLP 

1330 Connecticut Avenue, N.W. 

Washington, D.C. 20036 

Telephone: (202) 429-6254 

Facsimile: (202) 429-3902 

Email: draskin@steptoe.com 

Counsel for Petitioner 

Edison Electric Institute 

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CERTIFICATE AS TO PARTIES, 

RULINGS, AND RELATED CASES 

Parties, Intervenors, and Amici 

The following is a list of all parties, intervenors, and amici curiae who 

have appeared before this Court in this appeal: 

American Forest & Paper Association, Inc. 

American Municipal Power, Inc. 

American Public Power Association 

California Public Utilities Commission 

California Independent System Operator Corporation 

Coalition of Midwest Transmission Customers 

Edison Electric Institute 

EnergyConnect, Inc. 

EnerNOC, Inc. 

Federal Energy Regulatory Commission 

Lower Mount Bethel Energy, LLC 

Madison Gas and Electric Company 

Maryland Public Service Commission 

Missouri Joint Municipal Electric Utility Commission 

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Missouri River Energy Services 

National Rural Electric Cooperative Association 

Old Dominion Electric Cooperative 

Pennsylvania Public Utility Commission 

PJM Industrial Customer Coalition 

PJM Interconnection, L.L.C. 

PJM Power Providers Group 

PPL Brunner Island, LLC 

PPL Electric Utilities Corporation 

PPL EnergyPlus, LLC 

PPL Holtwood, LLC 

PPL Maine, LLC 

PPL Martins Creek, LLC 

PPL Montour, LLC 

PPL Susquehanna, LLC 

PSEG Energy Resources & Trade LLC 

PSEG Power LLC 

Public Service Electric and Gas Company 

Southern Minnesota Municipal Power Agency 

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Steel Producers 

Viridity Energy Inc. 

Wal-Mart Stores, Inc. 

WPPI Energy 

The following persons and entities appeared before the Federal 

Energy Regulatory Commission in the underlying administrative 

proceedings: 

Alcan Primary Products Corporation 

Alcoa Inc. 

Alliance for Clean Energy New York, Inc. 

Alliance to Save Energy 

American Chemistry Council 

American Clean Skies Foundation 

American Council for an Energy-Efficient Economy 

American Electric Power Service Corporation 

American Forest & Paper Association 

American Municipal Power, Inc. 

American Public Power Association 

American Wind Energy Association 

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ArcelorMittal USA Inc. 

Battelle Pacific Northwest Laboratories 

Robert J. Borlick 

Boston College Law School Administrative Law Class 

California Department of Water Resources State Water Project 

California Independent System Operator Corporation 

California Public Utilities Commission 

Calpine Corporation 

Capital Power Corporation 

Dr. Charles J. Cicchetti 

Cities of Anaheim, Azusa, Banning, Colton, Pasadena, and 

Riverside, California 

Citizens for Pennsylvania’s Future 

Coalition of Midwest Transmission Customers 

Connecticut Municipal Electric Energy Cooperative 

Consert Inc. 

Conservation Law Foundation 

Consolidated Edison Solutions, Inc. 

Constellation Energy Commodities Group, Inc. 

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Consumer Demand Response Initiative 

Consumer Power Advocates 

Consumers Energy Company 

CPG Advisors, Inc. 

CPower, Inc. 

Crane & Co., Inc. 

Delaware Public Service Commission 

Demand Response and Smart Grid Coalition 

Demand Response Supporters 

Derstine’s Inc. 

Detroit Edison Company 

Direct Energy Services, LLC 

Dominion Resources Services, Inc. 

Duke Energy Corporation 

Durgin and Crowell Lumber Co., Inc. 

Edison Electric Institute 

Edison Mission Energy 

Electric Power Generating Association 

Electric Power Supply Association 

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Electricity Committee 

Electricity Consumers Resource Council 

Electrodynamics, Inc. 

Energy Curtailment Specialists, Inc. 

EnergyConnect, Inc. 

Energy Future Coalition 

EnerNOC, Inc. 

Environmental Defense Fund 

Exelon Corporation 

Federal Trade Commission 

FirstEnergy Service Company 

GDF SUEZ Energy North America, Inc. 

Hess Corporation 

Dr. William W. Hogan 

Illinois Citizens Utility Board 

Illinois Commerce Commission 

Independent Power Producers of New York, Inc. 

Indicated New York Transmission Owners 

Industrial Energy Consumer Group 

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Industrial Energy Consumers of America 

Industrial Energy Consumers of Pennsylvania 

Intergrys Energy Services, Inc. 

International Power America, Inc. 

Irving Forest Products, Inc. 

ISO New England Inc. 

ISO-NE Internal Market Monitor 

Jiminy Peak Mountain Resort, LLC 

Joint Consumer Advocates 

Dr. Alfred E. Kahn 

Limington Lumber 

Lower Mount Bethel Energy, LLC 

Madison Paper Industries 

Maryland Governor Martin O’Malley 

Maryland Public Service Commission 

Massachusetts Attorney General 

Midwest Independent Transmission System Operator, Inc. 

Midwest ISO Transmission Owners 

Midwest Transmission Dependent Utilities 

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Mirant Corporation 

Monitoring Analytics, LLC 

National Electrical Manufactures Association 

National Energy Marketers Association 

National Rural Electric Cooperative Association 

National Grid USA 

National League of Cities 

Natural Gas Supply Association 

New England Conference of Public Utilities Commissioners 

New England Consumer Advocates 

New England Power Generators Association Inc. 

New England Power Pool Participants Committee 

New England Public Systems 

New Jersey Board of Public Utilities 

New York Independent System Operator, Inc. 

New York Mayor Michael R. Bloomberg 

New York State Consumer Protection Board 

New York State Public Service Commission 

North America Power Partners LLC 

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Northeast Utilities Services Company 

Northern California Power Agency 

NSTAR Electric Company 

Occidental Chemical Corporation 

Occidental Permian Ltd. 

Office of the People’s Counsel for the District of Columbia 

Okemo Mountain Resort 

Old Dominion Electric Cooperative 

Organization of MISO States 

Partners HealthCare 

Pennsylvania Department of Environmental Protection 

Pennsylvania Office of Consumer Advocate 

Pennsylvania Public Utility Commission 

Pennsylvania State Representative Chris Ross 

Pepco Holdings, Inc. 

PJM Interconnection, L.L.C. 

PJM Power Providers Group 

Potomac Economics, Ltd. 

PPL Brunner Island, LLC 

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PPL Electric Utilities Corporation 

PPL EnergyPlus, LLC 

PPL Holtwood, LLC 

PPL Maine, LLC, PPL Martins Creek, LLC 

PPL Montour, LLC 

PPL Susquehanna, LLC 

Praxair, Inc. 

Precision Lumber, Inc. 

Price Responsive Load Coalition 

PSEG Energy Resources & Trade LLC 

PSEG Power LLC 

Public Interest Organizations 

Public Service Electric and Gas Company 

Public Utilities Commission of Ohio 

Raritan Valley Community College 

RRI Energy, Inc. 

San Diego Gas & Electric Company 

Schneider Electric USA, Inc. 

Dr. Roy J. Shanker 

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Southern California Edison Company 

Southwest Power Pool, Inc. 

Steel Manufacturers Association 

Steel Producers 

Tendrill Networks, Inc. 

The Brattle Group 

The E Cubed Company, L.L.C. 

University of California, San Diego 

Utility Economic Engineers 

Verso Paper Corporation 

Virginia Committee for Fair Utility Rates 

Viridity Energy, Inc. 

Wal-Mart Stores, Inc. 

Waterville Valley Ski Resort Inc. 

Westar Energy, Inc. 

Wisconsin Industrial Energy Group 

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Rulings Under Review 

The Commission orders under review are: 

Demand Response Compensation in Organized Wholesale 

Energy Markets, Order No. 745, Final Rule, FERC Stats. & 

Regs. ¶ 31,322 (Mar. 15, 2011); and 

Demand Response Compensation in Organized Wholesale 

Energy Markets, Order No. 745-A, Order on Rehearing and 

Clarification, 137 FERC ¶ 61,215 (Dec. 15, 2011). 

Related Cases 

This case is not pending in any other court, and is not related to any 

other case in this Court or in any other court. 

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CORPORATE DISCLOSURE STATEMENT 

In accordance with Rule 26.1 of the Federal Rules of Appellate 

Procedure and D.C. Circuit Rule 26.1, petitioners make the following 

disclosures: 

ELECTRIC POWER SUPPLY ASSOCIATION 

The Electric Power Supply Association (“EPSA”) is a national trade 

association that represents the competitive power industry and is 

incorporated under the laws of the District of Columbia. There is no parent 

corporation or any publicly held corporation that owns 10 percent or more 

of EPSA’s stock. 

EPSA’s members include 15 companies, along with numerous 

supporting members, and state and regional partners that represent the 

competitive power industry in their respective regions. EPSA’s members 

have significant financial investments in electric generation and electricity 

marketing operations across the country. 

EPSA’s organizational purpose is, among other things, to promote a 

favorable market environment for the competitive electric industry; to 

support the development of state and federal legislative and regulatory 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 15 of 126
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policies that encourage the development and implementation of competitive 

wholesale markets for electricity; and to improve the public’s awareness of 

the competitive electric industry. 

AMERICAN PUBLIC POWER ASSOCIATION 

The American Public Power Association (“APPA”) is an association of 

governmental entities to which Rule 26.1 does not apply. APPA is the 

national service organization representing the interests of not-for-profit, 

publicly owned electric utilities throughout the United States. More than 

2,000 public power systems provide over 15 percent of all kilowatt-hour 

sales to ultimate customers, and APPA members do business in every state 

except Hawaii. Many APPA members sponsor or participate in “demand 

response” programs in the course of providing retail electric utility services.

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION 

The National Rural Electric Cooperative Association (“NRECA”) is a 

not-for-profit national service organization with no parent entity or publiclytraded stock. It is the national service organization for more than 900 notfor-profit rural electric cooperatives and public power districts providing 

retail electric service to more than 42 million customers in 47 states. 

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NRECA’s members include consumer-owned local distribution systems and 

66 generation and transmission cooperatives that supply wholesale power to 

their distribution cooperative owner-members. 

OLD DOMINION ELECTRIC COOPERATIVE 

Old Dominion Electric Cooperative (“ODEC”) is a not-for-profit 

power supply electric cooperative with no parent entity and no publiclytraded stock. It is a regional, consumer-owned power supplier that was 

formed in 1948 to provide power to a consortium of electric distribution 

cooperatives. In 2011, ODEC’s 11 members served over 550,000 retail 

electric consumers, representing approximately 1.2 million member-owners 

along 59,000 miles of line. The service territories served by ODEC’s 

members cover large portions of Virginia, Maryland, and Delaware. 

EDISON ELECTRIC INSTITUTE 

The Edison Electric Institute (“EEI”) is the trade association of the U.S. 

shareholder-owned electric companies. EEI members serve 95 percent of the 

ultimate customers in the shareholder-owned segment of the industry, and 

they represent approximately 70 percent of the U.S. electric power industry. 

EEI’s diverse membership includes utilities operating in all regions of the 

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U.S. EEI does not have any parent companies, and no publicly-held 

company has a 10 percent or greater ownership interest in EEI. EEI does not 

issue stock. 

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TABLE OF CONTENTS 

JURISDICTIONAL STATEMENT ........................................................................... 1

STATUTORY AND REGULATORY PROVISIONS ............................................ 1

STATEMENT OF ISSUES.......................................................................................... 2

INTRODUCTION....................................................................................................... 3

STATEMENT OF CASE AND FACTS ................................................................... 6

A. The Federal Power Act......................................................................... 6

B. The Organized Wholesale Markets.................................................... 9

C. The Relationship Between Wholesale And Retail Rates.............. 11

D. The Commission’s Orders ................................................................. 15

SUMMARY OF ARGUMENT................................................................................ 22

STANDING................................................................................................................ 24

STANDARD OF REVIEW....................................................................................... 25

ARGUMENT ............................................................................................................. 27

I. The Commission’s Orders Exceed Its Statutory Authority.................... 27

A. The Federal Power Act Prohibits The Commission From 

Regulating Retail Services. ................................................................ 27

B. The Commission’s Authority Over Practices Affecting 

Wholesale Rates Does Not Permit It To Regulate Retail 

Services.................................................................................................. 30

1. The Statute Prohibits The Commission From 

Regulating Retail Services....................................................... 30

2. The Commission’s Orders Cite No Case 

Supporting Its Position............................................................ 38

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C. The Commission’s Orders Unreasonably Interfere With 

The States’ Exclusive Jurisdiction Over Retail Services. .............. 41

II. The Commission’s Orders Violate The Federal Power Act 

And The Requirements Of Reasoned Decision-making......................... 45

A. The Commission’s Retail Compensation Scheme Is 

Unduly Discriminatory And Preferential Because It 

Overcompensates “Demand Response” Providers. ..................... 45

B. The Commission’s Orders Depart Without Reasoned 

Explanation From Precedent Recognizing That Full 

LMP Pricing Unfairly Subsidizes “Demand Response.”............. 50

C. The Commission’s Retail Compensation Scheme Is 

Unjust And Unreasonable Because It Distorts The 

Market. .................................................................................................. 53

D. The Commission’s Retail Customer Compensation 

Scheme Is Unjust And Unreasonable Because It Results 

In Artificially Suppressed Market Prices. ....................................... 56

III. The Commission’s Orders Violate Section 206 By Ordering 

Rate Changes Without First Demonstrating That Existing 

Rates Were Unjust And Unreasonable. ..................................................... 61

CONCLUSION.......................................................................................................... 66

CERTIFICATE OF COMPLIANCE

ADDENDUM

CERTIFICATE OF SERVICE

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TABLE OF AUTHORITIES 

Cases

*Alabama Elec. Coop., Inc. v. FERC, 

684 F.2d 20 (D.C. Cir. 1982) ................................................................ 46, 49 

Altamont Gas Transmission Co. v. FERC, 

92 F.3d 1239 (D.C. Cir. 1996). ....................................................................38 

American Bar Ass’n v. FTC, 

430 F.3d 457 (D.C. Cir. 2005) .....................................................................41 

*Arkansas Elec. Coop. v. Arkansas Pub. Serv. Comm’n, 

461 U.S. 375 (1983) ............................................................................. 6, 7, 32 

*Atlantic City Elec. Co. v. FERC, 

295 F.3d 1 (D.C. Cir. 2002) ............................................................ 27, 61, 63 

Beck v. Prupis, 

529 U.S. 494 (2000) ......................................................................................32 

Bonneville Power Admin. v. FERC, 

422 F.3d 908 (9th Cir. 2005)........................................................................41 

Boston Edison Co. v. FERC, 

233 F.3d 60 (1st Cir. 2000) ............................................................................8 

California Indep. Sys. Operator Corp. v. FERC, 

372 F.3d 395 (D.C. Cir. 2004) ................................................................ 9, 31 

Carpenters & Millwrights v. NLRB, 

481 F.3d 804 (D.C. Cir. 2007) .....................................................................26 

Chemehuevi Tribe of Indians v. FPC, 

420 U.S. 395 (1975) ......................................................................................35 

Chevron, U.S.A., Inc. v. Natural Resources Defense Council Inc., 

467 U.S. 837 (1984) ......................................................................................25 

* Authorities upon which we chiefly rely are marked with asterisks 

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City of Vernon, Cal. v. FERC,

845 F.2d 1042 (D.C. Cir. 1988) ...................................................................42 

City of Winnefeld, La. v. FERC, 

744 F.2d 871 (D.C. Cir. 1984) .......................................................................8 

Comcast Corp. v. FCC, 

600 F.3d 642 (D.C. Cir. 2010) .....................................................................36 

Connecticut Dept. of Pub. Util. Control v. FERC, 

569 F.3d 477 (D.C. Cir. 2009) ........................................................ 15, 38, 39 

Detroit Edison Co. v. FERC, 

334 F.3d 48 (D.C. Cir. 2003) .......................................................................25 

Dynegy Midwest Generation, Inc. v. FERC, 

633 F.3d 1122 (D.C. Cir. 2011) ...................................................................49 

Farmers Union Cent. Exch. v. FERC, 

734 F.2d 1486 (D.C. Cir. 1984) ...................................................................57 

*FCC v. Fox Television Stations, Inc., 

556 U.S. 502 (2009) ......................................................................................26 

Florida Gas Transmission Co. v. FERC, 

604 F.3d 636 (D.C. Cir. 2010) .............................................................. 26, 45 

FPC v. Conway Corp., 

426 U.S. 271 (1999) ......................................................................................31 

*FPC v. Hope Natural Gas Co., 

320 U.S. 591 (1944) ......................................................................... 57, 58, 60 

*FPC v. Southern Cal. Edison Co., 

376 U.S. 205 (1964) ........................................................................... 6, 27, 30 

General Dynamics Land Sys. Inc. v. Cline, 

540 U.S. 581 (2004) ......................................................................................25 

Grand Council of the Crees v. FERC, 

198 F.3d 950 (D.C. Cir. 2000) .....................................................................60 

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Hibbs v. Winn, 

542 U.S. 88 (2004) ........................................................................................32 

Hunt v. Washington State Apple Adver. Comm’n, 

432 U.S. 333 (1977) ......................................................................................24 

Lujan v. Defenders of Wildlife, 

504 U.S. 555 (1992) ......................................................................................24 

Michigan v. EPA, 

268 F.3d 1075 (D.C. Cir. 2001). ..................................................................26 

Morgan Stanley Capital Group Inc. v. 

Public Util. Dist. No. 1 of Snohomish Cty., 

554 U.S. 527 (2008) ........................................................................................9 

Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. 

State Farm Mut. Auto. Ins. Co., 

463 U.S. 29 (1983) ........................................................................................26 

Munn v. Illinois, 

94 U.S. 113 (1877) ..........................................................................................7 

National Fuel Gas Supply Corp. v. FERC, 

468 F.3d 831 (D.C. Cir. 2006) .....................................................................64 

*New York v. FERC, 

535 U.S. 1 (2002) ........................................................................... 7, 9, 28, 35 

Niagara Mohawk Power Corp. v. FERC, 

452 F.3d 822 (D.C. Cir. 2006). ......................................................................7 

NorAm Gas Transmission Co. v. FERC, 

148 F.3d 1158 (D.C. Cir. 1990) ...................................................................26 

North Am. Van Lines, Inc. v. NLRB, 

869 F.2d 596 (D.C. Cir. 1989) .....................................................................25 

Panhandle E. Pipe Line Co. v. Public Serv. Comm’n of Ind., 

332 U.S. 507 (1947) ......................................................................................28 

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PSEG Energy Res. & Trade LLC v. FERC, 

665 F.3d 203 (D.C. Cir. 2011) .....................................................................52 

Public Utils. Comm’n of Rhode Island v. 

Attleboro Steam & Elec. Co., 

273 U.S. 83 (1927) ................................................................................... 6, 32 

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 

__ U.S. __, 2012 WL 1912197 (May 29, 2012)...........................................31 

Sacramento Mun. Util. Dist. v. FERC, 

616 F.3d 520 (D.C. Cir. 2010) .................................................. 10, 38, 39, 40 

Sithe/Independence Power Partners, L.P. v. FERC, 

285 F.3d 1 (D.C. Cir. 2002) .........................................................................11 

Small Refiner Lead Phase-Down Task Force v. EPA, 

705 F.2d 506 (D.C. Cir. 1983) .....................................................................64 

Transmission Agency of N. Cal. v. FERC, 

495 F.3d 663 (D.C. Cir. 2007) .............................................................. 25, 41 

United Gas Distribution Cos. v. FERC, 

88 F.3d 1105 (D.C. Cir. 1996) .............................................................. 38, 40 

*Williams Gas Processing-Gulf Coast Co., L.P. v. FERC, 

475 F.3d 319 (D.C. Cir. 2006) .....................................................................42 

Wisconsin Pub. Power, Inc. v. FERC, 

493 F.3d 239 (D.C. Cir. 2007) ........................................................ 10, 11, 58 

Wisconsin Valley Improvement v. FERC, 

236 F.3d 738 (D.C. Cir. 2001) .....................................................................51 

Rules and Administrative Decisions

California Elec. Oversight. Bd. v. California Indep. Sys. Operator Corp., 

109 FERC ¶ 61,182 (2004)...........................................................................58 

Connecticut ex rel. Blumenthal v. ISO New England Inc., 

117 FERC ¶ 61,038 (2006)...........................................................................58 

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Demand Response Compensation 

in Organized Wholesale Energy Markets, 

Notice of Proposed Rulemaking, 

FERC Stats. & Regs. ¶ 32,656 (2010)............................................ 16, 17, 37 

Demand Response Compensation 

in Organized Wholesale Energy Markets, 

Order No. 745, 

76 Fed. Reg. 16,658 (Mar. 24, 2011), 

FERC Stats. & Regs. ¶ 31,322 (2011)........................... 1, 12, 14, 17, 18, 19, 

 20, 21, 28, 29, 33, 36, 37, 43, 

 47, 50, 54, 55, 56, 57, 59, 60, 61, 62, 64 

Demand Response Compensation 

in Organized Wholesale Energy Markets, 

Order No. 745-A, 

137 FERC ¶ 61,215 (2011)............................................. 1, 21, 30, 33, 37, 38, 

 41, 42, 44, 46, 48, 49, 51, 

 52, 57, 59, 62, 63, 64, 65 

*EnergyConnect, Inc., 

130 FERC ¶ 61,031 (2010)...........................................................................29 

Market-Based Rates for Wholesale Sales of Electric Energy, 

Capacity & Ancillary Servs. by Pub. Utils., 

Order No. 697-A, FERC Stats. & Regs. ¶ 31,268 (2008).........................58 

Maryland Pub. Serv. Comm’n v. PJM Interconnection, L.L.C., 

123 FERC ¶ 61,169, 

order on reh’g, 125 FERC ¶ 61,340 (2008) ..................................................58 

*PJM Indus. Customer Coal. v. PJM Interconnection, L.L.C., 

121 FERC ¶ 61,315 (2007)...........................................................................51 

*PJM Interconnection, L.L.C., 

99 FERC ¶ 61,227 (2002).............................................................................51 

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Regional Transmission Orgs., 

Order No. 2000, 

FERC Stats. & Regs. ¶ 31,089 (1999).........................................................61 

Wholesale Competition in Regions with Organized Elec. Mkts., 

Order No. 719, 

FERC Stats. & Regs. ¶ 31,281 (2008).........................................................16 

Statutes

16 U.S.C. § 824......................................................................................................3, 7 

*16 U.S.C. § 824(a) .................................................................. 2, 3, 7, 11, 22, 28, 31 

*16 U.S.C. § 824(b)(1) ..................................................................... 8, 22, 28, 29, 31 

16 U.S.C. § 824(f)............................................................................................... 7, 28 

*16 U.S.C. § 824d................................................................................... 8, 30, 45, 46 

16 U.S.C. § 824e........................................................................................... 9, 45, 46 

16 U.S.C. § 824h .....................................................................................................31 

16 U.S.C. § 824p .....................................................................................................35 

16 U.S.C. § 825l(b)............................................................................................. 1, 24 

5 U.S.C. § 706(2)........................................................................................ 25, 27, 45 

Energy Policy Act of 2005, 

Pub. L. No. 109-58, § 1252..........................................................................36 

Regulations

18 C.F.R. § 35.28(b) ......................................................................................... 15, 29 

Other Authorities

Department of Energy, 

Benefits of Demand Response in Electricity Markets 

and Recommendations for Achieving Them (Feb. 2006) .............................13 

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Department of Energy, 

Database of State Incentives for Renewables and Efficiency ...............34 

FERC Staff, 

2011 Assessment of Demand Response 

and Advanced Metering (Nov. 2011)...........................................................14 

FERC Staff, 

A National Assessment of Demand 

Response Potential (June 2009)............................................................. 13, 14 

James Bushnell, et al., 

When It Comes to Demand Response, 

Is FERC Its Own Worst Enemy?, 

The Electricity Journal (Oct. 2009)............................................................15 

Massachusetts Institute of Technology, 

The Future of the Electric Grid (2011)..........................................................13 

The Electric Energy Market Competition Task Force, 

Report to Congress on Competition in Wholesale 

and Retail Markets for Electric Energy (Apr. 2007)....................................12 

William W. Hogan, 

Implications for Consumers of the NOPR’s 

Proposal to Pay the LMP for All Demand Response (2010) ................. 47, 55 

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GLOSSARY OF TERMS 

APPA Petitioner American Public Power Association

California ISO California Independent System Operator 

Corporation 

CPUC California Public Utilities Commission 

Commission Federal Energy Regulatory Commission 

Delaware PSC Delaware Public Service Commission 

Demand Response A reduction in the consumption of electric 

energy by retail 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). 

DOE Report Department of Energy, Benefits of Demand 

Response in Electricity Markets and 

Recommendations for Achieving Them (Feb. 

2006). 

EEI Petitioner Edison Electric Institute 

EPSA Petitioner Electric Power Supply Association 

FERC Federal Energy Regulatory Commission 

FTC Federal Trade Commission 

Hogan Paper William W. Hogan, Implications for Consumers 

of the NOPR’s Proposal to Pay the LMP for All 

Demand Response (R.18, Attachment 1) (JA __). 

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ISO Independent System Operator — The operator 

of a regional transmission system that is 

independent of market participants. See RTO. 

ISO-NE ISO New England Inc. 

LMP Locational marginal price — A measure of the 

least-cost of meeting an incremental 

megawatt-hour of demand at each location on 

the grid. At any given grid location, the LMP 

has three components: a generation 

component, a congestion component, and a 

losses component. 

LMP-minus-G A measure of the least-cost of meeting an 

incremental megawatt-hour of demand at 

each location on the grid, adjusted to reflect 

an offset accounting for saved retail 

generation charges (“G” represents the retail 

generation charge). 

Megawatt (MW) A measure of real power equal to a million 

watts. 

Megawatt hour (MWh) The power utilization for one hour measured 

in megawatts. 

MISO Midwest Independent Transmission System 

Operator, Inc. 

NOPR Demand Response Compensation in Organized 

Wholesale Energy Markets, Notice of Proposed 

Rulemaking, FERC Stats. & Regs. ¶ 32,656 

(2010) (JA ___). 

NRECA Petitioner National Rural Electric Cooperative 

Association

ODEC Petitioner Old Dominion Electric Cooperative

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xxviii 

Ohio PUC Public Utilities Commission of Ohio 

Order 719 Wholesale Competition in Regions with Organized 

Elec. Mkts., Order No. 719, FERC Stats. & 

Regs. ¶ 31,281 (2008).

Order 745 Demand Response Compensation in Organized 

Wholesale Energy Markets, Order No. 745, Final 

Rule, 76 Fed. Reg. 16,658 (Mar. 24, 2011)FERC 

Stats. & Regs. ¶ 31,322 (Mar. 15, 2011) (JA __). 

Order 745-A Demand Response Compensation in Organized 

Wholesale Energy Markets, Order No. 745-A, 

Order on Rehearing and Clarification, 137 

FERC ¶ 61,215 (Dec. 15, 2011) (JA __). 

Potomac Economics Potomac Economics, Ltd. 

PJM Interconnection PJM Interconnection, L.L.C. 

Retail Sales Sales of electric energy to end-use customers. 

Such sales are subject to state jurisdiction. 

RTO Regional Transmission Organization — An 

entity responsible for the operation of a 

regional transmission network. See ISO. 

Tariff A Commission-approved document stating 

the rate or rates to be charged by a particular 

company or utility. 

Transmission Owner A transmission-owning utility. The term is 

used to refer to a transmission-owning utility 

that has transferred functional control over its 

transmission facilities to an RTO or ISO and, 

therefore, is no longer a provider of 

transmission services. 

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xxix 

Wholesale Sales Sales of electric energy to load-serving entities 

for resale to end-use customers. Such sales 

are subject to federal jurisdiction. 

2009 National Assessment FERC Staff, A National Assessment of 

Demand Response Potential (June 2009). 

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JURISDICTIONAL STATEMENT 

On March 15, 2011, the Federal Energy Regulatory Commission issued 

a final rule requiring that certain retail customers receive compensation for 

not consuming retail energy under the rules governing certain wholesale 

markets. Demand Response Compensation in Organized Wholesale Energy 

Markets, Order No. 745, 76 Fed. Reg. 16,658 (Mar. 24, 2011), FERC Stats. & 

Regs. ¶ 31,322 (“Order 745”). The Commission denied rehearing on 

December 15, 2011, see Order No. 745-A, 137 FERC ¶ 61,215 (“Order 745-A), 

and petitioners filed timely petitions for review. This Court has jurisdiction 

under 16 U.S.C. § 825l(b).

STATUTORY AND REGULATORY PROVISIONS 

The relevant statutory and regulatory provisions are reproduced in the 

addendum. 

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2 

STATEMENT OF ISSUES 

1. Because the Commission has no authority to regulate retail sales 

and matters “subject to regulation by the States,” 16 U.S.C. § 824(a), has the 

Commission exceeded its statutory authority by requiring that certain retail 

customers receive payments for reducing their retail purchases of electric 

energy and treating those reductions in retail consumption as the functional 

equivalent of producing energy for sale at wholesale? 

2. Has the Commission violated the requirements of the Federal 

Power Act and of reasoned decision-making (i) by establishing a scheme 

that overcompensates reductions in retail demand and thereby unduly 

discriminates in favor of certain retail customers; (ii) by departing from 

precedent without explaining or even acknowledging the departure; and 

(iii) by failing to provide a meaningful response to serious objections, 

including concerns that the Commission’s compensation scheme will distort 

the nation’s energy markets and artificially suppress market prices in a 

manner inconsistent with the Commission’s statutory obligation to ensure 

that rates are just and reasonable for wholesale sales? 

3. Has the Commission violated the Federal Power Act by 

requiring changes to rates without complying with section 206, which 

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3 

precludes the Commission from unilaterally modifying rates unless it 

demonstrates that existing rates are unjust and unreasonable and that its 

proposed rates are just and reasonable and not unduly discriminatory? 

INTRODUCTION 

This consolidated appeal arises out of attempts by the Commission to 

address perceived inefficiencies resulting from the division of jurisdictional 

authority between the States and the federal government. State retail rate 

regulation has a substantial impact on wholesale energy prices because retail 

prices affect retail customers’ demand for electric energy (in industry 

parlance, “load”), which in turn determines the amount of energy that must 

be generated and purchased at wholesale by the load-serving entities that 

serve retail customers. Despite this connection, the Federal Power Act 

draws a clear jurisdictional line between the regulation of wholesale and 

retail transactions, granting the Commission exclusive authority over the 

former, while prohibiting the Commission from interfering with the States’ 

traditional and equally exclusive authority over the latter. See 16 U.S.C. 

§§ 824, 824(a). 

In its orders below, the Commission has attempted to circumvent 

these statutory limits on its authority. In particular, it has sought to interfere 

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4 

with state and local regulation of retail transactions by redefining certain 

retail customers’ decisions not to purchase energy at retail — i.e., reductions 

in retail customer demand occurring in response to changes in price or other 

incentives (“demand response”) — as equivalent to producing electric 

energy for sale at wholesale and entitled to compensation as a service 

provided in the wholesale markets. Moreover, the Commission has ordered 

that retail customers who reduce their purchases of energy at retail shall be 

paid the full wholesale rate that generators receive for actually producing 

electric energy. As numerous experts explained to the Commission, because 

these retail customers will receive the full wholesale payment in addition to 

avoiding the associated retail charge, the Commission’s approach will overcompensate participating retail customers, unduly discriminate against 

wholesale power producers, and distort the nation’s electricity markets. 

Nonetheless, in its orders below, the Commission largely ignored these 

problems and instead concluded that its retail customer compensation 

scheme is justified on the theory that regulating retail consumption 

decisions will help address unspecified “market imperfections.” 

Petitioners are some of the nation’s leading energy industry 

associations. They together represent the diverse interests of almost all 

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5 

major wholesale market participants, including shareholder-owned electric 

utilities, community-owned electric utilities, competitive power suppliers, 

and not-for-profit rural electric cooperatives and public power districts. 

Although petitioners have a common interest in eliminating undue 

discrimination and ensuring that reliable supplies of electric energy are 

available at just and reasonable prices, they have vastly differing 

perspectives on how best to achieve these goals, even differing on questions 

as fundamental as the appropriateness of the Commission’s market-based 

rate program. Petitioners’ interests are rarely aligned when it comes to 

questions concerning the regulation of the nation’s wholesale energy 

markets. 

Nonetheless, as a clear sign of how far the Commission’s orders have 

gone astray, petitioners are taking the unusual step of submitting this joint 

brief. Petitioners share concerns about the Commission’s unlawful and 

unreasoned approach to paying retail customers for reducing retail 

consumption. 1 As described in more detail below, the Commission’s orders 

 

1 With one exception: Petitioners American Public Power Association, 

National Rural Electric Cooperative Association, and Old Dominion 

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6 

should be reversed and vacated because they exceed the Commission’s 

jurisdiction, are inconsistent with the Federal Power Act’s mandates, and do 

not comply with the requirements of reasoned decision-making. 

STATEMENT OF CASE AND FACTS 

A. The Federal Power Act 

When Congress enacted the Federal Power Act it reaffirmed, 

consistent with Supreme Court precedent, the “bright line” distinction 

“between state and federal jurisdiction” over the electric power industry. 

FPC v. Southern Cal. Edison Co., 376 U.S. 205, 215-16 (1964); see also Public 

Utils. Comm’n of Rhode Island v. Attleboro Steam & Elec. Co., 273 U.S. 83, 89 

(1927). Simply put, the statute provides that “retail” sales of electric energy 

remain subject to exclusive state regulation, as they were before Congress 

enacted the Federal Power Act, while wholesale sales and transmission of 

electric energy are subject to the Commission’s exclusive jurisdiction. See

Arkansas Elec. Coop. v. Arkansas Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983). 

The Federal Power Act thus reserves to the States jurisdiction over 

sales of energy at retail and expressly prohibits the Commission from 

 

Electric Cooperative do not join in section II.D. of this brief (or the 

summary of argument relating to that section). 

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regulating matters, such as retail services, that “are subject to regulation by 

the States.” 16 U.S.C. §§ 824, 824(a); see also New York v. FERC, 535 U.S. 1, 20 

(2002) (the Commission’s “jurisdiction over the sale of power has been 

specifically confined to the wholesale market”) (emphasis in original). As 

this Court has recognized, the States “retain jurisdiction over retail sales of 

electricity and over local distribution facilities.” Niagara Mohawk Power Corp. 

v. FERC, 452 F.3d 822, 824 (D.C. Cir. 2006). The statute similarly excludes 

from the Commission’s ratemaking jurisdiction certain electric entities that 

often make retail sales, including “any political subdivision of a State, an 

electric cooperative that receives financing under the Rural Electrification 

Act of 1936, or that sells less than 4,000,000 megawatt hours of electricity per 

year,” or any instrumentality or agency of any of the foregoing. 16 U.S.C. 

§ 824(f). By leaving undisturbed state and local authority over these matters, 

Congress preserved “one of the most important of the functions traditionally 

associated with the police power of the States.” Arkansas Elec., 461 U.S. at 

377 (citing Munn v. Illinois, 94 U.S. 113 (1877)). 

In contrast, the Federal Power Act grants the Commission exclusive 

jurisdiction over “the transmission of electric energy in interstate commerce” 

and “the sale of electric energy at wholesale in interstate commerce.” 16 

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U.S.C. § 824(b)(1). The Commission oversees “[a]ll rates and charges made, 

demanded, or received by any public utility for or in connection with the 

transmission or sale of electric energy subject to the jurisdiction of the 

Commission.” 16 U.S.C. § 824d(a). Moreover, the statute’s section 205 tasks 

the Commission with ensuring that all wholesale rates and charges, as well 

as “all rules and regulations affecting or pertaining to such rates or charges,” 

are just and reasonable and not unduly preferential or discriminatory. Id. 

§§ 824d(a), 824d(b). 

Significantly, Congress granted regulated sellers authority to “set[] the 

rates in the first instance” under section 205. Boston Edison Co. v. FERC, 233 

F.3d 60, 64 (1st Cir. 2000). The Federal Power Act thus directs that, “[u]nless 

the Commission otherwise orders,” rates and charges become automatically 

effective and presumptively lawful once they are accepted for filing. 16 

U.S.C. § 824d(d); see also Alabama Power Co. v. FERC, 22 F.3d 270, 271 (11th 

Cir. 1994). Moreover, once a rate is accepted and in force, the Commission 

has no authority to order changes to the rate unless it first complies with the 

requirements of section 206. City of Winnefeld, La. v. FERC, 744 F.2d 871, 875 

(D.C. Cir. 1984). Section 206 permits the Commission to modify existing 

rates currently “in force” only if they can be shown to have become “unjust, 

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unreasonable, unduly discriminatory or preferential.” 16 U.S.C. § 824e(a); 

see generally Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of 

Snohomish Cty., 554 U.S. 527 (2008). 

B. The Organized Wholesale Markets 

For most of the last century, power markets were dominated by 

vertically integrated utilities that served as “local monopolies subject to state 

or local regulation.” New York, 535 U.S. at 5. In recent decades, however, 

Congress and the Commission have taken steps seeking to facilitate greater 

competition in the nation’s wholesale power markets. Id. at 8. As part of 

these initiatives, the Commission has sought to lower barriers to entry by 

encouraging utilities to transfer control over their transmission facilities to 

independent public utility entities, known as independent system operators 

(“ISOs”) and regional transmission organizations (“RTOs”). 

ISOs and RTOs are responsible for administering organized, bid-based 

markets for wholesale electricity and for ensuring that participants within 

those markets have access to the transmission system on a nondiscriminatory basis. See California Indep. Sys. Operator Corp. v. FERC, 372 

F.3d 395, 397 (D.C. Cir. 2004). The wholesale markets administered by the 

ISOs and RTOs allow energy suppliers (e.g., electric generators) to sell the 

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power they produce at wholesale rates to load-serving entities, which then 

resell the power to retail customers at retail rates. See Wisconsin Pub. Power, 

Inc. v. FERC, 493 F.3d 239 (D.C. Cir. 2007). 

Within the ISO-/RTO-operated wholesale markets, electric energy is 

sold on a real-time and day-ahead basis, and the rates at which energy is 

bought and sold are subject to the Commission’s oversight. In simple terms, 

these wholesale markets work as follows: to balance supply and demand an 

ISO/RTO will accept offers to sell energy in ascending price order (from the 

lowest offer to the highest) until the market clears, meaning that all demand 

for energy has been met. When the market clears, all sellers whose offers 

have been accepted are paid for the energy they supply at the marketclearing price. 

For most ISOs and RTOs, the market-clearing price reflects the use of 

the “locational marginal price” (“LMP”) model. The LMP represents “the 

least-cost of meeting an incremental megawatt-hour of demand at each 

location on the grid.” Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520, 524 

(D.C. Cir. 2010). At any given grid location, the LMP has three components: 

(1) a generation component, which is intended to capture “the baseline cost 

of serving load anywhere on the system in the absence of congestion and 

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transmission losses,” id.; (2) a congestion component, “which takes into 

account the limits on available transmission capacity” and thus “results in 

higher energy prices at [locations] that require the use of congested 

transmission lines and lower prices in less congested areas,” Wisconsin Pub. 

Power, 493 F.3d at 250; and (3) a losses component, which accounts for the 

cost associated with “the amount of electric energy lost when electricity 

flows across a transmission system.” Sithe/Independence Power Partners, L.P. 

v. FERC, 285 F.3d 1, 2 (D.C. Cir. 2002). LMPs are calculated for intervals of 

an hour, or even less in some wholesale markets, and thus reflect 

fluctuations in the marginal cost of production at each location throughout 

the day. 

C. The Relationship Between Wholesale And Retail Rates 

Retail customers purchase energy at state-regulated rates from loadserving entities, which have either purchased energy in the wholesale 

markets or generated it with their own units. These retail transactions, and 

the rates at which retail customers purchase energy from load-serving 

entities, are not regulated by the Commission. They are instead “subject to 

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

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Because electric energy, unlike most other commodities, cannot be 

stored, there is a direct relationship between, on one hand, the volume of 

sales made to retail customers and, on the other, the volume of energy 

generated and purchased at wholesale by load-serving entities. For 

example, although demand for electricity may be relatively “inelastic” with 

respect to price, retail customers will purchase less energy from load-serving 

entities when retail prices increase. See The Electric Energy Market 

Competition Task Force, Report to Congress on Competition in Wholesale and 

Retail Markets for Electric Energy, at 48 (Apr. 2007), available at http://www.

ferc.gov/legal/fed-sta/ene-pol-act/epact-final-rpt.pdf. These retail 

consumption decisions thus translate directly into the “demand” (i.e., 

“load”) that load-serving entities must meet either through additional 

purchases in the wholesale markets or through their own generation. Id.

at 6. 

Although retail and wholesale rates are linked, because of the 

bifurcated regulatory structure imposed by Congress, there is typically no 

connection between retail prices at any particular time and location and 

wholesale prices at that same time and location. See Order 745, at P 57 

(JA __). Retail rates typically do not adjust on an hour-by-hour basis and do 

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13 

not track price fluctuations in the wholesale markets. See id. at 31,271 

(Comm’r Moeller, dissenting) (JA ___); Department of Energy, Benefits of 

Demand Response in Electricity Markets and Recommendations for Achieving 

Them, at 7 (Feb. 2006) (“DOE Report”), available at http://energy.gov/sites/

prod/files/oeprod/DocumentsandMedia/DOE_Benefits_of_Demand_Resp

onse_in_Electricity_Markets_and_Recommendations_for_Achieving_Them

_Report_to_Congress.pdf (same). In fact, many states and local 

governments have chosen to keep retail rates fixed because “customers do 

not like price volatility” and because there is a lack of advanced metering 

technology that would provide retail customers with more accurate price 

signals. FERC Staff, A National Assessment of Demand Response Potential, at 

189 (June 2009) (“2009 National Assessment”), available at http://www.ferc.

gov/legal/staff-reports/06-09-demand-response.pdf; see also Massachusetts 

Institute of Technology, The Future of the Electric Grid, at 143-45 (2011), 

available at http://web.mit.edu/mitei/research/studies/documents/electricgrid-2011/Electric_Grid_Full_Report.pdf. As a result, retail customers often 

do not see, and cannot adjust retail consumption in response to, the hourly 

(and often even more frequent) fluctuations in wholesale prices. See 2009 

National Assessment at 189; see also DOE Report at 7 (describing “disconnect 

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14 

between short-term marginal electricity production costs and retail rates 

paid by consumers”). 

Recognizing the inefficiency of this disconnect between wholesale and 

retail prices, some states and local governments have chosen to implement 

“dynamic pricing” models, promote advanced metering technology, and 

establish other regulatory programs to allow retail rates to more closely 

track price fluctuations in the wholesale markets. See 2009 National 

Assessment at 21-22 (describing these programs); id. at 79 (Appendix A) 

(analysis of existing programs); FERC Staff, 2011 Assessment of Demand 

Response and Advanced Metering at 4-6 (Nov. 2011) (describing state 

legislative and regulatory activity), available at http://www.ferc.gov/legal/

staff-reports/11-07-11-demand-response. pdf; R.83 at 5-6 (APPA, et al.) (JA 

__) (describing efforts undertaken by non-jurisdictional load-serving 

entities); Order 745, at P 9 (JA __). Significantly, however, some states and 

local governments have chosen not to implement retail programs that 

would make retail pricing more dynamic or responsive to changes in 

wholesale prices. See 2009 National Assessment at 38. These choices reflect 

local policy judgments about how best to protect consumers and to regulate 

retail rates. 

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D. The Commission’s Orders 

Dissatisfied with state and local government efforts to allow retail 

customers to respond to fluctuations in wholesale prices, the Commission 

has recently sought to influence retail consumption decisions directly by 

encouraging what it refers to as “demand response.” The term is part of that 

language this Court has come to know as “FERC-speak.” Connecticut Dept. 

of Pub. Util. Control v. FERC, 569 F.3d 477, 481 (D.C. Cir. 2009). In plain 

English, “demand response” refers to the basic economic phenomenon that 

when electricity prices go up customers demand less of it. See James 

Bushnell, et al., When It Comes to Demand Response, Is FERC Its Own Worst 

Enemy?, The Electricity Journal, at 11 (Oct. 2009) (“One rarely hears the term 

used outside of the electricity industry because the notion that consumers 

must pay and make decisions based on a real-time price is a fact of life in all 

industries without explicit price regulation.”). More specifically, the 

Commission defines ”demand response” as “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). 

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Although the Commission is not empowered to regulate retail sales, it 

decided to regulate “demand response” by redefining retail non-purchases 

as a wholesale service. In particular, the Commission concluded that a retail 

customer’s decision not to purchase energy at retail should be treated as a 

wholesale service that is equivalent to generating energy and making it 

available for sale at wholesale. Accordingly, in earlier orders the 

Commission directed ISOs and RTOs to allow retail customers, either 

directly or through an intermediary, to offer “demand response” into 

wholesale markets in certain circumstances and to treat “demand response” 

“comparably to other resources.” Wholesale Competition in Regions with 

Organized Elec. Mkts., Order No. 719, FERC Stats. & Regs. ¶ 31,281 at P 15 

(2008) (“Order 719”). Working with stakeholders in their respective regions, 

ISOs and RTOs developed, and the Commission approved, tariff changes 

designed to allow retail customers to participate directly in organized 

wholesale markets as purported energy suppliers. Demand Response 

Compensation in Organized Wholesale Energy Markets, Notice of Proposed 

Rulemaking, FERC Stats. & Regs. ¶ 32,656 at P 7 (2010) (JA ___) (“NOPR”). 

In the wake of these orders, each ISO or RTO developed “its own 

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17 

compensation methodologies” tailored to the specific circumstances of its 

individual market and filed them with the Commission. Id. at P 8 (JA __). 

The Commission initially accepted these filings. On March 18, 2010, 

however, the Commission issued a notice of proposed rulemaking, 

expressing its dissatisfaction with the fact that “demand response 

providers” — i.e., retail customers, directly and through their agents — were 

“collectively” playing only “a small role in wholesale markets.” Id. at P 9 

(JA __). Asserting that “some existing, inadequate compensation structures 

have hindered the development and use of demand response,” id., the 

Commission proposed to adopt a uniform requirement that all ISOs and 

RTOs pay retail customers the full wholesale LMP for agreeing to reduce 

their purchases of energy at retail. Id. at P 1 (JA __). 

Thousands of pages of comments were filed in response to this 

proposal. Order 745, at P 1 (JA __). The bulk of these comments, 

representing an unusually broad spectrum of interests, opposed the 

Commission’s attempt to assert jurisdiction over retail service by redefining 

reductions in retail consumption as providing a wholesale service. Id. at 

PP 103-14 (JA __). Comments also expressed concern that a “one size fits 

all” approach would fail to account for regional differences and would be 

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18 

incompatible with state and utility efforts to develop policies and programs 

for regulating retail “demand response.” Id. at P 44 (JA __); see also R.91 at 5-

8 (CPUC). Finally, comments objected that the full LMP payments 

contemplated by the Commission would over-compensate certain retail 

customers because they would receive both a reduction in their retail 

payments as well as a payment for reducing demand, which would inject 

distortions into the organized wholesale energy markets. Order 745, at 

PP 22-27 (JA __). 

On March 15, 2011, the Commission issued Order 745 requiring ISOs 

and RTOs to pay retail customers the market price for wholesale energy (the 

full LMP) in return for commitments to reduce retail consumption. The 

Commission asserted jurisdiction on the theory that compensating certain 

retail customers to reduce their retail purchases is purportedly a “practice” 

that affects wholesale rates within the meaning of section 205(a) of the 

Federal Power Act. Id. at P 125 (JA __). Based on its belief that “demand 

response can balance supply and demand as can generation,” id. at P 55 

(JA __), the Commission held that reductions in retail consumption by retail 

customers should be treated as equivalent to production of energy by 

generators at wholesale. Id. at P 53 (JA __). The Commission thus directed 

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19 

that “demand response resources that clear in the day-ahead and real-time 

energy markets should receive the LMP for services provided, as do 

generation resources.” Id. 

The Commission conditioned the payment of full LMP to retail 

customers on the “demand response” being “able to displace a generation 

resource” and allowing the ISO or RTO to “balanc[e] supply and demand.” 

Id. at P 48 (JA __). In addition, the Commission required “demand 

response” to be “cost-effective,” as determined by a newly devised “net 

benefits test.” Id. That test requires that “demand response” providers “be 

paid LMP only when the benefits of demand response compensation 

outweigh the energy market costs to consumers of paying demand response 

resources.” Id. at P 28 (JA __). 

This condition sprung from the Commission’s recognition that paying 

full LMP to retail customers for reducing retail purchases creates a revenue 

shortfall in the wholesale market. See id. at PP 50-52 (JA __). A shortfall 

occurs because the quantity of power purchased by load-serving entities 

participating in the wholesale market is based on the aggregate demand of 

their retail customers. When one of those retail customers provides 

“demand response,” the load-serving entity’s aggregate demand (load) goes 

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20 

down, reducing its wholesale purchases and the amount that must be paid 

to generators for supplying power in equal amounts. As the Commission 

acknowledged, paying retail customers to consume less energy would result 

in a “difference between the amount owed by the RTO to resources, 

including demand response providers,” and the revenues the RTO could 

collect from load-serving entities, creating a “negative balance” that would 

have to be recovered from load-serving entities participating in the 

wholesale market. Id. at P 99 (JA __); see also id. at P 102 (JA __). 

In a strongly worded dissent, Commissioner Moeller stated that the 

Commission’s retail customer compensation scheme “conflicts both with the 

Commission’s efforts to promote competitive markets and with its statutory 

mandate to ensure supplies of electric energy at just, reasonable, and not 

unduly discriminatory or preferential rates.” Id. at 31,268 (Comm’r Moeller, 

dissenting) (JA __). Among other things, Commissioner Moeller noted that 

paying retail customers full LMP for reducing consumption “results in overcompensation that is economically inefficient, preferential to demand 

resources, and unduly discriminatory towards other market resources.” Id.

at 31,269 (Comm’r Moeller, dissenting) (JA __). Referring to the net benefits 

test adopted by the Commission to address the imbalance between 

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21 

payments and receipts, Commissioner Moeller objected that the 

Commission disregarded concerns identified by a “clear majority” of the 

panel of experts the Commission had convened at a technical conference to 

opine on the “net benefits approach.” Id. Commissioner Moeller also 

objected that the use of a “net benefits test” is “troubling” because it “will 

only distort price signals” and “can be viewed as somehow equating the 

concept of a just and reasonable rate with a lower price.” Id. at 31,270 

(Comm’r Moeller, dissenting) (JA __). 

Requests for rehearing of Order 745 were filed by numerous parties, 

including ISOs/RTOs, suppliers, state regulatory commissions, trade 

associations, publicly owned utilities, rural cooperatives, and transmission 

owners. See Order 745-A, at P 6 (JA __). On December 15, 2011, with 

Commissioner Moeller again dissenting, the Commission generally denied 

the rehearing requests and granted clarification on certain issues. 

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SUMMARY OF ARGUMENT 

1. The Commission’s orders exceed the agency’s statutory 

authority because they regulate retail services, which are expressly subject 

only “to regulation by the States.” 16 U.S.C. §§ 824(a), 824(b)(1). In 

particular, the Commission’s orders directly regulate retail transactions by 

requiring that retail customers receive payment for reducing their retail 

purchases of electricity, and then treating those reductions in retail 

consumption as equivalent to supplying energy for sale at wholesale. The 

plain language of the Federal Power Act reserving jurisdiction over retail 

service to the States, an area in which the States have traditionally exercised 

exclusive regulation, trumps the Commission’s claim of authority to 

regulate “demand response” as a “practice” affecting wholesale service. 

Moreover, the Commission’s interpretation of the statutory requirements is 

unreasonable and arbitrary because the Commission failed to consider the 

impact its orders will have on existing state “demand response” programs, 

which the Commission concedes the States are empowered to adopt. 

2. The Commission’s orders also violate the Federal Power Act‘s 

requirements that rates be just and reasonable and not unduly preferential 

or discriminatory, and are not the product of reasoned decision-making. 

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First, the Commission’s compensation scheme over-compensates retail 

customers who agree to reduce their retail purchases by paying them the full 

LMP for forgoing retail purchases without accounting for the savings 

associated with avoiding retail generation costs. By failing to account for the 

avoided retail charge, the Commission’s scheme unduly prefers “demand 

response” providers and unduly discriminates against other market 

participants. Second, the Commission’s orders arbitrarily depart without 

acknowledgment or reasoned explanation from precedent recognizing that 

paying retail customers the full LMP for forgoing retail purchases results in 

an unwarranted “subsidy.” Third, the Commission’s orders violate the 

statutory requirements because they do not meaningfully address 

arguments and evidence that the Commission’s compensation scheme will 

distort the markets by encouraging retail customers to reduce their retail 

consumption below efficient levels. Fourth, the Commission’s orders 

impermissibly equate lower prices with “just and reasonable” rates and fail 

to address evidence that artificially lowering prices will interfere with 

existing market power requirements and potentially result in the overmitigation of generator market power. 

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24 

3. The Commission’s orders are invalid because they prescribe 

changes to existing rate tariffs without making the required findings under 

section 206 of the Federal Power Act that existing rates are unjust and 

unreasonable. 

STANDING 

Petitioners and their members are aggrieved by the orders below, they 

satisfy the requirements of 16 U.S.C. § 825l(b), and their associational 

standing is self-evident. See Hunt v. Washington State Apple Adver. Comm’n, 

432 U.S. 333 (1977). The Commission’s orders are causing injury in fact 

because, among other things, they exceed the Commission’s jurisdiction, 

deprive petitioners and their members of the statutory right to nondiscriminatory treatment, and directly affect the compensation their 

members receive for generating energy for transmission and sale at 

wholesale. The Court can redress these concrete injuries by reversing the 

Commission’s orders, preventing the Commission from exceeding its 

statutory authority, and requiring the Commission to comply with the 

requirements of reasoned decision-making. Lujan v. Defenders of Wildlife, 504 

U.S. 555, 560-61 (1992). Petitioners participated in the proceedings below 

and their interests fall within the zone of interests protected by the Federal 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 55 of 126
25 

Power Act. Transmission Agency of N. Cal. v. FERC, 495 F.3d 663, 669-70 (D.C. 

Cir. 2007). 

STANDARD OF REVIEW 

The Commission’s interpretation of the Federal Power Act is subject to 

the familiar two-step analysis in Chevron, U.S.A., Inc. v. Natural Resources 

Defense Council Inc., 467 U.S. 837, 843 (1984). See Detroit Edison Co. v. FERC, 

334 F.3d 48, 53 (D.C. Cir. 2003). The Court should defer to an agency’s 

statutory interpretation “only when the devices of judicial construction have 

been tried and found to yield no clear sense of congressional intent.” General 

Dynamics Land Sys. Inc. v. Cline, 540 U.S. 581, 600 (2004). Moreover, where 

(as here) “general principles of the law” are applied to undisputed 

jurisdictional facts, the Court need not afford the agency’s decision special 

deference. North Am. Van Lines, Inc. v. NLRB, 869 F.2d 596, 598 (D.C. Cir. 

1989). 

Under the Administrative Procedure Act, the Commission’s orders 

should be struck down if they are “arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). 

An agency’s action is “plainly contrary to law and cannot stand” if it exceeds 

the agency’s statutory authorization. Michigan v. EPA, 268 F.3d 1075, 1081 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 56 of 126
26 

(D.C. Cir. 2001). Moreover, an agency violates the requirements of reasoned 

decision-making if it fails to articulate a “rational connection between the 

facts found and the choice made,” Florida Gas Transmission Co. v. FERC, 604 

F.3d 636, 639 (D.C. Cir. 2010); departs from precedent without reasoned 

explanation, see FCC v. Fox Television Stations, Inc., 556 U.S. 502, 516 (2009); 

or fails “to consider an important aspect of the problem.” Motor Vehicle 

Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 

(1983). An agency must “engage the arguments raised before it,” NorAm Gas 

Transmission Co. v. FERC, 148 F.3d 1158, 1165 (D.C. Cir. 1990), and “explain 

why it rejected evidence that is contrary to its findings.” Carpenters & 

Millwrights v. NLRB, 481 F.3d 804, 809 (D.C. Cir. 2007). 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 57 of 126
27 

ARGUMENT 

I. The Commission’s Orders Exceed Its Statutory Authority. 

The Commission’s orders are “in excess” of its “statutory jurisdiction” 

and should be held “unlawful and set aside.” 5 U.S.C. §§ 706(2), (2)(C). The 

Commission cannot circumvent the limits on its authority by paying certain 

retail customers to reduce the amount of electricity they purchase at retail 

and then redefining those reductions in retail sales as a “wholesale service.” 

A. The Federal Power Act Prohibits The Commission From 

Regulating Retail Services. 

As a “creature of statute,” the Commission possesses only the 

authority that Congress has conferred upon it; “if there is no statute 

conferring authority,” the Commission “has none.” Atlantic City Elec. Co. v. 

FERC, 295 F.3d 1, 8 (D.C. Cir. 2002). It is therefore significant — indeed, 

dispositive — that although Congress granted the Commission “plenary” 

jurisdiction over rates for wholesale sales in interstate commerce, it 

expressly withheld authority to interfere with the States’ jurisdiction over 

retail sales. Southern Cal. Edison, 376 U.S. at 215-16. The Federal Power Act 

limits the Commission’s jurisdiction to “the transmission of electric energy 

in interstate commerce and to the sale of electric energy at wholesale in 

interstate commerce,” and forbids the Commission from regulating “any 

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28 

other sale of electric energy,” 16 U.S.C. § 824(b)(1), including transactions 

“subject to regulation by the States.” Id. § 824(a); see also id. § 824(f) 

(identifying entities exempt from the Commission’s jurisdiction). Congress 

has thus drawn a “clear and complete” line that “cut[s] sharply and cleanly 

between sales for resale and direct sales for consumptive uses.” Panhandle E. 

Pipe Line Co. v. Public Serv. Comm’n of Ind., 332 U.S. 507, 517 (1947); see also 

New York, 535 U.S. at 19 (Commission’s “jurisdiction over the sale of power 

has been specifically confined to the wholesale market”). 

In its orders below, the Commission crossed this line. Although the 

Commission’s orders refer obliquely to “demand response resources” that 

participate “as supply resources in the organized wholesale electricity 

markets,” Order 745, at P 62 (JA __), this jargon cannot obscure reality: The 

Commission has ordered ISOs and RTOs to pay retail customers for 

reducing their retail purchases of electricity. See id. at PP 86-87 (JA __). The 

“services” the Commission seeks to regulate are thus precisely the types of 

retail sales of electric energy that are “subject to regulation by the States.” 16 

U.S.C. §§ 824(a), (b)(1). 

Any doubt on this score is confirmed by the Commission’s own 

regulations. Those regulations define “demand response” as “a reduction in 

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29 

the consumption of electric energy by customers,” 18 C.F.R. § 35.28(b)(4), 

making clear that “demand response” involves neither a transmission nor a 

wholesale sale of electricity over which the Commission has authority. 16 

U.S.C. § 824(b)(1). The Commission conceded as much below, stating that it 

“does not view demand response as a resale of energy back into the 

[wholesale] energy market.” Order 745, at P 64 (JA ___). As the 

Commission has previously held, an entity that provides only “demand 

response” service does “not own or operate facilities that are subject to the 

Commission’s jurisdiction” and therefore is not “a public utility that is 

required to have a rate on file with the Commission.” EnergyConnect, Inc., 

130 FERC ¶ 61,031 at P 30 (2010) (contrasting “agreements not to purchase 

electric energy” with “agreements to sell electric energy at wholesale”). 

Indeed, “demand response” is the polar opposite of a wholesale sale: Rather 

than selling energy at wholesale, a “demand response provider” — a retail 

customer — is electing not to purchase energy at retail, thereby forgoing the 

payment of a retail rate regulated by a state or local government. 

If one accepts the notion that a retail customer’s decision to reduce its 

purchases of retail service is equivalent to a sale of energy at wholesale, it 

follows that an increase in a retail customer’s retail purchases (i.e., demand) 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 60 of 126
30 

is equivalent to a purchase of energy in the wholesale market. The 

Commission’s logic thus leads ineluctably to the conclusion that the 

Commission has authority to regulate both purchases and sales of energy at 

the retail level. This directly interferes with the States’ exclusive authority 

and erases the “bright line” between federal and state jurisdiction that 

Congress drew. Southern Cal. Edison, 376 U.S. at 215. 

B. The Commission’s Authority Over Practices Affecting 

Wholesale Rates Does Not Permit It To Regulate Retail 

Services. 

Although it concedes that retail customers are not “public utilit[ies]” 

and do not make “wholesale sales of electric energy,” Order 745-A, at P 22 

(JA __), the Commission claims jurisdiction over “demand response” as “a 

practice that affects rates in organized wholesale electric markets under 

sections 205(a) and (c) and section 206(a) of the” Federal Power Act. Id. at 

P 22 (JA __) (citation omitted). The Commission’s position does not 

withstand scrutiny. 

1. The Statute Prohibits The Commission From Regulating 

Retail Services. 

No one disputes that the Commission has authority to regulate 

practices affecting wholesale rates. 16 U.S.C. § 824d. But this authority 

cannot and does not extend so far as to allow the Commission to regulate 

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31 

directly the retail services that are expressly carved out from the scope of its 

jurisdiction. 16 U.S.C. §§ 824(a), (b)(1); see also California ISO, 372 F.3d at 399-

402 (rejecting similar attempt to expand the Commission’s jurisdiction). 

Congress carefully structured the statute to “foreclose the possibility that the 

Commission would ... regulat[e] the nonjurisdictional, retail price.” FPC v. 

Conway Corp., 426 U.S. 271, 276-77 (1999). This specific limit on the 

Commission’s authority to regulate retail services trumps the more general 

authorization to regulate practices affecting wholesale rates. See RadLAX 

Gateway Hotel, LLC v. Amalgamated Bank, __ U.S. __, 2012 WL 1912197, at *4-

*5 (May 29, 2012). 

Nor can the Commission obliterate the jurisdictional boundary set by 

Congress merely because it is concerned about what it refers to as the “direct 

and substantial” link between retail consumption and wholesale prices. 

Order 745-A, at P 31 (JA __). Congress obviously knew about this link when 

it enacted the Federal Power Act. See, e.g., 16 U.S.C. § 824h(b) (authorizing 

the Commission to “confer” with state commissions “regarding the 

relationship between rate structures ... practices ... and regulations of public 

utilities”). Indeed, it was that same link between wholesale and retail prices 

that prompted state efforts to regulate wholesale sales that the Supreme 

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32 

Court struck down in Attleboro. See 273 U.S. 83. And it was the desire to “fill 

the gap” in regulation of electric utilities revealed by Attleboro that, in turn, 

led Congress to enact the Federal Power Act. Arkansas Elec., 461 U.S. at 379. 

In any event, requiring ISOs and RTOs to pay retail consumers not to 

purchase electricity at retail directly regulates (and has the intended purpose 

of regulating) retail services. By contrast, any effect on wholesale sales is 

secondary; it occurs only by virtue of the primary effect on retail 

consumption. Although retail consumption and wholesale prices are to 

some extent linked, that linkage does not and cannot empower the 

Commission to regulate retail sales as a “practice” affecting the wholesale 

market. 

The fundamental problem with the Commission’s approach is that it 

reads the “affecting” clauses of sections 205 and 206 as nullifying the 

limitations on the Commission’s jurisdiction set forth in section 201. But a 

statute’s terms “should not be construed so as to render any provision of 

that statute meaningless or superfluous.” Beck v. Prupis, 529 U.S. 494, 506 

(2000); Hibbs v. Winn, 542 U.S. 88, 101 (2004). If the Commission can regulate 

“demand response” by re-defining reductions in retail sales as a wholesale 

service, Congress’s reservation of retail regulation to the States is 

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33 

meaningless. Indeed, 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. The 

Commission itself has recognized that such activities fall outside its 

jurisdiction. Cf. Order 745, at P 31 (JA __); Order 745-A, at PP 29-31 (JA __). 

The Commission defends its power grab by arguing that “demand 

response” is unique because 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,” and compensating retail customers provides a way 

for them “to indicate the price at which they are willing to stop 

consumption.” Order 745-A, at P 30 (JA ___). In the Commission’s view, 

“demand response” is different from other retail transactions because, by 

offering “demand response,” retail customers become “direct participants in 

the organized wholesale energy markets.” Id. at P 31 (JA __). 

This reasoning is circular and irreconcilable with the statutory 

requirements. Retail customers are participating in the wholesale markets 

only because the Commission has brought them into the markets by creating 

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34 

its retail compensation scheme and ordering generous payments for 

reductions in retail purchases. But that does not transform their retail nonpurchases into wholesale sales subject to the Commission’s jurisdiction. To 

the contrary, all retail consumption decisions, and the prices set by state 

regulators for retail service that impact those decisions, have an effect on the 

wholesale market. If the Commission were correct, all state ratemaking 

decisions that affect the level of consumption in the retail markets would 

potentially become subject to the Commission’s jurisdiction as “practices” 

affecting wholesale rates. For example, more than 30 states have adopted 

laws requiring utilities to use renewable power for certain percentages of 

their retail load, which has a “direct effect” on the wholesale market by 

changing the demand for different sources of power. See, e.g., Department 

of Energy, Database of State Incentives for Renewables and Efficiency, 

available at http://www.dsireusa.org/summarymaps/index.cfm?ee=1&RE

=1. Notwithstanding this direct effect, the Commission has no authority to 

regulate these programs.. 

So too here. The buyers in ISO-/RTO-operated markets are loadserving entities, not retail customers. If directed by state regulators, or on 

their own initiative, load-serving entities can and in many instances do 

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35 

respond to changes in wholesale prices by operating their own retail 

“demand response” programs. But these retail programs are regulated by 

states and local governments, for Congress granted the States exclusive 

authority to determine how best to protect retail customers from price 

volatility. Only Congress can alter the Federal Power Act’s assignment of 

responsibility. See Chemehuevi Tribe of Indians v. FPC, 420 U.S. 395, 424 

(1975); New York, 535 U.S. at 18. 

Significantly, in circumstances where state inaction adversely impacts 

interstate commerce, Congress has not hesitated to extend the Commission’s 

jurisdiction into areas traditionally reserved to the States. For example, in 

the Energy Policy Act of 2005, Congress did just that when it granted the 

Commission backstop authority over the siting of electric transmission 

facilities in circumstances where prolonged state inaction had prevented the 

development of the interstate transmission grid. See 16 U.S.C. 

§ 824p(b)(1)(C) (permitting the Commission to issue permits where the State 

regulatory authority has “withheld approval for more than 1 year after the 

filing of an application seeking approval”). Congress has granted the 

Commission no similar authority over “demand response” or any other 

aspect of retail sales. 

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36 

In fact, contrary to the Commission’s position, Congress has recently 

confirmed that the Commission does not have authority over “demand 

response.” While the Commission’s orders emphasize that section 1252 of 

the Energy Policy Act of 2005 made promoting “demand response” a 

“national policy,” Order 745, at P 11 & n21 (JA __), the operative provisions 

of that same section recognize that “demand response” is a matter of state 

concern, “encourag[ing] States to coordinate, on a regional basis, State 

energy policies to provide reliable and affordable demand response services 

to the public” and directing the federal Secretary of Energy to provide 

“technical assistance to States ... to assist them” with these efforts. Energy 

Policy Act of 2005, Pub. L. No. 109-58, § 1252(e)(1), (2); see also id. § 1252(a), 

(b), (g), (h), (i) (making revisions to ratemaking standards to be considered 

by state regulatory authorities in retail ratemaking). Far from granting the 

Commission new authority to interfere with state regulation of “demand 

response,” section 1252 assigned the Commission the purely advisory role of 

preparing a report “that assesses demand response resources, including 

those available from all consumer classes ....” Id. § 1252(e); see also Comcast 

Corp. v. FCC, 600 F.3d 642, 654 (D.C. Cir. 2010) (“Policy statements are just 

that — statements of policy. They are not delegations of authority.”).

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37 

The Commission pays lip service to “the confines of [its] statutory 

authority,” insisting that it is not seeking to “usurp[] or imped[e] state 

regulatory efforts concerning demand response.” Order 745, at PP 114-115 

(JA __). But the Commission plainly understood its orders as a response to 

perceived deficiencies in existing state policies. For instance, although it 

recognized that some states and local governments have taken steps to 

develop “price-responsive demand,” id. at P 9, the Commission noted that 

“demand response quite simply will not occur without adequate 

compensation.” NOPR, FERC Stats. & Regs. ¶ 32,656 at P 9 (JA __); see also 

R.153 at Tr. 234:5-8 (Chairman Wellinghoff) (JA __) (“I have no assurances as 

to when the States will put dynamic retail prices with the controversies that 

are going on, all the political problems with getting those in place”). 

According to the Commission, requiring ISOs and RTOs to pay retail 

customers the full LMP will “help address the lack of a direct connection 

between wholesale and retail prices and the lack of dynamic retail prices by 

providing ... the accurate price signal for [demand] response.” Order 745-A, 

at P 61 (JA __). 

The Commission’s approach thus joins two things Congress kept 

separate, conflating wholesale and retail jurisdiction in a way that allows the 

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38 

Commission to regulate both. In so doing, the Commission has tried to 

bypass state and local authority over retail sales, violating the principle that 

the Commission may not “do indirectly what it [may] not do directly.” 

Altamont Gas Transmission Co. v. FERC, 92 F.3d 1239, 1248 (D.C. Cir. 1996). 

2. The Commission’s Orders Cite No Case Supporting Its 

Position. 

In support of its claimed jurisdiction over retail consumption decisions 

“affecting” wholesale rates, the Commission points to this Court’s decisions 

in Connecticut Department of Public Utility Control v. FERC, 569 F.3d 477 (D.C. 

Cir. 2009), Sacramento Municipal Utility District v. FERC, 616 F.3d 520 (D.C. 

Cir. 2010), and United Gas Distribution Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 

1996). See Order 745-A, at PP 25, 28 (JA __). Each of these cases, however, 

involved matters falling within the Commission’s jurisdiction in the first 

instance and held that incidental effects on state regulation or nonjurisdictional utilities were acceptable. None of the cases stands for the 

proposition that the Commission may regulate retail services or otherwise 

bears the weight the Commission has asked it to carry. 

In Connecticut Department of Public Utility Control, the Court upheld the 

Commission’s jurisdiction to approve an “installed capacity requirement” 

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39 

used in the New England capacity market, finding no impermissible 

intrusion on state jurisdiction over electric generation facilities. As the Court 

noted, this “woefully misnamed” market design element did not “actually 

‘require’ anyone to ‘install’ any new ‘capacity’ at all.” 569 F.3d at 481. 

Because the Commission had undisputed authority to regulate directly by 

“‘determin[ing] just and reasonable capacity charges’ and .... set[ting] those 

charges so as to incentivize the procurement or creation of additional 

capacity to ensure system reliability,” id., the Court held that the 

Commission also had the authority to regulate “indirectly by setting a target 

for capacity demand and using a market mechanism to locate the price 

appropriate to that quantity.” Id. at 482. Here, in stark contrast, the 

Commission’s orders are directly setting prices for retail sales, a matter that 

Congress expressly reserved to the States. 

The Commission also relies on Sacramento, which upheld the 

“Commission’s jurisdiction to impose marginal line losses on a non-public 

utility” over objections that the relevant tariff was regulating the terms and 

conditions of a non-public utility’s non-jurisdictional transmission facilities. 

Order 745-A, at P 28 (citing Sacramento, 616 F.3d at 536). But the 

Commission’s orders themselves prove the irrelevance of Sacramento. The 

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40 

non-jurisdictional entity in that case was not being assessed charges for use 

of its own facilities; instead, the tariff rate was compensating a jurisdictional 

utility — the California Independent System Operator Corporation 

(“California ISO”) — for “transmission losses on the [California] ISO’s

grid.” Id. (quoting Sacramento, 616 F.3d at 536) (emphasis added) (JA __). 

Sacramento thus stands only for the unremarkable proposition that the 

Commission has authority to regulate rates charged by public utilities for 

interstate transmission service. 

Finally, the Commission’s reliance on United Distribution is equally 

unavailing. In its orders, the Commission mistakenly suggests that United 

Distribution upheld the Commission’s authority “to regulate resales of 

natural gas transportation capacity by non-jurisdictional entities.” Id. In 

fact, the Court merely upheld the Commission’s authority to condition a 

customer’s right to use jurisdictional interstate transportation service, 

including its right to resell pipeline transportation capacity. 88 F.3d at 1151-

54. Both this Court and the Ninth Circuit have rejected arguments that 

United Distribution eliminated the Federal Power Act’s express exemption of 

municipal utilities from rate regulation or granted the Commission authority 

to regulate their rates or to order them to pay refunds based on their 

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41 

participation in RTO markets. Transmission Agency, 495 F.3d at 675 n.9; 

Bonneville Power Admin. v. FERC, 422 F.3d 908, 922-23 (9th Cir. 2005).

In short, there is no support for the Commission’s suggestion that 

paying retail customers not to purchase energy at retail is analogous to the 

capacity, transmission, and natural gas transportation issues addressed in 

these earlier cases. Order 745-A, at P 31 (JA __); see also id. at P 30 (JA __). 

The Commission has not cited — and cannot cite — any authority for the 

notion that it may regulate retail sales by bringing certain retail customers 

into the wholesale markets and paying them not to purchase energy at retail. 

C. The Commission’s Orders Unreasonably Interfere With The 

States’ Exclusive Jurisdiction Over Retail Services. 

The Commission’s orders are also invalid because they unreasonably 

interfere with existing state and local programs addressing retail customer 

“demand response” and with state policy choices not to implement such 

programs at this time. The States have long regulated issues relating to 

retail consumption, and Congress has given no hint, much less any clear 

indication, that it intended for the Commission to intrude on this core area 

of traditional state regulation. See American Bar Ass’n v. FTC, 430 F.3d 457, 

472 (D.C. Cir. 2005) (unreasonable for federal agency to regulate area 

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42 

traditionally subject to state regulation when Congress has not spoken in 

clear terms). Moreover, the Commission has not responded in a meaningful 

fashion to concerns that its orders will adversely impact efforts at the state 

and local level to develop “demand response” programs. See Williams Gas 

Processing-Gulf Coast Co., L.P. v. FERC, 475 F.3d 319 (D.C. Cir. 2006) 

(Commission did not reasonably explain its assertion of jurisdiction). 

The Commission contends that it possesses jurisdiction over “demand 

response” by virtue of its “direct effect on wholesale prices” and because 

paying retail customers to reduce retail purchases “helps to mitigate 

generator market power and strengthen system reliability.” Order 745-A, at 

PP 23-24 (JA __); see also Order 745, at PP 112-115 (JA __) (Commission “has 

jurisdiction over demand response ... because it directly affects wholesale 

rates”). But this explanation is non-responsive to the jurisdictional concerns 

raised in comments before the agency, and provides no reasoned basis for 

intruding on this core area of traditional state retail rate regulation. See City 

of Vernon, Cal. v. FERC, 845 F.2d 1042, 1048 (D.C. Cir. 1988) (agency cannot 

respond to concerns “with a non sequitur”). 

Moreover, the Commission has failed to address the effect its orders 

will have on the development of “demand response” programs at the state 

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43 

level and by non-jurisdictional utilities. Numerous commenters, including 

state regulatory commissions and ISOs and RTOs, described the “demand 

response” and dynamic pricing programs developed (at considerable time 

and expense) by states, state-regulated utilities, and non-jurisdictional 

utilities for purposes of addressing the disconnect between wholesale and 

retail prices. See, e.g., R.233 at 3, 7 (MISO States) (JA __); Order 745, at P 9 

(JA __) (states are “pursuing retail-level price-responsive demand 

initiatives”). These commenters warned that the Commission’s new 

compensation scheme could interfere with these efforts. For example, the 

Illinois Commerce Commission noted that, by over-compensating retail 

customers for reducing their demand, the Commission would “reduce the 

incentive for implementation of retail rates which reflect wholesale prices,” 

and that “as the value of the subsidy increases, the state commission’s 

likelihood of implementing time-differentiated retail rates decreases.” R.10 

at 14 (Illinois Commerce Comm’n) (JA __). Representatives from state 

regulatory commissions likewise explained that the Commission’s rule 

would impede efforts to install “smart meters,” as “[a]n efficient retail price 

signal made possible by smart metering technology would be replaced with 

an inefficient price signal in the wholesale market.” R.74 at 5 (MISO States) 

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44 

(JA __). On rehearing, these representatives again objected that “state 

commissions would be faced with the task of revising retail rate structures in 

order to correct a price distortion created by a wholesale market pricing 

mechanism.” R.233 at 6 (MISO States) (JA __). Similar concerns were 

echoed by a large number of parties. See, e.g., R.131 at 20-22 (ODEC) (JA __); 

R.79 at 2 (Delaware PSC) (JA __); R.50 at 4-6 (Ohio PUC) (JA __); R.86 at 12 

(NYISO) (JA __). 

Instead of substantively addressing these concerns, the Commission 

declared that it was not required to consider the impact of its actions on 

retail “demand response” programs because Order 745 “does not directly 

affect retail-level demand response programs, nor does it require that 

demand response resources offer into the wholesale market only.” Order 

745-A, at P 71 (JA __). The Commission thus unreasonably refused to 

recognize that states and local governments may have reasons for creating 

their own regulatory regimes for addressing “demand response” at the retail 

level, or may choose for reasons of state or local policy not to establish 

incentive pricing regimes for “demand response.” 

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II. The Commission’s Orders Violate The Federal Power Act And The 

Requirements Of Reasoned Decision-making. 

Even assuming the Commission has jurisdiction, the Commission’s 

orders should be struck down because they violate the Federal Power Act’s 

requirements that rates be just and reasonable and not unduly 

discriminatory. See 16 U.S.C. §§ 824d, 824e. The Commission’s 

compensation scheme violates these requirements because it impermissibly 

over-compensates “demand response” providers, distorts the nation’s 

wholesale markets, and artificially suppresses market prices. Moreover, the 

Commission’s orders violate the requirements of reasoned decision-making 

because they depart from precedent without explanation, do not respond 

meaningfully to objections, and fail to articulate “a satisfactory explanation” 

for the Commission’s action. Florida Gas, 604 F.3d at 639; see also 5 U.S.C. 

§ 706(2)(A).

A. The Commission’s Retail Compensation Scheme Is Unduly 

Discriminatory And Preferential Because It Overcompensates 

“Demand Response” Providers. 

Section 205(b) of the Federal Power Act prohibits any public utility 

from making or granting “any undue preference or advantage to any 

person”; subjecting “any person to any undue prejudice or disadvantage”; 

or maintaining “any unreasonable difference in rates, charges, service, 

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46 

facilities, or in any other respect, either as between localities or as between 

classes of service.” 16 U.S.C. §§ 824d(b)(1), (2). These prohibitions against 

granting an undue preference or unduly discriminating are reinforced by 

section 206(a), which prohibits rates and charges that are “unjust, 

unreasonable, unduly discriminatory or preferential.” 16 U.S.C. § 824e(a). 

As this Court has recognized, the Commission has a statutory obligation to 

ensure that rates do not “result in undue prejudice.” Alabama Elec. Coop., Inc. 

v. FERC, 684 F.2d 20, 27 (D.C. Cir. 1982). 

Notwithstanding these statutory requirements, the Commission’s 

retail compensation scheme grants undue preference to “demand response” 

providers and unduly discriminates against power suppliers by ensuring 

that “demand response” providers receive more than the value of full LMP 

as payment for forgoing retail purchases. See Order 745-A, at 62,316 

(Comm’r Moeller, dissenting) (JA ___). In particular, the Commission’s 

compensation scheme ensures that “demand response” providers receive a 

windfall because they will be “paid the full LMP plus be allowed to retain 

the savings associated” with their “avoided retail generation cost.” Id. The 

result is a scheme that is unduly “preferential to demand resources, and 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 77 of 126
47 

unduly discriminatory towards other market resources.” Order 745, at 

31,269 (Comm’r Moeller, dissenting) (JA ___). 

In the record below, numerous experts noted that the Commission’s 

approach would provide “demand response” resources with a preferential 

subsidy and unjustified windfall. See, e.g., R.239 at 8-9 & nn. 17, 20 (EEI) 

(citing expert testimony). Professor William W. Hogan, one of the principal 

architects of the LMP pricing model, explained in detail how paying full 

LMP to retail customers for not consuming electricity results in a “double 

payment” because the retail customers not only save money by not 

consuming but they also get paid the full LMP. R.18, Attachment 1, William 

W. Hogan, Implications for Consumers of the NOPR’s Proposal to Pay the LMP 

for All Demand Response, at 5 (JA ___) (“Hogan Paper”). For example, if there 

were no disconnect between the wholesale and retail prices and both the 

retail and wholesale price equal $40/megawatt-hour, a “demand response” 

provider would be doubly compensated under the Commission’s scheme 

for each megawatt-hour it did not purchase at retail: the first $40 being the 

avoided retail charge and the second $40 being the payment of full LMP. See

id.; see also Order 745, at 31,269 (Comm’r Moeller, dissenting) (JA __) 

(explaining why “demand response” resources will be overcompensated). 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 78 of 126
48 

The Commission’s orders do not dispute that its scheme will result in 

“demand response” resources being “paid the full LMP plus be[ing] allowed 

to retain the savings associated with its avoided retail generation cost.” 

Order 745-A, at 62,316 (Comm’r Moeller, dissenting) (JA ___). Nor does the 

Commission dispute that retail customers and wholesale generators are not 

similarly situated: unlike demand response resources, wholesale generators 

do not avoid retail generation costs when they produce energy for sale at 

wholesale, and unlike wholesale generators, “demand response resources 

do not create electricity that can be used to serve load.” Id. at P 56 (JA __). 

As the Commission concedes, a so-called “negawatt” — a megawatt of 

electricity not consumed — is not the same as a megawatt. Id.; see also R.240 

at 19-20 (Competitive Power Supplier Ass’ns) (JA __). 

The Commission’s orders nonetheless maintain that “demand 

response” providers are entitled to the full LMP payment (in addition to the 

forgone retail generation charge) because the service they provide is 

“comparable” to the service provided by generation and that paying 

“demand response” providers the full LMP is appropriate in light of 

unspecified “market imperfections caused by the existing barriers to 

demand response.” Order 745-A, at P 58 (JA __). According to the 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 79 of 126
49 

Commission, “demand response” providers and generation “are equally 

able to assist RTOs and ISOs in maintaining a balance between supply and 

demand.” Id. at P 57 (JA __). 

The Commission’s explanation is non-responsive to the core of 

petitioners’ basic objections and, more importantly, is irrelevant under the 

statute. See Dynegy Midwest Generation, Inc. v. FERC, 633 F.3d 1122 (D.C. Cir. 

2011) (criticizing the Commission for being similarly non-responsive). First, 

it ignores the over-compensation problem that is at the heart of petitioners’ 

claim of undue discrimination. Second, because retail customers and 

wholesale generators are not similarly situated, providing them with the 

same full LMP payment is not necessarily appropriate. As this Court has 

recognized, an undue preference or undue discrimination can result just as 

surely from treating dissimilarly situated entities the same as it does from 

treating similarly situated entities differently. See Alabama Elec., 684 F.2d at 

27-28. 

The basic problem with the Commission’s approach is that generators 

do not benefit from the same retail rate savings as customers who choose to 

provide “demand response,” and generators incur costs when producing 

electricity that are not incurred by retail customers when electing not to 

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50 

consume energy. Worse yet, the Commission’s orders make clear that 

“demand response” should be compensated only when it will both displace 

a generating resource and result in significant downward pressure on 

market prices, thereby passing the net benefits test. See Order 745, at PP 48-

54 (JA __). Accordingly, the Commission’s orders impose an illegal 

preference in favor of “demand response” providers and unduly 

discriminate against other suppliers who will not be compensated even 

when they could have supplied energy more efficiently. See id. at 31,271 

(Comm’r Moeller, dissenting) (JA ___) (“the corrosive effect of 

overcompensating demand resources over time will come at the expense of 

other resources”). A rule so blatantly unduly discriminatory and 

preferential cannot pass muster under the Federal Power Act. 

B. The Commission’s Orders Depart Without Reasoned 

Explanation From Precedent Recognizing That Full LMP 

Pricing Unfairly Subsidizes “Demand Response.” 

The Commission’s requirement that retail customers must be paid the 

full LMP for providing “demand response” is also invalid because it departs 

from precedent without reasoned explanation. In earlier orders, the 

Commission recognized that paying retail customers the full LMP would 

create an unwarranted “subsidy,” PJM Indus. Customer Coal. v. PJM 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 81 of 126
51 

Interconnection, L.L.C., 121 FERC ¶ 61,315 at P 26 (2007), and that to avoid 

over-compensation, retail customers should be paid LMP with an offset to 

reflect saved retail generation charges (i.e., “LMP-minus-G,” where “G” 

represents the retail generation charge). See, e.g., PJM Interconnection, L.L.C., 

99 FERC ¶ 61,227 at 61,941 (2002) (retail customer should receive “the 

difference between the LMP and what the customer would save by not 

using power (the retail price it didn’t have to pay)”). Although the 

Commission’s orders now take the opposite position, they fail to 

acknowledge, much less explain, the Commission’s 180-degree change in 

direction. This unexplained departure from precedent is quintessentially 

arbitrary and capricious. Wisconsin Valley Improvement v. FERC, 236 F.3d 

738, 748 (D.C. Cir. 2001). 

Moreover, although it acknowledged comments from experts and 

others that the LMP-minus-G approach is necessary to prevent an undue 

preference — i.e., to ensure that retail customers who provide “demand 

response” receive the same value of LMP as wholesale power producers 

who actually generate energy for sale at wholesale, see Order 745-A, at P 60 

(JA __), the Commission did not tackle the merits of these objections to its 

approach. Instead, it brushed them aside on grounds that “examining cost 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 82 of 126
52 

avoidance by demand response resources is not consistent with the 

treatment of generation,” inasmuch as it “generally does not examine each 

of the costs of production for individual [generation] resources.” Id. at P 65 

(JA ___). 

This is a non sequitur and not a reasoned response to the objections 

raised. Even assuming one can get far enough through the looking glass to 

accept that a retail customer’s decision not to consume electricity is a form of 

supply, the avoided retail payment (i.e., “G”) is not by any measure a cost of 

production; instead, it is a benefit of not consuming. Moreover, offsetting 

the payment to a retail customer by the “G” amount has nothing to do with 

determining the retail customer’s cost of production; instead, it is a matter of 

trying to approximate the price signal that the retail customer would see if 

the existing disconnect between wholesale and retail rates did not exist. 

These points were raised before the Commission but were never answered. 

See PSEG Energy Res. & Trade LLC v. FERC, 665 F.3d 203, 210 (D.C. Cir. 2011) 

(not enough for agency to “characterize objections,” it must “answer them”). 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 83 of 126
53 

C. The Commission’s Retail Compensation Scheme Is Unjust 

And Unreasonable Because It Distorts The Market. 

The Commission’s retail compensation scheme will not achieve its 

stated purpose but will instead inject unjust and unreasonable distortions 

into the nation’s electricity markets. Although the Commission has sought 

to justify regulating “demand response” as necessary to address 

inefficiencies in ISO-/RTO-operated wholesale markets, it failed to consider 

the significant inefficiencies caused by paying retail customers the full LMP 

for not purchasing energy at retail. 

The Commission’s approach is inconsistent with rudimentary 

principles of economics. As a large number of respected economists and 

commenters, including the Federal Trade Commission, observed, paying 

full LMP to certain retail customers for not purchasing energy at retail “will 

lead“ those customers “to provide too much demand response.” R.58 at 7 

(FTC) (JA ___); see also R.10 at 5-6 (Illinois Commerce Comm’n) (JA __) 

(compensation at full LMP will provide customers incentive to provide too 

much “demand response”); R.76 at 8 (PJM Interconnection) (JA __) (LMP 

payment “distorts demand response incentives in such a manner as to 

inefficiently encourage additional demand response at lower market 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 84 of 126
54 

prices”); R.123 at 7 (Potomac Economics) (JA __) (full LMP payment results 

in the demand response provider “receiving a subsidy to curtail equal to the 

retail rate”). In particular, as Commissioner Moeller noted, retail customers 

“will begin to make inefficient decisions about using power” because they 

“now stand to receive more than the market price as an incentive to curtail 

their consumption.” Order 745, at 31,271 (Moeller, Comm’r, dissenting) 

(JA ___). 

Contrary to the Commission’s stated objectives, instead of 

approximating the efficient market outcomes that would occur if retail 

customers saw, and could respond to, changes in wholesale prices, the 

Commission’s compensation scheme will promote inefficient “demand 

response.” Returning to Professor Hogan’s example, if the retail rate and the 

LMP are both $40/megawatt-hour, the customer should not receive a 

payment to curtail its consumption because it is already saving 

$40/megawatt-hour by not using any electricity. In contrast, if the LMP is 

$40/megawatt-hour but the retail rate is $30/megawatt-hour, the customer 

should only have to be paid $10/megawatt-hour (not $40) to curtail its 

usage because that payment, combined with the saved retail rate, would 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 85 of 126
55 

result in an overall benefit to the customer that matches the value of the 

electricity at that time and location. 

By over-compensating demand response, the Commission’s rule will 

have negative implications for consumers and the organized wholesale 

markets over the long term. Among other things, the Commission’s rule 

will “unfairly shift the costs resulting from the inefficient curtailment to 

those retail customers who do not participate in” “demand response,” which 

are “typically small residential and commercial customers.” R.105 at 3 

(MISO) (JA __); see also Hogan Paper at 6-7 (JA __) (the Commission’s rule 

would create perverse incentives for generation to exit the organized 

market); R.86 at 15 (NYISO) (JA __) (“new technologies may be kept out of 

the market”); Order 745, at 31,271 (Moeller, Comm’r, dissenting) (JA ___) 

(the compensation scheme will result in “inefficiencies” that “impose longterm costs on the energy markets”). The American Public Power 

Association, along with other commenters, also made the point that the 

distorting effects of the Commission’s rule will extend beyond the electricity 

markets. For example, decreased industrial production and lost hours of 

employment associated with reductions in retail use may cause more overall 

harm than the individual retail customer gains in revenues. See R.187 at 3 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 86 of 126
56 

(APPA) (JA ___). In the end, paying retail customers full LMP is 

“inconsistent with fundamental economics” and will “over compensate 

participants in economic load response programs, negatively affect the 

efficient operation of the energy markets and provide no offsetting social 

benefit.” R.124 at 2 (PJM Independent Market Monitor) (JA __). 

D. The Commission’s Retail Customer Compensation Scheme Is 

Unjust And Unreasonable Because It Results In Artificially 

Suppressed Market Prices. 

In its orders below, the Commission repeatedly trumpeted the ability 

of “demand response” to lower prices by “reduc[ing] dispatch of higherpriced resources to satisfy load” and to “mitigate generator market power” 

because “the more demand response that sees and responds to higher 

market 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.” Order 745, at P 10 (JA __). This 

position is illustrated in the Commission’s directive that “demand response” 

be compensated only when it can displace a generator and when it lowers 

the LMP to such an extent that the price reduction will offset the increased 

cost per unit to remaining customers. Id. at PP 48-54 (JA __). As 

Commissioner Moeller observed, this test is unprecedented because it 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 87 of 126
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requires a “demand response” resource “to show that its participation will 

depress the market price.” Id. at 31,269 (Moeller, Comm’r, dissenting) (JA 

___). 

Whatever the superficial appeal of lowering prices in the short run, the 

Commission’s approach affects the ability of the market to provide accurate 

price signals. A just and reasonable rate is one that provides “enough 

revenue not only for operating expenses but also for the capital costs of the 

business,” and is sufficient for the utility to “maintain its credit and to attract 

capital.” FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944); Farmers Union 

Cent. Exch. v. FERC, 734 F.2d 1486, 1502 (D.C. Cir. 1984) (just and reasonable 

rates must be neither “less than compensatory” to producers nor “excessive” 

to consumers). Nonetheless, even as the Commission extolled the ability of 

“demand response” to “mov[e] prices closer to the levels that would result if 

all demand could respond to the marginal cost of energy,” Order 745-A, at P 

59 (JA __), it failed to consider how its policies would impact market signals 

and the ability of generators to recover their costs. 

The Commission also failed to analyze how its new rule and the 

attendant increase in participation by “demand response” resources would 

interact with existing ISO and RTO rules to control the exercise of market 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 88 of 126
58 

power. The tariffs of each ISO and RTO contain extensive provisions 

relating to the mitigation of supplier market power that have been accepted 

by the Commission as just and reasonable, and which the Commission has 

repeatedly emphasized are “sufficient to address any market power 

concerns.” Market-Based Rates for Wholesale Sales of Electric Energy, Capacity & 

Ancillary Servs. by Pub. Utils., Order No. 697-A, FERC Stats. & Regs. ¶ 31,268 

at P 111 (2008); see also Maryland Pub. Serv. Comm’n v. PJM Interconnection, 

L.L.C., 123 FERC ¶ 61,169, order on reh’g, 125 FERC ¶ 61,340 (2008); 

Connecticut ex rel. Blumenthal v. ISO New England Inc., 117 FERC ¶ 61,038 

(2006); California Elec. Oversight. Bd. v. California Indep. Sys. Operator Corp., 109 

FERC ¶ 61,182 (2004). Consistent with the principle that the setting of “just 

and reasonable” rates “involves a balancing of the investor and the 

consumer interests,” Hope, 320 U.S. at 603, these market-power rules were 

designed to “strik[e] a balance between ... detecting and dampening 

exercises of market power and ... allowing generators to charge prices that 

are high enough for them to recover their fixed costs.” Wisconsin Pub. Power, 

493 F.3d at 262. While petitioners may disagree with the Commission (and 

one another) as to whether these measures appropriately balance the risks of 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 89 of 126
59 

over-mitigation against those of under-mitigation, there is no question that 

they strike a balance that the Commission has found acceptable. 

Moreover, although the Commission’s orders assert that full LMP 

compensation would help “mitigate generator market power,” Order 745, at 

P 10 (JA __), the Commission refused to address in any meaningful fashion 

the objections raised about the interaction of its new compensation scheme 

with existing market power mitigation measures. See Order 745-A, at PP 76-

78 (JA ___). In particular, the Commission did not even attempt to gauge the 

impact of this additional market power mitigation on the careful balance 

between under-mitigation and over-mitigation built into the existing market 

power mitigation rules. Nor did it respond to concerns that additional 

market power mitigation could tip that balance in favor of over-mitigation. 

And it did not consider whether its new compensation scheme would cause 

rates to be unjust and unreasonable for generation sources. Instead, when 

EPSA and others made these points on rehearing, the Commission offered a 

classic non-response, asserting that it was merely articulating the “general 

principle that greater competition in the market helps to limit potential 

opportunities for the exercise of market power.” Id. at P 77 (JA __). 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 90 of 126
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The Commission’s failure to examine the impact of increased 

“demand response” participation on the balance between under-mitigation 

and over-mitigation is incompatible with controlling precedent. Hope and 

other cases recognize the need for a balancing of investor and consumer 

interests. See Grand Council of the Crees v. FERC, 198 F.3d 950, 956 (D.C. Cir. 

2000) (“the investor interest has a legitimate concern with the financial 

integrity of the company whose rates are being regulated”) (quoting Hope, 

320 U.S. at 603). Moreover, because the Commission focused only on 

providing customers with “a short-term benefit by way of a lower LMP,” it 

ignored that under-compensating producers would “impose long-term costs 

on the energy markets.” Order 745, at 31,272 (Moeller, Comm’r, dissenting) 

(JA __); see also R.100 at 29 (ISO-NE) (JA __) (“any consumer gains from 

suppression of LMPs in the short-run will result in higher prices and costs in 

the long-run”); R.86 at 3 (NYISO) (JA __) (the rule will “create perverse 

incentives and slow the introduction of other innovative clean technologies 

by uneconomically suppressing real-time prices”); R.105 at 3 (MISO) (JA __) 

(“overcompensating [demand response] will result in an artificial market 

construct”). By simplistically “equating the concept of a just and reasonable 

rate with a lower price,” Order 745, at 31,270 (Moeller, Comm’r, dissenting) 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 91 of 126
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(JA __), the Commission abdicated its responsibility to ensure that rates 

remain just and reasonable for suppliers and to safeguard the long-term 

health of the energy markets. 

III. The Commission’s Orders Violate Section 206 By Ordering Rate 

Changes Without First Demonstrating That Existing Rates Were 

Unjust And Unreasonable. 

Even assuming, for sake of argument, that the Commission has 

jurisdiction to regulate retail customers’ decisions about how much energy 

to consume at retail, the Commission has disregarded section 206’s 

fundamental requirement that the agency may not order changes to rates 

that are already “in effect” without first finding that those rates are no 

longer just and reasonable. Atlantic City, 295 F.3d at 8. 

Before it issued Order 745, the Commission accepted a number of ISO 

and RTO tariff filings under section 205 to implement their respective 

“demand response” programs. See Regional Transmission Orgs., Order No. 

2000, FERC Stats. & Regs. ¶ 31,089 at 31,061 (1999); Order 719, FERC Stats. & 

Regs. ¶ 31,281 at P 50. In ordering changes to these tariffs and imposing a 

one-size-fits-all obligation to compensate retail customers, the Commission 

claimed to have satisfied the requirements of section 206 because it found 

that paying “demand response” anything “other than the LMP is unjust and 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 92 of 126
62 

unreasonable.” Order 745, at P 47 (JA __); see also Order 745-A, at P 73 

(JA ___). But it provided no support for that conclusory assertion. Nor did 

it explain why each of the existing ISO and RTO tariffs had become unjust 

and unreasonable. 

Seeking to overcome this deficiency, the Commission’s orders state 

that it had already found other approaches unreasonable in Order 719, when 

it made “clear that demand response resources ... would receive the market 

clearing price.” Order 745-A, at P 74 (JA __). But that is no explanation. As 

the Commission concedes, “the levels of compensation for demand response 

vary significantly among RTOs and ISOs,” Order 745, at P 14 (JA __), and it 

had “previously accepted a variety of RTO and ISO proposals for 

compensation for demand response resources.” Order 745-A, at P 74 

(JA __). 

The Commission’s orders also include no explanation why the 

“variety of ... proposals” it had “previously accepted” are no longer just and 

reasonable. Although the Commission devotes five paragraphs of its 

rehearing order to discussing the argument, the Commission’s substantive 

explanation is terse: 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 93 of 126
63 

[B]ased on the record of the proceeding, and balancing 

the diverging opinions of noted experts, the 

Commission determined that it was necessary in this 

instance to adopt a uniform compensation rule for 

demand response resources participating in the 

organized wholesale energy markets under the 

conditions set forth in the Final Rule. We are not 

convinced ... that this decision was in error. 

Id.; see also id. PP 72-75 (JA __). This conclusory explanation falls far short 

of what section 206 demands before the Commission can sweep aside 

previously accepted tariff provisions. See Atlantic City, 295 F.3d at 8. 

Indeed, nowhere in the Commission’s orders is there any fact-specific 

determination concerning the just and reasonableness of each ISO’s or RTO’s 

approach as applied in each of their respective markets. For example, before 

Order 745, the amount of “demand response” capacity participating in 

PJM’s markets increased seven-fold from 2006 to 2010, while the amount of 

“demand response” resources increased by 17 percent in New England in 

2009 alone. See R.240 at 36 & n.124 (Competitive Power Supplier Ass’ns) 

(JA __). Similarly, PJM’s capacity payments to “demand response” 

resources increased by more than 100 percent from 2008 to 2009, while 

“demand response” compensation in New England increased by more than 

25 percent in 2009 alone. Id. Without addressing this record evidence, the 

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64 

Commission ordered modifications to existing ISO and RTO tariffs “without 

ever determining that the existing region-by-region approach to 

compensation is unjust and unreasonable.” Order 745, at 31,268 (Comm’r 

Moeller, dissenting) (JA __). 

To make matters worse, the Commission also failed to explain how 

much “demand response” is supposed to be enough. Order 745-A, at P 60 

(JA __). The Commission offers no reasoned analysis supporting its vague 

suggestions that it is always desirable for retail customers to purchase less 

energy, or that a uniform approach is appropriate to achieving that 

objective. See, e.g., National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 843 

(D.C. Cir. 2006) (asserting “that an order ameliorates a real industry problem 

but then citing no evidence demonstrating that there is in fact an industry 

problem is not reasoned decisionmaking”); cf. Small Refiner Lead Phase-Down 

Task Force v. EPA, 705 F.2d 506, 525 (D.C. Cir. 1983) (agency cannot justify 

regulation on theory that lead threatens human health and regulation will 

reduce lead levels in gasoline). 

The Commission likewise failed to explain why paying retail 

customers full LMP compensation for not purchasing electric energy at retail 

would help achieve an appropriate level of “demand response.” The 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 95 of 126
65 

Commission merely asserted that there are “barriers that clearly exist to full 

participation of demand in the wholesale market.” Order 745-A, at P 60 (JA 

__). The only “barriers” the Commission identified, however, were “the lack 

of a direct connection between wholesale and retail prices, lack of dynamic 

retail prices ..., lack of real-time information sharing, and the relative lack of 

sufficient retail metering technology.” Id. at P 59 (JA __). This recitation 

serves only to confirm that the “problem” the Commission seeks to remedy 

lies on the state side of the jurisdictional line drawn by Congress; it does 

nothing to establish that the Commission’s “remedy” is appropriate. 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 96 of 126
66 

CONCLUSION 

The Court should grant the petitions and vacate the orders below. 

 Respectfully submitted, 

Harvey L. Reiter 

 Counsel of Record 

Adrienne E. Clair 

STINSON MORRISON HECKER LLP 

1775 Pennsylvania Avenue, N.W. 

Washington, D.C. 20006 

Telephone: (202) 728-3016 

Facsimile: (202) 785-9163 

Email: hreiter@stinson.com 

Email: aclair@stinson.com 

Counsel for Petitioners American 

Public Power Association, National 

Rural Electric Cooperative Association 

and Old Dominion Electric Cooperative

 /s/ Ashley C. Parrish 

Ashley C. Parrish 

 Counsel of Record

David G. Tewksbury 

Stephanie L. Lim 

KING & SPALDING LLP 

1700 Pennsylvania Avenue, N.W. 

Washington, D.C. 20006 

Telephone: (202) 626-2627 

Facsimile: (202) 626-3737 

Email: aparrish@kslaw.com 

Email: dtewksbury@kslaw.com 

Email: slim@kslaw.com 

Counsel for Petitioner 

Electric Power Supply Association

David B. Raskin 

 Counsel of Record

STEPTOE & JOHNSON LLP 

1330 Connecticut Avenue, N.W. 

Washington, D.C. 20036 

Telephone: (202) 429-6254 

Facsimile: (202) 429-3902 

Email: draskin@steptoe.com 

Counsel for Petitioner 

Edison Electric Institute

Dated: June 6, 2012 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 97 of 126
CERTIFICATE OF COMPLIANCE 

Pursuant to Rule 32(a) of the Federal Rules of Appellate Procedure 

and Circuit Rule 32(a)(2), I hereby certify that the textual portion of the 

foregoing brief (exclusive of the disclosure statement, tables of content and 

authorities, certificates of service and compliance, but including footnotes) 

contains 12,617 words as determined by the word-counting feature of 

Microsoft Word 2000. 

 /s/ Ashley C. Parrish 

 Ashley C. Parrish 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 98 of 126
ADDENDUM 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 99 of 126
App-i 

TABLE OF CONTENTS 

Section 201 of the Federal Power Act, 

16 USC 824 ................................................................................................ App-1 

Section 205 of the Federal Power Act, 

16 U.S.C. § 824d........................................................................................ App-5 

Section 206 of the Federal Power Act, 

16 U.S.C. § 824e......................................................................................... App-8 

Section 209 of the Federal Power Act, 

16 U.S.C. § 824h(b) ................................................................................. App-13 

Section 216 of the Federal Power Act, 

16 U.S.C. § 824p(b)(1)(C)....................................................................... App-14 

Section 313 of the Federal Power Act, 

16 U.S.C. § 825l ....................................................................................... App-15 

Energy Policy Act of 2005, Pub. L. No. 109-58 

Section 1252............................................................................................. App-18 

18 C.F.R. § 35.28(b)(4) ................................................................................. App-25 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 100 of 126
Section 201 of the Federal Power Act, 16 U.S.C. § 824 

Declaration of policy; application of subchapter 

(a) Federal regulation of transmission and sale of electric 

energy 

It is declared that the business of transmitting and selling 

electric energy for ultimate distribution to the public is affected 

with a public interest, and that Federal regulation of matters 

relating to generation to the extent provided in this subchapter 

and subchapter III of this chapter and of that part of such 

business which consists of the transmission of electric energy in 

interstate commerce and the sale of such energy at wholesale in 

interstate commerce is necessary in the public interest, such 

Federal regulation, however, to extend only to those matters 

which are not subject to regulation by the States. 

(b) Use or sale of electric energy in interstate commerce 

(1) The provisions of this subchapter shall apply to the 

transmission of electric energy in interstate commerce and to 

the sale of electric energy at wholesale in interstate commerce, 

but except as provided in paragraph (2) shall not apply to any 

other sale of electric energy or deprive a State or State 

commission of its lawful authority now exercised over the 

exportation of hydroelectric energy which is transmitted across 

a State line. The Commission shall have jurisdiction over all 

facilities for such transmission or sale of electric energy, but 

shall not have jurisdiction, except as specifically provided in 

this subchapter and subchapter III of this chapter, over facilities 

used for the generation of electric energy or over facilities used 

in local distribution or only for the transmission of electric 

energy in intrastate commerce, or over facilities for the 

transmission of electric energy consumed wholly by the 

transmitter. 

(2) Notwithstanding subsection (f) of this section, the 

provisions of sections 824b(a)(2), 824e(e), 824i, 824j, 824j–1, 

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824k, 824o, 824p, 824q, 824r, 824s, 824t, 824u, and 824v of this 

title shall apply to the entities described in such provisions, and 

such entities shall be subject to the jurisdiction of the 

Commission for purposes of carrying out such provisions and 

for purposes of applying the enforcement authorities of this 

chapter with respect to such provisions. Compliance with any 

order or rule of the Commission under the provisions of section 

824b(a)(2), 824e(e), 824i, 824j, 824j–1, 824k, 824o, 824p, 824q, 

824r, 824s, 824t, 824u, or 824v of this title, shall not make an 

electric utility or other entity subject to the jurisdiction of the 

Commission for any purposes other than the purposes 

specified in the preceding sentence. 

(c) Electric energy in interstate commerce 

For the purpose of this subchapter, electric energy shall be held 

to be transmitted in interstate commerce if transmitted from a 

State and consumed at any point outside thereof; but only 

insofar as such transmission takes place within the United 

States. 

(d) “Sale of electric energy at wholesale” defined 

The term “sale of electric energy at wholesale” when used in 

this subchapter, means a sale of electric energy to any person 

for resale. 

(e) “Public utility” defined 

The term “public utility” when used in this subchapter and 

subchapter III of this chapter means any person who owns or 

operates facilities subject to the jurisdiction of the Commission 

under this subchapter (other than facilities subject to such 

jurisdiction solely by reason of section 824e(e), 824e(f),1 824i, 

824j, 824j–1, 824k, 824o, 824p, 824q, 824r, 824s, 824t, 824u, or 

824v of this title). 

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(f) United States, State, political subdivision of a State, or 

agency or instrumentality thereof exempt 

No provision in this subchapter shall apply to, or be deemed to 

include, the United States, a State or any political subdivision of 

a State, an electric cooperative that receives financing under the 

Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.) or that 

sells less than 4,000,000 megawatt hours of electricity per year, 

or any agency, authority, or instrumentality of any one or more 

of the foregoing, or any corporation which is wholly owned, 

directly or indirectly, by any one or more of the foregoing, or 

any officer, agent, or employee of any of the foregoing acting as 

such in the course of his official duty, unless such provision 

makes specific reference thereto. 

(g) Books and records 

(1) Upon written order of a State commission, a State 

commission may examine the books, accounts, memoranda, 

contracts, and records of— 

(A) an electric utility company subject to its regulatory 

authority under State law, 

(B) any exempt wholesale generator selling energy at 

wholesale to such electric utility, and 

(C) any electric utility company, or holding company 

thereof, which is an associate company or affiliate of an 

exempt wholesale generator which sells electric energy to 

an electric utility company referred to in subparagraph 

(A), wherever located, if such examination is required for 

the effective discharge of the State commission's 

regulatory responsibilities affecting the provision of 

electric service. 

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(2) Where a State commission issues an order pursuant to 

paragraph (1), the State commission shall not publicly disclose 

trade secrets or sensitive commercial information. 

(3) Any United States district court located in the State in which 

the State commission referred to in paragraph (1) is located 

shall have jurisdiction to enforce compliance with this 

subsection. 

(4) Nothing in this section shall— 

(A) preempt applicable State law concerning the 

provision of records and other information; or 

(B) in any way limit rights to obtain records and other 

information under Federal law, contracts, or otherwise. 

(5) As used in this subsection the terms “affiliate”, “associate 

company”, “electric utility company”, “holding company”, 

“subsidiary company”, and “exempt wholesale generator” shall 

have the same meaning as when used in the Public Utility 

Holding Company Act of 2005 [42 U.S.C. 16451 et seq.]. 

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Section 205 of the Federal Power Act, 16 U.S.C. § 824d 

Rates and charges; schedules; suspension of new rates; automatic 

adjustment clauses 

(a) Just and reasonable rates 

All rates and charges made, demanded, or received by any 

public utility for or in connection with the transmission or sale 

of electric energy subject to the jurisdiction of the Commission, 

and all rules and regulations affecting or pertaining to such 

rates or charges shall be just and reasonable, and any such rate 

or charge that is not just and reasonable is hereby declared to 

be unlawful. 

(b) Preference or advantage unlawful 

No public utility shall, with respect to any transmission or sale 

subject to the jurisdiction of the Commission, (1) make or grant 

any undue preference or advantage to any person or subject 

any person to any undue prejudice or disadvantage, or (2) 

maintain any unreasonable difference in rates, charges, service, 

facilities, or in any other respect, either as between localities or 

as between classes of service. 

(c) Schedules 

Under such rules and regulations as the Commission may 

prescribe, every public utility shall file with the Commission, 

within such time and in such form as the Commission may 

designate, and shall keep open in convenient form and place 

for public inspection schedules showing all rates and charges 

for any transmission or sale subject to the jurisdiction of the 

Commission, and the classifications, practices, and regulations 

affecting such rates and charges, together with all contracts 

which in any manner affect or relate to such rates, charges, 

classifications, and services. 

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(d) Notice required for rate changes 

Unless the Commission otherwise orders, no change shall be 

made by any public utility in any such rate, charge, 

classification, or service, or in any rule, regulation, or contract 

relating thereto, except after sixty days’ notice to the 

Commission and to the public. Such notice shall be given by 

filing with the Commission and keeping open for public 

inspection new schedules stating plainly the change or changes 

to be made in the schedule or schedules then in force and the 

time when the change or changes will go into effect. The 

Commission, for good cause shown, may allow changes to take 

effect without requiring the sixty days’ notice herein provided 

for by an order specifying the changes so to be made and the 

time when they shall take effect and the manner in which they 

shall be filed and published. 

(e) Suspension of new rates; hearings; five-month period 

Whenever any such new schedule is filed the Commission shall 

have authority, either upon complaint or upon its own 

initiative without complaint, at once, and, if it so orders, 

without answer or formal pleading by the public utility, but 

upon reasonable notice, to enter upon a hearing concerning the 

lawfulness of such rate, charge, classification, or service; and, 

pending such hearing and the decision thereon, the 

Commission, upon filing with such schedules and delivering to 

the public utility affected thereby a statement in writing of its 

reasons for such suspension, may suspend the operation of 

such schedule and defer the use of such rate, charge, 

classification, or service, but not for a longer period than five 

months beyond the time when it would otherwise go into 

effect; and after full hearings, either completed before or after 

the rate, charge, classification, or service goes into effect, the 

Commission may make such orders with reference thereto as 

would be proper in a proceeding initiated after it had become 

effective. If the proceeding has not been concluded and an 

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order made at the expiration of such five months, the proposed 

change of rate, charge, classification, or service shall go into 

effect at the end of such period, but in case of a proposed 

increased rate or charge, the Commission may by order require 

the interested public utility or public utilities to keep accurate 

account in detail of all amounts received by reason of such 

increase, specifying by whom and in whose behalf such 

amounts are paid, and upon completion of the hearing and 

decision may by further order require such public utility or 

public utilities to refund, with interest, to the persons in whose 

behalf such amounts were paid, such portion of such increased 

rates or charges as by its decision shall be found not justified. 

At any hearing involving a rate or charge sought to be 

increased, the burden of proof to show that the increased rate 

or charge is just and reasonable shall be upon the public utility, 

and the Commission shall give to the hearing and decision of 

such questions preference over other questions pending before 

it and decide the same as speedily as possible. 

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Section 206 of the Federal Power Act, 16 U.S.C. § 824e 

Power of Commission to fix rates and charges; determination of cost 

of production or transmission 

(a) Unjust or preferential rates, etc.; statement of reasons for 

changes; hearing; specification of issues 

Whenever the Commission, after a hearing held upon its own 

motion or upon complaint, shall find that any rate, charge, or 

classification, demanded, observed, charged, or collected by 

any public utility for any transmission or sale subject to the 

jurisdiction of the Commission, or that any rule, regulation, 

practice, or contract affecting such rate, charge, or classification 

is unjust, unreasonable, unduly discriminatory or preferential, 

the Commission shall determine the just and reasonable rate, 

charge, classification, rule, regulation, practice, or contract to be 

thereafter observed and in force, and shall fix the same by 

order. Any complaint or motion of the Commission to initiate a 

proceeding under this section shall state the change or changes 

to be made in the rate, charge, classification, rule, regulation, 

practice, or contract then in force, and the reasons for any 

proposed change or changes therein. If, after review of any 

motion or complaint and answer, the Commission shall decide 

to hold a hearing, it shall fix by order the time and place of such 

hearing and shall specify the issues to be adjudicated. 

(b) Refund effective date; preferential proceedings; statement of 

reasons for delay; burden of proof; scope of refund order; 

refund orders in cases of dilatory behavior; interest 

Whenever the Commission institutes a proceeding under this 

section, the Commission shall establish a refund effective date. 

In the case of a proceeding instituted on complaint, the refund 

effective date shall not be earlier than the date of the filing of 

such complaint nor later than 5 months after the filing of such 

complaint. In the case of a proceeding instituted by the 

Commission on its own motion, the refund effective date shall 

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not be earlier than the date of the publication by the 

Commission of notice of its intention to initiate such 

proceeding nor later than 5 months after the publication date. 

Upon institution of a proceeding under this section, the 

Commission shall give to the decision of such proceeding the 

same preference as provided under section 824d of this title and 

otherwise act as speedily as possible. If no final decision is 

rendered by the conclusion of the 180-day period commencing 

upon initiation of a proceeding pursuant to this section, the 

Commission shall state the reasons why it has failed to do so 

and shall state its best estimate as to when it reasonably expects 

to make such decision. In any proceeding under this section, 

the burden of proof to show that any rate, charge, classification, 

rule, regulation, practice, or contract is unjust, unreasonable, 

unduly discriminatory, or preferential shall be upon the 

Commission or the complainant. At the conclusion of any 

proceeding under this section, the Commission may order 

refunds of any amounts paid, for the period subsequent to the 

refund effective date through a date fifteen months after such 

refund effective date, in excess of those which would have been 

paid under the just and reasonable rate, charge, classification, 

rule, regulation, practice, or contract which the Commission 

orders to be thereafter observed and in force: Provided, That if 

the proceeding is not concluded within fifteen months after the 

refund effective date and if the Commission determines at the 

conclusion of the proceeding that the proceeding was not 

resolved within the fifteen-month period primarily because of 

dilatory behavior by the public utility, the Commission may 

order refunds of any or all amounts paid for the period 

subsequent to the refund effective date and prior to the 

conclusion of the proceeding. The refunds shall be made, with 

interest, to those persons who have paid those rates or charges 

which are the subject of the proceeding. 

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(c) Refund considerations; shifting costs; reduction in revenues; 

“electric utility companies” and “registered holding company” 

defined 

Notwithstanding subsection (b) of this section, in a proceeding 

commenced under this section involving two or more electric 

utility companies of a registered holding company, refunds 

which might otherwise be payable under subsection (b) of this 

section shall not be ordered to the extent that such refunds 

would result from any portion of a Commission order that (1) 

requires a decrease in system production or transmission costs 

to be paid by one or more of such electric companies; and (2) is 

based upon a determination that the amount of such decrease 

should be paid through an increase in the costs to be paid by 

other electric utility companies of such registered holding 

company: Provided, That refunds, in whole or in part, may be 

ordered by the Commission if it determines that the registered 

holding company would not experience any reduction in 

revenues which results from an inability of an electric utility 

company of the holding company to recover such increase in 

costs for the period between the refund effective date and the 

effective date of the Commission's order. For purposes of this 

subsection, the terms “electric utility companies” and 

“registered holding company” shall have the same meanings as 

provided in the Public Utility Holding Company Act of 1935, as 

amended.1 

(d) Investigation of costs 

The Commission upon its own motion, or upon the request of 

any State commission whenever it can do so without prejudice 

to the efficient and proper conduct of its affairs, may 

investigate and determine the cost of the production or 

transmission of electric energy by means of facilities under the 

jurisdiction of the Commission in cases where the Commission 

has no authority to establish a rate governing the sale of such 

energy. 

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(e) Short-term sales 

(1) In this subsection: 

(A) The term “short-term sale” means an agreement for 

the sale of electric energy at wholesale in interstate 

commerce that is for a period of 31 days or less (excluding 

monthly contracts subject to automatic renewal). 

(B) The term “applicable Commission rule” means a 

Commission rule applicable to sales at wholesale by 

public utilities that the Commission determines after 

notice and comment should also be applicable to entities 

subject to this subsection. 

(2) If an entity described in section 824(f) of this title voluntarily 

makes a short-term sale of electric energy through an organized 

market in which the rates for the sale are established by 

Commission-approved tariff (rather than by contract) and the 

sale violates the terms of the tariff or applicable Commission 

rules in effect at the time of the sale, the entity shall be subject 

to the refund authority of the Commission under this section 

with respect to the violation. 

(3) This section shall not apply to— 

(A) any entity that sells in total (including affiliates of the 

entity) less than 8,000,000 megawatt hours of electricity 

per year; or 

(B) an electric cooperative. 

(4)(A) The Commission shall have refund authority under 

paragraph (2) with respect to a voluntary short term sale of 

electric energy by the Bonneville Power Administration only if 

the sale is at an unjust and unreasonable rate. 

(B) The Commission may order a refund under 

subparagraph (A) only for short-term sales made by the 

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Bonneville Power Administration at rates that are higher 

than the highest just and reasonable rate charged by any 

other entity for a short-term sale of electric energy in the 

same geographic market for the same, or most nearly 

comparable, period as the sale by the Bonneville Power 

Administration. 

(C) In the case of any Federal power marketing agency or 

the Tennessee Valley Authority, the Commission shall not 

assert or exercise any regulatory authority or power 

under paragraph (2) other than the ordering of refunds to 

achieve a just and reasonable rate. 

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Section 209 of the Federal Power Act, 16 U.S.C. § 824h(b) 

References to State boards by Commission 

 * * * 

(b) Cooperation with State commissions 

The Commission may confer with any State commission 

regarding the relationship between rate structures, costs, 

accounts, charges, practices, classifications, and regulations of 

public utilities subject to the jurisdiction of such State 

commission and of the Commission; and the Commission is 

authorized, under such rules and regulations as it shall 

prescribe, to hold joint hearings with any State commission in 

connection with any matter with respect to which the 

Commission is authorized to act. The Commission is 

authorized in the administration of this chapter to avail itself of 

such cooperation, services, records, and facilities as may be 

afforded by any State commission. 

* * * 

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Section 216 of the Federal Power Act, 16 U.S.C. § 824p(b)(1)(C) 

Siting of interstate electric transmission facilities 

* * * 

(C) a State commission or other entity that has authority 

to approve the siting of the facilities has— 

(i) withheld approval for more than 1 year after the 

filing of an application seeking approval pursuant 

to applicable law or 1 year after the designation of 

the relevant national interest electric transmission 

corridor, whichever is later; or 

(ii) conditioned its approval in such a manner that 

the proposed construction or modification will not 

significantly reduce transmission congestion in 

interstate commerce or is not economically feasible. 

* * * 

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Section 313 of the Federal Power Act, 16 U.S.C. § 825l

Review of orders 

(a) Application for rehearing; time periods; modification of 

order 

Any person, electric utility, State, municipality, or State 

commission aggrieved by an order issued by the Commission 

in a proceeding under this chapter to which such person, 

electric utility, State, municipality, or State commission is a 

party may apply for a rehearing within thirty days after the 

issuance of such order. The application for rehearing shall set 

forth specifically the ground or grounds upon which such 

application is based. Upon such application the Commission 

shall have power to grant or deny rehearing or to abrogate or 

modify its order without further hearing. Unless the 

Commission acts upon the application for rehearing within 

thirty days after it is filed, such application may be deemed to 

have been denied. No proceeding to review any order of the 

Commission shall be brought by any entity unless such entity 

shall have made application to the Commission for a rehearing 

thereon. Until the record in a proceeding shall have been filed 

in a court of appeals, as provided in subsection (b) of this 

section, the Commission may at any time, upon reasonable 

notice and in such manner as it shall deem proper, modify or 

set aside, in whole or in part, any finding or order made or 

issued by it under the provisions of this chapter. 

(b) Judicial review 

Any party to a proceeding under this chapter aggrieved by an 

order issued by the Commission in such proceeding may obtain 

a review of such order in the United States court of appeals for 

any circuit wherein the licensee or public utility to which the 

order relates is located or has its principal place of business, or 

in the United States Court of Appeals for the District of 

Columbia, by filing in such court, within sixty days after the 

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order of the Commission upon the application for rehearing, a 

written petition praying that the order of the Commission be 

modified or set aside in whole or in part. A copy of such 

petition shall forthwith be transmitted by the clerk of the court 

to any member of the Commission and thereupon the 

Commission shall file with the court the record upon which the 

order complained of was entered, as provided in section 2112 of 

title 28. Upon the filing of such petition such court shall have 

jurisdiction, which upon the filing of the record with it shall be 

exclusive, to affirm, modify, or set aside such order in whole or 

in part. No objection to the order of the Commission shall be 

considered by the court unless such objection shall have been 

urged before the Commission in the application for rehearing 

unless there is reasonable ground for failure so to do. The 

finding of the Commission as to the facts, if supported by 

substantial evidence, shall be conclusive. If any party shall 

apply to the court for leave to adduce additional evidence, and 

shall show to the satisfaction of the court that such additional 

evidence is material and that there were reasonable grounds for 

failure to adduce such evidence in the proceedings before the 

Commission, the court may order such additional evidence to 

be taken before the Commission and to be adduced upon the 

hearing in such manner and upon such terms and conditions as 

to the court may seem proper. The Commission may modify its 

findings as to the facts by reason of the additional evidence so 

taken, and it shall file with the court such modified or new 

findings which, if supported by substantial evidence, shall be 

conclusive, and its recommendation, if any, for the modification 

or setting aside of the original order. The judgment and decree 

of the court, affirming, modifying, or setting aside, in whole or 

in part, any such order of the Commission, shall be final, 

subject to review by the Supreme Court of the United States 

upon certiorari or certification as provided in section 1254 of 

title 28. 

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(c) Stay of Commission's order 

The filing of an application for rehearing under subsection (a) 

of this section shall not, unless specifically ordered by the 

Commission, operate as a stay of the Commission's order. The 

commencement of proceedings under subsection (b) of this 

section shall not, unless specifically ordered by the court, 

operate as a stay of the Commission's order. 

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Energy Policy Act of 2005, Pub. L. No. 109-58, § 1252 

SEC. 1252. Smart Metering 

(a) IN GENERAL.—Section 111(d) of the Public Utility 

Regulatory Policies Act of 1978 (16 U.S.C. 2621(d)) is amended 

by adding at the end the following: 

“(14) TIME–BASED METERING AND 

COMMUNICATIONS.—(A) Not later than 18 months 

after the date of enactment of this paragraph, each electric 

utility shall offer each of its customer classes, and provide 

individual customers upon customer request, a timebased rate schedule under which the rate charged by the 

electric utility varies during different time periods and 

reflects the variance, if any, in the utility's costs of 

generating and purchasing electricity at the wholesale 

level. The time-based rate schedule shall enable the 

electric consumer to manage energy use and cost through 

advanced metering and communications technology. 

“(B) The types of time-based rate schedules that 

may be offered under the schedule referred to in 

subparagraph (A) include, among others— 

“(i) time-of-use pricing whereby electricity 

prices are set for a specific time period on an 

advance or forward basis, typically not 

changing more often than twice a year, based 

on the utility's cost of generating and/or 

purchasing such electricity at the wholesale 

level for the benefit of the consumer. Prices 

paid for energy consumed during these 

periods shall be pre-established and known to 

consumers in advance of such consumption, 

allowing them to vary their demand and 

usage in response to such prices and manage 

their energy costs by shifting usage to a lower 

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App-19 

cost period or reducing their consumption 

overall; 

“(ii) critical peak pricing whereby time-of-use 

prices are in effect except for certain peak 

days, when prices may reflect the costs of 

generating and/or purchasing electricity at 

the wholesale level and when consumers may 

receive additional discounts for reducing peak 

period energy consumption; 

“(iii) real-time pricing whereby electricity 

prices are set for a specific time period on an 

advanced or forward basis, reflecting the 

utility's cost of generating and/or purchasing 

electricity at the wholesale level, and may 

change as often as hourly; and 

“(iv) credits for consumers with large loads 

who enter into pre-established peak load 

reduction agreements that reduce a utility's 

planned capacity obligations. 

“(C) Each electric utility subject to subparagraph (A) shall 

provide each customer requesting a time-based rate with 

a time-based meter capable of enabling the utility and 

customer to offer and receive such rate, respectively. 

“(D) For purposes of implementing this paragraph, any 

reference contained in this section to the date of 

enactment of the Public Utility Regulatory Policies Act of 

1978 shall be deemed to be a reference to the date of 

enactment of this paragraph. 

“(E) In a State that permits third-party marketers to sell 

electric energy to retail electric consumers, such 

consumers shall be entitled to receive the same timeUSCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 119 of 126
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based metering and communications device and service 

as a retail electric consumer of the electric utility. 

“(F) Notwithstanding subsections (b) and (c) of section 

112, each State regulatory authority shall, not later than 18 

months after the date of enactment of this paragraph 

conduct an investigation in accordance with section 115(i) 

and issue a decision whether it is appropriate to 

implement the standards set out in subparagraphs (A) 

and (C).”. 

(b) STATE INVESTIGATION OF DEMAND RESPONSE AND 

TIME–BASED METERING.—Section 115 of the Public Utility 

Regulatory Policies Act of 1978 (16 U.S.C. 2625) is amended as 

follows: 

 (1) By inserting in subsection (b) after the phrase “the 

standard for time-of-day rates established by section 

111(d)(3)” the following: “and the standard for timebased metering and communications established by 

section 111(d)(14)”. 

 (2) By inserting in subsection (b) after the phrase “are 

likely to exceed the metering” the following: “and 

communications”. 

 (3) By adding at the end the following: 

“(i) TIME–BASED METERING AND COMMUNICATIONS.—

In making a determination with respect to the standard 

established by section 111(d)(14), the investigation requirement 

of section 111(d)(14)(F) shall be as follows: Each State 

regulatory authority shall conduct an investigation and issue a 

decision whether or not it is appropriate for electric utilities to 

provide and install time-based meters and communications 

devices for each of their customers which enable such 

customers to participate in time-based pricing rate schedules 

and other demand response programs.”. 

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 * * * 

(e) DEMAND RESPONSE AND REGIONAL 

COORDINATION.— 

(1) IN GENERAL.—It is 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. 

(2) TECHNICAL ASSISTANCE.—The Secretary shall 

provide technical assistance to States and regional 

organizations formed by two or more States to assist them 

in— 

(A) identifying the areas with the greatest demand 

response potential; 

(B) identifying and resolving problems in 

transmission and distribution networks, including 

through the use of demand response; 

(C) developing plans and programs to use demand 

response to respond to peak demand or emergency 

needs; and 

(D) identifying specific measures consumers can 

take to participate in these demand response 

programs. 

(3) REPORT.—Not later than 1 year after the date of 

enactment of the Energy Policy Act of 2005, the 

Commission shall prepare and publish an annual report, 

by appropriate region, that assesses demand response 

resources, including those available from all consumer 

classes, and which identifies and reviews— 

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(A) saturation and penetration rate of advanced 

meters and communications technologies, devices 

and systems; 

(B) existing demand response programs and timebased rate programs; 

(C) the annual resource contribution of demand 

resources; 

(D) the potential for demand response as a 

quantifiable, reliable resource for regional planning 

purposes; 

(E) steps taken to ensure that, in regional 

transmission planning and operations, demand 

resources are provided equitable treatment as a 

quantifiable, reliable resource relative to the 

resource obligations of any load-serving entity, 

transmission provider, or transmitting party; and 

(F) regulatory barriers to improve customer 

participation in demand response, peak reduction 

and critical period pricing programs. 

* * * 

(g) TIME LIMITATIONS.—Section 112(b) of the Public Utility 

Regulatory Policies Act of 1978 (16 U.S.C. 2622(b)) is amended 

by adding at the end the following: 

“(4)(A) Not later than 1 year after the enactment of this 

paragraph, each State regulatory authority (with respect 

to each electric utility for which it has ratemaking 

authority) and each nonregulated electric utility shall 

commence the consideration referred to in section 111, or 

set a hearing date for such consideration, with respect to 

the standard established by paragraph (14) of section 

111(d). 

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“(B) Not later than 2 years after the date of the enactment 

of this paragraph, each State regulatory authority (with 

respect to each electric utility for which it has ratemaking 

authority), and each nonregulated electric utility, shall 

complete the consideration, and shall make the 

determination, referred to in section 111 with respect to 

the standard established by paragraph (14) of section 

111(d).”. 

(h) FAILURE TO COMPLY.—Section 112(c) of the Public Utility 

Regulatory Policies Act of 1978 (16 U.S.C. 2622(c)) is amended 

by adding at the end the following: 

“In the case of the standard established by paragraph (14) 

of section 111(d), the reference contained in this 

subsection to the date of enactment of this Act shall be 

deemed to be a reference to the date of enactment of such 

paragraph (14).”. 

(i) PRIOR STATE ACTIONS REGARDING SMART 

METERING STANDARDS.— 

(1) IN GENERAL.—Section 112 of the Public Utility 

Regulatory Policies Act of 1978 (16 U.S.C. 2622) is 

amended by adding at the end the following: 

“(e) PRIOR STATE ACTIONS.—Subsections (b) and (c) of 

this section shall not apply to the standard established by 

paragraph (14) of section 111(d) in the case of any electric 

utility in a State if, before the enactment of this 

subsection— 

“(1) the State has implemented for such utility the 

standard concerned (or a comparable standard); 

“(2) the State regulatory authority for such State or 

relevant nonregulated electric utility has conducted 

a proceeding to consider implementation of the 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 123 of 126
App-24 

standard concerned (or a comparable standard) for 

such utility within the previous 3 years; or 

“(3) the State legislature has voted on the 

implementation of such standard (or a comparable 

standard) for such utility within the previous 3 

years.”. 

(2) CROSS REFERENCE.—Section 124 of such Act 

(16 U.S.C. 2634) is amended by adding the 

following at the end thereof: “In the case of the 

standard established by paragraph (14) of section 

111(d), the reference contained in this subsection to 

the date of enactment of this Act shall be deemed to 

be a reference to the date of enactment of such 

paragraph (14).”. 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 124 of 126
App-25 

TITLE 18 — CONSERVATION OF POWER AND WATER 

RESOURCES 

CHAPTER I — FEDERAL ENERGY REGULATORY 

COMMISSION, DEPARTMENT OF ENERGY 

SUBCHAPTER B — REGULATIONS UNDER THE 

FEDERAL POWER ACT 

PART 35 — FILING OF RATE SCHEDULES AND TARIFFS 

Subpart C — Other Filing Requirements 

Section 35.28(b)(4) Non-discriminatory open access 

transmission tariff. 

.* * * 

(4) Demand response means 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. 

* * * 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 125 of 126
CERTIFICATE OF SERVICE 

Pursuant to Rule 25 of the Federal Rules of Appellate Procedure, I 

hereby certify that I have this 6th day of June 2012, served a copy of the 

foregoing documents electronically through the Court’s CM/ECF system. 

All participants in the case are registered CM/ECF users and will be served 

by the appellate CM/ECF system. 

 /s/ Ashley C. Parrish 

 Ashley C. Parrish 

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 126 of 126