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 ASSO CIATION, 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 1 of 126Harvey 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 2 of 126CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES Parties, Interven ors, 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 Regu latory Commission Lower Mount Bethel Energy, LLC Madison Gas and Electric Company Maryland Public Service Commission Missouri Joint Municipal Electric Utility Commission USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 3 of 126ii Missouri River Energy Services
National Rural Electric Cooperative Association
Old Dominion Elec tric 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 Mu nicipal Power Agency USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 4 of 126iii Steel Producers Viridity E nergy Inc. Wal-Mart Stores, Inc. WPPI Energy The following persons and entitie s appeared before the Federal Energy Regulatory Commission in the underlying administrative proceedings: Alcan Primary Prod ucts 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 5 of 126iv ArcelorMittal USA Inc.
Battelle Pacific Nort hwest Laboratories Robert J. Borlick Boston College La w School Administrative Law Class California Department of Water Resources State Water Project California Independent Syst em Operator Corporation
California Public Utilities Commission Calpine Corporation Capital Power Corporation Dr. Charles J. Cicchetti Cities of Anaheim, Azusa, Banning, Co lton, Pasadena, and Riverside, California Citizens for Pennsylvania’s Future
Coalition of Midwest Transmission Customers Connecticut Municipal Elec tric Energy Cooperative
Consert Inc.
Conservation Law Foundation Consolidated Edison Solutions, Inc. Constellation Energy Commodities Group, Inc. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 6 of 126v 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 7 of 126vi 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 Nort h 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 8 of 126vii Industrial Energy Co nsumers of America Industrial Energy Cons umers 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 Mounta in 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 Transmissi on System Operator, Inc.
Midwest ISO Tran smission Owners
Midwest Transmission Dependent Utilities USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 9 of 126viii Mirant Corporation Monitoring Analytics, LLC
National Electrical Manu factures 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 Generat ors Association Inc. New England Power Pool Participants Committee New England Public Systems New Jersey Board of Public Utilities New York Independent Sy stem Operator, Inc. New York Mayor Mich ael R. Bloomberg
New York State Consumer Protection Board
New York State Public Service Commission
North America Power Partners LLC USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 10 of 126ix 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 Repres entative Chris Ross Pepco Holdings, Inc. PJM Interconnection, L.L.C. PJM Power Providers Group Potomac Economics, Ltd. PPL Brunner Island, LLC USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 11 of 126x 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 12 of 126xi 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 Industri al Energy Group USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 13 of 126xii 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 14 of 126xiii CORPORATE DISCLOSURE STATEMENT In accordance with Rule 26.1 of the Federal Rules of Appellate
Procedure and D.C. Circ uit Rule 26.1, petitioners make the following
disclosures:

ELECTRIC POWER SU PPLY ASSOCIATION The Electric Power Supply Associat ion (“EPSA”) is a national trade association that represents the co mpetitive power industry and is incorporated under the laws of the District of Columb ia. There is no parent corporation or any publicly held corpor ation that owns 10 percent or more
of EPSA’s stock. EPSA’s members include 15 comp anies, along with numerous supporting members, and state and re gional partners that represent the competitive power industry in their respective regions. EPSA’s members have significant financial investments in electric generat ion 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 126xiv policies that encourage the development and implementation of competitive wholesale markets for electricity; and to improve the public’s awareness of the competitive el ectric industry.

AMERICAN PUBLIC POWER ASSOCIATION The American Public Power Associatio n (“APPA”) is an association of governmental entities to which Rule 26.1 does not apply. APPA is the national service organization represent ing the interests of not-for-profit, publicly owned electric utilities throug hout the United States. More than 2,000 public power systems provide ov er 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 co urse of providing retail electric utility services.

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION The National Rural Electric Coopera tive Association (“NRECA”) is a not-for-profit national service organizati on with no parent entity or publiclytraded stock. It is the national se rvice 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 16 of 126xv NRECA’s members include consumer-owned local distribution systems and 66 generation and transmission cooperativ es that supply wholesale power to their distribution cooperative owner-members.

OLD DOMINION ELECTRIC COOPERATIVE Old Dominion Electric Cooperativ e (“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 co nsortium of electric distribution cooperatives. In 2011, ODEC’s 11 me mbers served over 550,000 retail electric consumers, representing ap proximately 1.2 million member-owners along 59,000 miles of line. The serv ice territories served by ODEC’s members cover large portions of Virginia, Maryland, and Delaware.

EDISON ELECTRIC INSTITUTE The Edison Electric Instit ute (“EEI”) is the trade association of the U.S.
shareholder-owned electric companies. EEI member s serve 95 percent of the
ultimate customers in the shareholde r-owned segment of the industry, and they represent approximately 70 percent of the U.S. electric power industry. EEI’s diverse membership in cludes utilities operatin g in all regions of the USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 17 of 126xvi U.S. EEI does not have any parent companies, and no publicly-held company has a 10 percent or greater owners hip interest in EEI. EEI does not
issue stock. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 18 of 126xvii TABLE OF CONTENTS JURISDICTIONAL STATEMEN T ........................................................................... 1 STATUTORY AND REGULA TORY PROVISIONS ............................................ 1 STATEMENT OF ISSUES.......................................................................................... 2 INTRODUC TION....................................................................................................... 3 STATEMENT OF CASE AND FA CTS ................................................................... 6 A. The Federal Po wer Act......................................................................... 6 B. The Organized Whol esale Mark ets.................................................... 9 C. The Relationship Between Whol esale And Retail Rates.............. 11 D. The Commission ’s Orders ................................................................. 15 SUMMARY OF ARGUME NT................................................................................ 22 STANDING................................................................................................................ 24 STANDARD OF REVIEW....................................................................................... 25 ARGUME NT ............................................................................................................. 27 I. The Commission’s Orders Exceed Its Statutory Authority.................... 27 A. The Federal Power Act Proh ibits 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 Servic es....................................................... 30 2. The Commission’s Orders Cite No Case Supporting Its Position............................................................ 38 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 19 of 126xviii C. The Commission’s Orders Un reasonably Interfere With The States’ Exclusive Jurisdicti on Over Retail Services. .............. 41 II. The Commission’s Orders Vi olate The Federal Power Act And The Requirements Of Reas oned Decision-making......................... 45 A. The Commission’s Retail Compensation Scheme Is Unduly Discriminatory And Preferential Because It Overcompensates “Demand Response” Pr oviders. ..................... 45 B. The Commission’s Orders Depart Without Reasoned Explanation From Preceden t Recognizing That Full LMP Pricing Unfairly Subsid izes “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 Unreas onable Because It Results In Artificially Suppre ssed Market Prices. ....................................... 56 III. The Commission’s Orders Viol ate Section 206 By Ordering Rate Changes Without First Demonstrating That Existing Rates Were Unjust An d Unreasonable. ..................................................... 61 CONCLUSI ON.......................................................................................................... 66 CERTIFICATE OF COMPLIANCE ADDENDUM CERTIFICATE OF SERVICE USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 20 of 126xix 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. Ar kansas Pub. Serv. Comm’n , 461 U.S. 375 (19 83) ............................................................................. 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. Natu ral Resources Defense Council Inc. , 467 U.S. 837 (1984) ......................................................................................25 * Authorities upon which we chiefl y rely are marked with asterisks USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 21 of 126xx 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 (19 44) ......................................................................... 57, 58, 60

* FPC v. Southern Cal. Edison Co. , 376 U.S. 205 (19 64) ........................................................................... 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 22 of 126xxi 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 Transmi ssion 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 23 of 126xxii 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, LL C v. Amalgamated Bank , __ U.S. __, 2012 WL 19121 97 (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-Gu lf 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. Ca lifornia Indep. Sys. Operator Corp. , 109 FERC ¶ 61, 182 (200 4)...........................................................................58 Connecticut ex rel. Blumenthal v. ISO New England Inc. , 117 FERC ¶ 61, 038 (200 6)...........................................................................58 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 24 of 126xxiii Demand Response Compensation in Organized Wholesale Energy Markets , Notice of Proposed Rulemaking, FERC Stats. & Regs. ¶ 32,656 (201 0)............................................ 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 (201 0)...........................................................................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 (200 8) ..................................................58 *PJM Indus. Customer Coal. v. PJM Interconnection, L.L.C. , 121 FERC ¶ 61, 315 (200 7)...........................................................................51 *PJM Interconnection, L.L.C. , 99 FERC ¶ 61, 227 (2002 ).............................................................................51 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 25 of 126xxiv 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. § 825 l (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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 26 of 126xxv 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 Jo urnal (Oct . 2009) ............................................................15 Massachusetts Institute of Technology, The Future of the Electric Grid (201 1)..........................................................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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 27 of 126xxvi 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 Pu blic 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 __). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 28 of 126xxvii 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 ut ilization 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 29 of 126xxviii 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 30 of 126xxix 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). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 31 of 126JURISDICTIONAL STATEMENT On March 15, 2011, the Fe deral Energy Regulatory Commission issued a final rule requiring that certain re tail customers rece ive 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 74 5”). 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 fo r review. This Court has jurisdiction under 16 U.S.C. § 825 l (b).
STATUTORY AND REGULATORY PROVISIONS The relevant statutory and regulatory provisions are reproduced in the
addendum. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 32 of 1262 STATEMENT OF ISSUES 1. Because the Commission has no authority to regulate retail sales and matters “subject to regulati on 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 re ductions in retail consum ption as the functional equivalent of producing ener gy for sale at wholesale?
2. Has the Commission violated the requirem ents 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 explaini ng or even acknowledg ing the departure; and (iii) by failing to provide a meaningfu l response to se rious objections, including concerns that the Commissio n’s compensation sche me will distort the nation’s energy markets and artifi cially suppress market prices in a
manner inconsistent with the Commissi on’s statutory obligation to ensure that rates are just and reas onable for wholesale sales? 3. Has the Commission violated the Federal Power Act by requiring changes to rates without complying with section 206, which USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 33 of 1263 precludes the Commission from unila terally modifying rates unless it demonstrates that existing rates are unjust and unreasonable and that its proposed rates are just and reasonab le and not unduly discriminatory?
INTRODUCTION This consolidated appeal arises ou t of attempts by the Commission to address perceived inefficiencies resultin g 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’ dema nd for electric energy (in industry parlance, “load”), which in turn determ ines 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 betw een the regulation of wholesale and retail transactions, granting the Co mmission exclusive au thority over the former, while prohibiting the Commission from interfering with the States’ traditional and equally exclusiv e authority over the latter. See 16 U.S.C. §§ 824, 824(a). In its orders below, the Commissi on has attempted to circumvent these statutory limits on its authority. In particular, it has sought to interfere USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 34 of 1264 with state and local regulation of reta il transactions by redefining certain
retail customers’ de cisions 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 entit led 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 gene rators receive for actually producing electric energy. As nume rous experts explained to the Commission, because
these retail customers will receive the fu ll wholesale payment in addition to avoiding the associ ated retail charge, the Commi ssion’s approach will overcompensate participating retail customers, unduly discriminate against wholesale power producers, and distort the nation’s electricity markets. Nonetheless, in its orde rs 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 “m arket imperfections.”
Petitioners are some of the na tion’s leading energy industry associations. They together represent the diverse interests of almost all USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 35 of 1265 major wholesale market participants, including shareholder-owned electric utilities, community-owned electric ut ilities, competitiv e power suppliers, and not-for-profit rural electric cooper atives and public power districts. Although petitioners have a common interest in eliminating undue discrimination and ensuring that re liable supplies of el ectric energy are available at just and reasonable pr ices, they have vastly differing perspectives on how best to achieve these goals, ev en differing on questions as fundamental as the appropriatene ss 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 ho w far the Commissio n’s orders have gone astray, petitioners are taking the un usual step of submitting this joint
brief. Petitioners share concerns about the Commission’s unlawful and unreasoned approach to paying re tail 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 Cooperativ e Association, and Old Dominion USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 36 of 1266 should be reversed and vacated because they exceed the Commission’s jurisdiction, are inconsistent with t he 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 prece dent, 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 regula tion, 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 expressl y 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). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 37 of 1267 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 jurisdic tion over retail sales of electricity and over local di stribution 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 jurisdic tion 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 an d local authority ov er these matters, Congress preserved “one of the most impo rtant 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 wh olesale in interstate commerce.” 16 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 38 of 1268 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 ensuri ng that all wholesale ra tes and charges, as well as “all rules and regulations affecting or pertaining to such rates or charges,” are just and reasonable and not undu ly preferential or discriminatory. Id

. §§ 824d(a), 824d(b). Significantly, Congress granted regula ted sellers authority to “set[] the
rates in the first instan ce” under section 205. Boston Edison Co. v. FERC , 233 F.3d 60, 64 (1st Cir. 2000) . The Federal Powe r Act thus direct s 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 an d 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” on ly if they can be shown to have become “unjust, USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 39 of 1269 unreasonable, unduly disc riminatory or preferentia l.” 16 U.S.C. § 824e(a); see generally Morgan Stanley Capital Group Inc. v. Public Ut il. Dist. No. 1 of Snohomish Cty., 554 U.S. 527 (2008).
B. The Organized Wh olesale Markets For most of the last century, power markets were dominated by vertically integrated utilities that serv ed 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 contro l over their transmission facilities to independent public utility entities, kn own as independent system operators (“ISOs”) and regional transmi ssion organizatio ns (“RTOs”). ISOs and RTOs are responsible for administering organized, bid-based
markets for wholesale elec tricity and for ensuring th at 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 market s administered by the ISOs and RTOs allow energy suppliers ( e.g. , electric generators) to sell the USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 40 of 12610 power they produce at wh olesale rates to load-ser ving entities, which then resell the power to retail cu stomers at retail rates. See Wisconsin Pub. Power,
Inc. v. FERC , 493 F.3d 239 (D.C. Cir. 2007). Within the ISO-/RTO-ope rated wholesale markets, electric energy is sold on a real-time and day-ahead ba sis, and the rates at which energy is bought and sold are subjec t to the Commission’s oversi ght. In simple terms,
these wholesale markets work as follow s: to balance supply and demand an ISO/RTO will accept offers to sell ene rgy 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 mark et clears, all sellers whose offershave 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” (“LM P”) model. The LMP represents “the least-cost of meeting an incremental megawatt-hour of demand at each location on the grid.” Sacramento Mun. Ut il. Dist. v. FERC , 616 F.3d 520, 524 (D.C. Cir. 2010). At any given grid lo cation, the LMP has three components: (1) a generation component, which is intended to ca pture “the baseline cost of serving load anywhere on the syst em in the absence of congestion and USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 41 of 12611 transmission losses,” id. ; (2) a congestion compo nent, “which takes into
account the limits on available transmi ssion capacity” and thus “results in higher energy prices at [locations] that requir e the use of congested transmission lines and lower pric es in less congested areas,” Wisconsin Pub.
Power , 493 F.3d at 250; and (3) a losses component, which accounts for the
cost associated with “t he amount of electric ener gy 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 calcul ated 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 Commi ssion. They are in stead “subject to regulation by the States .” 16 U.S.C. § 824(a). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 42 of 12612 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 wholesal e by load-serving entities. For example, although demand for electricit y 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 Comp etition in Wholesale and Retail Markets fo r Electric Energy , at 48 (Apr. 2007), available at http://www. ferc.gov/legal/fed-sta/ene-pol-act/ep act-final-rpt.pdf. These retail consumption decisions th us translate directly into the “demand” ( i.e. , “load”) that load-serving entities mu st meet either through additional purchases in the wholesale markets or through their own generation. Id.
at 6. Although retail and wholesale ra tes are linked, because of the bifurcated regulatory structure impose d by Congress, ther e is typically no connection between retail prices at an y 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 ad just on an hour-by-hour basis and do USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 43 of 12613 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 Mark ets and Recommendations for Achieving
Them , at 7 (Feb. 2006) (“DOE Report”), available at http://energy.gov/sites/ prod/files/oeprod/DocumentsandMe dia/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 reta il rates fixed becaus e “customers do not like price volatility” and because t here 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/resea rch/studies/documents/electricgrid-2011/Electric_Grid_Full _Report.pdf. As a resu lt, retail customers often do not see, and cannot adju st retail consumption in response to, the hourly (and often even more fr equent) fluctuations in wholesale prices. See 2009 National Assessment at 189; see also DOE Report at 7 (describing “disconnect USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 44 of 12614 between short-term marginal electricity production costs and retail rates paid by consumers”). Recognizing the inefficiency of th is 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 fluctuat ions in the wholesale markets. See 2009 National Assessment at 21-22 (descr ibing 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-respo nse. 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 dyna mic or responsive to changes in wholesale prices. See 2009 National Assessment at 38. These choices reflect local policy judgments abou t how best to protect consumers and to regulate
retail rates. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 45 of 12615 D. The Commission’s Orders Dissatisfied with stat e and local government efforts to allow retail customers to respond to fluctuations in wholesale prices, the Commission has recently sought to influence reta il 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 pr ices 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 indust ry because the notion that consumers must pay and make decisions based on a re al-time price is a fact of life in all industries without explicit price regu lation.”). More specifically, the
Commission defines ”deman d response” as “a reduct ion in the consumption of electric energy by customers fr om their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower co nsumption of electr ic energy.” 18
C.F.R. § 35.28(b)(4). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 46 of 12616 Although the Commission is not empo wered 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 e nergy 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 circumst ances 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”). Workin g with stakeholders in t heir 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 47 of 12617 compensation methodologies” tailored to the specific circ umstances 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 compens ation structures have hindered the development and use of demand response,” id. , the Commission proposed to adopt a unif orm requirement that all ISOs and RTOs pay retail customers the full whol esale LMP for agreeing to reduce their purchases of e nergy at retail. Id. at P 1 (JA __). Thousands of pages of comments we re filed in response to this proposal. Order 745, at P 1 (JA __). The bulk of these comments, representing an unusua lly 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 expre ssed concern that a “one size fits all” approach would fail to account fo r regional differences and would be USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 48 of 12618 incompatible with state and utility effo rts 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 obje cted that the full LMP payments contemplated by the Commission wo uld over-compensat e certain retail customers because they wo uld receive both a reduction in their retail payments as well as a payment for re ducing demand, which would inject distortions into the organized wholes ale 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 th e market price fo r 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 ra tes 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 an d demand as ca n generation,” id. at P 55 (JA __), the Commission held that reduct ions in retail consumption by retail customers should be treated as equi valent to production of energy by generators at wholesale. Id . at P 53 (JA __). The Co mmission thus directed USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 49 of 12619 that “demand response resources that clear in the day-ahead and real-time energy markets should receive the LM P for services provided, as do generation resources.” Id

. The Commission conditioned the pa yment 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 Co mmission’s recognition that paying
full LMP to retail customers for reduci ng 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 reta il customers provides “demand response,” the load-serving ent ity’s aggregate demand (load) goes USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 50 of 12620 down, reducing its wholes ale purchases and the amou nt 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 provider s,” and the revenues the RTO could collect from load-serving entities, creating a “negat ive balance” that would
have to be recovered from load-ser ving entities participating in the
wholesale market. Id . at P 99 (JA __); see also id. at P 102 (JA __). In a strongly worded dissent, Commissioner Mo eller stated that the Commission’s retail customer compensati on scheme “conflicts both with the Commission’s efforts to promote compet itive markets and with its statutory mandate to ensure supplies of electric energy at ju st, 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 redu cing consumption “results in overcompensation that is economically i nefficient, preferential to demand resources, and unduly discriminatory towards other market resources.” Id. at 31,269 (Comm’r Moeller, dissenting) (JA __). Referr ing to the net benefits test adopted by the Commission to address the imbalance between USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 51 of 12621 payments and receipts , Commissioner Moeller objected that the Commission disregarded concerns identi fied by a “clear majority” of the panel of experts the Commission had co nvened at a technica l 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, di ssenting) (JA __). Requests for rehearing of Order 745 were filed by numerous parties, including ISOs/RTOs, suppliers, state regulatory commissions, trade associations, publicly ow ned utilities, rural cooper atives, and transmission

owners. See Order 745-A, at P 6 (JA __). On December 15, 2011, with Commissioner Moeller agai n dissenting, the Commi ssion generally denied the rehearing requ ests and granted clarific ation on certain issues. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 52 of 12622 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 dire ctly regulate retail transactions by requiring that retail customers receiv e payment for reducing their retail purchases of electricity, and then treating thos e reductions in retail consumption as equivalent to supplyin g energy for sale at wholesale. The plain language of the Federal Power Ac t reserving jurisdiction over retail service to the States, an ar ea in which the States ha ve traditionally exercised exclusive regulation, trumps the Co mmission’s claim of authority to regulate “demand response ” as a “practice” affect ing wholesale service. Moreover, the Commission’s interpretati on of the statutory requirements is
unreasonable and arbitrar y because the Commission failed to consider the impact its orders will have on existi ng 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 re asonable and not unduly preferential or discriminatory, and are not the prod uct of reasoned decision-making. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 53 of 12623 First , the Commission’s compensation sc heme over-compensates retail customers who agree to reduce their retail purchases by paying them the full LMP for forgoing retail purchases wi thout accounting for the savings associated with avoiding retail generatio n costs. By failing to account for the avoided retail charge, the Commission ’s scheme unduly prefers “demand response” providers and unduly di scriminates 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 t hey do not meaningfully address arguments and evidence that the Co mmission’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 generat or market power. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 54 of 12624 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 aggr ieved by the orders below, they satisfy the requirement s of 16 U.S.C. § 825 l (b), and their associational standing is self-evident. See Hunt v. Washington Sta te Apple Adver. Comm’n , 432 U.S. 333 (1977). The Commission’s or ders are causing injury in fact because, among other things, they ex ceed the Commission’s jurisdiction, deprive petitioners and their member s of the statutory right to nondiscriminatory treatment, and direct ly affect the compensation their members receive for generating energy for transmission and sale at
wholesale. The Court can redress thes e concrete injuries by reversing the Commission’s orders, pr eventing the Commission from exceeding its statutory authority, and requiring t he Commission to comply with the requirements of reasoned decision-making. Lujan v. Defenders of Wildlife , 504 U.S. 555, 560-61 (1992). Petitioners part icipated in the proceedings below
and their interests fall with in the zone of interests protected by the Federal USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 55 of 12625 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 de vices of judicial construction have been tried and found to yield no clea r sense of congressi onal intent.” General Dynamics Land Sys. Inc. v. Cline , 540 U.S. 581, 600 (2004) . Moreover, where (as here) “general principles of th e law” are applied to undisputed jurisdictional facts, the Court need not afford the ag ency’s decision special
deference. North Am. Van Lin es, Inc. v. NLRB , 869 F.2d 596, 598 (D.C. Cir. 1989).
Under the Administrative Procedur e Act, the Commission’s orders should be struck down if they are “arbitrary, capriciou s, an abuse of discretion, or otherwise not in accordan ce 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 statutor y authorization. Michigan v. EPA , 268 F.3d 1075, 1081 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 56 of 12626 (D.C. Cir. 2001). Moreover, an agency vi olates the requirements of reasoned decision-making if it fails to articu late 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); depart s 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 t he 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 12627 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 “unlawfu l and set aside.” 5 U.S.C. §§ 706(2), (2)(C). The
Commission cannot circumvent the limits on its auth ority by paying certain
retail customers to reduce the amount of electricity they pu rchase at retail and then redefining those reductions in retail sales as a “wholesale service.”
A. The Federal Power Act Prohib its The Commission From Regulating Retail Services. As a “creature of st atute,” 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 gran ted the Commission “plenary” jurisdiction over rates for wholesal e 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 ener gy at wholesale in interstate commerce,” and forbids t he Commission from regulating “any USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 58 of 12628 other sale of electric energy,” 16 U.S. C. § 824(b)(1), incl uding 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 jarg on cannot obscur e reality: The
Commission has or dered 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 regu late are thus precisely the types of retail sales of electric energy that are “sub ject to regulation by the States.” 16 U.S.C. §§ 824(a), (b)(1). Any doubt on this score is conf irmed by the Commission’s own regulations. Those regulations define “demand response” as “a reduction in USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 59 of 12629 the consumption of electr ic energy by customers,” 18 C.F.R. § 35.28(b)(4), making clear that “demand response” in volves neither a transmission nor a wholesale sale of electricity over wh ich the Commission ha s authority. 16 U.S.C. § 824(b)(1). The Co mmission conceded as much below, stating that it “does not view demand response as a resale of ener gy back into the [wholesale] energy market.” Order 745, at P 64 (JA ___). As the Commission has previously held, an entity that pr ovides only “demand response” service does “not own or oper ate 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) (contras ting “agreements not to purchase electric energy” with “agreements to se ll electric energy at wholesale”). Indeed, “demand response” is the polar op posite 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 regulate d 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 re tail customer’s retail purchases ( i.e. , demand) USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 60 of 12630 is equivalent to a purchase of ene rgy in the wholesale market. The Commission’s logic thus leads ineluc tably to the conclusion that the Commission has authority to regulate both purchases and sales of energy at the retail level. This directly interfer es 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 Perm it It To Regulate Retail Services. Although it concedes that retail cu stomers are not “public utilit[ies]”
and do not make “wholesale sales of electric energy ,” Order 745-A, at P 22 (JA __), the Commission claims jurisd iction over “demand response” as “a practice that affects rates in organi zed wholesale electr ic markets under sections 205(a) and (c) and section 20 6(a) of the” Fede ral Power Act. Id . at P 22 (JA __) (citation omitted). The Commi ssion’s position does not withstand scrutiny.
1. The Statute Prohibits The Co mmission From Regulating Retail Services. No one disputes that the Commiss ion has authority to regulate practices affecting wholesal e rates. 16 U.S.C. § 824d. But this authority
cannot and does not extend so far as to allow the Commission to regulate USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 61 of 12631 directly the retail services that are ex pressly 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 atte mpt to expand the Commis sion’s jurisdiction). Congress carefully structured the statute to “foreclose the possibility that the Commission would ... regu lat[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 reta il 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 th e jurisdictional boundary set by Congress merely because it is concerned ab out 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 wholesal e and retail prices that prompted state efforts to regula te wholesale sales that the Supreme USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 62 of 12632 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 t he Federal Power Act. Arkansas Elec. , 461 U.S. at 379. In any event, requiring ISOs and RT Os to pay retail consumers not to purchase electricity at retail directly regulates (and has the intended purpose of regulating) retail services. By cont rast, any effect on wholesale sales is secondary; it occurs only by virtue of the primary effect on retail consumption. Although retail consum ption 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 Co mmission’s approach is that it reads the “affecting” clauses of se ctions 205 and 206 as nullifying the limitations on the Commission’s jurisdic tion set forth in section 201. But a
statute’s terms “should not be construe d 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 re tail regulation to the States is USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 63 of 12633 meaningless. Indeed, t he 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 gener ate or transmit electricity

—merely by redefining the activities as “practices ” that affect wholesale rates. The
Commission itself has reco gnized 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 arguin g that “demand response” is unique because a “properly functioning market should reflect both the willingness of sellers to sell at a price and the wil lingness 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 diffe rent from other retail tr ansactions because, by offering “demand response,” retail customers become “direct participants in the organized wholesal e energy markets.” Id . at P 31 (JA __). This reasoning is circular and irreconcilable with the statutory requirements. Retail customers are pa rticipating in the wholesale markets only because the Commission has brought them into the markets by creating USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 64 of 12634 its retail compensation scheme an d ordering generous payments for reductions in retail purchases. But that does not transform their retail nonpurchases into wholesale sa les subject to the Commissi on’s jurisdiction. To the contrary, all retail consumption de cisions, 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 co nsumption in the retail markets would potentially become subject to the Commi ssion’s jurisdiction as “practices” affecting wholesale rates. For exampl e, more than 30 st ates have adopted laws requiring utilities to use renewa ble power for certain percentages of their retail load, which ha s a “direct effect” on t he wholesale market by changing the demand for diff erent sources of power. See , e.g. , Department of Energy, Database of State Incent ives for Renewables and Efficiency,
available at http://www.dsireusa.org/su mmarymaps/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 enti ties can and in ma ny instances do USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 65 of 12635 respond to changes in wholesale prices by op erating their own retail “demand response” programs. But these retail programs are regulated by states and local governments, for Co ngress granted the States exclusive authority to determine how best to protect retail customers from price volatility. Only Congress can alter t he 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 wher e state inaction adversely impacts interstate commerce, Congress has not hes itated to extend the Commission’s jurisdiction into areas traditionally rese rved to the States. For example, in the Energy Policy Act of 2005, Congre ss did just that when it granted the Commission backstop authority over t he siting of electric transmission facilities in circumstances where prol onged 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 approv al for more than 1 year after the filing of an application seeking approval”). Congress has granted the
Commission no similar au thority over “demand response” or any other aspect of retail sales. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 66 of 12636 In fact, contrary to the Commissio n’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 “d emand response” is a matter of state concern, “encourag[ing] St ates to coordinate, on a regional basis, State energy policies to provide reliable and af fordable demand response services to the public” and direct ing the federal Secretar y of Energy to provide
“technical assistance to States ... to as sist 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 Comm ission 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 po licy. They are not delegations of authority.”). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 67 of 12637 The Commission pays lip service to “the confines of [its] statutory authority,” insisting that it is not s eeking to “usurp[] or imped[e] state regulatory efforts concerning demand response.” Order 745, at PP 114-115 (JA __). But the Commission plainly unde rstood its orders as a response to perceived deficiencies in existing stat e policies. For instance, although it recognized that some states and lo cal governments have taken steps to develop “price-res ponsive demand,” id. at P 9, the Comm ission noted that “demand response quite simply will not occur without adequate compensation.” NOPR, FE RC 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, requir ing ISOs and RTOs to pay retail customers the full LMP will “help addr ess the lack of a direct connection between wholesale and retail prices and the lack of dynami c 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 wholes ale and retail jurisdiction in a way that allows the USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 68 of 12638 Commission to regulate both. In so doing, the Commissi on has tried to bypass state and local authority over re tail 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 C ite No Case Supporting Its Position. In support of its claimed jurisdiction over retail consumption decisions “affecting” wholesale rates, the Commissi on points to this Court’s decisions
in Connecticut Department of Pu blic Utility Control v. FERC, 569 F.3d 477 (D.C. Cir. 2009), Sacramento Municipal Ut ility 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 Co mmission’s jurisdicti on in the first
instance and held that incidental e ffects on state regulation or nonjurisdictional utilities were acceptable . None of the ca ses stands for the proposition that the Commission may re gulate retail services or otherwise bears the weight the Commissi on has asked it to carry.
In Connecticut Department of Public Utility Control , the Court upheld the Commission’s jurisdiction to approve an “installed capaci ty requirement” USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 69 of 12639 used in the New England capacity market, finding no impermissible intrusion on state jurisdicti on over electric generation facilities. As the Court noted, this “woefully misnamed” mark et design element did not “actually ‘require’ anyone to ‘install’ any new ‘c apacity’ at all.” 569 F.3d at 481. Because the Commission had undisputed authority to regulate directly by “‘determin[ing] just and re asonable capacity charges’ and .... set[ting] those charges so as to incentivize the procurement or creation of additional capacity to ensure sy stem 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 mark et mechanism to locate the price appropriate to that quantity.” Id. at 482. Here, in stark contrast, the
Commission’s orders are dire ctly setting prices for retail sales, a matter that Congress expressly rese rved 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 releva nt 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 70 of 12640 non-jurisdictional entity in that case was not bein g assessed charges for use of its own facilities; instead, the tari ff rate was compensatin g a jurisdictional utility

— the California Inde pendent System Oper ator 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 ra tes 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 up held the Commission’s au thority to condition a customer’s right to use jurisdictional interstate transportation service, including its right to resell pipeline tr ansportation capaci ty. 88 F.3d at 1151-
54. Both this Court and the Ninth Ci rcuit have rejected arguments that
United Distribution eliminated the Federal Powe r 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 71 of 12641 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 sale s by bringing certain retail customers into the wholesale markets and paying th em not to purchase energy at retail.
C. The Commission’s Orders Unreasonably Interfere With The States’ Exclusive Jurisdic tion 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 poli cy choices not to implement such programs at this time. The States ha ve long regulated issues relating to retail consumption, and Congress has given no hint, much less any clear indication, that it intended for the Comm ission 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 72 of 12642 traditionally subject to state regula tion 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 “d emand 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 explai n its assertion of jurisdiction). The Commission contends that it po ssesses jurisdiction over “demand response” by virtue of its “direct ef fect on wholesale prices” and because paying retail customers to reduce re tail 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-re sponsive to the jurisdictional concerns raised in comments before the agency, and provides no reasoned basis for intruding on this core area of trad itional 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 73 of 12643 level and by non-jurisdictional utiliti es. Numerous commenters, including state regulatory commissions and IS Os and RTOs, described the “demand response” and dynamic pricing program s 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 reta il-level price-responsive demand initiatives”). These commenters wa rned that the Commission’s new compensation scheme could interfere with these efforts. For example, the
Illinois Commerce Commission noted th at, 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 subsid y increases, the state commission’s likelihood of implementing time-diffe rentiated retail rates decreases.” R.10 at 14 (Illinois Commerce Comm’n) (JA __). Representatives from state regulatory commissions likewise expl ained that the Co mmission’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) USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 74 of 12644 (JA __). On rehearing, these represent atives again objected that “state
commissions would be faced wi th the task of revising retail rate structures in order to correct a price distortion cr eated 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 be cause Order 745 “d oes 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 govern ments 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.” USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 75 of 12645 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 becaus e 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 re quirements because it impermissibly over-compensates “deman d response” providers, distorts the nation’s wholesale markets, and artificially sup presses market prices. Moreover, the
Commission’s orders violat e 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 Powe r Act prohibits any public utility from making or granting “any undu e preference or advantage to any person”; subjecting “any person to an y undue prejudice or disadvantage”; or maintaining “any unreasonable difference in rates, charges, service, USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 76 of 12646 facilities, or in any othe r respect, either as betw een 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 rate s and charges that are “unjust, unreasonable, unduly discriminatory or preferential.” 16 U.S.C. § 824e(a). As this Court has recognized, the Co mmission has a statutory obligation to
ensure that rates do not “res ult in undue prejudice.” Alabama Elec. Coop., Inc.
v. FERC , 684 F.2d 20, 27 (D.C. Cir. 1982). Notwithstanding these statutory requirements, t he Commission’s retail compensation scheme grants un due 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 ensur es that “demand respon se” providers receive a windfall because they will be “paid the full LMP plus be allowed to retain the savings associated” with their “avoided retail g eneration cost.” Id . The result is a scheme that is unduly “p referential to demand resources, and USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 77 of 12647 unduly discriminatory to wards other market reso urces.” Order 745, at 31,269 (Comm’r Moeller, dissenting) (JA ___). In the record below, numerous ex perts noted that the Commission’s approach would provide “demand resp onse” resources with a preferential subsidy and unjustified windfall. See, e.g., R.239 at 8-9 & nn. 17, 20 (EEI) (citing expert testimony). Professor W illiam W. Hogan, o ne of the principal architects of the LMP pricing model, explained in detail how paying full
LMP to retail customers for not consum ing electricity results in a “double payment” because the retail custom ers 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 th e NOPR’s Proposal to Pay the LMP for All Demand Response , at 5 (JA ___) (“Hogan Paper” ). For example, if there
were no disconnect betw een the wholesale and re tail prices and both the retail and wholesale price equal $40/me gawatt-hour, a “demand response” provider would be doubly compensat ed 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 pa yment of full LMP. See
id. ; see also Order 745, at 31,269 (Comm’r Moeller, dissenting) (JA __) (explaining why “demand response” re sources will be overcompensated). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 78 of 12648 The Commission’s orders do not disp ute that its scheme will result in “demand response” resources being “pai d 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 custom ers and wholesale generators are not similarly situated: unlike demand resp onse resources, wh olesale generators do not avoid retail generation costs when they produce energy for sale at wholesale, and unlike wholesale gene rators, “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-c alled “negawatt” — a megawatt of electricity not consumed — is not the same as a megawatt. Id .; see also R.240 at 19-20 (Competitive Powe r Supplier Ass’ns) (JA __).
The Commission’s orders noneth eless maintain that “demand response” providers are entitled to th e full LMP payment (in addition to the forgone retail generation charge) be cause the service they provide is “comparable” to the service provid ed 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 12649 Commission, “demand response” prov iders 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 no n-responsive to the core of petitioners’ basic objectio ns and, more importantly, is irrelevant under the

statute. See Dynegy Midwest Ge neration, Inc. v. FERC , 633 F.3d 1122 (D.C. Cir. 2011) (criticizing the Commission for bein g similarly non-responsive). First, it ignores the over-compensation problem that is at the heart of petitioners’
claim of undue discrimination. Se cond, because retail customers and wholesale generators are not similarly situated, providing them with the same full LMP payment is not necessar ily appropriate. As this Court has recognized, an undue prefer ence or undue discriminati on 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 ge nerators incur costs when producing electricity that are not incurred by retail customers when electing not to USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 80 of 12650 consume energy. Worse yet, the Commi ssion’s orders ma ke clear that “demand response” should be compensated only when it will both displace a generating resource and result in significant downwa rd pressure on market prices, thereby pass ing 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 bl atantly unduly discriminatory and preferential cannot pa ss muster under the Federal Power Act.
B. The Commission’s Orders Depart Without Reasoned Explanation From Precedent Recognizing That Full LMP Pricing Unfairly Subsidi zes “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 expl anation. In earlier orders, the Commission recognized that paying retail customers the full LMP would create an unwarranted “subsidy,” PJM Indus. Custom er Coal. v. PJM USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 81 of 12651 Interconnection, L.L.C. , 121 FERC ¶ 61,315 at P 26 (2007), and that to avoid over-compensation, retail customers shou ld 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) (r etail 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, th e Commission’s 180-degree change in direction. This unexplained departur e from precedent is quintessentially arbitrary and capricious. Wisconsin Valley Im provement v. FERC , 236 F.3d 738, 748 (D.C. Cir. 2001). Moreover, although it acknowledged comments from experts and
others that the LM P-minus-G approach is necess ary to prevent an undue preference

— i.e. , to ensure that retail cust omers who provide “demand response” receive the same value of LMP as wholesale power producers who actually generate energ y for sale at wholesale, see Order 745-A, at P 60 (JA __), the Commission did not tackle t he merits of these objections to its approach. Instead, it br ushed them aside on ground s that “examining cost USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 82 of 12652 avoidance by demand response reso urces is not consistent with the treatment of generation,” inasmuch as it “generally does not examine each of the costs of production for indi vidual [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 avoide d retail payment ( i.e. , “G”) is not by any measure a cost of production; instead, it is a benefit of not consumin g. Moreover, offsetting the payment to a retail customer by t he “G” amount has no thing 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 reta il customer would see if the existing disconnect between wholesal e 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 “characteriz e objections,” it mu st “answer them”). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 83 of 12653 C. The Commission’s Retail Compensation Scheme Is Unjust And Unreasonable Because It Distorts The Market. The Commission’s retail compensat ion scheme will not achieve its stated purpose but will instead inject unjust and unreasonable distortions
into the nation’s electric ity markets. Although the Commission has sought to justify regulating “demand re sponse” 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 in consistent with rudimentary principles of economics. As a large number of respected economists and commenters, including the Federal Tr ade Commission, ob served, paying
full LMP to certain retail customers fo r not purchasing energy at retail “will lead“ those customers “to provide too much demand respon se.” R.58 at 7 (FTC) (JA ___); see also R.10 at 5-6 (Illinois Commerce Comm’n) (JA __) (compensation at full LMP will provid e customers incentive to provide too much “demand response”); R.76 at 8 (P JM Interconnection) (JA __) (LMP payment “distorts demand response in centives 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 12654 prices”); R.123 at 7 (Potom ac Economics) (JA __) (full LMP payment results in the demand response pro vider “receiving a subsidy to curtail equal to the retail rate”). In particular, as Commis sioner Moeller noted, retail customers “will begin to make inefficient decisi ons about using power” because they
“now stand to receive more than the ma rket price as an in centive to curtail their consumption.” Or der 745, at 31,271 (Moelle r, Comm’r, dissenting) (JA ___). Contrary to the Commission’s st ated objectives, instead of approximating the efficient market ou tcomes that would occur if retail customers saw, and could respond to , changes in wholesale prices, the Commission’s compensation scheme w ill 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 consumptio n because it is already saving $40/megawatt-hour by not using any electr icity. 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/meg awatt-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 12655 result in an overall benefit to the cu stomer that matches the value of the electricity at that time and location. By over-compensating demand resp onse, the Commission’s rule will have negative implicatio ns for consumers and t he organized wholesale markets over the long term. Among other things, the Commission’s rule will “unfairly shift the costs resultin g from the inefficient curtailment to those retail customers who do not part icipate in” “demand response,” which are “typically small residential an d commercial customers.” R.105 at 3 (MISO) (JA __); see also Hogan Paper at 6-7 (JA __) (the Commission’s rule would create perverse incentives fo r generation to exit the organized market); R.86 at 15 (NYISO ) (JA __) (“new technologi es may be kept out of the market”); Order 745, at 31,271 (Moe ller, Comm’r, diss enting) (JA ___) (the compensation scheme will result in“inefficiencies” that “impose longterm costs on the energy markets” ). The American Public Power Association, along with other comment ers, also made the point that the distorting effects of the Commission’s rule will extend beyond the electricity markets. For example, decreased indu strial 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 12656 (APPA) (JA ___). In the end, payi ng retail customer s full LMP is
“inconsistent with fundamental ec onomics” and will “over compensate participants in economic load resp onse programs, negatively affect the efficient operation of the energy market s and provide no offsetting social benefit.” R.124 at 2 (PJM Indepe ndent Market Mo nitor) (JA __).
D. The Commission’s Retail Custom er 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 th at sees and resp onds to higher market prices ... the more downward pressure it places on generator bidding strategies by incr easing the risk to a supp lier that it will not be dispatched if it bids a price that is to o high.” Order 745, at P 10 (JA __). This position is illustrated in the Commission’s directiv e that “demand response” be compensated only when it can displa ce a generator and when it lowers the LMP to such an extent that the pr ice reduction will o ffset 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 12657 requires a “demand response ” resource “to show that its participation will depress the market price.” Id. at 31,269 (Moeller, Co mm’r, dissenting) (JA ___). Whatever the superficial appeal of lo wering 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 comp ensatory” 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 an alyze how its new rule and the attendant increase in participation by “demand response ” resources would interact with existing ISO and RTO rule s to control the exercise of market USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 88 of 12658 power. The tariffs of each ISO an d RTO contain ext ensive provisions relating to the mitigation of supplier market power that have been accepted by the Commission as just and reason able, and which t he Commission has repeatedly emphasized are “sufficient to address any market power
concerns.” Market-Based Rates for Wh olesale Sales of Electr ic 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. Ca lifornia Indep. Sys. Operator Corp. , 109 FERC ¶ 61,182 (2004). Cons istent with the principle that the setting of “just
and reasonable” rates “involves a ba lancing 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 ma y disagree with the Commission (and one another) as to whether these measur es appropriately balance the risks of USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 89 of 12659 over-mitigation against thos e 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 gener ator market powe r,” Order 745, at P 10 (JA __), the Commission refused to address in any meaningful fashion the objections raised ab out the interaction of it s new compensat ion scheme with existing market powe r mitigation measures. See Order 745-A, at PP 76- 78 (JA ___). In particular, the Commiss ion did not even attempt to gauge the impact of this additional market power mitigation on the careful balance between under-mitigation and over-mitig ation 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 fo r generation sources. Instead, when EPSA and others made these points on rehearing, the Comm ission 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 exerci se of market power.” Id . at P 77 (JA __). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 90 of 12660 The Commission’s failure to examine the impact of increased “demand response” particip ation on the balance be tween under-mitigation and over-mitigation is incompatib le with controlling precedent. Hope and other cases recognize the need for a ba lancing 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 le gitimate concern with the financial integrity of the company whose rate s are being regulated”) (quoting Hope , 320 U.S. at 603). Moreov er, because the Commissi on focused only on providing customers with “a short-term benefit by way of a lower LMP,” it ignored that under-comp ensating 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-tim e prices”); R.105 at 3 (MISO) (JA __) (“overcompensating [demand response] will result in an ar tificial market construct”). By simplistically “equatin g the concept of a ju st and reasonable rate with a lower price,” Order 745, at 31,270 (Moeller, Co mm’r, dissenting) USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 91 of 12661 (JA __), the Commission abdicated its responsibility to ensure that rates remain just and reasonable for supp liers and to safegu ard the long-term health of the energy markets.
III. The Commission’s Orde rs Violate Section 206 By Ordering Rate Changes Without First Demonstrating That Ex isting Rates Were Unjust And Unreasonable. Even assuming, for sake of argu ment, that the Commission has jurisdiction to regulate retail customers’ decisions about how much energy to consume at retail, the Commission has di sregarded section 206’s fundamental requirement that the ag ency 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 Orde r 745, the Commission acce pted 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 ch anges to these tariffs and imposing a one-size-fits-all obligation to comp ensate retail customer s, the Commission
claimed to have satisfie d 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 12662 unreasonable.” Order 745, at P 47 (JA __); see also Order 745-A, at P 73 (JA ___). But it provided no support fo r that conclusory a ssertion. Nor did it explain why each of t he existing ISO and RTO ta riffs had become unjust
and unreasonable. Seeking to overcome this deficien cy, the Commission’ s orders state that it had already found other approa ches 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 re sources.” Order 745-A, at P 74 (JA __).
The Commission’s orders also in clude no explanation why the “variety of ... proposals” it had “previou sly accepted” are no longer just and reasonable. Although the Commission devotes five paragraphs of its rehearing order to discussing the ar gument, the Commission’s substantive explanation is terse: USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 93 of 12663 [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 concluso ry 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 t he just and reasonableness of each ISO’s or RTO’s approach as applied in each of their re spective markets. For example, before Order 745, the amount of “demand response” capacity participating in PJM’s markets increased seven-fold fr om 2006 to 2010, while the amount of “demand response” resour ces increased by 17 perc ent in New England in
2009 alone. See R.240 at 36 & n.124 (Competi tive Power Supplier Ass’ns) (JA __). Similarly, PJ M’s capacity payments to “demand response” resources increased by more than 100 percent from 2008 to 2009, while “demand response” compensation in Ne w England increased by more than 25 percent in 2009 alone. Id. Without addressing this record evidence, the USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 94 of 12664 Commission ordered modifications to ex isting ISO and RTO tariffs “without ever determining that the existing region-by-region approach to compensation is unjust and unreasonab le.” Order 745, at 31,268 (Comm’r Moeller, dissenting) (JA __). To make matters worse, the Commi ssion also failed to explain how much “demand response” is supposed to be enough. Order 745-A, at P 60 (JA __). The Commission offers no re asoned 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 demonstratin g that there is in fact an industry problem is not reasoned decisionmaking”); cf. Small Refiner Le ad 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 compensati on for not purchasing el ectric 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 12665 Commission merely asserted that there ar e “barriers that clearly exist to full participation of demand in the wholes ale market.” Order 745-A, at P 60 (JA __). The only “barriers” the Commission identified, however, were “the lack
of a direct connection between wholesal e and retail prices, lack of dynamic retail prices ..., lack of real-time informat ion sharing, and the relative lack of sufficient retail metering technology.” Id. at P 59 (JA __). This recitation serves only to confirm that the “pro blem” the Commission seeks to remedy lies on the state side of the jurisdicti onal line drawn by Congress; it does nothing to establish that the Commi ssion’s “remedy” is appropriate. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 96 of 12666 CONCLUSION The Court should grant the petition s 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 126CERTIFICATE OF COMPLIANCE Pursuant to Rule 32(a) of the Fe deral Rules of Appellate Procedure and Circuit Rule 32(a)(2), I hereby certify that the textual portion of the foregoing brief (exclusive of the disclo sure statement, tabl es 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 126ADDENDUM

USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 99 of 126App-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. § 825 l ....................................................................................... App-15 Energy Policy Act of 2005, Pub. L. No. 109-58 Section 1 252............................................................................................. 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 126Section 201 of the Federal Power Act, 16 U.S.C. § 824 Declaration of policy; a pplication of subchapter (a) Federal regulation of transmission and sale of electric energy It is declared that the busi ness of transmitting and selling electric energy for ultimate distribu tion to the public is affected with a public interest, and that Federal regulation of matters relating to generation to the ext ent provided in this subchapter and subchapter III of this chap ter 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 su bchapter shall apply to the transmission of electric energy in interstate commerce and to the sale of electric energy at wh olesale 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 electr ic 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, USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 101 of 126App-2 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 subj ect 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 us ed in this subchapter and subchapter III of this chapter means any person who owns or operates facilities subject to t he jurisdiction of the Commission under this subchapter (other th an 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). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 102 of 126App-3 (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 offi cial 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 b ooks, accounts, memoranda, contracts, and records of— (A) an electric utility compan y 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 comp any, or holding company thereof, which is an associat e company or affiliate of an exempt wholesale generator which sells electric energy to an electric utility company re ferred 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 103 of 126App-4 (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.]. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 104 of 126App-5 Section 205 of the Federal Power Act, 16 U.S.C. § 824d Rates and charges; schedules; susp ension of new rates; automatic adjustment clauses (a) Just and reasonable rates All rates and charges made, de manded, 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 re asonable 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 differenc e 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 regula tions 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 105 of 126App-6 (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, regulati on, 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, cl assification, 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, ei ther 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 106 of 126App-7 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 107 of 126App-8 Section 206 of the Federal Power Act, 16 U.S.C. § 824e Power of Commission to fix rates a nd 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 transmi ssion 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, regulati on, 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 ther ein. 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 pr oof; 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 instit uted on complaint, the refund effective date shall not be earlie r 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 108 of 126App-9 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 mont hs 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 co ntract 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 reasonab le 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 wi thin 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. T he refunds shall be made, with interest, to those persons who ha ve paid those rates or charges which are the subject of the proceeding. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 109 of 126App-10 (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 ex perience 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 Ho lding 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 co nduct 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 110 of 126App-11 (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 to tal (including affiliates of the entity) less than 8,000,000 mega watt 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 Po wer Administration only if the sale is at an unjust and unreasonable rate. (B) The Commission may order a refund under subparagraph (A) only for sh ort-term sales made by the USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 111 of 126App-12 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 Fede ral 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 112 of 126App-13 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, cla ssifications, 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, reco rds, and facilities as may be afforded by any State commission. * * * USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 113 of 126App-14 Section 216 of the Federal Power Act, 16 U.S.C. § 824p(b)(1)(C) Siting of interstate electr ic 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. * * * USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 114 of 126App-15 Section 313 of the Federal Power Act, 16 U.S.C. § 825 l 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 ch apter to which such person, electric utility, State, municipa lity, 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 su ch 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 app lication 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 Un ited 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 115 of 126App-16 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 or der 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 grou nd 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 reas on 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 t he 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. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 116 of 126App-17 (c) Stay of Commission's order The filing of an application for rehearing under subsection (a) of this section shall not, unle ss 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 specif ically ordered by the court, operate as a stay of the Commission's order. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 117 of 126App-18 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 provideindividual 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 USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 118 of 126App-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 subj ect 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 Utilit y 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 el ectric consumers, suchconsumers shall be entitled to receive the same timeUSCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 119 of 126App-20 based metering and communica tions device and service as a retail electric consumer of the electric utility. “(F) Notwithstanding subsections (b) and (c) of section 112, each State regulatory auth ority shall, not later than 18 months after the date of enactment of this paragraph conduct an investigation in a ccordance 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.—Sectio n 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 section111(d)(3)” the following: “and the standard for timebased metering and communications established by section 111(d)(14)”. (2) By inserting in subsecti on (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 METERI NG 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 a ppropriate 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.”. USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 120 of 126App-21 * * * (e) DEMAND RESPONSE AND REGIONAL COORDINATION.— (1) IN GENERAL.—It is the polic y of the United States to encourage States to coordinate , on a regional basis, State energy policies to provide relia ble 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 pe ak 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— USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 121 of 126App-22 (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 fo r 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). USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 122 of 126App-23 “(B) Not later than 2 years af ter the date of the enactment of this paragraph, each State regulatory authority (with respect to each electric utilit y for which it has ratemaking authority), and each nonregul ated 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.—Sectio n 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 refe rence 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.—S ubsections (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 elec tric utility has conducted a proceeding to consider implementation of the USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 123 of 126App-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.—Sec tion 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 126App-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-discr iminatory open access transmission tariff.

. * * * (4) Demand response means a reduction in the consumption of electric energy by customers from their expected consumption in respon se to an increase in the price of electric energy or to incentive payments designed to induce lower consumpt ion of electric energy. * * * USCA Case #11-1486 Document #1377461 Filed: 06/06/2012 Page 125 of 126CERTIFICATE OF SERVICE Pursuant to Rule 25 of the Federal Rules of Appellate Procedure, I hereby certify that I have this 6th da y of June 2012, served a copy of the foregoing documents electronically th rough the Court’s CM/ECF system. All participants in the case are regist ered 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