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An obscure legal case could impact several electric utilities in states where wholesale power pricing is controlled by Regional Transmission Organizations, such as PJM Interconnect. Demand Response technology is at the heart of the issue. Is the Federal Government overreaching into the territory of state’s rights? The US Supreme Court SCOTUS could be intruding into your electric utility investment strategy. In an obscure case entitled Federal Energy Regulatory Commission v. Electric Power Supply Association (FERC v EPSA), SCOTUS will settle a long standing dispute between the FERC and power producers. At the heart of the conflict is the implementation and impact of Residential Demand Response (DR) technology. Pricing for electricity and hence the profitability of several electric utilities hang in the balance. Demand Response is the ability of specific electric appliances to turn off during times of high cost power, also known as “smart” appliances. Stated more clearly: Conservation implies whether to consume energy; Efficiency deals with how to consume energy; Demand Response concerns when to consume energy. Oilprice.com offers an interesting recap of the issue: Demand-responders argue that a megawatt saved is financially equal to a megawatt produced by a power generator. The power generators who comprise EPSA recognize that DR will hurt them, reducing both power prices and their profitability, to the benefit of consumers. Adding DR to a power market is the competitive equivalent of adding more generators. Either way, added competition lowers prices. The issue before the court is whether the FERC can compel regional power producers to pay consumers who reduce their use of power at peak times and if so, at what price. An interesting analogy could be the government program to pay farmers for not planting crops. In this case, power companies would pay consumers not to use electricity from the grid during times of peak demand. Daily peak demand varies based on location. For example, in Arizona where air conditioning is a large portion of demand, Arizona Public Service bills customers the following schedule: The plans billed on an off-peak and on-peak basis, with a super peak period in the summer billing months of June – August. Off-peak hours are weekdays from 7 pm to noon and all day Saturday and Sunday, as well as 6 major holidays; on-peak hours noon – 7 pm weekdays are billed at a higher rate; super-peak hours (3-6 pm weekdays during June – August) are billed at the most expensive cost per kWh. Save money when you use more energy on weekends and weekday mornings before noon or evenings after 7 pm. From their rate card , APS off-peak hours are billed at $0.05517 per kWh while on-peak rates vary from $0.19847 in April and $0.24477 in May, with super-peak costing $0.46517 in June. FERC Order 745 implements a program where power producers pay retail customers the going purchase rate for power not consumed, if the demand response is economical and helps balance the energy load on the Grid. The power producers contend this overcompensates as the variable cost to generate electricity is less than the retail price. In addition, the power producers claim the Order is an over-reach by the FERC as retail power rates are set by individual state utility commission boards, some of which are elected by the general population. In May 2014, the DC Federal District Court of Appeals ruled in favor of the power producers, resulting in FERC’s appeal to the SCOTUS. The Circuit threw out FERC Order 745’s compensation calculation and found that FERC has no jurisdiction over Demand Response, placing jurisdiction back on the states. The amount of money Demand Response could represent are not insignificant. The table below is an estimate from GTM Research for the forecast of the U.S. demand response market – with and without FERC Order 745. Source In a review of Con Ed (NYSE: ED ), I discussed the implementation of the “Clean Virtual Power Plant” where ED is developing a network of solar panels and electricity storage to supply the Grid with power when the solar panels are ineffective. If this becomes a viable business model in connection with higher Demand Response expansion and the FERC Order 745 of paying the highest prices for DR, wholesale power prices controlled by Regional Transmission Organizations, such as PJM in the Mid-Atlantic and eastern Midwest, could alter profitability for power producers. Which electric utilities could affected? GTM Research offers the following map of the highest kW replacement from DR, by Regional Transmission Organization: (click to enlarge) As shown, 68% of the Demand Response reduction in MW demand comes from areas under the jurisdiction of PJM and MISO, and includes a large swath of 31 states. Utilities with power generation in these states affected include Exelon (NYSE: EXC ), FirstEnergy (NYSE: FE ), American Electric Power (NYSE: AEP ), Dominion Resources (NYSE: D ), and Duke Energy (NYSE: DUK ). More information can be found in an interesting article published by utilitydive.com. Investors should keep an eye out for the ruling by SCOTUS concerning FERC Order 745. The impact could affect the profitability of many utilities selling wholesale power in various RTO jurisdictions. Author’s Note: Please review disclosure in Author’s profile. Scalper1 News
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