After a long investigation dating back to 2008, the Federal Energy Regulatory Commission (Commission) concluded in 2013 that Lincoln Paper and Tissue, LLC (Lincoln), a Maine paper mill, had engaged in fraud through its participation in the ISO New England Inc. (ISO-NE) demand response program. Under this program, ISO-NE—an independent operator of the New England bulk transmission system and administrator of Commission-jurisdictional wholesale power markets in New England—compensates customers for reducing electricity consumption during periods of high demand. To measure the extent to which a participating customer reduces consumption, the customers must establish a “baseline” level of consumption. The baseline is intended to reflect the amount of power the customer pulls from the grid during normal operating conditions. The Commission found in its 2013 order that Lincoln engaged in an “intentional fraudulent scheme” by artificially inflating its baseline, which allowed Lincoln to collect substantial demand response revenues without having to actually reduce load below normal operating levels. Lincoln allegedly inflated its baseline by strategically curtailing its use of on-site generation during the period when its customer baseline was being developed. Lincoln denies any wrongdoing.
In the 2013 order, the Commission directed Lincoln to pay a $5 million civil penalty and to disgorge $379,016.03, plus interest, of unjust profits to ISO-NE. After Lincoln did not make the required payments, the Commission petitioned the United States District Court for the District of Massachusetts in December 2013 to enforce the penalty. Lincoln filed a Motion to Dismiss on February 14, 2014, alleging, among other things, that the Commission’s petition to enforce the penalty is barred by the statute of limitations and that, in any event, the Commission lacks jurisdiction over demand response.1
The scope of the Commission’s jurisdiction over demand response has not been resolved definitively. In 2011, the Commission issued Order No. 745, which required organized wholesale market operators to compensate demand response comparably to generators—in other words, to treat the reduction of a unit of consumption comparably to the production of a unit of energy.2 Several parties have contested the authority of the Commission to regulate compensation levels for demand response in wholesale markets. The Commission rejected the jurisdictional challenge3 but the issue is still pending before the United States Court of Appeals for the District of Columbia Circuit.4 Parties opposing Order No. 745 have argued that demand response is an activity that occurs at the retail level because it reflects the choice of an end-user to not consume power, and, therefore, only the States—not the Commission—may regulate it. The Commission, however, has argued that demand response activities directly affect the price for wholesale power and therefore fall within the Commission’s exclusive jurisdiction over wholesale rates. The Commission also has noted that the Energy Policy Act of 2005 required the Commission to remove unnecessary barriers to demand response participation in the energy, capacity, and ancillary services markets, which are within the jurisdiction of the Commission.
Lincoln, like the petitioners in the rulemaking that resulted in Order No. 745, argues that the Commission lacks jurisdiction over demand response and therefore has no authority to levy civil penalties for the conduct in question. Even if demand response affects wholesale rates, Lincoln argues that the Commission may not regulate indirectly what it cannot regulate directly.
A ruling that the Commission lacks jurisdiction over demand response, either in this case or in the D.C. Circuit challenge to Order No. 745, could have major consequences for the wholesale markets for energy and capacity. The markets have seen a significant increase in demand response participation in recent years, which many consider the primary legacy of former Chairman Jon Wellinghoff. If the Commission lacks jurisdiction over demand response, the extent to which demand response can participate in the wholesale markets is unclear.
1 Lincoln further argues that the Commission’s petition should be dismissed because the Commission failed to provide fair notice of the conduct it now considers improper and because the Commission failed to plead its claim with sufficient particularity.
2 Demand Response Compensation in Org. Wholesale Energy Mkts., Order No. 745, 76 Fed. Reg. 16,658, FERC Stats. & Regs. ¶ 31,322 (2011).
3 See id. at PP 103-15
4 Oral arguments for this proceeding were held on September 23, 2013. See Elec. Power Supply Ass’n v. FERC, Nos. 11-1486, et al. (D.C. Cir. Dec. 23, 2011).