Energy efficiency has become one of the building blocks of the larger effort to transform the way society consumes electricity. Within the realm of efficiency, demand-response programs have become one of most effective tools for utilities to cut back on consumers’ energy consumption.


Now that tool faces uncertainty as a legal challenge has put the future of those programs in doubt.


Last May, the U.S. Court of Appeals for the District of Columbia struck down the federal government’s authority to regulate pricing for demand-response programs. Specifically, the court ruled the Federal Energy Regulatory Commission (FERC) had overstepped its authority when it issued Order 745.


Issued in 2011, Order 745 requires utilities to reward participants in demand-response programs as if the utility were buying electricity from the customer at the wholesale price.


Typically, demand-response programs reward customers for cutting back during times of peak demand when the wholesale price for that electricity is at its highest. Many utilities object to this formula for pricing rewards in a demand-response program.


The benefits of efficiency are easy to see, especially for consumers, but utilities survive on the revenue from electricity sales. When customers cut back, utilities’ profits shrink. Paying customers who participate in demand-response programs at wholesale rates dips into their reserves even more.


Opponents of demand response also argue that the programs discourage utilities from building more plants, which jeopardizes the stability of the grid. In congressional testimony last April, Nicholas Akins, CEO of American Electric Power, said that “demand response continues to be paid similar capacity prices to steel-in-the-ground generation.”


With these arguments in mind, the Electric Power Supply Association, a coalition of power generators, filed suit against the FERC over Order 745. The American Public Power Association, the National Rural Electric Cooperative Association and the Edison Electric Institute joined the group in the suit.


At the heart of the legal debate is the question of whether demand-response programs should be treated as a retail or wholesale commodity. In its ruling against Order 745, the Appeals Court found that “demand response—simply put—is part of the retail market,” and, as such, was subject only to the oversight of state utilities, not the FERC.


Undaunted, proponents of demand response have fought back. In January, the White House, through the Office of the Solicitor General, asked the U.S. Supreme Court to review the case. Environmental groups, including the Natural Resources Defense Council, the Environmental Defense Fund, and the Sierra Club, as well as a number of consumer advocates, have also petitioned the Supreme Court to hear the case.


Opinions differ widely Order 745’s survival. Even if it doesn’t, some think that demand-response programs will carry on, although possibly in a different form, with encouragement or regulation from the states.


It could take several months for the court to decide if it will take up the case for review.