FERC Order 745 (2011) — Demand Response Compensation in Organized Wholesale Energy Markets

Order No. 745, issued in March 2011 in Docket RM10-17-000, required organized wholesale energy markets—RTOs and ISOs—to accept demand-response resources comparable to generation when they can meet established capability requirements, and to compensate them at the locational marginal price (LMP) for energy dispatched to reduce load. FERC found that barriers preventing demand response from participating fully in wholesale markets led to unjust and unreasonable rates by foreclosing a cost-effective resource that could balance supply and demand.

The order distinguished economic demand response—where customers voluntarily reduce consumption in response to price signals—from emergency demand response used for reliability events. For economic demand response bid into day-ahead and real-time energy markets, FERC required compensation at LMP when a bid passes a net benefits test showing that the demand response provides more value than the cost of administering the reduction. This put demand response on a more level playing field with generation in organized markets.

Order 745 applied to RTO/ISO markets with centralized energy price formation, not to bilateral wholesale transactions outside organized markets. The order sparked significant industry debate over whether LMP compensation overpaid demand response providers relative to their actual willingness to curtail. The D.C. Circuit vacated Order 745 in Electric Power Supply Association v. FERC (2014), but the Supreme Court reversed and reinstated the rule in 2016, affirming FERC's jurisdiction over demand response in wholesale markets.

Following reinstatement, RTOs and ISOs implemented Order 745 compliance in their tariffs, enabling greater demand response participation in energy markets. The order is a foundational market design rule supporting price formation, operational flexibility, and consumer access to wholesale market revenues for load curtailment when economically efficient.

FERC established a net benefits test to ensure demand response bids provide wholesale market value exceeding administrative costs before they are dispatched at LMP. The order required RTOs to remove barriers that had treated load reductions differently from supply offers in day-ahead and real-time energy markets. Litigation over the rule highlighted tensions between generators and demand response providers about appropriate compensation levels, but the Supreme Court's 2016 decision confirmed that economic demand response falls within FERC's wholesale market jurisdiction when it affects interstate rates and market efficiency.

After reinstatement, regional market operators revised energy market tariffs to incorporate Order 745 compensation rules, enabling aggregators to bid demand reductions alongside supply in economic dispatch. The order remains a landmark in FERC's effort to treat demand-side resources as full participants in wholesale price formation where they provide comparable reliability value.