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Stock Strategist

Court Decision's Impact on Dynegy Overblown

We think the market has overreacted, providing a buying opportunity.

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This week, the U.S. Supreme Court issued a 6-2 decision effectively supporting the Federal Energy Regulatory Commission's Order No. 745, which said that when a demand response provider in an organized wholesale energy market has the capability to balance supply and demand as an alternative to a generation resource, and when that is cost-effective, the provider must be compensated for its service to the energy market at the locational marginal price. With this, the FERC aimed to ensure the competitiveness of organized wholesale energy markets and see that demand response providers were paid the same as power producers.

The decision on its face appears to be a win for demand response providers and a loss for power producers like  Dynegy (DYN). However, we think the actual impact on energy and capacity prices will be muted. Near-term capacity prices might go down, but energy prices should go up since demand response has much higher marginal costs than conventional generation. We expect the trade-off to be mostly neutral.

Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.