HIGHLIGHTS:

  • In a 6-2 decision on Jan. 25, 2016, the Supreme Court held that the Federal Energy Regulatory Commission (FERC) has the authority under the Federal Power Act (FPA) to authorize demand response resources to participate in organized wholesale energy markets just like power plants, and that FERC properly decided that such demand response resources should be paid the same locational marginal price as energy from power plants.
  • FERC's authority to regulate demand response extends to such resources that "directly affect" the wholesale power market, but states retain authority over retail sales transactions.
  • Although this decision involves competitive energy markets, two pending cases challenging similar rules in competitive capacity markets are now at risk. Furthermore, this decision could impact other Federal Power Act challenges seeking to compensate demand or distributed generation "negawatts" at the same rate as "megawatts" supplied by power generators.

In FERC v. Electric Power Supply Association et al., the U.S. Supreme Court held in a 6-2 decision that the Federal Energy Regulatory Commission (FERC) has the authority, pursuant to the Federal Power Act (FPA), to regulate demand response programs directly affecting the wholesale power market.1 Under Section 205 of the FPA, FERC is tasked with ensuring that all rates and charges for or "in connection with" the transmission or sale for resale of electric energy in interstate commerce – and all rules and regulations "affecting or pertaining to" such rates or charges – are just and reasonable. FERC therefore has jurisdiction over demand response in organized wholesale energy markets because such resources directly affect wholesale rates.2

FERC Shows that Wholesale Demand Response Holds Down Prices and Enhances Reliability

The Supreme Court reinstated FERC Order No. 745 that mandates compensation for demand response projects in competitive wholesale markets and observed that FERC had "amply explained how wholesale demand response" helps to achieve the FPA's core objectives – to protect "against excessive prices" and ensure "effective transmission of electric power." The Court said it would not "read the FPA, against its clear terms" and overhaul demand response when it so clearly permits FERC "to fulfill its statutory duties of holding down prices and enhancing reliability in the wholesale energy market." The Court noted that no party to the case argued that FERC's compensation rules for demand response went against either purpose of the FPA, but instead parties argued that FERC had overstepped its jurisdiction and was impinging on states' rights to regulate retail power prices. Justice Elena Kagan, writing for the majority, wrote that "although (inevitably) influencing the retail market too, [Order No. 745] does not intrude on the States' power to regulate retail sales," adding that "in choosing a compensation formula, the Commission met its duty of reasoned judgment. FERC took full account of the alternative policies proposed, and adequately supported and explained its decision."

This case is the second of three cases before the Supreme Court within a year that challenges the balance of federal power versus states' rights in national energy policy and pricing. In Oneok, Inc. v. Learjet, Inc. et al, 135 S. Ct. 1591 (2015), the Court held that the Natural Gas Act did not preempt a state antitrust investigation of sales of natural gas but nonetheless observed that "Congress occupied the field of matters relating to wholesale sales and transportation of natural gas in interstate commerce." Both Electric Power Supply Assn. andHughes v. Talen Energy Marketing3 (oral argument scheduled for Feb. 24, 2016) deal with pricing under the FPA. The issue in Talen Energy is whether the FPA preempts states from offering guaranteed contract prices to build wholesale power plants in organized competitive wholesale power markets. Both the Fourth Circuit and the Third Circuit decided that states' procurement contracts were preempted by the FPA and therefore invalid. The Talen Energycases are essentially the inverse of Electric Power Supply Assn. – examining states' power to regulate in a field reserved exclusively for FERC under the FPA compared to FERC's power to regulate in a domain reserved for the states. Whatever the outcome, this is the first time in decades that the Court has dealt with two FPA cases and a Natural Gas Act case within a year.

The Court's View of an Agency's Authority to Influence Energy Policy and Implementation

While environmental groups have been quoted in the media as welcomingElectric Power Supply Assn. as a possible harbinger of future results in challenges to the U.S. Environmental Protection Agency's (EPA) Clean Power Plan, the Court grounded its decision squarely within the FPA's statutory dual purposes: to ensure the reasonableness of wholesale prices and to enhance the reliability of the power grid. The Court wrote that demand response arose "because wholesale market operators can sometimes – say, on a muggy August day – offer electricity both more cheaply and more reliably by paying users to dial down their consumption than by paying power plants to ramp up their production."

It remains unclear whether the Court will reach similar conclusions when challenges to President Obama's Clean Power Plan arrives at the Supreme Court.4 Although both the Electric Power Supply Assn. and challenges to the Clean Power Plan involve arguments that federal agencies usurped states' rights, and therefore involve federalism versus states' rights in addressing problems of national significance, each agency's authority and controlling statutes are different and the outcomes of future cases remain uncertain. Here, the Court gave a federal agency room to apply its statutory authority and mandate to develop an effective, cost-minimizing solution to complex national problems – enhancing electric reliability while reducing energy costs. A similar outcome could happen with the EPA's expansive reading of the Clean Air Act.

At a time in which electric utilities and state regulators are increasingly questioning the prudency of allowing on-site owners/operators to install net metered renewable energy facilities such as solar photovoltaics and wind turbines – in exchange for retail credits at retail rates at the expense of other customers – the decision suggests the Court would have trouble reversing FERC in future renewable cases that directly affect wholesale rates. As the Court observed, "The Commission, not this or any other court, regulates electricity rates. The disputed question here involves both technical understanding and policy judgment. ... It is not our job to render that judgment, on which reasonable minds may differ."