SCOTUS Upholds FERC Authority over Demand Response

The U.S. Supreme Court announced its landmark opinion on January 25 in the case, Federal Energy Regulatory Commission (FERC) v. Electric Power Supply Association – upholding FERC’s jurisdiction over demand response in U.S. wholesale electricity markets.

Justices Antonin Scalia and Clarence Thomas filed a dissenting opinion in the case and Justice Samuel Alito recused himself. Therefore, the decision was split, 6-2.

The case hinged on FERC’s Order 745 [Docket No.RM10-17-000], issued in March 20ll,under which the Commission amended its regulations under the Federal Power Act (FPA) to ensure that, “when a demand response resource participating in an organized wholesale energy market administered by a Regional Transmission Organization (RTO) or Independent System Operator (ISO) has the capability to balance supply and demand as an alternative to a generation resource and when dispatch of that demand response resource is cost-effective … that demand response resource must be compensated for the service it provides to the energy market at the market price for energy, referred to as the locational marginal price (LMP).”

Prior to being accepted for consideration by the Supremes, Order 745 had been vacated in 2014 by the  U.S. Court of Appeals for the District of Columbia Circuit which agreed with the Electric Power Supply Association, an industry group that FERC had exceeded its legal authority and was encroaching on the states’ exclusive legal right to regulate retail electricity markets.

Justice Elena Kagen, who delivered the majority opinion for SCOTUS, wrote that the Federal Power Actprovides FERC with the authority to regulate wholesale market operators’ [fair market] compensation of demand response bids. The Court’s analysis proceeds in three parts. First, the practices at issue directly affect wholesale rates. Second, FERC has not regulated retail sales. Taken together, these conclusions establish that the rule complies with the FPA’s plain terms. Third, the contrary view would conflict with the FPA’s core purposes.”

While Justice Kagen acknowledged that “§824(b) ‘limit[s] FERC’s sale jurisdiction to that at wholesale,’ reserving regulatory authority over retail sales (as well as intrastate wholesale sales) to the States,” she did not see a conflict with Order 745.

“It is a fact of economic life that the wholesale and retail markets in electricity, as in every other known product, are not hermetically sealed from each other,” she wrote. adding, “To the contrary, transactions that occur on the wholesale market have natural consequences at the retail level. And so too, of necessity, will FERC’s regulation of those wholesale matters.”

Indeed, the opinion notes, “When FERC regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail rates, §824(b) imposes no bar.”

As for any attempt to go beyond its authority and directly influence retail market conditions, Justice Kagen wrote,” Demand response … emerged not as a commission power grab, but instead as a market-generated innovation for more optimally balancing wholesale electricity supply and demand.”

Environmentalists cheered the decision. “Today’s Supreme Court decision is a victory for all Americans who want greater choice and value broader customer access to clean, low-cost energy,” said Environmental Defense Fund (EDF) president Fred Krupp.  “Demand response is helping millions of Americans get low-cost, clean and reliable electricity. Today’s court ruling will help expand customer choice, and solidify demand response as a crucial part of our clean energy future.”

Demand response is a critical tool for bringing energy markets into the 21st century by recognizing the value in avoiding carbon emissions and other pollution while maintaining a clean, affordable and reliable electric system,” commented Allison Clements, director of the Sustainable FERC Coalition at the Natural Resources Defense Council (NRDC). “Today’s ruling gives clean energy a huge boost and keeps America moving forward toward our critical goal of slashing climate-warming emissions while maintaining a clean, affordable, and reliable electric system.”

In addition, NRDC said, legal scholars and U.S. states had hoped for this decision. “Leading legal scholars noted how Order 745 helps to ensure just and reasonable rates, consonant with FERC’s central responsibility under the Federal Power Act, and states pointed to the benefit wholesale demand response provides to their clean energy initiatives.”

However, major base load generators nationwide – especially operators of coal-fired plants – see this as just another factor piling on to pinch their profits. In addition to competition from renewables and natural gas, they now have to face off with industrial customers and other small generators that will receive market rates to decrease their energy use without having to pay the price of operating a large-scale power plant themselves.

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