Supreme Court Rules in Favor of FERC

On January 25, 2016 the Supreme Court decided the case FERC v. Electric Power Supply Association. The Federal Energy Regulatory Commission (FERC) has authority under the Federal Power Act (FPA) to regulate the wholesale interstate transmission and sale of electricity. FERC enacted an order which attempted to incentivize a reduction in energy consumption by retail consumers. A coalition of wholesale market participants who had unsuccessfully attempted to scuttle the rule during the notice and comment period sued arguing that FERC did not have authority to promulgate it. The coalition further argued that the rule was arbitrary and capricious because FERC did not adequately respond to the arguments put forth in the comments in opposition to the order.

Wholesale energy markets are run regionally by non-profit entities that run a market to instantly match sellers and purchasers of electricity in order to protect the reliability of the energy grid. These entities also run a separate market with groups of energy consumers, or large single consumers, who are willing to reduce their energy consumption in return for a payment by wholesale energy purchasers. During periods of high demand for electricity wholesale electricity price rates can rise drastically. When those rates raise high enough where it is cheaper for wholesale energy purchasers to pay consumers (the court refers to them as “demand response providers”) to reduce consumption rather than buy additional energy from producers they do so. As described by the Supreme Court the order in question in this case “requires market operators to pay the same price to demand response providers for conserving energy as to generators for producing it, as long as a ‘net benefits test,’ which ensures that accepted bids actually save consumers money, is met.” A coalition of wholesale market participants brought suit arguing that FERC’s order improperly invades the states’ exclusive jurisdiction to regulate the retail electricity market.

The case initially went before the D.C. Court of Appeals. The court held that FERC did not have the statutory authority to directly regulate the retail market and that the order was arbitrary and capricious because FERC did not adequately respond to or take into consideration comments opposing the order. FERC appealed to the Supreme Court.

The questions before the Court were: (1) does FERC have authority under the FPA to regulate the rules used by wholesale electricity market operators to pay for reductions in electricity consumption and to recoup those payments through changes to wholesale rates, and (2) did the D.C. Circuit err in holding that the order was arbitrary and capricious?        

In a 6-2 decision, written by Justice Kagan, the Court ruled FERC had authority to regulate wholesale market operators’ compensation for incentivizing energy reduction by retail consumers and that FERC’s order was not arbitrary and capricious. Reversing the court of appeals, the Court stated the order does not regulate the retail market, but instead protects against excessive wholesale prices and ensures the effective transmission of power. Supporting the holding, Justice Kagan wrote that FERC has amply explained how wholesale demand response helps to achieve those ends, by bringing down costs and preventing service interruptions in peak periods. The Court said that the FPA’s statutory limitation on FERC was clear and therefore FERC’s interpretation of the statute receives no deference (under the Chevron standard). Further the order was not arbitrary and capricious because FERC adequately responded to the relevant comments, examined reasonable alternatives to the order, and offered explanations for why those alternatives were not chosen.

Justices Scalia and Thomas dissented. In an opinion authored by Justice Scalia, the dissenters argued that FERC’s order overstepped its bounds under the FPA by regulating retail consumers. Justice Scalia argues that the Court framed the question wrong and that the proper question to ask is whether FERC is regulating “any other sale of electricity” other than wholesale electricity under this order. According to Scalia, FERC is regulating a wholesale order if the purchaser of the electricity is one who resells it to others and all other sales are not. Thus because the “demand-response bidders here indisputably do not resell energy to other customers” the order does not regulate wholesale sales and is beyond FERC’s authority under the FPA.

Therefore FERC will be able to continue to mandate that market operators pay the same price to demand response providers for conserving energy as to generators for producing it.