A Supreme Court decision on Monday, Jan. 25, has clarified one of the murkier recent developments in the world of electricity demand-response programs.

In a 6-2 decision authored by Justice Elena Kagan, the court ruled that FERC’s Order 745 was a correct application of FERC’s powers under the Federal Power Act (FPA) and does not infringe on states’ rights to set retail rates. The decision reversed a 2014 appeals court ruling that struck down FERC’s demand-response rule on the basis that it exceeded FERC’s jurisdiction to only set wholesale rates and regulate wholesale power markets.

The decision is considered a victory for the Obama Administration and several environmental groups, but other sectors of the power industry are clearly concerned about its impact. The Electric Power Supply Association and four other energy industry groups had filed actions challenging FERC’s authority to regulate demand-response programs, arguing that Order 745 went far beyond its authority under the FPA to only regulate wholesale power markets. Under the law, FERC has jurisdiction over wholesale electricity markets beyond state lines, while states have legal authority over retail markets and rates within state borders.

The rule requires operators of the wholesale electricity market to pay customers who commit to reduce electricity demand at a rate generally used to compensate power plant operators during peak demand periods.

Though plaintiffs and intervenors including the American Public Power Association primarily argued that FERC had illegally overstepped its authority, they also have expressed concerns that setting demand-response rates equivalent to peak-demand generation pricing would set prices artificially high through an unfair compensation method.

Kagan and a majority of her colleagues were convinced that FERC made no attempt to directly influence retail market conditions or prices and was making a good faith effort to improve how power markets run simply by setting rules for how demand-response transactions should occur. Kagan pointed out in the opinion that Congress has also encouraged demand-response in an energy policy law (PL 109-580).

“The commission, not this or any other court, regulates electricity rates. The disputed question here involves both technical understanding and policy judgment,” Kagan wrote. “The commission addressed that issue seriously and carefully, providing reasons in support of its position and responding to the principal alternative advanced.”

Kagan also wrote: “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. 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.”

The high court has agreed to take on a separate but related issue later this year about the scope of FERC's authority in energy markets. The justices will hear arguments in two linked cases involving a Maryland program providing incentives for new power generation. A lower court threw out the state program after judges found the incentives infringed on FERC’s jurisdiction.

Photo Credit: jordanuhl7 via Compfight cc

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With extensive experience in industry policy and advanced technologies applied throughout North America, Mike Beehler is a Vice President at Burns & McDonnell.