The Supreme Court today granted the Obama administration’s request to review a regulatory effort that would reshape energy markets by incentivizing reduced electricity use.
In a customary short order, the court agreed to review a federal appeals court decision last May that threw out the Federal Energy Regulatory Commission’s demand-response regulations.
FERC’s Order 745 requires grid operators to compensate customers and demand-response providers for unused electricity at approximately the same rate as it purchases electricity from power companies.
The order’s goal is to establish parity between selling electricity into the grid and committing to reduced electricity use. The order primarily affected third-party demand-response providers, which pool unused energy from condominiums, hospitals, universities and factories, among other sources.
FERC Commissioner Philip Moeller said in an email that he appreciates the court’s decision to hear the arguments on Order 745.
"I’ve supported demand response in wholesale markets as long as the compensation is fair," he said. "I’m concerned that we will need it during this extraordinary period when so many generating sources are being retired in such a short time frame."
FERC Chairman Norman Bay echoed those remarks.
"The integration of demand response is important to the nation’s competitive wholesale electricity markets and reliable electric service," he said.
Environmentalists cheered the 2011 order, but grid operators and power providers challenged it in court. They claimed FERC was exercising authority beyond what it was granted by the Federal Power Act. The U.S. Court of Appeals for the District of Columbia Circuit agreed last May, vacating the order in a 2-1 decision (Greenwire, May 23, 2014).
The case deals with the complicated nature of the country’s electrical grid and efforts to ease strain on it during times of high consumption, such as during afternoons on hot summer days when air conditioners are running.
Regional grid operators, such as PJM Interconnection, which serves most of the East Coast, historically responded to those periods by buying more wholesale electricity from providers. The cost of that can be expensive and drive up rates for customers.
The alternative for the operators is to reduce demand on the grid. To accomplish that, operators may pay electricity consumers for commitments to reduce consumption during peak periods, so-called demand response.
FERC’s regulation mandated that operators pay roughly the same rate for those demand-response commitments as they paid for electricity from power providers.
Michael Panfil, an Environmental Defense Fund attorney, said demand response can be critical to preventing rolling blackouts and can be as simple as shutting off power to elevator banks when an office building is closed so that electricity can be used elsewhere.
FERC’s regulations, he said, established demand response as a commodity just like wholesale electricity.
"Demand response is put in the same position as any other resource would as long as it provides the same benefit," he said. "And that’s really all this order did."
The challengers — power providers and groups like the Electric Power Supply Association — contend that FERC’s order effectively regulates the retail sale of electricity — that is, the interaction with ratepayers like homeowners. The Federal Power Act, however, grants FERC authority over wholesale electricity sales — when an operator purchases electricity from a power provider for resale — not retail, which is left to the states to regulate.
In Supreme Court documents, power providers contend that the order is entirely about activity at the retail level, meaning whether customers purchase and use electricity or vow not to.
"FERC’s claim that it has authority to regulate reduced retail demand because it has invited ‘demand response providers’ into the wholesale markets merely describes FERC’s power grab without justifying it," they wrote.
"FERC cannot expand its own jurisdiction at the expense of the States’ exclusive jurisdiction by asserting a need to regulate a ‘direct effect’ on wholesale rates that FERC has created by inviting retail customers into wholesale markets."
How D.C. Circuit ruled
In its ruling last May, the D.C. Circuit largely agreed with power providers’ reasoning. Under the premise that retail sales have an impact on wholesale rates, the court ruled, FERC was creatively seeking to vastly broaden.
Under that premise, Judge Janice Rogers Brown wrote, FERC’s authority would be "almost limitless."
"The commission’s rationale, however, has no limiting principle," Brown, a Republican appointee, wrote. "Without boundaries, [FERC’s interpretation] could ostensibly authorize FERC to regulate any number of areas, including the steel, fuel, and labor markets."
Senior Judge Harry Edwards dissented. He argued that the law is unclear and FERC deserves deference in its interpretation. Further, he said that demand response commitments clearly influence the cost of wholesale electricity, because the demand response enables operators to buy less electricity.
"Demand response is not unambiguously a matter of retail regulation. … and because the demand response resources subject to the rule directly affect wholesale electricity prices."
In its order today, the Supreme Court consolidated two cases involving the rule, one from the Obama administration and one from demand-response providers.
The justices granted an hour of arguments, likely to take place next fall, on the following two questions: "Whether [FERC] reasonably concluded that it has authority under the Federal Power Act … to regulate the rules used by operators of wholesale electricity markets to pay for reductions in electricity consumption and to recoup those payments through adjustments to wholesale rates. [And] [w]hether the Court of Appeals erred in holding that the rule issued by the Federal Energy Regulatory Commission is arbitrary and capricious."
The court will likely hear an hour of arguments in the case next fall and rule by the end of June 2016.
Clean energy advocates and environmental groups cheered the Supreme Court’s decision to review the case.
"Demand response is a vital service that allows grid operators to relieve stress on the U.S. electric power system at times of peak demand," said Malcolm Woolf, a vice president at Advanced Energy Economy. "Under FERC’s rules, demand response has matured into a major industry that helps keep the lights on during critical events such as the polar vortex and saves consumers billions of dollars annually."
Allison Clements of the Natural Resources Defense Council added that the D.C. Circuit opinion should be reversed.
"The lower court decision," she said in a statement, "unnecessarily upended a workable division of state-federal authority over demand response and other customer-powered resources that are critical to a reliable, affordable and clean electric grid."
Reporter Hannah Northey contributed.
