ENERGY MARKETS

Supreme Court’s challenge: Fit new grid into old law

What happens when you try to fit an evolving electric grid into an 80-year-old statute?

Lawsuits wind their way to the Supreme Court.

In a move that surprised energy experts, the high court has decided to hear at least two cases this year that deal with how to regulate evolving electricity markets. It's an unusual amount of attention being paid by the high court to complex energy policies, and many attribute the heightened scrutiny to the rapidly changing nature of the grid and electricity markets.

"It's a great celebration of the 80th anniversary of the statute," said Jim Rossi, a law professor at Vanderbilt University who specializes in energy law. "In many ways, I think what's at issue here is whether an old New Deal statute can work effectively in managing a dynamic new interstate market that just didn't exist when the statute was passed."

The statute in play: the Federal Power Act, which in 1935 gave the Federal Energy Regulatory Commission the power to regulate interstate electricity transmission and wholesale energy rates.

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The intricacies of that law are now being tested in two major Supreme Court cases. In the first, argued last week before the court, justices are weighing whether a government "demand response" program to encourage consumers to slash electricity use surpasses FERC's authority. In the second -- just teed up this week for consideration later this term -- the justices will consider a related question about whether state programs to provide incentives for new power generation cross into FERC's territory.

The complex cases are being closely watched by a wide range of parties including federal regulators, states, power companies and environmentalists. And the court's decisions in both cases could have a major impact on the future of programs like demand response and state and federal efforts to set new energy policies.

"Everybody in the energy industry who I know is pretty familiar with these cases," Rossi said.

The court's decision could bring clarity to those looking for boundaries that weren't laid out explicitly in the Federal Power Act.

"There's a real need from the perspective of regulators at both the state and federal level to try to work out what the boundaries are," Rossi said, particularly as federal regulators are trying to push the electric power industry toward greater efficiency and some states are pursuing their own aggressive renewable energy policies. "There is some real concern in the industry; investors want certainty."

Ari Peskoe, an energy fellow at Harvard Law School's Environmental Policy Initiative, said it's surprising the court decided to take back-to-back FERC cases.

"Hopefully, these two decisions combined will give a lot of clarity in an area that I think really needs it," he said. "This section of the Federal Power Act was written 80 years ago, and it hasn't changed, but the industry has."

There's some concern among those watching the case that the court could split 4-4 in the demand response case due to a recusal by Justice Samuel Alito, simply upholding the lower court's decision and offering little guidance on the boundaries.

"The investment outlook is very important, whether you're a utility or independent generator or demand response provider or renewable energy provider because of the long life of the assets that you're being called upon to invest in," said Christi Tezak, an analyst at ClearView Energy Partners. "The industries' investors are very curious; they are watching this closely."

Impact on Clean Power Plan

The court's decisions could also affect compliance with the Obama administration's landmark Clean Power Plan -- a rule to curb greenhouse gases from the power sector.

"To the extent that the Clean Power Plan envisions states adopting policies that will promote lower-carbon sources of energy -- whether those sources of energy are renewable power, nuclear power or natural gas -- as part of those programs, states are very invested in putting in place incentives, subsidies, other programs to encourage new investment in these sources of energy," Rossi said.

"It's precisely those types of incentives and the form that those incentives take" that's being challenged in the case about states encouraging new power generation, he added. "So what's at core here is really what energy federalism will tolerate states doing to promote certain sources of energy against the backdrop of interstate markets, which FERC regulates."

Joseph Hall, a partner at Dorsey & Whitney and co-chairman of the firm's energy industry group, said the Obama administration rule "contemplates that states will require utilities to substitute the use of higher-emission CO2 fossil-fuel-fired generators with lower or zero-emitting generators, presumably through a combination of shifting from coal-fired units to increased reliance on natural gas generation and renewables.

"The idea that states cannot interfere with FERC's jurisdiction over wholesale markets is not new, but depending on its scope, an order by the Supreme Court finding that states cannot set rules that interfere with the way that generation resources are dispatched in wholesale markets may have a direct impact on a cornerstone of the carbon plan," Hall added.

Tezak, however, said she isn't expecting the court's rulings to have a big impact on compliance with the Clean Power Plan, which prods states to develop plans to slash power plant emissions to comply with federal reduction limits.

In the demand response case, she said, "I think it's relevant, but a bit oblique," because EPA has acknowledged the role of demand response as a way to help avoid emissions.

In the second case involving incentives for state generation, she added, "I would suggest that the question before the court is not whether or not a state can define the environmental parameters of generation. That was never in dispute." That case centers on a natural gas plant and is about the ability to provide power when called upon, she said, whereas renewable energy is often variable and intermittent.

"Their ability to participate for the context of this state case is apples and steak," Tezak said. "It's not even really an orange."

Twitter: @rbravender Email: rbravender@eenews.net

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