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FERC emboldened by Supreme Court victory

A landmark Supreme Court opinion issued today underscored the government's power to regulate an evolving electric grid.

In a 6-2 opinion issued this morning, the high court sided with the Federal Energy Regulatory Commission by reviving the agency's contentious "demand-response" rule aimed at encouraging energy conservation.

A majority of the justices found that FERC did indeed have the authority to issue a regulation requiring that power users be paid for committing to scale back electricity use at times of peak demand.

The Supreme Court reversed a lower court decision that tossed out the rule. The U.S. Court of Appeals for the District of Columbia Circuit ruled that FERC overstepped its authority by wading into states' regulatory turf and had set an illegal payment scheme.

Led by Justice Elena Kagan, the high court found that FERC hadn't exceeded its power and that the Federal Power Act "provides FERC with the authority to regulate wholesale market operators' compensation of demand response bids." The court also found that FERC's compensation system "is not arbitrary and capricious," contrary to the lower court's ruling.

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Kagan was joined in the majority opinion by Chief Justice John Roberts and Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor.

The decision "really recognized the agency's expertise," said Vanderbilt University law professor Jim Rossi, who co-authored an amicus brief calling on the court to back FERC's authority.

He added, "It comes as we're seeing increasing innovation, volatility in interstate energy markets." The decision makes it clear that when it comes to "the problems presented by dynamic modern energy markets," FERC's "tools are fairly expansive and flexible."

Justices Antonin Scalia and Clarence Thomas took a drastically different view of FERC's authority in their dissenting opinion.

"I believe the Federal Power Act ... prohibits the Federal Energy Regulatory Commission (FERC) from regulating the demand response of retail purchasers of power," Scalia wrote.

"While the majority would find every sale of electric energy to be within FERC's authority to regulate unless the transaction is demonstrably a retail sale, the statute actually excludes from FERC's jurisdiction all sales of electric energy except those that are demonstrably sales at wholesale," he added.

Opponents of the demand-response rule criticized today's ruling. "The Supreme Court sends a clear message by ruling in favor of FERC's power demand rule: Energy politics are a game that ignores both the rule of law and states' constitutional authority," said Myron Ebell of the conservative Competitive Enterprise Institute. "The effect of this decision trickles down to each individual consumer."

Scott Segal, an attorney at Bracewell who represents utilities, saw the opinion as taking a "pretty limited view" of FERC's authority. "The Court has said that there is still a substantial statutory separation between FERC's wholesale authority and state retail rate-making," Segal said. "It recognized demand response as an exception noting that FERC was responding to a market-developed concept that had been approved by Congress and had a consumer protection and reliability rationale."

Only eight justices heard the case; Justice Samuel Alito had recused himself, likely due to his financial interests.

Today's decision to resuscitate the FERC rule came as a surprise to some experts tracking the case. Following oral arguments last year, many lawyers predicted that the court would divide 4-4 on the issue, which would have upheld the lower court's decision.

"I was pleasantly surprised it was 6-2, but I was not surprised that we in fact won the case," former FERC Chairman Jon Wellinghoff, a chief architect of the rule, said in an interview today.

"I think this is one of the greatest decisions for consumers and for the advancement of the utility grid in this decade," Wellinghoff added. He said the lower court's ruling had been "holding back companies" and that the Supreme Court ruling will "open up the markets in a very wide way."

The Obama administration warned that the ramifications of throwing out the rule would be high. Solicitor General Donald Verrilli, who represented the agency in the court arguments, told the justices that the demand-response rule could bring about billions of dollars in consumer benefits by lowering electricity rates and would help protect the grid against blackouts and brownouts.

Click here to read the opinion.

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