On Monday, in a 6-2 opinion, the U.S. Supreme Court reinstated a Federal Energy Regulatory Commission rule that has broad consequences for the electric power markets. The Court’s decision fosters energy efficiency through a practice known as “demand response,” which allows utilities to treat customer commitments not to use power during peak, high-price periods as if those promised levels of reduced purchases represent power supply.
“This decision means that consumers will continue to see the significant benefits of demand response, which enhances competition in the markets, reduces wholesale prices, and helps makes the grid more reliable,” FERC Chairman Norman C. Bay said in a statement on Monday.
Monday’s decision in FERC v. Electric Power Supply Association reverses and remands a May 2014 opinion of the U.S. Court of Appeals for the D.C. Circuit. That decision was put on hold pending final disposition by the Supreme Court.
“[Demand response] arose because wholesale market operators can sometimes–say, on a muggy August day–offer electricity both more cheaply and more reliably by paying users to dial down their consumption than by paying power plants to ramp up their production,” Justice Elena Kagan wrote in the Court’s majority decision.
The underlying FERC rule sets the price paid to demand response providers in wholesale power markets, such as PJM Interconnection, at the same level as the price paid to generators. PJM Interconnection operates the wholesale regional market for electricity in an area that includes D.C., Maryland and all or parts of 12 other states.
Understand that utilities must balance the electricity demands of their customers – called load – with available power generation in real time. For the most part, electricity cannot be stored (although batteries and other forms of storage are developing), and imbalances between power sent into the grid and electricity consumed can cause brown outs or worse. Demand response helps meet these real-time load needs.
Demand response exists at the retail and wholesale levels. PEPCO, the utility that sells electricity in D.C. and parts of Maryland, for example, offers several retail programs that offer credits and rebates to customers who reduce their electricity purchases during peak times. Unlike retail programs, wholesale demand response allows retail customers to participate in competitive wholesale power markets.
Back in a 2005 law, the U.S. Congress made encouraging demand response a national policy. The benefit of relying on demand response to meet the real-time load balancing needs of utilities is largely undisputed. But the Supreme Court decision ensures that demand response will continue to flourish at the wholesale level where power prices are largely established through competition in regional markets.
Monday’s decision determines an issue of federalism involving the complex federal-state regulation of electricity. Federal authority, exercised through FERC, extends to interstate transmission and wholesale power sales, as well as to practices that affect those jurisdictional transactions. State authority (which, for this discussion, includes Washington D.C.), exercised through state public utility commissions or their equivalent, covers retail electric service, as well as electric facility construction.
FERC’s rule required the Court to divine the jurisdictional dividing line under a 1935 law. The majority held that the FERC rule directly affects wholesale electricity prices and reliability; and affirming the D.C. Circuit’s divided opinion that had vacated the rule would create a regulatory gap because states have no authority over wholesale demand response.
“[T]he Rule does not intrude on the State’s power to regulate retail sales,” Justice Kagan held.
But the dissent written by Justice Antonin Scalia placed more emphasis on the rule’s affect on retail customer purchases, contending that the identity of the purchaser controlled. The dissent also discounted the notion that the federal law providing FERC authority over wholesale regulation of electricity had sought to close a gap between federal and state regulation.
“[The] extravagant and otherwise-unheard of method of establishing regulatory jurisdiction was not necessary to the judgments that invoked it, and should disappear in the Court’s memory hole,” Justice Scalia wrote, referring to the Court’s majority opinion.
But Monday’s decision could very well set the stage for another energy case before the Court, where similar principles of federalism are at play. That case involves Maryland orders that had sought to create incentives for electric generators to build plants in Maryland.
Monday’s Supreme Court decision provides support for a broad application of FERC authority over practices that directly affect wholesale power markets, making it difficult for the Court to overturn the decision of the U.S. Court of Appeals for the Fourth Circuit, which, affirming the lower court decision, determined that federal regulation of wholesale electricity preempted the Maryland program under the U.S. Constitution. The Maryland case is set for oral argument on February 24, 2016 (Law360/1/26/16).