Energy Efficiency
Electricity Markets

Supreme Court affirms FERC's demand response compensation rules

The U.S. Supreme Court on Jan. 25 affirmed the Federal Energy Regulatory Commission's rules for demand response compensation in wholesale energy markets run by regional transmission organizations and independent system operators.

The high court in a 6-2 decision reversed and remanded the U.S. Court of Appeals for the District of Columbia Circuit judgment that set aside FERC's Order No. 745.

In Order 745, issued by FERC in 2011, the commission set forth rules on compensating demand-response resources in the energy markets run by regional transmission organizations and independent system operators. FERC said that demand-response resources participating in an energy market run by an RTO or ISO must be compensated at the full locational marginal price, or LMP, as long as the demand-response resource passed a net benefits test.

The American Public Power Association and a number of other electricity groups told the Supreme Court on Aug. 31 that FERC lacks jurisdiction under the Federal Power Act to regulate the compensation to retail customers or aggregators for curtailing electric consumption. Congress reserved that authority to state and local regulators who are responsible for retail matters, APPA and the others said in a joint brief filed with the high court. Oral argument on the case was held at the Supreme Court in October.

The Supreme Court's jurisdictional analysis consists of three parts. First, the court found that demand response compensation in RTO and ISO markets directly affects wholesale electric energy rates within FERC's jurisdiction. The FPA gives FERC jurisdiction over wholesale rates, but also any practice affecting such rates, and demand response was clearly such a practice.

Second, the court determined that FERC was not regulating retail sales in violation of the limits on its jurisdiction set by the FPA.

Third, the court found that the contrary view — that FERC could not regulate wholesale demand response compensation — would create a regulatory gap, because the states cannot regulate such compensation in wholesale markets.

In addition, the court found that FERC reasonably explained the compensation rule it adopted and under the deferential standard of review applied to such technical judgments, the FERC order could not be set aside as arbitrary and capricious.

The court's opinion was written by Justice Elena Kagan. Chief Justice John Roberts and Justices Kennedy, Ginsburg, Breyer, and Sotomayor joined the majority opinion. Justice Samuel Alito did not participate in the case.

Justice Antonin Scalia, joined by Justice Clarence Thomas, dissented.

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

"So what, exactly, is a ‘sale of electric energy at whole¬sale'? We need not guess, for the Act provides a defini¬tion: ‘a sale of electric energy to any person for resale,'" the dissent stated.

The majority "is wrong even on its own terms," for the rule at issue does in fact regulate retail electricity sales, which are indisputably matters subject to regulation by the states "and therefore off-limits to FERC," Scalia said.

"While APPA disagrees with the majority opinion's reasoning, the Supreme Court has now spoken, and we will move forward on demand response-related issues in that light," said APPA President and CEO Sue Kelly.

Second important energy case teed up for action

Another significant energy case now before the Supreme Court involves the Maryland Public Service Commission's attempt to encourage the construction of new natural-gas-fired generation and whether that effort was preempted by the FPA and FERC's orders governing the PJM Interconnection's capacity market.

APPA and the National Rural Electric Cooperative Association previously filed a joint brief supporting Maryland's position.

The case will be argued before the Supreme Court on Feb. 24.