U.S. Supreme Court weighs in on line between FERC and States when it comes to demand response programs.

Yesterday the U.S. Supreme Court in a majority decision reversed the D.C. Circuit Court of Appeals’ decision and determined that a regional transmission organization’s (RTO) demand response program compensation comes under FERC’s jurisdiction. A demand response program is when, during high electricity demand, customers of electricity are paid not to use electricity. These demand response programs serve to lower electricity prices and increase the reliability of the electric grid. Center to the present issue is FERC’s issuance of Order No. 745 (Order 745). Order 745 requires market operators to pay the same price to demand response providers for conserving energy as to the generators for making energy. The D.C. Circuit Court held that FERC lacked authority to issue the order because Order 745 would directly regulate retail electricity rates. The D.C. Circuit Court also held that FERC’s demand response compensation scheme was arbitrary and capricious under the Administrative Procedure Act. The U.S. Supreme Court disagreed.

The U.S. Supreme Court opinion, written by Justice Kagan, cited the FPA which authorizes FERC to regulate the “sale of electric energy at wholesale in interstate commerce including both wholesale electricity rates and any rule or practice ‘affecting’ such rates.” F.E.R.C. v. Elec. Power Supply Ass'n, No. 14-840, 2016 WL 280888 (U.S. Jan. 25, 2016), citing §§ 824(b), 824e (a). The Court also stated that the FPA leaves any retail sale of electricity to the States alone. The Court noted that this division creates a “steady flow” of jurisdictional disputes. Id.

On its way to clarifying the authoritative division between FERC and States, the Court adopted an earlier D.C. Circuit decision which found that FERC’s jurisdiction lies with rules and practices that “directly affect the wholesale rate.” Id. The Court stressed the “directly” in this determination by explaining that a “non-hyperliteral reading is needed to prevent the statute from assuming near-infinite breadth.” Id. The Court further reasoned that FERC’s Order 745 does in fact directly affect wholesale rates because demand response bids in competitive auctions balance wholesale supply and demand and thereby set the prices. Id. Because demand response programs are all about reducing wholesale rates and so too the rules and practices that determine how these programs operate, they fit, “with room to spare,” the definition of directly affecting wholesale rates. Id. This is true because RTOs only accept demand response bids if and only if the bids displace higher-priced generation.

The Court not only decided that demand response programs as well as the compensation that drives them is within FERC’s jurisdiction, but also that such jurisdiction does not intrude on the States authority to regulate retail rates. Here, the Court determined that, although demand response programs have “consequences at the retail level”, when FERC regulates the wholesale market then no matter the effect on retail rates the FPA imposes no bar. Id.

Justices Scalia and Thomas dissented, saying that they would agree with the majority if not for the FPA’s definition of “wholesale” which under their determination bars FERC’s Order 745. The FPA’s definition of “wholesale” is “a sale of electric energy to any person for resale.” Id. citing § 824(b). Because the majority of demand-response participants are end users, the dissent states that the demand response program does not fit the wholesale definition and hence is outside FERC jurisdiction.

Both the majority and dissent rely on “wholesale” as the pivotal word in determining jurisdiction. The majority finds that those practices that directly impact wholesale prices come under FERC’s jurisdiction, the dissent only practices that impact wholesale customers – those reselling energy. Yesterday’s decision secures FERC’s authority to regulate not only wholesale rates, but the programs and incentives that affect them.