Federal Energy Regulatory Commission v. Electric Power Supply Association: The Case and What it Means for You

March 4, 2016

On January 25, 2016, the United States Supreme Court issued an opinion allowing the federal government to provide incentives for large energy consumers to reduce their power usage during peak usage seasons. In Federal Energy Regulatory Commission v. Electric Power Supply Association the Court reversed the appellate decision and approved the federal government’s scheme for reducing blackouts and lowering rates.

 

At issue in the case was the Federal Power Act (“FPA”), which authorizes the Federal Energy Regulatory Commission (“FERC”) to regulate “the sale of electric energy at wholesale in interstate commerce.”[1] This authorization includes the power to regulate wholesale electric rates as well as practices affecting those rates.[2] The power to regulate “any other sale” of electricity is reserved to the states.[3] Arising from this authorization is a practice known as demand response[4]. Operators of wholesale markets, called demand response providers, pay large electricity consumers who agree not to use power during a peak usage time[5]. The demand response providers are required to pay the same rate to those conserving energy as they do to the power plants producing the energy.[6]

 

The FERC claimed that this demand response practice ensures the effective delivery of power while protecting against excessive prices.[7] In support of the practice, the White House said that incentives for preserving electricity help reduce air pollution and encourage the use of clean energy.[8] Local energy suppliers and state regulators argued that the practice affects retail suppliers over which states alone have regulatory authority.[9]

 

In a 6-2 opinion written by Justice Kagan, the Court held that the FERC has the power to regulate rules and practices that directly affect the wholesale energy market.[10] This standard, according the Court, is easily met “with room to spare” in the practice of demand response, because demand response addresses only wholesale rates.[11] As in all other markets, wholesale and retail are not completely separate and distinct; because of this reality, it is expected and acceptable that the regulation will have indirect effects on retail markets.[12]

 

The opinion is overall positive, but adding the “directly affects” standard to this practice is a constraint on the FERC’s power. It is outside the scope of the FERC’s power to regulate in an industry where such regulation would only tangentially affect wholesale electricity rates.[13] Any regulation by the FERC must be more than related or connected to wholesale electricity rates.[14]

 

Some of the practical effects of this decision were apparent soon after its release. EnerNOC, Inc., a large provider of energy conservation services, saw an 86 percent increase in its stock prices on the day the opinion was released.[15] Meanwhile, the stock of independent power producers fell; for example, Dynegy, Inc. stock fell 12 percent.[16] Traditional power sources have recently seen a drop in profits as consumption of renewable energy increased.[17] The Court’s ruling is a loss for these companies and is expected to have lasting effects on traditional power sources.[18] The decision is seen as a win, however, for technology companies as the continued demand response practice incentivizes innovation and new technology in the energy industry.[19] Although the ruling only applies to the energy market, it is expected to affect the capacity market as well.[20]

 

As of January 25, 2016, wholesale energy providers are permitted to pay large electric consumers for reducing usage during peak times. Environmental and technology groups are happy with the ruling saying incentives reduce pollution and encourage innovation. Many are disappointed with the ruling, however, claiming the demand response practice encroaches on states’ rights to regulate retail markets. The largest power grid in the United States, PJM, paid $584.6 million through September to consumers who cut usage.[21] This will continue following the Supreme Court ruling upholding the Federal Power Act’s grant of power to the Federal Energy Regulatory Commission to regulate the wholesale energy market.

 

[1] The Federal Power Act, 16 U.S.C. §824(b).

[2] Id.

[3] Id.

[4] Fed. Energy Regulatory Comm’n v. Electric Power Supply Ass’n, No. 14-840, slip op. at 7 (U.S. Jan. 25, 2016).

[5] Id.

[6] Id. at 10.

[7] Id. at 28.

[8] Greg Stohr and Jim Polson, FERC’s ‘Demand Response’ Rule Upheld by U.S. Supreme Court, Bloomberg (Jan. 25, 2016), http://www.bloomberg.com/politics/articles/2016-01-25/ferc-s-demand-response-rule-upheld-by-u-s-supreme-court

[9]Fed. Energy Regulatory Comm’n v. Electric Power Supply, No. 14-840, slip op. at 21.

[10] Id. at 14.

[11] Id. at 16.

[12] Id. at 18.

[13] Id. at 15.

[14] Id.

[15] FERC’s Demand Response Rule Upheld.

[16] Id.

[17] Darius Dixon, Supreme Court backs federal authority in power saving rule, Politico (Jan. 25, 2016), http://www.politico.com/story/2016/01/supreme-court-backs-electricity-saving-rule-218182.

[18] Id.

[19] Katie Fehrenbacher, Why the Supreme Court’s Electricity Ruling is Important for Innovation, Forbes (Jan. 25, 2016), http://fortune.com/2016/01/25/supreme-court-demand-response-ruling/.

[20] FERC’s Demand Response Rule Upheld.

[21] Id.

About

Sarah Brown is a third-year law student at The University of Texas School of Law. She graduated from Texas Christian University in 2014 with a Bachelor of Science in Political Science and minors in business and Spanish. After graduation Sarah will return to her hometown of Dallas to join the litigation group at Norton Rose Fulbright.