Fed. Energy Regulatory Comm'n v. Elec. Power Supply Ass'n
193 L. Ed. 2d 661, 2016 U.S. LEXIS 853, 136 S. Ct. 760 (2016)
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Rule of Law:
The Federal Power Act grants the Federal Energy Regulatory Commission (FERC) jurisdiction to regulate practices that directly affect wholesale electricity rates, including compensation for demand response programs, so long as the regulation does not directly regulate retail electricity sales.
Facts:
- The U.S. electricity grid operates through wholesale markets where generators sell power to utilities and other load-serving entities (LSEs) for resale to retail consumers.
- During periods of peak demand, the wholesale price of electricity rises significantly and the grid's reliability is strained.
- To manage high prices and improve reliability, wholesale market operators developed 'demand response' programs.
- In these programs, large electricity consumers or aggregators of smaller consumers bid into the wholesale market, offering to reduce their power consumption for a certain period in exchange for payment.
- These demand reduction bids are treated like bids from power generators; the market operator accepts the lowest-cost offers (whether for generation or for consumption reduction) until supply meets demand.
- Accepting demand response bids generally lowers the overall wholesale price of electricity and enhances grid stability during peak periods.
Procedural Posture:
- The Federal Energy Regulatory Commission (FERC) issued Order No. 745, a rule requiring wholesale electricity market operators to pay providers of 'demand response' the same rate paid to electricity generators.
- The Electric Power Supply Association (EPSA) and other parties challenged the rule in the U.S. Court of Appeals for the District of Columbia Circuit.
- A divided panel of the D.C. Circuit, the intermediate appellate court, vacated the rule.
- The Court of Appeals held that FERC lacked statutory authority because the rule constituted direct regulation of the retail market, which is reserved for the states.
- The Court of Appeals also held, alternatively, that the rule was arbitrary and capricious because FERC failed to adequately justify its compensation formula.
- The U.S. Supreme Court, the highest court, granted certiorari to review the D.C. Circuit's decision.
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Issue:
Does the Federal Power Act grant the Federal Energy Regulatory Commission (FERC) jurisdiction to regulate compensation for 'demand response' programs in wholesale electricity markets, where such regulation also affects retail electricity consumption?
Opinions:
Majority - Justice Kagan
Yes. The Federal Power Act grants FERC jurisdiction to regulate demand response compensation because it is a practice that directly affects wholesale electricity rates and does not constitute a direct regulation of retail sales. The FPA gives FERC authority over rules and practices 'affecting' wholesale rates, which this Court construes as covering practices that 'directly affect' those rates. Demand response compensation squarely meets this standard, as it is a tool used within the wholesale auction to lower prices and enhance grid reliability. While the FPA reserves regulation of retail sales to the states, FERC's rule only operates on the wholesale market; any impact on retail consumption is an indirect, natural consequence of permissible wholesale regulation, not a usurpation of state authority. Denying FERC jurisdiction would create a 'regulatory gap' contrary to the FPA's purpose, as states are preempted from regulating wholesale market practices.
Dissenting - Justice Scalia
No. The Federal Power Act does not grant FERC jurisdiction to regulate demand response transactions with retail customers. The FPA limits FERC's authority to 'sale[s] of electric energy at wholesale,' defined as a sale 'for resale.' Demand response participants are retail consumers who consume electricity themselves, not resellers. Therefore, these transactions are not wholesale sales and fall outside FERC's jurisdiction. Furthermore, the rule is a direct regulation of the retail market because by offering payments to reduce consumption, it effectively increases the retail price of electricity by creating an opportunity cost for consumers, thereby intruding on an area of exclusive state control.
Analysis:
This decision significantly clarifies the scope of FERC's jurisdiction under the Federal Power Act, affirming its authority over practices that directly affect wholesale rates even when they involve retail customers. By adopting the 'direct effect' standard while holding that indirect consequences on retail markets are permissible, the Court empowers FERC to regulate modern, market-based grid management tools like demand response. This strengthens federal oversight of energy efficiency and grid reliability initiatives that operate within wholesale markets, setting a precedent that will likely govern future jurisdictional disputes over innovative energy practices that bridge the wholesale-retail divide.
