Getty Supreme Court backs federal authority in power saving rule

The Supreme Court rejected a challenge to an administration-supported rule on Monday that promotes electricity conservation, handing a big victory to environmentalists and federal power regulators.

The 6-2 decision overturned a federal appeals panel ruling and affirmed the Federal Energy Regulatory Commission’s authority to offer incentives to reduce power consumption during peak demand periods by paying large users to curb their electricity use, policies that green groups say help open the power grid up to more renewable sources like wind and solar.


"Demand response" programs help grid operators avoid blackouts and keep consumer costs down, reducing the need for generators to turn on older, dirtier power plants.

Many power plant operators in electricity markets across the Northeast and parts of the Midwest have seen their profits shrink from lower energy prices, and they fear greater competition from demand response providers will further erode demand for electricity.

Those power companies had argued that the demand response rule had unfairly given FERC authority in the retail power markets, which have traditionally been governed by the states. But the court's ruling Monday affirmed the FERC's ability to regulate those programs since they affect the wholesale power market, and it said the agency had properly assessed how much the businesses that cut their power consumption should be paid.

The Federal Power Act "should not be read, against its clear terms, to halt a practice that so evidently enables FERC to fulfill its statutory duties of holding down prices and enhancing reliability in the wholesale energy market," the high court said in its ruling in the case, FERC v. Electric Power Supply Association.

In addition to the support of the court's more liberal justices, FERC’s demand response rule, known as Order No. 745, won the backing of Chief Justice John Roberts and Justice Anthony Kennedy.

Justice Samuel Alito had recused himself from the case, leaving FERC's critics hoping for a 4-4 stalemate that would cement the appeals court decision to kill the regulation.

Writing for the majority, Justice Elena Kagan wrote that “although (inevitably) influencing the retail market too, the Rule does not intrude on the States’ power to regulate retail sales," adding that "in choosing a compensation formula, the Commission met its duty of reasoned judgment. FERC took full account of the alternative policies proposed, and adequately supported and explained its decision.”

She added: “Compensation for demand response ...directly affects wholesale prices. Indeed, it is hard to think of a practice that does so more.”

Justices Antonin Scalia wrote a dissent, which was joined by Justice Clarence Thomas.

“[T]he majority is wrong even on its own terms,” Scalia wrote, “for the rule at issue here does in fact regulate ‘retail electricity sales,’ which are indisputably ‘matters . . . subject to regulation by the States’ and therefore off-limits to FERC.”

The agency's win is seen as a big loss for large “baseload” power sources like coal, natural gas and nuclear in the Northeast and parts of the Midwest, which have seen their profits decline over the last several years as electricity consumption has eased and renewables grew. Now they have to compete with industrial customers and others who will at times be paid at market rates to reduce their electricity use without having the costs of operating and maintaining a power plant themselves.

The North American Electric Reliability Corp. projected that demand response programs could reduce consumption by more than 17,000 megawatts across the U.S. this winter.

Environmentalists cheered the decision as paving a path to lower carbon emissions and renewable energy.

“Today’s Supreme Court decision is a victory for all Americans who want greater choice and value broader customer access to clean, low-cost energy,” Environmental Defense Fund President Fred Krupp said in a statement. “Demand response is helping millions of Americans get low-cost, clean and reliable electricity.”

Allison Clements, director of the Sustainable FERC Coalition at the Natural Resources Defense Council, said the decision was key "because demand response is flexible and fast-acting, it enables the affordable integration of more wind and solar power into the electricity transmission grid."

During oral arguments in October, Scalia was the most vocal critic of the rule. But FERC supporters held out some hope that Roberts or Kennedy would rule in the agency's favor despite their concerns that it might have an outsize influence on retail power markets.

While Order No. 745 involved energy markets, some utilities that see a well-paid demand response market as threat to their profits had also argued that that industry should be excluded from capacity markets.

Capacity markets set up by some regional grid operators are intended to act as an insurance policy by paying generators to keep power plants available in the event that demand jumps unexpectedly. After the frigid winter of 2013-2014, PJM raised its capacity payments, which plant operators can use to buy fuel or upgrade equipment, while also instituting stiffer penalties for plants that don't deliver when called upon.

But on the same day that the D.C. Circuit Court of Appeals struck down Order 745 in May 2014, utility FirstEnergy called on FERC to invalidate PJM’s capacity results queuing up commitments for its 2017/2018 window, which were still pending at the time.

“While Order No. 745 involved energy markets, the Court’s rationale necessarily extends to include capacity markets as well,” the company said at the time. This is because PJM’s capacity market allowed demand response providers to be paid for the reduction in power usage. And those capacity payments account for about 90 percent of DR providers’ revenue in PJM, which is the largest overall power market in the country.

A few months later the New England Power Generators Association filed a similar complaint with FERC, telling the agency that ISO-New England’s capacity market needed to “disqualify” demand response participation.

Although the Court of Appeals for the D.C. Circuit would need to issue an order to reflect the Supreme Court’s decision, the FERC may not have a reason to change current tariffs that involve demand response programs. In fact, according to earlier analyses by ClearView Energy Partners, those requests will likely fail to sway FERC in light of Monday’s Supreme Court decision.