Supreme Court Upholds FERC’s Demand Response Rule

On Monday, the Supreme Court issued its decision in Federal Energy Regulatory Commission v. Electric Power Supply Association.  In this case, the Court considered FERC’s demand response rule, Order No. 745, which requires a market operator to pay the same price to a demand response provider to conserve energy as it would pay a generator to produce energy.  Order No. 745 set the payment to be made for reducing energy usage at the locational marginal price (LMP) of energy, so long as FERC’s “net benefits test” is met.  For example, large individual consumers, such as a big store or manufacturer, may reduce their use of power and receive payment pursuant to Order No. 745.

The two primary objections to Order No. 745 were that: (1) it represents an intrusion by FERC into the retail market (a jurisdictional issue under the Federal Power Act), and (2) FERC’s decision that compensation at LMP was arbitrary and capricious. On the jurisdictional issue, the Court found that while FERC’s jurisdiction lies in wholesale markets, Order No. 745 regulates the activity of wholesale market operators and does not constitute a regulation of retail sales.  On the issue of the appropriate price, the Court found that the decision to pay demand response providers LMP is not arbitrary and capricious.  The Court found that FERC engaged in reasoned decisionmaking in selecting the compensation scheme in Order No. 745, stating that its “important but limited role is to ensure that the Commission . . . weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that choice.”

The Court reversed the D.C. Circuit’s May 2014 decision that vacated Order No. 745 in its entirety as “encroaching on the states’ exclusive jurisdiction to regulate the retail market.”

The decision was not unanimous, though, with Justice Scalia authoring a dissent, in which Justice Thomas joined.  The dissent believes that Order No. 745 is outside of FERC’s authority as an intrusion into the retail electricity market.  (Justice Alito did not participate.)

The case was argued on October 14, 2015. The recording of the argument and the briefs in the case provide more background.

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