Updated: Supreme Court upholds FERC Order 745, affirming federal role in demand response

Dive Brief:

  • The Supreme Court issued a ruling on Monday upholding the Federal Energy Regulatory Commission's (FERC) authority to regulate demand response (DR) programs in wholesale markets. 
  • In a 6-2 decision, the justices ruled the agency was within its authority under the Federal Power Act when it issued Order 745, which set standards for demand response practices and pricing in wholesale markets and brought the practice under the agency's jurisdiction. 
  • In May 2014, The U.S. Court of Appeals for the District of Columbia Circuit vacated Order 745, agreeing with a group of electricity generators that the agency had overstepped its legal authority and was encroaching on the states' exclusive legal right to regulate retail electricity markets.
  • The Supreme Court majority disagreed with the Court of Appeals, ruling that demand response is primarily a wholesale market function and FERC Order 745 only addresses wholesale market transactions.

Dive Insight:

When a three-judge panel at the D.C. Circuit Court vacated FERC Order 745 last year, it did so on the grounds that the order "goes too far, encroaching on the states' exclusive jurisdiction to regulate the retail market."

The Supreme Court on Monday disagreed. In a 6-2 decision with Justice Samuel Alito recusing himself, the nation's highest judicial body ruled that FERC acted within its powers enumerated under the Federal Power Act (FPA) in issuing the order, which aims to ensure that DR providers are compensated at the same rates as generation owners. 

Under the law, FERC has jurisdiction over wholesale electricity markets, which reach across state lines, but states have legal authority over their individual retail markets. The Electric Power Supply Association (EPSA), the national trade association for competitive power suppliers, argued that Order 745 crossed over too much into these retail markets, constituting an overreach of federal authority. 

However, Justice Elena Kagen, who delivered the majority opinion, wrote that FERC is within its powers to regulate the wholesale market even when it has indirect impacts on retail market conditions. 

"It is a fact of economic life that the wholesale and retail markets in electric­ity, as in every other known product, are not hermetically sealed from each other," Kagan wrote. "To the contrary, transactions that occur on the wholesale market have natural consequences at the retail level. And so too, of necessity, will FERC’s regulation of those wholesale matters."

If FERC had attempted to directly influence retail market conditions, that may constitute an overreach. But, Kagan wrote, "When FERC regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail rates, [the Federal Power Act] imposes no bar."

"And in setting rules for demand response, that is all FERC has done," she continued. "The Commission’s Rule addresses—and addresses only—transactions occurring on the wholesale market."

In the dissent, Justice Antonin Scalia argued that FERC Order 745 was not legal due to the FPA's prohibition on FERC regulating "any other sale of electric energy" in wholesale markets, according to SNL. He pointed out that most DR customers are energy consumers, not resellers. 

"It follows that the rule does not regulate electric-energy sales 'at wholesale,' and [the Federal Power Act] therefore forbids FERC to regulate these demand-response transactions. That is so whether or not those transactions 'directly affect' wholesale rates," Scalia wrote.

The ruling is a victory for the agency and demand response providers. In the aftermath of the D.C. Circuit ruling, GTM Research predicted that an unfavorable Supreme Court decision could cut DR growth rates nearly in half. Instead, the organization now predicts that DR market size in the U.S. could expand by $200 in 2016 alone.

Former FERC Chief Jon Wellinghoff, who headed the commission when it issued Order 745, also raised concerns that a decision against FERC's authority over demand response could threaten its ability to regulate a litany of other aggregated distributed resources in wholesale markets across the nation. He praised the decision in a blog post Monday, saying it will increase competition for central station generation from DR, distributed generation and battery storage. 

"The introduction of these assets into wholesale markets will significantly drive down wholesale energy prices by billions of dollars each year," Wellinghoff wrote.

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Filed Under: Efficiency & Demand Response Regulation & Policy