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Federal Energy Regulatory Commission v. Electric Power Supply Ass'n

ELR Citation: 46 ELR 20021
Nos. 14-840, (U.S., 01/25/2016) (Kagan, J.)

The U.S. Supreme Court upheld FERC's "demand-response" rule under which operators of wholesale electricity markets, in specified circumstances, must pay the same price to providers for conserving energy as to generators for producing it. During peak periods, electricity rates increase dramatically, and the increased flow of electricity threatens to overload the grid. Wholesale market operators therefore devised demand-response programs under which they pay consumers to reduce their use of power during these peak periods. This allows operators to offer electricity during peak times more cheaply and more reliably than by paying power plants to increase production. Under the FERC rule challenged here, wholesale market operators must pay the same price to demand-response providers for conserving energy as to generators for producing it, so long as a "net benefits test" is met to ensure that accepted bids actually save consumers money. The D.C. Circuit vacated the rule, holding that FERC lacked authority to issue the order because it directly regulates the retail electricity market. It also held that the rule's compensation scheme is arbitrary and capricious. The Supreme Court reversed. The Federal Power Act provides FERC with the authority to regulate wholesale market operators' compensation of demand response bids. The practices at issue directly affect wholesale rates, and the rule does not regulate retail sales. Moreover, the contrary view—that the entire practice of wholesale demand response falls outside what FERC can regulate—would conflict with the Act's core purposes of protecting against "excessive prices" and ensuring effective transmission of electric power. Nor is the compensation scheme arbitrary and capricious. FERC weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that decision. Kagan, J., delivered the opinion of the Court, in which Roberts, C.J., and Kennedy, Ginsburg, Breyer, and Sotomayor, JJ., joined. Scalia, J., filed a dissenting opinion, in which Thomas, J., joined. Alito, J., took no part in the consideration or decision of the cases.