On January 25, 2016, the United States Supreme Court upheld the Federal Energy Regulatory Commission’s (FERC) jurisdiction over wholesale demand response programs in a 6-2 decision.  Please click here to read the decision, Federal Energy Regulatory Commission v. Electric Power Supply Association et al.

There were essentially two issues before the Court. The first issue was whether demand response programs are deemed to be “the sale of electric energy at wholesale in interstate commerce” (that FERC regulates) or the retail sale of electricity (that the states regulate).

The second issue was whether FERC justified its reasons to compensate equally demand response providers and electricity producers. Under demand response programs, grid operators of wholesale markets pay electricity consumers for commitments to not use power at certain times. As the Court explained, electricity can be offered more cheaply and more reliably by paying users to “dial down” their consumption rather than by paying power plants to ramp up their production. However, under FERC’s rules, demand response providers are paid the same for conserving energy as generators are paid to make more electricity. 

In deciding that demand response is under FERC’s jurisdiction, the Court noted that the Commission did not attempt to regulate retail rates – in fact, the demand response program was designed to reduce wholesale rates of electricity. In support of that finding, the Court pointed out that:

1. Wholesale market operators administer the entire demand response program
2. The demand response bid is accepted only when the bid provides value to the wholesale market by balancing supply and demand more cost effectively (i.e., at a lower cost to wholesale purchases than a bid to generate power
3. Those footing the bill are the same wholesale purchasers that benefit from the lower wholesale price that results from the demand response program.

Thus, the Court found that including demand response programs in the organized markets “enables FERC to fulfill its statutory duties of holding down prices and enhancing reliability in the wholesale energy market.” 

Having determined that FERC has jurisdiction over the demand response programs, the Court evaluated whether FERC’s decision to compensate demand response providers at the same price paid to generators was arbitrary and capricious. In short, the Court found that FERC provided a detailed explanation of its choice to compensate demand response providers and in FERC’s Order No. 745 (the findings of which were at issue before the Supreme Court) provided lengthy responses to contrary views. Thus, “FERC’s serious and careful discussion of the issue satisfies the arbitrary and capricious standard.” 

Justice Kagan wrote for the majority and Justices Scalia and Thomas dissented.