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January 28, 2016Client Alert

Supreme Court Sides with FERC on Wholesale Demand Response

In a 6-2 decision on January 25, 2016, the U.S. Supreme Court sided with the Federal Energy Regulatory Commission (FERC), finding that the FERC had jurisdiction to incorporate demand response in the wholesale energy markets. 

The Court’s opinion overturned a 2014 D.C. Circuit Court split decision that found Order No. 745 (the FERC’s Wholesale Demand Response Rule) inappropriately breached the Federal Power Act §824(b) boundary between federal and state jurisdiction in regulating electric sales. The D.C. Circuit held that the FERC had inappropriately entered the province of state regulation of retail rates.

In overturning the D.C. Circuit, the Supreme Court found: 

[A] FERC regulation does not run afoul of §824(b)’s proscription just because it affects – even substantially – the quantity or terms of retail sales. 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. 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…When FERC sets a wholesale rate, when it changes wholesale market rules, when it allocates electricity as between wholesale purchasers – in short, when it takes virtually any action respecting wholesale transaction – it has some effect, in either the short or the long term, on retail rates. That is of no legal consequence…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, §824(b) imposes no bar…And in setting rules for demand response, that is all FERC has done. 577 U.S. _____ (2016) (Slip Op. at 18-19)(citations omitted).

Appellants sought determination of two issues in this case: 

  • Whether the FERC’s authority allowed it to adopt “wholesale demand response” market rules as provided for in Order No. 745; and
  • Whether the manner of compensating demand response (paying the demand response the location marginal price (LMP) for reducing energy demand without subtracting the provider’s retail savings from not consuming energy) was appropriate.         

In response, the Court resoundingly held for the FERC.

In assessing whether the Federal Power Act authorized the FERC’s actions in adopting demand response, the Court found that “FERC has the authority—and, indeed, the duty—to ensure that rules or practices ’affecting’ wholesale rates are just and reasonable.” Id. at 15.

However, the Court, recognizing that the term “affecting wholesale rates” could lead to an extraordinary and likely unsupportable extension of the FERC’s jurisdictional reach, applied, and affirmatively adopted a prior D.C. Court opinion in California Independent System Operator Corp. v. FERC, 372 F. 3d 395, 403 (2004). There the D.C. Circuit effectively inserted the word “directly” preceding “affecting” so that the FERC has the “duty” to deal with those matters that “directly affect wholesale rates.” While it remains less than clear precisely what “directly affecting wholesale” rates means, the Court concluded that “the rules governing wholesale demand response programs meet that standard with room to spare.” Id. at 16. The Court found the FERC’s authority so clear that it concluded it need not address Chevron deference. Id. at 14, fn 5.

When it came to determining whether the FERC had acted appropriately in setting the price for  demand response at full LMP rather than subtracting from it the retail rate (known as LMP-G), the Court gave substantial deference to FERC’s role as policy maker:

“The Commission, not the Supreme Court or any other court, regulates electricity rates. The disputed question here involves both technical understanding and policy judgment. The Commission addressed that issue seriously and carefully, providing reasons in support of its position and responding to the principal alternative advanced. In upholding that action, we do not discount the cogency of [petitioners’] arguments in favor of LMP-G. Nor do we say that in opting for LMP instead, FERC made the better call. It is not our job to render that judgment, on which reasonable minds can differ. Our important but limited role is to ensure that the Commission engaged in reasoned decision-making—that it weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that choice. FERC satisfied that standard. Id. at 33.”

While the judgment of the Supreme Court is significant and the continued implementation of demand response in the wholesale electricity market will have significant impact on the market, generators of electricity and consumers of electricity, the import of this case is likely to be even more far reaching and may provide guidance on other significant pending cases before the Court.

The Supreme Court will be called upon to decide whether certain actions by the states of Maryland and New Jersey, intended to promote the local construction of new generation, inappropriately invaded the FERC’s jurisdiction over wholesale sales. In those cases, the states provided direct financial support in the form of “contracts for differences” that would “directly affect” wholesale prices in PJM. The Courts of Appeals have found that they invade the FERC’s exclusive jurisdiction over wholesale electric sales.[1]

While not addressed in this case, the Court’s position could force an even more dramatic “show down” in the electric marketplace. Currently, more than 40 states regulate sales from various customer-owned generating facilities (typically rooftop solar panels) to the utility to which the “generator” is connected. The utility in turn “resells” that customer-generated energy to its other retail customers. As the Court noted:

[T]he [FPA] establishes a scheme for federal regulation of “the sale of electric energy at wholesale in interstate commerce.” 16 U. S. C. §824(b)(1). Under the statute, “[a]ll rates and charges made, demanded, or received by any public utility for or in connection with” interstate wholesale sales “shall be just and reasonable”; so too shall “all rules and regulations affecting or pertaining to such rates or charges.” §824d(a).

If the FERC sees a violation of that standard, it must take remedial action. More specifically, whenever the Commission “shall find that any rate [or] charge”—or “any rule, regulation, practice, or contract affecting such rate [or] charge”—is “unjust [or] unreasonable,” then the Commission “shall determine the just and reasonable rate, charge[,] rule, regulation, practice or contract” and impose “the same by order.” §824e(a). Id. at 14-15 (internal citation omitted).

The FERC has shown no inclination to involve itself in issues involving “net metering” or related issues, and has specifically disclaimed any responsibility for those types of transactions. This opinion of the Court may change that perspective.

For more information, please contact your Michael Best attorney or Daniel L. Sanford at dlsanford@michaelbest.com  or 202.747.9561.

[1]CPV Maryland, LLC etal, v. Talen Energy Marketing, etal, 14-623; W. Kevin Hughes,  Chairman, Maryland Public Service Commission, etal v. Talen Energy Marketing, etal, 14-614 (consolidated for argument).

 

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