Supreme Court Revives FERC Order No. 745; FERC Maintains its Role in a Distributed Energy World

The Supreme Court handed down a decision on Monday in Federal Energy Regulatory Commission v. Electric Power Supply Association affirming FERC’s Order No. 745.  Order No. 745 generally requires market operators to pay the locational marginal price (LMP) for demand response (offers to voluntarily curtail electricity use)—the same price paid to generators for producing electricity.  (Seth Jaffe previously posted on the decision.)  The Supreme Court’s decision reverses a May 2014 decision from the D.C. Circuit, which had held that FERC’s order impermissibly regulated retail sales of electricity (the exclusive domain of states) and arbitrarily selected the LMP as a price for compensating demand response.

Does this decision change the landscape of federal and state jurisdiction over electric power markets?  I don’t think so.  But it confirms that FERC’s authority to set rules for energy markets will not be displaced by technological advances that are decentralizing the operation of the electric grid and putting more power in the hands of consumers.

Disputes about federal and state roles in the regulation of electricity are not new.  The regulation of electricity and electricity markets epitomizes the challenges associated with implementing a system of federalism over a subject matter that defies neat divisions.  The Federal Power Act (FPA), which the Supreme Court parses in its decision, was enacted in 1935 to address questions of state and federal jurisdiction over electricity transactions.  But its focus on whether a transaction is wholesale or retail in nature has “generate[d] a steady flow of jurisdictional disputes because—in point of fact if not of law—the wholesale and retail markets in electricity are inextricably linked.”  Recent evolution in the way the electric power grid functions and in the services it provides—generally away from a model of central generation, transmission, and distribution and towards a model of distributed functions and responsibilities—does not make it any easier to apply the FPA.

In this case, challengers to FERC Order No. 745 argued that by setting a price for demand response, FERC was effectively setting retail prices, an impermissible step into the exclusive jurisdiction of the states.  A decision from the Supreme Court adopting that argument might have inspired additional challenges to FERC’s authority to regulate wholesale markets in other contexts because FERC’s regulation of wholesale markets often affects retail markets.  A decision focused on the fact that participants in demand response programs are energy consumers and are generally not engaged in the resale of electricity, as Justice Scalia called for in dissent, might have had significant implications for FERC’s role regulating the increasing participation of end users in wholesale markets, a potential feature of distributed generation and energy storage resources as well as demand response.

The Court did not take us down those paths.  Justice Kagan’s cogent decision may not be trail-blazing law, but it substantially clarified FERC’s authority, leaving room for FERC to oversee wholesale markets even as those markets become more complex: “FERC regulation does not [infringe on state jurisdiction over retail sales] just because it affects—even substantially—the quantity or terms of retail sales.”  Rather, when “FERC regulates what takes place on the wholesale market, as part of its charge to improve how that market runs, then no matter the effect on retail rates,” that regulation is within FERC’s authority.  The Supreme Court’s approach allows FERC to take actions, like that embodied in Order No. 745, that change consumers’ incentives relative to retail market transactions.  The Court made clear that only if FERC “establish[es] the amount of money a consumer will hand over in exchange for power” does it set a retail electricity rate.

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