Supreme Court Decision Takeaways: Great for Demand Response and Clean Energy

While much of Washington, D.C., was digging out from Winter Storm Jonas, the justices of the U.S. Supreme Court made it to work in time to issue an important decision sure to warm the hearts of those worried about the affordable and reliable electricity and the urgency involved with the fight against climate change. In a powerful 6-2 decision this week (Justice Alito did not participate in the case), the High Court reversed the U.S. Court of Appeals for the D.C. Circuit and held that the federal government has authority to regulate demand response participation in wholesale energy markets.

Many, including the Sustainable FERC Project coalition, celebrated Justice Elena Kagan's lucid and commonsense decision in the case known as "FERC v. Electric Power Supply Association " or "EPSA." The case stemmed from a challenge by the power supply trade association to a Federal Energy Regulatory Commission (FERC) rule called Order 745. The rule requires regional grid operators to pay customers for reducing their energy consumption (often during periods when electricity demand is high and the grid is stressed), a practice known as "demand response." The Supreme Court decision overturned a lower court, the U.S. Court of Appeals for the D.C. Circuit, which in a split 2-1 decision agreed with the power suppliers that FERC had overstepped its authority and intruded on states' authority to regulate this customer-driven practice.

Now that we've had a chance to dig into the case's legal details, here are some important takeaways:

1. FERC has both the authority and the duty to regulate demand response

The Supreme Court determined that FERC, the agency that oversees the nation's electric grid, has not just the authority but the duty to regulate demand response. Under a statute called the Federal Power Act (FPA), states are given exclusive authority to regulate retail sales (the sale of power from utilities to customers for use in our homes and businesses), but FERC is responsible for ensuring the rates of wholesale sales of electricity (from the power plants to the utilities) are "just and reasonable." It has the same obligation for "practices affecting" those wholesale rates. As the Court observed, this division of power has caused a "steady flow of . . . disputes," because "the wholesale and retail markets in electricity are inextricably linked." Practices like saving energy naturally reduce both wholesale and retail bills, and so jurisdictional boundary questions arise.

To help clear up the issue, the Court articulated a "common-sense" approach to assess whether FERC has authority to regulate any given practice: FERC has jurisdiction over practices that directly affect wholesale rates, so long as it does not actually (and not just "effectively") regulate retail sales. This may still sound like legalese to you, but it's actually a lot clearer than things were before.

The Court recognized that there isn't a practice with as much of a direct impact on wholesale rates as demand response. In fact, Justice Kagan wrote that "[w]e will not read the FPA, against its clear terms, to halt a practice that so evidently enables the Commission to fulfill its statutory duties of holding down prices and enhancing reliability in the wholesale energy market." This directness can be distinguished from, say, the cost of labor, which is included in a power supplier's cost calculation but does not "directly" affect the price of electricity.) Demand response directly lowers wholesale electricity prices so FERC is required to ensure that it can participate in the market in order to ensure that electricity customers pay fair prices.

From a clean energy perspective, the Court's decision has exciting implications. Demand response resources can still play in wholesale markets, bringing with them important pollution-fighting benefits. The decision also should spur FERC to ensure that wholesale markets fully incentivize other clean distributed resources like energy efficiency, rooftop solar power, and electric vehicle services. These resources can provide value across the transmission and distribution systems, and FERC should facilitate rules that allow them the option to contribute directly to lower wholesale prices (and cleaner air!).

2. The Supreme Court recognizes the reality of our interconnected grid

Over the 80 years that the Federal Power Act has regulated a state line-crossing transmission system, many disputes have arisen as to where state authority ends and FERC's authority begins. The issues have gotten increasingly complicated in recent years, as advanced technology and customer-powered demand response, energy efficiency, rooftop solar generation, and electric vehicles have emerged as resources capable of participating in wholesale markets - making the grid even more interconnected (and cleaner), all the way from high voltage transmission lines down to the solar panels on your rooftop.

The Court's opinion helps ensure that energy regulators can take advantage of this increasing connectedness of the grid rather than be stymied by it. It explained that the purpose of the Federal Power Act is "precisely to eliminate vacuums of authority over the electricity markets." That FERC regulations can affect retail prices and vice versa does not change this purpose. Specific to the issue at hand, the opinion holds that it would be unacceptable to create a "regulatory gap" for demand response. Since it's clear that states cannot regulate demand response in wholesale markets, if FERC couldn't do it, there would have been no one left to set the appropriate market rules. From a practical perspective, a regulatory gap outcome would have left the electric grid without an important tool to reduce costs and enhance reliability. Going forward, the Court's avoidance of this gap will be important for designing regulation to take advantage of other clean energy resources.

3. The Supreme Court appreciates the distinct value of demand response

Throughout its opinion, the Court underscored the unanimous agreement regarding the value of demand response. It noted that "no one (not even EPSA)," the entity that first challenged FERC's rule, disputes that participation of demand response in wholesale markets "will curb prices and enhance reliability." It came as no surprise, then, that regional grid operators and then FERC sought to encourage this participation. As Justice Kagan explained, "[l]ike the market operators, FERC saw that sky-high demand in peak periods threatened network breakdowns, compelled purchases from inefficient generators and consequently drove up wholesale prices. Addressing those problems--which demand response does--falls within the sweet spot of FERC's statutory charge."

It's great that the Court now recognizes the benefits of demand response as a given. This week's decision means demand response in wholesale markets is here to stay, and that in the future there will be even more opportunities to develop the role of energy efficiency, rooftop solar, and electric vehicles in providing flexibility, reliability, and clean energy.

About the Authors

Allison Clements

Senior Attorney

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