FERC v. Electric Power Supply Association: Establishing Federal Authority over Wholesale Demand Response Compensation

FERC v. Electric Power Supply Association: Establishing Federal Authority over Wholesale Demand Response Compensation

Introduction

FERC v. Electric Power Supply Association, et al. (577 U.S. 260, 2016) is a pivotal U.S. Supreme Court decision that affirmed the Federal Energy Regulatory Commission's (FERC) authority to regulate compensation for wholesale demand response programs. The case centered around FERC's Order No. 745, which mandated that wholesale electricity market operators compensate demand response providers at the same rate as power generators. The Electric Power Supply Association (EPSA) and other petitioners challenged this regulation, arguing it overstepped FERC's legal authority and infringed upon states' regulatory powers.

Summary of the Judgment

The Supreme Court ruled in favor of FERC, reversing the lower Court of Appeals' decision that had vacated Order No. 745. The majority held that FERC possessed the statutory authority under the Federal Power Act (FPA) to regulate wholesale demand response compensation. Furthermore, the Court determined that FERC's method of compensating demand response providers at the locational marginal price (LMP) was not arbitrary or capricious. The dissenting opinion, led by Justice Scalia, argued that FERC's regulation effectively overstepped into the states' domain by impacting retail electricity prices.

Analysis

Precedents Cited

The judgment extensively referenced prior cases that delineate FERC's authority and the interplay between federal and state regulation of energy markets. Notable among these are:

  • Public Utility Commission of Rhode Island v. Attleboro Steam & Elec. Co. (273 U.S. 83, 1927): Established the "Attleboro gap," highlighting the need for federal regulation of interstate wholesale electricity transactions.
  • NEW YORK v. FERC (535 U.S. 1, 2002): Affirmed FERC's jurisdiction over interstate wholesale electricity sales.
  • Panhandle Eastern Pipe Line Co. v. Public Serv. Commission of Indiana (332 U.S. 507, 1947): Clarified the distinction between wholesale and retail electricity sales.
  • Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (467 U.S. 837, 1984): Discussed the deference courts should grant to agency interpretations of ambiguous statutes.

Impact

The decision has significant implications for the energy sector:

  • Enhanced Market Efficiency: By affirming equal compensation for demand response and generation, FERC promotes a more competitive and efficient wholesale electricity market. This can lead to lower wholesale prices and increased grid reliability.
  • Federal-State Dynamics: The ruling clarifies the boundaries between federal and state regulatory powers, reinforcing FERC's authority over wholesale transactions while respecting states' control over retail sales.
  • Demand Response Programs: Utilities and market operators are encouraged to integrate more demand response initiatives, knowing they can be compensated fairly. This fosters innovation in energy management and consumption reduction strategies.
  • Legal Precedent: The judgment serves as a reference point for future cases involving FERC's regulatory scope and the balance of federal and state authority in energy law.

Complex Concepts Simplified

Demand Response

Demand response refers to programs where electricity consumers are incentivized to reduce their power usage during peak demand periods. Instead of increasing power generation, market operators pay consumers to lower their consumption, thereby stabilizing the grid and reducing wholesale electricity prices.

Locational Marginal Price (LMP)

LMP is the cost of delivering the next unit of electricity at a specific location and time, reflecting the marginal cost of supply and demand. It accounts for factors like transmission congestion and generation costs. In this case, LMP was used as the standard compensation rate for both demand response providers and electricity generators.

Net Benefits Test

The net benefits test ensures that accepting a demand response bid genuinely lowers overall costs for wholesale purchasers. It compares the savings from reduced electricity use against any increased costs from consumers not entering the market, ensuring that only beneficial demand response bids are compensated.

Conclusion

The Supreme Court's decision in FERC v. Electric Power Supply Association underscores FERC's pivotal role in regulating the wholesale electricity market. By affirming FERC's authority to mandate equal compensation for demand response and generation, the Court reinforced the Commission's ability to foster competitive, efficient, and reliable energy markets. This ruling not only clarifies the division of regulatory responsibilities between federal and state entities but also paves the way for more sophisticated demand management strategies that benefit both the economy and the environment. Stakeholders across the energy sector must now navigate this reinforced federal authority, ensuring compliance while leveraging demand response opportunities to optimize energy consumption and pricing.

Case Details

Year: 2016
Court: U.S. Supreme Court

Judge(s)

Elena Kagan

Attorney(S)

Donald B. Verrilli, Jr., Solicitor General, for Federal Energy Regulatory Commission. Carter G. Phillips, Washington, DC, for EnerNOC, Inc., et al. Arocles Aguilar, General Counsel, Harvey Y. Morris, Assistant General Counsel, Elizabeth Dorman, Principal Counsel, California Public, Utilities Commission, San Francisco, CA, for Respondent. Carter G. Phillips, C. Frederick Beckner III, Sidley Austin LLP, Washington, DC, Matthew J. Cushing, EnerNOC, Inc., Boston, MA, for EnerNOC, Inc. Marvin T. Griff, Husch Blackwell LLP, Washington, DC, for EnergyConnect, Inc. Robert A. Weishaar, Jr., McNees Wallace & Nurick LLC, Washington, DC, for the Coalition of MISO Transmission Customers, and PJM Industrial, Customer Coalition. Allen M. Freifeld, Philadelphia, PA, for Viridity Energy, Inc. Cynthia S. Bogorad, William S. Huang, Katharine M. Mapes, Jessica R. Bell, Spiegel & McDiarmid LLP, Washington, DC, for Respondents Midwest Load–Serving Entities. Roger E. Collanton, General Counsel, Burton Gross, Assistant General Counsel, Daniel J. Shonkwiler, Lead Counsel, California Independent System Operator Corp., Folsom, CA, Catherine E. Stetson, Counsel of Record, Elizabeth Austin Bonner, Hogan Lovells US LLP, Washington, DC, for Respondent. Elizabeth Dorman, Counsel of Record, Principal Counsel, California Public Utilities Commission, San Francisco, CA, H. Robert Erwin, Jr., General Counsel, Ransom E. Davis, Associate General Counsel, Public Service Commission of Maryland, Baltimore, MA, Bohdan R. Pankiw, Chief Counsel, Kriss E. Brown, Assistant Counsel, Pennsylvania Public Utility Commission, Harrisburg, PA, for joint states. David L. Morenoff, General Counsel, Robert H. Solomon, Solicitor, Holly E. Cafer, Attorney, Federal Energy Regulatory Commission, Washington, DC, Donald B. Verrilli, Jr., Solicitor General, Counsel of Record, Edwin S. Kneedler, Deputy Solicitor General, John F. Bash, Assistant to the Solicitor General, Department of Justice, Washington, DC, for Petitioner. Vincent P. Duane, Senior Vice President and General Counsel, PJM Interconnection, L.L.C., Audubon, PA, Craig Glazer, Vice President–Federal Government Policy, PJM Interconnection, L.L.C., Washington, DC, Barry S. Spector, Counsel of Record, Paul M. Flynn, Wright & Talisman, P.C., Washington, DC, for Respondent PJM Interconnection, L.L.C. Ashley C. Parrish, David G. Tewksbury, King & Spalding LLP, Washington, DC, for Electric Power Supply Association. Paul D. Clement, Counsel of Record, Erin E. Murphy, Bancroft PLLC, Washington, DC, for all respondents joining this brief. Harvey L. Reiter, Adrienne E. Clair, Stinson Leonard Street LLP, Washington, DC, for American Public Power Association, National Rural Electric Cooperative Association, and Old Dominion Electric Cooperative. David B. Raskin, Steptoe & Johnson LLP, Washington, DC, for Edison Electric Institute. Sandra E. Rizzo, Arnold & Porter LLP, Washington, DC, for PPL Electric Utilities Corporation, PPL, EnergyPlus, LLC, PPL Brunner Island, LLC, PPL, Holtwood, LLC, PPL Martins Creek, LLC, PPL, Maine, LLC, PPL Montour, LLC, PPL Susquehanna, LLC, Lower Mount Bethel Energy, LLC, and PJM Power Providers Group. Paul Breakman, National Rural Electric, Cooperative Association, Arlington, VA, for National Rural Electric Cooperative Association. Edward H. Comer, Henri D. Bartholomot, Edison Electric Institute, Washington, DC, for Edison Electric Institute. Delia D. Patterson, Randolph Lee Elliott, American Public Power Association, Arlington, VA, for American Public Power Association. Jesse A. Dillon, Talen Energy, Allentown, PA, for Talen Energy Marketing, LLC, Brunner Island, LLC, Holtwood, LLC, Martins Creek, LLC, Talen Maine, LLC, Montour, LLC, Susquehanna Nuclear, LLC, and Lower Mount Bethel Energy, LLC. Michael A. McGrail, PPL Services Corporation, Allentown, PA, for PPL Electric Utilities Corporation.

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