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U.S. Supreme Court Upholds Federal Energy Regulatory Commission’s Authority to Regulate Demand Response Programs in Wholesale Markets

On January 25, 2016, the U.S. Supreme Court (“Supreme Court”) issued a ruling in Federal Energy Regulatory Commission v. Electric Power Suppliers Association, upholding the Federal Energy Regulatory Commission’s (“FERC”) authority to regulate demand response programs in wholesale markets. At issue was whether FERC Order 745, promulgated in 2011, was arbitrary and capricious. At stake was whether demand response participants in the wholesale energy market should be compensated for curtailed electricity use in an effort to stabilize supply and demand of wholesale electricity generation.

After the issuance of Order 745, a number of generators challenged Order 745, asserting that the demand response measures issued by FERC amounted to a forced retail sale of electricity and infringed upon the rights of state public utility authorities to regulate retail electricity sales. The case came to the Supreme Court after the U.S. Court of Appeals for the District of Columbia vacated the order, concluding that “FERC’s new rule goes too far, encroaching on the states’ exclusive jurisdiction to regulate the retail market.”

The Supreme Court disagreed; ruling in a 6-2 decision with Justice Alito abstaining, that FERC acted within its powers enumerated under the Federal Power Act (“FPA”) by issuing FERC Order 745.

The Supreme Court considered the D.C. Circuit ruling with respect to two issues:

1. Whether FERC reasonably concluded that it has authority under the Federal Power Act to implement rules used by operators of wholesale electricity markets to pay for reductions in electricity consumption and to recoup those payments through adjustments to wholesale rates; and

2. Whether the Court of Appeals erred in holding that Order 745 is “arbitrary and capricious.”

FERC Order 745 requires market operators to pay the same price to demand response providers for conserving energy as to generators for producing it, so long as a “net benefits test” (which ensures that accepted power generation bids save consumers money), is met. In simplistic terms, FERC is placing a wholesale value on the conservation (or “non-use”) of energy; that making energy conservation a profitable proposition for energy conservation innovators.

Most of the arguments revolved around the question of FERC jurisdiction. Under the FPA, FERC is authorized to regulate the “sale of electric energy at wholesale in interstate commerce,” and this includes the wholesale electricity rates and any rule or practice affecting those rates. The FPA does not, however, authorize FERC to regulate “any other sale” (i.e., any retail sale) of electricity.

In addressing the first issue, the Supreme Court held that the FPA does provide FERC with the authority to regulate wholesale market operators’ compensation of demand response bids. In addressing the second, the Court reasoned that FERC did engage in “reasoned decision-making” by weighing competing views, selecting a compensation formula with adequate support in the record, and intelligibly explaining the reasons for making that decision.

This ruling represents a major win for a number of energy constituencies including aggregated groups of consumers, industrial buyers, demand response brokers, and energy distributors because of the ability to further manage energy use. The ability to treat demand as a resource, much like supply is treated, will allow the Federal regulation of wholesale demand much as, through demand flexibility, states set their own peak demand rates; this collectively encouraging non-use of electricity as a market-balancing tool.

Members of Leech Tishman’s Energy Practice Group are available to counsel your organization on the impact of FERC Order 745 in light of the Supreme Court’s decision.

For questions about this alert, please contact William F. Bresee, partner and Chair of the firm’s Energy Practice Group at 412-261-1600, or by email at wbresee@leechtishman.com. Learn more about Leech Tishman’s Energy Practice Group here.

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, safety & toxic torts, estates & trusts, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, internal investigations, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York and Wilmington, DE. For more information call 412.261.1600 or visit us at www.leechtishman.com.

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