FERC v. Electric Power Supply Assn.
Headline: FERC’s rule to pay consumers market prices for cutting power is upheld, allowing wholesale operators to compensate demand-response providers like generators and affecting state-regulated retail markets.
Holding: The Court held that FERC may regulate how wholesale market operators compensate demand response providers, reversing the D.C. Circuit, and that paying the full market price (LMP) to such providers was not arbitrary.
- Allows wholesale operators to pay consumers full market price for cutting electricity.
- Could increase participation and lower wholesale prices, improving grid reliability.
- States keep power to bar their retail customers from joining.
Summary
Background
The dispute involved a federal agency, regional wholesale market operators, electricity suppliers and aggregators, state regulators, and customers who can be paid to reduce power use. Wholesale market operators run auctions that set the locational marginal price (LMP). FERC issued Order No. 745 requiring operators to pay LMP to demand response providers when a net‑benefits test showed cost savings. The D.C. Circuit vacated the Rule, saying FERC overstepped into retail regulation, and the case reached the Supreme Court. Earlier FERC actions (Order No. 719) and Congress encouraged demand response development.
Reasoning
The Court addressed whether FERC could regulate compensation that affects wholesale rates and whether its LMP decision was reasonable. The Justices held that demand response directly affects wholesale prices, so FERC’s authority to regulate practices affecting those prices applies. The Court said the Rule does not unlawfully regulate retail sales because it governs only wholesale market rules and preserves States’ power to bar their customers’ participation. The Court also found FERC’s explanation for paying LMP adequate and not arbitrary, especially given the net‑benefits test and record evidence.
Real world impact
The ruling allows wholesale market operators to pay consumers and aggregators market prices for cutting electricity, which can increase participation, lower wholesale costs, and improve grid reliability. States retain the power to prevent their retail customers from joining, and the cases were remanded for further proceedings consistent with the opinion. Some retail prices may fall if wholesale savings are passed along by utilities.
Dissents or concurrances
Justice Scalia, joined by Justice Thomas, dissented, arguing the Rule improperly regulates retail sales and exceeds FERC’s statutory authority. Justice Alito took no part in the decision.
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