The Supreme Court’s Decision in Federal Energy Regulatory Commission v. Electric Power Supply Association

On January 25, 2016, the Supreme Court handed down its decision in Federal Energy Regulatory Commission v. Electric Power Supply Association, upholding Order No. 745 of the FERC. This case primarily involves a question of statutory interpretation. However, the Court’s decision also has important policy implications. It represents a significant victory for businesses and consumers who purchase electricity as well as a victory for the environment, by reducing the necessity to generate electricity from expensive and polluting coal-fired electrical generating plants. Justice Kagan joined by five other justices authored the opinion for the majority. Justice Scalia, joined by Justice Thomas, dissented. Justice Alito did not participate.

Under the Federal Power Act, the Federal Energy Regulatory Commission (FERC) has statutory authority to regulate the wholesale market for electricity in the United States. However, the same law prohibits the Commission from regulating the retail market. Wholesalers of electricity purchase electricity from generating companies and resell it to utility companies, who are the retailers. The utility companies resell electricity to the end users, consumers and businesses that consume electricity.

A serious problem that arises in the market for electricity is that demand is not steady. Instead, demand fluctuates substantially, depending on the weather, the time of day, and other considerations. When demand is low, prices are low, and electricity can be generated in ways that are friendly to the environment. However, when demand spikes, prices can skyrocket, and it becomes necessary to generate electricity from relatively “dirty” sources like coal-fired plants.

Order No. 745 addresses this problem by requiring wholesalers to not only purchase electricity from generating plants as needed, but also to purchase promises from end users (or collective organizations of end users) not to use electricity during peak periods. Order 745 requires wholesalers to pay customers the same rate not to use electricity as the wholesaler would pay to purchase electricity – that is, the wholesale price. This is called “demand response.” Demand response is used to eliminate “spikes” in demand that disproportionately drive up the cost of electricity during peak periods. As noted before, Order No. 745 has the effect of reducing the price of electricity and reducing harmful emissions from plants that would otherwise not be in use.

Order No. 745 was challenged, naturally, by companies that stand to profit from unregulated spikes in the demand for electricity. They raised two challenges to the order. First, they contended that the Commission’s order unlawfully regulates the retail market, not the wholesale market, in violation of the Federal Power Act. Second, they contended that the order is “arbitrary and capricious” because it the “demand response” rate is too high. In their opinion the rate that wholesalers should pay to consumers for demand response should be reduced by the amount of savings that consumers earn by not buying electricity in the retail market. The Supreme Court rejected both challenges.

The challengers’ first argument is that, since consumers are end users who purchase electricity in the retail market, the FERC simply lacks the authority to order or even allow wholesalers to pay them not to consume electricity during peak periods. In other words, “demand response” is illegal. The Supreme Court found that in requiring wholesalers to pay consumers to reduce demand, the FERC was regulating the wholesale market, not the retail market, and thus was not overstepping its bounds under the Federal Power Act. It was not necessary for the Court to invoke the Chevron doctrine – the doctrine that prescribes the authority of a regulatory body to interpret ambiguities in the statute that it is charged with enforcing. The Supreme Court found that the Federal Power Act is not ambiguous, and that it clearly grants the Commission the power to require wholesalers to engage in “demand response.”

Regarding the second issue, the Court rejected the challengers’ contention that the rate of reimbursement that the Commission established for “demand response” was so unreasonable as to be “arbitrary and capricious.” In addressing this issue the Court implicitly invoked the doctrine of Separation of Powers; it spoke of the necessity for the courts to defer to an agency’s authority and expertise. The Court stated:

“The commission, not this or any other court, regulates electricity rates. The disputed question here involves both technical understanding and policy judgment. The Commission addressed that issue seriously and carefully, providing reasons in support of its position and responding to the principal alternative advanced. In upholding that action, we do not discount the cogency of [the challenger’s argument in favor of the alternative rate of reimbursement.] Nor do we say that in opting for [the higher rate of reimbursement] instead, the FERC made the better call. It is not our job to render that judgment, on which reasonable minds can differ. Our important but limited role is to ensure that the Commission engaged in reasoned decisionmaking – that it weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that choice. FERC satisfied that standard.”

Accordingly, the Court upheld the Commission’s Order No. 745.

Justice Scalia dissented on the ground that “demand response” constitutes an unlawful regulation of the retail market. He did not reach the issue of whether the agency’s order was arbitrary and capricious.