On January 25, 2016, the U.S. Supreme Court upheld in a 6-2 decision the Federal Energy Regulatory Commission’s (FERC) Order 745, which requires wholesale market operators to pay the same compensation to demand response (DR) providers for conserving energy as paid to generators for producing it. In doing so, the Court found that under the Federal Power Act, FERC can regulate wholesale markets and other matters “directly affecting” wholesale rates if it “affects—even substantially—the quantity or terms of retail sales.” While this ruling does not necessarily clarify the “bright line” between federal and state regulation of the power grid, it expands the area inside the line where federal regulation constitutes the final word.
The decision is first a big boost for DR, as it defers to FERC, whose policies have been promoting DR in both Orders 719 (permitting DR aggregation) and 745. Given its now broad jurisdiction and regulatory findings in support of Order 745, FERC’s approach to DR and LMP compensation is here to stay. Electric suppliers’ complaint will remain though: that DR will cause some critical “iron in the ground” capacity resources to shutter. Time will tell whether capacity adequacy and reliability issues will arise.
Second, this ruling could have broader implications, expanding federal authority and superseding state policies in other federal-state jointly regulated activities such as the Clean Power Plan, absent some limiting principle. One rationale for expansive federal authority was the Court’s statement that electricity flows “not through ‘the local power networks of the past,’ but instead through an interconnected ‘grid’ of near-nationwide scope.” The Court might articulate some limiting principle in Hughes v. PPL Energy Plus, which involves a challenge to a Maryland policy guaranteeing a fixed price to generators, aimed at encouraging generation development in an area with reliability issues. That case bears watching.
Third, it is unclear whether and how this jurisdictional approach may be applied to traditional bilateral markets in that Order 745 and this ruling are in the context of competitive wholesale electric markets.
Finally, this ruling may afford FERC more leverage in crafting policies that may impact some retail customers in the interest of “just and reasonable” wholesale prices. While FERC has historically worked in collaboration with state regulators in considering and forming policy, it might feel empowered to abandon such comity when addressing critical market issues.
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