FERC Gets Top U.S. Court Hearing on Energy-Conservation Rule

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The Obama administration will get a U.S. Supreme Court hearing as it tries to save a rule that rewards industrial consumers for cutting electricity use.

The rule, opposed by the power industry, benefits smart-grid companies such as EnerNOC Inc. that help large electricity consumers reduce their power usage during peak-demand hours. It’s also backed by large power consumers, including Alcoa Inc. and Wal-Mart Stores Inc., that are eyeing millions of dollars in energy savings.

A federal appeals court said the Federal Energy Regulatory Commission lacked authority to issue the rule. It requires wholesale-market operators to pay electricity users that cut consumption during high-demand periods at the same rate as generators that produce power. The practice, known as “demand response,” means stiffer competition for generators.

“It’s going to lead to a fair amount of uncertainty for quite some time,” William Scherman, a former FERC general counsel who now leads the energy, regulation and litigation practice at Gibson, Dunn & Crutcher LLP in Washington, said Monday by phone.

The court will consider the case in the nine-month term that starts in October, with arguments likely in November or December, and a decision by June 2016. FERC’s payment rule remains in effect.

Rejection of the rule would widen profits for NRG Energy Inc., FirstEnergy Corp., Exelon Corp., Dynegy Inc. and American Electric Power Co., the companies with the most wholesale electricity sales in PJM Interconnection LLC’s mid-Atlantic grid, Bloomberg Intelligence analyst Kit Konolige wrote in a note to clients Monday.

Mid-Atlantic Grid

The 13-state grid, which has the highest amount of demand response of all the regional markets, paid $17.7 million for consumers to cut their electricity use in 2014, according to Monitoring Analytics LLC, based in Eagleville, Pennsylvania, which oversees the market.

Advocates of demand response say it can cut air pollution and reduce the need to build additional power plants. Demand response helped the grid maintain reliable service when the system faced potential supply shortages during the Polar Vortex in January 2014, according to PJM.

“It’s a great day for demand response and consumers across the country,” Frank Lacey, a vice president at Comverge Inc., a demand-response company based in Norcross, Georgia, said in a phone interview. “We believe the court will hold that demand response is rightfully within the jurisdiction of FERC and consumers will continue to save billions of dollars annually because of the decision.”

Power plant owners that opposed the FERC plan say it is too generous to energy consumers.

FERC’s Authority

The court fight centers on the reach of FERC’s authority. Federal law lets the commission regulate rates only at the wholesale level, leaving retail regulation in the hands of the states.

FERC and the Obama administration contend that the rule applies only to wholesale rates and to demand-response providers that are participating in that market. A divided federal appeals court in Washington rejected that reasoning, saying that demand response by definition “involves retail customers, their decision whether to purchase at retail and the levels of retail electricity consumption.”

That appeals court decision was poised to take effect and void the rule had the Supreme Court not intervened.

Alito Recusal

Justice Samuel Alito didn’t participate in the court’s action today. As is customary, Alito gave no reasons, though his most recent financial-disclosure form indicated he owned at least $100,000 of OGE Energy Corp., a wholesale power company based in Oklahoma City.

Assuming Alito doesn’t take part in the case, the administration will have to win the votes of five of the other eight justices to save the rule.

PJM said Monday it will include demand response in a power-capacity auction, expected to take place by August.

The auction will cover the 12 months starting in June 2018. Capacity auctions are intended to give power-plant owners an incentive to have their generators ready to run when needed. Aggregators of demand response also can be paid for assuring that customers are ready to shut down equipment or lights, reducing the need for plants to run.

“The demand response case being reviewed by the Supreme Court involves the energy market specifically. If the court applies the decision also to the capacity markets, as the generators have asked, as much as $100 million of annual net income would be at stake for Exelon,” Konolige said.

The high court also will consider whether the appeals court was right to say FERC didn’t adequately weigh whether the rule will lead to unjust rates.

The Supreme Court also will hear a related appeal filed by companies including EnerNOC and Johnson Controls Inc.’s EnergyConnect unit.

The cases are FERC v. Electric Power Supply Association, 14-840, and EnerNOC v. Electric Power Supply Association, 14-841.

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