FERC Energy-Saving Rule in Doubt After Supreme Court Session

  • Justices question FERC power to set `demand response' rates
  • Swing vote Kennedy suggests possibility of narrow ruling

U.S. Supreme Court justices raised doubts about a federal rule that rewards industrial consumers for cutting electricity use, hearing arguments in a clash between the Obama administration and the power-generation industry.

The hour-long session Wednesday suggested the court was likely to give at least a partial victory to generators that say the national government is overstepping its bounds and infringing on state regulation of the retail electricity market. The Federal Energy Regulatory Commission rule sets rates for an energy-saving practice known as “demand response.”

The justice likely to provide the pivotal vote, Anthony Kennedy, probed the possibility of a narrow ruling that might set aside the disputed rule -- or require FERC to better explain why it set the rates as it did -- without necessarily slashing the agency’s authority. He twice called FERC’s reasoning “circular.”

Power companies oppose the rule because it threatens to cut their rates, perhaps by billions of dollars. Major energy consumers including Alcoa Inc. back the rule, as do smart-grid companies such as EnerNOC Inc., which help large consumers reduce their power use.

Rejection of the rule would widen profits for the country’s biggest energy generators. Beneficiaries would include NRG Energy Inc. FirstEnergy Corp., Exelon Corp., Dynegy Inc., Talen Energy Corp., Calpine Corp., Public Service Enterprise Group and American Electric Power Co., according to Bloomberg Intelligence analyst Kit Konolige.

The court Wednesday separately considered giving businesses a new tool to thwart class action lawsuits. The issue is whether defendants can end a case by offering full payment to the lead plaintiff. The court under Chief Justice John Roberts has proven skeptical of class action litigation in recent years.

Wholesale Regulation

The U.S. Federal Power Act law lets FERC regulate rates only at the wholesale level, leaving retail regulation in the hands of the states.

FERC and the Obama administration contend that the disputed rule applies only to wholesale rates and to demand-response providers participating in that market. The government says the Federal Power Act doesn’t block FERC from regulating practices just because they affect the retail market.

Trade groups representing the power industry say FERC is making a transparent attempt to regulate retail sales.

The latter argument struck a chord with Roberts. “FERC is directly affecting the retail price,” he told U.S. Solicitor General Donald Verrilli.

Justice Stephen Breyer said FERC was entitled to deference in its reading of the Federal Power Act. “I do not see any law that prevents them from raising or lowering wholesale price despite the fact that that also affects retail price,” he said.

No Alito

Justice Samuel Alito isn’t participating in the case, leaving the court with only eight justices. As is the court’s usual practice, Alito gave no reasons, though his most recent financial-disclosure form indicates he owns shares of Johnson Controls Inc., whose EnergyConnect subsidiary is helping to defend the FERC rule.

Alito’s absence opens the possibility of a 4-4 split, which would leave intact a federal appeals court ruling invalidating the FERC rule.

Whether that occurs will in all likelihood depend on Kennedy. On the core question of FERC’s authority, Kennedy directed the bulk of his questions at Verrilli and Carter Phillips, the lawyer representing EnerNOC and EnergyConnect. Kennedy asked Verrilli whether FERC was improperly “luring” retail customers into the wholesale market.

Later, however, Kennedy said he wanted the lawyer for the power generators, Paul Clement, to discuss narrower contentions that FERC is overcompensating consumers who forgo consumption. The court probably would reach those issues only if it concludes FERC has authority over demand response in the first place.

Cutting Pollution

“I think it’s a close call,” Allison Clements, director of the Sustainable FERC Project, a group advocating for demand response, said in a phone call after the arguments. “There was skepticism on the part of a couple of the justices that was well-addressed” by Verrilli and Phillips.

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 Interconnection LLC, which runs the mid-Atlantic grid.

A high court ruling against FERC wouldn’t abolish demand response altogether, but it would curb the federal government’s power to encourage the practice. States would still able to promote demand response.

Although the disputed FERC rule applies directly only to the energy market, the court’s ruling is likely to have ramifications for demand response in the capacity market, which is where generators are paid for commitments to provide power three years in the future. In that market, proponents say demand response could save as much as $9 billion a year.

PJM, which runs the largest U.S. grid and has the highest amount of demand response of all the regional markets, paid major power consumers $584.6 million through September in return for commitments to drop electricity consumption during periods of peak use. In return for actually cutting use, power curtailment service providers collected $6.84 million this year.

PJM, whose network stretches from Washington to Chicago, secured commitments of about 11,000 megawatts of power reductions in an annual auction held in August. That’s about enough power to run New York City on all but the hottest summer days.

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