Can I get the wholesale price?

Photographer: Luke Sharrett/Bloomberg

Justices Give Government Power to Cut Electric Use

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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I’ve always loved the title of the 1951 film, “I Can Get It for You Wholesale,” maybe because of my ancestral connections to the garment industry (manufacturing on the paternal side, retail on the maternal). Today I get to connect my job to that of my grandparents: The U.S. Supreme Court has decided a case about the power of the Federal Energy Regulatory Commission on the basis of the wholesale-retail distinction. I don’t have anything to sell you, but I will try to explain why the case matters, and what the court said.

At issue was a FERC order that regulates what’s called “demand response” in the electricity markets. Put simply, because demand for electricity surges during the day and declines at night, companies that sell power at wholesale can find it economically efficient to pay consumers not to use power at times of peak demand. As Justice Elena Kagan described it in her opinion for the court, “Wholesale market operators can sometimes -- say, on a muggy August day -- offer electricity both more cheaply and more reliably by paying users to dial down their consumption than by paying power plants to ramp up their production.”

The FERC order, which had been struck down by the U.S. Court of Appeals for the D.C. Circuit, told the wholesalers “to pay the same price to demand response providers for conserving energy as to generators for making more of it,” provided a cost-benefit test was satisfied.

The issue before the Supreme Court was whether the order fell within FERC’s zone of authority -- and that’s where the wholesale-retail distinction comes in.

The Federal Power Act gives FERC power to regulate “the sale of electric energy at wholesale in interstate commerce.” The law includes wholesale electricity rates as well as any practice “affecting” those rates. The regulation of “any other sale” is left to the states.

The distinction between federal and state regulation made the case into a stalking horse for federalism concerns. Indeed, all the liberal justices, who typically favor federal authority over state authority, voted that FERC was authorized to issue its order.

But the four liberals needed to win over at least one federalism conservative -- and in the end, they got two, Justice Anthony Kennedy and Chief Justice John Roberts, to join them. They did that by framing the case in terms of statutory interpretation, not federalism, which is mentioned just once (favorably) in Kagan’s opinion.

Kagan laid out her argument simply. First, she pointed out that in the electricity market, paying for users not to use power, as the FERC order requires, directly affects wholesale rates. That effect, she reasoned, makes the order track the Federal Power Act.

Then Kagan went on to say that the order doesn’t regulate retail sales, which only states can do. Her logic was that the order doesn’t actually set rates for the purchase of electricity by consumers -- because demand response involves an offer to retail consumers not to buy electricity, rather than to buy it.

Kagan’s opinion acknowledged the “fact of economic life that the wholesale and retail markets in electricity, as in every other known product, are not hermetically sealed from each other.” But she said it didn’t matter whether FERC’s order affected retail prices, so long as it didn’t set those prices.

To support this claim, Kagan offered an analogy from air travel, painfully familiar to anyone who’s been trying to fly in or out of the mid-Atlantic region over the past few days: the offer of payment to passengers to take a later flight to free up seats on an overbooked one.

The airline, Kagan said, isn’t setting a new retail price for flying. It’s paying some customers not to fly. The same is true of the electricity wholesaler offering to pay consumers not to use electricity -- it isn’t setting a retail rate.

Justice Antonin Scalia, joined by Justice Clarence Thomas, didn’t agree. (Justice Samuel Alito was recused.) Scalia’s dissent also focused on the wholesale-retail distinction, but in a different way. Scalia pointed out that Kagan’s opinion asked whether the FERC order impermissibly regulated retail sales. But, Scalia said, the Federal Power Act doesn’t simply say that FERC can’t regulate retail. It says that FERC may only regulate wholesale electricity sales -- and nothing else.

Scalia went on to argue that “paying someone not to conclude a transaction that otherwise would without a doubt have been concluded is most assuredly a regulation of that transaction.” The recipients of the demand response offer are generally consumers, he explained -- so retail sales are being regulated.

Using basic economic theory, he explained that, after the FERC order, consumers “must now account for the opportunity cost of using, as opposed to abstaining from using, more energy.

Economically, Scalia is right, of course. The whole point of the FERC order is to affect consumer usage, which is part of the retail market. As usual, Scalia went a little too far, saying that “in other words, it literally costs [consumers] more to buy energy on the retail market.” Literally, it doesn’t. Economically, it does.

Literalism isn’t on Scalia’s side here; it’s on Kagan’s. That’s noteworthy, because ordinarily, the liberals favor functional interpretations of the law and Scalia likes literal ones. They’ve flipped here because of the underlying federalism issue. But for better or worse, the justices don’t decide cases wholesale. They decide them at retail -- and for you, they’re willing to make a special price.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Feldman at nfeldman7@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net