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Friday, June 21, 2024 | Back issues
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High Court OKs Energy-Reduction Payout Scheme

(CN) - The Supreme Court on Monday upheld a federal rule that gives consumers an incentive to reduce electricity use during peak periods, when wholesale prices are at their highest.

Electric Power Supply Association and four other industry groups had challenged a Federal Energy Regulatory Commission rule, which set compensation levels for groups of consumers who agree to lower their energy usage during peak periods at the same rate paid to generators who produce electricity.

The commission was divided in adopting the rule, and the D.C. Circuit vacated it 2-1 as well.

At issue for the appellate majority was section 201 of the Federal Power Act, which authorizes the commission to regulate "the sale of electric energy at wholesale in interstate commerce."

The commission's jurisdiction over the sale of electricity has thus "been specifically confined to the wholesale market," according to the D.C. Circuit's lead opinion in the case.

After agreeing to hear the case this past May - limited solely to the questions of whether the commission was correct in concluding it had the authority to regulate the rules used by wholesale electricity market operators to pay for reduced energy consumption and whether the commission's decision was arbitrary and capricious - the high court ruled 6-2 on Monday and upheld the commission's rule.

Specifically, the high court held the Federal Power Act gives authority to the commission to regulate compensation for voluntarily reducing energy consumption since the rule directly affects the wholesale rate of electricity but does not regulate retail sales.

"A Federal Energy Regulatory Commission regulation does not run afoul of the Federal Power Act's proscription just because it affects-even substantially- the quantity or terms of retail sales," Justice Elena Kagan wrote for the majority. "It is a 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. To the contrary, transactions that occur on the wholesale market have natural consequences at the retail level. And so too, of necessity, will the commission's regulation of those wholesale matters.

"When the commission sets a wholesale rate, when it changes wholesale market rules, when it allocates electricity as between wholesale purchasers-in short, when it takes virtually any action respecting wholesale transactions-it has some effect, in either the short or the long term, on retail rates. That is of no legal consequence. When the commission regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail rates, the Federal Power Act imposes no bar."

In setting rules for paying users to reduce their electricity use during peak periods, that is all the commission has done - regulate the wholesale market to improve how the market runs, Kagan wrote.

As to the Electric Power Supply Association's argument that the rule impermissibly intrudes on states' rights under the Federal Power Act, Kagan noted that the commission's rule explicitly allows any state regulator to prohibit consumers from making consumption-reduction bids on the wholesale market.

"Although claiming the ability to negate such state decisions, the commission chose not to do so in recognition of the linkage between wholesale and retail markets and the states' role in overseeing retail sales," Kagan wrote. "The veto power thus granted to the states belies the association's view that the commission aimed to 'obliterate' their regulatory authority or 'override' their pricing policies. And that veto gives states the means to block whatever 'effective' increases in retail rates demand response programs might be thought to produce.

"Wholesale demand response as implemented in the rule is a program of cooperative federalism, in which the states retain the last word. That feature of the rule removes any conceivable doubt as to its compliance with the Federal Power Act's allocation of federal and state authority."

Chief Justice John Roberts and Justices Ruth Bader Ginsberg, Sonia Sotomayor, Anthony Kennedy and Stephen Breyer joined Kagan's majority opinion. Justice Samuel Alito did not participate in either the consideration or decision of the case.

In a dissent, Justice Antonin Scalia - joined by Justice Clarence Thomas - said the Federal Power Act prohibits the commission from regulating bids to reduce usage since they come from retail purchasers of electricity.

"While the majority would find every sale of electric energy to be within the commission's authority to regulate unless the transaction is demonstrably a retail sale, the statute actually excludes from the commission's jurisdiction all sales of electric energy except those that are demonstrably sales at wholesale," Scalia wrote.

He said the entire scheme is aimed at energy consumers, not resellers - meaning the transactions occur at the retail level, not the wholesale market.

"It follows that the rule does not regulate electric-energy sales 'at wholesale,' and the Federal Power Act therefore forbids the commission to regulate these demand-response transactions," Scalia wrote.

Sierra Club staff attorney Casey Roberts praised the Supreme Court's decision, saying the group looks forward to "the continued growth of demand-response programs across the country" to protect the electric grid and idle dirty fossil fuel power plants that are fired up during periods of high demand.

"The commission's demand-response programs make energy cheaper, ensure the reliability of the grid, and protect our air and water from fossil fuel pollution," Roberts said. "Today's decision will go a long way toward protecting public health and building on the massive strides we have made toward transitioning to a clean-energy economy."

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