What Does U.S. Supreme Court Decision Upholding FERC's Authority Over Demand Response Mean For The Future Of FERC's Jurisdiction?

The Supreme Court reversed the lower court's findings, holding that the practice of demand response compensation directly affects wholesale rates and is not a retail-level regulation.

On January 25, 2016, the U.S. Supreme Court upheld the authority of the Federal Energy Regulatory Commission (FERC or Commission) to regulate demand response in the case Federal Energy Regulatory Commission v. Electric Power Supply Association et al. ("EPSA").1 This opinion is significant not only for upholding FERC's right to regulate demand response, but also more broadly in clarifying the scope of FERC's jurisdiction as the regulator of wholesale energy markets.

Two issues were before the Court. The first asked whether demand response regulation is within the Commission's purview. The second assumed the Commission has such authority, but examined whether the Commission's rulemaking on demand response compensation is arbitrary and capricious. At the root of this controversy is a rulemaking issued by the Commission in March 2011, designated Order No. 745. That Order requires demand response resources participating in wholesale energy markets to be compensated at the same price paid to generation resources (the locational marginal price) in the energy market when dispatch of the demand response resource is cost-effective.

Order No. 745 garnered the opposition of electricity generating entities, who sought to overturn it. After the Commission denied requests for rehearing, arguments were heard by the U.S. Court of Appeals for the District of Columbia Circuit. The Court of Appeals vacated the Order, holding that the action taken was outside the Commission's jurisdiction and thus encroached on the states' regulatory authority. In addition, the Court of Appeals found that the Order was arbitrary and capricious because the Commission did not address certain arguments against the rulemaking, notably, that the Order results in overcompensation of demand response resources.

The Supreme Court reversed the lower court's findings, holding that the practice of demand response compensation directly affects wholesale rates and is not a retail-level regulation. The Court explained that while the Commission has jurisdiction over the rules, regulations and practices that affect the rates within its statutory authority, its jurisdiction is limited to the rules, regulations and practices that directly affect such rates. The Court found that the use of demand response resources...