Fed. Energy Regulatory Comm'n v. Elec. Power Supply Ass'n
136 S. Ct. 760
| SCOTUS | 2016

Background

  • FERC regulates wholesale interstate electricity sales and any rules or practices "affecting" wholesale rates under the Federal Power Act (FPA), while States regulate retail sales. 16 U.S.C. §824(b), §824d(a), §824e(a).
  • Organized wholesale market operators (ISOs/RTOs) run auctions that set locational marginal prices (LMP) and accept supply bids in merit order; LMP is paid to all accepted suppliers.
  • Wholesale "demand response" programs let aggregators or large consumers bid to reduce consumption during peak periods; accepted curtailment bids displace higher-cost generation, lowering LMP and improving reliability.
  • FERC adopted Order No. 745 requiring that, when a net-benefits test is met and the responder can provide the service, demand-response providers be paid LMP (rather than a reduced amount like LMP minus the retail price G). The Rule preserves state authority to prohibit retail customers in their jurisdiction from participating.
  • The D.C. Circuit vacated Order 745, holding FERC lacked authority because the Rule effectively regulates retail sales and, alternatively, that the LMP compensation choice was arbitrary and capricious.
  • The Supreme Court granted certiorari to decide (1) whether FERC has authority to regulate compensation for wholesale demand response and (2) whether the LMP compensation choice was arbitrary and capricious.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether FERC has statutory authority under the FPA to regulate compensation for demand-response bids in organized wholesale markets EPSA: Rule impermissibly regulates retail sales (reserved to States); paying retail consumers to curtail effectively raises "retail" prices and lures them into wholesale markets FERC/U.S.: Rule regulates wholesale practices that "directly affect" wholesale rates; it governs transactions and compensation in organized wholesale markets and permits state opt-out Held: FERC has authority. The Rule governs practices that directly affect wholesale rates and does not unlawfully regulate retail sales.
Whether FERC’s use of the "directly affect" limitation prevents overbroad jurisdiction under the FPA EPSA: Even a direct effect on wholesale rates cannot justify regulation that in substance governs retail transactions FERC: "Directly affect" limits FERC to rules that have a direct effect on wholesale rates; Rule satisfies that standard Held: The Court adopts and applies the D.C. Circuit’s "directly affect" standard and finds Demand Response compensation directly affects wholesale rates.
Whether compensating demand-response providers at LMP (vs. LMP-G) is arbitrary and capricious under the APA EPSA: Paying full LMP overcompensates demand responders because they also avoid paying retail price (double payment); FERC failed adequately to address that view FERC: Reasoned explanation: demand response and generation provide equivalent wholesale services when net-benefit test is met; equal pay promotes participation and competition; practical/admin problems with measuring/using G Held: Not arbitrary and capricious. FERC provided a reasoned explanation, adopted net-benefits filter, and addressed alternatives.
Whether EPSA’s broader theory would create an untenable regulatory "gap" (no regulator) if FERC lacked authority EPSA: The Rule should be invalidated even if no regulator would be left FERC/U.S.: If neither FERC nor States could regulate wholesale demand response, a regulatory vacuum would arise contrary to the FPA’s comprehensive scheme Held: Court rejects EPSA’s position as producing an impermissible gap; FPA contemplates FERC regulation of practices directly affecting wholesale rates.

Key Cases Cited

  • United States v. Detroit Timber & Lumber Co., 200 U.S. 321 (statement that syllabus is not part of the opinion)
  • New York v. FERC, 535 U.S. 1 (2002) (interpreting FPA division between federal wholesale and state retail jurisdiction)
  • California Independent System Operator Corp. v. FERC, 372 F.3d 395 (D.C. Cir. 2004) (adopted "directly affect" standard limiting FERC "affecting" jurisdiction)
  • Motor Vehicle Mfrs. Ass'n v. State Farm, 463 U.S. 29 (1983) (arbitrary-and-capricious review standard)
  • Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354 (1988) (FERC jurisdiction can preempt state action even if retail effects follow)
  • Panhandle Eastern Pipe Line Co. v. Public Serv. Comm'n of Ind., 332 U.S. 507 (1947) (statutory division between sales for resale and direct sales for consumption)
  • FPC v. Louisiana Power & Light Co., 406 U.S. 621 (1972) (cases emphasizing comprehensive federal-state regulatory scheme)
  • Morgan Stanley Capital Group Inc. v. Public Util. Dist. No.1 of Snohomish Cty., 554 U.S. 527 (2008) (deference to FERC rate decisions and competitive-market context)
  • Pennsylvania Water & Power Co. v. FPC, 343 U.S. 414 (1952) (FPA purposes: protect against excessive prices and ensure effective transmission)
  • Gulf States Util. Co. v. FPC, 411 U.S. 747 (1973) (same)
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